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ICBK County Bancorp

Filed: 7 May 21, 1:02pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number: 001-36808

 

COUNTY BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Wisconsin

39-1850431

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

2400 South 44th Street

Manitowoc, WI

54221

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (920) 686-9998

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.01 par value

 

ICBK

 

Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 7, 2021, the registrant had 6,078,216 shares of common stock, $0.01 par value per share, outstanding.

 

 


 

 

Table of Contents

 

 

 

i


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2021 and December 31, 2020

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

(unaudited)

 

 

 

 

 

 

 

(dollars in thousands except per share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,404

 

 

$

19,084

 

Interest earning cash at other financial institutions

 

 

416

 

 

 

416

 

Securities available-for-sale, at fair value

 

 

385,240

 

 

 

352,854

 

FHLB Stock

 

 

5,875

 

 

 

5,758

 

Loans held for sale

 

 

5,788

 

 

 

35,976

 

Loans, net of allowance for loan losses of $15,082 as of March 31, 2021;

   $14,808 as of December 31, 2020

 

 

996,582

 

 

 

981,477

 

Premises and equipment, net

 

 

17,177

 

 

 

14,898

 

Loan servicing rights

 

 

18,864

 

 

 

18,396

 

Other real estate owned, net

 

 

739

 

 

 

1,077

 

Cash surrender value of bank owned life insurance

 

 

31,475

 

 

 

31,275

 

Core deposit intangible, net of accumulated amortization of $1,772 as

   of March 31, 2021; $1,747 as of December 31, 2020

 

 

29

 

 

 

54

 

Accrued interest receivable and other assets

 

 

11,739

 

 

 

11,093

 

Total assets

 

$

1,491,328

 

 

$

1,472,358

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

139,838

 

 

$

163,202

 

Interest-bearing

 

 

958,690

 

 

 

877,624

 

Total deposits

 

 

1,098,528

 

 

 

1,040,826

 

Other borrowings

 

 

48,674

 

 

 

49,006

 

Advances from FHLB

 

 

100,000

 

 

 

129,000

 

Subordinated debentures

 

 

67,179

 

 

 

67,111

 

Deferred tax liability, net

 

 

324

 

 

 

2,302

 

Accrued interest payable and other liabilities

 

 

10,286

 

 

 

12,337

 

Total liabilities

 

 

1,324,991

 

 

 

1,300,582

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Preferred stock- $1,000 stated value; 15,000 shares authorized; 8,000 shares issued

 

 

8,000

 

 

 

8,000

 

Common stock - $0.01 par value; 50,000,000 authorized; 7,226,232 shares issued

   and 6,094,450 shares outstanding as of March 31, 2021; 7,212,727 shares issued

   and 6,197,965 shares outstanding as of December 31, 2020

 

 

29

 

 

 

29

 

Surplus

 

 

55,691

 

 

 

55,346

 

Retained earnings

 

 

121,939

 

 

 

118,712

 

Treasury stock, at cost; 1,131,782  shares at March 31, 2021; 1,014,762 shares at

   December 31, 2020

 

 

(20,119

)

 

 

(17,606

)

Accumulated other comprehensive income

 

 

797

 

 

 

7,295

 

Total shareholders' equity

 

 

166,337

 

 

 

171,776

 

Total liabilities and shareholders' equity

 

$

1,491,328

 

 

$

1,472,358

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

1

 


 

 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2021 and 2020

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020*

 

 

 

(dollars in thousands except per share data)

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Loans, including fees

 

$

11,523

 

 

$

12,582

 

Taxable securities

 

 

1,887

 

 

 

1,282

 

Tax-exempt securities

 

 

246

 

 

 

6

 

Federal funds sold and other

 

 

59

 

 

 

225

 

Total interest and dividend income

 

 

13,715

 

 

 

14,095

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

2,070

 

 

 

4,347

 

FHLB advances and other borrowed funds

 

 

321

 

 

 

244

 

Subordinated debentures

 

 

1,106

 

 

 

706

 

Total interest expense

 

 

3,497

 

 

 

5,297

 

Net interest income

 

 

10,218

 

 

 

8,798

 

Provision for loan losses

 

 

242

 

 

 

2,218

 

Net interest income after provision for loan losses

 

 

9,976

 

 

 

6,580

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

Services charges

 

 

119

 

 

 

113

 

Crop insurance commission

 

 

301

 

 

 

229

 

Gain on sale of loans

 

 

1,680

 

 

 

543

 

Loan servicing fees, net

 

 

1,039

 

 

 

1,615

 

Other

 

 

573

 

 

 

203

 

Total non-interest income

 

 

3,712

 

 

 

2,703

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

5,582

 

 

 

5,260

 

Occupancy

 

 

279

 

 

 

354

 

Information processing

 

 

661

 

 

 

670

 

Professional fees

 

 

802

 

 

 

401

 

Writedown of other real estate owned

 

 

 

 

 

1,360

 

Goodwill impairment

 

 

 

 

 

5,038

 

Other

 

 

1,440

 

 

 

1,935

 

Total non-interest expense

 

 

8,764

 

 

 

15,018

 

Income (loss) before income taxes

 

 

4,924

 

 

 

(5,735

)

Income tax expense (benefit)

 

 

996

 

 

 

(547

)

NET INCOME (LOSS)

 

$

3,928

 

 

$

(5,188

)

Less: Cash dividends declared on preferred stock

 

 

(81

)

 

 

(108

)

NET INCOME (LOSS) ATTRIBUTABLE TO

   COMMON SHAREHOLDERS

 

$

3,847

 

 

$

(5,296

)

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

0.62

 

 

$

(0.79

)

Diluted

 

$

0.62

 

 

$

(0.78

)

Dividends paid per share

 

$

0.10

 

 

$

0.07

 

*Amounts reclassed to current classifications from original presentation

 

See accompanying notes to unaudited consolidated financial statements.

 

2

 


 

 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2021 and 2020

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(dollars in thousands)

 

Net income (loss)

 

$

3,928

 

 

$

(5,188

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain (loss) on securities available-for-sale

 

 

(9,668

)

 

 

3,447

 

Income tax benefit (expense)

 

 

2,633

 

 

 

(939

)

Total other comprehensive income (loss) on securities

    available-for-sale

 

 

(7,035

)

 

 

2,508

 

Unrealized gain (loss) on derivatives arising during the period

 

 

738

 

 

 

(1,194

)

Income tax benefit (expense)

 

 

(201

)

 

 

325

 

Total other comprehensive income (loss) on derivatives

 

 

537

 

 

 

(869

)

Total other comprehensive income (loss)

 

 

(6,498

)

 

 

1,639

 

Comprehensive loss

 

$

(2,570

)

 

$

(3,549

)

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

3

 


 

 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2021 and 2020

(Unaudited)

 

 

Preferred

Stock

 

 

Common

Stock

 

 

Surplus

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Shareholders'

Equity

 

 

 

(dollars in thousands except share data)

 

Balance at January 1, 2020

 

$

8,000

 

 

$

28

 

 

$

54,122

 

 

$

115,595

 

 

$

(5,030

)

 

$

1,798

 

 

$

174,513

 

   Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,188

)

 

 

 

 

 

 

 

 

(5,188

)

   Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,639

 

 

 

1,639

 

   Stock compensation expense

 

 

 

 

 

 

 

 

314

 

 

 

 

 

 

 

 

 

 

 

 

314

 

   Cash dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(466

)

 

 

 

 

 

 

 

 

(466

)

   Cash dividends declared on preferred stock

 

 

 

 

 

 

 

 

 

 

 

(108

)

 

 

 

 

 

 

 

 

(108

)

   Treasury stock purchases (255,650 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,853

)

 

 

 

 

 

(5,853

)

   Proceeds from exercise of common stock

      options (14,590 shares)

 

 

 

 

 

 

 

 

195

 

 

 

 

 

 

 

 

 

 

 

 

195

 

Balance at March 31, 2020

 

$

8,000

 

 

$

28

 

 

$

54,631

 

 

$

109,833

 

 

$

(10,883

)

 

$

3,437

 

 

$

165,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

$

8,000

 

 

$

29

 

 

$

55,346

 

 

$

118,712

 

 

$

(17,606

)

 

$

7,295

 

 

$

171,776

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

3,928

 

 

 

 

 

 

 

 

 

3,928

 

   Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,498

)

 

 

(6,498

)

   Stock compensation expense

 

 

 

 

 

 

 

 

273

 

 

 

 

 

 

 

 

 

 

 

 

273

 

   Cash dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(620

)

 

 

 

 

 

 

 

 

(620

)

   Cash dividends declared on preferred stock

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

 

 

 

 

 

 

 

(81

)

   Treasury stock purchases (117,020 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,513

)

 

 

 

 

 

(2,513

)

   Proceeds from exercise of common stock

      options (6,206 shares)

 

 

 

 

 

 

 

 

72

 

 

 

 

 

 

 

 

 

 

 

 

72

 

Balance at March 31, 2021

 

$

8,000

 

 

$

29

 

 

$

55,691

 

 

$

121,939

 

 

$

(20,119

)

 

$

797

 

 

$

166,337

 

 

See accompanying notes to unaudited consolidated financial statements

4


 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2021 and 2020

(Unaudited)

 

 

 

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,928

 

 

$

(5,188

)

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of premises and equipment

 

 

309

 

 

 

345

 

Amortization of core deposit intangible

 

 

25

 

 

 

54

 

Amortization of subordinated debentures discount

 

 

68

 

 

 

38

 

Impairment of goodwill

 

 

 

 

 

5,038

 

Provision for loan losses

 

 

242

 

 

 

2,218

 

Realized loss (gain) on sales of premises and equipment

 

 

(5

)

 

 

350

 

Realized loss on sales of other real estate owned

 

 

17

 

 

 

4

 

Writedown of other real estate owned

 

 

 

 

 

1,360

 

Increase in cash surrender value of bank owned life insurance

 

 

(200

)

 

 

(156

)

Deferred income tax expense (benefit)

 

 

656

 

 

 

(253

)

Stock compensation expense

 

 

273

 

 

 

314

 

Net amortization of securities

 

 

488

 

 

 

171

 

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

(646

)

 

 

(1,103

)

Loans held for sale

 

 

30,188

 

 

 

(12,237

)

Loan servicing rights

 

 

(468

)

 

 

(1,218

)

Accrued interest payable and other liabilities

 

 

(1,514

)

 

 

(2,314

)

Net cash provided by (used in) operating activities

 

 

33,361

 

 

 

(12,577

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from maturities, principal repayments, and call of securities available-for-sale

 

 

7,961

 

 

 

5,315

 

Purchases of securities available-for-sale

 

 

(50,504

)

 

 

(89,455

)

Purchase of FHLB stock

 

 

(117

)

 

 

(3,275

)

Purchase of bank owned life insurance

 

 

 

 

 

(10,000

)

Loan originations and principal collections, net

 

 

(15,347

)

 

 

23,399

 

Proceeds from sales of premises and equipment

 

 

18

 

 

 

1,381

 

Purchases of premises and equipment

 

 

(2,601

)

 

 

(1,849

)

Proceeds from sales of other real estate owned

 

 

321

 

 

 

910

 

Net cash used in investing activities

 

 

(60,269

)

 

 

(73,574

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase (decrease) in demand and savings deposits

 

 

83,691

 

 

 

(33,756

)

Net decrease in certificates of deposits

 

 

(25,989

)

 

 

(47,726

)

Net change in other borrowings

 

 

(332

)

 

 

1,399

 

Proceeds from FHLB advances

 

 

162,000

 

 

 

255,000

 

Repayment of FHLB advances

 

 

(191,000

)

 

 

(190,000

)

Payments to acquire treasury stock

 

 

(2,513

)

 

 

(5,853

)

Proceeds from issuance of common stock

 

 

72

 

 

 

195

 

Dividends paid on common stock

 

 

(620

)

 

 

(466

)

Dividends paid on preferred stock

 

 

(81

)

 

 

(108

)

Net cash provided by (used in) financing activities

 

 

25,228

 

 

 

(21,315

)

Net change in cash and cash equivalents

 

 

(1,680

)

 

 

(107,466

)

Cash and cash equivalents, beginning of period

 

 

19,500

 

 

 

129,011

 

Cash and cash equivalents, end of period

 

$

17,820

 

 

$

21,545

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

3,458

 

 

$

3,774

 

Income taxes

 

$

 

 

$

 

Noncash investing activities:

 

 

 

 

 

 

 

 

Transfer from loans to other real estate owned

 

$

 

 

$

 

Loans charged off

 

$

 

 

$

 

See accompanying notes to unaudited consolidated financial statements.

 

 

5


 

 

 

County Bancorp, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – BASIS OF PRESENTATION

The unaudited consolidated financial statements of County Bancorp, Inc. (“we,” “us,” ”our,” or the “Company”) and its subsidiaries, including Investors Community Bank (the “Bank”), have been prepared, in the opinion of management, to reflect all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows as of and for the three and three months ended March 31, 2021.  The results of operations for the three months ended March 31, 2021 may not necessarily be indicative of the results to be expected for the year ending December 31, 2021, or for any other period.

Management of the Company is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.  Actual results could differ significantly from those estimates.

These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).  Certain information in footnote disclosure normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 12, 2021.

New Accounting Pronouncements

On December 27, 2020, the Consolidated Appropriations Act (“CAA”), 2021, was signed into law which extended the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which expired on December 31, 2020.  The CAA included a $900.0 billion COVID-19 relief package that included an additional $284.5 billion in PPP funding.  In March 2021, President Biden signed the American Rescue Plan Act of 2021, a $1.9 trillion economic stimulus package that includes cash payments to individuals, supplemental unemployment insurance, and modifications and expansion of the PPP.  In March 2021, President Biden also signed the PPP Extension Act of 2021, which extended the PPP application deadline to May 31, 2021. Section 4013 of the CARES Act allows financial institutions to elect to suspend troubled debt restructuring accounting under certain circumstances when the temporary restructuring is related to the Coronavirus Disease 2019 (COVID-19) pandemic.  The Company has elected to implement Section 4013, and at March 31, 2021, loan balances totaling $6.1 million were still participating in the payment deferral program.

In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-04, Reference Rate Reform (Topic 848).  The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.  The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.  The ASU was effective upon issuance on March 12, 2020 and can be applied through December 31, 2022. The Company is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position, and liquidity.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  The amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  Entities should apply this amendment by a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The Company has engaged a third-party software consultant and is currently testing the model’s methodology in parallel to current loss model calculations.  At this time, the effect this ASU will have on its consolidated financial statements is still being quantified as the Company ensures data, assumptions, and methods all comply with the requirements of ASU 2016-13.  In October 2019, the FASB voted to delay the effective date for the credit losses standard to January 2023 for certain entities, including SEC filers that qualify as smaller reporting companies and private companies.  As a smaller reporting company, the Company is eligible for the delay and will be deferring adoption.  Management will continue to progress on its implementation project plan and improve the Company’s approach throughout the deferral period.   

 

6


 

 

NOTE 2 – EARNINGS PER SHARE

Earnings per common share is computed using the two-class method.  Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period.  Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share plus the dilutive effect of share-based compensation using the treasury stock method.

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

(dollars in thousands)

 

Net income (loss) from continuing operations

 

$

3,928

 

 

$

(5,188

)

Less:  preferred stock dividends

 

 

81

 

 

 

108

 

Income (loss) available to common shareholders for basic earnings

   per common share

 

$

3,847

 

 

$

(5,296

)

 

 

 

 

 

 

 

 

 

Weighted average number of common shares issued

 

 

7,218,358

 

 

 

7,182,945

 

Less: weighted average treasury shares

 

 

1,080,089

 

 

 

518,740

 

Plus: weighted average of participating restricted stock units

 

 

63,991

 

 

 

39,785

 

Weighted average number of common shares and participating

   securities outstanding

 

 

6,202,260

 

 

 

6,703,990

 

Effect of dilutive options

 

 

34,465

 

 

 

49,072

 

Weighted average number of common shares outstanding

   used to calculate diluted earnings per common share

 

 

6,236,725

 

 

 

6,753,062

 

Weighted average of anti-dilutive options

 

 

54,831

 

 

 

55,764

 

 

 

 

NOTE 3 – SECURITIES AVAILABLE-FOR-SALE

The amortized cost and fair value of securities available-for-sale as of March 31, 2021 and December 31, 2020 were as follows:

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

13,453

 

 

$

 

 

$

(138

)

 

$

13,315

 

Municipal securities

 

 

162,639

 

 

 

2,602

 

 

 

(5,145

)

 

 

160,096

 

Mortgage-backed securities

 

 

148,422

 

 

 

6,244

 

 

 

(1,266

)

 

 

153,400

 

Corporate bonds

 

 

42,000

 

 

 

253

 

 

 

(440

)

 

 

41,813

 

Asset-backed securities

 

 

16,456

 

 

 

165

 

 

 

(5

)

 

 

16,616

 

 

 

$

382,970

 

 

$

9,264

 

 

$

(6,994

)

 

$

385,240

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

14,745

 

 

$

 

 

$

(152

)

 

$

14,593

 

Municipal securities

 

 

149,203

 

 

 

4,736

 

 

 

(285

)

 

 

153,654

 

Mortgage-backed securities

 

 

127,804

 

 

 

7,872

 

 

 

(298

)

 

 

135,378

 

Corporate bonds

 

 

32,500

 

 

 

21

 

 

 

(10

)

 

 

32,511

 

Asset-backed securities

 

 

16,664

 

 

 

55

 

 

 

(1

)

 

 

16,718

 

 

 

$

340,916

 

 

$

12,684

 

 

$

(746

)

 

$

352,854

 

7


 

 

The amortized cost and fair value of securities at March 31, 2021 and December 31, 2020, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

Due in one year or less

 

$

 

 

$

 

Due from one to five years

 

 

 

 

 

 

Due from five to ten years

 

 

62,187

 

 

 

61,758

 

Due after ten years

 

 

155,905

 

 

 

153,466

 

Asset-backed securities

 

 

16,456

 

 

 

16,616

 

Mortgage-backed securities

 

 

148,422

 

 

 

153,400

 

 

 

$

382,970

 

 

$

385,240

 

December 31, 2020

 

 

 

 

 

 

 

 

Due in one year or less

 

$

 

 

$

 

Due from one to five years

 

 

 

 

 

 

Due from five to ten years

 

 

55,024

 

 

 

55,120

 

Due after ten years

 

 

141,424

 

 

 

145,638

 

Asset-backed securities

 

 

16,664

 

 

 

16,718

 

Mortgage-backed securities

 

 

127,804

 

 

 

135,378

 

 

 

$

340,916

 

 

$

352,854

 

There were 0 security sales for the three months ended March 31, 2021 and 2020, respectively.

At March 31, 2021 and December 31, 2020, there were $41.4 million and $23.0 million, respectively, of securities pledged at the Federal Reserve Bank to secure municipal customer deposits.

Federal Home Loan Bank (FHLB) advances were secured by $5.9 million and $5.8 million FHLB stock at March 31, 2021 and December 31, 2020, respectively.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temorarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2021 and December 31, 2020:

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

 

 

$

 

 

$

13,315

 

 

$

(138

)

 

$

13,315

 

 

$

(138

)

Municipal securities

 

 

118,771

 

 

 

(5,145

)

 

 

 

 

 

 

 

 

118,771

 

 

 

(5,145

)

Mortgage-backed securities

 

 

34,945

 

 

 

(1,266

)

 

 

 

 

 

 

 

 

34,945

 

 

 

(1,266

)

Corporate bonds

 

 

28,060

 

 

 

(440

)

 

 

 

 

 

 

 

 

28,060

 

 

 

(440

)

Asset-backed securities

 

 

1,576

 

 

 

(5

)

 

 

 

 

 

 

 

 

1,576

 

 

 

(5

)

 

 

$

183,352

 

 

$

(6,856

)

 

$

13,315

 

 

$

(138

)

 

$

196,667

 

 

$

(6,994

)

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

12,217

 

 

$

(134

)

 

$

2,376

 

 

$

(18

)

 

$

14,593

 

 

$

(152

)

Municipal securities

 

 

30,849

 

 

 

(285

)

 

 

 

 

 

 

 

 

30,849

 

 

 

(285

)

Mortgage-backed securities

 

 

7,781

 

 

 

(298

)

 

 

 

 

 

 

 

 

7,781

 

 

 

(298

)

Corporate bonds

 

 

7,990

 

 

 

(10

)

 

 

 

 

 

 

 

 

7,990

 

 

 

(10

)

Asset-backed securities

 

 

3,817

 

 

 

(1

)

 

 

 

 

 

 

 

 

3,817

 

 

 

(1

)

 

 

$

62,654

 

 

$

(728

)

 

$

2,376

 

 

$

(18

)

 

$

65,030

 

 

$

(746

)

The unrealized losses on the investments at March 31, 2021 and December 31, 2020 were due to market conditions as well as normal fluctuations and pricing inefficiencies.  The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the amortized cost basis of the investment.  Because the Company does not intend to sell the investments

8


 

and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2021 and December 31, 2020.

 

 

NOTE 4 – LOANS

The components of loans were as follows:  

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(dollars in thousands)

 

Agricultural loans

 

$

609,482

 

 

$

606,881

 

Commercial real estate loans

 

 

244,791

 

 

 

235,969

 

Commercial loans

 

 

119,083

 

 

 

115,087

 

Residential real estate loans

 

 

38,063

 

 

 

38,084

 

Installment and consumer other

 

 

245

 

 

 

264

 

  Total gross loans

 

 

1,011,664

 

 

 

996,285

 

Allowance for loan losses

 

 

(15,082

)

 

 

(14,808

)

    Net loans

 

$

996,582

 

 

$

981,477

 

Net unamortized deferred costs totalling $0.5 million and $0.3 million as of March 31, 2021 and December 31, 2020, respectivley, are included in the total gross loans above.

Changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2021 and 2020 were as follows: 

 

 

For the Three Months Ended March 31, 2021

 

 

 

Beginning Balance

 

 

Provision for Loan Losses

 

 

Loans Charged Off

 

 

Loan Recoveries

 

 

Ending Balance

 

 

 

(dollars in thousands)

 

Agricultural loans

 

$

10,859

 

 

$

668

 

 

$

 

 

$

 

 

$

11,527

 

Commercial real estate loans

 

 

3,139

 

 

 

(282

)

 

 

 

 

 

1

 

 

 

2,858

 

Commercial loans

 

 

805

 

 

 

(145

)

 

 

 

 

 

31

 

 

 

691

 

Residential real estate loans

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Installment and consumer other

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Total

 

$

14,808

 

 

$

242

 

 

$

 

 

$

32

 

 

$

15,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2020

 

 

 

Beginning Balance

 

 

Provision for Loan Losses

 

 

Loans Charged Off

 

 

Loan Recoveries

 

 

Ending Balance

 

 

 

(dollars in thousands)

 

Agricultural loans

 

$

11,737

 

 

$

948

 

 

$

 

 

$

 

 

$

12,685

 

Commercial real estate loans

 

 

1,913

 

 

 

603

 

 

 

 

 

 

61

 

 

 

2,577

 

Commercial loans

 

 

1,599

 

 

 

573

 

 

 

 

 

 

1

 

 

 

2,173

 

Residential real estate loans

 

 

15

 

 

 

97

 

 

 

 

 

 

 

 

 

112

 

Installment and consumer other

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Total

 

$

15,267

 

 

$

2,218

 

 

$

 

 

$

62

 

 

$

17,547

 

9


 

 

The following tables present the balances in the allowance for loan losses and the recorded balance in loans by portfolio segment and based on impairment method as of  March 31, 2021 and December 31, 2020: 

 

 

March 31, 2021

 

 

 

Individually

Evaluated for

Impairment

 

 

Collectively

Evaluated for

Impairment

 

 

Total

 

 

 

(dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

4,340

 

 

$

7,187

 

 

$

11,527

 

Commercial real estate loans

 

 

192

 

 

 

2,666

 

 

 

2,858

 

Commercial loans

 

 

88

 

 

 

603

 

 

 

691

 

Residential real estate loans

 

 

 

 

 

5

 

 

 

5

 

Installment and consumer other

 

 

 

 

 

1

 

 

 

1

 

Total ending allowance for loan losses

 

 

4,620

 

 

 

10,462

 

 

 

15,082

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

 

54,495

 

 

 

554,987

 

 

 

609,482

 

Commercial real estate loans

 

 

7,074

 

 

 

237,717

 

 

 

244,791

 

Commercial loans

 

 

2,786

 

 

 

116,297

 

 

 

119,083

 

Residential real estate loans

 

 

58

 

 

 

38,005

 

 

 

38,063

 

Installment and consumer other

 

 

 

 

 

245

 

 

 

245

 

Total loans

 

 

64,413

 

 

 

947,251

 

 

 

1,011,664

 

Net loans

 

$

59,793

 

 

$

936,789

 

 

$

996,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

Individually

Evaluated for

Impairment

 

 

Collectively

Evaluated for

Impairment

 

 

Total

 

 

 

(dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

3,504

 

 

$

7,355

 

 

$

10,859

 

Commercial real estate loans

 

 

672

 

 

 

2,467

 

 

 

3,139

 

Commercial loans

 

 

86

 

 

 

719

 

 

 

805

 

Residential real estate loans

 

 

 

 

 

5

 

 

 

5

 

Installment and consumer other

 

 

 

 

 

 

 

 

 

Total ending allowance for loan losses

 

 

4,262

 

 

 

10,546

 

 

 

14,808

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

 

63,777

 

 

 

543,104

 

 

 

606,881

 

Commercial real estate loans

 

 

7,077

 

 

 

228,892

 

 

 

235,969

 

Commercial loans

 

 

2,818

 

 

 

112,269

 

 

 

115,087

 

Residential real estate loans

 

 

59

 

 

 

38,025

 

 

 

38,084

 

Installment and consumer other

 

 

 

 

 

264

 

 

 

264

 

Total loans

 

 

73,731

 

 

 

922,554

 

 

 

996,285

 

Net loans

 

$

69,469

 

 

$

912,008

 

 

$

981,477

 

10


 

 

The following tables present loans individually evaluated for impairment by class of loans at March 31, 2021 and December 31, 2020:

 

 

March 31, 2021

 

 

 

Unpaid Principal Balance

 

 

Recorded Investment

 

 

Allowance for Loan Losses Allocated

 

 

 

(dollars in thousands)

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

7,599

 

 

$

7,219

 

 

$

0

 

Commercial real estate loans

 

 

5,209

 

 

 

4,328

 

 

 

0

 

Commercial loans

 

 

2,244

 

 

 

2,237

 

 

 

0

 

Residential real estate loans

 

 

61

 

 

 

58

 

 

 

0

 

 

 

$

15,113

 

 

$

13,842

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

51,856

 

 

$

47,276

 

 

$

4,340

 

Commercial real estate loans

 

 

4,582

 

 

 

2,746

 

 

 

192

 

Commercial loans

 

 

580

 

 

 

549

 

 

 

88

 

Residential real estate loans

 

 

0

 

 

 

0

 

 

 

0

 

 

 

$

57,018

 

 

$

50,571

 

 

$

4,620

 

Total

 

$

72,131

 

 

$

64,413

 

 

$

4,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

Unpaid Principal Balance

 

 

Recorded Investment

 

 

Allowance for Loan Losses Allocated

 

 

 

(dollars in thousands)

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

20,245

 

 

$

20,120

 

 

$

0

 

Commercial real estate loans

 

 

288

 

 

 

288

 

 

 

0

 

Commercial loans

 

 

2,504

 

 

 

2,481

 

 

 

0

 

Residential real estate loans

 

 

61

 

 

 

59

 

 

 

0

 

 

 

$

23,098

 

 

$

22,948

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

47,971

 

 

$

43,657

 

 

$

3,504

 

Commercial real estate loans

 

 

8,245

 

 

 

6,790

 

 

 

672

 

Commercial loans

 

 

357

 

 

 

336

 

 

 

86

 

Residential real estate loans

 

 

0

 

 

 

0

 

 

 

0

 

 

 

$

56,573

 

 

$

50,783

 

 

$

4,262

 

Total

 

$

79,671

 

 

$

73,731

 

 

$

4,262

 

11


 

 

The following table presents the aging of the recorded investment in past due loans at March 31, 2021 and December 31, 2020:

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90+ Days

Past Due

 

 

Total

Past Due

 

 

Loans Not

Past Due

 

 

Total

Loans

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

1,658

 

 

$

 

 

$

4,745

 

 

$

6,403

 

 

$

603,079

 

 

$

609,482

 

Commercial real estate loans

 

 

 

 

 

 

 

 

4,328

 

 

 

4,328

 

 

 

240,463

 

 

 

244,791

 

Commercial loans

 

 

 

 

 

 

 

 

56

 

 

 

56

 

 

 

119,027

 

 

 

119,083

 

Residential real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,063

 

 

 

38,063

 

Installment and consumer other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

245

 

 

 

245

 

   Total

 

$

1,658

 

 

$

 

 

$

9,129

 

 

$

10,787

 

 

$

1,000,877

 

 

$

1,011,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

47

 

 

$

 

 

$

5,041

 

 

$

5,088

 

 

$

601,793

 

 

$

606,881

 

Commercial real estate loans

 

 

82

 

 

 

 

 

 

4,283

 

 

 

4,365

 

 

 

231,604

 

 

 

235,969

 

Commercial loans

 

 

 

 

 

 

 

 

96

 

 

 

96

 

 

 

114,991

 

 

 

115,087

 

Residential real estate loans

 

 

4

 

 

 

 

 

 

 

 

 

4

 

 

 

38,080

 

 

 

38,084

 

Installment and consumer other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

264

 

 

 

264

 

   Total

 

$

133

 

 

$

 

 

$

9,420

 

 

$

9,553

 

 

$

986,732

 

 

$

996,285

 

 

 

The following table presents the recorded investment in nonaccrual loans by class of loan:

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(dollars in thousands)

 

Agricultural loans

 

$

37,416

 

 

$

35,067

 

Commercial real estate loans

 

 

6,099

 

 

 

6,093

 

Commercial loans

 

 

400

 

 

 

405

 

Residential real estate loans

 

 

58

 

 

 

59

 

   Total

 

$

43,973

 

 

$

41,624

 

The following tables present the average recorded investment and interest income recognized on impaired loans by portfolio segment for the three months ended March 31, 2021 and 2020:

 

 

As of and for the Three Months Ended March 31, 2021

 

 

 

Unpaid Principal Balance

 

 

Recorded Investment

 

 

Allowance for Loan Losses Allocated

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

 

(dollars in thousands)

 

Agricultural loans

 

$

59,455

 

 

$

54,495

 

 

$

4,340

 

 

$

59,136

 

 

$

926

 

Commercial real estate loans

 

 

9,791

 

 

 

7,074

 

 

 

192

 

 

 

7,076

 

 

 

37

 

Commercial loans

 

 

2,824

 

 

 

2,786

 

 

 

88

 

 

 

2,802

 

 

 

40

 

Residential real estate loans

 

 

61

 

 

 

58

 

 

 

 

 

 

58

 

 

 

1

 

   Total

 

$

72,131

 

 

$

64,413

 

 

$

4,620

 

 

$

69,072

 

 

$

1,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Three Months Ended March 31, 2020

 

 

 

Unpaid Principal Balance

 

 

Recorded Investment

 

 

Allowance for Loan Losses Allocated

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

 

(dollars in thousands)

 

Agricultural loans

 

$

63,876

 

 

$

60,234

 

 

$

3,678

 

 

$

59,533

 

 

$

1,310

 

Commercial real estate loans

 

 

3,674

 

 

 

3,640

 

 

 

802

 

 

 

3,661

 

 

 

25

 

Commercial loans

 

 

2,154

 

 

 

1,837

 

 

 

1,310

 

 

 

1,850

 

 

 

48

 

Residential real estate loans

 

 

61

 

 

 

60

 

 

 

 

 

 

61

 

 

 

1

 

   Total

 

$

69,765

 

 

$

65,771

 

 

$

5,790

 

 

$

65,105

 

 

$

1,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12


 

 

Impaired loans include nonaccrual loans, troubled debt restructured loans, and loans that are 90 days or more past due and still accruing.  For nonaccrual loans included in impaired loans, the interest income that would have been recognized had those loans been performing in accordance with their original terms would have been approximately $0.6 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively.  

 

 

Troubled Debt Restructurings

 

The Company allocated approximately $4.6 million and $3.8 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDR”) at March 31, 2021 and December 31, 2020, respectively.  The Company had 0 additional lending commitments at March 31, 2021 or December 31, 2020 to customers with outstanding loans that were classified as TDRs.

A TDR on nonaccrual status is classified as a nonaccrual loan until evaluation supports reasonable assurance of repayment and there has been a satisfactory period of performance according to the modified terms of the loan.  Once this assurance is reached, the TDR is returned to accrual status.  The following table presents the TDRs and related allowance for loan losses by loan class at March 31, 2021 and December 31, 2020:

 

 

Non-Accrual

 

 

Restructured and Accruing

 

 

Total

 

 

Allowance for Loan Losses Allocated

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

26,382

 

 

$

10,630

 

 

$

37,012

 

 

$

4,273

 

Commercial real estate loans

 

 

1,772

 

 

 

975

 

 

 

2,747

 

 

 

192

 

Commercial loans

 

 

66

 

 

 

1,890

 

 

 

1,956

 

 

 

88

 

   Total

 

$

28,220

 

 

$

13,495

 

 

$

41,715

 

 

$

4,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

27,223

 

 

$

15,690

 

 

$

42,913

 

 

$

3,494

 

Commercial real estate loans

 

 

1,810

 

 

 

984

 

 

 

2,794

 

 

 

315

 

Commercial loans

 

 

68

 

 

 

1,918

 

 

 

1,986

 

 

 

4

 

   Total

 

$

29,101

 

 

$

18,592

 

 

$

47,693

 

 

$

3,813

 

 The following table provides the number of loans modified in a troubled debt restructuring investment by class for the three months ended March 31, 2021 and 2020:

 

 

For the Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

Number of Loans

 

 

Recorded Investment

 

 

Number of Loans

 

 

Recorded Investment

 

 

 

(dollars in thousands)

 

Troubled debt restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Agricultural loans

 

 

1

 

 

$

299

 

 

 

2

 

 

$

232

 

      Total

 

 

1

 

 

$

299

 

 

 

2

 

 

$

232

 

 

The following table provides the troubled debt restructurings for the three months ended March 31, 2021 and 2020 grouped by type of concession:

 

 

For the Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

Number of Loans

 

 

Recorded Investment

 

 

Number of Loans

 

 

Recorded Investment

 

 

 

(dollars in thousands)

 

Agricultural loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Term concessions

 

 

 

 

$

 

 

 

1

 

 

$

49

 

   Extension of interest-only payments

 

 

1

 

 

 

299

 

 

 

 

 

 

 

   Combination of extension of term and interest rate

     concessions

 

 

 

 

 

 

 

 

1

 

 

 

183

 

      Total

 

 

1

 

 

$

299

 

 

 

2

 

 

$

232

 

13


 

 

 

No troubled debt restructurings defaulted within twelve months of the restructure date during the three ended March 31, 2021 and March 31, 2020.

The CAA extended Section 4013 of the CARES Act which allows financial institutions to elect to suspend troubled debt restructuring accounting under certain circumstances when the temporary restructuring is related to the COVID-19 pandemic. The Company has elected to implement Section 4013, the balance of those loans modified under Section 4103 was $6.1 million at March 31, 2021.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Company analyzes agricultural, commercial, and commercial real estate loans individually by classifying the credits as to credit risk. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits with total exposure in excess of $300,000. The Company uses the following definitions for credit risk ratings:

Sound. Credits classified as sound show very good probability of ongoing ability to meet and/or exceed obligations.

Acceptable. Credits classified as acceptable show a good probability of ongoing ability to meet and/or exceed obligations.

Satisfactory. Credits classified as satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.

Low Satisfactory.  Credits classified as low satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.  Low satisfactory credits may be newer or have a less established track record of financial performance, inconsistent earnings, or may be going through an expansion.

Watch. Credits classified as watch show some questionable probability of ongoing ability to meet and/or exceed obligations.

Special Mention. Credits classified as special mention show potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard – Performing.  Credits classified as substandard – performing generally have well-defined weaknesses. Collateral coverage is adequate, and the loans are not considered impaired.  Payments are being made and the loans are on accrual status. 

Substandard - Impaired. Credits classified as substandard generally have well-defined weaknesses that jeopardize the repayment of the debt. They have a distinct possibility that a loss will be sustained if the deficiencies are not corrected.  Loans are considered impaired.  Loans are either exhibiting signs of delinquency, are on non-accrual or are identified as a TDR. 

Doubtful. Credits classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable.

The Company categorizes residential real estate, installment and consumer other loans as satisfactory at the time of origination based on information obtained as to the ability of the borrower(s) to service their debt, such as current financial information, employment status and history, historical payment experience, credit scores and type and amount of collateral among other factors. The Company updates relevant information on these types of loans at the time of refinance, troubled debt restructuring or other indications of financial difficulty, downgrading as needed using the same category descriptions as for agricultural, commercial, and commercial real estate loans. In addition, the Company further considers current payment status as an indicator of which risk category to assign the borrower.

The greater the level of deteriorated risk as indicated by a loan’s assigned risk category, the greater the likelihood a loss will occur in the future. If the loan is substandard - impaired, then the loan loss reserves for the loan are recorded at the loss level of impairment. If the loan is not impaired, then its loan loss reserves are determined by the application of a loss rate that increases with risk in accordance with the allowance for loan loss analysis.

14


 

The Bank will not accrue interest on any loan past due 90-days or more.  Furthermore, the Bank will place any loan on non-accrual status for which payment in full of principal and interest is not expected.  A loan shall be placed on non-accrual as soon as it is determined that payment in full of interest and/or principal is unlikely.  The Bank’s chief credit officer may approve the placement of a loan on non-accrual prior to 90-days past due.

Based on the most recent analysis performed by management, the risk category of loans by class of loans was as follows as of March 31, 2021 and December 31, 2020: 

 

 

As of  March 31, 2021

 

 

 

Sound/

Acceptable/

Satisfactory/

Low Satisfactory

 

 

Watch

 

 

Special

Mention

 

 

Substandard Performing

 

 

Substandard

Impaired

 

 

Total

Loans

 

 

 

(dollars in thousands)

 

Agricultural loans

 

$

402,735

 

 

$

129,840

 

 

$

 

 

$

34,310

 

 

$

42,597

 

 

$

609,482

 

Commercial real estate loans

 

 

210,260

 

 

 

26,113

 

 

 

 

 

 

2,319

 

 

 

6,099

 

 

 

244,791

 

Commercial loans

 

 

106,172

 

 

 

9,614

 

 

 

605

 

 

 

2,331

 

 

 

361

 

 

 

119,083

 

Residential real estate loans

 

 

37,749

 

 

 

256

 

 

 

 

 

 

 

 

 

58

 

 

 

38,063

 

Installment and consumer other

 

 

245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

245

 

Total

 

$

757,161

 

 

$

165,823

 

 

$

605

 

 

$

38,960

 

 

$

49,115

 

 

$

1,011,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020

 

 

 

Sound/

Acceptable/

Satisfactory/

Low Satisfactory

 

 

Watch

 

 

Special

Mention

 

 

Substandard Performing

 

 

Substandard

Impaired

 

 

Total

Loans

 

 

 

(dollars in thousands)

 

Agricultural loans

 

$

374,595

 

 

$

155,546

 

 

$

1,854

 

 

$

34,452

 

 

$

40,434

 

 

$

606,881

 

Commercial real estate loans

 

 

200,208

 

 

 

26,266

 

 

 

 

 

 

3,402

 

 

 

6,093

 

 

 

235,969

 

Commercial loans

 

 

103,488

 

 

 

8,022

 

 

 

647

 

 

 

2,566

 

 

 

364

 

 

 

115,087

 

Residential real estate loans

 

 

37,758

 

 

 

267

 

 

 

 

 

 

 

 

 

59

 

 

 

38,084

 

Installment and consumer other

 

 

264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

264

 

Total

 

$

716,313

 

 

$

190,101

 

 

$

2,501

 

 

$

40,420

 

 

$

46,950

 

 

$

996,285

 

 

 

 

NOTE 5 – LOAN SERVICING RIGHTS

Loans serviced for others are not included in the accompanying consolidated balance sheets.  The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates.  The unpaid principal balances of loans serviced for others were approximately $841.9 million and $812.6 million at March 31, 2021 and December 31, 2020, respectively.  The fair value of these rights were approximately $18.9 million and $18.4 million at March 31, 2021 and December 31, 2020.  

The fair value of servicing rights is highly sensitive to changes in underlying assumptions.  The Company’s portfolio of loan serviced for others is mostly comprised of fixed rate loans. Generally, as market interest rates rise, prepayments on fixed rate loans decrease due to a decline in refinancing activity, which results in an increase in the fair value of servicing rights. However, due to the cross-collateralization of loans in the portfolio and the government guarantee programs under which many of the loans were originated, prepayments on the portfolio tend to be muted in comparison to those of other types of loans, such as mortgage loans. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they were applied at a different time.

The fair value of servicing rights at March 31, 2021 was determined using an assumed discount rate of 14.7% percent and a weighted average run-off rate of 16.24%, ranging from 15.67% to 24.42%, depending upon loan type, the stratification of the specific right, and nominal credit losses.  The fair value of servicing rights at December 31, 2020 was determined using an assumed discount rate of 14.3% and weighted average run-off rate of 16.59%, ranging from 16.02% to 24.72%, depending upon the stratification of the specific right, and nominal credit losses.

Changes to the fair value are reported in loan servicing fees within the consolidated statements of operations.  

 

 

15


 

 

The following tables summarize servicing rights capitalized, along with the aggregate activity in related valuation allowances for periods indicated.

 

 

For the Three Months Ended

 

 

 

March 31, 2021

 

 

 

(dollars in thousands)

 

  Balance at December 31, 2020

 

$

18,396

 

    Additions, net

 

 

1,587

 

    Fair value changes:

 

 

 

 

       Decay due to increases in principal paydowns or runoff

 

 

(271

)

       Due to changes in valuation inputs or assumptions

 

 

(848

)

  Balance, March 31, 2021

 

$

18,864

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31, 2020

 

 

 

(dollars in thousands)

 

  Balance at January 1, 2020

 

$

15,921

 

    Additions, net

 

 

505

 

    Fair value changes:

 

 

 

 

       Decay due to increases in principal paydowns or runoff

 

 

(265

)

       Due to changes in valuation inputs or assumptions

 

 

50

 

  Balance, March 31, 2020

 

$

16,211

 

 

 

 

 

NOTE 6 – DEPOSITS

Deposits are summarized as follows at March 31, 2021 and December 31, 2020:

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(dollars in thousands)

 

Demand deposits

 

$

139,838

 

 

$

163,202

 

NOW and interest checking

 

 

95,591

 

 

 

96,624

 

Savings

 

 

8,430

 

 

 

7,367

 

Money market accounts

 

 

390,742

 

 

 

344,250

 

Certificates of deposit

 

 

278,591

 

 

 

304,580

 

National time deposits

 

 

26,302

 

 

 

44,347

 

Brokered deposits

 

 

159,034

 

 

 

80,456

 

   Total deposits

 

$

1,098,528

 

 

$

1,040,826

 

 

 

 

16


 

 

NOTE 7—ADVANCES FROM FHLB AND OTHER BORROWINGS

The Bank had advances outstanding from the FHLB in the amount of $100.0 million and $129.0 million on March 31, 2021 and December 31, 2020, respectively. These advances, rates, and maturities were as follows:

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

Maturity

 

Rate

 

 

2021

 

 

2020

 

 

 

 

 

 

(dollars in thousands)

 

Fixed rate, fixed term

 

01/04/2021

 

 

0.23

%

 

$

 

 

$

29,000

 

Fixed rate, fixed term

 

04/12/2021

 

 

1.92

%

 

 

8,000

 

 

 

8,000

 

Fixed rate, fixed term

 

05/03/2021

 

 

0.00

%

 

 

4,000

 

 

 

4,000

 

Fixed rate, fixed term

 

06/15/2021

 

 

1.39

%

 

 

5,000

 

 

 

5,000

 

Fixed rate, fixed term

 

08/16/2021

 

 

2.29

%

 

 

3,000

 

 

 

3,000

 

Fixed rate, fixed term

 

12/30/2021

 

 

2.29

%

 

 

2,000

 

 

 

2,000

 

Fixed rate, fixed term

 

03/18/2022

 

 

1.03

%

 

 

15,000

 

 

 

15,000

 

Fixed rate, fixed term

 

03/25/2022

 

 

0.75

%

 

 

10,000

 

 

 

10,000

 

Fixed rate, fixed term

 

11/16/2022

 

 

0.38

%

 

 

20,000

 

 

 

20,000

 

Fixed rate, putable, 2 years no call

 

01/12/2023

 

 

2.03

%

 

 

8,000

 

 

 

8,000

 

Fixed rate, fixed term

 

03/23/2023

 

 

1.26

%

 

 

10,000

 

 

 

10,000

 

Fixed rate, fixed term

 

03/27/2023

 

 

0.82

%

 

 

15,000

 

 

 

15,000

 

 

 

 

 

 

 

 

 

$

100,000

 

 

$

129,000

 

The terms of security agreements with the FHLB require the Bank to pledge collateral for its borrowings. The collateral consists of qualifying first mortgage loans and stock of the FHLB.  At March 31, 2021 and December 31, 2020, the Bank had pledged qualifying mortgage loans of $390.6 million and $367.6 million, respectively.

As of March 31, 2021 and December 31, 2020, the Bank also had a line-of-credit available with the Federal Reserve Bank of Chicago.  Borrowings under this line of credit are limited by the amount of collateral pledged by the Bank, which totaled $109.3 million and $111.5 million in loans at March 31, 2021 and December 31, 2020, respectively.  The borrowings available to the Company were $82.0 million and $83.3 million, as of March 31, 2021 and December 31, 2020, respectively.  There were 0 outstanding advances included in other borrowings at March 31, 2021 and December 31, 2020.

Other borrowings are borrowings as a result of sold loans that do not qualify for sale accounting. These agreements are recorded as financing transactions as the Bank maintains effective control over the transferred loans. The dollar amount of the loans underlying the sale agreements continues to be carried in the Bank’s loan portfolio, and the transfer is reported as a secured borrowing with pledge of collateral.  At March 31, 2021 and December 31, 2020, the amounts of these borrowings were $0.1 million and $0.2 million, respectively.

Also included in other borrowings is the financing lease for our full-service banking location in Manitowoc, Wisconsin.  This branch location was owned by the Bank and was sold to a third party in March 2020.  The Bank is leasing back a portion of the building for its full-service branch.  Under the terms of the current lease which began on March 2, 2020, the Company is obligated to pay monthly rent of $16 thousand with an initial lease term of ten years with 2 renewal options of five years each.  As of March 31, 2021 and December 31, 2020, the liability remaining under the financing lease was $1.3 million.  

Company largely funded the Small Business Administration’s Paycheck Protection Program (“PPP”) loans through the Federal Reserve’s PPP Liquidity Facility, which allowed for 12-month advances collateralized by PPP loans at an interest rate of 0.35%.  The balance of these advances was $47.3 million and $47.5 million at March 31, 2021 and December 31, 2020, respectively, and were secured by PPP loans of the same amount.  

The following table sets forth information concerning balances and interest rates on other borrowings as of and for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(dollars in thousands)

 

Balance outstanding at end of period

 

$

48,674

 

 

$

49,006

 

Average amount outstanding during the period

 

 

51,220

 

 

 

61,483

 

Maximum amount outstanding at any month-end

 

 

56,299

 

 

 

93,709

 

Weighted average interest rate during the period

 

 

0.38

%

 

 

0.42

%

Weighted average interest rate at end of period

 

 

0.39

%

 

 

0.39

%

17


 

 

 

NOTE 8 — SUBORDINATED DEBENTURES

 

The following is a summary of the carrying values, including unamortized issuance costs, of the Company’s subordinated debt as of the dates indicated:

 

 

As of March 31, 2021

 

 

 

 

 

 

 

 

As of

December 31, 2020

 

 

 

Balance Outstanding

 

 

Interest Rate

 

 

Interest Reset Date

 

Call Date

 

Maturity Date

 

Balance Outstanding

 

 

 

(dollars in thousands)

 

Junior subordinated notes issued

   to County Bancorp Statutory

   Trust II (1)(2)

 

$

6,186

 

 

 

1.71

%

 

06/15/2021

 

N/A

 

09/15/2035

 

$

6,186

 

Junior subordinated notes issued

   to County Bancorp Statutory

   Trust III (1)(3)

 

 

6,186

 

 

 

1.87

%

 

06/15/2021

 

N/A

 

06/15/2036

 

 

6,186

 

Junior subordinated notes issued to

   Fox River Valley Capital Trust I (4)

 

 

3,348

 

 

 

6.40

%

 

11/30/2023

 

N/A

 

05/30/2033

 

 

3,336

 

5.875% Fixed-to-Floating rate

   subordinated notes (5)

 

 

29,592

 

 

 

5.875

%

 

06/01/2023

 

06/01/2023

 

06/01/2028

 

 

29,545

 

7.00% Fixed-to-Floating rate

   subordinated notes (6)

 

 

21,867

 

 

 

7.00

%

 

06/30/2025

 

06/30/2025

 

06/30/2030

 

 

21,858

 

      Total subordinated debentures

 

$

67,179

 

 

 

 

 

 

 

 

 

 

 

 

$

67,111

 

 

(1)

The company formed wholly owned subsidiary business trusts County Bancorp Statutory Trust II (“Trust II”) and County Bancorp Statutory Trust III (“Trust III”) (together, the “Trusts”), which are both Delaware statutory trusts.  The Company owns all of the outstanding common securities of Trust II and Trust III, which qualify as Tier 1 capital for regulatory purposes. The Trusts used the proceeds from the issuance of their capital securities to buy floating rate junior subordinated deferrable interest debentures (“debentures”) issued by the Company. These debentures are the Trusts’ only assets, and interest payments from these debentures finance the distributions paid on the capital securities. These debentures are unsecured, rank junior, and are subordinate in the right of payment to all senior debt of the Company.  

 

(2)

The debentures issued to Trust II bear an interest rate of three-month LIBOR plus 1.53% through maturity.

 

(3)

The debentures issued to Trust III bear an interest rate of three-month LIBOR plus 1.69% through maturity.

 

(4)

In connection with the merger with Fox River Valley, the Company acquired all of the common securities of Fox River Valley’s wholly-owned subsidiary, Fox River Valley Capital Trust I, a Delaware statutory trust (the “FRV Trust I”), which qualify as Tier 1 capital for regulatory purposes.  The debentures of the Company owned by FRV Trust I carry an interest rate equal to 5-year LIBOR plus 3.40%, which resets every five years.  

 

(5)

The notes bear interest at a fixed rate of 5.875% per year, from and including May 30, 2018 to, but excluding, June 1, 2023. From and including June 1, 2023 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current 3-month LIBOR plus 2.88%.  The notes qualify as Tier II capital of the Company.  Debt issuance costs of $0.9 million are being amortized over the life of the notes.

 

(6)

The notes bear interest at a fixed rate of 7.00% per year, from and including June 30, 2020 to, but excluding, June 30, 2025. From and including June 30, 2025 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term secured overnight financing rate (SOFR) plus 687.5 basis points.  The notes qualify as Tier II capital of the Company.  The Company incurred $0.6 million of costs related to the issuance of the notes.  These costs have been capitalized and are being amortized over the life of the notes.  

 

 

18


 

 

NOTE 9 – EQUITY INCENTIVE PLAN

Under the Company’s 2016 Long Term Incentive Plan (the “Plan”), the Company may grant options to purchase shares of common stock and issue restricted stock to its directors, officers, and employees.  Both qualified and non-qualified stock options and restricted stock may be granted and issued, respectively, under the Plan.  As of March 31, 2021, 25,406 options or shares of restricted stock remained available under the Plan.

The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. Vesting periods range from one to five years from the date of grant. The restricted stock vesting periods range from one to five years from the date of issuance.

The status of the Plan as of March 31, 2021 and changes in the Plan during the three months ended March 31, 2021 were as follows:

 

 

March 31, 2021

 

 

 

Number

of

Options

 

 

Weighted-Average

Exercise Price

 

 

Aggregate

Intrinsic

Value (1)

 

 

 

(dollars in thousands except option and per share data)

 

Outstanding, beginning of year

 

 

249,667

 

 

$

19.75

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(6,206

)

 

 

13.18

 

 

 

 

 

Forfeited/expired

 

 

(7,797

)

 

 

19.77

 

 

 

 

 

Outstanding, end of period

 

 

235,664

 

 

$

19.92

 

 

$

1,601

 

Options exercisable at period-end

 

 

174,691

 

 

$

19.87

 

 

$

801

 

Weighted-average fair value of options granted during

   the period (2)

 

 

 

 

 

$

 

 

 

 

 

 

(1)

The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2021. This amount changes based on changes in the market value of the Company’s stock.

(2)

The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

Activity in restricted stock awards and restricted stock units for the three months ended March 31, 2021 was as follows:

 

 

March 31, 2021

 

 

 

Restricted Stock Awards

 

 

Weighted

Average Grant

Price

 

Outstanding, beginning of year

 

 

6,299

 

 

$

24.80

 

Granted

 

 

 

 

 

 

Vested

 

 

(3,500

)

 

 

22.90

 

Forfeited/expired

 

 

(493

)

 

 

27.15

 

Outstanding, end of period

 

 

2,306

 

 

$

27.19

 

 

 

 

March 31, 2021

 

 

 

Restricted Stock Units

 

 

Weighted

Average Grant

Price

 

Outstanding, beginning of year

 

 

66,856

 

 

$

19.38

 

Granted

 

 

32,853

 

 

 

22.53

 

Vested

 

 

(11,879

)

 

 

19.50

 

Forfeited/expired

 

 

(3,332

)

 

 

18.25

 

Outstanding, end of period

 

 

84,498

 

 

$

20.63

 

Restricted shares vested not yet issued, end of period

 

 

9,779

 

 

$

23.61

 

 

For the three months ended March 31, 2021 and 2020, share-based compensation expense, including options and restricted stock awards and units, applicable to the Plan was $0.3 million.

19


 

As of March 31, 2021, unrecognized share-based compensation expense related to nonvested share-based compensation instruments amounted to $1.2 million and is expected to be recognized over a weighted average period of 1.95 years.

 

NOTE 10 – REGULATORY MATTERS

The Company (on a consolidated basis) and Bank are each subject to various regulatory capital requirements administered by the federal and state banking agencies.  The Basel III rules, a comprehensive capital framework for U.S. banking organizations, includes quantitative measures designed to ensure capital adequacy.  The Basel III rules designed the capital conservation buffer to absorb losses during periods of economic stress and effectively increase the minimum required risk-weighted capital ratios.  The Basel III rules require the Company and the Bank to maintain:

 

(i)

Tier 1 Common Equity ratio to risk weighted assets minimum of 4.50% plus a 2.50% “capital conservation buffer” (effectively resulting in minimum Tier 1 Common Equity ratio of 7.00%);

 

(ii)

Tier 1 Capital ratio to risk weighted assets minimum of 6.00% plus the capital conservation buffer (effectively resulting in a minimum Tier 1 Capital to risk-based capital ratio of 8.50%);

 

(iii)

Total Capital ratio to risk weighted assets minimum of 8.00% plus the capital conservation buffer (effectively resulting in a minimum Total Capital to risk weighted assets ratio of 10.50%); and

 

(iv)

Tier 1 Leverage Capital ratio minimum of 4.00%.   

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (applicable only to the Bank), the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.  Management believed, as of March 31, 2021 and December 31, 2020, that the Company and Bank met all capital adequacy requirements to which they were subject.

As of March 31, 2021, the most recent notification from the banking regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There were no conditions or events since the notification that management believes have changed the Bank’s category

20


 

The Company and Bank’s actual capital amounts and ratios are presented in the following table:

 

 

Actual

 

 

Minimum For

Capital Adequacy

Purposes

(including the capital

conservation buffer):

 

 

Minimum To Be Well

Capitalized Under

Prompt Corrective

Action Provisions:

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

$

247,772

 

 

 

19.11

%

 

$

136,164

 

 

 

10.50

%

 

Not applicable

 

 

 

 

 

     Bank

 

 

215,631

 

 

 

16.68

%

 

 

135,755

 

 

 

10.50

%

 

$

129,291

 

 

 

10.00

%

Tier 1 Capital (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

181,231

 

 

 

13.98

%

 

$

110,228

 

 

 

8.50

%

 

Not applicable

 

 

 

 

 

     Bank

 

 

200,549

 

 

 

15.51

%

 

 

109,897

 

 

 

8.50

%

 

 

103,433

 

 

 

8.00

%

Tier 1 Capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

181,231

 

 

 

12.69

%

 

 

57,125

 

 

 

4.00

%

 

Not applicable

 

 

 

 

 

     Bank

 

 

200,549

 

 

 

13.88

%

 

 

57,790

 

 

 

4.00

%

 

 

72,237

 

 

 

5.00

%

Tier 1 Common Equity Ratio (to risk

   weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

157,511

 

 

 

12.15

%

 

$

90,776

 

 

 

7.00

%

 

Not applicable

 

 

 

 

 

     Bank

 

 

200,549

 

 

 

15.51

%

 

 

90,504

 

 

 

7.00

%

 

 

84,039

 

 

 

6.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

$

246,275

 

 

 

19.50

%

 

$

132,603

 

 

 

10.50

%

 

Not applicable

 

 

 

 

 

     Bank

 

 

211,864

 

 

 

16.83

%

 

 

132,174

 

 

 

10.50

%

 

$

125,880

 

 

 

10.00

%

Tier 1 Capital (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

180,135

 

 

 

14.26

%

 

 

107,345

 

 

 

8.50

%

 

Not applicable

 

 

 

 

 

     Bank

 

 

197,056

 

 

 

15.65

%

 

 

106,998

 

 

 

8.50

%

 

 

100,704

 

 

 

8.00

%

Tier 1 Capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

180,135

 

 

 

13.01

%

 

 

55,403

 

 

 

4.00

%

 

Not applicable

 

 

 

 

 

     Bank

 

 

197,056

 

 

 

14.06

%

 

 

56,047

 

 

 

4.00

%

 

 

70,059

 

 

 

5.00

%

Tier 1 Common Equity Ratio (to risk

   weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

156,427

 

 

 

12.39

%

 

 

88,402

 

 

 

7.00

%

 

Not applicable

 

 

 

 

 

     Bank

 

 

197,056

 

 

 

15.65

%

 

 

88,116

 

 

 

7.00

%

 

 

81,822

 

 

 

6.50

%

 

 

NOTE 11 – FAIR VALUE MEASUREMENTS

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.

ASC 820-10 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own

21


 

assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2—Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3—Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments recorded at fair value on a recurring basis:

Securities Available-for-Sale

Where quoted prices are available in an active market, the Company classifies the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.

If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes and credit spreads.

Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. government and agency securities, corporate bonds and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in Level 3.

22


 

Loan Servicing Rights

The Company’s loan servicing rights do not trade in an active, open market with readily observable prices.  Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed, and default rate.    Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the valuation hierarchy.

Derivative Instruments

The Company's derivative instruments consist of interest rate swaps, which are accounted for as cash flow hedges. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total

Fair

Value

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

 

 

$

13,315

 

 

$

 

 

$

13,315

 

Municipal securities

 

 

 

 

 

160,096

 

 

 

 

 

 

160,096

 

Mortgage-backed securities

 

 

 

 

 

153,400

 

 

 

 

 

 

153,400

 

Corporate bonds

 

 

 

 

 

41,813

 

 

 

 

 

 

41,813

 

Asset-backed securities

 

 

 

 

 

16,616

 

 

 

 

 

 

16,616

 

Loan servicing rights (1)

 

 

 

 

 

 

 

 

18,864

 

 

 

18,864

 

Total assets at fair value

 

$

 

 

$

385,240

 

 

$

18,864

 

 

$

404,104

 

Derivative instruments, interest rate swaps

 

 

 

 

 

1,176

 

 

 

 

 

 

1,176

 

Total liabilities at fair value

 

$

 

 

$

1,176

 

 

$

 

 

$

1,176

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

 

 

$

14,593

 

 

$

 

 

$

14,593

 

Municipal securities

 

 

 

 

 

153,654

 

 

 

 

 

 

153,654

 

Mortgage-backed securities

 

 

 

 

 

135,378

 

 

 

 

 

 

135,378

 

Corporate bonds

 

 

 

 

 

32,511

 

 

 

 

 

 

32,511

 

Asset-backed securities

 

 

 

 

 

16,718

 

 

 

 

 

 

16,718

 

Loan servicing rights (1)

 

 

 

 

 

 

 

 

18,396

 

 

 

18,396

 

Total assets at fair value

 

$

 

 

$

352,854

 

 

$

18,396

 

 

$

371,250

 

Derivative instruments, interest rate swaps

 

 

 

 

 

1,914

 

 

 

 

 

 

1,914

 

Total liabilities at fair value

 

$

 

 

$

1,914

 

 

$

 

 

$

1,914

 

 

(1)

See Note 5 for quantitative information on the significant inputs and a rollforward of activity related to the loan servicing rights.

23


 

 

 

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy for which a nonrecurring change in fair value has been recorded:

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

45,951

 

Other real estate owned

 

 

 

 

 

 

 

 

739

 

Total assets at fair value

 

$

 

 

$

 

 

$

46,690

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

46,521

 

Other real estate owned

 

 

 

 

 

 

 

 

1,077

 

Total assets at fair value

 

$

 

 

$

 

 

$

47,598

 

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis were as follows:

March 31, 2021

 

 

Valuation

Techniques

 

Unobservable

Inputs

 

Range

(Average)

Impaired loans

 

Evaluation of collateral

 

Estimation of value

 

NM*

Other real estate owned

 

Appraisal

 

Appraisal adjustment

 

6%-7% (7%)

 

 

 

 

 

 

 

December 31, 2020

 

 

Valuation

Techniques

 

Unobservable

Inputs

 

Range

(Average)

Impaired loans

 

Evaluation of collateral

 

Estimation of value

 

NM*

Other real estate owned

 

Appraisal

 

Appraisal adjustment

 

6%-9% (7%)

 

 *

Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivable, inventory, a variety of equipment, and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered include aging of receivables, condition of the collateral, potential market for the collateral, and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

24


 

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments were as follows:

 

 

March 31,

 

 

December 31,

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Input

Level

 

 

(dollars in thousands)

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,404

 

 

$

17,404

 

 

$

19,084

 

 

$

19,084

 

 

1

Interest earning cash at other financial institutions

 

 

416

 

 

 

416

 

 

 

416

 

 

 

416

 

 

1

FHLB Stock

 

 

5,875

 

 

 

5,875

 

 

 

5,758

 

 

 

5,758

 

 

2

Securities available for sale

 

 

385,240

 

 

 

385,240

 

 

 

352,854

 

 

 

352,854

 

 

2

Loans, net of allowance for loan losses

 

 

996,582

 

 

 

1,004,518

 

 

 

981,477

 

 

 

991,342

 

 

3

Loans held for sale

 

 

5,788

 

 

 

5,788

 

 

 

35,976

 

 

 

35,976

 

 

3

Accrued interest receivable

 

 

4,060

 

 

 

4,060

 

 

 

3,240

 

 

 

3,240

 

 

2

Loan servicing rights

 

 

18,864

 

 

 

18,864

 

 

 

18,396

 

 

 

18,396

 

 

3

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time

 

 

463,927

 

 

 

457,095

 

 

 

419,542

 

 

 

426,092

 

 

2

Other deposits

 

 

634,601

 

 

 

634,601

 

 

 

621,284

 

 

 

621,284

 

 

1

Other borrowings

 

 

48,674

 

 

 

48,674

 

 

 

49,006

 

 

 

49,006

 

 

3

Advances from FHLB

 

 

100,000

 

 

 

101,068

 

 

 

129,000

 

 

 

130,361

 

 

2

Subordinated debentures

 

 

67,179

 

 

 

66,179

 

 

 

67,111

 

 

 

67,111

 

 

3

Accrued interest payable

 

 

2,536

 

 

 

2,536

 

 

 

2,496

 

 

 

2,496

 

 

2

Derivative instruments, interest rate swaps

 

 

1,176

 

 

 

1,176

 

 

 

1,914

 

 

 

1,914

 

 

2

 

 

NOTE 12 – OTHER REAL ESTATE OWNED

Changes in other real estate owned were as follows:

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

 

2021

 

 

 

2020

 

 

 

(dollars in thousands)

 

Balance, beginning of period

 

$

1,077

 

 

$

5,521

 

Assets foreclosed

 

 

 

 

 

 

Write-down of other real estate owned

 

 

 

 

 

(1,360

)

Net loss on sales of other real estate owned

 

 

(17

)

 

 

(4

)

Proceeds from sale of other real estate owned

 

 

(321

)

 

 

(910

)

Balance, end of period

 

$

739

 

 

$

3,247

 

 

Expenses applicable to other real estate owned included in non-interest expense included the following:

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

 

2021

 

 

 

2020

 

 

 

(dollars in thousands)

 

Net loss on sales of other real estate owned

 

$

(17

)

 

$

(4

)

Write-down of other real estate owned

 

 

 

 

 

(1,360

)

Operating expenses, net of rental income

 

 

(19

)

 

 

(116

)

 

 

$

(36

)

 

$

(1,480

)

NOTE 13 – DERIVATIVE FINANCIAL INSTRUMENTS

On June 15, 2018, the Company executed an interest rate swap to manage interest rate risk on 2 sets of its trust preferred securities.  This derivative contract involves the receipt of floating rate interest from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.  This instrument is designated as a cash flow hedge as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with three-month LIBOR advances.  The change in the fair value of this hedging instrument is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.

25


 

The Company had 2 outstanding interest rate swaps designated as a cash flow hedge each with an aggregate notional value of $6.0 million at March 31, 2021 and December 31, 2020.  Both interest rate swaps mature on June 15, 2028. A pre-tax unrealized gain of $0.7 million was recognized in accumulated other comprehensive income for the three months ended March 31, 2021, and a pre-tax loss of $1.2 million was recognized in accumulated other comprehensive income for the three months ended March 31, 2020.  There was 0 ineffective portion of this hedge.   

The Company is exposed to credit risk in the event of nonperformance by the interest rate swaps counterparty.  The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate swaps. The Company monitors counterparty risk in accordance with the provisions of FASB ASC 815.  In addition, the interest rate swap agreements contain language outlining collateral-pledging requirements for each counterparty.  Collateral must be posted when the market value exceeds certain threshold limits.  Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels.  These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration.  The Company was required to pledge $2.4 million of cash as collateral to the counterparty as of March 31, 2021.

NOTE 14 – SUBSEQUENT EVENTS

Management evaluated subsequent events through the date the financial statements were issued.  

There were no other significant events or transactions occurring after March 31, 2021, but prior to May 7, 2021, that provided additional evidence about conditions that existed at March 31, 2021.


26


 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q.  This report contains statements that constitute forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by the use of words such as “estimate,” “project,” “predict,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “may,” “might,” “should,” “indicate,” “will,” “would,” “could,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements are not historical facts and include statements of our goals, intentions, expectations, business plans, and operating strategies.

Forward-looking statements are subject to significant risks and uncertainties, and our actual results may differ materially from the results discussed in such forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

 

the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic;

 

government intervention in the U.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reformst;

 

adverse changes in the economic conditions of our market area and of the agriculture market generally, dairy in particular;

 

adverse changes in the financial services industry and national and local real estate markets (including real estate values);

 

competition among depository and other financial institutions, as well as financial technology (FinTech) companies and other non-traditional competitors;

 

risks related to a high concentration of dairy-related collateral located in our market area;

 

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our     allowance for loan losses and provision for loan losses;

 

the failure of assumptions and estimates underlying the establishment of our allowance for loan losses and estimation of values of collateral and various financial assets and liabilities;

 

interest rate risks associated with our business;

 

fluctuations in the values of the securities held in our securities portfolio;

 

changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity, our net interest margin, our funding sources and the value of our assets and liabilities;

 

our success in introducing new financial products;

 

our ability to attract and maintain deposits;

 

fluctuations in the demand for loans, which may be affected by numerous factors, including commercial conditions in our market areas and declines in the value of real estate in our market areas;

 

changes in consumer spending, borrowing and saving habits that may affect deposit levels;

 

costs or difficulties related to the integration of the business of acquired entities and the risk that the anticipated benefits, cost savings and any other savings from such transactions may not be fully realized or may take longer than expected to realize;

 

our ability to enter new markets successfully and capitalize on growth opportunities, execute our strategic plan, and manage our growth;

 

any negative perception of our reputation or financial strength;

 

our ability to raise additional capital on acceptable terms when needed;

 

changes in laws or government regulations or policies affecting financial institutions, including changes in banking, consumer protection, securities, trade, and tax laws and regulations, and any increased costs of compliance with such laws and regulations;

 

changes in accounting policies and practices, including the implementation of CECL;

27


 

 

 

our ability to retain key members of our senior management team;

 

our ability to successfully manage liquidity risk;

 

the effectiveness of our risk management framework;

 

the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents and our ability to identify and address such incidents;

 

interruptions involving our information technology and telecommunications systems or third-party servicers;

 

changes in benchmark interest rates used to price our loans and deposits, including the expected elimination of the London Interbank Offered Rate (“LIBOR”) and the adoption of a substitute;

 

the extensive regulatory framework that applies to us and our compliance with governmental and regulatory requirements including the Dodd-Frank Act, the Basel III Rule and others relating to banking, consumer protection, securities and tax matters;

 

rapid technological change in the financial services industry;

 

the effects of severe weather, natural disasters, acts of war or terrorism, widespread disease or pandemics, including the COVID-19 pandemic, and other external events;

 

the impact of any claims, legal actions, litigation, and other legal proceedings and regulatory actions against us, including any effect on our reputation;

 

the effect of tariffs, trade agreements, and other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; and

 

each of the factors and risks identified in the “Risk Factors” section included in this Form 10-Q and under Item 1A of Part I of our most recent Annual Report on Form 10-K.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements are made only as of the date of this report, and the Company undertakes no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.

Overview

County Bancorp, Inc. is a Wisconsin corporation founded in May 1996 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our primary activities consist of operating through our wholly owned subsidiary bank, Investors Community Bank, headquartered in Manitowoc, Wisconsin, and providing a wide range of banking and related business services through the Bank and our other subsidiaries.

In addition to the Bank, we have three wholly owned subsidiaries, County Bancorp Statutory Trust II, County Bancorp Statutory Trust III, and Fox River Valley Capital Trust I, which are Delaware statutory trusts.  The Bank is the sole member of Investors Insurance Services, LLC and ABS 1, LLC, which are both Wisconsin limited liability companies.  

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans, and the interest we pay on interest-bearing liabilities, such as deposits. We generate most of our revenue from interest on loans and investments and loan- and deposit-related fees. Our loan portfolio consists of a mix of agricultural, commercial real estate, commercial, and residential real estate loans.  Our primary source of funding is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance through various metrics, including our pre-tax net income, net interest margin, net overhead ratio, return on average assets, earnings per share, and ratio of non-performing assets to total assets.  We also utilize non-GAAP metrics, such as adjusted diluted earnings per share, efficiency ratio, return on average common shareholders’ equity, tangible book value per share, ratio of tangible common equity to tangible assets, and adverse classified asset ratio, to evaluate the Company’s performance.  We are required to maintain appropriate regulatory leverage and risk-based capital ratios.

There have been no material changes to the critical accounting policies included in the 2020 Form 10-K filed on March 12, 2021.

28


 

Significant Developments – Impact of COVID-19

The COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three months ended March 31, 2021 and 2020, and has had a complex and adverse impact on the economy and the banking industry and is expected to continue to adversely impact the Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on Our Market Areas.  Our commercial and consumer banking products and services are offered primarily in Wisconsin, where individual and governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity beginning in March 2020.  A stay-at-home order was imposed in March 2020, and on May 13, 2020, businesses and social gatherings began reopening based on local ordinances in a phased-in approach, subject to public health reopening guidelines, including social distancing and limitations on capacity.  

The Bank and its branches remained open during these orders because banks were deemed essential businesses although lobbies were initially closed from March 18, 2020, to June 22, 2020 and again from October 13, 2020 to March 1, 2021.  Based on the current environment, it is unclear how communities in Wisconsin will change, relax, or impose new stay-at-home and social distancing policies, including as a result of the availability of vaccines, and how that will impact the economy and our customers.

Across the United States, as a result of the curtailment of business activities since March 2020, many states have experienced a dramatic increase in unemployment levels. According to the U.S. Bureau of Labor Statistics, the unemployment rate in Wisconsin (on a seasonally adjusted basis) increased from 3.1% in March 2020 to 13.6% in April 2020, and subsequently decreased to 3.8% in March 2021 (based on preliminary numbers).

Policy and Regulatory Developments.  Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

 

The Federal Reserve decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching the current range of 0.0 – 0.25%.

 

On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (“SBA”), referred to as the PPP.  The Bank participates as a lender in the PPP. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized.  In addition in December 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900.0 billion COVID-19 relief package that included an additional $284.5 billion in PPP funding.  In March 2021, President Biden signed the American Rescue Plan Act of 2021, a $1.9 trillion economic stimulus package that includes cash payments to individuals, supplemental unemployment insurance, and modifications and expansion of the PPP.  In March 2021, President Biden also signed the PPP Extension Act of 2021, which extended the PPP application deadline to May 31, 2021.

 

The CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19.  In addition on April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.  The FDIC and the Board of Governors of the Federal Reserve System, in consultation with state financial regulators, issued a revision to the Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus issued on March 22, 2020. The revised interagency statement encourages financial institutions to work constructively with borrowers impacted by COVID-19, provides additional information regarding loan modifications, and clarifies the interaction between the interagency statement and related relief provided by the CARES Act.  The Statement provides guidance on handling payment modification requests for impacted borrowers without triggering TDR classifications, by allowing up to 6-months of payment deferrals or interest only to assist our customers at this time.  

Effects on Our Business.  The COVID-19 pandemic and the specific developments referred to above have had and will continue to have an impact on our business.  In particular, we anticipate that a significant portion of the Bank’s borrowers in retail shopping centers, limited service restaurants, hotels, assisted living and nursing homes and residential rental industries may continue to endure significant economic distress, which may cause them to draw on their existing lines of credit and adversely affect their ability and willingness to repay existing indebtedness, and may adversely impact the value of collateral.  These developments, together with economic conditions generally, may impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries and the value of certain collateral securing our loans.  As a result, we anticipate that our financial condition, capital levels and results of operations will be adversely affected, as described in further detail below.

29


 

Our Response.  We have taken numerous steps in response to the COVID-19 pandemic, including the following:

 

In response to the interagency statement encouraging financial institutions to work with borrowers impacted by COVID-19, between March 31, 2020 and March 31, 2021, we processed 184 customer payment modification requests for customers who had loan balances of $200.4 million, and at March 31, 2021, five customers remained on payment relief with loan balances totaling $6.1 million,

 

The Bank processed 904 PPP loan applications in round one, totaling $106.2 million, and 461 applications in round two totaling $32.6 million in the first quarter of 2021.  These loans are being funded through borrowings from the Federal Reserve’s PPP Liquidity Facility so as not to reduce the Bank’s available liquidity.  As of March 31, 2021, there were $46.3 million of PPP loans (rounds one and two) outstanding.  We are currently working with PPP borrowers to help them through the process of forgiveness of their PPP loans.

 

Approximately 80% of the Bank’s employees are working remotely as of March 31, 2021.  In our branch network, the drive thrus are open, and the lobbies reopened to the public on March 1, 2021.

 

There are no current plans to suspend our common stock repurchase plan or common stock dividend.  The Board and management will continue to evaluate our capital plans as our credit metrics and capital levels change.  In addition, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, we will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if we do not maintain greater than 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.

Operational Overview

 

Net income for the three months ended March 31, 2021 was $3.9 million, compared to $4.5 million for the three months ended December 31, 2020, and a net loss of $5.2 million for the three months ended March 31, 2020.  The year-over-year increase was primarily the result of $5.0 million of goodwill impairment during the first quarter of 2020 and $2.0 million decrease in provision for loan losses for the three months ended March 31, 2021.

 

Total securities available-for-sale increased $32.4 million, or 9.2% from December 31, 2020 to $385.2 million at March 31, 2021, and increased $139.1 million, or 56.5%, since March 31, 2020.

 

Total loans increased $15.4 million, or 1.5%, from December 31, 2020 to $1.0 billion at March 31, 2021, and decreased $0.8 million, or 0.1%, from March 31, 2020.  

 

Participated and sold loans that we continue to service totaled $841.9 million at March 31, 2021, an increase of $29.3 million, or 3.6%, since December 31, 2020, and an increase of $94.3 million, or 12.6%, since March 31, 2020.

 

Non-performing assets increased $2.0 million, or 4.7%, since December 31, 2020, to $44.7 million at March 31, 2021, and increased $9.4 million, or 26.7%, since March 31, 2020.

 

Client deposits (demand, NOW accounts and interest checking, savings, money market accounts, and certificates of deposit) decreased $2.8 million, or 0.3%, since December 31, 2020, to $913.2 million at March 31, 2021, and increased $121.5 million, or 15.3%, since March 31, 2020.

 

Cost of funds on interest bearing deposits decreased 22 basis points since the quarter ended December 31, 2020 to 0.91%, and decreased 92 basis points since the quarter ended March 31, 2021.

30


 

Selected Financial Data

 

 

As of and for the

 

 

As of and for the

 

 

 

Three Months Ended

 

 

Year Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

December 31, 2020

 

 

 

(unaudited)

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

Selected Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

13,715

 

 

$

14,095

 

 

$

55,475

 

Interest expense

 

 

3,497

 

 

 

5,297

 

 

 

18,499

 

Net interest income

 

 

10,218

 

 

 

8,798

 

 

 

36,976

 

Provision for loan losses

 

 

242

 

 

 

2,218

 

 

 

2,984

 

Net interest income after provision for loan losses

 

 

9,976

 

 

 

6,580

 

 

 

33,992

 

Non-interest income

 

 

3,712

 

 

 

2,703

 

 

 

14,250

 

Non-interest expense

 

 

8,764

 

 

 

15,018

 

 

 

39,645

 

Income tax expense (benefit)

 

 

996

 

 

 

(547

)

 

 

3,118

 

Net income

 

$

3,928

 

 

$

(5,188

)

 

$

5,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

0.62

 

 

$

(0.79

)

 

$

0.79

 

Diluted earnings (loss) per common share

 

$

0.62

 

 

$

(0.78

)

 

$

0.79

 

Adjusted diluted earnings (loss) per common share (1)

 

$

0.62

 

 

$

(0.04

)

 

$

1.56

 

Cash dividends per common share

 

$

0.10

 

 

$

0.07

 

 

$

0.31

 

Book value per share, end of period

 

$

25.99

 

 

$

24.17

 

 

$

26.42

 

Tangible book value per share, end of period (1)

 

$

25.98

 

 

$

24.15

 

 

$

26.42

 

Weighted average common shares - basic

 

 

6,202,260

 

 

 

6,700,329

 

 

 

6,477,173

 

Weighted average common shares - diluted

 

 

6,236,725

 

 

 

6,749,401

 

 

 

6,505,198

 

Common shares outstanding, end of period

 

 

6,094,450

 

 

 

6,496,790

 

 

 

6,197,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,491,328

 

 

$

1,354,974

 

 

$

1,472,358

 

Securities available-for-sale

 

 

385,240

 

 

 

246,148

 

 

 

352,854

 

Total loans

 

 

1,011,664

 

 

 

1,012,436

 

 

 

996,285

 

Allowance for loan losses

 

 

(15,082

)

 

 

(17,547

)

 

 

(14,808

)

Total deposits

 

 

1,098,528

 

 

 

1,019,960

 

 

 

1,040,826

 

Other borrowings and FHLB advances

 

 

148,674

 

 

 

111,593

 

 

 

178,006

 

Subordinated debentures

 

 

67,179

 

 

 

44,896

 

 

 

67,111

 

Total shareholders' equity

 

 

166,337

 

 

 

165,046

 

 

 

171,776

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

 

1.06

%

 

 

(1.53

)%

 

 

0.38

%

Return on average shareholders' equity (annualized)

 

 

9.11

%

 

 

(11.97

)%

 

 

3.22

%

Return on average common shareholders' equity (1)

 

 

9.29

%

 

 

(12.81

)%

 

 

3.15

%

Equity to assets ratio

 

 

11.15

%

 

 

12.18

%

 

 

11.67

%

Net interest margin

 

 

2.95

%

 

 

2.74

%

 

 

2.68

%

Interest rate spread

 

 

2.73

%

 

 

2.37

%

 

 

2.37

%

Non-interest income to average assets (annualized)

 

 

1.00

%

 

 

0.80

%

 

 

1.19

%

Non-interest expense to average assets (annualized)

 

 

2.37

%

 

 

4.43

%

 

 

2.58

%

Net overhead ratio (annualized) (2)

 

 

1.36

%

 

 

3.64

%

 

 

1.40

%

Efficiency ratio (1)

 

 

62.79

%

 

 

74.92

%

 

 

66.09

%

Dividend payout ratio

 

 

16.13

%

 

 

(8.97

)%

 

 

39.24

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Adverse classified asset ratio (1)

 

 

39.61

%

 

 

32.35

%

 

 

39.43

%

Non-performing loans to total loans (3)

 

 

4.35

%

 

 

3.17

%

 

 

4.18

%

Allowance for loan losses to:

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

1.49

%

 

 

1.73

%

 

 

1.49

%

Non-performing loans

 

 

34.30

%

 

 

54.75

%

 

 

35.58

%

Net charge-offs to average loans

 

 

0.00

%

 

 

(0.01

)%

 

 

0.32

%

Non-performing assets to total assets (3)

 

 

3.00

%

 

 

2.61

%

 

 

2.90

%

31


 

 

(1)

Adjusted diluted earnings per common share, tangible book value per share, return on average common shareholders’ equity, efficiency ratio, and adverse classified asset ratio are not recognized under GAAP and are therefore considered to be non-GAAP financial measures.  See below for reconciliations of these financial measures to their most comparable GAAP measures.

(2)

Net overhead ratio represents the difference between noninterest expense and noninterest income, divided by average assets.

(3)

Non-performing loans consist of nonaccrual loans.  Non-performing assets consist of nonaccrual loans and other real estate owned.  

 

 

As of

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

(unaudited)

 

Capital Ratios:

 

 

 

 

 

 

 

 

Shareholders' common equity to assets

 

 

10.62

%

 

 

11.59

%

Total capital to risk-weighted assets (Bank)

 

 

16.68

%

 

 

17.95

%

Tangible common equity to tangible assets (1)

 

 

10.62

%

 

 

11.58

%

 

 

(1)

Tangible common equity to tangible assets is not recognized under GAAP and is therefore considered to be a non-GAAP financial measure.  See below for reconciliations of this financial measure to its most comparable GAAP measure.

Non-GAAP Financial Measures

“Efficiency ratio” is defined as non-interest expense, excluding goodwill impairment, historical tax credit investment impairment, and gains and losses on sales and write-downs of other real estate owned, divided by operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities.  In our judgment, the adjustments made to non-interest expense and non-interest income allow investors to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.

 

 

Three Months Ended

 

 

Year Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

December 31, 2020

 

 

 

(dollars in thousands)

 

Efficiency Ratio GAAP to Non-GAAP reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

$

8,764

 

 

$

15,018

 

 

$

39,645

 

Less: goodwill impairment

 

 

 

 

 

(5,038

)

 

 

(5,038

)

Less: historical tax credit investment

   impairment

 

 

 

 

 

(1,364

)

 

 

 

Less: net loss on sales and write-downs of

   OREO

 

 

(17

)

 

 

 

 

 

(1,195

)

Adjusted non-interest expense (non-GAAP)

 

$

8,747

 

 

$

8,616

 

 

$

33,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

10,218

 

 

$

8,798

 

 

$

36,976

 

Non-interest income

 

 

3,712

 

 

 

2,703

 

 

 

14,250

 

Less: net gain on sales of securities

 

 

 

 

 

 

 

 

(671

)

Operating revenue

 

$

13,930

 

 

$

11,501

 

 

$

50,555

 

Efficiency ratio

 

 

62.79

%

 

 

74.92

%

 

 

66.09

%

 

Return on average common shareholders’ equity is a non-GAAP based financial measure calculated using non-GAAP based amounts.  The most directly comparable GAAP based measure is return on average shareholders’ equity.  We calculate return on average common shareholders’ equity by excluding the average preferred shareholders’ equity and the related dividends.  Management uses the return on average common shareholders’ equity in order to review our core operating results and our performance.  

 

 

Three Months Ended

 

 

Year Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

December 31, 2020

 

Return on Average Common Shareholders' Equity

   GAAP to Non-GAAP reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

Return on average shareholders' equity

 

 

9.11

%

 

 

(11.97

)%

 

 

3.22

%

Effect of excluding average preferred

    shareholders' equity

 

 

0.18

%

 

 

(0.84

)%

 

 

(0.07

)%

Return on average common shareholders'

    equity

 

 

9.29

%

 

 

(12.81

)%

 

 

3.15

%

32


 

 

 

Tangible book value per share and ratio of tangible common equity to tangible assets are non-GAAP financial measures based on GAAP amounts.  In our judgment, the adjustments made to book value, equity and assets allow investors to better assess our capital adequacy and net worth by removing the effect of goodwill and intangible assets that are unrelated to our core business.

 

 

March 31, 2021

 

 

March 31, 2020

 

 

December 31, 2020

 

 

 

(dollars in thousands, except per share data)

 

Tangible book value per share and tangible common

   equity to tangible assets reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

     Common equity

 

$

158,338

 

 

$

157,046

 

 

$

163,776

 

     Less: Core deposit intangible, net of amortization

 

 

29

 

 

 

171

 

 

 

54

 

         Tangible common equity

 

$

158,309

 

 

$

156,875

 

 

$

163,722

 

     Common shares outstanding

 

 

6,094,450

 

 

 

6,496,790

 

 

 

6,197,965

 

     Tangible book value per share

 

$

25.98

 

 

$

24.15

 

 

$

26.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Total assets

 

$

1,491,328

 

 

$

1,354,974

 

 

$

1,472,358

 

     Less: Core deposit intangible, net of amortization

 

 

29

 

 

 

171

 

 

 

54

 

         Tangible assets

 

$

1,491,299

 

 

$

1,354,803

 

 

$

1,472,304

 

     Tangible common equity to tangible assets

 

 

10.62

%

 

 

11.58

%

 

 

11.12

%

Adjusted diluted earnings per share is a non-GAAP measure based on GAAP amounts.  In our judgment, the adjustments made to diluted earnings per share allow investors to better assess our income related to core operations by removing the volatility associated with the goodwill impairment, which was a one-time, non-cash expense.

 

 

Three Months Ended

 

 

Year Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

December 31, 2020

 

 

 

(dollars in thousands, except per share data)

 

Adjusted diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

     Net income from continuing operations

 

$

3,928

 

 

$

(5,188

)

 

$

5,479

 

     Less:  preferred stock dividends

 

 

(81

)

 

 

(108

)

 

 

(367

)

     Plus: goodwill impairment

 

 

 

 

 

5,038

 

 

 

5,038

 

     Adjusted income available to common shareholders

        for basic earnings per common share

 

$

3,847

 

 

$

(258

)

 

$

10,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Weighted average number of common shares

        outstanding

 

 

6,202,260

 

 

 

6,703,990

 

 

 

6,477,173

 

     Effect of dilutive options

 

 

34,465

 

 

 

49,072

 

 

 

28,025

 

     Weighted average number of common shares

        outstanding used to calculate diluted earnings

        per common share

 

 

6,236,725

 

 

 

6,753,062

 

 

 

6,505,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted diluted earnings per share

 

$

0.62

 

 

$

(0.04

)

 

$

1.56

 

33


 

 

Adverse classified asset ratio is a non-GAAP financial measure based on GAAP amounts.  In our judgment, the adjustments made to non-performing assets allow management to better assess asset quality and monitor the amount of capital coverage necessary for non-performing assets.  

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

(dollars in thousands, except per share data)

 

Adverse classified asset ratio:

 

 

 

 

 

 

 

 

     Substandard loans

 

 

88,075

 

 

 

71,694

 

     Other real estate owned

 

 

739

 

 

 

3,247

 

     Substandard unused commitments

 

 

5,091

 

 

 

2,840

 

     Less: Substandard government guarantees

 

 

(8,485

)

 

 

(7,699

)

           Total adverse classified assets (non-GAAP)

 

$

85,420

 

 

$

70,082

 

 

 

 

 

 

 

 

 

 

     Total equity (Bank)

 

$

202,200

 

 

$

204,089

 

     Accumulated other comprehensive gain on available-for-sale

        securities

 

 

(1,651

)

 

 

(5,012

)

     Allowance for loan losses

 

 

15,082

 

 

 

17,547

 

        Adjusted total equity (non-GAAP)

 

$

215,631

 

 

$

216,624

 

           Adverse classified asset ratio

 

 

39.61

%

 

 

32.35

%

Results of Operations

Our operating revenue is comprised of interest income and non-interest income.  Net interest income increased by 16.1% to $10.2 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily attributable to a 92 basis point decrease in rates paid on interest bearing deposits that contributed to the decrease in interest expense by $2.3 million.  The decrease in cost of funds was coupled with a $1.1 million decrease in interest income on loans which was primarily attributable to a 28 basis point decrease in loan yield on an average balance that was $15.1 million lower than the comparable quarter.  

Interest income decreased $0.4 million to $13.7 million for the first quarter of 2021 compared to $14.1 million for the first quarter of 2020, which resulted mainly from a decrease in average loan balance and a decline in loan yields from 4.89% for the first quarter of 2020 to 4.61% for the first quarter of 2021, which was only partially offset by a net increase of $0.7 million in interest income from investment securities and interest-bearing deposits due from other banks from the first quarter of 2020.  

PPP loans contributed $1.0 million in interest and related SBA fee income for the three months ended March 31, 2021.  There was no PPP income for the three months ended March 31, 2020.  The following table shows the accretive effect the SBA PPP loans had on net interest margin for the three months ended March 31, 2021:

 

 

For the Three Months Ended

 

 

 

March 31, 2021

 

Net interest margin excluding PPP loans

 

 

2.74

%

Accretion related to PPP loans:

 

 

 

 

Yield on PPP loans

 

 

(0.06

)%

Yield on PPP loan SBA fees

 

 

0.29

%

Interest expense on PPP Liquidity Facility

   programs

 

 

(0.02

)%

Total accretion related to PPP loans

 

 

0.21

%

Total net interest margin

 

 

2.95

%

Interest expense decreased from $5.3 million for the first quarter of 2020 to $3.5 million for the first quarter of 2021, which was primarily the result of a 79 basis point decrease in the rate paid on interest-bearing liabilities.  The decline in average rate was primarily the result of the Federal Reserve’s decrease to the target federal funds rate in March 2020 and our focused efforts to increase customer transactional deposits which have a lower rate than time deposits.  Rates paid on savings, NOW, money market, and interest checking accounts decreased from 0.92% for the quarter ended March 31, 2020 to 0.32% for the quarter ended March 31, 2021, and the average balance increased by $0.1 million between the two periods.  Rates paid on time deposits decreased from 2.33% for the quarter ended March 31, 2020 to 1.55% for the quarter ended March 31, 2021, and the average balance decreased by $0.2 million between the same periods.

34


 

Analysis of Net Interest Income

Net interest income is the largest component of our income and is dependent on the volumes of and yields earned on interest-earning assets as compared to the volumes of and rates paid on interest-bearing liabilities.  

As a result of the reductions in the target federal funds interest rate, as well as the impact of the COVID-19 pandemic that we expect to incur, we expect that our net interest income and net interest margin could decrease in future periods.

The following tables reflect the components of net interest income for the three months ended March 31, 2021 and 2020:

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

Average

Balance (1)

 

 

Income/

Expense

 

 

Yields/

Rates

 

 

Average

Balance (1)

 

 

Income/

Expense

 

 

Yields/

Rates

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

372,235

 

 

$

2,187

 

 

 

2.38

%

 

$

196,353

 

 

$

1,289

 

 

 

2.63

%

Loans excluding PPP loans(2)

 

 

969,429

 

 

 

10,479

 

 

 

4.38

%

 

 

1,028,637

 

 

 

12,582

 

 

 

4.89

%

PPP loans - round 1 (2)

 

 

27,252

 

 

 

961

 

 

 

14.30

%

 

 

 

 

 

 

 

 

 

PPP loans - round 2 (2)

 

 

16,857

 

 

 

83

 

 

 

2.01

%

 

 

 

 

 

 

 

 

 

Total loans (2)

 

 

1,013,538

 

 

 

11,523

 

 

 

4.61

%

 

 

1,028,637

 

 

 

12,582

 

 

 

4.89

%

Interest bearing deposits due from other banks

 

 

19,949

 

 

 

5

 

 

 

0.10

%

 

 

60,825

 

 

 

225

 

 

 

1.48

%

Total interest-earning assets

 

$

1,405,722

 

 

$

13,715

 

 

 

3.96

%

 

$

1,285,815

 

 

$

14,096

 

 

 

4.39

%

Allowance for loan losses

 

 

(14,932

)

 

 

 

 

 

 

 

 

 

 

(15,330

)

 

 

 

 

 

 

 

 

Other assets

 

 

90,109

 

 

 

 

 

 

 

 

 

 

 

84,461

 

 

 

 

 

 

 

 

 

     Total assets

 

$

1,480,899

 

 

 

 

 

 

 

 

 

 

$

1,354,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, money market, interest checking

 

$

477,159

 

 

$

380

 

 

 

0.32

%

 

$

334,740

 

 

$

774

 

 

 

0.92

%

Time deposits

 

 

442,626

 

 

 

1,690

 

 

 

1.55

%

 

 

613,753

 

 

 

3,574

 

 

 

2.33

%

Total interest-bearing deposits

 

$

919,785

 

 

$

2,070

 

 

 

0.91

%

 

$

948,493

 

 

$

4,348

 

 

 

1.83

%

Other borrowings

 

 

51,220

 

 

 

48

 

 

 

0.38

%

 

 

1,259

 

 

 

11

 

 

 

3.49

%

FHLB advances

 

 

116,311

 

 

 

273

 

 

 

0.95

%

 

 

56,708

 

 

 

233

 

 

 

1.65

%

Junior subordinated debentures

 

 

67,123

 

 

 

1,106

 

 

 

6.68

%

 

 

44,871

 

 

 

706

 

 

 

6.29

%

Total interest-bearing liabilities

 

$

1,154,439

 

 

$

3,497

 

 

 

1.23

%

 

$

1,051,331

 

 

$

5,298

 

 

 

2.02

%

Non-interest-bearing deposits

 

 

138,814

 

 

 

 

 

 

 

 

 

 

 

113,351

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

15,190

 

 

 

 

 

 

 

 

 

 

 

16,877

 

 

 

 

 

 

 

 

 

     Total liabilities

 

$

1,308,443

 

 

 

 

 

 

 

 

 

 

$

1,181,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

172,456

 

 

 

 

 

 

 

 

 

 

 

173,387

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

1,480,899

 

 

 

 

 

 

 

 

 

 

$

1,354,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

10,218

 

 

 

 

 

 

 

 

 

 

$

8,798

 

 

 

 

 

Interest rate spread (3)

 

 

 

 

 

 

 

 

 

 

2.73

%

 

 

 

 

 

 

 

 

 

 

2.37

%

Net interest margin (4)

 

 

 

 

 

 

 

 

 

 

2.95

%

 

 

 

 

 

 

 

 

 

 

2.74

%

Ratio of interest-earning assets to interest-bearing

   liabilities

 

 

1.22

 

 

 

 

 

 

 

 

 

 

 

1.22

 

 

 

 

 

 

 

 

 

 

(1)

Average balances are calculated on amortized cost.

 

(2)

Includes loan fee income, nonaccruing loan balances, and interest received on such loans.

 

(3)

Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

 

(4)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income between the periods indicated.  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The net column represents the sum of the

35


 

volume and rate columns. For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately between the changes due to rate and the changes due to volume.

 

 

 

Three Months Ended March 31, 2021 v. 2020

 

 

 

Increase (Decrease)

Due to Change in Average

 

 

 

Rate

 

 

Volume

 

 

Net

 

 

 

(dollars in thousands)

 

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

(105

)

 

$

1,003

 

 

$

898

 

Loans (excluding PPP)

 

 

(1,351

)

 

 

(752

)

 

 

(2,103

)

PPP loans - round 1

 

 

1,639

 

 

 

(678

)

 

 

961

 

PPP loans - round 2

 

 

(1,130

)

 

 

1,213

 

 

 

83

 

   Total loans

 

 

(842

)

 

 

(217

)

 

 

(1,059

)

Federal funds sold and interest-bearing deposits with

   banks

 

 

(128

)

 

 

(92

)

 

 

(220

)

Total interest income

 

 

(1,075

)

 

 

694

 

 

 

(381

)

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, money market and interest checking

 

 

(1,144

)

 

 

750

 

 

 

(394

)

Time deposits

 

 

(1,030

)

 

 

(854

)

 

 

(1,884

)

Other borrowings

 

 

(1

)

 

 

38

 

 

 

37

 

FHLB advances

 

 

(28

)

 

 

68

 

 

 

40

 

Junior subordinated debentures

 

 

45

 

 

 

355

 

 

 

400

 

Total interest expense

 

 

(2,158

)

 

 

357

 

 

 

(1,801

)

Net interest income

 

$

1,083

 

 

$

337

 

 

$

1,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for Loan Losses

Based on our analysis of the components of the allowance for loan losses, management recorded a provision expense for loan losses of $0.2 million for the three months ended March 31, 2021, compared to $2.2 million for the three months ended March 31, 2020.  The decrease in provision was primarily the result of a $2.0 million qualitative factor for industries that were deemed to be high-risk due to the COVID-19 pandemic for the three months ended March 31, 2020, and the economic uncertainty at that time.  As of March 31, 2021, only $0.5 million of this qualitative factor remained.

The specific reserve related to impaired loans was $4.6 million at March 31, 2021, which was an increase of $0.4 million, or 8.4%, from December 31, 2020, which was the result of an additional impairment on an agricultural relationship that was already impaired.  During the first quarter of 2021, watch and worse rated loans decreased by $25.5 million, or 9.3%, compared to December 31, 2020, primarily as the result of eight dairy customers upgraded to a low satisfactory rating.  This improvement in asset quality is expected to continue in the second quarter of 2021 as we complete the annual review process.  

As of March 31, 2021, there were five customer relationships with loans in payment deferral associated with COVID-19 customer support programs totaling $6.1 million, or 0.6% of total loans, which is a decrease of $16.8 million, or 63.5%, since December 31, 2020

Other than the qualitative factor for COVID-19 discussed above, there have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan losses from what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.  Based upon this methodology, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan losses of $15.1 million, or 1.49% of total loans, was appropriate as of March 31, 2021.  This is compared to an allowance for loan losses of $17.5 million, or 1.73% of total loans, at March 31, 2020, and $14.8 million, or 1.49% of total loans, at December 31, 2020.  

Non-Interest Income

Non-interest income for the three months ended March 31, 2021 increased by 36.5% to $3.7 million from $2.7 million for the three months ended March 31, 2020.  The $1.0 million increase was primarily the result of $0.3 million and $0.2 million increases in loan servicing fees and net loan servicing right income, respectively, which was the result of $94.3 million additional loans

36


 

serviced for the three months ended March 31, 2021 compared to the same period in the previous year.  In addition, referral fee income increased $0.3 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The following table reflects the components of non-interest income for the three months ended March 31, 2021 and 2020:

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

(dollars in thousands)

 

Service charges

 

$

119

 

 

$

113

 

Crop insurance commission

 

 

301

 

 

 

229

 

Gain on sale of residential loans

 

 

93

 

 

 

38

 

Gain on sale of service-retained loans

 

 

1,587

 

 

 

505

 

   Total gain on sale of loans

 

 

1,680

 

 

 

543

 

Loan servicing fees

 

 

2,158

 

 

 

1,830

 

Decay due to increases in principal paydowns or runoff

 

 

(271

)

 

 

(265

)

Changes in valuation inputs or assumptions

 

 

(848

)

 

 

50

 

    Total loan servicing fees, net

 

 

1,039

 

 

 

1,615

 

Referral fees

 

 

319

 

 

 

17

 

Other

 

 

254

 

 

 

186

 

Total non-interest income

 

$

3,712

 

 

$

2,703

 

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2021 decreased $6.3 million, or 41.6%, to $8.8 million compared to the three months ended March 31, 2020, primarily due to the $5.0 million goodwill impairment and a $1.4 million OREO writedown that took place the first quarter of 2020.  Small increases in employee compensation and benefits and professional fees for the three months ended March 31, 2021 were offset by decreases in occupancy, OREO, and other non-interest expenses.  

The following table reflects the components of our non-interest expense for the three months ended March 31, 2021 and 2020:

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

(dollars in thousands)

 

Employee compensation and benefits

 

$

5,582

 

 

$

5,260

 

Occupancy

 

 

279

 

 

 

354

 

Information processing

 

 

661

 

 

 

670

 

Professional fees

 

 

802

 

 

 

401

 

Business development

 

 

307

 

 

 

366

 

Other real estate owned expenses

 

 

23

 

 

 

116

 

Write-down of other real estate owned

 

 

 

 

 

1,360

 

Net loss on other real estate owned

 

 

17

 

 

 

4

 

Depreciation and amortization

 

 

257

 

 

 

301

 

Goodwill impairment

 

 

 

 

 

5,038

 

Other

 

 

836

 

 

 

1,148

 

Total non-interest expense

 

$

8,764

 

 

$

15,018

 

 

Income taxes

The Company accounts for income taxes in accordance with income tax accounting guidance, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. 

37


 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50%; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the “more likely than not” recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the “more likely than not” recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company files income tax returns in the U.S. federal jurisdiction and in the state of Wisconsin. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2017.

The Company recognizes interest and penalties on income taxes, if any, as a component of other non-interest expense.

Income tax expense (benefit) for the three months ended March 31, 2021 and 2020, was $1.0 million and $(0.5) million, respectively, which represents an effective tax rate of 20.2% and 9.5%, respectively.  The increase in the effective tax rate for the 2021 period compared to the 2020 period was primarily the result of the non-deductible goodwill impairment that took place during the first quarter of 2020.

Financial Condition

Total assets increased $19.0 million, or 1.3%, from December 31, 2020 to $1.5 billion at March 31, 2021.  Total loans increased by $15.4 million, or 1.5%, since December 31, 2020, primarily as the result of the $32.6 million of second round PPP loans that were funded in the first quarter of 2021 which were partially offset by the forgiveness from the SBA of $24.1 million of first round PPP loans during the same period.  In addition, commercial real estate loans increased $8.8 million as of March 31, 2021, which were partially offset by normal pay-downs.

Total liabilities increased $24.4 million, or 1.9%, from December 31, 2020 to $1.3 billion at March 31, 2021.  This increase was primarily attributable to a $60.5 million increase in wholesale deposits that was used to purchase securities as part of our long-term leverage strategy and to paydown FHLB borrowings.  We funded the second round of PPP loans discussed above with advances received through the Federal Reserve Bank’s Paycheck Protection Program Liquidity Facility (“PPPLF”).  PPPLF borrowings bear an interest rate of 0.35%.  The balance of the PPPLF was $47.3 million at March 31, 2021, compared to $47.5 million at December 31, 2020 due to payments made against the facility when forgiveness was received from the SBA for the first round of PPP loans.

Shareholders’ equity decreased $5.5 million, or 3.2%, to $166.3 million at March 31, 2021 from $171.8 million at December 31, 2020.  This decrease was due primarily to $6.4 million of unrealized losses in our securities portfolio during the first quarter of 2021, which was partially offset by net income for the three months ended March 31, 2021 of $3.9 million.  In addition, the Company repurchased 117,020 shares of its common stock, totaling $2.5 million, during the three months ended March 31, 2021.  Total shareholders’ equity was also reduced by the payment of $0.7 million of dividends on common and preferred stock during the three months ended March 31, 2021.  

Net Loans

Net loans increased by $15.1 million, or 1.5%, to $1.0 billion at March 31, 2021 from December 31, 2020.  This increase was primarily the result of $32.6 million of second round PPP loans that were funded in the first quarter of 2021, which were partially offset by the forgiveness from the SBA of $24.1 million of first round PPP loans during the same period.  In addition, commercial real estate loans increased $8.8 million as of March 31, 2021, which were partially offset by normal pay-downs.

38


 

The following table sets forth the composition of our loan portfolio at the dates indicated:

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

(dollars in thousands)

 

Agriculture loans

 

$

609,482

 

 

 

60.2

%

 

$

606,881

 

 

 

60.9

%

Commercial real estate loans

 

 

244,791

 

 

 

24.2

%

 

 

235,969

 

 

 

23.7

%

Commercial loans

 

 

72,834

 

 

 

7.2

%

 

 

77,297

 

 

 

7.8

%

PPP loans

 

 

46,249

 

 

 

4.6

%

 

 

37,790

 

 

 

3.8

%

Residential real estate loans

 

 

38,063

 

 

 

3.8

%

 

 

38,084

 

 

 

3.8

%

Installment and consumer other

 

 

245

 

 

 

0.0

%

 

 

264

 

 

 

0.0

%

Total gross loans

 

$

1,011,664

 

 

 

100.0

%

 

$

996,285

 

 

 

100.0

%

Allowance for loan losses

 

 

(15,082

)

 

 

 

 

 

 

(14,808

)

 

 

 

 

Loans, net

 

$

996,582

 

 

 

 

 

 

$

981,477

 

 

 

 

 

The following table sets forth the composition of PPP loans in our loan portfolio at the dates indicated:

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

# of Loans

 

 

Balance

 

 

Deferred Fee Income

 

 

# of Loans

 

 

Balance

 

 

Deferred Fee Income

 

 

 

(dollars in thousands)

 

PPP 1oans - Round 1

 

 

127

 

 

$

13,674

 

 

$

301

 

 

 

456

 

 

$

37,790

 

 

$

1,191

 

PPP loans - Round 2

 

 

461

 

 

 

32,595

 

 

 

1,479

 

 

 

 

 

 

 

 

 

 

Total PPP loans

 

 

588

 

 

$

46,269

 

 

$

1,780

 

 

 

456

 

 

$

37,790

 

 

$

1,191

 

% of Total loans

 

 

 

 

 

 

4.57

%

 

 

 

 

 

 

 

 

 

 

3.79

%

 

 

 

 

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of all or some of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of probable incurred losses in the loan portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to, past loan loss experience, the nature of the portfolio, economic conditions, information about specific borrower situations, and estimated collateral values. Our board of directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem credits. Management continuously reviews these policies and procedures and makes further improvements as needed. The adequacy of our allowance for loan losses and the effectiveness of our internal policies and procedures are also reviewed periodically by our regulators, our auditors, and external loan review personnel. Our regulators may advise us to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is taken under consideration by management, and we may recognize additions to the allowance as a result.

We continually refine our methodology for determining the allowance for loan losses by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreements; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to us. We mitigate this risk by actively using government guarantee programs.  12.1% of our substandard loans are partially guaranteed by the U.S. Farm Services Agency (“FSA”) or the SBA.  The amount of the guarantee can range from 80% to 95% of unpaid principal for FSA guaranteed loans and 50% to 100% for SBA guaranteed loans.  

At March 31, 2021 and December 31, 2020, the allowance for loan losses was $15.1 million and $14.8 million, respectively, which resulted in a ratio of the allowance to total loans of 1.49% for each period.  

39


 

Charge-offs and recoveries by loan category for the three months ended March 31, 2021 and 2020 were as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

(dollars in thousands)

 

Balance, beginning of period

 

$

14,808

 

 

$

15,267

 

Loans charged off:

 

 

 

 

 

 

 

 

Agriculture loans

 

 

 

 

 

 

Commercial real estate loans

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

Residential real estate loans

 

 

 

 

 

 

Installment and consumer other

 

 

 

 

 

 

Total loans charged off

 

$

 

 

$

 

Recoveries:

 

 

 

 

 

 

 

 

Agriculture loans

 

 

 

 

 

 

Commercial real estate loans

 

 

1

 

 

 

61

 

Commercial loans

 

 

31

 

 

 

1

 

Residential real estate loans

 

 

 

 

 

 

Installment and consumer other

 

 

 

 

 

 

Total recoveries

 

 

32

 

 

 

62

 

Net loans recovered

 

$

(32

)

 

$

(62

)

Provision for loan losses

 

 

242

 

 

 

2,218

 

Allowance for loan losses, end of period

 

$

15,082

 

 

$

17,547

 

 

 

 

 

 

 

 

 

 

Selected loan quality ratios:

 

 

 

 

 

 

 

 

Net charge offs to average loans

 

 

0.00

%

 

 

(0.01

)%

Allowance for loan losses to total loans (end of period)

 

 

1.49

%

 

 

1.73

%

Allowance for loan losses to non-performing loans and

   performing troubled debt restructurings (end of period)

 

 

26.24

%

 

 

30.70

%

 

As provided in the interagency statement, the Company has been working with its borrowers impacted by COVID-19.  As of March 31, 2021, loans with COVID-19 payment modifications were $6.1 million, or 0.6% of total loans.  We will continue to evaluate the impacts of these payment modification requests on our allowance for loan losses.

Loan Servicing Rights

As part of our growth and risk management strategy, we have actively developed a loan participation and loan sales network. Our ability to sell loan participations and whole loans benefits us by freeing up capital and funding to lend to new customers as well as increasing non-interest income through the recognition of loan sale and servicing revenue. Because we continue to service these loans, we are able to maintain a relationship with the customer. Additionally, we receive a servicing fee that offsets some of the cost of administering the loan, while maintaining the customer relationship.  

Loan servicing rights are recognized as separate assets when rights are acquired through the sale of financial assets. Servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer.  Under the fair value method, the value of the asset is based on a discounted cash flow model. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, ancillary income, and run-off rates.  These variables change from quarter-to-quarter as market conditions and projected interest rates change and may have an adverse impact on the value of the servicing right and may result in a reduction to non-interest income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

40


 

Information about the loan servicing portfolio is shown below:

 

 

For the Three Months Ended

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(dollars in thousands)

 

Loan servicing rights, end of period

 

$

18,864

 

 

$

18,396

 

Loans serviced, end of period

 

 

841,893

 

 

 

812,560

 

Loan servicing rights as a % of loans

   serviced

 

 

2.24

%

 

 

2.26

%

 

 

 

 

 

 

 

 

 

     Total loan servicing fees

 

$

2,158

 

 

$

1,974

 

Average loans serviced

 

 

827,227

 

 

 

805,190

 

Annualized loan servicing fees as a

   % of average loans serviced

 

 

1.04

%

 

 

0.98

%

Securities

Our securities portfolio is predominately composed of municipal securities, investment grade mortgage-backed securities, U.S. government and agency securities, asset-backed securities, and corporate bonds. We classify substantially all of our securities as available for sale. We do not engage in active securities trading in carrying out our investment strategies.

Securities increased to $385.2 million at March 31, 2021 from $352.9 million at December 31, 2020, in an effort to deploy excess cash and mitigate interest rate risk.  During the three months ended March 31, 2021, we recognized unrealized holding losses of $9.7 million before income taxes through other comprehensive income.

The following table sets forth the amortized cost and fair values of our securities portfolio at March 31, 2021 and December 31, 2020:

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Amortized

Cost

 

 

Fair

Value

 

 

Amortized

Cost

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

13,453

 

 

 

13,315

 

 

 

14,745

 

 

 

14,593

 

Municipal securities

 

 

162,639

 

 

 

160,096

 

 

 

149,203

 

 

 

153,654

 

Mortgage-backed securities

 

 

148,422

 

 

 

153,400

 

 

 

127,804

 

 

 

135,378

 

Corporate bonds

 

 

42,000

 

 

 

41,813

 

 

 

32,500

 

 

 

32,511

 

Asset-backed securities

 

 

16,456

 

 

 

16,616

 

 

 

16,664

 

 

 

16,718

 

Total securities available-for-sale

 

$

382,970

 

 

$

385,240

 

 

$

340,916

 

 

$

352,854

 

 

Deposits

Deposits are the major source of our funds for lending and other investment purposes.  Deposits are attracted principally from within our primary market area through the offering of a broad variety of deposit instruments including checking accounts, noninterest-bearing demand accounts, money market accounts, savings accounts, time deposit accounts (including “jumbo” certificates in denominations of $100,000 or more), and retirement savings plans.  

Total deposits increased $57.7 million, or 5.5%, from December 31, 2020 to $1.1 billion at March 31, 2021, due primarily to a $60.5 million increase in wholesale deposits in order to facilitate investment purchases. The increase in wholesale funding was partially offset by a $2.8 million decrease in client deposits (demand, NOW accounts and interest checking, savings, money market accounts, and certificates of deposit).  This decrease in client deposits was expected due to seasonal attrition.

41


 

As of March 31, 2021 and December 31, 2020, the distribution by type of deposit account was as follows:

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Amount

 

 

% of Deposits

 

 

Amount

 

 

% of Deposits

 

 

 

(dollars in thousands)

 

Demand, noninterest-bearing

 

$

139,838

 

 

 

12.7

%

 

$

163,202

 

 

 

15.6

%

NOW accounts and interest checking

 

 

95,591

 

 

 

8.7

%

 

 

96,624

 

 

 

9.3

%

Savings

 

 

8,430

 

 

 

0.8

%

 

 

7,367

 

 

 

0.7

%

Money market accounts

 

 

390,742

 

 

 

35.5

%

 

 

344,250

 

 

 

33.1

%

Certificates of deposit

 

 

278,591

 

 

 

25.4

%

 

 

304,580

 

 

 

29.3

%

Brokered deposits

 

 

26,302

 

 

 

2.4

%

 

 

44,347

 

 

 

4.3

%

National time deposits

 

 

159,034

 

 

 

14.5

%

 

 

80,456

 

 

 

7.7

%

Total deposits

 

$

1,098,528

 

 

 

100.0

%

 

$

1,040,826

 

 

 

100.0

%

 

Hedging Activities

As of March 31, 2021, the Company had two outstanding interest rate swaps designated as a cash flow hedge, each with an aggregate notional value of $6.0 million. Both interest rate swaps mature on June 15, 2028.  A pre-tax unrealized loss of $1.2 million and $1.9 million was recognized at March 31, 2021 and December 31, 2020, respectively, with a corresponding increase reported in accrued interest payable and other liabilities on the consolidated balance sheets.  There was no ineffective portion of this hedge.  

Liquidity Management and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature including, but not limited to, funding loans and depositor withdrawals. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions and competition.

At March 31, 2021, advances from the FHLB were $100.0 million compared to $129.0 million at December 31, 2020.  At March 31, 2021, there were advances from the Federal Reserve Bank’s PPPLF program totaling $47.3 million compared to $47.5 million at December 31, 2020.    

Management adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, (4) the objectives of our interest-rate risk and investment policies and (5) the risk tolerance of management and our board of directors.

Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash provided by (used in) operating activities was $33.4 million and ($12.6) million for the three months ended March 31, 2021 and 2020, respectively.  Net cash used in investing activities, which consists primarily of purchases of and proceeds from the sale, maturities, calls, and principal repayments of securities available for sale, as well as loan originations, net of repayments, was $60.3 million and $73.6 million for the three months ended March 31, 2021 and 2020, respectively.  Net cash provided by (used in) financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $25.2 million and ($21.3) million for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, the Bank had $35.8 million and $82.0 million in borrowing capacity with the FHLB and the Federal Reserve Bank of Chicago, respectively, to mitigate any liquidity needs.  The Bank also had $329.2 million in unpledged securities available for sale available for liquidity needs.

At March 31, 2021, the Bank exceeded all of its regulatory capital requirements, with Tier 1 leverage capital of $200.5 million, or 13.88% of adjusted average total assets, which is above the minimum level to be well-capitalized of $72.2 million, or 5.0% of adjusted average total assets, and total risk-based capital of $215.6 million, or 16.68% of risk-weighted assets, which is above the minimum level to be well-capitalized of $129.3 million, or 10.5% of risk-weighted assets.  In addition, the Company issued $22.4 million of subordinated debt during 2020 that qualifies as Tier 2 capital that is available to support the Bank.

At the holding company level, our primary sources of liquidity are dividends from the Bank, investment income and net proceeds from investment sales, borrowings and capital offerings. The main uses of liquidity are the payment of interest to holders of our junior subordinated debentures and subordinated notes and the payment of interest or dividends to common and preferred shareholders.  The Bank is subject to certain regulatory limitations regarding its ability to pay dividends to the Company; however, we

42


 

do not believe that the Company will be adversely affected by these dividend limitations.  At March 31, 2021, there were $111.5 million of retained earnings available for the payment of dividends by the Bank to the Company but would be limited to the Bank maintaining minimum regulatory capital ratios.  Management believed liquidity to be sufficient as of March 31, 2021.

At March 31, 2021, the holding company exceeded all of its regulatory capital requirements, with Tier 1 leverage capital of $181.2 million, or 12.69% of adjusted average assets, which is above the minimum level for capital adequacy of $57.1 million, or 4.0% of adjusted average assets, and total risk-based capital of $247.8 million, or 19.11% of risk-weighted assets, which is above the minimum level for capital adequacy of $136.2 million, or 10.0% of risk-weighted assets.  

During the fourth quarter of 2020, the Company began construction on a new branch in Appleton, Wisconsin with an estimated completion of the fourth quarter of 2021.  The remaining contractual obligation related to the construction was $4.8 million at March 31, 2021.

Off-Balance Sheet Arrangements and Contractual Obligations

As of March 31, 2021, there were no significant changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 12, 2021.  We continue to believe that we have adequate capital and liquidity available from various sources to fund projected obligations and commitments.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

General. Market risk refers to potential losses arising from changes in interest rates, commodity prices, such as milk prices, and/or other relevant market rates or prices. We are exposed to market risk as a result of our banking activities. Our market risk is comprised primarily of interest rate risk. As a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit our exposure to changes in market interest rates. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.

A major source of interest rate risk is a difference in the repricing of assets and liabilities. First, there are differences in the timing of rate changes reflecting the maturity and/or repricing of assets and liabilities. For example, the rate earned on a commercial real estate loan may be fixed for 10 years, while the rate paid on a certificate of deposit may be fixed only for a few months. Due to these timing differences, net interest income is sensitive to changes in the level and shape of the yield curve. Second, there are differences in the drivers of rate changes of various assets and liabilities known as basis risk. For example, commercial loans may reprice based on one-month LIBOR or prime, while the rate paid on retail money market demand accounts may be only loosely correlated with LIBOR and depend on competitive demand for funds. Due to these basis differences, net interest income is sensitive to changes in spreads between certain indices or repricing rates.

Another important source of interest rate risk relates to the potential exercise of explicit or embedded options for prepayment or withdrawal. For example, most residential real estate loans can be prepaid without penalty, and most consumer deposits can be withdrawn without penalty. The exercise of such options by customers can exacerbate the timing differences discussed above.

Deposit accounts typically react more quickly to changes in market interest rates than loans because of the shorter maturities of deposits. However, given the asset sensitive nature of our balance sheet, a decrease in interest rates may adversely affect our earnings while increases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes adjustable-rate loans for retention in our loan portfolio, promoting core deposit products and time deposits, adjusting the maturities of borrowings, and adjusting the investment portfolio mix and duration.

We have an asset/liability committee, which includes members of management, to communicate, coordinate and control all aspects involving asset-liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income and net income and control exposure to interest rate risk within policy limits approved by our board of directors. These limits and guidelines reflect our tolerance for interest rate risk over both short-term and long-term horizons. We analyze our sensitivity to

43


 

changes in interest rates through our net interest income simulation model. Exposures are reported on a monthly basis to the asset and liability committee and at meetings of our board of directors.

Net Interest Income Simulation Analysis. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings.

Income simulation is the primary tool for measuring the interest rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over specified time horizons, under a range of interest rate shock scenarios. These simulations take into account repricing, maturity and prepayment characteristics of individual products. We estimate what our net interest income would be for a one- and two-year horizon based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions.

These estimates require us to make certain assumptions, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain, and, as a result, we cannot precisely predict the impact of changes in interest rates on our net interest income. Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

The following table shows the estimated impact on net interest income for the one- and two-year periods beginning March 31, 2021 resulting from potential changes in interest rates. The net interest income simulation analyses assume a static balance sheet and do not include possible future actions that management might undertake to mitigate this risk.

Rate Shift

 

Net Interest Income

Year 1 Forecast

 

 

Year 1 Change

from Base

 

 

Net Interest Income

Year 2 Forecast

 

 

Year 2 Change

from Base

 

 

 

(dollars in thousands)

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

+400 bps

 

$

46,700

 

 

 

17.34

%

 

$

43,500

 

 

 

16.00

%

+200 bps

 

 

43,300

 

 

 

8.79

%

 

 

41,200

 

 

 

9.87

%

+100 bps

 

 

41,400

 

 

 

4.02

%

 

 

39,500

 

 

 

5.33

%

Base

 

 

39,800

 

 

 

0.00

%

 

 

37,500

 

 

 

0.00

%

-100 bps

 

 

38,300

 

 

 

-3.77

%

 

 

36,500

 

 

 

-2.67

%

-200 bps

 

 

37,500

 

 

 

-5.78

%

 

 

35,800

 

 

 

-4.53

%

As of March 31, 2021, net interest income simulation indicated that our exposure to changing interest rates was within our internal policy guidelines. As the table illustrates, our balance sheet is asset-sensitive over a one- and two-year time horizon and net interest income would increase as interest rates increase. It should be noted that the magnitude of any possible increase in interest rates is constrained by the low absolute starting levels of rates. While immediate, proportional, and severe shifts in interest rates upward were used as part of this analysis, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact.

Depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, we may place greater emphasis on maximizing our net interest margin than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe that our level of interest rate risk is acceptable using this approach.

Economic Value of Equity Analysis. We also analyze the sensitivity of our financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between predicted changes in the present value of our assets and predicted changes in the present value of our liabilities assuming various changes in current interest rates. As with the net interest income simulation model, the estimates of changes in the economic value of our equity require certain assumptions to be made. These assumptions include loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain, and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of our equity and will differ from actual results.

 

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of

44


 

1934, as amended (the “Exchange Act”)) as of March 31, 2021. Based on such evaluation, our President and Chief Financial Officer have concluded that, as of March 31, 2021, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

There are inherent limitations in the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective system of disclosure controls and procedures can provide only reasonable assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

45


 

 

PART II—OTHER INFORMATION

We and our subsidiaries may be involved from time to time in ordinary routine litigation incidental to our respective businesses.  Neither we nor any of our subsidiaries are currently engaged in, nor is any of our property the subject of, any legal proceedings, other than ordinary routine litigation incidental to the business, that are expected to have a material adverse effect on our results of operations or financial position.  

Item 1A. Risk Factors.

There were no material changes to the risk factors set forth in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

The Company did not issue any unregistered equity securities during the quarter ended March 31, 2021.

Issuer Purchases of Equity Securities

The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the first quarter of 2021.

Period

 

Total Number

of Shares

Purchased

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

 

 

Maximum Number of Shares that may yet be Purchased under the Plans or Programs (1)

 

January 1 - 31, 2021

 

 

46,566

 

 

$

21.69

 

 

 

39,408

 

 

 

62,740

 

February 1 - 28, 2021

 

 

33,475

 

 

 

22.34

 

 

 

33,475

 

 

 

638,265

 

March 1 - 31, 2021

 

 

36,979

 

 

 

24.61

 

 

 

36,979

 

 

 

601,286

 

(1)

On January 29, 2020, the Company announced that its Board of Directors authorized the Company to repurchase up to 673,000 shares of its common stock through January 23, 2023.  Stock repurchases under the program could be made from time to time on the open market, in privately negotiated transactions, or in any manner that complies with applicable securities laws, at the discretion of the Company. As of March 31, 2021, all the authorized shares in this program had been repurchased for a total of $14.9 million.  On February 16, 2021, the Company announced that its Board of Directors extended the stock repurchase program, authorizing the purchase of up to an aggregate of 609,000 additional shares of the Company’s outstanding common stock through February 16, 2024.  The timing of purchases and the number of shares repurchased under the program are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice.  As of March 31, 2021, $0.2 million, or 7,714 shares, of the Company’s common stock had been repurchased under the program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

 

 

46


 

 

Item 6. Exhibits.

 

Exhibit

Number

 

Description

 

 

 

  3.1

 

Third Amended and Restated Articles of Incorporation of County Bancorp, Inc.  (Incorporated by reference to Exhibit 3.1 of County Bancorp, Inc.’s annual report on Form 10-K filed on March 15, 2018)

 

 

 

  3.2

 

Third Amended and Restated Bylaws of County Bancorp, Inc. as of November 20, 2018 (Incorporated by reference to Exhibit 3.1 of County Bancorp, Inc.’s current report on Form 8-K filed on November 27, 2018)

 

 

 

  10.1

 

Employment Agreement among County Bancorp, Inc., Investors Community Bank, and Glen L. Stiteley (Incorporated by reference to Exhibit 10.1 of County Bancorp Inc.’s current report on Form 8-K filed on July 20, 2017)

 

 

 

  31.1

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  31.2

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

The iXBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (1)

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

(1) Includes the following financial information included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements

 

 

 

 

47


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

County Bancorp, Inc.

 

 

 

 

Date:  May 7, 2021

 

By:

/s/ Timothy J. Schneider

 

 

 

Timothy J. Schneider

 

 

 

President

(principal executive officer)

 

 

 

 

Date:  May 7, 2021

 

By:

/s/ Glen L. Stiteley

 

 

 

Glen L. Stiteley

 

 

 

Chief Financial Officer

(principal financial and accounting officer)

 

 

 

48