COUY BANC The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q. This report contains statements that constitute forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as "estimate," "project," "predict," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "may," "might," "should," "indicate," "will," "would," "could," "contemplate," "continue," "intend," "target" and words of similar meaning. These forward-looking statements are not historical facts and include statements of our goals, intentions, expectations, business plans, and operating strategies. Forward-looking statements are subject to significant risks and uncertainties, and our actual results may differ materially from the results discussed in such forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
• the effects of the COVID-19 pandemic, including its effects on the economic
environment, our customers, and our operations, including supply chain
disruptions, as well as any changes to federal, state, or local government
laws, regulations, or orders in connection with the pandemic;
• government intervention in theU.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reforms;
• adverse changes in the economic conditions of our market area and of the
agriculture market generally, dairy in particular;
• adverse changes in the financial services industry and national and local
real estate markets (including real estate values);
• competition among depository and other financial institutions, as well as
financial technology (FinTech) companies and other non-traditional
competitors;
• risks related to a high concentration of dairy-related collateral located in
our market area;
• credit risks of lending activities, including changes in the level and trend
of loan delinquencies and write-offs and in our allowance for loan losses
and provision for loan losses;
• the failure of assumptions and estimates underlying the establishment of our
allowance for loan losses and estimation of values of collateral and various
financial assets and liabilities;
• interest rate risks associated with our business;
• fluctuations in the values of the securities held in our securities
portfolio;
• changes in
the capital markets and other market conditions that may affect, among other
things, our liquidity, our net interest margin, our funding sources and the
value of our assets and liabilities;
• our success in introducing new financial products;
• our ability to attract and maintain deposits;
• fluctuations in the demand for loans, which may be affected by numerous
factors, including commercial conditions in our market areas and declines in
the value of real estate in our market areas;
• changes in consumer spending, borrowing, and saving habits that may affect
deposit levels;
• costs or difficulties related to the integration of the business of acquired
entities and the risk that the anticipated benefits, cost savings and any
other savings from such transactions may not be fully realized or may take
longer than expected to realize;
• our ability to enter new markets successfully and capitalize on growth
opportunities, execute our strategic plan, and manage our growth;
• any negative perception of our reputation or financial strength;
• our ability to raise additional capital on acceptable terms when needed;
• changes in laws or government regulations or policies affecting financial
institutions, including changes in banking, consumer protection, securities,
trade, and tax laws and regulations, and any increased costs of compliance
with such laws and regulations;
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• changes in accounting policies and practices, including the implementation
of CECL;
• our ability to retain key members of our senior management team;
• our ability to successfully manage liquidity risk;
• the effectiveness of our risk management framework;
• the occurrence of fraudulent activity, breaches or failures of our
information security controls or cybersecurity-related incidents and our
ability to identify and address such incidents;
• interruptions involving our information technology and telecommunications
systems or third-party servicers;
• changes in benchmark interest rates used to price our loans and deposits,
including the expected elimination of the London Interbank Offered Rate
("LIBOR") and the adoption of a substitute;
• the extensive regulatory framework that applies to us and our compliance
with governmental and regulatory requirements including the Dodd-Frank Act,
the Basel III rules and others relating to banking, consumer protection,
securities, and tax matters;
• rapid technological change in the financial services industry;
• the effects of severe weather, natural disasters, acts of war or terrorism,
widespread disease, pandemics, including the COVID-19 pandemic, and other
external events;
• the impact of any claims, legal actions, litigation, and other legal
proceedings and regulatory actions against us, including any effect on our
reputation;
• the effect of tariffs, trade agreements, and other domestic or international
governmental policies impacting the value of the agricultural or other
products of our borrowers; and
• each of the factors and risks identified in the "Risk Factors" section
included in this Form 10-Q and under Item 1A of Part I of our most recent
Annual Report on Form 10-K.
In addition, this report also contains forward-looking statements regarding the Company's outlook or expectations with respect to the planned Merger with Nicolet. Examples of forward-looking statements include, but are not limited to, statements regarding the outlook and expectations of the Company and Nicolet with respect to the planned Merger, including the timing of the closing of the transaction, the strategic benefits of the merger, and the financial benefits of the Merger, including the expected impact of the Merger on the combined corporation's future financial performance. Such risks, uncertainties, and assumptions, include, among others, the following:
• the possibility that any of the anticipated benefits of the proposed Merger
will not be realized or will not be realized within the expected time
period;
• the risk that integration of the Company's operations with those of Nicolet
will be materially delayed or will be more costly or difficult than
expected;
• the parties' inability to meet expectations regarding the timing of the
proposed Merger;
• changes to tax legislation and their potential effects on the accounting for
the Merger;
• the failure to satisfy the conditions to completion of the proposed Merger;
• the failure of the proposed Merger to close for any other reason;
• diversion of management's attention from ongoing business operations and
opportunities due to the proposed Merger;
• the challenges of integrating and retaining key employees;
• the effect of the announcement of the proposed Merger on Nicolet's, the
Company's or the combined company's respective customer and employee
relationships and operating results;
• the possibility that the proposed Merger may be more expensive to complete
than anticipated, including as a result of unexpected factors or events;
• dilution caused by Nicolet's issuance of additional shares of Nicolet common
stock in connection with the Merger; and
• risks and uncertainties relating to Nicolet's acquisition of Mackinac
uncertainties relating to Mackinac's business, the combined business of
Mackinac and Nicolet, and the combined businesses of Nicolet, the Company
and Mackinac.
33
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These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Forward-looking statements are made only as of the date of this report, and the Company undertakes no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.
Overview
County Bancorp, Inc. is aWisconsin corporation founded inMay 1996 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our primary activities consist of operating through our wholly owned subsidiary bank,Investors Community Bank , headquartered inManitowoc, Wisconsin , and providing a wide range of banking and related business services through the Bank and our other subsidiaries. In addition to the Bank, we have three wholly owned subsidiaries,County Bancorp Statutory Trust II, County Bancorp Statutory Trust III, andFox River Valley Capital Trust I, which areDelaware statutory trusts. The Bank is the sole member ofInvestors Insurance Services, LLC and ABS 1, LLC, which are bothWisconsin limited liability companies. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans, and the interest we pay on interest-bearing liabilities, such as deposits. We generate most of our revenue from interest on loans and investments and loan- and deposit-related fees. Our loan portfolio consists of a mix of agricultural, commercial real estate, commercial, and residential real estate loans. Our primary source of funding is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance through various metrics, including our pre-tax net income, net interest margin, net overhead ratio, return on average assets, earnings per share, and ratio of non-performing assets to total assets. We also utilize non-GAAP metrics, such as adjusted diluted earnings per share, efficiency ratio, return on average common shareholders' equity, tangible book value per share, ratio of tangible common equity to tangible assets, and adverse classified asset ratio, to evaluate the Company's performance. We are required to maintain appropriate regulatory leverage and risk-based capital ratios. There have been no material changes to the critical accounting policies included in the Form 10-K for the year endedDecember 31, 2020 , filed by the Company with theSEC onMarch 12, 2021 . Merger Agreement OnJune 22, 2021 , the Company entered into an Agreement and Plan of Merger with Nicolet, pursuant to which the Company will merge with and into Nicolet. Following the Merger, the Bank will merge with and intoNicolet National Bank , Nicolet's wholly-owned bank subsidiary, withNicolet National Bank continuing as the surviving bank, with all Bank branches operating under the Nicolet National Bank brand. Nicolet filed with theSEC a registration statement on Form S-4, which included a joint proxy statement/prospectus, which became effective onAugust 26, 2021 . The Company filed the joint proxy statement/prospectus with theSEC onAugust 27, 2021 , and it was mailed to the Company's shareholders on or aboutAugust 30, 2021 . Nicolet had received all regulatory approvals for the Merger onSeptember 7, 2021 , and the Merger was approved by the Company's and Nicolet's shareholders onOctober 5, 2021 . Merger Consideration. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, County shareholders will receive for each share of County common stock, at the election of the shareholder, either 0.48 shares of Nicolet common stock or$37.18 in cash, subject to customary proration procedures so that the total consideration will consist of approximately 80% stock and 20% cash. Closing Conditions and Timing. Consummation of the Merger is subject to certain customary closing conditions, including without limitation, receipt of a tax opinion of Nicolet's counsel that the Merger will qualify as a tax-free reorganization. In addition, each party's obligation to consummate the Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of each party's representations and warranties; and (ii) each party's compliance with its covenants and agreements contained in the Merger Agreement. The Merger is expected to close onDecember 3, 2021 . 34 --------------------------------------------------------------------------------
Significant Developments - Impact of COVID-19
The COVID-19 pandemic inthe United States has had an adverse impact on our financial condition and results of operations as of and for the three and nine months endedSeptember 30, 2021 and 2020, has had a complex and adverse impact on the economy and the banking industry, and is expected to continue to adversely impact the Company in future fiscal periods. Effects on Our Business. The COVID-19 pandemic, federal, state, and local government responses to the pandemic, and the effects of existing and future variants of the disease, such as the Delta variant, have had and are expected to continue to have an impact on our business. In particular, we anticipate that a significant portion of the Bank's borrowers in retail shopping centers, limited-service restaurants, hotels, assisted living and nursing homes and residential rental industries may continue to endure significant economic distress, which may cause them to draw on their existing lines of credit and adversely affect their ability and willingness to repay existing indebtedness, and may adversely impact the value of collateral. These developments, together with economic conditions generally, may impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations may be adversely affected.
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
• In response to the interagency statement encouraging financial institutions
to work with borrowers impacted by COVID-19, between
for customers who had loan balances of
two customers remained on payment relief with loan balances totaling
million.
• The Bank processed 904 PPP loan applications in round one in 2020, totaling
quarters of 2021 totaling
borrowings from the
reduce the Bank's available liquidity. As of
working with the remaining PPP borrowers to help them through the process of
forgiveness of their PPP loans.
• Approximately 80% of the Bank's employees are working remotely as of
lobbies reopened to the public on
Operational Overview
• Net income for the three months ended
compared to
2021 and
ended
nine months ended
of
result of improved credit quality within the loan portfolio.
• Total securities available-for-sale decreased
• Total loans increased
billion at
• Participated and sold loans that we continue to service totaled
million at
December 31, 2020 , and an increase of$41.5 million , or 5.2%, sinceSeptember 30, 2020 .
• Client deposits (demand, NOW accounts and interest checking, savings, money
market accounts, and certificates of deposit) increased $91.6 million , or
10.0%, since December 31, 2020 , to $1.0 billion at September 30, 2021 , and
increased $110.0 million , or 12.3%, since September 30, 2020 .
• Cost of funds on interest bearing deposits decreased 9 basis points since the
quarter ended
2021 and decreased 65 basis points since the quarter ended
2020. For the nine months ended
bearing deposits decreased 83 basis points to 0.75% compared to the nine
months ended September 30, 2020 .
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Selected Financial Data
As of and for the As of and for the As of and for the
Three Months Ended Nine Months Ended Year Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 December 31, 2020
(unaudited) (unaudited)
(Dollars in thousands, except per share data)
Selected Income Statement Data:
Interest income $ 13,665 $ 13,106 $ 41,917 $ 40,750 $ 55,475
Interest expense 2,928 4,452 9,524 14,549 18,499
Net interest income 10,737 8,654 32,393 26,201 36,976
Provision for (recovery of) loan
losses (634 ) 79 (4,670 ) 3,439 2,984
Net interest income after provision for loan losses 11,371 8,575 37,063 22,762 33,992 Non-interest income 3,207 3,672 9,171 9,892 14,250 Non-interest expense 9,037 7,667 26,567 30,150 39,645 Income tax expense 1,433 1,164 4,888 1,543 3,118 Net income $ 4,108 $ 3,416 $ 14,779 $ 961 $ 5,479 Per Common Share Data: Basic earnings per common share $ 0.66 $ 0.52 $ 2.36 $ 0.10 $
0.79
Diluted earnings per common share $ 0.65 $ 0.52 $ 2.34 $ 0.10 $
0.79
Adjusted diluted earnings per common share (1) $ 0.65 $ 0.52 $ 2.34 $ 0.87 $
1.56
Cash dividends per common share $ 0.10 $ 0.07 $ 0.30 $ 0.21 $
0.31
Book value per share, end of period $ 27.97 $ 25.72 $ 27.97 $ 25.72 $
26.42
Tangible book value per share, end of period (1) $ 27.97 $ 25.71 $ 27.97 $ 25.71 $
26.42
Weighted average common shares - basic 6,134,656 6,386,339 6,165,938 6,531,041
6,477,173
Weighted average common shares - diluted 6,215,872 6,407,254 6,220,978 6,563,874
6,505,198
Common shares outstanding, end of period 6,053,369 6,294,675 6,053,369 6,294,675
6,197,965
Selected Balance Sheet Data: Total assets $ 1,539,993 $
1,492,055 $ 1,539,993 $ 1,492,055 $ 1,472,358 Securities available-for-sale
338,211 298,476 338,211 298,476 352,854
Total loans 1,004,958 1,075,926 1,004,958 1,075,926 996,285
Allowance for loan losses (10,715 ) (18,649 ) (10,715 ) (18,649 ) (14,808 )
Total deposits 1,181,496 1,050,171 1,181,496 1,050,171 1,040,826
Other borrowings and FHLB advances 97,844 101,809 97,844 101,809 178,006
Subordinated debentures 67,598 67,025 67,598 67,025 67,111
Total shareholders' equity 177,319 169,910 177,319 169,910 171,776
Performance Ratios:
Return on average assets (annualized) 1.07 % 0.91 % 1.31 % 0.09 % 0.38 %
Return on average shareholders' equity
(annualized) 9.22 % 8.05 % 11.34 % 0.75 % 3.22 %
Return on average common shareholders'
equity (1) 9.47 % 8.25 % 11.70 % 0.56 % 3.15 %
Equity to assets ratio 11.51 % 11.39 % 11.51 % 11.39 % 11.67 %
Net interest margin 2.93 % 2.40 % 3.03 % 2.55 % 2.68 %
Interest rate spread 2.74 % 2.12 % 2.83 % 2.23 % 2.37 %
Non-interest income to average assets
(annualized) 0.83 % 0.98 % 0.81 % 0.92 % 1.19 %
Non-interest expense to average assets
(annualized) 2.35 % 2.05 % 2.35 % 2.79 % 2.58 %
Net overhead ratio (annualized) (2) 1.52 % 1.07 % 2.31 % 1.87 % 1.40 %
Efficiency ratio (1) 64.86 % 62.64 % 64.25 % 67.02 % 65.63 %
Dividend payout ratio 15.38 % 13.46 % 12.82 % 210.00 % 39.24 %
Asset Quality Ratios:
Adverse classified asset ratio (1) 19.02 % 42.64 % 19.02 % 42.64 % 39.43 %
Non-performing loans to total loans
(3) 2.78 % 3.84 % 2.78 % 3.84 % 4.18 %
Allowance for loan losses to:
Total loans 1.07 % 1.73 % 1.07 % 1.73 % 1.49 %
Non-performing loans 38.42 % 45.10 % 38.42 % 45.10 % 35.58 %
Net charge-offs (recoveries) to
average loans 0.01 % 0.00 % (0.05 )% 0.01 % 0.32 %
Non-performing assets to total assets
(3) 1.87 % 2.98 % 1.87 % 2.98 % 2.90 %
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(1) Adjusted diluted earnings per common share, tangible book value per share,
return on average common shareholders' equity, efficiency ratio, and adverse
classified asset ratio are not recognized under GAAP and are therefore
considered to be non-GAAP financial measures. See below for reconciliations
of these financial measures to their most comparable GAAP measures.
(2) Net overhead ratio represents the difference between noninterest expense and
noninterest income, divided by average assets.
(3) Non-performing loans consist of nonaccrual loans. Non-performing assets
consist of nonaccrual loans and other real estate owned.
As of
September 30, 2021 September 30, 2020 December 31, 2020
(unaudited)
Capital Ratios:
Shareholders' common equity to assets 10.99 % 10.85 % 11.12 %
Total capital to risk-weighted assets (Bank) 16.18 % 17.25 % 16.83 %
Tangible common equity to tangible assets (1) 10.99 % 10.85 % 11.12 %
(1) Tangible common equity to tangible assets is not recognized under GAAP and
is therefore considered to be a non-GAAP financial measure. See below for
reconciliations of this financial measure to its most comparable GAAP
measure.
Non-GAAP Financial Measures
"Efficiency ratio" is defined as non-interest expense, excluding goodwill impairment, gains and losses on sales and write-downs of other real estate owned, and gains and losses on sales of fixed assets, divided by operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities. In our judgment, the adjustments made to non-interest expense and non-interest income allow investors to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.
Three Months Ended Nine Months Ended Year Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 December 31, 2020
(dollars in thousands)
Efficiency Ratio GAAP to Non-GAAP
reconciliation:
Non-interest expense $ 9,037 $ 7,667 $ 26,567 $ 30,150 $ 39,645
Less: goodwill impairment - - - (5,038 ) (5,038 )
Net loss on sales and write-downs of
OREO - - (17 ) - (1,195 )
Net gain (loss) on sale of fixed assets 7 (9 ) 1,088 (1,373 ) (234 )
Adjusted non-interest expense (non-GAAP) $ 9,044 $ 7,658 $ 27,638 $ 23,739 $ 33,178
Net interest income $ 10,738 $ 8,654 $ 32,393 $ 26,201 $ 36,976
Non-interest income 3,206 3,672 9,171 9,892 14,250
Less: net loss (gain) on sales of
securities - (101 ) 1,453 (671 ) (671 )
Operating revenue $ 13,944 $ 12,225 $ 43,017 $ 35,422 $ 50,555
Efficiency ratio 64.86 % 62.64 % 64.25 % 67.02 % 65.63 %
Return on average common shareholders' equity is a non-GAAP based financial measure calculated using non-GAAP based amounts. The most directly comparable GAAP based measure is return on average shareholders' equity. We calculate return on
37
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average common shareholders' equity by excluding the average preferred
shareholders' equity and the related dividends. Management uses the return on
average common shareholders' equity in order to review our core operating
results and our performance.
Three Months Ended Nine Months Ended Year Ended
September 30, 2021 GAAP to Non-GAAP reconciliation: Return on average shareholders' equity 9.22 % 8.05 % 11.34 % 0.75 % 3.22 %
Effect of excluding average preferred
shareholders' equity 0.25 % 0.20 % 0.36 % (0.19 )% (0.07 )%
Return on average common shareholders'
equity 9.47 % 8.25 % 11.70 % 0.56 % 3.15 %
Tangible book value per share and ratio of tangible common equity to tangible
assets are non-GAAP financial measures based on GAAP amounts. In our judgment,
the adjustments made to book value, equity and assets allow investors to better
assess our capital adequacy and net worth by removing the effect of goodwill and
intangible assets that are unrelated to our core business.
September 30, 2021
(dollars in thousands, except per share data)
Tangible book value per share and tangible
common
equity to tangible assets reconciliation:
Common equity $ 169,319 $ 161,910 $ 163,776
Less: Core deposit intangible, net of
amortization 2 86 54
Tangible common equity $ 169,317 $ 161,824 $ 163,722
Common shares outstanding 6,053,369 6,297,675 6,197,965
Tangible book value per share $ 27.97 $ 25.71 $ 26.42
Total assets $ 1,539,993 $ 1,492,055 $ 1,472,358
Less: Core deposit intangible, net of
amortization 2 86 54
Tangible assets $ 1,539,991 $ 1,491,969 $ 1,472,304
Tangible common equity to tangible assets 10.99 % 10.85 % 11.12 %
38
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Adjusted diluted earnings per share is a non-GAAP measure based on GAAP
amounts. In our judgment, the adjustments made to diluted earnings per share
allow investors to better assess our income related to core operations by
removing the volatility associated with the goodwill impairment, which was a
one-time, non-cash expense.
Three Months Ended Nine Months Ended Year Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 December 31, 2020
(dollars in thousands, except per share data) Adjusted diluted earnings per share:
Net income from continuing operations $ 4,108 $ 3,416 $ 14,779 $ 961 $ 5,479
Less: preferred stock dividends (80 ) (80 ) (239 ) (286 ) (367 )
Plus: goodwill impairment - - - 5,038 5,038
Adjusted income available to common
shareholders
for basic earnings per common share $ 4,028 $ 3,336 $ 14,540 $ 5,713 $ 10,150
Weighted average number of common shares
outstanding 6,134,656 6,386,339 6,165,938 6,531,041 6,477,173
Effect of dilutive options 81,216 20,915 55,040 32,833 28,025
Weighted average number of common shares
outstanding used to calculate diluted
earnings
per common share 6,215,872 6,407,254 6,220,978 6,563,874 6,505,198
Adjusted diluted earnings per share $ 0.65 $ 0.52 $ 2.34 $ 0.87 $ 1.56
Adverse classified asset ratio is a non-GAAP financial measure based on GAAP
amounts. In our judgment, the adjustments made to non-performing assets allow
management to better assess asset quality and monitor the amount of capital
coverage necessary for non-performing assets.
September 30, 2021
(dollars in thousands)
Adverse classified asset ratio:
Substandard loans 44,073 88,370 87,370
Other real estate owned 914 3,064 1,077
Substandard unused commitments 1,824 5,124 4,049
Less: Substandard government guarantees (6,162 ) (7,002 ) (8,960 )
Total adverse classified assets
(non-GAAP) $ 40,649 $ 89,556 $ 83,536
Total equity (Bank) $ 207,180 $ 200,011 $ 205,743
Accumulated other comprehensive gain on
available-for-sale
securities (4,129 ) (8,640 ) (8,686 )
Allowance for loan losses 10,715 18,649 14,808
Adjusted total equity (non-GAAP) $ 213,766 $ 210,020 $ 211,865
Adverse classified asset ratio 19.02 % 42.64 % 39.43 %
Results of Operations
Our operating revenue is comprised of interest income and non-interest
income. Net interest income increased by 24.1% to $10.7 million for the three
months ended September 30, 2021 compared to the three months ended September 30,
2020 , primarily attributable to a 65 basis point decrease in rates paid on
interest bearing deposits that contributed to the decrease in interest expense
of $1.5 million . The decrease in cost of funds was coupled with a 23 basis point
increase in total loan yield due to the fee income recognized at the time of PPP
loan forgiveness. For the nine months ended September 30, 2021 , net interest
income was $32.4 million , an increase of $6.2 million , or 23.6%, from the nine
months ended September 30, 2020 .
Interest income increased $0.5 million to $13.7 million for the third quarter of
2021 compared to $13.1 million for the third quarter of 2020, which resulted
mainly from a 23 basis point increase in loan yield from 4.26% for the three
months ended September 30, 2020 to 4.49% for the three months ended September
30, 2021 . The increase in loan yield was partially offset by a decrease in
average loan balance of $67.6 million from September 30, 2020 , which was
primarily the result of PPP loan forgiveness. For the nine
39
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months ended September 30, 2021 , interest income increased $1.2 million , or
2.9%, to $41.9 million , compared to $40.8 million for the nine months ended
September 30, 2020 , primarily due to the $2.9 million of PPP fee income that was
recognized in connection with the forgiveness of PPP loans during the 2021
period compared to $1.4 million of PPP fee income in the 2020 period. The
increase in fee income was partially offset by a decrease of $33.4 million in
average non-PPP loan balance compared to the first nine months of 2020.
PPP loans contributed $1.1 million and $2.9 million in interest and related SBA
fee income for the three and nine months ended September 30, 2021 , respectively,
compared to $1.1 million and $1.4 million , respectively for the three and nine
months ended September 30, 2020 . The following table shows the accretive effect
the PPP loans had on net interest margin for the three and nine months ended
September 30, 2021 :
For the Three Months
Ended For the Nine Months Ended
September 30, 2021 September 30, 2021
Net interest margin excluding PPP loans 2.68 % 2.85 %
Accretion related to PPP loans:
Impact of interest rate on PPP loans (0.07 )% (0.12 )%
Impact of PPP fee income recognized 0.34 % 0.32 %
Impact of interest expense on PPP
Liquidity Facility program (0.02 )% (0.02 )% Total accretion related to PPP loans 0.25 % 0.18 % Total net interest margin 2.93 % 3.03 % Interest expense decreased from$4.5 million for the third quarter of 2020 to$2.9 million for the third quarter of 2021, which was primarily the result of a 53 basis point decrease in the rate paid on interest-bearing liabilities. The decline in average rate was primarily the result of the continuing low level of the target federal funds rate and our focused efforts to increase customer transactional deposits, which have a lower rate than time deposits. Rates paid on savings, NOW, money market, and interest checking accounts decreased from 0.46% for the quarter endedSeptember 30, 2020 to 0.26% for the quarter endedSeptember 30, 2021 , and the average balance increased by$0.2 million between the two periods. Rates paid on time deposits decreased from 1.95% for the quarter endedSeptember 30, 2020 to 1.11% for the quarter endedSeptember 30, 2021 , and the average balance decreased by$0.1 million between the same periods. For the nine months endedSeptember 30, 2021 , interest expense decreased to$9.5 million from$14.5 million for the nine months endedSeptember 30, 2020 . The$5.0 million , or 34.5%, decrease was primarily due to a 83 basis point reduction in the rate paid on interest-bearing deposits, and the 44 basis point reduction in the rate of our FHLB borrowings, which was slightly offset by the 11 basis point increase on the rate paid on our subordinated debt.
Analysis of Net Interest Income
Net interest income is the largest component of our income and is dependent on the volumes of and yields earned on interest-earning assets as compared to the volumes of and rates paid on interest-bearing liabilities.
As a result of the continued low level of the target federal funds interest rate, as well as the impact of the COVID-19 pandemic, we expect that our net interest income and net interest margin could decrease in future periods.
40
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The following tables reflect the components of net interest income for the three
and nine months ended
Three Months Ended
September 30, 2021 September 30, 2020
Average Income/ Yields/ Average Income/ Yields/
Balance (1) Expense Rates Balance (1) Expense Rates
(dollars in thousands)
Assets
Investment securities $ 352,781 $ 2,141 2.41 %
992,594 10,389 4.15 % 978,954 10,412 4.23 %
PPP loans - round 1 (2) 1,666 87 20.72 % 104,429 1,182 4.50 %
PPP loans - round 2 (2) 21,510 1,015 18.72 % - - -
Total loans (2) 1,015,770 11,491 4.49 % 1,083,383 11,594 4.26 % Interest bearing deposits due from other banks
84,756 33 0.15 % 92,701 18 0.08 %
Total interest-earning assets $ 1,453,307 $ 13,665 3.73 % $ 1,432,143 $ 13,106 3.64 %
Allowance for loan losses (11,519 ) (18,641 )
Other assets 94,892 86,109
Total assets $ 1,536,680 $ 1,499,611
Liabilities
Savings, NOW, money market,
interest checking $ 561,715 $ 365 0.26 % $ 406,888 $ 469 0.46 %
Time deposits 439,640 1,225 1.11 % 499,665 2,444 1.95 %
Total interest-bearing deposits $ 1,001,355 $ 1,590 0.63 % $ 906,553 $ 2,913 1.28 %
Other borrowings 25,534 28 0.44 % 101,829 158 0.62 %
FHLB advances 86,500 204 0.94 % 89,622 298 1.32 % Junior subordinated debentures
64,546 1,106
6.80 % 65,903 1,082 6.53 %
Total interest-bearing liabilities
160,980 147,595
Other liabilities 19,566 18,314
Total liabilities $ 1,358,481 $ 1,329,816
Shareholders' equity 178,199 169,795
Total liabilities and equity $ 1,536,680 Net interest income$ 10,737 $ 8,655 Interest rate spread (3) 2.74 % 2.12 % Net interest margin (4) 2.93 % 2.40 % Ratio of interest-earning assets to interest-bearing liabilities 1.23 1.23 (1) Average balances are calculated on amortized cost.
(2) Includes loan fee income, nonaccruing loan balances, and interest received
on such loans.
(3) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
41
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Nine Months Ended
September 30, 2021 September 30, 2020
Average Income/ Yields/ Average Income/ Yields/
Balance (1) Expense Rates Balance (1) Expense Rates
(dollars in thousands)
Assets
Investment securities $ 370,479 $ 6,862 2.48 %
978,934 32,149 4.39 % 1,012,381 34,753 4.59 %
PPP loans - round 1 (2) 12,660 1,330 14.05 % 57,783 1,416 3.25 %
PPP loans - round 2 (2) 23,833 1,535 8.61 % - - -
Total loans (2) 1,015,427 35,014 4.61 % 1,070,164 36,169 4.51 % Interest bearing deposits due from other banks
42,501 41 0.13 % 72,629 288 0.53 %
Total interest-earning assets $ 1,428,407 $ 41,917 3.92 % $ 1,372,720 $ 40,750 3.97 %
Allowance for loan losses (13,906 ) (17,281 )
Other assets 92,025 85,435
Total assets $ 1,506,526 $ 1,440,874
Liabilities
Savings, NOW, money market,
interest checking $ 515,631 $ 1,104 0.29 %
444,892 4,272 1.28 % 563,809 9,265 2.20 %
Total interest-bearing deposits $ 960,523 $ 5,376 0.75 % $ 929,467 $ 10,982 1.58 %
Other borrowings 37,601 120 0.43 % 56,830 183 0.43 %
FHLB advances 101,278 710 0.94 % 83,438 860 1.38 % Junior subordinated debentures
67,296 3,318
6.59 % 52,006 2,524 6.48 %
Total interest-bearing liabilities
148,760 131,797
Other liabilities 17,322 17,318
Total liabilities $ 1,332,780 $ 1,270,856
Shareholders' equity 173,746 170,018
Total liabilities and equity $ 1,506,526 Net interest income$ 32,393 $ 26,201 Interest rate spread (3) 2.83 % 2.23 % Net interest margin (4) 3.03 % 2.55 % Ratio of interest-earning assets to interest -bearing liabilities 1.22 1.22 (1) Average balances are calculated on amortized cost.
(2) Includes loan fee income, nonaccruing loan balances, and interest received
on such loans.
(3) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
42
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Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income between the periods indicated. The volume column shows the
effects attributable to changes in volume (changes in volume multiplied by prior
rate). The rate column shows the effects attributable to changes in rate
(changes in rate multiplied by prior volume). The net column represents the sum
of the volume and rate columns. For purposes of this table, changes attributable
to both rate and volume which cannot be segregated have been allocated
proportionately between the changes due to rate and the changes due to volume.
Three Months Ended
Increase (Decrease)
Due to Change in Average
Rate Volume Net
(dollars in thousands)
Interest Income:
Investment securities $ 59 $ 589 $ 648
Loans (excluding PPP) (92 ) 69 (23 )
PPP loans - round 1 (1,507 ) 412 (1,095 )
PPP loans - round 2 1,015 - 1,015
Total loans (584 ) 481 (103 )
Federal funds sold and interest-bearing
deposits with
banks 16 (1 ) 15
Total interest income (509 ) 1,069 560
Interest Expense:
Savings, NOW, money market and interest
checking (742 ) 638 (104 )
Time deposits (954 ) (265 ) (1,219 )
Other borrowings (37 ) (93 ) (130 )
FHLB advances (84 ) (10 ) (94 )
Junior subordinated debentures 48 (25 ) 23
Total interest expense (1,769 ) 245 (1,524 )
Net interest income $ 1,260 $ 824 $ 2,084
Nine Months Ended September 30, 2021 v. 2020
Increase (Decrease)
Due to Change in Average
Rate Volume Net
(dollars in thousands)
Interest Income:
Investment securities $ (30 ) $ 2,599 $ 2,569
Loans (excluding PPP) (1,464 ) (1,140 ) (2,604 )
PPP loans - round 1 (113 ) 27 (86 )
PPP loans - round 2 1,535 - 1,535
Total loans (42 ) (1,113 ) (1,155 )
Federal funds sold and interest-bearing
deposits with
banks (160 ) (87 ) (247 )
Total interest income (232 ) 1,399 1,167
Interest Expense:
Savings, NOW, money market and interest
checking (2,497 ) 1,884 (613 )
Time deposits (3,311 ) (1,682 ) (4,993 )
Other borrowings (1 ) (62 ) (63 )
FHLB advances (454 ) 304 (150 )
Junior subordinated debentures 43 751 794
Total interest expense (6,220 ) 1,195 (5,025 )
Net interest income $ 5,988 $ 204 $ 6,192 Provision for Loan Losses
Based on our analysis of the components of the allowance for loan losses, management recorded a recovery of loan losses of$0.6 million for the three months endedSeptember 30, 2021 , compared to a provision for loan losses of$0.1 million for the three months endedSeptember 30, 2020 . The decrease in provision was primarily the result of a$14.0 million decrease in substandard rated loans and the release of corresponding reserves related to the inherent risk associated with those loans. 43 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2021 , the recovery of loan losses was$4.7 million compared to a provision for loans losses of$3.4 million for the nine months endedSeptember 30, 2020 . The$8.1 million decrease in provision expense was primarily the result of the improvement in asset quality of the loan portfolio. During the first nine months of 2021, watch rated loans decreased by$65.5 million , or 34.4%, primarily as the result of 41 dairy customers being upgraded to a low satisfactory rating. In addition during the second quarter of 2021, we eliminated the$0.6 million qualitative factor for industries immediately affected by the COVID-19 pandemic during the first two quarters of 2021. The specific reserve related to impaired loans was$1.9 million atSeptember 30, 2021 , which was a decrease of$2.4 million , or 56.4%, fromDecember 31, 2020 , as a result of five agricultural customers being upgraded as part of our annual review process and two commercial customer pay-offs. This improvement in asset quality is expected to continue during the remainder of 2021. As ofSeptember 30, 2021 , there were two customer relationships with loans in payment deferral associated with COVID-19 customer support programs with loan balances totaling$0.2 million , or less than 0.1% of total loans, which is a decrease of$22.7 million sinceDecember 31, 2020 . Other than the qualitative factor for COVID-19 discussed above, there have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan losses from what was previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Based upon this methodology, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan losses of$10.7 million , or 1.07% of total loans, was appropriate as ofSeptember 30, 2021 . This is compared to an allowance for loan losses of$18.6 million , or 1.73% of total loans, atSeptember 30, 2020 , and$14.8 million , or 1.49% of total loans, atDecember 31, 2020 .
Non-Interest Income
Non-interest income for the three months endedSeptember 30, 2021 decreased by 12.7% to$3.2 million from$3.7 million for the three months endedSeptember 30, 2020 . The$0.5 million decrease was primarily the result of fewer loans being sold on the secondary market during the quarter due to the Bank's excess liquidity loans paying off resulting in a loss in loan servicing rights. For the nine months endedSeptember 30, 2021 , non-interest income decreased$0.7 million , or 7.3%, to$9.2 million from$9.9 million for the nine months endedSeptember 30, 2020 , primarily as a result of the sale of$35.3 million of securities during the second quarter of 2021 in an effort to reduce duration risk, which resulted in a loss of$1.5 million . The loss on the sale of securities was partially offset by modest increases in referral fees and crop insurance commissions.
The following table reflects the components of non-interest income for the three
and nine months ended
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
(dollars in thousands)
Service charges $ 137 $ 108 $ 421 $ 360
Crop insurance commission 309 271 901 729
Gain on sale of residential
loans 69 17 251 59
Gain on sale of
service-retained loans 1,631 1,268 5,002 2,812
Total gain on sale of loans 1,700 1,285 5,253 2,871
Loan servicing fees 2,287 2,054 6,723 5,808
Decay due to increases in
principal paydowns or runoff (1,083 ) (386 ) (2,213 ) (1,378 )
Changes in valuation inputs or
assumptions (613 ) (165 ) (1,763 ) (154 )
Total loan servicing fees,
net 591 1,503 2,747 4,276
Gain (loss) on sale of
securities - 101 (1,453 ) 671
Referral fees - 110 319 248
Other 470 294 982 737
Total non-interest income $ 3,207 $ 3,672 $ 9,170 $ 9,892
44
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Non-Interest Expense Non-interest expense for the three months endedSeptember 30, 2021 increased$1.4 million , or 17.9%, to$9.0 million compared to the three months endedSeptember 30, 2020 , primarily due to a$1.1 million increase to employee compensation and benefits which was the result of adjustments made to employee benefit programs in contemplation of the closing of the Merger that was announced in the second quarter of 2021. In addition, during the third quarter of 2021, the Company made a$0.3 million one-time charitable contribution to further agricultural education in addition to its regular contributions. For the nine months endedSeptember 30, 2021 , non-interest expense decreased by$3.6 million , or 11.9%, to$26.6 million from$30.2 million for the nine months endedSeptember 30, 2020 . In addition to the items noted above, the year-over-year decrease was primarily the result of a$5.0 million goodwill impairment during the first quarter of 2020. In addition, in the first quarter of 2020 there was a$1.4 million write-down of a retail shopping center that was in other real estate owned and a$0.3 million loss recognized on the sale-leaseback of ourManitowoc branch. During the second quarter of 2021, the Company sold the excess land that surrounds the area where our new branch is under construction inAppleton, Wisconsin , which resulted in a gain of$1.1 million . For the nine months endedSeptember 30, 2021 , the Company recorded$0.7 million of expenses related to the Merger.
The following table reflects the components of our non-interest expense for the
three and nine months ended
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
(dollars in thousands)
Employee compensation and
benefits $ 5,846 $ 4,766 $ 17,854 $ 14,620
Occupancy 331 322 903 980
Information processing 640 640 1,965 1,974
Professional fees 503 555 1,755 1,436
Business development 227 305 823 1,004
Charitable contributions 301 47 402 143
Other real estate owned
expenses (income) (2 ) 47 594 207
Write-down of other real estate
owned - - 75 1,360
Net loss on other real estate
owned - 9 17 13
Net gain on sale of fixed
assets (7 ) - (1,088 ) -
Depreciation and amortization 211 295 952 899
Merger expenses 322 - 707 -
Goodwill impairment - - - 5,038
Other 665 681 1,608 2,476
Total non-interest expense $ 9,037 $ 7,667 $ 26,567 $ 30,150
Income taxes
The Company accounts for income taxes in accordance with income tax accounting
guidance, which sets out a consistent framework to determine the appropriate
level of tax reserves to maintain for uncertain tax positions.
The income tax accounting guidance results in two components of income tax
expense: current and deferred. Current income tax expense reflects taxes to be
paid or refunded for the current period by applying the provisions of the
enacted tax law to the taxable income or excess of deductions over revenues. The
Company determines deferred income taxes using the liability (or balance sheet)
method. Under this method, the net deferred tax asset or liability is determined
based on the tax effects of the temporary differences between the book and tax
bases of assets and liabilities, and enacted changes in tax rates and laws are
recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and
liabilities between periods. Deferred tax assets are recognized if it is more
likely than not, based on the technical merits, that the tax position will be
realized or sustained upon examination. The term "more likely than not" means a
likelihood of more than 50%; the terms "examined" and "upon examination" also
include resolution of the related appeals or litigation processes, if any. A tax
position that meets the "more likely than not" recognition threshold is
initially and subsequently measured as the largest amount of tax benefit that
has a greater than 50% likelihood of being realized upon settlement with a
taxing authority that has full knowledge of all relevant information. The
determination of whether or not a tax position has met the "more likely than
not" recognition threshold considers the facts, circumstances, and information
available at the reporting date and is subject to management's judgment.
Deferred tax assets are reduced by a valuation
45
--------------------------------------------------------------------------------allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company files income tax returns in theU.S. federal jurisdiction and in the state ofWisconsin . The Company is no longer subject toU.S. federal or state income tax examinations by tax authorities for years before 2017.
The Company recognizes interest and penalties on income taxes, if any, as a component of other non-interest expense.
Income tax expense for the three months endedSeptember 30, 2021 and 2020, was$1.4 million and$1.2 million , respectively, which represents an effective tax rate of 25.9% and 25.4%, respectively. Income tax expense for the nine months endedSeptember 30, 2021 and 2020, was$4.9 million and$1.5 million , respectively, which represents an effective tax rate of 24.9% and 61.6%, respectively. The decrease in the effective tax rate for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily the result of the non-deductible goodwill impairment that took place during the first quarter of 2020.
Financial Condition
Total assets increased$67.6 million , or 4.6%, fromDecember 31, 2020 to$1.5 billion atSeptember 30, 2021 . The increase was primarily due to cash and cash equivalents increasing by$86.0 million fromDecember 31, 2020 to$105.5 million atSeptember 30, 2021 . These increases were partially offset by the decreases of loans held for sale of$14.5 million and securities available-for-sale of$14.6 million over the same period. Total loans increased by$8.7 million , or 0.9%, fromDecember 31, 2020 toSeptember 30, 2021 , primarily as a result of the increase of$36.5 million in agricultural and commercial real estate loans which was partially offset by the forgiveness by the SBA of$26.2 million of first and second round PPP loans during the same period. Total liabilities increased$62.1 million , or 4.8%, fromDecember 31, 2020 to$1.4 billion atSeptember 30, 2021 . This increase was primarily attributable to a$49.1 million increase in wholesale deposits that were used to purchase securities and to paydown FHLB borrowings. Client deposits increased$91.6 million fromDecember 31, 2020 toSeptember 30, 2021 . The balance of theFederal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") borrowings was$11.5 million atSeptember 30, 2021 , compared to$47.5 million atDecember 31, 2020 due to payments made against the PPPLF when forgiveness was received from the SBA for the first and second round of PPP loans. Shareholders' equity increased$5.5 million , or 3.2%, to$177.3 million atSeptember 30, 2021 from$171.8 million atDecember 31, 2020 . This increase was due primarily to net income for the nine months endedSeptember 30, 2021 of$14.8 million , which was partially offset by$4.6 million of unrealized losses in our securities portfolio during the first nine months of 2021. In addition, the Company repurchased 117,020 shares of its common stock, totaling$4.7 million , during the nine months endedSeptember 30, 2021 . Total shareholders' equity was also reduced by the payment of$2.1 million of dividends on common and preferred stock during the nine months endedSeptember 30, 2021 .
Net Loans
Net loans increased by$12.8 million , or 1.3%, to$1.0 billion atSeptember 30, 2021 fromDecember 31, 2020 . This increase was primarily the result of agricultural and commercial real estate loans increasing$36.5 million as ofSeptember 30, 2021 compared toDecember 31, 2020 . In addition,$36.1 million of second round PPP loans were funded in 2021, which were offset by the forgiveness from the SBA of$26.2 million of first and second round PPP loans during the same period. 46
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The following table sets forth the composition of our loan portfolio at the
dates indicated:
September 30, 2021 December 31, 2020
Amount Percent Amount Percent
(dollars in thousands)
Agriculture loans $ 631,833 62.8 % $ 606,881 60.9 %
Commercial real estate loans 247,520 24.6 % 235,969 23.7 %
Commercial loans 75,195 7.5 % 77,297 7.8 %
PPP loans 11,618 1.2 % 37,790 3.8 %
Residential real estate loans 36,873 3.7 % 38,084 3.8 %
Installment and consumer other 1,918 0.2 % 264 0.0 %
Total gross loans $ 1,004,957 100.0 % $ 996,285 100.0 %
Allowance for loan losses (10,715 ) (14,808 )
Loans, net $ 994,242 $ 981,477 The following table sets forth the composition of PPP loans in our loan portfolio at the dates indicated:
September 30, 2021 December 31, 2020
Deferred Fee Deferred Fee
# of Loans Balance Income # of Loans Balance Income
(dollars in thousands)
PPP 1oans - Round 1 9 $ 265 $ 6 456 $ 37,790 $ 1,191
PPP loans - Round 2 107 11,353 490 - - -
Total PPP loans 116 $ 11,618 $ 496 456 $ 37,790 $ 1,191
% of Total loans 1.16 % 3.79 %
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of all or some of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management's estimate of the level of probable incurred losses in the loan portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to, past loan loss experience, the nature of the portfolio, economic conditions, information about specific borrower situations, and estimated collateral values. Our board of directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors. The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem credits. Management continuously reviews these policies and procedures and makes further improvements as needed. The adequacy of our allowance for loan losses and the effectiveness of our internal policies and procedures are also reviewed periodically by our regulators, our auditors, and external loan review personnel. Our regulators may advise us to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is taken under consideration by management, and we may recognize additions to the allowance as a result. We continually refine our methodology for determining the allowance for loan losses by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreements; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to us. We mitigate this risk by actively using government guarantee programs. 14.0% of our substandard loans are partially guaranteed by theU.S. Farm Services Agency ("FSA") or the SBA. The amount of the guarantee can range from 80% to 95% of unpaid principal for FSA guaranteed loans and 50% to 100% for SBA guaranteed loans. AtSeptember 30, 2021 andDecember 31, 2020 , the allowance for loan losses was$10.7 million and$14.8 million , respectively, which resulted in a ratio of the allowance to total loans of 1.07% and 1.49%, respectively. 47 --------------------------------------------------------------------------------
Charge-offs and recoveries by loan category for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
(dollars in thousands)
Balance, beginning of period $ 11,466 $ 18,569 $ 14,808 $ 15,267
Loans charged off:
Agriculture loans - - - -
Commercial real estate loans 125 - 125 -
Commercial loans - - - 144
Residential real estate loans - - - -
Installment and consumer other - - - -
Total loans charged off $ 125 $ - $ 125 $ 144
Recoveries:
Agriculture loans - - - 23
Commercial real estate loans 8 1 621 63
Commercial loans - - 81 1
Residential real estate loans - - - -
Installment and consumer other - - - -
Total recoveries 8 1 702 87
Net loans charged-off (recovered) $ 117 $ (1 ) $ (577 ) $ 57
Unallocated - 77 - 77
Provision for loan losses (634 ) 2 (4,670 ) 3,439
Allowance for loan losses, end of period $ 10,715 $ 18,649 $ 10,715 $ 18,726
Selected loan quality ratios:
Net charge offs (recoveries) to average
loans 0.01 % 0.00 % (0.05 )% 0.01 %
Allowance for loan losses to total loans
(end of period) 1.07 % 1.73 % 1.07 % 1.73 %
Allowance for loan losses to
non-performing loans and
performing troubled debt
restructurings (end of period) 30.99 % 30.88 % 30.99 % 30.88 %
As provided in the interagency statement, the Company has been working with its
borrowers impacted by COVID-19. As of September 30, 2021 , loans balances with
COVID-19 payment modifications were $0.2 million , or less than 0.1% of total
loans. We will continue to evaluate the impacts of these payment modification
requests on our allowance for loan losses.
Loan Servicing Rights
As part of our growth and risk management strategy, we have actively developed a
loan participation and loan sales network. Our ability to sell loan
participations and whole loans benefits us by freeing up capital and funding to
lend to new customers as well as increasing non-interest income through the
recognition of loan sale and servicing revenue. Because we continue to service
these loans, we are able to maintain a relationship with the customer.
Additionally, we receive a servicing fee that offsets some of the cost of
administering the loan, while maintaining the customer relationship.
Loan servicing rights are recognized as separate assets when rights are acquired
through the sale of financial assets. Servicing rights resulting from the sale
or securitization of loans originated by the Company are initially measured at
fair value at the date of transfer. Under the fair value method, the value of
the asset is based on a discounted cash flow model. The discounted cash flow
model incorporates assumptions that market participants would use in estimating
future net servicing income, such as the cost to service, the discount rate,
ancillary income, and run-off rates. These variables change from
quarter-to-quarter as market conditions and projected interest rates change and
may have an adverse impact on the value of the servicing right and may result in
a reduction to non-interest income.
48
-------------------------------------------------------------------------------- Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.
Information about the loan servicing portfolio is shown below:
For the Three Months Ended
September 30 , December 31,
2021 2020
(dollars in thousands)
Loan servicing rights, end of period
839,357 812,560
Loan servicing rights as a % of loans
serviced 2.31 % 2.26 % Total loan servicing fees$ 2,287 $ 1,974 Average loans serviced 846,267 805,190
Annualized loan servicing fees as a
% of average loans serviced 1.08 % 0.98 % Securities
Our securities portfolio is predominately composed of municipal securities,
investment grade mortgage-backed securities,
Securities decreased to
In an effort to reduce long-term duration risk, we sold
The following table sets forth the amortized cost and fair values of our
securities portfolio at
September 30, 2021 December 31, 2020
Amortized Fair Amortized Fair
Cost Value Cost Value
(dollars in thousands)
Securities available-for-sale:
U.S. government and agency securities $ 12,408 $ 12,324 $ 14,745 $ 14,593
Municipal securities 126,874 128,552 149,203 153,654
Mortgage-backed securities 132,242 136,205 127,804 135,378
Corporate bonds 45,000 44,952 32,500 32,511
Asset-backed securities 16,012 16,178
16,664 16,718
Total securities available-for-sale
Deposits Deposits are the major source of our funds for lending and other investment purposes. Deposits are attracted principally from within our primary market area through the offering of a broad variety of deposit instruments including checking accounts, noninterest-bearing demand accounts, money market accounts, savings accounts, time deposit accounts (including "jumbo" certificates in denominations of$100,000 or more), and retirement savings plans. Total deposits increased$140.7 million , or 13.5%, fromDecember 31, 2020 to$1.2 billion atSeptember 30, 2021 , due primarily to a$91.6 million increase in client deposits (demand, NOW accounts and interest checking, savings, money market accounts, and certificates of deposit). In addition, there was a$49.1 million increase in wholesale deposits in order to paydown FHLB and other borrowings during the same period. 49 --------------------------------------------------------------------------------
As of
September 30, 2021 December 31, 2020
Amount % of Deposits Amount % of Deposits
(dollars in thousands)
Demand, noninterest-bearing $ 168,008 14.2 % $ 163,202 15.6 %
NOW accounts and interest checking 143,843 12.2 % 96,624 9.3 %
Savings 17,258 1.5 % 7,367 0.7 %
Money market accounts 415,813 35.2 % 344,250 33.1 %
Certificates of deposit 262,658 22.2 % 304,580 29.3 %
Brokered deposits 157,583 13.3 % 44,347 4.3 %
National time deposits 16,333 1.4 % 80,456 7.7 %
Total deposits $ 1,181,496 100.0 % $ 1,040,826 100.0 %
Hedging Activities
As of September 30, 2021 , the Company had two outstanding interest rate swaps
designated as a cash flow hedge, each with an aggregate notional value of $6.0
million . Both interest rate swaps mature on June 15, 2028 . A pre-tax unrealized
loss of $1.2 million and $1.9 million was recognized at September 30, 2021 and
December 31, 2020 , respectively, with a corresponding increase reported in
accrued interest payable and other liabilities on the consolidated balance
sheets. There was no ineffective portion of this hedge.
Liquidity Management and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature including, but not limited to, funding loans and depositor withdrawals. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions, and competition. AtSeptember 30, 2021 , advances from the FHLB were$85.0 million compared to$129.0 million atDecember 31, 2020 . AtSeptember 30, 2021 , there were advances from theFederal Reserve Bank's PPPLF program totaling$11.5 million compared to$47.5 million atDecember 31, 2020 . Management adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, (4) the objectives of our interest-rate risk and investment policies and (5) the risk tolerance of management and our board of directors. Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$39.3 million and$10.7 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash used in investing activities, which consists primarily of purchases of and proceeds from the sale, maturities, calls, and principal repayments of securities available for sale, as well as loan originations, net of repayments, was$7.9 million and$186.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was$54.6 million and$100.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively.
As of
AtSeptember 30, 2021 , the Bank exceeded all of its regulatory capital requirements, with Tier 1 leverage capital of$203.1 million , or 13.37% of adjusted average total assets, which is above the minimum level to be well-capitalized of$76.0 million , or 5.0% of adjusted average total assets, and total risk-based capital of$213.8 million , or 16.18% of risk-weighted assets, which is above the minimum level to be well-capitalized of$132.1 million , or 10.0% of risk-weighted assets. In addition, the Company issued$22.4 million of subordinated debt during 2020 that qualifies as Tier 2 capital that is available to support the Bank. At the holding company level, our primary sources of liquidity are dividends from the Bank, investment income and net proceeds from investment sales, borrowings, and capital offerings. The main uses of liquidity are the payment of interest to holders of our junior subordinated debentures and subordinated notes and the payment of interest or dividends to common and preferred shareholders. The Bank is subject to certain regulatory limitations regarding its ability to pay dividends to the Company; however, we 50 -------------------------------------------------------------------------------- do not believe that the Company will be adversely affected by these dividend limitations. AtSeptember 30, 2021 , there were$113.6 million of retained earnings available for the payment of dividends by the Bank to the Company but would be limited to the Bank maintaining minimum regulatory capital ratios. Management believed liquidity to be sufficient as ofSeptember 30, 2021 . AtSeptember 30, 2021 , the Company exceeded all of its regulatory capital requirements, with Tier 1 leverage capital of$190.1 million , or 12.64% of adjusted average assets, which is above the minimum level for capital adequacy of$60.1 million , or 4.0% of adjusted average assets, and total risk-based capital of$252.4 million , or 19.05% of risk-weighted assets, which is above the minimum level for capital adequacy of$139.1 million , or 10.5% of risk-weighted assets. During the fourth quarter of 2020, the Company began construction on a new branch inAppleton, Wisconsin with an estimated completion in the fourth quarter of 2021. The remaining contractual obligation related to the construction was$0.5 million atSeptember 30, 2021 .
Off-Balance Sheet Arrangements and Contractual Obligations
As ofSeptember 30, 2021 , there were no significant changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 12, 2021 . We continue to believe that we have adequate capital and liquidity available from various sources to fund projected obligations and commitments.
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