CITIZENS COMMUNITY BANCORP, INC. FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect," "estimates," "intend," "may," "preliminary," "planned," "potential," "should," "will," "would," or the negative of those terms or other words of similar meaning. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are inherently subject to many uncertainties in the Company's operations and business environment. Factors that could affect actual results or outcomes include the matters described under the caption "Risk Factors" in Item 1A of our annual report on Form 10-K for the year endedDecember 31, 2022 , filed with theSEC onMarch 7, 2023 ("2022 10-K"), and in Item 1A of this Form 10-Q, and the following: •conditions in the financial markets and economic conditions generally; •reputational risk, new legislation, regulations or policy changes as a result of recent volatility in the banking sector; •adverse impacts to the Company or Bank arising from the COVID-19 pandemic; •acts of terrorism and political or military actions bythe United States or other governments; •the possibility of a deterioration in the residential real estate markets; •interest rate risk; •lending risk; •higher lending risks associated with our commercial and agricultural banking activities; •the sufficiency of the allowance for credit losses; •changes in the fair value or ratings downgrades of our securities; •competitive pressures among depository and other financial institutions; •disintermediation risk; •our ability to maintain our reputation; •our ability to maintain or increase our market share; •our ability to realize the benefits of net deferred tax assets; •our inability to obtain needed liquidity; •our ability to raise capital needed to fund growth or meet regulatory requirements; •our ability to attract and retain key personnel; •our ability to keep pace with technological change; •prevalence of fraud and other financial crimes; •cybersecurity risks; •the possibility that our internal controls and procedures could fail or be circumvented; •our ability to successfully execute our acquisition growth strategy; •risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits; •restrictions on our ability to pay dividends; •the potential volatility of our stock price; •accounting standards for loan losses; •legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank; •public company reporting obligations; •changes in federal or state tax laws; and •changes in accounting principles, policies or guidelines and their impact on financial performance. Stockholders, potential investors, and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report. 55 --------------------------------------------------------------------------------
GENERAL
The following discussion sets forth management's discussion and analysis of our consolidated financial condition as ofMarch 31, 2023 , and our consolidated results of operations for the three months endedMarch 31, 2023 , compared to the same periods in the prior fiscal year for the three months endedMarch 31, 2022 . This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2022 10-K. Unless otherwise stated, all monetary amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses, and their related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, "Nature of Business and Summary of Significant Accounting Policies," to the Consolidated Financial Statements included as an exhibit in our annual report on our 2022 10-K, our critical accounting estimates are as follows: Allowance for Credit Losses We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), "Measurement of Credit Losses on Financial Instruments" through a cumulative-effect adjustment onJanuary 1, 2023 . We have selected a loss estimation methodology, utilizing a third-party model. See also Notes 1 and 3 to the unaudited consolidated financial statements for further discussion of our adoption of ASU 2016-13. Allowance for Credit Losses -Held-to-Maturity Securities . Currently, all of the Company's held-to-maturity securities are backed by governments or government agencies, for which the risk of credit loss is minimal. Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities. Allowance for Credit Losses - Loans - We maintain an allowance for credit losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated lifetime losses in our loan portfolio. In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management. We follow all applicable regulatory guidance, including the "Interagency Policy Statement on Allowances for Credit losses," issued by theOffice of the Comptroller of the Currency ,Department of the Treasury ,Federal Deposit Insurance Corporation , andNational Credit Union Administration . We believe that the Bank's Allowance for Credit Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for credit losses recorded during a particular period may be adjusted. Our determination of the allowance for credit losses - loans is based on (1) an individual allowance for specifically identified and evaluated loans that management has determined have unique risk characteristics. For these loans the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on the fair value of the underlying collateral relative to the amortized cost of the loans. For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan's original effective interest rate through the repayment period; and (2) a collective allowance for loans not specifically identified in (1) above. The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool's risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. This collectively estimated loss is adjusted for qualitative factors. Assessing the allowance for credit losses - loans is inherently subjective as it requires making material estimates, including the amount, and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.
Allowance for Credit Losses - Unfunded Commitments. The Company estimates expected credit losses over the contractual period for which the Company is exposed to credit risk, via a contractual obligation to extend credit, unless the
56
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obligation is unconditionally cancellable by the Company. The allowance for
credit losses - unfunded commitments on off-balance sheet exposures is included
in other liabilities on the
We account 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, but reviews goodwill 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 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 ofMarch 31, 2023 , which is related to its banking activities. The Company performed the required goodwill impairment test and determined that goodwill was not impaired as ofDecember 31, 2022 . The Company has monitored events and conditions sinceDecember 31, 2022 , and has determined that no triggering event has occurred that would require goodwill to be tested for impairment.
Fair Value Measurements and Valuation Methodologies.
We apply various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit intangible assets, other assets and liabilities obtained or assumed in business combinations, and certain other financial instruments. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company's results of operations, financial condition, or disclosures of fair value information. In addition to valuation, the Company must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statement of operations. Examples include but are not limited to: loans, investment securities, goodwill, core deposit intangible assets and deferred tax assets, among others. Specific assumptions, estimates and judgments utilized by management are discussed in detail herein in management's discussion and analysis of financial condition and results of operations and in notes 1, 2, 3, 4 and 10 of Condensed Notes to Consolidated Financial Statements. Income Taxes. Amounts provided for income tax expenses are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. The amounts provided for income taxes is also impacted by the Company's investment in a New Markets Tax Credit. With the adoption of ASU 2023-02 onJanuary 1, 2023 , amortization of the investment will now be recognized in the period of and proportional to recognition of the related tax credit and included in provision for income taxes. Deferred income tax assets and liabilities, which arise principally from temporary differences between the amounts reported in the financial statements and the tax basis of certain assets and liabilities, are included in the amounts provided for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and if necessary, tax planning strategies in making this assessment. The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and application of specific provisions of federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management's current assessment, the impact of which could be material to our consolidated results of operations and reported earnings. We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements. As ofMarch 31, 2023 , management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary. 57 --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS ANALYSIS
Net Interest Income. Net interest income represents the difference between the
dollar amount of interest earned on interest-bearing assets and the dollar
amount of interest paid on interest-bearing liabilities. The interest income and
expense of financial institutions (including those of the Bank) are
significantly affected by general economic conditions, competition, policies of
regulatory authorities and other factors.
Interest rate spread and net interest margin are used to measure and explain
changes in net interest income. Interest rate spread is the difference between
the yield on interest earning assets and the rate paid for interest-bearing
liabilities that fund those assets. Net interest margin is expressed as the
percentage of net interest income to average interest earning assets. Net
interest margin currently exceeds interest rate spread because
non-interest-bearing sources of funds ("net free funds"), principally demand
deposits and stockholders' equity, also support interest earning assets. The
narrative below discusses net interest income, interest rate spread, and net
interest margin for the three-month periods ended March 31, 2023 , and March 31,
2022 , respectively.
Net interest income was $12.8 million for the three months ended March 31, 2023 ,
compared to $13.2 million for the three months ended March 31, 2022 . Net
interest income for the three months ended March 31, 2023 , decreased from the
same period one year ago due to: 1) higher deposit and borrowing balances and
costs; 2) a reduction in the accretion on purchased loans; and 3) a $0.3 million
reduction in the accretion of deferred fees related to SBA Paycheck Protection
Program ("SBA PPP") loans. This was partially offset by: 1) positive loan volume
variance due to growth in loans outstanding and 2) increases in loan and
investment yields due to both contractual repricing and higher coupons on new
loans in excess of portfolio yield.
The net interest margin for the three-month period ended March 31, 2023 , was
3.02%, compared to 3.25% for the three-month period ended March 31, 2022 . The
net interest margin decrease was due to: 1) higher deposit costs due to
strategic increases in deposit rates to maintain a strong deposit base and
customers moving from lower cost savings and money market accounts to higher
yielding certificate accounts; 2) a 6-basis point decrease in SBA PPP deferred
loan fee accretion in loan yields; and 3) a 5-basis point decrease in accretion
on purchased loans. This was partially offset by increases in loan and
investment yields due to contractual repricings and rates on new loans and
investments exceeding the portfolio as a whole.
58-------------------------------------------------------------------------------- Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis. Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three-month periods endedMarch 31, 2023 , andMarch 31, 2022 . Non-accruing loans have been included in the table as loans carrying a zero yield. NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS (Dollar amounts in thousands) Three months endedMarch 31, 2023 compared to the three months ended March 31, 2022: Three months ended March 31, 2023 Three months ended March 31, 2022 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (1) Balance Expense Rate (1) Average interest earning assets: Cash and cash equivalents$ 18,270 $ 140 3.11 %$ 35,208 $ 13 0.15 % Loans 1,412,409 17,126 4.92 % 1,304,141 13,767 4.28 % Interest-bearing deposits 249 1 1.63 % 1,511 8 2.15 % Investment securities (1) 270,174 2,175 3.22 % 288,261 1,416 1.99 % Other investments 16,663 231 5.62 % 15,258 172 4.57 % Total interest earning assets (1)$ 1,717,765 $ 19,673 4.64 %$ 1,644,379 $ 15,376 3.79 % Average interest-bearing liabilities: Savings accounts$ 216,169 $ 382 0.72 %$ 233,642 $ 99 0.17 % Demand deposits 391,635 1,432 1.48 % 410,890 213 0.21 % Money market 301,710 1,096 1.47 % 299,004 216 0.29 % CD's 255,567 1,438 2.28 % 189,185 540 1.16 % Total deposits$ 1,165,081 $ 4,348 1.51 %$ 1,132,721 $ 1,068 0.38 % FHLB Advances and other borrowings 232,166 2,530 4.42 % 166,118 1,141 2.79 % Total interest-bearing liabilities$ 1,397,247 $ 6,878 2.00 %$ 1,298,839 $ 2,209 0.69 % Net interest income$ 12,795 $ 13,167 Interest rate spread 2.64 % 3.10 % Net interest margin (1) 3.02 % 3.25 % Average interest earning assets to average interest-bearing liabilities 1.23
1.27
(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters endedMarch 31, 2023 , andMarch 31, 2022 . The FTE adjustment to net interest income included in the rate calculations totaled$0 and$1 thousand for the three months endedMarch 31, 2023 , andMarch 31, 2022 , respectively. 59
-------------------------------------------------------------------------------- Rate/Volume Analysis. The following tables present the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: 1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant) and 2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant). Rate changes have been discussed previously in the net interest income section above. For the three months endedMarch 31, 2023 , compared to the same period in 2022, the loan volume increased due to strong organic growth. The increase in certificate volumes is due to CD growth, with some of this growth moving from money market accounts. Investment securities volume decreases for the three months endedMarch 31, 2023 , compared to the three months endedMarch 31, 2022 , are primarily due to: 1) principal repayments and 2) unrealized losses in the available for sale securities portfolio, partially offset by purchases. RATE / VOLUME ANALYSIS (Dollar amounts in thousands) Three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . Increase (decrease) due to Volume Rate Net Interest income: Cash and cash equivalents$ (12) $ 139 $ 127 Loans 1,201 2,158 3,359 Interest-bearing deposits (5) (2) (7) Investment securities (94) 853 759 Other investments 17 42 59 Total interest earning assets 1,107 3,190 4,297 Interest expense: Savings accounts (8) 291 283 Demand deposits (10) 1,229 1,219 Money market accounts 2 878 880 CD's 228 670 898 Total deposits 212 3,068 3,280 FHLB Advances and other borrowings 541 848 1,389 Total interest bearing liabilities 753 3,916 4,669 Net interest income$ 354 $
(726)$ (372) Provision for Credit Losses. We determine our provision for credit losses ("provision") based on our desire to provide an adequate allowance for credit losses ("ACL") to reflect estimated lifetime losses in our loan portfolio and estimated losses on our unfunded commitments. We use a third-party model to collectively evaluate and estimate the ACL on loans and unfunded commitments on a pooled basis. The model pools loans and commitments with similar characteristics and calculates an estimated loss rate for the pool based on identified risk drivers. These risk drivers vary with loan type. Projections about future economic conditions and the effect they could have on future losses are inherent in the model. Loans with uniquely identified circumstances and risks are individually evaluated. Lifetime losses on these loans are estimated based on the loans' individual characteristics. Total provision for credit losses for the three months endedMarch 31, 2023 , was$0.05 million , compared to no provision for the three months endedMarch 31, 2022 . The current year's provision is primarily the result of growth in the loan portfolio, minimal net charge offs of$0.02 million , partially offset by reductions in special mention and substandard loans and a reduction in unfunded commitments. Based on loan growth and changes in economic conditions, the provision would have been$0.35 million in the first quarter of 2023. However, payments on criticized assets decreased computed reserves, reducing the provision. Continued improving economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in improving overall economic trends for businesses. 60 --------------------------------------------------------------------------------
Note that in discussing ACL allocations, the entire ACL balance is available for any loan that, in management's judgment, should be charged off.
Management believes that the provision recorded for the current year's three-month period is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans. We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ACL. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ACL. If there are significant charge-offs against the ACL, or we otherwise determine that the ACL is inadequate, we will need to record an additional provision in the future. Non-interest Income. The following table reflects the various components of non-interest income for the three- month periods endedMarch 31, 2023 and 2022, respectively. Three months ended March 31, 2023 2022 % Change Non-interest Income: Service charges on deposit accounts $ 485$ 488 (0.61) % Interchange income 551 549 0.36 % Loan servicing income 569 701 (18.83) % Gain on sale of loans 298 722 (58.73) % Loan fees and service charges 80 92 (13.04) % Net gains (losses) on investment securities 56 (37) N/M Other 253 198 27.78 % Total non-interest income$ 2,292 $ 2,713 (15.52) % Loan servicing income decreased due to reduced capitalization of mortgage servicing rights resulting from lower mortgage loan origination volume in the three-month period endedMarch 31, 2023 , compared to the same prior year period, along with lower mortgage servicing income due to servicing a smaller portfolio.
Gain on sale of loans decreased in the current three-month period ended
The change in net gains (losses) on investment securities between the three
months ended
61-------------------------------------------------------------------------------- Non-interest Expense. The following table reflects the various components of non-interest expense for the three-month periods endedMarch 31, 2023 and 2022, respectively. Three months ended March 31, 2023 2022 % Change Non-interest Expense: Compensation and related benefits$ 5,338 $ 5,398 (1.11) % Occupancy 1,423 1,365 4.25 % Data processing 1,460 1,301 12.22 % Amortization of intangible assets 204 399 (48.87) % Mortgage servicing rights expense, net 158 (327) N/M Advertising, marketing and public relations 136 212 (35.85) % FDIC premium assessment 201 115 74.78 % Professional services 505 402 25.62 % Gains on repossessed assets, net (29) (7) (314.29) % New market tax credit depletion - 163 N/M Other 725 647 12.06 % Total non-interest expense$ 10,121 $ 9,668 4.69 % Non-interest expense (annualized) / Average assets 2.25 % 2.24 % 0.45 % Data processing expense for the three months endedMarch 31, 2023 , increased from the three months endedMarch 31, 2022 , due to larger asset size and the impact of inflationary cost increases.
Amortization of intangible assets for three months ended
Mortgage servicing rights expense, net increased for the three months endedMarch 31, 2023 , compared to the comparable prior year period. While amortization expense decreased in the current three-month period due to the impact of lower forecasted prepayments, this decrease was more than offset by$566 thousand of impairment reversal in the comparable prior year period. Advertising, marketing and public relations expense decreased for the three months endedMarch 31, 2023 , compared to the prior year period, while yearly expenses are expected to be approximately equal. The timing of related spending will be more heavily weighted in the last three quarters of 2023 than it was in 2022. TheFDIC insurance premium increased for the three-month period endedMarch 31, 2023 , from the comparable prior year period due to an increase in theFDIC assessment rate. This was partially offset by the favorable impact of increased bank capital ratios, largely due to both a$15 million capital injection following the Company's subordinated debt issuance in March of 2022, and the impact of growth in the Bank's retained earnings. Professional services costs increased during the three months endedMarch 31, 2023 , from the comparable prior year period due to an increase in the use of outside professionals as projects needing outside professionals increased. In the first quarter of 2022, the Bank invested$4.1 million in a New Market Tax Credit. Based on accounting guidance at the time of investment, the related non-tax-deductible asset depletion would have occurred over a 5-year period in lockstep with the recognition of the tax credit. In March of 2023, FASB issued ASU 2023-02, which allows for proportional amortization of tax credit investments that meet certain criteria. We have determined that our New Market Tax Credit investment meets the criteria of ASU 2023-02 and have chosen to early adopt using the modified retrospective approach as ofJanuary 1, 2023 . Under ASU 2023-02, the amortization of the investment is now included in income tax expense. The increase in other expenses during the three months endedMarch 31, 2023 , from the comparable prior year period is largely related to costs related to expenses to support new products and product expansion. 62 -------------------------------------------------------------------------------- Income Taxes. Income tax expense was$1.3 million for the three months endedMarch 31, 2023 , compared to$1.5 million for the three months endedMarch 31, 2022 . The effective tax rate was 25.5% for the three-month period endedMarch 31, 2023 , compared to 24.2% for the comparable prior year period. The higher effective tax rate is due to the impact of the New Market Tax Credit investment depletion, now being included in income tax expense, partially offset by the impact of lower pre-tax income.
BALANCE SHEET ANALYSIS
Cash and Cash Equivalents. Our cash balances increased$29.7 million to$65.1 million compared to$35.4 million atDecember 31, 2022 , as we increased our interest-bearing cash deposits at theFederal Reserve by$30 million atMarch 31, 2023 .
Securities available for sale, which represent the majority of our investment portfolio, were$173.4 million atMarch 31, 2023 , compared with$166.0 million atDecember 31, 2022 . The increase in the available for sale portfolio is primarily due to the purchase of$11 million , primarily floating-rate SBA backed pass-through securities, and a reduction in the unrealized loss of$1.5 million arising during the period, partially offset by principal repayments.
Securities held to maturity decreased to
The amortized cost and market values of our available for sale securities by asset categories as of the dates indicated below were as follows:
Amortized Fair
Available for sale securities Cost Value
March 31, 2023
U.S. government agency obligations $ 25,213 $ 25,182
Mortgage-backed securities 96,020 78,959
Corporate debt securities 47,141 42,215
Corporate asset-backed securities 27,933 27,067
Totals $ 196,307 $ 173,423
December 31, 2022
U.S. government agency obligations $ 18,373 $ 18,313
Mortgage-backed securities 97,458 78,610
Corporate debt securities 44,636 40,251
Corporate asset-backed securities 29,877 28,817
Totals $ 190,344 $ 165,991
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The amortized cost and fair value of our held to maturity securities by asset categories as of the dates noted below were as follows:
Amortized Fair
Held to maturity securities Cost Value
March 31, 2023 Obligations of states and political subdivisions$ 600 $ 555 Mortgage-backed securities 94,701
76,628
Totals $ 95,301 $77,183
Obligations of states and political subdivisions
546
Mortgage-backed securities 95,779
76,233
Totals $ 96,379 $ 76,779 The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:
March 31, 2023
Amortized Fair Amortized Fair
Available for sale securities Cost Value Cost Value
U.S. government agency $ 109,544 $ 92,532 $ 112,477 $ 93,669
AAA 8,179 7,928 8,640 8,334
AA 31,443 30,748 24,591 23,737
A 8,200 7,612 5,700 5,133
BBB 38,941 34,603 38,936 35,118
Non-rated - - - -
Total available for sale securities
The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:
March 31, 2023 December 31, 2022
Amortized Fair Amortized Fair
Held to maturity securities Cost Value Cost Value
U.S. government agency $ 94,701 $ 76,628 $ 95,779 $ 76,233
AAA - - - -
AA - - - -
A 600 555 600 546
Total $ 95,301 $ 77,183 $ 96,379 $ 76,779
At March 31, 2023 , the Bank has pledged mortgage-backed securities with a
carrying value of $30.4 million as collateral against a borrowing line of credit
with the Federal Reserve Bank with no borrowings outstanding on this line of
credit. As of March 31, 2023 , the Bank has pledged U.S. Government Agency
securities with a carrying value of $2.2 million and mortgage-backed securities
with a carrying value of $2.1 million as collateral against specific municipal
deposits. As of March 31, 2023 , the Bank also has mortgage-backed securities
with a carrying value of $0.1 million pledged as collateral to the Federal Home
Loan Bank of Des Moines .
At December 31, 2022 , the Bank has pledged certain of its mortgage-backed
securities with a carrying value of $5.4 million as collateral to secure a line
of credit with the Federal Reserve Bank with no borrowings outstanding on this
line of credit. As of December 31, 2022 , the Bank has pledged certain of its
U.S. Government Agency securities with a carrying value of $2.6 million and
mortgage-backed securities with a carrying value of $2.2 million as collateral
against specific municipal deposits. As of December 31, 2022 , the Bank also has
mortgage-backed securities with a carrying value of $0.1 million pledged as
collateral to the Federal Home Loan Bank of Des Moines .
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Loans. Total loans outstanding, net of deferred loan fees and costs and
unamortized discount on acquired loans, increased by $9.2 million , to $1.42
billion as of March 31, 2023 , from $1.41 billion at December 31, 2022 . The
following table reflects the composition, of our loan portfolio at March 31,
2023 , and December 31, 2022 :
March 31, 2023 December 31, 2022
Amount Percent Amount Percent
Real estate loans:
Commercial/Agricultural real estate
Commercial real estate $ 726,748 51.1 % $ 725,971 51.5 %
Agricultural real estate 90,958 6.4 % 87,908 6.2 %
Multi-family real estate 207,786 14.6 % 208,908 14.8 %
Construction and land development 114,951 8.1 % 102,492 7.3 %
Residential mortgage
Residential mortgage 110,379 7.8 % 105,389 7.5 %
Purchased HELOC loans 3,206 0.2 % 3,262 0.2 %
Total real estate loans 1,254,028 88.2 % 1,233,930 87.5 %
C&I/Agricultural operating and Consumer Installment
Loans:
C&I/Agricultural operating
Commercial and industrial ("C&I") 130,943 9.2 % 136,013 9.6 %
Agricultural operating 24,146 1.7 % 28,806 2.0 %
Consumer installment
Originated indirect paper 9,314 0.7 % 10,236 0.7 %
Other consumer 6,728 0.5 % 7,150 0.5 %
Total C&I/Agricultural operating and Consumer
installment Loans 171,131 12.1 % 182,205 12.8 %
Gross loans $ 1,425,159 100.3 % $ 1,416,135 100.3 %
Unearned net deferred fees and costs and loans in
process (2,689) (0.2) % (2,585) (0.2) %
Unamortized discount on acquired loans (1,515) (0.1) % (1,766) (0.1) %
Total loans (net of unearned income and deferred
expense) 1,420,955 100.0 % 1,411,784 100.0 %
Allowance for credit losses (22,679) (17,939)
Total loans receivable, net $ 1,398,276 $ 1,393,845
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Allowance for Credit Losses.
The allowance for credit losses ("ACL") is is a valuation allowance for current
expected credit losses in the Company's loan portfolio as of the balance sheet
date. In determining the allowance, the company estimates credit losses over the
loan's entire contractual term, adjusted for expected prepayments when
appropriate. The allowance estimate considers qualitative and quantitative
relevant information from internal and external sources relating to historical
loss experience; known and inherent risks in our portfolio; information about
specific borrowers' ability to repay; estimated collateral values; current
economic conditions; reasonable and supportable forecasts for future conditions;
and other relevant factors determined by management. To ensure that the ACL is
maintained at an adequate level, a detailed analysis is performed on a quarterly
basis and an appropriate provision is made to adjust the allowance. The entire
ACL balance is available for any loan that, in management's judgment, should be
charged off.
The determination of the ACL requires significant judgement to estimate credit
losses. The ACL on loans is measured collectively on a pooled basis when similar
risk characteristics exist, and on an individual basis when management
determines that the loan does not share similar risk characteristics with other
loans. The ACL on loans collectively evaluated is measured using the loss rate
model. The Company categorizes its loan portfolio into four segments based on
similar risk characteristics. Loans within each segment are pooled based on
individual loan characteristics. Aggregated risk drivers are then calculated at
a pool level. Risk drivers are identified attributes that have proven to be
predictive of loan loss rates and vary based on loan segment and type. A loss
rate is calculated and applied to the pool utilizing a model that combines the
pool's risk drivers, historical loss experience, and reasonable and supportable
future economic forecasts to project lifetime losses. The loss rate is then
combined with the loan's balance and contractual maturity, adjusted for expected
prepayments, to determine expected future losses. Future and supportable
economic forecasts are based on national economic conditions and their reversion
to the mean is implicit in the model and generally occurs over a period of two
years.
Qualitative adjustments are made to the allowance calculated on collectively
evaluated loans to incorporate factors not included in the model. Qualitative
factors include but are not limited to, lending policies and procedures, the
experience and ability of lending and other staff, the volume and severity of
problem credits, quality of the loan review system, and other external factors.
Loans that exhibit different risk characteristics from the pool are individually
evaluated for impairment. Loans can be identified for individual evaluation for
a variety of reasons including delinquency, nonaccrual status, risk rating and
loan modification. Accruing loans that exhibit different risk characteristics
from their pool may also be within scope. On these loans, an allowance may be
established so that the loan is reported, net, at the lower of (a) its amortized
cost; (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 the loan is collateral dependent. Collateral
dependency is determined using the practical expedient when: 1) the borrower is
experiencing financial difficulty; and 2) repayment is expected to be provided
substantially through the sale or operation of the collateral.
In addition, various regulatory agencies periodically review the ACL. These
agencies may require the company to make additions to the ACL or may require
that certain loan balances be charged off or downgraded into classified loan
categories when the agencies's evaluation differs from management's evaluation
based on their judgments of collectability from the information available to
them at the time of examination.
On January 1, 2023 , the Company adopted Accounting Standards Update ("ASU")
2016-13, Financial Instruments using the modified retrospective method. This
adoption resulted in a $4.7 million increase in the ACL on loans ("ACL - Loans")
and established a $1.5 million ACL on unfunded commitments ("ACL - Unfunded
Commitments"). The increase in transition ACL is primarily due to the
interaction of change from an incurred loss model to a lifetime loss model and
the duration of our portfolio. Since transition, the ACL- Loans modestly
increased $0.03 million to $22.7 million at March 31, 2023 , representing 1.60%
of loans receivable. The allowance for loan losses, prior to the ASU 2016-13
transition, was $17.9 million at December 31, 2022 , representing 1.27% of loans
receivable. The increase in the ACL - Loans, was due to a provision of $0.06
million , partially offset by net loan charge-offs. The ACL - Unfunded
Commitments, established under ASU 2016-13, was $1.5 million at March 31, 2023 .
During the three months ended March 31, 2023 , the ACL - Unfunded Commitments
decreased $0.01 million due to a reduction in commitments.
66
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Allowance for Credit Losses - Loans Roll Forward
(in thousands, except ratios)
March 31, 2023 and December 31, 2022 and March 31, 2022 and
Three Months Ended Three Months Ended Three Months Ended
Allowance for Credit Losses ("ACL")
ACL - Loans, at beginning of period $ 17,939 $ 17,217 $ 16,913
Cumulative effect of ASU 2016-13 adoption 4,706 - -
Loans charged off:
Commercial/Agricultural real estate (32) - (35)
C&I/Agricultural operating - (36) (63)
Residential mortgage (14) - (12)
Consumer installment (11) (14) (9)
Total loans charged off (57) (50) (119)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate 3 62 3
C&I/Agricultural operating 15 8 10
Residential mortgage 4 - 1
Consumer installment 12 2 10
Total recoveries of loans previously charged off: 34 72 24
Net loans charged off ("NCOs") (23) 22 (95)
Additions to ACL - Loans via provision for credit
losses charged to operations 57 700 -
ACL - Loans, at end of period $ 22,679 $ 17,939 $ 16,818
Average outstanding loan balance $ 1,421,096 $ 1,399,244 $ 1,304,141 Ratios:
NCOs (annualized) to average loans 0.01 % (0.01) % 0.03 %
Allowance for Credit Losses - Loans Activity by Segment (in thousands, except ratios)
Commercial/Agricultural Real C&I/Agricultural Residential Consumer
Estate operating Mortgage Installment Unallocated Total
Three months ended March 31, 2023
Allowance for Credit Losses - Loans:
ACL - Loans, at beginning of period $ 14,085 $ 2,318 $ 599 $ 129 $ 808 $ 17,939
Cumulative effect of ASU 2016-13 adoption 4,510 (331) 1,119 216 (808) 4,706
Charge-offs (32) - (14) (11) - (57)
Recoveries 3 15 4 12 - 34
Additions to ACL - Loans via provision
for credit losses charged to operations (70) (154) 292 (11) - 57
ACL - Loans, at end of period $ 18,496 $ 1,848 $ 2,000 $ 335
$ -
Allowance for Credit Losses - Loans to Percentage
(in thousands, except ratios)
March 31 ,
2023 2022
Loans, end of period $ 1,420,955 $1,411,784
ACL - Loans $ 22,679 $ 17,939
ACL - Loans to loans, end of period 1.60 % 1.27 %
67--------------------------------------------------------------------------------
Allowance for Credit Losses - Unfunded Commitments: (in thousands)
In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of$1,530 atMarch 31, 2023 and$0 atDecember 31, 2022 , classified in other liabilities on the consolidated balance sheets.March 31, 2023 and
Three
Months Ended Three Months Ended
ACL - Unfunded commitments - beginning of period $ - $ -
Cumulative effect of ASU 2016-13 adoption 1,537 -
Reductions to ACL - Unfunded commitments via
provision for credit losses charged to operations (7) -
ACL - Unfunded commitments - end of period $ 1,530 $ -
Nonperforming Loans, Potential Problem Loans and Foreclosed Properties . We
practice early identification of nonaccrual and problem loans in order to
minimize the Bank's risk of loss. Nonperforming loans are defined as nonaccrual
loans and restructured loans that were 90 days or more past due at the time of
their restructure, or when management determines that such classification is
warranted. The accrual of interest income is discontinued on our loans according
to the following schedule:
•Commercial/agricultural real estate loans, past due 90 days or more;
•C&I/Agricultural operating loans, past due 90 days or more;
•Closed ended consumer installment loans, past due 120 days or more; and
•Residential mortgage loans and open-ended consumer installment loans, past due 180 days or more.
When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. The Company adopted ASU 2022-02 onJanuary 1, 2023 , which eliminated special accounting rules for TDRs. Prior to the elimination of the special accounting rules, TDR loans were accounted for under ASC 310-40. A TDR typically involved the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes. TDR loans may have involved loans that had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10. 68 -------------------------------------------------------------------------------- The following table identifies the various components of nonperforming assets and other balance sheet information as of the dates indicated below and changes in the ACL for the periods then ended: March 31, 2023 and December 31, 2022 and Three Months Then Ended Twelve Months Then Ended (1) (2) Nonperforming assets: Nonaccrual loans Commercial real estate $ 5,515 $ 5,736 Agricultural real estate 2,495 2,742 Construction and land development - - Commercial and industrial 450 552 Agricultural operating 794 890 Residential mortgage 1,133 1,253 Consumer installment 23 31 Total nonaccrual loans $ 10,410 $ 11,204 Accruing loans past due 90 days or more 224 246 Total nonperforming loans ("NPLs") 10,634 11,450 Other real estate owned 1,113 1,265 Other collateral owned - 6 Total nonperforming assets ("NPAs") $ 11,747 $ 12,721 Average outstanding loan balance$ 1,421,096 $ 1,351,052 Loans, end of period$ 1,420,955 $ 1,411,784 Total assets, end of period$ 1,860,720 $ 1,816,386 ACL - Loans, at beginning of period $ 17,939 $ 16,913 Cumulative effect of ASU 2016-13 adoption 4,706 - Loans charged off: Commercial/Agricultural real estate (32) (205) C&I/Agricultural operating - (346) Residential mortgage (14) (68) Consumer installment (11) (48) Total loans charged off (57) (667) Recoveries of loans previously charged off: Commercial/Agricultural real estate 3 102 C&I/Agricultural operating 15 36 Residential mortgage 4 29 Consumer installment 12 51 Total recoveries of loans previously charged off: 34 218 Net loans charged off ("NCOs") (23) (449) Additions to ACL - loans via provision for credit losses charged to operations 57 1,475 ACL - Loans, at end of period $ 22,679 $ 17,939 Ratios: ALL to NCOs (annualized) 24,313.40 % 3,995.32 % NCOs (annualized) to average loans 0.01 % 0.03 % ALL to total loans 1.60 % 1.27 % NPLs to total loans 0.75 % 0.81 % NPAs to total assets 0.63 % 0.70 % (1) Loan balances are stated at amortized cost. (2) Loan balances are stated at the unpaid principal balance of the loan. 69 --------------------------------------------------------------------------------
Nonaccrual Loans Roll Forward:
Quarter Ended
December 31, September 30, June 30,
March 31, 2023 2022 2022 2022 March 31, 2022
Balance, beginning of period
154 1,039 257 1,918 720
Acquired nonaccrual loans - - - - -
Charge offs (49) (37) (4) (437) (15)
Transfers to OREO (25) - (27) (65) -
Return to accrual status (252) - (117) - (51)
Repurchases of government
guaranteed loans - - 517 - -
Payments received (527) (561) (288) (2,830) (461)
Other, net (95) (9) - (10) -
Balance, end of period $ 10,410 $ 11,204 $ 10,772 $ 10,434 $ 11,858
Nonaccrual loans decreased by $0.7 million at March 31, 2023 , from $11.2 million
December 31, 2022 . As seen above, this is largely due to payments received with
only modest new additions. Nonperforming assets decreased to $11.7 million or
0.63% of total assets at March 31, 2023 , compared to $12.7 million , or 0.70% of
total assets at December 31, 2022 .
Refer to the "Allowance for Credit Losses" and "Nonperforming Loans, Potential
Problem Loans and Foreclosed Properties " sections above for more information
related to nonperforming loans.
Below is a summary of loan modifications made to borrowers experiencing
financial difficulty during the three months ended
Term Extension
Amortized Cost Basis at % of Total Class of Financing
Loan Class March 31, 2023 Receivables
Commercial real estate $ 5,359 0.74 %
Commercial and industrial $ 25 0.02 %
Residential mortgage $ 38 0.03 %
Other-Than-Insignificant Payment Delay
Amortized Cost Basis at % of Total Class of Financing
Loan Class March 31, 2023 Receivables
Other consumer $ 22 0.33 %
Included in the nonaccrual loans roll forward table above, for periods prior to
the January 1, 2023 adoption of ASU 2022-02 are nonaccrual TDR loans. Nonaccrual
TDR loans were $2.6 million at December 31, 2022 .
70
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December 31, 2022
Number of Recorded
Modifications Investment
Troubled debt restructurings: Accrual Status
Commercial/Agricultural real estate 10 $ 1,336
C&I/Agricultural operating 5 960
Residential mortgage 36 2,875
Consumer installment - -
Total loans 51 $ 5,171 Accruing troubled debt restructurings were
The table below shows a summary of criticized loans for the past five quarters. In the second quarter of 2022, two loans became categorized as special mention. One is a commercial real estate loan secured by a hotel (50% LTV at origination) and has rebounded more slowly from the pandemic due to reliance on seasonal events and company meetings. Performance year to date and current bookings show good progress. The second special mention loan is a$10.4 million fully secured working capital C&I loan. In the third quarter of 2022, this loan increased its outstanding balance by$2.4 million with a draw on a secured line of credit. The loan was categorized as special mention atJune 30, 2022 , and was paid off in the first quarter of 2023. The decrease in substandard loan balances fromDecember 31, 2022 is due to a decrease in non-performing loans along with the receipt of payments. See Note 3, "Loans and Allowance for Credit Losses" for additional information. In addition to our discussion of criticized, special mention, and substandard loans above, we are disclosing the following information about our loans to certain industries. As ofMarch 31, 2023 , hotel loans totaled$92 million with a weighted average LTV of 56% and average size of$3.4 million . Restaurant loans totaled$48 million , atMarch 31, 2023 . The weighted-average LTV percentage on these restaurant loans was 54% and the average loan size was$689 thousand . Approximately$35.0 million of restaurant loans are to franchise quick-service restaurants. AtMarch 31, 2023 we have$45 million of office loans with a weighted average LTV of 65% and average loan size of$626 thousand . The office properties are not located in large cities. (in thousands) (Loan balance at unpaid March 31, December 31, September 30, June 30, March 31, principal balance) 2023 2022 2022 2022 2022
Special mention loan balances
15,439 17,319 20,227 20,680 24,822
Criticized loans, end of
period $ 22,075 $ 29,489
Mortgage Servicing Rights. Mortgage servicing rights ("MSR") assets are
initially measured at fair value; assessed at least quarterly 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 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.
The fair market value of the Company's MSR asset decreased from $5.7 million at
December 31, 2022 , to $5.5 million at March 31, 2023 , primarily due to a
reduction in size of the servicing portfolio as principal repayments exceeded
new servicing rights. At March 31, 2023 and December 31, 2022 , the Company did
not have an MSR impairment, or related valuation allowance.
The unpaid balances of one- to four-family residential real estate loans
serviced for others as of March 31, 2023 , and December 31, 2022 , were $513.8
million and $523.7 million , respectively. The fair market value of the Company's
MSR asset as a percentage of its servicing portfolio at March 31, 2023 and
December 31, 2022 , was 1.07% and 1.08%, respectively.
71
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Deposits. From a month-end perspective, deposits remained stable. From March 7,
2023 to March 31, 2023 , a period closely monitored for unusual withdrawal
activity, balances remained stable. Deposit composition changed during the
quarter ended March 31, 2023 , as both business and retail depositors sought
higher yields on deposit accounts. For the quarter, retail deposits remained
stable, with customers returning to higher yielding certificates with money
moving from money market and savings accounts to certificate accounts. In
January 2023 , commercial non-interest bearing deposits fell as commercial
customers decreased their cash balances to support the needs of their
businesses. Modest brokered deposit growth supplemented deposit growth, with $10
million of brokered money market growth and $14.5 million of brokered
certificate growth.
Consumer, commercial and government deposits have been stable since January 31,
2023 and since the two large coastal bank failures in early March. There are no
material customer or industry concentrations. A decrease in deposits during
January occurred as commercial customers decreased their cash balances to
support the needs of their businesses.
February 28, December 31,
March 31, 2023 2023 January 31, 2023 2022
Consumer deposits $ 786,614 $ 784,162 $ 779,476 $ 805,598
Commercial deposits 391,534 388,770 385,071 405,733
Public deposits 194,683 193,213 195,115 173,548
Brokered deposits 63,962 53,963 39,841 39,841
Total deposits $ 1,436,793 $ 1,420,108 $ 1,399,503 $ 1,424,720 At
March 31, 2023
Non-interest bearing demand deposits $ 247,735 $ 284,722
Interest bearing demand deposits 390,730 371,210
Savings accounts 214,537 220,019
Money market accounts 309,005 323,435
Certificate accounts 274,786 225,334
Total deposits $ 1,436,793 $ 1,424,720
Uninsured and uncollateralized deposits were $252.7 million , or 18% of total
deposits, at March 31, 2023 and $298.8 million , or 21% of total deposits, at
December 31, 2022 . Uninsured deposits at March 31, 2023 were $413.5 million , or
29% of total deposits, and $441.2 million , or 31% of total deposits at December
31, 2022 , with the difference from the above sentence being fully secured
government deposits.
On-balance sheet liquidity, collateralized borrowing and uncommitted federal
funds availability was $517.4 million , or 205% of uninsured and uncollateralized
deposits at March 31, 2023 . At December 31, 2022 on-balance sheet liquidity,
collateralized borrowing and uncommitted federal funds availability was $570.0
million , or 191% of uninsured and uncollateralized deposits.
`
72--------------------------------------------------------------------------------
March 31, 2023 December 31, 2022
Stated
Maturity Amount Range of Stated Rates Stated Maturity Amount Range of Stated Rates
Federal Home Loan Bank
advances (1), (2), (3) 2023 $ 157,000 1.43 % 4.92 % 2023 $ 117,000 1.43 % 4.31 %
2024 20,530 0.00 % 1.45 % 2024 20,530 0.00 % 1.45 %
2025 5,000 1.45 % 1.45 % 2025 5,000 1.45 % 1.45 %
Federal Home Loan Bank
advances $ 182,530 $ 142,530
Senior Notes (4) 2034 $ 18,083 6.75 % 7.25 % 2034 $ 23,250 3.00 % 6.75 %
Subordinated Notes (5) 2030 $ 15,000 6.00 % 6.00 % 2030 $ 15,000 6.00 % 6.00 %
2032 35,000 4.75 % 4.75 % 2032 35,000 4.75 % 4.75 %
$ 50,000 $ 50,000
Unamortized debt issuance
costs (783) (841)
Total other borrowings $ 67,300 $ 72,409
Totals $ 249,830 $ 214,939
(1) The FHLB advances bear fixed rates, require interest-only monthly payments,
and are collateralized by a blanket lien on pre-qualifying first mortgages, home
equity lines, multi-family loans and certain other loans which had a pledged
balance of $1,017,535 and $984,878 at March 31, 2023 and December 31, 2022 ,
respectively. At March 31, 2023 , the Bank's available and unused portion under
the FHLB borrowing arrangement was approximately $213,372 compared to $256,773
as of December 31, 2022 .
(2) Maximum month-end borrowed amounts outstanding under this borrowing
agreement were
(3) The weighted-average interest rate on FHLB borrowings maturing within twelve
months as of
(4) Senior notes, entered into by the Company in
(a) A term note, which was subsequently refinanced inMarch 2022 and modified in February of 2023, requiring quarterly interest-only payments throughMarch 2027 , and quarterly principal and interest payments thereafter. Interest is variable, based on US Prime rate minus 75 basis points with a floor rate of 3.00%.
(b) A
(5) Subordinated notes resulted from the following:
(a) The Company's Subordinated Note Purchase Agreement entered into with certain purchasers inAugust 2020 , which bears a fixed interest rate of 6.00% for five years. InSeptember 2025 , the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period. (b) The Company's Subordinated Note Purchase Agreement entered into with certain purchasers inMarch 2022 , which bears a fixed interest rate of 4.75% for five years. InApril 2027 , the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 329 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period. 73 -------------------------------------------------------------------------------- FHLB advances increased$40.0 million to$182.5 million as ofMarch 31, 2023 , compared to$142.5 million as ofDecember 31, 2022 . The increase is due to loan growth, as well as the Bank's desire to manage it's liquidity and increase cash on hand in response to recent events. The Bank had$47 million of FHLB advances maturing overnight as ofMarch 31, 2023 . The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with theFederal Home Loan Bank . This irrevocable standby letter of credit ("LOC") is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances. The Bank's current unused borrowing capacity, supported by loan collateral as ofMarch 31, 2023 , is approximately$213.4 million . AtMarch 31, 2023 andDecember 31 2022 , the Bank had the ability to borrow$19.9 million and$4.1 million from theFederal Reserve Bank of Minneapolis . The ability to borrow is based on mortgage-backed securities pledged with a carrying value of$30.4 million and$5.4 million as ofMarch 31, 2023 andDecember 31, 2022 , respectively. There were noFederal Reserve borrowings outstanding on these as ofMarch 31, 2023 orDecember 31, 2022 . In addition, The Bank has been approved to obtain funding from theFederal Reserve's new Bank Term Funding Program ("BTFP"). As ofMarch 31, 2023 , the Bank has not borrowed from this facility and has not pledged any collateral to this facility. The Bank maintains two unsecured federal funds purchased lines of credit with banking partners which total$30 million . These lines bear interest at the lender banks announced daily federal funds rate, mature daily, and are revocable at the discretion of the lending institution. There were no borrowings outstanding on these lines of credit as ofMarch 31, 2023 , orDecember 31, 2022 . Additionally, we have a$5.0 million revolving line of credit which is available as needed for general liquidity purposes.
See Note 7, "
At
Stockholders' Equity. Total stockholders' equity was$164.6 million atMarch 31, 2023 , compared to$167.1 million atDecember 31, 2022 . The decrease in stockholder's equity was attributable to: 1) the$4.4 million cumulative effect adjustment from the adoption of ASU 2016-13; and 2) the payment of the annual cash dividend paid in February to common stockholders of$0.29 per share or$3.0 million . These reductions to equity were partially offset by: 1) net income of$3.7 million ; 2) a reduction in the unrealized loss on available for sale securities of$1.1 million ; and 3) the$0.1 million cumulative effect adjustment from the adoption of ASU 2023-02. OnJuly 23, 2021 , the Board of Directors adopted a new share repurchase program. No shares were repurchased under this program in the first quarter of 2023. The Company is authorized to repurchase an additional 243 thousand shares under thisJuly 2021 share repurchase program. Liquidity and Asset / Liability Management. Liquidity management refers to our ability to ensure cash is available in a timely manner to meet loan demand, depositors' needs, and meet other financial obligations as they become due without undue cost, risk, or disruption to normal operating activities. We manage and monitor our short-term and long-term liquidity positions and needs through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk. A key metric we monitor is our liquidity ratio, calculated as cash and securities portfolio divided by total assets. AtMarch 31, 2023 , our liquidity ratio increased to 13.7% percent from 13.0% atDecember 31, 2022 . This was largely due to an increase in interest-bearing cash. Consumer, commercial and government deposits have been stable sinceJanuary 31, 2023 and since the two large coastal bank failures in early March. There are no material customer or industry concentrations. A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses. AtMarch 31, 2023 our deposit portfolio composition was 55% consumer, 27% commercial, 14% public and 4% brokered deposits. AtDecember 31, 2022 our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits. Uninsured and uncollateralized deposits were$252.7 million , or 18% of total deposits, atMarch 31, 2023 and$298.8 million , or 21% of total deposits, atDecember 31, 2022 . Uninsured deposits alone atMarch 31, 2023 were$413.5 million , or 29% of total deposits, and$441.2 million , or 31% of total deposits atDecember 31, 2022 , with the difference being fully secured government deposits. On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was$517.4 million , or 205% of uninsured and uncollateralized deposits atMarch 31, 2023 . AtDecember 31, 2022 on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was$570.0 million , or 191% of uninsured and uncollateralized deposits. 74 -------------------------------------------------------------------------------- Our primary sources of funds are deposits, amortization, prepayments and maturities on the investment and loan portfolios and funds provided from operations. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, and to fund loan commitments. While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Although$171.1 million of our$274.8 million (62%) CD portfolio will mature within the next 12 months, we have historically retained a majority of our maturing CD's. However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate decreased in 2022 and may remain at lower than historical levels in 2023 based on management's current pricing strategy, which reflects the Bank's current strong on-balance sheet liquidity ratio. Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits. We maintain access to additional sources of funds including FHLB borrowings and lines of credit with theFederal Reserve Bank , and our correspondent banks. We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk. Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate, commercial and industrial loans, and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank's total assets. Currently, we have approximately$213.4 million available to borrow under this arrangement, supported by loan collateral as ofMarch 31, 2023 . We also had borrowing capacity of$19.9 million at theFederal Reserve Bank and have been approved to access the Bank Term Funding Program ("BTFP") if the need should arise. The bank maintains$30 million of uncommitted federal funds purchased lines with correspondent banks as part of our contingency funding plan. In addition, the Company has a$5.0 million revolving line of credit which is available as needed for general liquidity purposes. While the Bank does not have formal brokered certificate lines of credit with counter parties atMarch 31, 2023 , we believe that the Bank could access this market, which provides an additional potential source of liquidity as evidenced by third and fourth quarter 2022 and first quarter of 2023 new brokered deposits. See Note 7, "Federal Home Loan Bank and Other Borrowings" of "Notes to Consolidated Financial Statements" which are included in Part I, Item 1, "Financial Statements and Supplementary Data" of this Form 10-Q, for further detail. In reviewing the adequacy of our liquidity, we review and evaluate historical financial information, including information regarding general economic conditions, current ratios, management goals and the resources available to meet our anticipated liquidity needs. Management believes that our liquidity is adequate, and to management's knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity. Off-Balance Sheet Liabilities. In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments, issued to meet customer financial needs. Such financial instruments are recorded in the financial statements when they become payable. These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit. As ofMarch 31, 2023 , the Company had approximately$234.8 million in unused loan commitments, compared to approximately$243.0 million in unused commitments as ofDecember 31, 2022 . In addition, there are$4.4 million of commitments for contributions of capital to an SBIC and an investment company atMarch 31, 2023 . These commitments totaled$4.7 million atDecember 31, 2022 . 75 -------------------------------------------------------------------------------- Capital Resources. As ofMarch 31, 2023 , andDecember 31, 2022 , as shown in the table below, the Bank's Tier 1 and Risk-based capital levels exceeded levels necessary to be considered "Well Capitalized" under Prompt Corrective Action provisions. Below are the amounts and ratios for our capital levels as of the dates noted below for the Bank: To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As ofMarch 31, 2023 (Unaudited) Total capital (to risk weighted assets)$ 226,873 14.6 %$ 124,595 > = 8.0 %$ 155,744 > = 10.0 % Tier 1 capital (to risk weighted assets) 207,474 13.3 % 93,446 > = 6.0 % 124,595 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 207,474 13.3 % 70,085 > = 4.5 % 101,234 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 207,474 11.7 % 71,180 > = 4.0 % 88,974 > = 5.0 % As ofDecember 31, 2022 (Audited) Total capital (to risk weighted assets)$ 221,361 14.2 %$ 124,971 > = 8.0 %$ 156,213 > = 10.0 % Tier 1 capital (to risk weighted assets) 203,422 13.0 % 93,728 > = 6.0 % 124,971 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 203,422 13.0 % 70,296 > = 4.5 % 101,539 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 203,422 11.5 % 70,610 > = 4.0 % 88,262 > = 5.0 %
At
Below are the amounts and ratios for our capital levels as of the dates noted below for the Company:
For Capital Adequacy
Actual Purposes
Amount Ratio Amount Ratio
As of March 31, 2023 (Unaudited)
Total capital (to risk weighted assets) $ 220,131 14.1 % $ 124,595 > = 8.0 %
Tier 1 capital (to risk weighted
assets) 150,732 9.7 % 93,446 > = 6.0 %
Common equity tier 1 capital (to risk
weighted assets) 150,732 9.7 % 70,085 > = 4.5 %
Tier 1 leverage ratio (to adjusted
total assets) 150,732 8.5 % 71,180 > = 4.0 %
As of December 31, 2022 (Audited)
Total capital (to risk weighted assets) $ 218,737 14.0 % $ 124,971 > = 8.0 %
Tier 1 capital (to risk weighted
assets) 150,798 9.7 % 93,728 > = 6.0 %
Common equity tier 1 capital (to risk
weighted assets) 150,798 9.7 % 70,296 > = 4.5 %
Tier 1 leverage ratio (to adjusted
total assets) 150,798 8.5 % 70,610 > = 4.0 %
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