Attached files
file | filename |
---|---|
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - Citizens Community Bancorp Inc. | czwi-20200331xex321.htm |
EX-31.2 - SECTION 302 CFO CERTIFICATION - Citizens Community Bancorp Inc. | czwi-20200331xex312.htm |
EX-31.1 - SECTION 302 CEO CERTIFICATION - Citizens Community Bancorp Inc. | czwi-20200331xex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
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 001-33003
CITIZENS COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 20-5120010 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | |
2174 EastRidge Center | ||
Eau Claire, WI | 54701 | |
(Address of principal executive offices) | (Zip Code) |
715-836-9994
(Registrant’s telephone number, including area code)
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, $.01 par value per share | CZWI | NASDAQ Global Market SM |
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 x 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | x | |||
Non-accelerated filer | ¨ | Smaller reporting company | x | |||
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 x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At May 11, 2020 there were 11,150,695 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
CITIZENS COMMUNITY BANCORP, INC.
FORM 10-Q
March 31, 2020
INDEX
Page Number | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
3
PART 1 – FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
4
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Balance Sheets
March 31, 2020 (unaudited) and December 31, 2019
(derived from audited financial statements)
(in thousands, except share and per share data)
March 31, 2020 | December 31, 2019 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 41,347 | $ | 55,840 | |||
Other interest-bearing deposits | 4,006 | 4,744 | |||||
Securities available for sale "AFS" | 163,435 | 180,119 | |||||
Securities held to maturity "HTM" | 10,767 | 2,851 | |||||
Equity securities with readily determinable fair value | 163 | 246 | |||||
Other investments | 14,999 | 15,005 | |||||
Loans receivable | 1,180,951 | 1,177,380 | |||||
Allowance for loan losses | (11,835 | ) | (10,320 | ) | |||
Loans receivable, net | 1,169,116 | 1,167,060 | |||||
Loans held for sale | 3,281 | 5,893 | |||||
Mortgage servicing rights | 3,728 | 4,282 | |||||
Office properties and equipment, net | 21,066 | 21,106 | |||||
Accrued interest receivable | 4,822 | 4,738 | |||||
Intangible assets | 7,175 | 7,587 | |||||
Goodwill | 31,498 | 31,498 | |||||
Foreclosed and repossessed assets, net | 1,432 | 1,460 | |||||
Bank owned life insurance ("BOLI") | 23,205 | 23,063 | |||||
Other assets | 5,124 | 5,757 | |||||
TOTAL ASSETS | $ | 1,505,164 | $ | 1,531,249 | |||
Liabilities and Stockholders’ Equity | |||||||
Liabilities: | |||||||
Deposits | $ | 1,180,055 | $ | 1,195,702 | |||
Federal Home Loan Bank advances | 123,477 | 130,971 | |||||
Other borrowings | 43,576 | 43,560 | |||||
Other liabilities | 10,123 | 10,463 | |||||
Total liabilities | 1,357,231 | 1,380,696 | |||||
Stockholders’ Equity: | |||||||
Common stock— $0.01 par value, authorized 30,000,000; 11,151,009 and 11,266,954 shares issued and outstanding, respectively | 112 | 113 | |||||
Additional paid-in capital | 127,732 | 128,856 | |||||
Retained earnings | 22,690 | 22,517 | |||||
Unearned deferred compensation | (992 | ) | (462 | ) | |||
Accumulated other comprehensive loss | (1,609 | ) | (471 | ) | |||
Total stockholders’ equity | 147,933 | 150,553 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,505,164 | $ | 1,531,249 |
See accompanying condensed notes to unaudited consolidated financial statements.
5
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 2020 and 2019
(in thousands, except per share data)
Three Months Ended | |||||||
March 31, 2020 | March 31, 2019 | ||||||
Interest and dividend income: | |||||||
Interest and fees on loans | $ | 15,459 | $ | 12,414 | |||
Interest on investments | 1,449 | 1,304 | |||||
Total interest and dividend income | 16,908 | 13,718 | |||||
Interest expense: | |||||||
Interest on deposits | 3,180 | 2,593 | |||||
Interest on FHLB borrowed funds | 508 | 661 | |||||
Interest on other borrowed funds | 549 | 402 | |||||
Total interest expense | 4,237 | 3,656 | |||||
Net interest income before provision for loan losses | 12,671 | 10,062 | |||||
Provision for loan losses | 2,000 | 1,225 | |||||
Net interest income after provision for loan losses | 10,671 | 8,837 | |||||
Non-interest income: | |||||||
Service charges on deposit accounts | 560 | 550 | |||||
Interchange income | 464 | 338 | |||||
Loan servicing income | 685 | 554 | |||||
Gain on sale of loans | 780 | 308 | |||||
Loan fees and service charges | 477 | 128 | |||||
Insurance commission income | 279 | 184 | |||||
Net gains on investment securities | 73 | 34 | |||||
Other | 285 | 236 | |||||
Total non-interest income | 3,603 | 2,332 | |||||
Non-interest expense: | |||||||
Compensation and related benefits | 5,435 | 4,706 | |||||
Occupancy | 1,006 | 954 | |||||
Office | 543 | 522 | |||||
Data processing | 996 | 987 | |||||
Amortization of intangible assets | 412 | 327 | |||||
Mortgage servicing rights expense | 736 | 191 | |||||
Advertising, marketing and public relations | 239 | 203 | |||||
FDIC premium assessment | 68 | 94 | |||||
Professional services | 604 | 825 | |||||
Gain on repossessed assets, net | (68 | ) | (37 | ) | |||
Other | 760 | 1,122 | |||||
Total non-interest expense | 10,731 | 9,894 | |||||
Income before provision for income tax | 3,543 | 1,275 | |||||
Provision for income taxes | 937 | 322 | |||||
Net income attributable to common stockholders | $ | 2,606 | $ | 953 | |||
Per share information: | |||||||
Basic earnings | $ | 0.23 | $ | 0.09 | |||
Diluted earnings | $ | 0.23 | $ | 0.09 | |||
Cash dividends paid | $ | 0.21 | $ | 0.20 |
See accompanying condensed notes to unaudited consolidated financial statements.
6
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (unaudited)
Three months ended March 31, 2020 and 2019
(in thousands)
Three Months Ended | ||||||||
March 31, 2020 | March 31, 2019 | |||||||
Net income attributable to common stockholders | $ | 2,606 | $ | 953 | ||||
Other comprehensive income, net of tax: | ||||||||
Securities available for sale | ||||||||
Net unrealized gains (losses) arising during period | (1,191 | ) | 1,137 | |||||
Reclassification adjustment for net gains included in net income | 53 | 27 | ||||||
Other comprehensive income (loss) | (1,138 | ) | 1,164 | |||||
Comprehensive income | $ | 1,468 | $ | 2,117 |
See accompanying condensed notes to unaudited consolidated financial statements.
7
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Three Months Ended March 31, 2020
(in thousands, except shares and per share data)
Additional Paid-In Capital | Retained Earnings | Unearned Deferred Compensation | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance, January 1, 2020 | 11,266,954 | $ | 113 | $ | 128,856 | $ | 22,517 | $ | (462 | ) | $ | (471 | ) | $ | 150,553 | |||||||||||
Net income | — | — | — | 2,606 | — | — | 2,606 | |||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | (1,138 | ) | (1,138 | ) | |||||||||||||||||
Surrender of restricted shares of common stock | (1,746 | ) | — | (21 | ) | — | — | — | (21 | ) | ||||||||||||||||
Common stock awarded under the equity incentive plan | 41,507 | — | 669 | — | (669 | ) | — | — | ||||||||||||||||||
Common stock fractional share audit adjustment | (40 | ) | — | — | — | — | — | — | ||||||||||||||||||
Common stock repurchased | (155,666 | ) | (1 | ) | (1,776 | ) | (61 | ) | — | — | (1,838 | ) | ||||||||||||||
Stock option expense | — | — | 4 | — | — | — | 4 | |||||||||||||||||||
Amortization of restricted stock | — | — | — | — | 139 | — | 139 | |||||||||||||||||||
Cash dividends ($0.21 per share) | — | — | — | (2,372 | ) | — | — | (2,372 | ) | |||||||||||||||||
Balance at March 31, 2020 | 11,151,009 | $ | 112 | $ | 127,732 | $ | 22,690 | $ | (992 | ) | $ | (1,609 | ) | $ | 147,933 |
See accompanying condensed notes to unaudited consolidated financial statements.
8
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Twelve Months Ended December 31, 2019
Additional Paid-In Capital | Retained Earnings | Unearned Deferred Compensation | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance, January 1, 2019 | 10,953,512 | $ | 109 | $ | 125,512 | $ | 15,264 | $ | (857 | ) | $ | (1,841 | ) | $ | 138,187 | |||||||||||
Net income | — | — | — | 953 | — | — | 953 | |||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 1,164 | 1,164 | |||||||||||||||||||
Forfeiture of unvested shares | (958 | ) | — | (13 | ) | — | 13 | — | — | |||||||||||||||||
Surrender of restricted shares of common stock | (798 | ) | — | (9 | ) | — | — | — | (9 | ) | ||||||||||||||||
Common stock awarded under the equity incentive plan | 10,847 | — | 252 | — | (252 | ) | — | — | ||||||||||||||||||
Common stock options exercised | 27,430 | 1 | 194 | — | — | — | 195 | |||||||||||||||||||
Stock option expense | — | — | 4 | — | — | — | 4 | |||||||||||||||||||
Amortization of restricted stock | — | — | — | — | 140 | — | 140 | |||||||||||||||||||
Adoption of ASU 2016-01; Equity securities | — | — | — | 45 | — | (45 | ) | — | ||||||||||||||||||
Adoption of ASU 2016-02; Leases | — | — | — | (56 | ) | — | — | (56 | ) | |||||||||||||||||
Cash dividends ($0.20 per share) | — | — | — | (2,198 | ) | — | — | (2,198 | ) | |||||||||||||||||
Balance at March 31, 2019 | 10,990,033 | 110 | 125,940 | 14,008 | (956 | ) | (722 | ) | 138,380 | |||||||||||||||||
Net income | — | — | — | 4,107 | — | — | 4,107 | |||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 675 | 675 | |||||||||||||||||||
Forfeiture of unvested shares | (7,958 | ) | — | (118 | ) | — | 118 | — | — | |||||||||||||||||
Surrender of restricted shares of common stock | (3,067 | ) | — | (35 | ) | — | — | — | (35 | ) | ||||||||||||||||
Common stock awarded under the equity incentive plan | 2,000 | — | 22 | — | (22 | ) | — | — | ||||||||||||||||||
Common stock options exercised | 1,000 | — | 8 | — | — | — | 8 | |||||||||||||||||||
Stock option expense | — | — | 5 | — | — | — | 5 | |||||||||||||||||||
Amortization of restricted stock | — | — | — | — | 103 | — | 103 | |||||||||||||||||||
Adoption of ASU 2016-02; Leases | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||
Balance at June 30, 2019 | 10,982,008 | 110 | 125,822 | 18,114 | (757 | ) | (47 | ) | 143,242 | |||||||||||||||||
Net income | — | — | — | 1,234 | — | — | 1,234 | |||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 319 | 319 | |||||||||||||||||||
Surrender of restricted shares of common stock | (297 | ) | — | (3 | ) | — | — | — | (3 | ) | ||||||||||||||||
Common stock issued to F&M shareholders | 288,999 | 3 | 3,102 | — | — | — | 3,105 | |||||||||||||||||||
Stock option expense | — | — | 5 | — | — | — | 5 | |||||||||||||||||||
Amortization of restricted stock | — | — | — | — | 127 | — | 127 | |||||||||||||||||||
Balance, September 30, 2019 | 11,270,710 | $ | 113 | $ | 128,926 | $ | 19,348 | $ | (630 | ) | $ | 272 | $ | 148,029 | ||||||||||||
Net income | — | — | — | 3,169 | — | — | 3,169 | |||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | (743 | ) | (743 | ) | |||||||||||||||||
Forfeiture of unvested shares | (3,251 | ) | — | (68 | ) | — | 68 | — | — | |||||||||||||||||
Surrender of restricted shares of common stock | (505 | ) | — | (6 | ) | — | — | — | (6 | ) | ||||||||||||||||
Stock option expense | — | — | 4 | — | — | — | 4 | |||||||||||||||||||
Amortization of restricted stock | — | — | — | — | 100 | — | 100 | |||||||||||||||||||
Balance, December 31, 2019 | 11,266,954 | $ | 113 | $ | 128,856 | $ | 22,517 | $ | (462 | ) | $ | (471 | ) | $ | 150,553 |
See accompanying condensed notes to unaudited consolidated financial statements.
9
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2020 and 2019
(in thousands)
Three Months Ended | |||||||
March 31, 2020 | March 31, 2019 | ||||||
Cash flows from operating activities: | |||||||
Net income attributable to common stockholders | $ | 2,606 | $ | 953 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Net premium amortization/discount accretion on investment securities | 111 | 287 | |||||
Depreciation expense | 463 | 351 | |||||
Provision for loan losses | 2,000 | 1,225 | |||||
Net realized loss (gain) on equity securities | 83 | (34 | ) | ||||
Net realized gain on debt securities | (156 | ) | — | ||||
Increase in MSR assets resulting from transfers of financial assets | (182 | ) | (129 | ) | |||
Mortgage servicing rights expense | 736 | 191 | |||||
Amortization of intangible assets | 412 | 327 | |||||
Amortization of restricted stock | 139 | 140 | |||||
Net stock based compensation expense | 4 | 4 | |||||
Loss on sale of office properties and equipment | — | 27 | |||||
Deferred income taxes | (150 | ) | — | ||||
Increase in cash surrender value of life insurance | (142 | ) | (113 | ) | |||
Net (gain) loss from disposals of foreclosed and repossessed assets | (68 | ) | 1 | ||||
Gain on sale of loans held for sale, net | (780 | ) | (308 | ) | |||
Net change in loans held for sale | 3,392 | 1,004 | |||||
(Decrease) increase in accrued interest receivable and other assets | 1,131 | (1,441 | ) | ||||
Decrease in other liabilities | (340 | ) | (3,042 | ) | |||
Total adjustments | 6,653 | (1,510 | ) | ||||
Net cash provided by (used in) operating activities | 9,259 | (557 | ) | ||||
Cash flows from investing activities: | |||||||
Net decrease in other interest-bearing deposits | 738 | 1,225 | |||||
Purchase of available for sale securities | (9,985 | ) | (17,425 | ) | |||
Purchase of held to maturity securities | (8,063 | ) | — | ||||
Proceeds from principal payments and sale of available for sale securities | 25,149 | 5,102 | |||||
Proceeds from principal payments and maturities of held to maturity securities | 142 | 139 | |||||
Net sales of other investments | 6 | 55 | |||||
Proceeds from sale of foreclosed and repossessed assets | 997 | 862 | |||||
Net increase in loans | (4,957 | ) | (27,637 | ) | |||
Net capital expenditures | (423 | ) | (352 | ) | |||
Net cash provided by (used in) investing activities | 3,604 | (38,031 | ) | ||||
Cash flows from financing activities: | |||||||
Net (decrease) increase in short-term Federal Home Loan Bank advances | (64,994 | ) | 13,015 | ||||
Proceeds from long-term Federal Home Loan Bank advances | 57,500 | — | |||||
Amortization of debt issuance costs | 16 | 28 | |||||
Net (decrease) increase in deposits | (15,647 | ) | 23,137 | ||||
Repurchase shares of common stock | (1,838 | ) | — | ||||
Surrender of restricted shares of common stock | (21 | ) | (9 | ) | |||
Common stock options exercised | — | 195 | |||||
Cash dividends paid | (2,372 | ) | (2,198 | ) | |||
Net cash (used in) provided by financing activities | (27,356 | ) | 34,168 | ||||
Net decrease in cash and cash equivalents | (14,493 | ) | (4,420 | ) | |||
Cash and cash equivalents at beginning of period | 55,840 | 45,778 | |||||
Cash and cash equivalents at end of period | $ | 41,347 | $ | 41,358 |
10
Supplemental cash flow information: | |||||||
Cash paid during the period for: | |||||||
Interest on deposits | $ | 3,238 | $ | 2,504 | |||
Interest on borrowings | $ | 1,029 | $ | 1,122 | |||
Income taxes | $ | — | $ | 1,632 | |||
Supplemental noncash disclosure: | |||||||
Transfers from loans receivable to foreclosed and repossessed assets | $ | 879 | $ | 393 |
See accompanying condensed notes to unaudited consolidated financial statements.
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(UNAUDITED)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Citizens Community Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Citizens Community Federal N.A. (the “Bank”), and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. As used in this quarterly report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning.
The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank” or “CCFBank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. Wells Insurance Agency (“WIA”) is a wholly owned subsidiary of the Bank, providing insurance products to the Bank’s customers. F&M Investment Corp. of Tomah was a wholly owned subsidiary of the Bank that was formerly utilized by F. & M. Bancorp. of Tomah, Inc. (“F & M”) to manage its municipal bond portfolio, and has been dissolved. The U.S. Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank.
The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers in Wisconsin and Minnesota through 28 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, the Twin Cities and Mankato markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one-to-four family residential mortgages, as well as expanded services through Wells Insurance Agency, Inc.
The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.
In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the balance sheet date as of March 31, 2020 and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements.
The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Unless otherwise stated herein, and except for shares and per share amounts, all amounts are in thousands.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated.
Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of intangible assets arising from acquisitions, useful lives for depreciation and amortization, valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption “Risk Factors” in Item 1A of the annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020, the matters described in “Risk Factors” in Item 1A of this Form 10-Q, external market factors such as market interest rates and unemployment rates, changes to operating policies and procedures, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.
Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to
12
maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax.
Equity securities with readily determinable fair value - The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities. Farmer Mac equity securities are carried at their fair market value, which is readily determinable. Changes in fair value are recognized as gains (losses) on investment securities in the consolidated Statement of Operations.
Other Investments - As a member of the Federal Reserve Bank (“FRB”) System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as other income in the consolidated statement of operations.
Also included in non-marketable equity securities is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any.
Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $14,999 at March 31, 2020 consisted of $8,158 of FHLB stock, $5,166 of Federal Reserve Bank stock and $1,675 of Bankers’ Bank stock. Other investments totaling $15,005 at December 31, 2019 consisted of $8,196 of FHLB stock and $5,162 of Federal Reserve Bank stock and $1,647 of Bankers’ Bank stock..
Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net of deferred loan fees and costs, and non-accretable discount on purchased credit impaired loans. Interest income is accrued on the unpaid principal balance of these loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. Late charge fees are recognized into income when collected.
Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules:
•Commercial/agricultural real estate loans past due 90 days or more;
•Commercial/agricultural non-real estate loans past due 90 days or more;
•Closed end consumer non-real estate loans past due 120 days or more; and
•Residential real estate loans and open ended consumer non-real estate loans past due 180 days or more.
Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments
13
are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established. Interest on impaired loans considered troubled debt restructurings (“TDRs”) or substandard, less than 90 days delinquent, is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment. Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Residential real estate loans and open ended consumer non-real estate loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 180 days or more. Closed ended consumer non-real estate loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more. Commercial/agricultural real estate and non-real estate loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 90 days or more.
Allowance for Loan Losses – The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; and other relevant factors determined by management. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in management’s judgment, should be charged off.
A loan is impaired when full payment under the loan terms is not expected. Impaired loans consist of all TDRs, as well as individual loans not considered a TDR, that are either (1) rated substandard or worse, (2) on nonaccrual status or (3) PCI loans which are impaired at the time of acquisition. All TDRs are individually evaluated for impairment. See Note 4, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. For TDR’s or substandard loans deemed to be impaired, a specific ALL allocation may be established so that the loan is reported, net, at the lower of (a) its outstanding principal balance; (b) the present value of the loan’s estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any loan collateral, less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 90+ days past due, and certain substandard loans that are less than 90+ days delinquent, the likelihood of the loan migrating to over 90 days past due is also taken into account when determining the specific ALL allocation for these particular loans. Large groups of smaller balance homogeneous loans, such as non-TDR commercial, consumer and residential real estate loans, are collectively evaluated for ALL purposes, and accordingly, are not separately identified for ALL disclosures.
Acquired Loans— Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.
Loans acquired with deteriorated credit quality are accounted for in accordance with Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors include, but are not limited to; loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.
14
Under the ASC 310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable yield is recognized into income over the remaining life of the loan if the timing and/or amount of cash flows expected to be collected can be reasonably estimated (the accretion method). If the timing or amount of cash flows expected to be collected cannot be reasonably estimated, the cost recovery method of income recognition is used. The difference between the loan’s total scheduled principal and interest payments over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference. The non-accretable difference represents contractually required principal and interest payments which the Company does not expect to collect.
Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized in interest income on a prospective basis over the loan’s remaining life.
Acquired loans that were not individually determined to be purchased with deteriorated credit quality are accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs (ASC 310-20), whereby the premium or discount derived from the fair market value adjustment, on a loan-by-loan or pooled basis, is recognized into interest income on a level yield basis over the remaining expected life of the loan or pool.
For all acquired loans, the outstanding loan balances less any related accretable yield and/or non-accretable difference is referred to as the loans’ carrying amount.
Loans Held for Sale — Loans held for sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or fair value. Gains and losses on sales of loans are recognized at settlement dates, and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating costs to servicing rights retained. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material.
Mortgage Servicing Rights— Mortgage servicing rights (“MSR”) assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed at least annually for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations.
The valuation of MSRs and related amortization, included in amortization of mortgage servicing rights in the Consolidated Statements of Operations, thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.
Foreclosed and Repossessed Assets, net – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the Consolidated Statements of Operations.
Transfers of financial assets—Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the entity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and (3) the entity does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Goodwill and other intangible assets-The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill and any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any
15
distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of December 31, 2019 which is related to its banking activities. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2019. The Company performed a goodwill impairment analysis as of March 31, 2020, due to triggering events being identified, and determined that goodwill was not impaired.
Leases - We determine if an arrangement is a lease at inception. All of our existing leases have been determined to be operating leases under ASC 842. Right-of-use (“ROU”) assets are included in other assets in our consolidated balance sheets. Operating lease liabilities are included in other liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date, based on the present value of lease payments over the lease term. As none of our existing leases provide an implicit rate, we use our incremental borrowing rate, based on information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option. Lease expense is recognized based on the total contractually required lease payments, over the term of the lease, on a straight-line basis.
Debt and equity issuance costs—Debt issuance costs, which consist primarily of fees paid to note lenders, are deferred and included in other borrowings in the consolidated balance sheet. Debt issuance costs are amortized over the contractual term of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statement of operations. Specific costs associated with the issuance of shares of the Company’s common or preferred stock are netted against proceeds and recorded in stockholders’ equity, as additional paid in capital, on the consolidated balance sheet, in the period of the share issuance.
Advertising, Marketing and Public Relations Expense—The Company expenses all advertising, marketing and public relations costs as they are incurred.
Income Taxes – The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.
Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income includes fees from brokerage and advisory service, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The Company also receives contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the Company. Contingent commissions from insurance companies
16
are recognized when determinable. Commission revenue is included in other non-interest income in the consolidated statement of operations.
Earnings Per Share – Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company’s stock price on the reporting date.
Operating Segments—While our executive officers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications – Certain items previously reported were reclassified for consistency with the current presentation.
Recent Accounting Pronouncements—The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.
Recent Accounting Pronouncements—Adopted
ASU 2018-02; Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income - ASU 2018-02 permits, but does not require, entities to reclassify tax effects stranded in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income. The Company adopted this standard update, effective January 1, 2019. The Company’s stranded tax effects were related to valuation of the net deferred tax asset attributable to accumulated other comprehensive income (loss), which are unrealized gains (losses) on available-for-sale debt securities. Adoption resulted in a reclassification between two categories of stockholders’ equity at January 1, 2018, with an increase of $137 in retained earnings and a decrease in accumulated other comprehensive loss for the same amount (no net change in stockholders’ equity).
ASU 2014-09; Revenue from Contracts with Customers (Topic 606)—Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Company’s interest income and certain non-interest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Company’s largest sources of non-interest revenue which are subject to the guidance include fees and service charges on loan and deposit accounts and interchange revenue from debit card transactions. ASU 2014-09, as amended, became effective for the Company’s annual and interim periods beginning in the first quarter 2019. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as the change in the timing and pattern of the Company’s revenue recognition related to scoped-in non-interest income recognized under the newly issued ASU is consistent with the current applicable accounting guidance. The Company has made all required additional disclosures related to non-interest income in the consolidated financial statements, primarily in Revenue Recognition policy included herein in Note 1.
ASU 2016-01; Recognition and Measurement of Financial Assets and Liabilities—The guidance requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. The Company’s adoption of ASU 2016-01 as of January 1, 2019, constitutes a change in accounting principle. The Company recorded a cumulative effect adjustment to retained earnings of $45 as of January 1, 2019, as a result of implementing this new accounting standard.
ASU 2016-02; Leases (Topic 842)—The ASU changed current GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of Topic 842. Topic 842 does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election, by class of underlying asset, not to recognize lease assets and liabilities. Topic 842 became effective for the Company for annual and interim periods beginning in the first quarter 2019.
17
The Company leased (1) 9 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases that resulted in the recognition of right-of-use assets and corresponding lease liabilities of approximately $5,000 on the consolidated balance sheet under Topic 842. Adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations. Management adopted the guidance on January 1, 2019, and elected certain practical expedients offered by the FASB, including foregoing the restatement of comparative periods upon adoption. Management also excluded short-term leases from the recognition of right-of-use asset and lease liabilities. Additionally, the Company elected the transition relief allowed by FASB in foregoing reassessment of the following: whether any existing contracts were or contained leases, the classification of existing leases, and the determination of initial direct costs for existing leases. As of March 31, 2020, the Company leases (1) 6 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases. See Note 5 for additional detail.
ASU 2017-04; Intangibles - Goodwill and Other (Topic 350)—The ASU simplifies the accounting for goodwill impairment. This guidance, among other things, removes step two of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in either greater or less impairment being recognized than under current guidance. The Company adopted this Update for the Company’s annual goodwill impairment tests beginning in the year ended December 31, 2019. Adoption of this ASU to had no material impact on its consolidated financial statements.
ASU 2018-13, Fair Value Measurement (Topic 820)—The ASU modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose, (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and (2) the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that, disclosure regarding measurement uncertainty, is intended to communicate information about the uncertainty in measurement, as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this ASU, in first quarter 2020. The amendments on (1) changes in unrealized gains and losses, (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and (3) the narrative description of measurement uncertainty, are being applied prospectively. All other amendments have been applied retrospectively for all periods presented. Adoption of this ASU had no material impact on its consolidated financial position or results of operations.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)—The ASU was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract, with similar costs to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance became effective for the Company beginning in the first quarter 2020. Adoption of this ASU had no material impact on its consolidated financial statements.
ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting--The ASU provides optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contacts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. ASU 2020-04 is effective for the Company immediately and through December 31, 2022. The Company utilizes LIBOR, among other indexes, as a reference rate for underwriting variable rate loans. Reference rate reform has not had, nor does the Company expect it to have, a material effect on the Company’s consolidated balance sheet, operations or cash flows.
Recently Issued, But Not Yet Effective Accounting Pronouncements
ASU 2016-13; Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments--The ASU changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. On July 17, 2019, the FASB proposed delaying the effective date for ASU 2016-13 for smaller reporting companies. In November 2019, the FASB issued ASU 2019-10 to extend the effective date one year. Earlier adoption is permitted; however, the Company does not currently plan to
18
adopt the ASU early. Management is assessing alternative loss estimation methodologies and the Company’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Company’s financial condition and results of operations. The Company anticipates recording the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which will be January 1, 2023.
19
NOTE 2 – INVESTMENT SECURITIES
The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of March 31, 2020 and December 31, 2019, respectively, were as follows:
Available for sale securities | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||
March 31, 2020 | |||||||||||||||
U.S. government agency obligations | $ | 43,128 | $ | 317 | $ | 736 | $ | 42,709 | |||||||
Obligations of states and political subdivisions | 140 | — | — | 140 | |||||||||||
Mortgage-backed securities | 62,764 | 2,250 | 12 | 65,002 | |||||||||||
Corporate debt securities | 18,759 | 42 | 244 | 18,557 | |||||||||||
Corporate asset based securities | 29,670 | — | 2,883 | 26,787 | |||||||||||
Trust preferred securities | 11,193 | 10 | 963 | 10,240 | |||||||||||
Total available for sale securities | $ | 165,654 | $ | 2,619 | $ | 4,838 | $ | 163,435 | |||||||
December 31, 2019 | |||||||||||||||
U.S. government agency obligations | $ | 52,020 | $ | 132 | $ | 347 | $ | 51,805 | |||||||
Obligations of states and political subdivisions | 281 | — | — | 281 | |||||||||||
Mortgage-backed securities | 70,806 | 635 | 110 | 71,331 | |||||||||||
Corporate debt securities | 18,776 | 66 | 117 | 18,725 | |||||||||||
Corporate asset based securities | 27,718 | — | 864 | 26,854 | |||||||||||
Trust preferred securities | 11,167 | 35 | 79 | 11,123 | |||||||||||
Total available for sale securities | $ | 180,768 | $ | 868 | $ | 1,517 | $ | 180,119 |
Held to maturity securities | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||
March 31, 2020 | |||||||||||||||
Obligations of states and political subdivisions | $ | 300 | $ | 1 | $ | — | $ | 301 | |||||||
Mortgage-backed securities | 10,467 | 462 | — | 10,929 | |||||||||||
Total held to maturity securities | $ | 10,767 | $ | 463 | $ | — | $ | 11,230 | |||||||
December 31, 2019 | |||||||||||||||
Obligations of states and political subdivisions | $ | 300 | $ | 2 | $ | — | $ | 302 | |||||||
Mortgage-backed securities | 2,551 | 104 | — | 2,655 | |||||||||||
Total held to maturity securities | $ | 2,851 | $ | 106 | $ | — | $ | 2,957 |
As of March 31, 2020, the Bank has pledged U.S. Government Agency securities with a market value of $633 and mortgage-backed securities with a market value of $4,575 as collateral against specific municipal deposits. At March 31, 2020, the Bank has pledged mortgage-backed securities with a market value of $1,511 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of March 31, 2020, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of March 31, 2020, the Bank also has mortgage-backed securities with a carrying value of $655 pledged as collateral to the Federal Home Loan Bank of Des Moines.
20
The estimated fair value of securities at March 31, 2020 and December 31, 2019, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and municipal securities due to the call feature.
March 31, 2020 | December 31, 2019 | ||||||||||||||
Available for sale securities | Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||
Due in one year or less | $ | — | $ | — | $ | 141 | $ | 141 | |||||||
Due after one year through five years | 5,883 | 5,760 | 5,900 | 5,959 | |||||||||||
Due after five years through ten years | 37,249 | 36,480 | 43,269 | 43,180 | |||||||||||
Due after ten years | 59,758 | 56,193 | 60,652 | 59,508 | |||||||||||
Total securities with contractual maturities | $ | 102,890 | $ | 98,433 | $ | 109,962 | $ | 108,788 | |||||||
Mortgage backed securities | 62,764 | 65,002 | 70,806 | 71,331 | |||||||||||
Securities without contractual maturities | — | — | — | — | |||||||||||
Total available for sale securities | $ | 165,654 | $ | 163,435 | $ | 180,768 | $ | 180,119 |
March 31, 2020 | December 31, 2019 | ||||||||||||||
Held to maturity securities | Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||
Due in one year or less | $ | 300 | $ | 301 | $ | 300 | $ | 302 | |||||||
Total securities with contractual maturities | 300 | 301 | 300 | 302 | |||||||||||
Mortgage backed securities | 10,467 | 10,929 | 2,551 | 2,655 | |||||||||||
Total held to maturity securities | $ | 10,767 | $ | 11,230 | $ | 2,851 | $ | 2,957 |
Securities with unrealized losses at March 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Available for sale securities | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
March 31, 2020 | ||||||||||||||||||||||||
U.S. government agency obligations | $ | 7,902 | $ | 369 | $ | 10,467 | $ | 367 | $ | 18,369 | $ | 736 | ||||||||||||
Mortgage backed securities | 554 | 2 | 918 | 10 | 1,472 | 12 | ||||||||||||||||||
Corporate debt securities | 5,620 | 123 | 1,379 | 121 | 6,999 | 244 | ||||||||||||||||||
Corporate asset based securities | 5,379 | 465 | 21,407 | 2,418 | 26,786 | 2,883 | ||||||||||||||||||
Trust preferred securities | 6,540 | 963 | — | — | 6,540 | 963 | ||||||||||||||||||
Total | $ | 25,995 | $ | 1,922 | $ | 34,171 | $ | 2,916 | $ | 60,166 | $ | 4,838 | ||||||||||||
December 31, 2019 | ||||||||||||||||||||||||
U.S. government agency obligations | $ | 14,593 | $ | 156 | $ | 10,540 | $ | 191 | $ | 25,133 | $ | 347 | ||||||||||||
Mortgage backed securities | 22,537 | 62 | 5,883 | 48 | 28,420 | 110 | ||||||||||||||||||
Corporate debt securities | 7,001 | 15 | 1,398 | 102 | 8,399 | 117 | ||||||||||||||||||
Corporate asset based securities | 8,683 | 285 | 18,171 | 579 | 26,854 | 864 | ||||||||||||||||||
Trust preferred securities | 7,420 | 79 | — | — | 7,420 | 79 | ||||||||||||||||||
Total | $ | 60,234 | $ | 597 | $ | 35,992 | $ | 920 | $ | 96,226 | $ | 1,517 |
There were no held to maturity securities in a net loss position at either March 31, 2020 or December 31, 2019.
21
The Company evaluates AFS securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
As of March 31, 2020, the Company does not consider its AFS securities with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration; thus, no other-than-temporary impairment on AFS securities was recorded. There were no other-than-temporary impairments charged to earnings during the three months ended March 31, 2020 or the three-months ended March 31, 2019.
In the first quarter of fiscal 2020, the Bank sold approximately $10,700 of fixed-rate mortgage-backed certificates with a realized gain of $156, which is included in net gains on investment securities in the Consolidated Statements of Operations. During the three months ended March 31, 2019, there were no debt securities sold.
NOTE 3 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
Portfolio Segments:
Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The level of owner-occupied property versus non-owner-occupied property are tracked and monitored on a regular basis. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 75%.
Commercial non-real estate loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.
Residential real estate loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential real estate portfolio as relatively small loan amounts are spread across many individual borrowers. Management evaluates trends in past due loans and current economic factors such as the housing price index on a regular basis.
Consumer non-real estate loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles, purchased indirect paper loans secured primarily by household goods and other consumer loans secured primarily by automobiles and other personal assets. The Bank ceased new originations of these types of loans in early fiscal 2017. Consumer loans underwriting terms often depend on the collateral type, debt to income ratio and the borrower’s creditworthiness as evidenced by their credit score. Collateral value alone may not provide an adequate source of repayment of the outstanding loan balance in the event of a consumer non-real estate default. This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.
22
Credit Quality/Risk Ratings:
Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio. Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant.
Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience. The Bank’s loan portfolio is presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:
1 through 4 - Pass. A “Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.
5 - Watch. A “Watch” loan has clearly identifiable developing weaknesses that deserve additional attention from management. Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future.
6 - Special Mention. A “Special Mention” loan has one or more potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future.
7 - Substandard. A “Substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
8 - Doubtful. A “Doubtful” loan has all the weaknesses inherent in a Substandard loan 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 and improbable.
9 - Loss. Loans classified as “Loss” are considered uncollectible, and their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future.
23
Below is a summary of originated and acquired loans by type and risk rating as of March 31, 2020:
1 to 5 | 6 | 7 | 8 | 9 | TOTAL | |||||||||||||||||||
Originated Loans: | ||||||||||||||||||||||||
Commercial/Agricultural real estate: | ||||||||||||||||||||||||
Commercial real estate | $ | 307,313 | $ | 4,978 | $ | 856 | $ | — | $ | — | $ | 313,147 | ||||||||||||
Agricultural real estate | 33,069 | 469 | 2,114 | — | — | 35,652 | ||||||||||||||||||
Multi-family real estate | 89,474 | — | — | — | — | 89,474 | ||||||||||||||||||
Construction and land development | 72,427 | 5,780 | 3,478 | — | — | 81,685 | ||||||||||||||||||
Commercial/Agricultural non-real estate: | ||||||||||||||||||||||||
Commercial non-real estate | 80,746 | 1,115 | 3,388 | — | — | 85,249 | ||||||||||||||||||
Agricultural non-real estate | 21,552 | 428 | 720 | — | — | 22,700 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
One to four family | 98,138 | 35 | 4,681 | — | — | 102,854 | ||||||||||||||||||
Purchased HELOC loans | 7,367 | — | 234 | — | — | 7,601 | ||||||||||||||||||
Consumer non-real estate: | ||||||||||||||||||||||||
Originated indirect paper | 36,153 | — | 261 | — | — | 36,414 | ||||||||||||||||||
Other Consumer | 14,923 | — | 157 | — | — | 15,080 | ||||||||||||||||||
Total originated loans | $ | 761,162 | $ | 12,805 | $ | 15,889 | $ | — | $ | — | $ | 789,856 | ||||||||||||
Acquired Loans: | ||||||||||||||||||||||||
Commercial/Agricultural real estate: | ||||||||||||||||||||||||
Commercial real estate | $ | 192,367 | $ | 5,513 | $ | 9,123 | $ | — | $ | — | $ | 207,003 | ||||||||||||
Agricultural real estate | 39,729 | — | 8,037 | — | — | 47,766 | ||||||||||||||||||
Multi-family real estate | 13,361 | — | 148 | — | — | 13,509 | ||||||||||||||||||
Construction and land development | 13,982 | — | 251 | — | — | 14,233 | ||||||||||||||||||
Commercial/Agricultural non-real estate: | ||||||||||||||||||||||||
Commercial non-real estate | 34,914 | 563 | 1,280 | — | — | 36,757 | ||||||||||||||||||
Agricultural non-real estate | 13,700 | 82 | 1,458 | — | — | 15,240 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
One to four family | 60,335 | 424 | 2,198 | — | — | 62,957 | ||||||||||||||||||
Consumer non-real estate: | ||||||||||||||||||||||||
Other Consumer | 2,095 | — | 9 | — | — | 2,104 | ||||||||||||||||||
Total acquired loans | $ | 370,483 | $ | 6,582 | $ | 22,504 | $ | — | $ | — | $ | 399,569 | ||||||||||||
Total Loans: | ||||||||||||||||||||||||
Commercial/Agricultural real estate: | ||||||||||||||||||||||||
Commercial real estate | $ | 499,680 | $ | 10,491 | $ | 9,979 | $ | — | $ | — | $ | 520,150 | ||||||||||||
Agricultural real estate | 72,798 | 469 | 10,151 | — | — | 83,418 | ||||||||||||||||||
Multi-family real estate | 102,835 | — | 148 | — | — | 102,983 | ||||||||||||||||||
Construction and land development | 86,409 | 5,780 | 3,729 | — | — | 95,918 | ||||||||||||||||||
Commercial/Agricultural non-real estate: | ||||||||||||||||||||||||
Commercial non-real estate | 115,660 | 1,678 | 4,668 | — | — | 122,006 | ||||||||||||||||||
Agricultural non-real estate | 35,252 | 510 | 2,178 | — | — | 37,940 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
One to four family | 158,473 | 459 | 6,879 | — | — | 165,811 | ||||||||||||||||||
Purchased HELOC loans | 7,367 | — | 234 | — | — | 7,601 | ||||||||||||||||||
Consumer non-real estate: | ||||||||||||||||||||||||
Originated indirect paper | 36,153 | — | 261 | — | — | 36,414 | ||||||||||||||||||
Other Consumer | 17,018 | — | 166 | — | — | 17,184 | ||||||||||||||||||
Gross loans | $ | 1,131,645 | $ | 19,387 | $ | 38,393 | $ | — | $ | — | $ | 1,189,425 | ||||||||||||
Less: | ||||||||||||||||||||||||
Unearned net deferred fees and costs and loans in process | (510 | ) | ||||||||||||||||||||||
Unamortized discount on acquired loans | (7,964 | ) | ||||||||||||||||||||||
Allowance for loan losses | (11,835 | ) | ||||||||||||||||||||||
Loans receivable, net | $ | 1,169,116 |
24
Below is a summary of originated loans by type and risk rating as of December 31, 2019:
1 to 5 | 6 | 7 | 8 | 9 | TOTAL | |||||||||||||||||||
Originated Loans: | ||||||||||||||||||||||||
Commercial/Agricultural real estate: | ||||||||||||||||||||||||
Commercial real estate | $ | 301,381 | $ | 266 | $ | 899 | $ | — | $ | — | $ | 302,546 | ||||||||||||
Agricultural real estate | 31,129 | 829 |