8-K
NICOLET BANKSHARES INC (NIC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):December 3, 2021
NICOLET BANKSHARES, INC.
(Exact name of registrant as specified in itscharter)
| Wisconsin | 001-37700 | 47-0871001 |
|---|---|---|
| (State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
111 North Washington Street
Green Bay, Wisconsin 54301
(Address of principal executive offices)
(920) 430-1400
(Registrant’s telephone number, includingarea code)
Not Applicable
(Former name or former address, if changed sincelast report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| --- | --- |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| --- | --- |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| --- | --- |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common stock, par value $0.01 per share | NCBS | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter.)
Emerging Growth Company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Introductory Note
On December 3, 2021, Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) completed its merger (the “Merger”) with County Bancorp, Inc. (“County”), pursuant to the terms of the Agreement and Plan of Merger, dated June 22, 2021, by and between Nicolet and County (the “Merger Agreement”). At closing, County merged with and into Nicolet, with Nicolet surviving the Merger. Immediately following the Merger, County’s wholly owned bank subsidiary, Investors Community Bank, merged with and into Nicolet’s wholly owned bank subsidiary, Nicolet National Bank (the “Bank”) pursuant to the terms of a Plan of Merger (the “Bank Plan of Merger”) by and between the Bank and Investors Community Bank (the “Bank Merger”).
Pursuant to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of County common stock issued and outstanding immediately prior to the Effective Time was converted into the right to receive, at the election of the shareholder, either cash of $37.18 or 0.48 shares of Nicolet common stock, subject to proration procedures such that 1,237,000 shares of County common stock will be exchanged for cash, and the remaining shares will be exchanged for Nicolet common stock. In lieu of any fractional shares of Nicolet common stock, County shareholders who would otherwise have been entitled to receive a fraction of a share of Nicolet common stock (after taking into account all shares held by a shareholder) will instead receive an amount in cash (without interest and rounded to the nearest whole cent) in lieu of such fractional share in accordance with the terms of the Merger Agreement. Outstanding equity awards of County were treated as specified in the Merger Agreement.
As a result of the Merger, Nicolet is issuing approximately 2.3 million shares of Nicolet common stock, valued at $73.03 per share based on the closing price of Nicolet’s common stock on the Nasdaq Capital Market on December 2, 2021, the last trading day prior to the consummation of the Merger, and paying approximately $49 million in cash. The value of the total merger consideration was approximately $220 million.
The foregoing summary of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Merger Agreement, which is included as Exhibit 2.1 to this Current Report on Form 8-K and is incorporated herein by reference.
| Item 2.01 | Completion of Acquisition or Disposition of Assets |
|---|
The information set forth in the Introductory Note to this Current Report on Form 8-K is incorporated by reference in its entirety.
| Item 5.02 | Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers |
|---|
Effective immediately upon the consummation of the Merger on December 3, 2021, and in accordance with the terms of the Merger Agreement, the Nicolet Board of Directors increased the size of the board by one member and appointed Lynn D. Davis, a former member of the County board of directors, to fill the vacancy created by this increase. Dr. Davis was not selected as a director of Nicolet pursuant to any other arrangement or understanding with any other persons.
Effective immediately upon the consummation of the Bank Merger on December 3, 2021, and in accordance with the terms of the Merger Agreement and the Bank Plan of Merger, the Bank Board of Directors increased the size of the board by one member and appointed Dr. Davis to fill the vacancy created by this increase.
| Item 8.01 | Other Events |
|---|
On December 6, 2021, the Company issued a press release announcing the completion of the Merger with County. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference.
| Item 9.01 | Financial Statements and Exhibits. |
|---|---|
| (a) | Financial statements of businesses acquired |
| --- | --- |
The audited consolidated financial statements of County as of and for the year ended December 31, 2020, and the related notes thereto and report of the independent auditor thereon, are included in Exhibit 99.2 to this Current Report on Form 8-K and are incorporated herein by reference.
The unaudited consolidated financial statements of County as of and for the nine months ended September 30, 2021, and the related notes thereto, are included in Exhibit 99.3 to this Current Report on Form 8-K and are incorporated herein by reference.
| (b) | Pro forma financial information |
|---|
The unaudited pro forma condensed combined financial information of the Company and County as of and for the year ended December 31, 2020, and as of and for the nine months ended September 30, 2021, is included as Exhibit 99.4 to this Current Report on Form 8-K and is incorporated herein by reference.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: | December 6, 2021 | NICOLET BANKSHARES, INC. | |
|---|---|---|---|
| By: | /s/ H. Phillip Moore, Jr. | ||
| H. Phillip Moore, Jr. | |||
| Chief Financial Officer |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM
We consent to the incorporation by reference in the following Registration Statements:
Registration Statement (Form S-8 No. 333-188853)
Registration Statement (Form S-8 No. 333-188856)
Registration Statement (Form S-8 No. 333-188857)
Registration Statement (Form S-8 No. 333-188858)
Registration Statement (Form S-8 No. 333-208192)
Registration Statement (Form S-8 No. 333-213734)
Registration Statement (Form S-8 No. 333-225180)
Registration Statement (Form S-8 No. 333-231638)
of our report dated March 12, 2021, with respect to the financial statements of County Bancorp, Inc. as of December 31, 2020 and 2019, and for each of the years in the two-year period ended December 31, 2020.
| /s/ Plante & Moran, PLLC |
|---|
Chicago, Illinois
December 6, 2021
Exhibit 99.1
FOR IMMEDIATE RELEASE
Nicolet Bankshares,Inc. Completes Merger with County Bancorp, Inc.
GREEN BAY, WIDecember 6, 2021– Nicolet Bankshares, Inc. (NASDAQ: NCBS) (“Nicolet”) completed its merger with County Bancorp, Inc., (NASDAQ: ICBK) (“County”), as a result of which, County merged with and into Nicolet, with Nicolet being the surviving corporation. Immediately following the merger, County’s wholly-owned banking subsidiary, Investors Community Bank (“Investors”), was merged with and into Nicolet National Bank.
Based on initial financial data, the addition of County added approximately $1.5 billion in assets to increase Nicolet’s total assets to approximately $8.0 billion. Total loans of the combined company will increase to approximately $4.5 billion, and total deposits will increase to approximately $6.7 billion.
The systems integration was completed, and three branches of Investors opened as Nicolet National Bank branches, with one opening in Grand Chute, WI, expanding Nicolet’s presence in the Fox Valley area, and two opening in new markets in Stevens Point, WI and Manitowoc, WI.
About Nicolet Bankshares, Inc.
Nicolet Bankshares, Inc. is the bank holding company of Nicolet National Bank, a growing full-service, community bank providing services ranging from commercial and consumer banking to wealth management and retirement plan services. Founded in Green Bay in 2000, Nicolet National Bank operates branches in Northeast and Central Wisconsin, the upper peninsula of Michigan, and Northern Michigan. More information can be found at www.nicoletbank.com.
Investor Relations & Media Contacts:
Mike Daniels – President & CEO
Jeff Gahnz – VP, Marketing & Public Relations
Phone: 920.430.1400
Email: mdaniels@nicoletbank.com or jgahnz@nicoletbank.com
Exhibit 99.2
Report of Independent Registered Public AccountingFirm
To the Stockholders and Board of Directors
County Bancorp, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of County Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019; the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020; and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has elected to change its method of accounting for the subsequent measurement of loan servicing rights from the amortized cost method to fair value as of January 1, 2020.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion under Section 404(b) of the Sarbanes-Oxley Act.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - QualitativeFactors - Refer to Notes 1 and 4 to the Financial Statements
Critical Audit Matter Description
The allowance for loan losses (allowance) is an estimate of credit losses inherent in the Company’s loan portfolio. The allowance consists of two primary components, general reserves and specific reserves related to impaired loans. The general component covers non-impaired loans and is based on historical losses adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a weighted average of the actual loss history experienced by the Company over the most recent four years. The Company places more emphasis, or weight, on the more current quarters in the loss history period. This actual loss experience is adjusted for qualitative factors based on the risks present within each portfolio segment including adjustments for levels of classified loans, credit concentrations, and economic trends. These factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment. During 2020, the Company added an additional qualitative factor for loans in industries for which it anticipated to be more significantly impacted by COVID-19. These qualitative factors are inherently subjective and are driven by the assessed repayment risk associated with each portfolio segment.
Auditing management’s determination of general reserves within its allowance involved a high degree of subjectivity and judgement in the selection and measurement of the qualitative factors.
How the Critical Audit Matter Was Addressedin the Audit
Our audit procedures related to the qualitative factors with the allowance included the following, among others:
| • | We obtained an understanding of management’s process for determining the need for qualitative factor adjustments, identifying appropriate factors, and measuring the direction and magnitude of the adjustment. |
|---|---|
| • | We evaluated the design of controls over the application of management’s qualitative factor methodology in the estimate of general reserves. |
| --- | --- |
| • | We evaluated management's rationale for determining qualitative adjustments was relevant and warranted for each loan segment and assessed the measurement of qualitative factor adjustments applied by management. |
| --- | --- |
| • | Where applicable, we tested the accuracy and completeness of data used by management in the measurement of qualitative factor adjustments or vouched factors to relevant external data sources. |
| --- | --- |
| • | We assessed changes in qualitative factors year-over-year against overall trends in credit quality within the Company and broader trends within the industry and local and national economies to evaluate reasonableness of management’s qualitative factor adjustments. |
| --- | --- |
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor since 2018.
Chicago, Illinois
March 12, 2021
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
| 2019 | |||||
|---|---|---|---|---|---|
| ASSETS | |||||
| Cash and cash equivalents | 19,084 | $ | 108,457 | ||
| Interest earning cash at other financial institutions | 416 | 20,554 | |||
| Securities available for sale, at fair value | 352,854 | 158,733 | |||
| FHLB Stock | 5,758 | 1,628 | |||
| Loans held for sale | 35,976 | 2,151 | |||
| Loans, net of allowance for loan losses of 14,808 as of December 31, 2020; 15,267 as of December 31, 2019 | 981,477 | 1,020,506 | |||
| Premises and equipment, net | 14,898 | 13,603 | |||
| Loan servicing rights | 18,396 | 12,509 | |||
| Other real estate owned, net | 1,077 | 5,521 | |||
| Cash surrender value of bank owned life insurance | 31,275 | 18,302 | |||
| Deferred tax asset, net | - | 1,453 | |||
| Goodwill | - | 5,038 | |||
| Core deposit intangible, net | 54 | 225 | |||
| Accrued interest receivable and other assets | 11,093 | 10,099 | |||
| Total assets | 1,472,358 | $ | 1,378,779 | ||
| LIABILITIES | |||||
| Deposits: | |||||
| Noninterest-bearing | 163,202 | $ | 138,489 | ||
| Interest-bearing | 877,624 | 962,953 | |||
| Total deposits | 1,040,826 | 1,101,442 | |||
| Other borrowings | 49,006 | 794 | |||
| Advances from FHLB | 129,000 | 44,400 | |||
| Subordinated debentures, net | 67,111 | 44,858 | |||
| Deferred tax liability, net | 2,302 | - | |||
| Accrued interest payable and other liabilities | 12,337 | 15,256 | |||
| Total liabilities | 1,300,582 | 1,206,750 | |||
| SHAREHOLDERS' EQUITY | |||||
| Preferred stock - 1,000 stated value; 15,000 shares authorized; 8,000 shares issued | 8,000 | 8,000 | |||
| Common stock - 0.01 par value; 50,000,000 authorized; 7,212,727 shares issued and 6,197,965 shares outstanding as of December 31, 2020; 7,178,052 shares issued and 6,734,132 shares outstanding as of December 31, 2019 | 29 | 28 | |||
| Surplus | 55,346 | 54,122 | |||
| Retained earnings | 118,712 | 113,111 | |||
| Treasury stock, at cost, 1,014,762 and 443,920 shares at December 31, 2020 and 2019, respectively | (17,606 | ) | (5,030 | ) | |
| Accumulated other comprehensive gain | 7,295 | 1,798 | |||
| Total shareholders' equity | 171,776 | 172,029 | |||
| Total liabilities and shareholders' equity | 1,472,358 | $ | 1,378,779 |
All values are in US Dollars.
See accompanying notes to the consolidated financial statements
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2020 and 2019
| 2020 | 2019 | ||||
|---|---|---|---|---|---|
| (dollars in thousands except per share data) | |||||
| INTEREST AND DIVIDEND INCOME | |||||
| Loans, including fees | $ | 48,906 | $ | 59,706 | |
| Taxable securities | 5,550 | 4,586 | |||
| Tax-exempt securities | 536 | 257 | |||
| Federal funds sold and other | 483 | 1,783 | |||
| Total interest and dividend income | 55,475 | 66,332 | |||
| INTEREST EXPENSE | |||||
| Deposits | 13,463 | 21,457 | |||
| FHLB advances and other borrowings | 1,405 | 1,350 | |||
| Subordinated debentures | 3,631 | 2,743 | |||
| Total interest expense | 18,499 | 25,550 | |||
| Net interest income | 36,976 | 40,782 | |||
| Provision for loan losses | 2,984 | 423 | |||
| Net interest income after provision for loan losses | 33,992 | 40,359 | |||
| NON-INTEREST INCOME | |||||
| Services charges | 469 | 550 | |||
| Crop insurance commission | 1,245 | 1,107 | |||
| Gain on sale of loans, net | 278 | 146 | |||
| Loan servicing fees | 10,255 | 9,998 | |||
| Gain on sale of securities | 671 | 341 | |||
| Other | 1,332 | 1,251 | |||
| Total non-interest income | 14,250 | 13,393 | |||
| NON-INTEREST EXPENSE | |||||
| Employee compensation and benefits | 21,306 | 19,112 | |||
| Occupancy | 1,277 | 1,402 | |||
| Information processing | 2,630 | 2,482 | |||
| Professional fees | 2,019 | 1,670 | |||
| Depreciation and amortization | 1,188 | 1,303 | |||
| Writedown of other real estate owned | 1,508 | 626 | |||
| Cost of operation of other real estate owned, net | (86 | ) | 873 | ||
| Goodwill impairment | 5,038 | - | |||
| Investment tax credit impairment | - | 1,149 | |||
| Other | 4,765 | 4,067 | |||
| Total non-interest expense | 39,645 | 32,684 | |||
| Income before income taxes | 8,597 | 21,068 | |||
| Income tax expense | 3,118 | 4,616 | |||
| NET INCOME | $ | 5,479 | $ | 16,452 | |
| NET INCOME PER SHARE: | |||||
| Basic | $ | 0.79 | $ | 2.37 | |
| Diluted | $ | 0.79 | $ | 2.36 | |
| Dividends paid per share | $ | 0.31 | $ | 0.20 |
See accompanying notes to the consolidated financial statements
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2020 and 2019
| 2020 | 2019 | |||||
|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||
| Net income | $ | 5,479 | $ | 16,452 | ||
| Other comprehensive income: | ||||||
| Unrealized gain on securities available-for-sale | 9,167 | 6,835 | ||||
| Income tax expense | (2,498 | ) | (1,861 | ) | ||
| Reclassification for realized gains on securities | (671 | ) | (341 | ) | ||
| Income tax (benefit) | 183 | 93 | ||||
| Total other comprehensive income on securities available-for-sale | 6,181 | 4,726 | ||||
| Unrealized loss on derivatives arising during the period | (940 | ) | (793 | ) | ||
| Income tax benefit | 256 | 216 | ||||
| Total other comprehensive loss on derivatives | (684 | ) | (577 | ) | ||
| Total other comprehensive income | 5,497 | 4,149 | ||||
| Comprehensive income | $ | 10,976 | $ | 20,601 |
See accompanying notes to the consolidated financial statements
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY
Years Ended December 31, 2020 and 2019
| Preferred <br>Stock | Common <br>Stock | Surplus | Retained <br>Earnings | Treasury <br>Stock | Accumulated <br>Other <br>Comprehensive <br>Income (Loss) | Total <br>Shareholders' <br>Equity | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||||||||||||||
| Balance at December 31, 2018 | $ | 8,000 | $ | 28 | $ | 53,162 | $ | 98,475 | $ | (5,030 | ) | $ | (2,351 | ) | $ | 152,284 | ||
| Net income | - | - | - | 16,452 | - | - | 16,452 | |||||||||||
| Other comprehensive income | - | - | - | - | - | 4,149 | 4,149 | |||||||||||
| Stock compensation expense | - | - | 695 | - | - | - | 695 | |||||||||||
| Cash dividends declared on common stock | - | - | - | (1,344 | ) | - | - | (1,344 | ) | |||||||||
| Cash dividends declared on preferred stock | - | - | - | (472 | ) | - | - | (472 | ) | |||||||||
| Issuance of common stock (21,224 shares) | - | - | 265 | - | - | - | 265 | |||||||||||
| Balance at December 31, 2019 | $ | 8,000 | $ | 28 | $ | 54,122 | $ | 113,111 | $ | (5,030 | ) | $ | 1,798 | $ | 172,029 | |||
| Cumulative effect of change in accounting principle | 2,484 | 2,484 | ||||||||||||||||
| Net income | - | - | - | 5,479 | - | - | 5,479 | |||||||||||
| Other comprehensive income | - | - | - | - | - | 5,497 | 5,497 | |||||||||||
| Stock compensation expense | - | - | 867 | - | - | - | 867 | |||||||||||
| Cash dividends declared on common stock | - | - | - | (1,994 | ) | - | - | (1,994 | ) | |||||||||
| Cash dividends declared on preferred stock | - | - | - | (368 | ) | - | - | (368 | ) | |||||||||
| Treasury stock purchases (570,842 shares) | (12,576 | ) | (12,576 | ) | ||||||||||||||
| Issuance of common stock (34,675 shares) | - | 1 | 357 | - | - | - | 358 | |||||||||||
| Balance at December 31, 2020 | $ | 8,000 | $ | 29 | $ | 55,346 | $ | 118,712 | $ | (17,606 | ) | $ | 7,295 | $ | 171,776 |
See accompanying notes to the consolidated financial statements
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020 and 2019
| 2020 | 2019 | |||||
|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||
| Cash flows from operating activities | ||||||
| Net income | $ | 5,479 | $ | 16,452 | ||
| Adjustments to reconcile net income to cash (used in) provided by operating activities: | ||||||
| Depreciation and amortization of premises and equipment | 1,335 | 1,391 | ||||
| Amortization of core deposit intangible | 171 | 288 | ||||
| Amortization of subordinated debenture costs | 449 | 155 | ||||
| Impairment of goodwill | 5,038 | - | ||||
| Provision for loan losses | 2,984 | 423 | ||||
| Realized gain on sales of securities available for sale | (671 | ) | (341 | ) | ||
| Realized gain on sales of other real estate owned | (313 | ) | (40 | ) | ||
| Write-down of other real estate owned | 1,508 | 626 | ||||
| Realized loss (gain) on sales of premises and equipment | 243 | (6 | ) | |||
| Increase in cash surrender value of bank owned life insurance | (729 | ) | (460 | ) | ||
| Deferred income tax expense | 1,700 | 1,401 | ||||
| Stock compensation expense | 867 | 695 | ||||
| Net amortization of premiums paid on securities | 1,042 | 441 | ||||
| Net change in: | ||||||
| Accrued interest receivable and other assets | (2,166 | ) | (405 | ) | ||
| Loans held for sale | (33,825 | ) | 798 | |||
| Loan servicing rights | (3,403 | ) | (3,462 | ) | ||
| Accrued interest payable and other liabilities | (3,861 | ) | 3,997 | |||
| Net cash (used in) provided by operating activities | (24,152 | ) | 21,953 | |||
| Cash flows from investing activities | ||||||
| Proceeds from maturities, principal repayments, and call of securities available for sale | 25,693 | 24,368 | ||||
| Purchases of securities available for sale | (247,155 | ) | (10,122 | ) | ||
| Proceeds from sales of securities available-for-sale | 35,466 | 29,361 | ||||
| Net (purchases) redemptions of FHLB stock | (4,130 | ) | 1,184 | |||
| Purchases of bank owned life insurance | (12,244 | ) | - | |||
| Loan originations and principal collections, net | 35,277 | 163,546 | ||||
| Proceeds from sales of premises and equipment | 1,508 | 6 | ||||
| Purchases of premises and equipment | (3,211 | ) | (659 | ) | ||
| Proceeds from sales of other real estate owned | 4,017 | 6,776 | ||||
| Net cash (used in) provided by investing activities | (164,779 | ) | 214,460 | |||
| Cash flows from financing activities | ||||||
| Net increase in demand and savings deposits | 265,648 | 52,491 | ||||
| Net decrease in certificates of deposits | (326,264 | ) | (174,396 | ) | ||
| Proceeds from other borrowings | 101,120 | - | ||||
| Repayment of other borrowings | (52,908 | ) | (33 | ) | ||
| Proceeds from FHLB advances | 627,000 | 115,000 | ||||
| Repayment of FHLB advances | (542,400 | ) | (160,000 | ) | ||
| Payments to acquire treasury stock | (12,576 | ) | - | |||
| Proceeds from issuance of subordinated debt | 22,400 | - | ||||
| Issuance cost of subordinated debt | (596 | ) | - | |||
| Proceeds from issuance of common stock | 358 | 265 | ||||
| Dividends paid on preferred stock | (368 | ) | (472 | ) | ||
| Dividends paid on common stock | (1,994 | ) | (1,344 | ) | ||
| Net cash provided by (used in) financing activities | 79,420 | (168,489 | ) | |||
| Net change in cash and cash equivalents | (109,511 | ) | 67,924 | |||
| Cash and cash equivalents, beginning of period | 129,011 | 61,087 | ||||
| Cash and cash equivalents, end of period | $ | 19,500 | $ | 129,011 | ||
| Supplemental disclosure of cash flow information: | ||||||
| Cash paid during the period for: | ||||||
| Interest | $ | 21,735 | $ | 23,833 | ||
| Income taxes | 2,950 | 1,725 | ||||
| Noncash investing activities: | ||||||
| Transfer of assets held for sale from premises and equipment to other assets | $ | 695 | $ | 1,500 | ||
| Transfer from loans to other real estate owned | 768 | 6,315 |
See accompanying notes to the consolidated financial statements
COUNTY BANCORP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of County Bancorp, Inc. and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practice within the banking industry. The following is a description of the more significant of those policies.
Nature of Business and Significant Concentrations of Credit Risk
The Company is the sole shareholder of Investors Community Bank. The Bank is the sole member of Investors Insurance Services, LLC and ABS 1, LLC, which are both Wisconsin limited liability companies. The Company commenced operations in May 1996; the Bank commenced operations in March 1997. In July 2010, the Bank formed Investors Insurance Services, LLC for the sole purpose of protecting the Bank from liability risk when selling crop insurance. Selling crop insurance had historically been a business function performed within the Bank. In August 2011, the Bank formed ABS 1, LLC for the sole purpose of holding real estate and personal property for sale which was obtained through repossession.
The Bank provides a full range of banking and related financial services, which include real estate lending, business services, and agricultural finance, to individual and corporate customers primarily located within the state of Wisconsin. The Bank’s primary source of revenue is providing loans to customers, the majority of which are predominantly engaged in dairy farming and commercial activities. Its primary deposit products are savings and term certificate accounts. The Bank is subject to competition from other financial institutions and is regulated by federal and state banking agencies and undergoes periodic examinations by those agencies.
Agricultural loans, including agricultural operating, real estate and construction loans, represented 60.9% and 63.7% of our total loan portfolio at December 31, 2020 and 2019, respectively. Commercial real estate loans, including commercial construction loans, represented 23.7% and 22.8% of our total loan portfolio at December 31, 2020 and 2019, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company also has three wholly owned subsidiaries, County Bancorp Statutory Trust II, County Bancorp Statutory Trust III, and Fox River Valley Capital Trust I, that are Delaware statutory trusts which have not been consolidated in accordance with accounting guidance related to variable interest entities.
Use of Estimates in Preparing Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of investment securities available for sale, loan servicing rights, other real estate owned, financial instruments, and deferred tax assets (liabilities). Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold, all of which mature within 90 days.
In the normal course of business, the Company maintains balances with correspondent banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to specified limits. Management believes these financial institutions have strong credit ratings and the credit risk related to these deposits is minimal.
Securities Available for Sale
Available for sale securities are carried at fair value with unrealized gains and losses excluded from earnings and reported separately in other comprehensive income. The Company currently has no securities designated as trading or held-to-maturity. Interest income is recognized at the coupon rate adjusted for amortization and accretion of premiums and discounts. Discounts are accreted into interest income over the estimated life of the related security and premiums are amortized against income to the earlier of the call date or weighted average life of the related security using the interest method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. They are included in non-interest income or expense and, when applicable, are reported as a reclassification adjustment in other comprehensive income.
Declines in the fair value of individual available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The Company monitors the investment security portfolio for impairment on an individual security basis and has a process in place to identify securities that could potentially have a credit impairment that is other than temporary. This process involves analyzing the length of time and the extent to which the fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and near-term prospects of the issuer, expected cash flows, and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the temporary impairment. A decline in value due to a credit event that is considered other than temporary is recorded as a loss in non-interest income.
Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank of Chicago (“FHLB”), is required to maintain an investment in the capital stock of the FHLB based on the level of borrowings and other factors, and may invest additional amounts. Based on the redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost which approximates fair value. It is periodically evaluated by management for impairment. Because it is viewed as a long term investment, impairment is based on ultimate recovery of par value. Both stock and cash dividends are reported as income.
Loans Held for Sale
Loans intended for sale in the secondary market are carried at the lower of cost or fair value. Gains and losses on loan sales (sale proceeds minus carrying value) are recorded in non-interest income, and direct loan origination costs and fees deferred at origination of the loan are recognized in non-interest income upon sale of the loan.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances adjusted for unearned income and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, non-refundable fees and direct loan origination costs are amortized over the life of the loan and accounted for as an adjustment of yield of the related loan categories.
The accrual of interest on mortgage and commercial loans is discontinued at the time the principal and interest is 90 days delinquent unless the credit is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on nonaccrual loans is applied to reduce the principal balance outstanding. Once the loans qualify for a return to accrual status, the interest is accounted for on a cash-basis. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses (hereinafter referred to as “allowance”) is an estimate of loan losses inherent in the Company’s loan portfolio. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Loan losses are charged off against the allowance when the Company determines the loan balance to be uncollectible. Cash received on previously charged off amounts is recorded as a recovery to the allowance.
The allowance consists of two primary components, general reserves and specific reserves related to impaired loans. The general component covers non-impaired loans and is based on historical losses adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a weighted average of the actual loss history experienced by the Company over the most recent four years. The Company places more emphasis, or weight, on the more current quarters in the loss history period. This actual loss experience is adjusted for qualitative factors based on the risks present within each portfolio segment including adjustments for levels of classified loans, credit concentrations, and economic trends. These factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment. During 2020, the Company provided for additional reserves for loans in industries deemed to be high risk to account for additional losses driven by COVID-19 that have not yet been specifically identified.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is generally measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent.
Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above. TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with other nonaccrual loans. On March 22, 2020, issued a revision to the Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the COVID-19 pandemic. The Statement provides guidance on handling payment modification requests for impacted borrowers without triggering TDR classifications, by allowing up to 6-months of payment deferrals or interest only to assist our customers during that time. During 2020, we processed 184 customer payment modification for loans totaling $200.4 million, and at December 31, 2020, 24 customers remained on payment relief with loan balances totaling $16.8 million.
Large groups of small balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for credit quality disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
The Company maintains separate general reserves for each portfolio segment. These portfolio segments include agricultural, commercial, commercial real estate, residential real estate, and installment and consumer other with risk characteristics described as follows:
**Agricultural:**Agricultural loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows. Adverse economic conditions and trends influenced by Class III milk prices and other key economic indicators are closely correlated to the credit quality of these loans.
CommercialReal Estate: Commercial real estate loans, including land and construction, generally possess a higher inherent risk of loss than other real estate portfolio segments. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability of the properties to produce sufficient cash flow to service debt obligations.
Commercial: Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows, and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
ResidentialReal Estate: The degree of risk in residential mortgage and home equity lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Installmentand Consumer Other: The installment and consumer other loan portfolio is usually comprised of a large number of small loans. Most loans are made directly for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate the borrowers’ capacity to repay their obligations may be deteriorating.
Bank Premises and Equipment
Land is carried at cost. Bank premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed on the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any recognized gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and improvements are capitalized, and a deduction is made from the property accounts for retirements of capitalized renewals or improvements.
Off-Balance Sheet Credit-Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Loan Servicing Rights
As discussed in Note 1, the Company changed its method of accounting form loan servicing rights to fair market value effective January 1, 2020. Servicing assets 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.
Fair value 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, the runoff rate, and ancillary income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned.
Prior to January 1, 2020, The Company subsequently measured each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date.
Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measure of the impairment.
Under the amortized cost method, changes in the valuation allowances are reported with loan servicing fees on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized. The amortization of loan servicing rights is netted against loan servicing fee income.
Other Real Estate Owned
Land and assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure less estimated costs to sell, establishing a new cost basis with any loss on transfer recorded as a charge against the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in non-interest expense.
Impairment losses on assets to be held and used are measured at the amount by which the carrying amount of a property exceeds its fair value. The evaluation of impairment is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements. Costs of significant asset improvements are capitalized, whereas costs relating to holding assets are expensed. Revenue and expenses from operations and changes in the valuation allowance are included in non-interest expense.
Cash Surrender Value of Bank Owned Life Insurance
The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized, if lower.
Goodwill and Core Deposit Intangible
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired and is included as an asset on the balance sheets. Goodwill is not amortized but is subject to impairment tests on at least an annual basis. Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 66-month period and is subject to periodic impairment evaluation.
Management will periodically review the carrying value of its long-lived and intangible assets to determine if any impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life, in which case an impairment charge would be recorded as an expense in the period of impairment. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible.
Income Taxes
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 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. As of December 31, 2020 and 2019, there was no valuation allowance.
The Company files income taxes returns in the U.S. federal jurisdiction and in the state of Wisconsin. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2017.
The Company recognizes interest and penalties on income taxes, if any, as a component of other non-interest expense.
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.
Comprehensive Income
Recognized revenue, expenses, gains, and losses are included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale and interest rate swap contracts designed as hedges, are reported as a separate component of the equity section of the consolidated balance sheet. Such items, along with net income, are components of comprehensive income. Accumulated other comprehensive income included unrealized gains on securities available for sale and unrealized losses on interest rate swap contracts of $8,687 and $(1,392), respectively, net of tax of $(3,251) and $525, respectively, as of December 31, 2020. Accumulated other comprehensive loss as of December 31, 2019 included unrealized gains on securities available for sale and unrealized losses on interest rate swap contracts of $2,564 and $(766), respectively, net of tax of $(878) and $206, respectively.
Derivatives
Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives consist of interest rate swap agreements that qualify for hedge accounting. We do not use derivatives for trading purposes.
Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash flows to be received or paid on certain assets and are effective are reported in other comprehensive income. They are later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in the line item in which the hedged cash flows are recorded.
We formally document the relationship between the derivative instrument and the hedged item, as well as the risk-management objective and the strategy for undertaking the hedge transaction. This documentation includes linking cash flow hedges to specific assets on the balance sheet. If designated as a hedge, we also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative instrument that is used is highly effective in offsetting changes in cash flows of the hedged items. Ineffective hedge gains and losses would be recognized immediately in current earnings as noninterest income or expense.
Equity Incentive Plan
Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. All grants and awards out of the equity incentive plan are newly issued shares.
Treasury Stock
Common stock shares repurchased are recorded as treasury stock at cost.
Earnings per Share
Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.
Treasury shares are not deemed outstanding for earnings per share calculations.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except any cash flows allocated as compensation for servicing or other services performed, must be divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, and (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 20. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
Segments
The Company’s operations consist of one segment, community banking. The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance. Selected information is not presented separately for the Company's reportable segment, as there is no material difference between that information and the corresponding information in the consolidated financial statements.
New Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In October 2019, the FASB voted to delay the effective date for the credit losses standard to January 2023 for certain entities, including SEC filers that qualified as smaller reporting companies and private companies. As a smaller reporting company, the Company was eligible for the delay and will be deferring adoption until January 2023. Entities should apply this amendment a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. At this time, the effect this ASU will have on its consolidated financial statements is still being quantified as the Company ensures data assumptions, and methods all comply with the requirements of ASU 2016-13. The Company is also developing internal control processes and disclosure documentation related to the adoption of this standard. Management will continue to progress on its implementation project plan and improve the Company’s approach throughout the deferral period.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 842) - Disclosure Framework-Changes to the Disclosure Requirementsfor Fair Value Measurement, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendment became effective January 1, 2020, and the adoption did not have a material effect on the Company’s financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The ASU provides optional, temporary expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The main provisions of this ASU include: (1) a change in the contract’s reference rate would be accounted for as a continuation of that contract rather than as the creation of a new contract and (2) an entity would be allowed to preserve its hedge accounting when updating it hedging strategies in response to the reference rate reform. The ASU was effective upon issuance on March 12, 2020 and can be applied through December 31, 2022 allowing for different elections over the effective date range for legacy and new activity. The Company is evaluating and reassessing the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position, and liquidity.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act allows financial institutions to elect to suspend troubled debt restructuring accounting under certain circumstances when the temporary restructuring is related to the Coronavirus Disease 2019 (COVID-19) pandemic. The Company has elected to implement Section 4013, and for the year ended December 31, 2020, the Company has processed 184 requests with loan balances totaling $200.7 million. At December, 24 clients with loan balances totaling $16.8 million were still participating in the payment deferral program.
Change in AccountingPrinciple
As of January 1, 2020, the Company elected to make an accounting principle change for the valuation of the loan servicing assets from amortized cost to fair market value.
We believe that the fair value method is the preferred method of presenting these assets and is more widely recognized by current and potential investors. These assets represent the value of future net revenue streams. Updating the estimate of these cash flow streams based on both observable and unobservable trends and inputs at each reporting period provides meaningful changes in the economic value to shareholders. The amortized cost approach requires a periodic impairment test; however, it does not provide any transparency if the portfolio, or certain tranches within the portfolio, have significant increases in value. Therefore, the fair value method provides a balanced, measurement policy for the benefit of the investing public. As a result of this accounting principle change, servicing assets increased by $3.4 million and deferred tax assets decreased by $0.9 million. The adoption of the change was recorded through a cumulative effect adjustment to retained earnings as of January 1, 2020, of $2.5 million. All future adjustments to fair value will be reflected in the consolidated statement of operations.
NOTE 2-RESTRICTIONS ON CASH AND CASH EQUIVALENTS
The Bank is generally required to maintain average balances on hand or with the Federal Reserve Bank. However, the reserve balance was suspended by the Board of Governors of the Federal Reserve System on March 15, 2020. At December 31, 2020 there was no required reserve balance. At December 31, 2019 the reserve balance amounted to approximately $7.2 million.
NOTE 3-SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale are as follows:
| Amortized | Unrealized | Unrealized | Fair | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Cost | Gains | Losses | Value | ||||||
| (dollars in thousands) | |||||||||
| December 31, 2020 | |||||||||
| U.S. government and agency securities | $ | 14,745 | $ | - | $ | (152 | ) | $ | 14,593 |
| Municipal securities | 149,203 | 4,736 | (285 | ) | 153,654 | ||||
| Mortgage-backed securities | 127,804 | 7,872 | (298 | ) | 135,378 | ||||
| Corporate bonds | 32,500 | 21 | (10 | ) | 32,511 | ||||
| Asset-backed securities | 16,664 | 55 | (1 | ) | 16,718 | ||||
| $ | 340,916 | $ | 12,684 | $ | (746 | ) | $ | 352,854 | |
| December 31, 2019 | |||||||||
| U.S. government and agency securities | $ | 3,490 | $ | - | $ | (32 | ) | $ | 3,458 |
| U.S treasury securities | 2,499 | 7 | - | 2,506 | |||||
| Mortgage-backed securities | 149,302 | 3,633 | (166 | ) | 152,769 | ||||
| $ | 155,291 | $ | 3,640 | $ | (198 | ) | $ | 158,733 |
The amortized cost and fair value of securities at December 31, 2020 and 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Amortized | Fair | |||
|---|---|---|---|---|
| Cost | Value | |||
| (dollars in thousands) | ||||
| December 31, 2020 | ||||
| Due in one year or less | $ | - | $ | - |
| Due from one to five years | - | - | ||
| Due from five to ten years | 55,024 | 55,120 | ||
| Due after ten years | 141,424 | 145,638 | ||
| Asset-backed securities | 16,664 | 16,718 | ||
| Mortgage-backed securities | 127,804 | 135,378 | ||
| $ | 340,916 | $ | 352,854 | |
| December 31, 2019 | ||||
| Due in one year or less | $ | 2,499 | $ | 2,506 |
| Due from one to five years | - | - | ||
| Due from five to ten years | 3,490 | 3,458 | ||
| Due after ten years | - | - | ||
| Mortgage-backed securities | 149,302 | 152,769 | ||
| $ | 155,291 | $ | 158,733 |
Proceeds from the sale of securities available for sale were $ 35.5 million and $29.4 million and the gross gain was $0.7 million $0.3 million for the year ended December 31, 2020 and December 31, 2019, respectively. There were no securities available for sale sold at a loss during 2020 or 2019.
At December 31, 2020 and 2019 no securities were pledged to secure the FHLB advances besides FHLB stock of $5.8 million and $1.6 million, respectively. There were no securities pledged to secure the Federal Reserve Bank line of credit at December 31, 2020 and 2019; however, there were $23.0 million and $63.0 million of securities pledged to secure municipal customer deposits at December 31, 2020 and 2019, respectively.
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019.
| Less Than 12 Months | 12 Months or Greater | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||
| Value | Losses | Value | Losses | Value | Losses | ||||||||||
| (dollars in thousands) | |||||||||||||||
| December 31, 2020 | |||||||||||||||
| U.S. government and agency securities | $ | 12,217 | $ | (134 | ) | $ | 2,376 | $ | (18 | ) | $ | 14,593 | $ | (152 | ) |
| Municipal securities | 30,849 | (285 | ) | - | - | 30,849 | (285 | ) | |||||||
| Mortgage-backed securities | 7,781 | (298 | ) | - | - | 7,781 | (298 | ) | |||||||
| Corporate bonds | 7,990 | (10 | ) | - | - | 7,990 | $ | (10 | ) | ||||||
| Asset-backed securities | 3,817 | (1 | ) | - | - | 3,817 | $ | (1 | ) | ||||||
| $ | 62,654 | $ | (728 | ) | $ | 2,376 | $ | (18 | ) | $ | 65,030 | $ | (746 | ) | |
| December 31, 2019 | |||||||||||||||
| U.S. government and agency securities | $ | - | $ | - | $ | 3,458 | $ | (32 | ) | $ | 3,458 | $ | (32 | ) | |
| Mortgage-backed securities | 9,873 | (41 | ) | 11,867 | (125 | ) | 21,740 | (166 | ) | ||||||
| $ | 9,873 | $ | (41 | ) | $ | 15,325 | $ | (157 | ) | $ | 25,198 | $ | (198 | ) |
The unrealized loss on the investments at December 31, 2020 and 2019 was due to normal fluctuations and pricing inefficiencies. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell the investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2020 and 2019.
Other-Than-Temporary Impairment
The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. There were no securities with material unrealized losses existing longer than 12 months, and no securities with unrealized losses which management believed were other-than-temporarily impaired, at December 31, 2020 or 2019.
At December 31, 2020, 26 debt securities with unrealized losses totaling 1.15% of the related securities; amortized cost basis. At December 31, 2019, 34 debt securities had unrealized losses with aggregate depreciation of 0.78% from the Company’s amortized cost basis. These unrealized losses related principally to Government National Mortgage Association mortgage-backed and municipal debt securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Since none of the unrealized losses relate to deterioration in the underlying repayment sources and management has the indent and ability hold debt securities until maturity, the decline is not deemed to be other-than-temporary.
NOTE 4-LOANS
The components of the loan portfolio were as follows:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| (dollars in thousands) | ||||||
| Agricultural loans | $ | 606,881 | $ | 659,725 | ||
| Commercial real estate loans | 235,969 | 235,936 | ||||
| Commercial loans | 115,087 | 95,787 | ||||
| Residential real estate loans | 38,084 | 43,958 | ||||
| Installment and consumer other | 264 | 367 | ||||
| Total gross loans | 996,285 | 1,035,773 | ||||
| Allowance for loan losses | (14,808 | ) | (15,267 | ) | ||
| Loans, net | $ | 981,477 | $ | 1,020,506 |
Net unamortized deferred costs totaling $0.3 million and $0.6 million as of December 31, 2020 and 2019, respectively, are included in total gross loans above.
The following table presents the aging of the recorded investment in past due loans at December 31, 2020 and 2019:
| 30-59 <br><br>Days <br>Past Due | 60-89 <br><br>Days <br>Past Due | 90+ Days <br>Past Due | Total <br>Past Due | Loans Not <br>Past Due | Total Loans | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||||||||
| December 31, 2020 | ||||||||||||
| Agricultural loans | $ | 47 | $ | - | $ | 5,041 | $ | 5,088 | $ | 601,793 | $ | 606,881 |
| Commercial real estate loans | 82 | - | 4,283 | 4,365 | 231,604 | 235,969 | ||||||
| Commercial loans | - | - | 96 | 96 | 114,991 | 115,087 | ||||||
| Residential real estate loans | 4 | - | - | 4 | 38,080 | 38,084 | ||||||
| Installment and consumer other | - | - | - | - | 264 | 264 | ||||||
| Total | $ | 133 | $ | - | $ | 9,420 | $ | 9,553 | $ | 986,732 | $ | 996,285 |
| December 31, 2019 | ||||||||||||
| Agricultural loans | $ | 1,489 | $ | 71 | $ | 4,974 | $ | 6,534 | $ | 653,191 | $ | 659,725 |
| Commercial real estate loans | - | 288 | - | 288 | 235,648 | 235,936 | ||||||
| Commercial loans | - | 28 | 228 | 256 | 95,531 | 95,787 | ||||||
| Residential real estate loans | - | - | 62 | 62 | 43,896 | 43,958 | ||||||
| Installment and consumer other | - | - | - | - | 367 | 367 | ||||||
| Total | $ | 1,489 | $ | 387 | $ | 5,264 | $ | 7,140 | $ | 1,028,633 | $ | 1,035,773 |
The following table lists information on nonaccrual, restructured, and certain past due loans:
| December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| (dollars in thousands) | ||||
| Nonaccrual loans, 90 days or more past due | $ | 9,420 | $ | 5,264 |
| Nonaccrual loans 30-89 days past due | - | 1,781 | ||
| Nonaccrual loans, less than 30 days past due | 32,204 | 23,923 | ||
| Troubled debt restructured loans not on nonaccrual status | 18,592 | 21,783 | ||
| 90 days or more past due and still accruing | - | - |
The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days on accrual by class of loan:
| December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| (dollars in thousands) | ||||
| Agricultural loans | $ | 35,067 | $ | 26,415 |
| Commercial real estate loans | 6,093 | 2,673 | ||
| Commercial loans | 405 | 1,818 | ||
| Residential real estate loans | 59 | 62 | ||
| Total | $ | 41,624 | $ | 30,968 |
The average recorded investment in total impaired loans for the years ended December 31, 2020 and 2019 amounted to approximately $69.1 million and $60.6 million, respectively. Interest income recognized on total impaired loans for the years ended December 31, 2020 and 2019 amounted to approximately $5.6 million and $5.7 million, respectively. For nonaccrual loans included in impaired loans, the interest income that would have been recognized had those loans been performing in accordance with their original terms would have been approximately $3.4 million and $2.9 million for the years ended December 31, 2020 and 2019, respectively.
The following tables present loans individually evaluated for impairment by class of loans at December 31, 2020 and 2019:
| December 31, 2020 | ||||||
|---|---|---|---|---|---|---|
| Unpaid Principal<br><br>Balance | Recorded<br><br>Investment | Allowance for<br><br>Loan Losses<br><br>Allocated | ||||
| (dollars in thousands) | ||||||
| With no related allowance: | ||||||
| Agricultural loans | $ | 20,245 | $ | 20,120 | $ | - |
| Commercial real estate loans | 288 | 288 | - | |||
| Commercial loans | 2,504 | 2,481 | - | |||
| Residential real estate loans | 61 | 59 | - | |||
| $ | 23,098 | $ | 22,948 | $ | - | |
| With an allowance recorded | ||||||
| Agricultural loans | $ | 47,971 | $ | 43,657 | $ | 3,504 |
| Commercial real estate loans | 8,245 | 6,790 | 672 | |||
| Commercial loans | 357 | 336 | 86 | |||
| Residential real estate loans | - | - | - | |||
| 56,573 | 50,783 | 4,262 | ||||
| Total | $ | 79,671 | $ | 73,731 | $ | 4,262 |
| December 31, 2019 | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Unpaid Principal<br><br>Balance | Recorded<br><br>Investment | Allowance for<br><br>Loan Losses<br><br>Allocated | ||||
| (dollars in thousands) | ||||||
| With no related allowance: | ||||||
| Agricultural loans | $ | 14,151 | $ | 14,131 | $ | - |
| Commercial real estate loans | - | - | - | |||
| Commercial loans | - | - | - | |||
| Residential real estate loans | 62 | 62 | - | |||
| $ | 14,213 | $ | 14,193 | $ | - | |
| With an allowance recorded | ||||||
| Agricultural loans | $ | 47,225 | $ | 44,702 | $ | 3,515 |
| Commercial real estate loans | 3,681 | 3,682 | 836 | |||
| Commercial loans | 2,155 | 1,862 | 1,238 | |||
| Residential real estate loans | - | - | - | |||
| 53,061 | 50,246 | 5,589 | ||||
| Total | $ | 67,274 | $ | 64,439 | $ | 5,589 |
Changes in the allowance for loan losses by portfolio segment were as follows:
| December 31, 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Beginning <br>Balance | Provision<br><br> for <br>Loan Losses | Loans <br>Charged <br>Off | Loan <br>Recoveries | Ending <br>Balance | ||||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 11,737 | $ | (901 | ) | $ | - | $ | 23 | $ | 10,859 | |
| Commercial real estate loans | 1,913 | 3,357 | (2,195 | ) | 64 | 3,139 | ||||||
| Commercial loans | 1,599 | 541 | (1,336 | ) | 1 | 805 | ||||||
| Residential real estate loans | 15 | (10 | ) | - | - | 5 | ||||||
| Installment and consumer other | 3 | (3 | ) | - | - | - | ||||||
| Total | $ | 15,267 | $ | 2,984 | $ | (3,531 | ) | $ | 88 | $ | 14,808 | |
| December 31, 2019 | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Beginning <br>Balance | Provision<br><br> for <br>Loan Losses | Loans <br>Charged <br>Off | Loan <br>Recoveries | Ending <br>Balance | ||||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 12,258 | $ | (518 | ) | $ | (61 | ) | $ | 58 | $ | 11,737 |
| Commercial real estate loans | 2,779 | 613 | (3,585 | ) | 2,106 | 1,913 | ||||||
| Commercial loans | 1,414 | 364 | (282 | ) | 103 | 1,599 | ||||||
| Residential real estate loans | 53 | (38 | ) | - | - | 15 | ||||||
| Installment and consumer other | 1 | 2 | - | - | 3 | |||||||
| Total | $ | 16,505 | $ | 423 | $ | (3,928 | ) | $ | 2,267 | $ | 15,267 |
The following tables present the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:
| December 31, 2020 | ||||||
|---|---|---|---|---|---|---|
| Individually <br>Evaluated for <br>Impairment | Collectively <br>Evaluated for <br>Impairment | Total | ||||
| (dollars in thousands) | ||||||
| Allowance for loan losses: | ||||||
| Agricultural loans | $ | 3,504 | $ | 7,355 | $ | 10,859 |
| Commercial real estate loans | 672 | 2,467 | 3,139 | |||
| Commercial loans | 86 | 719 | 805 | |||
| Residential real estate loans | - | 5 | 5 | |||
| Installment and consumer other | - | - | - | |||
| Total ending allowance for loan losses | 4,262 | 10,546 | 14,808 | |||
| Loans: | ||||||
| Agricultural loans | 63,777 | 543,104 | 606,881 | |||
| Commercial real estate loans | 7,077 | 228,892 | 235,969 | |||
| Commercial loans | 2,818 | 112,269 | 115,087 | |||
| Residential real estate loans | 59 | 38,025 | 38,084 | |||
| Installment and consumer other | - | 264 | 264 | |||
| Total loans | 73,731 | 922,554 | 996,285 | |||
| Net loans | $ | 69,469 | $ | 912,008 | $ | 981,477 |
| December 31, 2019 | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Individually <br>Evaluated for <br>Impairment | Collectively <br>Evaluated for <br>Impairment | Total | ||||
| (dollars in thousands) | ||||||
| Allowance for loan losses: | ||||||
| Agricultural loans | $ | 3,515 | $ | 8,222 | $ | 11,737 |
| Commercial real estate loans | 836 | 1,077 | 1,913 | |||
| Commercial loans | 1,238 | 361 | 1,599 | |||
| Residential real estate loans | - | 15 | 15 | |||
| Installment and consumer other | - | 3 | 3 | |||
| Total ending allowance for loan losses | 5,589 | 9,678 | 15,267 | |||
| Loans: | ||||||
| Agricultural loans | 58,833 | 600,892 | 659,725 | |||
| Commercial real estate loans | 3,682 | 232,254 | 235,936 | |||
| Commercial loans | 1,862 | 93,925 | 95,787 | |||
| Residential real estate loans | 62 | 43,896 | 43,958 | |||
| Installment and consumer other | - | 367 | 367 | |||
| Total loans | 64,439 | 971,334 | 1,035,773 | |||
| Net loans | $ | 58,850 | $ | 961,656 | $ | 1,020,506 |
Troubled Debt Restructurings
The Company had allocated $3.8 million and $3.5 million of specific reserves for loans where terms have been modified in troubled debt restructurings at December 31, 2020 and 2019, respectively. The Company had no additional lending commitments at December 31, 2020 and 2019 to customers with outstanding loans that are classified as troubled debt restructurings.
A TDR on nonaccrual status is classified as a nonaccrual loan until evaluation supports reasonable assurance of repayment and recent performance according to the modified terms of the loan. Once this assurance is reached, the TDR is classified as an accruing loan. At December 31, 2020, there were $47.7 million of TDR loans, of which $29.1 million were classified as nonaccrual and $18.6 million were classified as accruing, and there were $0.8 million unfunded commitments on these loans. At December 31, 2019, there were $41.0 million of TDR loans, of which $19.3 million were classified as nonaccrual and $21.7 million were classified as accruing. There were $0.3 million unfunded commitments on these loans.
The following table provides the number of loans modified in a troubled debt restructuring investment by class for the year ended December 31, 2020 and 2019:
| Year Ended December 31, 2020 | Year Ended December 31, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Number of <br><br>Loans | Recorded <br><br>Investment | Number of<br><br> Loans | Recorded<br><br>Investment | |||||
| (dollars in thousands) | ||||||||
| Troubled debt restructurings: | ||||||||
| Agricultural loans | 14 | $ | 9,460 | 42 | $ | 17,595 | ||
| Commercial real estate loans | 3 | 3,728 | 1 | 1,021 | ||||
| Commercial loans | - | - | 4 | 1,115 | ||||
| Total | 17 | $ | 13,188 | 47 | $ | 19,731 |
During the years ended December 31, 2020 and 2019, there were no loans modified as troubled debt restructurings within the previous 12 months that subsequently defaulted.
The following table provides the troubled debt restructurings for the year ended December 31, 2020 and 2019 grouped by type of concession:
| Year Ended December 31, 2020 | Year Ended December 31, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Number of<br><br> Loans | Recorded<br><br>Investment | Number of<br><br> Loans | Recorded<br><br>Investment | |||||
| (dollars in thousands) | ||||||||
| Agricultural loans | ||||||||
| Payment concessions | 1 | $ | 214 | 4 | $ | 844 | ||
| Extension of interest-only payments | 2 | 258 | 24 | 12,436 | ||||
| Combination of extension of term and interest rate concession | 9 | 8,367 | - | - | ||||
| Rate concession | - | - | 1 | 85 | ||||
| Capitalized interest | 1 | 152 | 1 | 152 | ||||
| Term concession | 1 | 469 | 12 | 4,078 | ||||
| Commercial real estate loans | ||||||||
| Payment concessions | - | - | 1 | 1,021 | ||||
| Extension of interest-only payments | 3 | 3,728 | - | - | ||||
| Commercial loans | ||||||||
| Payment concessions | - | - | 2 | 69 | ||||
| Extension of interest-only payments | - | - | 2 | 1,046 | ||||
| Total | 17 | $ | 13,188 | 47 | $ | 19,731 |
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes agricultural, commercial, and commercial real estate loans individually by classifying the credits as to credit risk. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits with total exposure in excess of $1.0 million. The Company uses the following definitions for credit risk ratings:
Sound. Credits classified as sound show very good probability of ongoing ability to meet and/or exceed obligations.
Acceptable. Credits classified as acceptable show a good probability of ongoing ability to meet and/or exceed obligations.
Satisfactory. Credits classified as satisfactory show an average probability of ongoing ability to meet and/or exceed obligations.
LowSatisfactory. Credits classified as low satisfactory may have more inconsistent earnings but have a fair probability of ongoing ability to meet and/or exceed obligations.
Watch. Credits classified as watch show some questionable probability of ongoing ability to meet and/or exceed obligations.
SpecialMention. Credits classified as special mention show potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.
Substandard- Performing. Credits classified as substandard - performing generally have well-defined weaknesses. Collateral coverage is adequate, and the loans are not considered impaired. Payments are being made and the loans are on accrual status.
Substandard- Impaired. Credits classified as substandard - impaired generally have well-defined weaknesses that jeopardize the repayment of the debt. They have a distinct possibility that a loss will be sustained if the deficiencies are not corrected. Loans are considered impaired. Loans are either exhibiting signs of delinquency or are on non-accrual.
Doubtful. Credits classified as doubtful have all the weaknesses inherent in those classified as substandard - impaired with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable.
The Company categorizes residential real estate, installment, and consumer other loans as satisfactory at the time of origination based on information obtained as to the ability of the borrower(s) to service their debt, such as current financial information, employment status and history, historical payment experience, credit scores and type and amount of collateral among other factors. The Company updates relevant information on these types of loans at the time of refinance, troubled debt restructuring or other indications of financial difficulty, downgrading as needed using the same category descriptions as for agricultural, commercial, and commercial real estate loans. In addition, the Company further considers current payment status as an indicator of which risk category to assign the borrower.
The greater the level of deteriorated risk as indicated by a loan’s assigned risk category, the greater the likelihood a loss will occur in the future.
Based on the most recent analysis performed by management, the risk category of loans by class of loans was as follows:
| As of December 31, 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sound/ <br>Acceptable/ <br>Satisfactory/ <br>Low<br><br>Satisfactory | Watch | Special <br>Mention | Substandard<br><br>Performing | Substandard <br>Impaired | Total <br>Loans | |||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 374,595 | $ | 155,546 | $ | 1,854 | $ | 34,452 | $ | 40,434 | $ | 606,881 |
| Commercial real estate loans | 200,208 | 26,266 | - | 3,402 | 6,093 | 235,969 | ||||||
| Commercial loans | 103,488 | 8,022 | 647 | 2,566 | 364 | 115,087 | ||||||
| Residential real estate loans | 37,758 | 267 | - | - | 59 | 38,084 | ||||||
| Installment and consumer other | 264 | - | - | - | - | 264 | ||||||
| Total | $ | 716,313 | $ | 190,101 | $ | 2,501 | $ | 40,420 | $ | 46,950 | $ | 996,285 |
| As of December 31, 2019 (1) | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Sound/ <br>Acceptable/ <br>Satisfactory/ <br>Low<br><br>Satisfactory | Watch | Special <br>Mention | Substandard<br><br>Performing | Substandard <br>Impaired | Total <br>Loans | |||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 388,184 | $ | 184,050 | $ | 9,239 | $ | 46,587 | $ | 31,665 | $ | 659,725 |
| Commercial real estate loans | 209,279 | 21,703 | - | 2,281 | 2,673 | 235,936 | ||||||
| Commercial loans | 83,141 | 10,091 | - | 737 | 1,818 | 95,787 | ||||||
| Residential real estate loans | 43,473 | 254 | - | 169 | 62 | 43,958 | ||||||
| Installment and consumer other | 367 | - | - | - | - | 367 | ||||||
| Total | $ | 724,444 | $ | 216,098 | $ | 9,239 | $ | 49,774 | $ | 36,218 | $ | 1,035,773 |
| (1) | Performing troubled debt restructurings have been reclassified to be reflected in their internal risk rating category rather than Substandard Impaired as previously reported to conform with current year’s presentation. | |||||||||||
| --- | --- |
NOTE 5-PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
| December 31, | Estimated | ||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | Useful Life | |||||
| (dollars in thousands) | |||||||
| Land | $ | 1,965 | $ | 2,240 | N/A | ||
| Construction in process | 2,456 | 1,319 | N/A | ||||
| Bank premises | 9,373 | 10,038 | 35-40 years | ||||
| Leasehold improvements | 1,643 | 44 | 5-39 years | ||||
| Furniture, fixtures, and equipment | 5,165 | 6,110 | 3-7 years | ||||
| 20,602 | 19,751 | ||||||
| Accumulated depreciation and amortization | (5,704 | ) | (6,148 | ) | |||
| $ | 14,898 | $ | 13,603 |
Depreciation and amortization expense charged to operations for the years ended December 31, 2020 and 2019 totaled $1.3 million and $1.4 million, respectively.
NOTE 6-LOAN SERVICING RIGHTS
Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in payment patterns that result from shifts in interest rates. The unpaid principal balances of mortgage and other loans serviced for others were approximately $812.6 million and $751.7 million at December 31, 2020 and 2019, respectively. All sales of loans are executed on a servicing retained basis. The standard loan sale agreement provides the Company with a “servicing spread” paid from a portion of the interest cash flow of the loan. Industry practice recognizes adequate compensation for SBA and FSA loans to be 1.0% and 2.0% respectively. Loans sold with servicing spread that is greater than or equal to adequate compensation are recognized as a servicing asset, while loans with a servicing spread less than adequate compensation are recognized as a servicing liability. Loans with a servicing fee significantly above an amount that would fairly compensate a substitute servicer are reported as “Other Borrowings” on the consolidated balance sheet.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. The Company’s portfolio of loan serviced for others is mostly comprised of fixed rate loans. Generally, as market interest rates rise, prepayments on fixed rate loans decrease due to a decline in refinancing activity, which results in an increase in the fair value of servicing rights. However, due to the cross-collateralization of loans in the portfolio and the government guarantee programs under which many of the loans were originated, prepayments on the portfolio tend to be muted in comparison to those of other types of loans, such as mortgage loans. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate at a different time.
Loan servicing fee income is recorded on the consolidated statements of operations for fees earned for servicing loans. The fees are based on the contractual percentage of the outstanding principal and are recorded as income when earned.
The fair value of servicing rights at December 31, 2020 was $18.4 million and was determined using an assumed discount rate of 14.3% and a weighted average run-off rate of 6.16%, primarily ranging from 6.04% to 7.75%. The fair value of servicing rights at December 31, 2019 was $15.9 million and was determined using a discount rate of 14.0% and weighted average prepayment speed of 7.33%, ranging from 5.00% to 10.00%, depending upon the stratification of the specific right, and nominal credit losses.
Changes to the fair value are also reported in loan servicing fees within the consolidated statements of operations.
The following tables summarize servicing rights capitalized for the years ending December 31, 2020 and 2019, along with the aggregate activity in related valuation allowance for the year ended December 31, 2019. The year ended December 31, 2020 is presented at fair value, and the year ended December 31, 2019 is presented using the amortized cost method.
| For the Year Ended <br>December 31, 2020 | |||
|---|---|---|---|
| (dollars in thousands) | |||
| Balance, December 31, 2019 | $ | 12,509 | |
| Impact of cumulative effect of change in accounting principle | 3,412 | ||
| Balance, January 1, 2020 | $ | 15,921 | |
| Additions, net | 4,707 | ||
| Fair value changes: | |||
| Decay due to increases in principal paydowns or runoff | (3,330 | ) | |
| Due to changes in valuation inputs or assumptions | 1,098 | ||
| Balance, December 31, 2020 | $ | 18,396 | |
| For the Year Ended <br>December 31, 2019 | |||
| --- | --- | --- | --- |
| (dollars in thousands) | |||
| Balance, December 31, 2018 | $ | 9,047 | |
| Additions related to new loans | 6,539 | ||
| Impairment due to prepayment | (757 | ) | |
| Amortization of existing asset | (2,320 | ) | |
| Balance, December 31, 2019 | $ | 12,509 |
NOTE 7 - GOODWILL AND COREDEPOSIT INTANGIBLE
During the first quarter of 2020, goodwill was evaluated for impairment due to economic disruption and unknown growth and credit risk related to the COVID-19 pandemic. Three valuation models were weighted and evaluated: discounted cash flow model (60%), guideline public company method (30%) and transaction method (10%). The transaction method was weighted the lowest as the identified transactions happened prior to the COVID-19 pandemic and could not be relied upon as comparable values as of March 31, 2020. More weighting was put toward cash flows as management believes the value of the Company is still tied to overall earnings. For the discounted cash flow method, the analysis discounted projected earnings by 14.5% based on an evaluation of required returns for similar public companies adjusted for an expected size and company-specific premium. Through this evaluation, it was determined that as of March 31, 2020, the fair value of the Company did not exceed the current carrying value by an amount in excess of the carrying amount of the goodwill; therefore, the goodwill was deemed to be impaired.
Goodwill: Goodwill resulted from the acquisition of Fox River Valley on May 13, 2016. Goodwill was fully impaired and had no carrying valued at December 31, 2020. There was no impairment to goodwill as of December 31, 2019.
Core deposit intangible: Core deposit intangible, primarily related to acquired customer relationships, is amortized over its estimated finite life. There was no impairment charge to core deposit intangible for the year ended December 31, 2020 and 2019. The core deposit intangible related to the Fox River Valley acquisition is as follows:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| (dollars in thousands) | ||||||
| Core deposit intangible: | ||||||
| Gross carrying amount | $ | 1,801 | $ | 1,801 | ||
| Accumulated amortization | (1,747 | ) | (1,576 | ) | ||
| Net book value | $ | 54 | $ | 225 |
NOTE 8-OTHER REAL ESTATE OWNED
Changes in other real estate owned were as follows:
| For the Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| (dollars in thousands) | ||||||
| Balance, beginning of period | $ | 5,521 | $ | 6,568 | ||
| Assets foreclosed | 768 | 6,315 | ||||
| Write-down of other real estate owned | (1,508 | ) | (626 | ) | ||
| Net gain on sales of other real estate owned | 313 | 40 | ||||
| Proceeds from sale of other real estate owned | (4,017 | ) | (6,776 | ) | ||
| Balance, end of period | $ | 1,077 | $ | 5,521 |
Income (expenses) attributable to other real estate owned include the following:
| For the Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| (dollars in thousands) | ||||||
| Net gain on sales of other real estate owned | $ | 313 | $ | 40 | ||
| Write-down of other real estate owned | (1,508 | ) | (626 | ) | ||
| Operating expenses, net of rental income | (227 | ) | (162 | ) | ||
| $ | (1,422 | ) | $ | (748 | ) |
NOTE 9-DEPOSITS
Deposits are summarized as follows:
| December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| (dollars in thousands) | ||||
| Non-interest-bearing | $ | 163,202 | $ | 138,489 |
| NOW and interest checking | 96,624 | 67,805 | ||
| Savings | 7,367 | 6,395 | ||
| Money market accounts | 344,250 | 247,828 | ||
| Certificates of deposit | 304,580 | 375,100 | ||
| National time deposits | 44,347 | 99,485 | ||
| Brokered deposits | 80,456 | 166,340 | ||
| Total deposits | $ | 1,040,826 | $ | 1,101,442 |
Certificates of deposit in amounts of more than $250,000 at December 31, 2020 and 2019 were approximately $153.4 million and $240.6 million, respectively.
The scheduled maturities of certificates of deposit were as follows:
| December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| (dollars in thousands) | ||||
| 1 year or less | $ | 262,138 | $ | 378,098 |
| 1 to 2 years | 83,511 | 161,251 | ||
| 2 to 3 years | 39,182 | 50,736 | ||
| 3 to 4 years | 19,809 | 26,321 | ||
| Over 4 years | 14,669 | 14,394 | ||
| $ | 419,309 | $ | 630,800 |
NOTE 10-ADVANCES FROM FHLB AND OTHER BORROWINGS
The Bank had advances outstanding from the FHLB in the amount of $129.0 million and $44.4 million on December 31, 2020 and 2019, respectively. These advances, rates, and maturities were as follows:
| Amount outstanding as of <br>December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Maturity | Rate | 2020 | 2019 | ||||||
| (dollars in thousands) | |||||||||
| Loan Type | |||||||||
| Fixed rate, fixed term | 02/20/2020 | 1.71 | % | - | 5,000 | ||||
| Fixed rate, fixed term | 07/16/2020 | 1.85 | % | - | 800 | ||||
| Fixed rate, fixed term | 08/25/2020 | 1.84 | % | - | 3,000 | ||||
| Fixed rate, fixed term | 08/27/2020 | 1.88 | % | - | 5,000 | ||||
| Fixed rate, fixed term | 12/30/2020 | 2.09 | % | - | 4,000 | ||||
| Fixed rate, fixed term | 12/31/2020 | 1.94 | % | - | 600 | ||||
| Fixed rate, fixed term | 01/04/2021 | 0.23 | % | 29,000 | - | ||||
| Fixed rate, fixed term | 04/12/2021 | 1.92 | % | 8,000 | 8,000 | ||||
| Fixed rate, fixed term | 05/03/2021 | 0.00 | % | 4,000 | - | ||||
| Fixed rate, fixed term | 06/15/2021 | 1.39 | % | 5,000 | 5,000 | ||||
| Fixed rate, fixed term | 08/16/2021 | 2.29 | % | 3,000 | 3,000 | ||||
| Fixed rate, fixed term | 12/30/2021 | 2.29 | % | 2,000 | 2,000 | ||||
| Fixed rate, fixed term | 03/18/2022 | 1.03 | % | 15,000 | - | ||||
| Fixed rate, fixed term | 03/25/2022 | 0.75 | % | 10,000 | - | ||||
| Fixed rate, fixed term | 11/16/2022 | 0.38 | % | 20,000 | - | ||||
| Fixed rate, putable, no call 2 years | 01/12/2023 | 2.03 | % | 8,000 | 8,000 | ||||
| Fixed rate, fixed term | 03/23/2023 | 1.26 | % | 10,000 | - | ||||
| Fixed rate, fixed term | 03/27/2023 | 0.82 | % | 15,000 | - | ||||
| $ | 129,000 | $ | 44,400 |
The terms of security agreements with the FHLB require the Bank to pledge collateral for its borrowings. The collateral consists of qualifying first mortgage loans and stock of the FHLB. At December 31, 2020 and 2019, the Bank had pledged qualifying mortgage loans of $367.6 million and $393.7 million, respectively. At December 31, 2020, we had $29.0 million of overnight advances with FHLB that is included in total amount outstanding. We did not have overnight advances with the FHLB at December 31, 2019.
The Bank had no irrevocable letters of credit with the FHLB as of December 31, 2020 and 2019.
As of December 31, 2020 and 2019, the Bank also had a line-of-credit available with the Federal Reserve Bank of Chicago. Borrowings under this line of credit are limited by the amount collateral pledged by the Company, which totaled $111.5 million and $127.3 million in loans at December 31, 2020 and December 31, 2019, respectively. The borrowings available to the Company were $83.3 million and $96.0 million, as of December 31, 2020 and December 31, 2019, respectively. There were no outstanding advances included in other borrowings at December 31, 2020 or 2019, respectively.
As of December 31, 2019, the Company had an unsecured credit agreement with U.S. Bank, National Association for a $10.0 million revolving line-of-credit with an interest rate equal to the one-month LIBOR rate plus 2.25%. The line also bears a non-usage fee of 0.275% per annum. The non-usage fee for year ended December 31, 2019 was $22 thousand. The line did not have an outstanding balance as of December 31, 2019. The line of credit expired on September 30, 2020 and was not renewed.
Other borrowings consist of a financing lease for a branch location and sold loans that do not qualify for sale accounting treatment and are recorded as financing transactions as the Bank maintains effective control over the transferred loans.
During 2020, the Company largely funded the Small Business Administration’s Paycheck Protection Program (“PPP”) loans through the Federal Reserve’s PPP Liquidity Facility, which allowed for 12-month advances collateralized by PPP loans at an interest rate of 0.35%. The balance of these advances was $47.5 million at December 31, 2020 and was secured by PPP loans of the same amount.
The following table sets forth information concerning balances and interest rates on other borrowings as of the dates and for the periods indicated:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| (dollars in thousands) | ||||||
| Balance outstanding at end of period | $ | 49,006 | $ | 794 | ||
| Average amount outstanding during the period | 61,483 | 800 | ||||
| Maximum amount outstanding at any month end | 93,709 | 1,412 | ||||
| Weighted average interest rate during the period | 0.42 | % | 4.60 | % | ||
| Weighted average interest rate at end of period | 0.39 | % | 4.51 | % |
NOTE 11-SUBORDINATED DEBENTURES
The following table is a summary of the carrying values, including unamortized issuance costs, of the Company’s subordinated debt as of the dates indicated:
| As of December 31,<br> 2020 | As of <br>December 31,<br> 2019 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Balance<br> Outstanding | Interest<br> Rate | Interest<br> Reset Date | Call<br> Date | Maturity<br> Date | Balance<br> Outstanding | |||||
| (dollars in thousands) | ||||||||||
| Junior<br> subordinated notes issued to County Bancorp Statutory Trust II (1)(2) | $ | 6,186 | 1.75 | % | 03/15/2021 | N/A | 09/15/2035 | $ | 6,186 | |
| Junior subordinated<br> notes issued to County Bancorp Statutory Trust III (1)(3) | 6,186 | 1.91 | % | 03/15/2021 | N/A | 06/15/2036 | 6,186 | |||
| Junior subordinated<br> notes issued to Fox River Valley Capital Trust I (4) | 3,336 | 6.40 | % | 11/30/2023 | N/A | 05/30/2033 | 3,279 | |||
| 5.875% Fixed-to-Floating<br> rate subordinated notes (5) | 29,545 | 5.875 | % | 06/01/2023 | 06/01/2023 | 06/01/2028 | 29,207 | |||
| 7.00%<br> Fixed-to-Floating rate subordinated notes (6) | 21,858 | 7.00 | % | 06/30/2025 | 06/30/2025 | 06/30/2030 | - | |||
| $ | 67,111 | $ | 44,858 | |||||||
| (1) | The company formed wholly owned subsidiary business trusts County Bancorp Statutory Trust II (“Trust II”) and County Bancorp Statutory Trust III (“Trust III”) (together, the “Trusts”), which are both Delaware statutory trusts. The Company owns all of the outstanding common securities of Trust II and Trust III, which qualify as Tier 1 capital for regulatory purposes. The Trusts used the proceeds from the issuance of their capital securities to buy floating rate junior subordinated deferrable interest debentures (“debentures”) issued by the Company. These debentures are the Trusts’ only assets, and interest payments from these debentures finance the distributions paid on the capital securities. These debentures are unsecured, rank junior, and are subordinate in the right of payment to all senior debt of the Company. | |||||||||
| --- | --- | |||||||||
| (2) | The debentures issued to Trust II bear an interest rate of three-month LIBOR plus 1.53% through maturity. | |||||||||
| --- | --- | |||||||||
| (3) | The debentures issued to Trust III bear an interest rate of three-month LIBOR plus 1.69% through maturity. | |||||||||
| --- | --- | |||||||||
| (4) | In connection with the merger with Fox River Valley, the Company acquired all of the common securities of Fox River Valley’s wholly-owned subsidiary, Fox River Valley Capital Trust I, a Delaware statutory trust (the “FRV Trust I”), which qualify as Tier 1 capital for regulatory purposes. The debentures of the Company owned by FRV Trust I carry an interest rate equal to 5-year LIBOR plus 3.40%, which resets every five years. | |||||||||
| --- | --- | |||||||||
| (5) | The notes bear interest at a fixed rate of 5.875% per year, from and including May 30, 2018 to, but excluding, June 1, 2023. From and including June 1, 2023 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current 3-month LIBOR plus 2.88%. The notes qualify as Tier II capital of the Company. Debt issuance costs of $0.9 million are being amortized over the life of the notes. | |||||||||
| --- | --- | |||||||||
| (6) | The notes bear interest at a fixed rate of 7.00% per year, from and including June 30, 2020 to, but excluding, June 30, 2025. From and including June 30, 2025 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term secured overnight financing rate (SOFR) plus 687.5 basis points. The notes qualify as Tier II capital of the Company. The Company incurred $0.6 million of costs related to the issuance of the notes. These costs have been capitalized and are being amortized over the life of the notes. | |||||||||
| --- | --- |
NOTE 12-PREFERRED STOCK
The Company has 15,000 shares of non-cumulative, nonparticipating preferred stock authorized with a $1,000 per share stated value. This preferred stock pays a quarterly dividend at a variable rate equivalent to the prime rate plus fifty basis points with a minimum dividend of 4.0%. The variable rate at December 31, 2020 was 4.0%. There were 8,000 shares issued and outstanding at both December 31, 2020 and 2019.
NOTE 13-INCOME TAXES
Allocation of income tax expense between current and deferred portions consisted of the following:
| December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| (dollars in thousands) | ||||
| Current | ||||
| Federal income tax | $ | 1,219 | $ | 1,766 |
| State income tax | 199 | 1,449 | ||
| Total current | 1,418 | 3,215 | ||
| Deferred income tax expense | 1,700 | 1,401 | ||
| Total income tax expense | $ | 3,118 | $ | 4,616 |
The reasons for the difference between income tax expense and the amount computed by applying the statutory tax rates to income before taxes were as follows:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| (dollars in thousands) | ||||||
| Statutory federal tax rate | 21 | % | 21 | % | ||
| Income tax at statutory federal rate | $ | 1,805 | $ | 4,425 | ||
| Increase (reduction) resulting from: | ||||||
| State income taxes, net of federal income tax benefit | 858 | 1,319 | ||||
| Tax exempt interest | (153 | ) | (119 | ) | ||
| Increase in cash surrender value | (160 | ) | (100 | ) | ||
| Goodwill impairment | 1,058 | - | ||||
| Historical tax credit | - | (1,465 | ) | |||
| Other | (290 | ) | 556 | |||
| Income tax expense | $ | 3,118 | $ | 4,616 | ||
| Effective tax rate | 36 | % | 22 | % |
The components of the net deferred tax asset were as follows:
| December 31, | |||||
|---|---|---|---|---|---|
| 2020 | 2019 | ||||
| (dollars in thousands) | |||||
| Deferred tax assets: | |||||
| Management salary continuation accrued | $ | 585 | $ | 571 | |
| Allowance for loan losses | 4,034 | 4,159 | |||
| Deferred compensation | 1,050 | 842 | |||
| Other real estate owned | 475 | 265 | |||
| Net operating loss | 1,098 | 1,282 | |||
| Interest rate swap contracts | 525 | 266 | |||
| Other | 63 | 63 | |||
| Total deferred tax assets | $ | 7,830 | $ | 7,448 | |
| Deferred tax liabilities | |||||
| Loan servicing rights | 5,011 | 3,407 | |||
| Deferred loan costs | 378 | 220 | |||
| Depreciation and amortization | 1,100 | 1,034 | |||
| FHLB stock dividend | 21 | 21 | |||
| Available for sale investment securities | 3,251 | 878 | |||
| Other | 371 | 435 | |||
| Total deferred tax liabilities | $ | 10,132 | $ | 5,995 | |
| Net deferred tax assets | $ | (2,302 | ) | $ | 1,453 |
The Company has federal net operating loss carryforwards of approximately $2.9 million as of December 31, 2020. These losses begin to expire in 2035. The Company also has state net operating loss carryforwards totaling approximately $7.7 million as of December 31, 2020 which begin to expire in 2032. These net operating loss carryforwards may be applied against future taxable income.
NOTE 14-OFF-BALANCE SHEET ACTIVITIES
Credit-Related Financial Instruments
The Bank is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.
Financial instruments with contract amounts representing credit risk as of December 31, 2020 and 2019 were as follows:
| December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| (dollars in thousands) | ||||
| Commitments to extend credit and unused lines of credit, including unused credit card lines | $ | 239,159 | $ | 171,101 |
| Standby letters of credit | 3,948 | 3,930 |
Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank, is based on management’s credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are usually collateralized and contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the payment or the performance of a Bank customer to a third party. Both standby and performance letters of credit are generally issued for terms of one to four years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting these commitments.
NOTE 15-HEDGING ACTIVITIES
On June 15, 2018, the Company executed an interest rate swap to manage interest rate risk on two sets of its trust preferred securities. This derivative contract involves the receipt of floating rate interest from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. This instrument is designated as a cash flow hedge as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with fluctuations in the three-month LIBOR interest rate. The change in the fair value of this hedging instrument is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.
As of December 31, 2020, 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 $0.9 million and $0.8 million was recognized in other comprehensive income for the years ended December 31, 2020 and December 31, 2019, respectively, and there was no ineffective portion of this hedge.
The Company is exposed to credit risk in the event of nonperformance by the interest rate swap’s counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate swaps. The Company monitors counterparty risk in accordance with the provisions of FASB ASC 815. In addition, the interest rate swap agreements contain language outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits. Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. The Company pledged $2.4 million and $1.6 million of cash as collateral to the counterparty as of December 31, 2020 and December 31, 2019, respectively.
NOTE 16-EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering substantially all employees. As of January 1, 2020, all employees are eligible to receive safe harbor matching contributions equal to 4.0% of qualifying compensation as well as additional contributions at the discretion of the board of directors. For the year ended December 31, 2020, the Company’s contributions are based only upon the discretion of the board of directors; for 2019 and prior years, the plan did not provide for a safe harbor matching contribution. Total expense was $1.1 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively.
On May 1, 2006, the Company entered into salary continuation agreements with five key employees. Under these agreements, the key employees will receive $60,000 per year beginning on the later of attaining age 65 or their separation from service and continuing for 15 years. During 2011, the Company entered into a salary continuation agreement with an additional key employee. Under this agreement, the key employee will receive an amount ranging between $36,000 and $60,000 annually, depending on the employee’s age at separation, commencing upon retirement and continuing for 15 years. Each of these agreements allow for early retirement opportunities or modifications that may reduce the annual payment.
As of December 31, 2020 and 2019, the Company had accrued $2.1 million and $2.1 million, respectively, in conjunction with these salary continuation agreements. The payouts under these agreements for the years ending December 31, 2020 and 2019 were $0.1 million in each year.
NOTE 17-EQUITY INCENTIVE PLAN
In 2016, the Company’s shareholders approved the Company’s 2016 Equity Incentive Compensation Plan (the “Plan”). Under the Plan, the Company may grant options and stock awards to its directors, officers and employees for shares of the Company’s common stock. Both qualified and non-qualified stock options, stock appreciation rights, restricted stock, and restricted stock units may be granted and issued, respectively, under the Plan. As of December 31, 2020, 46,637 shares remained available under the Plan.
The exercise price of options is no less than the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. Vesting periods for options and stock awards range from one to five years from the date of grant.
The Company grants restricted stock awards and restricted stock units to certain members of management and directors. The shares and units have a grant date fair value equal to the company’s stock’s Nasdaq Official Closing Price on the grant date.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| Risk-free interest rates | 0.59%-1.73% | 1.42%-2.56% | ||||
| Dividend yields | 0.76-1.85% | 0.76%-1.59% | ||||
| Expected volatility | 33.00 | % | 34.00 | % | ||
| Weighted-average expected life of options | 7.00 years | 7.00 years |
The expected volatility is based on historical volatility. The risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history of declaring dividends on its common stock.
The activity of the Company’s outstanding stock options for the years ended December 31, 2020 and 2019 were as follows:
| December 31,<br> 2020 | December 31,<br> 2019 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number<br> <br>of <br>Options | Weighted-Average<br> <br>Exercise Price | Aggregate<br> <br>Intrinsic <br>Value (1) | Number<br> <br>of <br>Options | Weighted-Average<br> <br>Exercise Price | Aggregate<br> <br>Intrinsic <br>Value (1) | |||||||||
| (dollars in thousands<br> except option and per share data) | ||||||||||||||
| Outstanding,<br> beginning of year | 214,904 | $ | 18.94 | 208,988 | $ | 18.15 | ||||||||
| Granted | 62,398 | 19.52 | 30,495 | 19.91 | ||||||||||
| Exercised | (27,635 | ) | 12.94 | (21,224 | ) | 12.47 | ||||||||
| Forfeited/expired | - | - | (3,355 | ) | 19.88 | |||||||||
| Outstanding,<br> end of period | 249,667 | $ | 19.75 | $ | 797 | 214,904 | $ | 18.94 | $ | 2,405 | ||||
| Options<br> exercisable at period-end | 160,274 | $ | 19.60 | $ | 535 | 164,083 | $ | 17.96 | $ | 2,023 | ||||
| Weighted-average<br> fair value of options granted during the period (2) | $ | 5.74 | $ | 6.86 | ||||||||||
| (1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2020 and 2019. This amount changes based on changes in the market value of the Company’s stock. | |||||||||||||
| --- | --- | |||||||||||||
| (2) | The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. | |||||||||||||
| --- | --- |
Information pertaining to options outstanding at December 31, 2020 and 2019 was as follows:
| Options<br> Exercisable | |||||||||
| Range of Exercise Prices | Number<br><br> <br>Outstanding | Weighted<br><br> <br>Average<br><br> <br>Remaining<br><br> <br>Contractual<br><br> <br>Life | Weighted<br><br> <br>Average<br><br> <br>Exercise<br><br> <br>Price | Number<br><br> <br>Exercisable | Weighted<br><br> <br>Average<br><br> <br>Remaining<br><br> <br>Contractual<br><br> <br>Life | Weighted<br><br> <br>Average<br><br> <br>Exercise<br><br> <br>Price | |||
| 12.00 | 5,000 | 0.09 Years | $ | 12.00 | 5,000 | 0.09 Years | $ | 12.00 | |
| 13.02-14.83 | 32,250 | 2.66 Years | 13.83 | 32,250 | 2.66 Years | 13.83 | |||
| 15.12-16.41 | 4,831 | 9.22 Years | 15.53 | - | N/A | - | |||
| 17.14-19.88 | 144,125 | 6.65 Years | 19.00 | 84,029 | 4.94 Years | 19.52 | |||
| 20.92-24.98 | 22,089 | 7.85 Years | 22.30 | 12,742 | 7.02 Years | 23.39 | |||
| 25.24-27.31 | 41,372 | 7.36 Years | 26.49 | 26,253 | 6.70 Years | 26.52 | |||
| Outstanding, end of period | 249,667 | $ | 19.75 | 160,274 | $ | 19.60 |
All values are in US Dollars.
| Options<br> Exercisable | |||||||||
| Range<br> of Exercise Prices | Number<br> <br>Outstanding | Weighted<br> <br>Average<br> <br>Remaining<br> <br>Contractual<br> <br>Life | Weighted<br> <br>Average<br> <br>Exercise<br> <br>Price | Number<br> <br>Exercisable | Weighted<br> <br>Average<br> <br>Remaining<br> <br>Contractual<br> <br>Life | Weighted<br> <br>Average<br> <br>Exercise<br> <br>Price | |||
| 12.00 | 26,400 | 1.02<br> Years | $ | 12.00 | 26,400 | 1.02<br> Years | $ | 12.00 | |
| 13.02-14.83 | 36,220 | 3.70<br> Years | 13.88 | 36,220 | 3.70<br> Years | 13.88 | |||
| 17.15-19.88 | 100,060 | 6.42<br> Years | 19.28 | 78,178 | 5.62<br> Years | 19.68 | |||
| 20.92-24.98 | 20,291 | 8.59<br> Years | 23.42 | 7,672 | 7.23<br> Years | 22.82 | |||
| 25.24-27.31 | 31,933 | 7.85<br> Years | 26.49 | 15,613 | 7.60<br> Years | 26.54 | |||
| Outstanding,<br> end of period | 214,904 | $ | 18.94 | 164,083 | $ | 17.96 |
All values are in US Dollars.
| Number of <br>Shares | Weighted Average <br>Grant Date Fair <br>Value | ||||
|---|---|---|---|---|---|
| Nonvested options, December 31, 2018 | 49,532 | $ | 7.86 | ||
| Granted | 30,495 | 6.86 | |||
| Vested | (27,528 | ) | 6.94 | ||
| Forfeited/exercised | (1,678 | ) | 4.88 | ||
| Nonvested options, December 31, 2019 | 50,821 | $ | 7.86 | ||
| Granted | 62,398 | 5.74 | |||
| Vested | (23,826 | ) | 8.31 | ||
| Forfeited/exercised | - | - | |||
| Nonvested options, December 31, 2020 | 89,393 | $ | 6.26 |
Activity in restricted stock awards and restricted stock units during 2020 and 2019 was as follows:
| December 31, 2020 | |||||
|---|---|---|---|---|---|
| Restricted Stock Awards | Weighted <br>Average Grant <br>Price | ||||
| Outstanding, beginning of year | 12,896 | $ | 22.75 | ||
| Granted | - | - | |||
| Vested | (6,597 | ) | 20.57 | ||
| Forfeited/expired | - | - | |||
| Outstanding, end of period | 6,299 | $ | 24.80 | ||
| December 31, 2019 | |||||
| --- | --- | --- | --- | --- | --- |
| Restricted Stock <br>Awards (1) | Weighted <br>Average Grant <br>Price | ||||
| Outstanding, beginning of year | 28,701 | $ | 21.02 | ||
| Granted | - | - | |||
| Vested | (15,579 | ) | 19.50 | ||
| Forfeited/expired | (226 | ) | 27.15 | ||
| Outstanding, end of period | 12,896 | $ | 22.75 | ||
| December 31, 2020 | |||||
| --- | --- | --- | --- | --- | --- |
| Restricted Stock <br>Units | Weighted <br>Average Grant <br>Price | ||||
| Outstanding, beginning of year | 32,125 | $ | 19.80 | ||
| Granted | 50,410 | 19.11 | |||
| Issued | (15,679 | ) | 19.27 | ||
| Forfeited/expired | - | - | |||
| Outstanding, end of period | 66,856 | $ | 19.38 | ||
| December 31, 2019 | |||||
| --- | --- | --- | --- | --- | --- |
| Restricted Stock <br>Units (1) | Weighted <br>Average Grant <br>Price | ||||
| Outstanding, beginning of year | 11,772 | $ | 25.53 | ||
| Granted | 24,382 | 17.54 | |||
| Issued | (3,654 | ) | 27.42 | ||
| Forfeited/expired | (375 | ) | 18.11 | ||
| Outstanding, end of period | 32,125 | $ | 19.80 | ||
| (1) | 2019 amounts have been reclassified in include restricted stock awards and units for individuals that have reached retirement age as defined by the Plan. Previously, these were considered vested and removed from the schedule; however, the Plan only accelerates the vesting of these options if the participant leaves employment | ||||
| --- | --- |
For the years ended December 31, 2020 and 2019, share-based compensation expense, including options, restricted stock awards, and restricted stock units, applicable to the Plan was $0.9 million and $0.7 million, respectively, and the recognized tax benefit related to this expense was $0.2 million and $0.2 million, respectively.
As of December 31, 2020, unrecognized share-based compensation expense related to nonvested options and restricted stock amounted to $0.9 million and is expected to be recognized over a weighted average period of 1.66 years.
NOTE 18-REGULATORY MATTERS
The Company (on a consolidated basis) and Bank are each subject to various regulatory capital requirements administered by the federal and state banking agencies. The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, includes quantitative measures designed to ensure capital adequacy. The Basel III Rules designed the capital conservation buffer to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. The Basel III rules require the Company and the Bank to maintain (set forth in the table below):
| (i) | Tier 1 Common Equity ratio to risk weighted assets minimum of 4.50% plus a 2.50% “capital conservation buffer” (effectively resulting in minimum Tier 1 Common Equity ratio of 7.00%) |
|---|---|
| (ii) | Tier 1 Capital ratio to risk weighted assets minimum of 6.00% plus the capital conservation buffer (effectively resulting in a minimum Tier 1 Capital to risk-based capital ratio of 8.50%) |
| --- | --- |
| (iii) | Total Capital ratio to risk weighted assets minimum of 8.00% plus the capital conservation buffer (effectively resulting in a minimum Total Capital to risk weighted assets ratio of 10.50%) |
| --- | --- |
| (iv) | Tier 1 Leverage Capital ratio minimum of 4.00%. |
| --- | --- |
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (applicable only to the Bank), the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Management believed, as of December 31, 2020 and 2019, that the Company and Bank met all capital adequacy requirements to which they were subject.
As of December 31, 2020, the most recent notification from the banking regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There were no conditions or events since the notification that management believes have changed the Bank’s category.
The Company’s and Bank’s actual capital amounts and ratios are presented in the following table:
| Actual | Minimum<br> For <br>Capital Adequacy<br><br> Purposes <br>(including the capital <br>conservation buffer): | Minimum<br> To Be Well <br>Capitalized Under <br>Prompt Corrective <br>Action Provisions: | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||
| (dollars<br> in thousands) | ||||||||||
| December 31,<br> 2020 | ||||||||||
| Total<br> Capital (to risk weighted assets): | ||||||||||
| Company | 246,275 | 19.50 | % | 132,603 | 10.50 | % | Not<br> applicable | |||
| Bank | 211,864 | 16.83 | % | 132,174 | 10.50 | % | $ | 125,880 | 10.00 | % |
| Tier<br> 1 Capital (to risk weighted assets): | ||||||||||
| Company | 180,135 | 14.26 | % | 107,345 | 8.50 | % | Not<br> applicable | |||
| Bank | 197,056 | 15.65 | % | 106,998 | 8.50 | % | 100,704 | 8.00 | % | |
| Tier<br> 1 Capital (to average assets): | ||||||||||
| Company | 180,135 | 13.01 | % | 55,403 | 4.00 | % | Not<br> applicable | |||
| Bank | 197,056 | 14.06 | % | 56,047 | 4.00 | % | 70,059 | 5.00 | % | |
| Tier<br> 1 Common Equity (to risk weighted assets): | ||||||||||
| Company | 156,427 | 12.39 | % | 88,402 | 7.00 | % | Not<br> applicable | |||
| Bank | 197,056 | 15.65 | % | 88,116 | 7.00 | % | 81,822 | 6.50 | % | |
| December 31,<br> 2019 | ||||||||||
| Total<br> Capital (to risk weighted assets): | ||||||||||
| Company | 225,094 | 19.41 | % | 121,746 | 10.50 | % | Not<br> applicable | |||
| Bank | 216,198 | 18.70 | % | 121,396 | 10.50 | % | $ | 115,615 | 10.00 | % |
| Tier<br> 1 Capital (to risk weighted assets): | ||||||||||
| Company | 180,620 | 15.58 | % | 98,557 | 8.50 | % | Not<br> applicable | |||
| Bank | 201,735 | 17.45 | % | 98,273 | 8.50 | % | 92,492 | 8.00 | % | |
| Tier<br> 1 Capital (to average assets): | ||||||||||
| Company | 180,620 | 12.42 | % | 58,182 | 4.00 | % | Not<br> applicable | |||
| Bank | 201,735 | 14.68 | % | 54,962 | 4.00 | % | 68,702 | 5.00 | % | |
| Tier<br> 1 Common Equity (to risk weighted assets): | ||||||||||
| Company | 156,969 | 13.54 | % | 81,164 | 7.00 | % | Not<br> applicable | |||
| Bank | 201,735 | 17.45 | % | 80,930 | 7.00 | % | 75,150 | 6.50 | % |
NOTE 19-RELATEDPARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to principal officers and directors and their affiliates.
Activity consisted of the following:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| (dollars<br> in thousands) | ||||||
| Balance,<br> beginning of period | $ | 4,074 | $ | 5,637 | ||
| New<br> loans | 709 | 2,174 | ||||
| Repayments | (2,622 | ) | (3,737 | ) | ||
| Balance,<br> end of period | $ | 2,161 | $ | 4,074 |
Deposits from related parties held by the Bank at December 31, 2020 and 2019 amounted to $4.8 million and $6.0 million, respectively.
NOTE20-FAIR VALUE MEASUREMENTS
Determinationof Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is considered a reasonable point within the range that is most representative of fair value under current market conditions.
FairValue Hierarchy
The Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1-Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2-Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3-Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:
Cashand Cash Equivalents and Interest Earning Deposits in Banks
The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.
Fair values of interest bearing deposits in banks are estimated using discounted cash flow analyses based on current rates for similar types of deposits.
SecuritiesAvailable for Sale
Where quoted prices are available in an active market, the Company classifies the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.
If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes and credit spreads.
Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. government and agency securities, corporate bonds and other securities. Mortgage-backed securities that are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in Level 3.
Loans
For variable-rate loans that reprice frequently and that have no significant change in credit risk, carrying values approximate fair value. Fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values adjusted for selling costs , where applicable.
LoansHeld for Sale
The carrying value of loans held for sale generally approximates fair value based on the short-term nature of the assets. If management identifies a loan held for sale that will ultimately sell at a value less than its carrying value, it is recorded at the estimated value.
LoanServicing Rights
Fair value is based on a discounted cash flow model based on estimates of future net servicing income.
OtherReal Estate Owned
Property recognized as other real estate owned is initially recorded at fair value. Subsequently, other real estate owned is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral reduced for estimated selling costs. Due to the significance of the unobservable inputs, all other real estate owned is classified as Level 3.
Deposits
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
OtherBorrowings
The carrying amounts of federal funds purchased, other borrowings and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.
Advancesfrom FHLB
Current market rates for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Fair values are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.
SubordinatedDebentures
The carrying amounts approximate fair value.
HedgingActivities
Interest rate swap agreements are measured at fair value on a recurring basis. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves.
AccruedInterest
The carrying amounts approximate fair value.
Commitmentsto Extend Credit and Standby Letters of Credit
As of December 31, 2020 and 2019, the carrying and fair values of commitments to extend credit and standby letters of credit are not considered significant.
Assetsand Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| Level<br> 1 <br><br> Inputs | Level<br> 2 <br><br> Inputs | Level<br> 3 <br><br> Inputs | Total<br> <br><br> Fair<br><br> Value | |||||
|---|---|---|---|---|---|---|---|---|
| (dollars<br> in thousands) | ||||||||
| December 31,<br> 2020 | ||||||||
| Assets | ||||||||
| Securities<br> available for sale: | ||||||||
| U.S.<br> government and agency securities | $ | - | $ | 14,593 | $ | - | $ | 14,593 |
| Municipal<br> securities | - | 153,654 | - | 153,654 | ||||
| Mortgage-backed<br> securities | - | 135,378 | - | 135,378 | ||||
| Corporate<br> bonds | - | 32,511 | - | 32,511 | ||||
| Asset-backed<br> securities | - | 16,718 | - | 16,718 | ||||
| Loan<br> servicing rights (1) | - | - | 18,396 | 18,396 | ||||
| Total<br> assets at fair value | $ | - | $ | 352,854 | $ | 18,396 | $ | 371,250 |
| Liabilities | ||||||||
| Derivative<br> instruments, interest rate swaps | $ | - | $ | 1,914 | $ | - | $ | 1,914 |
| December 31,<br> 2019 | ||||||||
| Assets | ||||||||
| Securities<br> available for sale: | ||||||||
| U.S.<br> government and agency securities | $ | - | $ | 3,458 | $ | - | $ | 3,458 |
| U.S<br> treasury securities | - | 2,506 | - | 2,506 | ||||
| Mortgage-backed<br> securities | - | 152,769 | - | 152,769 | ||||
| Total<br> assets at fair value | $ | - | $ | 158,733 | $ | - | $ | 158,733 |
| Liabilities | ||||||||
| Derivative<br> instruments, interest rate swaps | $ | - | $ | 972 | $ | - | $ | 972 |
| (1) | See<br> Note 6 for quantitative information on the significant inputs and a rollforward of activity related to the loan servicing rights | |||||||
| --- | --- |
AssetsMeasured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy for which a nonrecurring change in fair value has been recorded:
| Level<br> 1 <br><br> Inputs | Level<br> 2 <br><br> Inputs | Level<br> 3<br><br> Inputs | ||||
|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||
| December 31,<br> 2020 | ||||||
| Impaired<br> loans | $ | - | $ | - | $ | 46,521 |
| Other<br> real estate owned | - | - | 1,077 | |||
| Total<br> assets at fair value | $ | - | $ | - | $ | 47,598 |
| December 31,<br> 2019 | ||||||
| Impaired<br> loans | $ | - | $ | - | $ | 44,657 |
| Other<br> real estate owned | - | - | 5,521 | |||
| Total<br> assets at fair value | $ | - | $ | - | $ | 50,178 |
The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis are as follows:
| December 31,<br> 2020 | |||
|---|---|---|---|
| Valuation<br> <br>Techniques | Unobservable<br> <br>Inputs | Range<br> <br>(Average) | |
| Impaired<br> loans | Evaluation<br> of collateral | Estimation<br> of value | NM* |
| Other<br> real estate owned | Appraisal | Appraisal<br> adjustment | 6%-9%<br> (7%) |
| December 31,<br> 2019 | |||
| --- | --- | --- | --- |
| Valuation<br> <br>Techniques | Unobservable<br> <br>Inputs | Range<br> <br>(Average) | |
| Impaired<br> loans | Evaluation<br> of collateral | Estimation<br> of value | NM* |
| Other<br> real estate owned | Appraisal | Appraisal<br> adjustment | 5%-64%<br> (29%) |
| * | Not<br> Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral<br> vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are<br> reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent<br> appraisal may be obtained. Types of discounts considered include aging of receivables, condition of the collateral, potential market<br> for the collateral, and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be<br> meaningful. | ||
| --- | --- |
ImpairedLoans
In accordance with the provisions of the loan impairment guidance, impairment was measured on loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans for which an allowance is established require classification in the fair value hierarchy. Collateral values are estimated using Level 3 inputs based on management judgement of discounts to collateral valuations and estimates of costs to sell.
Impairment amounts on impaired loans represent specific valuation allowance and write-downs during the period presented on impaired loans that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off.
OtherReal Estate Owned
Foreclosed assets are recorded at fair value based on property appraisals, less estimated selling costs, at the date of the transfer with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, foreclosed assets are carried at the lower of carrying value or fair value, less estimated selling costs with changes in fair value or any impairment amount recorded in the other non-interest expense. Values are estimated using Level 3 inputs based on customized discounting criteria. The carrying value of foreclosed assets is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments were as follows:
| December 31,<br> 2020 | December 31,<br> 2019 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Carrying<br> <br>Amount | Fair<br> <br>Value | Carrying<br> <br>Amount | Fair<br> <br>Value | Input<br> <br>Level | ||||||
| (dollars<br> in thousands) | ||||||||||
| Financial<br> assets: | ||||||||||
| Cash<br> and cash equivalents | $ | 19,084 | $ | 19,084 | $ | 108,457 | $ | 108,457 | 1 | |
| Interest<br> earning cash at other financial institutions | 416 | 416 | 20,554 | 20,554 | 1 | |||||
| FHLB<br> Stock | 5,758 | 5,758 | 1,628 | 1,628 | 2 | |||||
| Securities<br> available for sale | 352,854 | 352,854 | 158,733 | 158,733 | 2 | |||||
| Loans,<br> net of allowance for loan losses | 981,477 | 991,342 | 1,020,506 | 1,024,062 | 3 | |||||
| Loans<br> held for sale | 35,976 | 35,976 | 2,151 | 2,151 | 3 | |||||
| Accrued<br> interest receivable | 3,240 | 3,240 | 2,571 | 2,571 | 2 | |||||
| Loan<br> servicing rights | 18,396 | 18,396 | 12,509 | 15,921 | 3 | |||||
| Financial<br> liabilities: | ||||||||||
| Deposits: | ||||||||||
| Time | 419,542 | 426,092 | 640,925 | 635,558 | 2 | |||||
| Other<br> deposits | 621,284 | 621,284 | 460,517 | 460,517 | 1 | |||||
| Other<br> borrowings | 49,006 | 49,006 | 794 | 794 | 3 | |||||
| Advances<br> from FHLB | 129,000 | 130,361 | 44,400 | 44,578 | 2 | |||||
| Subordinated<br> debentures | 67,111 | 67,111 | 44,858 | 44,858 | 3 | |||||
| Accrued<br> interest payable | 2,496 | 2,496 | 4,769 | 4,769 | 2 | |||||
| Derivative<br> instruments, interest rate swaps | 1,914 | 1,914 | 972 | 972 | 2 |
NOTE 21-EARNINGSPER SHARE
Earnings per common share (“EPS”) was computed based on the following:
| For<br> the Year Ended | ||||
|---|---|---|---|---|
| December 31, | ||||
| 2020 | 2019 | |||
| (dollars<br> in thousands except share data) | ||||
| Net<br> income from continuing operations | $ | 5,479 | $ | 16,452 |
| Less:<br> preferred stock dividends | 368 | 472 | ||
| Income<br> available to common shareholders for basic EPS | $ | 5,111 | $ | 15,980 |
| Average<br> number of common shares issued | 7,197,557 | 7,163,650 | ||
| Less:<br> weighted average treasury shares | 780,070 | 443,873 | ||
| Plus:<br> weighted average nonvested equity incentive plan shares | 59,686 | 27,804 | ||
| Weighted<br> average number of common shares outstanding | 6,477,173 | 6,747,581 | ||
| Effect<br> of dilutive options | 28,025 | 21,344 | ||
| Weighted<br> average number of common shares outstanding <br>used to calculate diluted earnings per common share | 6,505,198 | 6,768,925 |
NOTE 22-DIVIDENDAND CAPITAL RESTRICTIONS
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. Cash dividends paid to the Company by the Bank were $22.0 million and $6.0 million for the years ended December 31, 2020 and 2019, respectively.
NOTE 23-SUBSEQUENTEVENTS
Management evaluated subsequent events through the date the financial statements were issued.
On February 16, 2021, the Company announced the authorization of a stock repurchase plan that allows for the repurchase of up to 609,000 shares of its common stock through February 16, 2024.
On February 16, 2021, our Board of Directors declared a quarterly dividend totaling $0.10 per share for shareholders of record as of March 5, 2021, and payable on March 19, 2021.
NOTE24 - UNAUDITED INTERIM FINANCIAL DATA
Unaudited quarterly financial data for the periods indicated is summarized below:
| 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Fourth<br><br> Quarter | Third<br> Quarter | Second<br> <br><br> Quarter | First<br> Quarter | |||||||
| (dollars<br> in thousands, except share data) | ||||||||||
| Interest<br> income | $ | 14,588 | $ | 13,106 | $ | 13,686 | $ | 14,095 | ||
| Interest<br> expense | 3,950 | 4,452 | 4,800 | 5,297 | ||||||
| Net<br> interest income | 10,638 | 8,654 | 8,886 | 8,798 | ||||||
| Provision<br> for loan losses | (455 | ) | 79 | 1,142 | 2,218 | |||||
| Net<br> interest income after provision for loan losses | 11,093 | 8,575 | 7,744 | 6,580 | ||||||
| Non-interest<br> income | 4,495 | 3,672 | 3,380 | 2,703 | ||||||
| Non-interest<br> expense | 9,495 | 7,667 | 7,465 | 15,018 | ||||||
| Income<br> tax expense (benefit) | 1,575 | 1,164 | 926 | (547 | ) | |||||
| Net<br> income (loss) | $ | 4,518 | $ | 3,416 | $ | 2,733 | $ | (5,188 | ) | |
| Basic earnings (loss)<br> per share | $ | 0.70 | $ | 0.52 | $ | 0.40 | $ | (0.79 | ) | |
| Diluted earnings (loss)<br> per share | $ | 0.70 | $ | 0.52 | $ | 0.40 | $ | (0.78 | ) | |
| Dividends declared<br> per share | $ | 0.10 | $ | 0.07 | $ | 0.07 | $ | 0.07 | ||
| 2019 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Fourth<br> Quarter | Third<br> Quarter | Second<br> Quarter | First<br> Quarter | |||||||
| (dollars<br> in thousands, except share data) | ||||||||||
| Interest<br> income | $ | 15,239 | $ | 16,759 | $ | 17,208 | $ | 17,126 | ||
| Interest<br> expense | 5,701 | 6,507 | 6,776 | 6,566 | ||||||
| Net<br> interest income | 9,538 | 10,252 | 10,432 | 10,560 | ||||||
| Provision<br> for loan losses | (51 | ) | (1,154 | ) | 876 | 752 | ||||
| Net<br> interest income after provision for loan losses | 9,589 | 11,406 | 9,556 | 9,808 | ||||||
| Non-interest<br> income | 3,722 | 4,034 | 2,887 | 2,750 | ||||||
| Non-interest<br> expense | 10,265 | 7,668 | 7,446 | 7,305 | ||||||
| Income<br> tax expense | (258 | ) | 2,090 | 1,293 | 1,491 | |||||
| Net<br> income | $ | 3,304 | $ | 5,682 | $ | 3,704 | $ | 3,762 | ||
| Basic earnings per<br> share | $ | 0.47 | $ | 0.82 | $ | 0.53 | $ | 0.54 | ||
| Diluted earnings per<br> share | $ | 0.47 | $ | 0.82 | $ | 0.53 | $ | 0.54 | ||
| Dividends declared<br> per share | $ | 0.05 | $ | 0.05 | $ | 0.05 | $ | 0.05 |
NOTE25 - COUNTY BANCORP, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
| December 31,<br> 2020 | December 31,<br> 2019 | |||
|---|---|---|---|---|
| (dollars<br> in thousands) | ||||
| ASSETS | ||||
| Cash<br> and cash equivalents | $ | 31,327 | $ | 5,016 |
| Investment<br> in bank subsidiary | 205,743 | 204,240 | ||
| Goodwill | - | 5,038 | ||
| Other<br> assets | 4,135 | 3,566 | ||
| Total<br> assets | $ | 241,205 | $ | 217,860 |
| LIABILITIES<br> AND SHAREHOLDERS' EQUITY | ||||
| Liabilities | $ | 2,318 | $ | 1,239 |
| Subordinated<br> debentures, net | 67,111 | 44,858 | ||
| Shareholders'<br> equity | 171,776 | 171,763 | ||
| Total<br> liabilities and shareholders' equity | $ | 241,205 | $ | 217,860 |
CONDENSED STATEMENTS OF OPERATIONS
| For<br> the year ended | ||||||
|---|---|---|---|---|---|---|
| December 31,<br> 2020 | December 31,<br> 2019 | |||||
| (dollars<br> in thousands) | ||||||
| INTEREST<br> AND DIVIDEND INCOME | $ | 281 | $ | 147 | ||
| EXPENSES | ||||||
| Interest<br> expense | 3,631 | 2,743 | ||||
| Goodwill<br> impairment | 5,038 | - | ||||
| Other<br> operating expenses | 1,473 | 1,398 | ||||
| Total<br> expenses | 10,142 | 4,141 | ||||
| Income<br> before income taxes and equity in undistributed net income of subsidiary | (9,861 | ) | (3,994 | ) | ||
| Income<br> tax benefit | 1,369 | 1,085 | ||||
| Equity<br> in undistributed net income of subsidiary | 13,971 | 19,361 | ||||
| NET<br> INCOME | $ | 5,479 | $ | 16,452 |
CONDENSED STATEMENT OF CASH FLOWS
| For<br> the year ended | ||||||
|---|---|---|---|---|---|---|
| December 31,<br> 2020 | December 31,<br> 2019 | |||||
| (dollars<br> in thousands) | ||||||
| Cash<br> flows from operating activities | ||||||
| Net<br> income | $ | 5,479 | $ | 16,452 | ||
| Adjustments<br> to reconcile net income to cash provided by operating activities: | ||||||
| Equity<br> in undistributed net income of subsidiary | (13,971 | ) | (19,361 | ) | ||
| Amortization<br> of core deposit intangible | 171 | 288 | ||||
| Amortization<br> of subordinated debenture costs | 449 | 155 | ||||
| Impairment<br> of goodwill | 5,038 | - | ||||
| Net<br> change in: | ||||||
| Other<br> assets | (485 | ) | (1,559 | ) | ||
| Other<br> liabilities | 406 | 102 | ||||
| Net<br> cash used in operating activities | (2,913 | ) | (3,923 | ) | ||
| Cash<br> flows from investing activities | ||||||
| Dividends<br> received from subsidiary | 22,000 | 6,000 | ||||
| Net<br> cash provided by investing activities | 22,000 | 6,000 | ||||
| Cash<br> flows from financing activities | ||||||
| Proceeds<br> from issuance of common stock | 358 | 265 | ||||
| Increase<br> in subordinated debentures | 21,804 | - | ||||
| Payments<br> to acquire treasury stock | (12,576 | ) | - | |||
| Dividends<br> paid on preferred stock | (368 | ) | (472 | ) | ||
| Dividends<br> paid on common stock | (1,994 | ) | (1,344 | ) | ||
| Net<br> cash provided by (used in) financing activities | 7,224 | (1,551 | ) | |||
| Net<br> change in cash and cash equivalents | 26,311 | 526 | ||||
| Cash<br> and cash equivalents, beginning of period | 5,016 | 4,490 | ||||
| Cash<br> and cash equivalents, end of period | $ | 31,327 | $ | 5,016 |
Exhibit 99.3
Item 1. Financial Statements.
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2021 and December 31,2020
| December 31, 2020 | |||||
|---|---|---|---|---|---|
| ASSETS | |||||
| Cash and cash equivalents | 105,131 | $ | 19,084 | ||
| Interest earning cash at other financial institutions | 417 | 416 | |||
| Securities available-for-sale, at fair value | 338,211 | 352,854 | |||
| FHLB Stock | 5,485 | 5,758 | |||
| Loans held for sale | 11,139 | 35,976 | |||
| Loans, net of allowance for loan losses of 10,715 as of September 30, 2021; 14,808 as of December 31, 2020 | 994,243 | 981,477 | |||
| Premises and equipment, net | 20,677 | 14,898 | |||
| Loan servicing rights | 19,413 | 18,396 | |||
| Other real estate owned, net | 914 | 1,077 | |||
| Cash surrender value of bank owned life insurance | 31,885 | 31,275 | |||
| Core deposit intangible, net of accumulated amortization of 1,798 as of September 30, 2021; 1,747 as of December 31, 2020 | 2 | 54 | |||
| Accrued interest receivable and other assets | 12,476 | 11,093 | |||
| Total assets | 1,539,993 | $ | 1,472,358 | ||
| LIABILITIES | |||||
| Deposits: | |||||
| Noninterest-bearing | 168,008 | $ | 163,202 | ||
| Interest-bearing | 1,013,488 | 877,624 | |||
| Total deposits | 1,181,496 | 1,040,826 | |||
| Other borrowings | 12,844 | 49,006 | |||
| Advances from FHLB | 85,000 | 129,000 | |||
| Subordinated debentures | 67,598 | 67,111 | |||
| Deferred tax liability, net | 2,420 | 2,302 | |||
| Accrued interest payable and other liabilities | 13,316 | 12,337 | |||
| Total liabilities | 1,362,674 | 1,300,582 | |||
| SHAREHOLDERS' EQUITY | |||||
| Preferred stock- 1,000 stated value; 15,000 shares authorized; 8,000 shares issued | 8,000 | 8,000 | |||
| Common stock - 0.01 par value; 50,000,000 authorized; 7,277,097 shares issued and 6,053,369 shares outstanding as of September 30, 2021; 7,212,727 shares issued and 6,197,965 shares outstanding as of December 31, 2020 | 29 | 29 | |||
| Surplus | 56,989 | 55,346 | |||
| Retained earnings | 131,415 | 118,712 | |||
| Treasury stock, at cost; 1,223,728 shares at September 30, 2021; 1,014,762 shares at December 31, 2020 | (22,346 | ) | (17,606 | ) | |
| Accumulated other comprehensive income | 3,232 | 7,295 | |||
| Total shareholders' equity | 177,319 | 171,776 | |||
| Total liabilities and shareholders' equity | 1,539,993 | $ | 1,472,358 |
All values are in US Dollars.
See accompanying notes to unaudited consolidated financial statements.
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30,2021 and 2020
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020* | 2021 | 2020* | |||||||||
| (dollars in thousands except per share data) | ||||||||||||
| INTEREST AND DIVIDEND INCOME | ||||||||||||
| Loans, including fees | $ | 11,491 | $ | 11,594 | $ | 35,014 | $ | 36,169 | ||||
| Taxable securities | 1,821 | 1,293 | 5,913 | 3,858 | ||||||||
| Tax-exempt securities | 260 | 167 | 768 | 335 | ||||||||
| Federal funds sold and other | 93 | 52 | 222 | 388 | ||||||||
| Total interest and dividend income | 13,665 | 13,106 | 41,917 | 40,750 | ||||||||
| INTEREST EXPENSE | ||||||||||||
| Deposits | 1,590 | 2,914 | 5,376 | 10,982 | ||||||||
| FHLB advances and other borrowed funds | 232 | 456 | 830 | 1,043 | ||||||||
| Subordinated debentures | 1,106 | 1,082 | 3,318 | 2,524 | ||||||||
| Total interest expense | 2,928 | 4,452 | 9,524 | 14,549 | ||||||||
| Net interest income | 10,737 | 8,654 | 32,393 | 26,201 | ||||||||
| Provision for (recovery of) loan losses | (634 | ) | 79 | (4,670 | ) | 3,439 | ||||||
| Net interest income after provision for loan losses | 11,371 | 8,575 | 37,063 | 22,762 | ||||||||
| NON-INTEREST INCOME | ||||||||||||
| Services charges | 137 | 108 | 421 | 360 | ||||||||
| Crop insurance commission | 309 | 271 | 902 | 729 | ||||||||
| Gain on sale of loans | 1,701 | 1,285 | 5,253 | 2,856 | ||||||||
| Loan servicing fees, net | 590 | 1,503 | 2,746 | 4,291 | ||||||||
| Gain (loss) on sale of securities | - | 101 | (1,453 | ) | 671 | |||||||
| Other | 470 | 404 | 1,302 | 985 | ||||||||
| Total non-interest income | 3,207 | 3,672 | 9,171 | 9,892 | ||||||||
| NON-INTEREST EXPENSE | ||||||||||||
| Employee compensation and benefits | 5,846 | 4,766 | 17,854 | 14,620 | ||||||||
| Occupancy | 331 | 321 | 903 | 980 | ||||||||
| Information processing | 640 | 641 | 1,965 | 1,974 | ||||||||
| Professional fees | 503 | 555 | 1,755 | 1,436 | ||||||||
| Charitable contributions | 301 | 47 | 402 | 143 | ||||||||
| Writedown of other real estate owned | - | - | - | 1,360 | ||||||||
| Goodwill impairment | - | - | - | 5,038 | ||||||||
| Loss (gain) on sale of fixed assets | (7 | ) | (2 | ) | (1,088 | ) | 234 | |||||
| Merger-related professional fees | 322 | - | 707 | - | ||||||||
| Other | 1,101 | 1,339 | 4,069 | 4,365 | ||||||||
| Total non-interest expense | 9,037 | 7,667 | 26,567 | 30,150 | ||||||||
| Income before income taxes | 5,541 | 4,580 | 19,667 | 2,504 | ||||||||
| Income tax expense | 1,433 | 1,164 | 4,888 | 1,543 | ||||||||
| NET INCOME | $ | 4,108 | $ | 3,416 | $ | 14,779 | $ | 961 | ||||
| Less: Cash dividends declared on preferred stock | (80 | ) | (80 | ) | (239 | ) | (287 | ) | ||||
| NET INCOME ATTRIBUTABLE TO<br><br> <br>COMMON SHAREHOLDERS | $ | 4,028 | $ | 3,336 | $ | 14,540 | $ | 674 | ||||
| NET INCOME PER SHARE: | ||||||||||||
| Basic | $ | 0.66 | $ | 0.52 | $ | 2.36 | $ | 0.10 | ||||
| Diluted | $ | 0.65 | $ | 0.52 | $ | 2.34 | $ | 0.10 | ||||
| Dividends paid per share | $ | 0.10 | $ | 0.07 | $ | 0.30 | $ | 0.21 |
*Amounts reclassed to current classifications from original presentation
See accompanying notes to unaudited consolidated financial statements.
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30,2021 and 2020
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||
| (dollars in thousands) | ||||||||||||
| Net income | $ | 4,108 | $ | 3,416 | $ | 14,779 | $ | 961 | ||||
| Other comprehensive income: | ||||||||||||
| Unrealized gain (loss) on securities available-for-sale | (2,372 | ) | (29 | ) | (7,718 | ) | 9,103 | |||||
| Income tax benefit (expense) | 646 | 8 | 2,103 | (2,481 | ) | |||||||
| Reclassification for realized losses (gains) on securities | - | (101 | ) | 1,453 | (671 | ) | ||||||
| Income tax expense (benefit) | - | 28 | (396 | ) | 184 | |||||||
| Total other comprehensive income (loss) on securities <br>available-for-sale | (1,726 | ) | (94 | ) | (4,558 | ) | 6,135 | |||||
| Unrealized gain (loss) on derivatives arising during the period | 127 | 98 | 680 | (1,156 | ) | |||||||
| Income tax benefit (expense) | (34 | ) | (27 | ) | (185 | ) | 315 | |||||
| Total other comprehensive income (loss) on derivatives | 93 | 71 | 495 | (841 | ) | |||||||
| Total other comprehensive income (loss) | (1,633 | ) | (23 | ) | (4,063 | ) | 5,294 | |||||
| Comprehensive income | $ | 2,475 | $ | 3,393 | $ | 10,716 | $ | 6,255 |
See accompanying notes to unaudited consolidated financial statements.
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY
For the Three and Nine Months Ended September 30,2021 and 2020
(Unaudited)
| Preferred <br>Stock | Common <br>Stock | Surplus | Retained <br>Earnings | Treasury <br>Stock | Accumulated <br>Other <br>Comprehensive <br>Income | Total <br>Shareholders' <br>Equity | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands except share data) | ||||||||||||||||||
| Balance at January 1, 2020 | $ | 8,000 | $ | 28 | $ | 54,122 | $ | 115,595 | $ | (5,030 | ) | $ | 1,798 | $ | 174,513 | |||
| Net loss | - | - | - | (5,188 | ) | - | - | (5,188 | ) | |||||||||
| Other comprehensive income | - | - | - | - | - | 1,639 | 1,639 | |||||||||||
| Stock compensation expense | - | - | 314 | - | - | - | 314 | |||||||||||
| Cash dividends declared on common stock | - | - | - | (466 | ) | - | - | (466 | ) | |||||||||
| Cash dividends declared on preferred stock | - | - | - | (108 | ) | - | - | (108 | ) | |||||||||
| Treasury stock purchases (255,650 shares) | - | - | - | - | (5,853 | ) | - | (5,853 | ) | |||||||||
| Proceeds from exercise of common stock <br>options (14,590 shares) | - | - | 195 | - | - | - | 195 | |||||||||||
| Balance at March 31, 2020 | $ | 8,000 | $ | 28 | $ | 54,631 | $ | 109,833 | $ | (10,883 | ) | $ | 3,437 | $ | 165,046 | |||
| Net income | - | - | - | 2,733 | - | - | 2,733 | |||||||||||
| Other comprehensive income | - | - | - | - | - | 3,678 | 3,678 | |||||||||||
| Stock compensation expense | - | - | 182 | - | - | - | 182 | |||||||||||
| Cash dividends declared on common stock | - | - | - | (455 | ) | - | - | (455 | ) | |||||||||
| Cash dividends declared on preferred stock | - | - | - | (99 | ) | - | - | (99 | ) | |||||||||
| Treasury stock purchases (127,280 shares) | - | - | - | - | (2,560 | ) | - | (2,560 | ) | |||||||||
| Balance at June 30, 2020 | $ | 8,000 | $ | 28 | $ | 54,813 | $ | 112,012 | $ | (13,443 | ) | $ | 7,115 | $ | 168,525 | |||
| Net income | - | - | - | 3,416 | - | - | 3,416 | |||||||||||
| Other comprehensive loss | - | - | - | - | - | (23 | ) | (23 | ) | |||||||||
| Stock compensation expense | - | - | 189 | - | - | - | 189 | |||||||||||
| Cash dividends declared on common stock | - | - | - | (446 | ) | - | - | (446 | ) | |||||||||
| Cash dividends declared on preferred stock | - | - | - | (80 | ) | - | - | (80 | ) | |||||||||
| Treasury stock purchases (80,475 shares) | - | - | - | - | (1,671 | ) | - | (1,671 | ) | |||||||||
| Balance at September 30, 2020 | $ | 8,000 | $ | 28 | $ | 55,002 | $ | 114,902 | $ | (15,114 | ) | $ | 7,092 | $ | 169,910 | |||
| Balance at December 31, 2020 | $ | 8,000 | $ | 29 | $ | 55,346 | $ | 118,712 | $ | (17,606 | ) | $ | 7,295 | $ | 171,776 | |||
| Net Income | - | - | - | 3,928 | - | - | 3,928 | |||||||||||
| Other comprehensive loss | - | - | - | - | - | (6,498 | ) | (6,498 | ) | |||||||||
| Stock compensation expense | - | - | 273 | - | - | - | 273 | |||||||||||
| Cash dividends declared on common stock | - | - | - | (620 | ) | - | - | (620 | ) | |||||||||
| Cash dividends declared on preferred stock | - | - | - | (81 | ) | - | - | (81 | ) | |||||||||
| Treasury stock purchases (117,020 shares) | - | - | - | - | (2,513 | ) | - | (2,513 | ) | |||||||||
| Proceeds from exercise of common stock <br>options (6,206 shares) | - | - | 72 | - | - | - | 72 | |||||||||||
| Balance at March 31, 2021 | $ | 8,000 | $ | 29 | $ | 55,691 | $ | 121,939 | $ | (20,119 | ) | $ | 797 | $ | 166,337 | |||
| Net income | - | - | - | 6,743 | - | - | 6,743 | |||||||||||
| Other comprehensive income | - | - | - | - | - | 4,068 | 4,068 | |||||||||||
| Stock compensation expense | - | - | 224 | - | - | - | 224 | |||||||||||
| Cash dividends declared on common stock | - | - | - | (611 | ) | - | - | (611 | ) | |||||||||
| Cash dividends declared on preferred stock | - | - | - | (79 | ) | - | - | (79 | ) | |||||||||
| Treasury stock purchases (91,946 shares) | - | - | - | - | (2,227 | ) | - | (2,227 | ) | |||||||||
| Proceeds from exercise of common stock <br>options (18,274 shares) | - | - | 357 | - | - | - | 357 | |||||||||||
| Balance at June 30, 2021 | $ | 8,000 | $ | 29 | $ | 56,272 | $ | 127,992 | $ | (22,346 | ) | $ | 4,865 | $ | 174,812 | |||
| Net income | - | - | - | 4,108 | - | - | 4,108 | |||||||||||
| Other comprehensive loss | - | - | - | - | - | (1,633 | ) | (1,633 | ) | |||||||||
| Stock compensation expense | - | - | 205 | - | - | - | 205 | |||||||||||
| Cash dividends declared on common stock | - | - | - | (605 | ) | - | - | (605 | ) | |||||||||
| Cash dividends declared on preferred stock | - | - | - | (80 | ) | - | - | (80 | ) | |||||||||
| Proceeds from exercise of common stock <br>options (26,912 shares) | - | - | 512 | - | - | - | 512 | |||||||||||
| Balance at September 30, 2021 | $ | 8,000 | $ | 29 | $ | 56,989 | $ | 131,415 | $ | (22,346 | ) | $ | 3,232 | $ | 177,319 |
See accompanying notes to unaudited consolidated financial statements
COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,2021 and 2020
(Unaudited)
| For the Nine Months Ended | ||||||
|---|---|---|---|---|---|---|
| September 30, 2021 | September 30, 2020 | |||||
| (dollars in thousands) | ||||||
| Cash flows from operating activities | ||||||
| Net income | $ | 14,779 | $ | 961 | ||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||
| Depreciation and amortization of premises and equipment | 871 | 1,007 | ||||
| Amortization of core deposit intangible | 52 | 139 | ||||
| Amortization of subordinated debentures discount | 487 | 363 | ||||
| Impairment of goodwill | - | 5,038 | ||||
| Provision for (recovery of) loan losses | (4,670 | ) | 3,439 | |||
| Realized loss (gain) on sales of securities available-for-sale | 1,453 | (671 | ) | |||
| Realized loss (gain) on sales of premises and equipment | (1,088 | ) | 234 | |||
| Realized loss on sales of other real estate owned | 17 | 13 | ||||
| Writedown of other real estate owned | - | 1,360 | ||||
| Increase in cash surrender value of bank owned life insurance | (610 | ) | (535 | ) | ||
| Deferred income tax expense (benefit) | 1,825 | (272 | ) | |||
| Stock compensation expense | 702 | 685 | ||||
| Net amortization of securities | 1,577 | 721 | ||||
| Net change in: | ||||||
| Accrued interest receivable and other assets | (1,383 | ) | (996 | ) | ||
| Loans held for sale | 24,837 | (442 | ) | |||
| Loan servicing rights | (1,017 | ) | (2,210 | ) | ||
| Accrued interest payable and other liabilities | 1,474 | 1,872 | ||||
| Net cash provided by operating activities | 39,306 | 10,706 | ||||
| Cash flows from investing activities | ||||||
| Proceeds from maturities, principal repayments, and call of securities available-for-sale | 25,250 | 18,768 | ||||
| Purchases of securities available-for-sale | (53,753 | ) | (185,595 | ) | ||
| Proceeds from sales of securities available-for-sale | 33,852 | 35,466 | ||||
| Purchase (redemption) of FHLB stock | 273 | (4,130 | ) | |||
| Purchase of bank owned life insurance | - | (10,000 | ) | |||
| Loan originations and principal collections, net | (8,456 | ) | (40,978 | ) | ||
| Proceeds from sales of premises and equipment | 1,757 | 1,507 | ||||
| Purchases of premises and equipment | (7,319 | ) | (3,528 | ) | ||
| Proceeds from sales of other real estate owned | 506 | 1,851 | ||||
| Net cash used in investing activities | (7,890 | ) | (186,639 | ) | ||
| Cash flows from financing activities | ||||||
| Net increase in demand and savings deposits | 133,478 | 129,817 | ||||
| Net increase (decrease) in certificates of deposits | 7,191 | (181,088 | ) | |||
| Net change in other borrowings | (36,162 | ) | 101,015 | |||
| Proceeds from FHLB advances | 376,000 | 516,000 | ||||
| Repayment of FHLB advances | (420,000 | ) | (475,800 | ) | ||
| Payments to acquire treasury stock | (4,740 | ) | (10,084 | ) | ||
| Proceeds from issuance of subordinated debt | - | 21,804 | ||||
| Proceeds from issuance of common stock | 941 | 195 | ||||
| Dividends paid on common stock | (1,836 | ) | (1,367 | ) | ||
| Dividends paid on preferred stock | (240 | ) | (287 | ) | ||
| Net cash provided by financing activities | 54,632 | 100,205 | ||||
| Net change in cash and cash equivalents | 86,048 | (75,728 | ) | |||
| Cash and cash equivalents, beginning of period | 19,500 | 129,011 | ||||
| Cash and cash equivalents, end of period | $ | 105,548 | $ | 53,283 | ||
| Supplemental disclosure of cash flow information: | ||||||
| Cash paid during the period for: | ||||||
| Interest | $ | 9,896 | $ | 16,296 | ||
| Income taxes | $ | 2,140 | $ | 2,500 | ||
| Noncash operating activities: | ||||||
| Change in accounting principle | $ | - | $ | 2,484 | ||
| Noncash investing activities: | ||||||
| Transfer from loans to other real estate owned | $ | 360 | $ | 767 | ||
| Loans charged off | $ | 125 | $ | 144 |
See accompanying notes to unaudited consolidated financial statements.
County Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE****1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of County Bancorp, Inc. (“we,” “us,” ”our,” or the “Company”) and its subsidiaries, including Investors Community Bank (the “Bank”), have been prepared, in the opinion of management, to reflect all adjustments necessary for a fair presentation of the financial position and results of operations as of and for the three and nine months ended September 30, 2021. The results of operations for the three and nine months ended September 30, 2021 may not necessarily be indicative of the results to be expected for the year ending December 31, 2021, or for any other period.
Management of the Company is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ significantly from those estimates.
These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). Certain information in footnote disclosure normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 12, 2021.
Merger Transaction
On June 22, 2021, we entered into an agreement and plan of merger (the “Merger Agreement”) with Nicolet Bankshares, Inc. (“Nicolet”), a Wisconsin corporation, pursuant to which the Company will merge with and into Nicolet (the “Merger”). Following the Merger, the Bank will merge with and into Nicolet National Bank, Nicolet’s wholly-owned bank subsidiary, with Nicolet National Bank continuing as the surviving bank, with all Bank branches operating under the Nicolet National Bank brand. Nicolet had received all regulatory approvals for the Merger on September 7, 2021, and the Merger was approved by the Company’s and Nicolet’s shareholders on October 5, 2021. Subject to customary closing conditions, the Merger is expected to be completed on December 3, 2021. For additional information on this proposed Merger, see Note 2 “Acquisition” to our consolidated financial statements.
New Accounting Pronouncements
On December 27, 2020, the Consolidated Appropriations Act (“CAA”), 2021, was signed into law which extended the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which expired on December 31, 2020. Section 4013 of the CARES Act was extended in the CAA and allows financial institutions to elect to suspend troubled debt restructuring accounting under certain circumstances when the temporary restructuring is related to the Coronavirus Disease 2019 (COVID-19) pandemic. The Company has elected to implement Section 4013, and at September 30, 2021, loan balances totaling $0.2 million were still outstanding under the payment deferral program and were not classified as troubled debt restructurings.
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU was effective upon issuance on March 12, 2020 and can be applied through December 31, 2022. The Company is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position, and liquidity.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Entities should apply this amendment by a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company has engaged a third-party software consultant and is currently testing the model’s methodology in parallel to current loss model calculations. At this time, the effect this ASU will have on its consolidated financial statements is still being quantified as the Company ensures data, assumptions, and methods all comply with the requirements of ASU 2016-13. In October 2019, the FASB voted to delay the effective date for the credit losses standard to January 2023 for certain entities, including SEC filers that qualify as smaller reporting companies and private companies. As a smaller reporting company, the Company is eligible for the delay and will be deferring adoption. Management will continue to progress on its implementation project plan and improve the Company’s approach throughout the deferral period.
NOTE2 - ACQUISITION
On June 22, 2021, the Company entered into the Merger Agreement with Nicolet Bankshares, Inc. Inc. Following the Merger, the Bank will merge with and into Nicolet National Bank, Nicolet’s wholly-owned bank subsidiary, with Nicolet National Bank continuing as the surviving bank, with all Bank branches operating under the Nicolet National Bank brand.
Under the terms of the Merger Agreement, at the effective time of the Merger, the Company’s shareholders will have the right to receive for each share of the Company’s common stock, at the election of each holder and subject to proration, either $37.18 in cash or 0.48 shares of Nicolet common stock. County shareholder elections will be prorated to ensure the total consideration will consist of approximately 20% cash and approximately 80% common stock.
The Merger had been approved by Nicolet’s regulators on September 7, 2021, and was approved by the Company’s and Nicolet’s shareholders on October 5, 2021. Subject to certain customary closing conditions, the Merger is expected to be completed on December 3, 2021.
NOTE3 - EARNINGS PER SHARE
Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share plus the dilutive effect of share-based compensation using the treasury stock method.
| For the Three Months Ended | For the Nine Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| September 30, | September 30, | |||||||
| 2021 | 2020 | 2021 | 2020 | |||||
| (dollars in thousands) | ||||||||
| Net income from continuing operations | $ | 4,108 | $ | 3,416 | $ | 14,779 | $ | 961 |
| Less: preferred stock dividends | 80 | 80 | 239 | 287 | ||||
| Income available to common shareholders for basic earnings per common share | $ | 4,028 | $ | 3,336 | $ | 14,540 | $ | 674 |
| Weighted average number of common shares issued | 7,260,493 | 7,202,000 | 7,240,770 | 7,194,642 | ||||
| Less: weighted average treasury shares | 1,223,728 | 882,153 | 1,161,555 | 720,654 | ||||
| Plus: weighted average of participating restricted stock units | 97,891 | 66,492 | 86,723 | 57,053 | ||||
| Weighted average number of common shares and participating securities outstanding | 6,134,656 | 6,386,339 | 6,165,938 | 6,531,041 | ||||
| Effect of dilutive options | 81,216 | 20,915 | 55,040 | 32,833 | ||||
| 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 | ||||
| Weighted average of anti-dilutive options | - | 137,740 | 31,442 | 85,272 |
NOTE4 - SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of securities available-for-sale as of September 30, 2021 and December 31, 2020 were as follows:
| Amortized | Unrealized | Unrealized | Fair | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Cost | Gains | Losses | Value | ||||||
| (dollars in thousands) | |||||||||
| September 30, 2021 | |||||||||
| U.S. government and agency securities | $ | 12,408 | $ | 1 | $ | (85 | ) | $ | 12,324 |
| Municipal securities | 126,874 | 3,061 | (1,383 | ) | 128,552 | ||||
| Mortgage-backed securities | 132,242 | 4,923 | (960 | ) | 136,205 | ||||
| Corporate bonds | 45,000 | 239 | (287 | ) | 44,952 | ||||
| Asset-backed securities | 16,012 | 166 | - | 16,178 | |||||
| $ | 332,536 | $ | 8,390 | $ | (2,715 | ) | $ | 338,211 | |
| December 31, 2020 | |||||||||
| U.S. government and agency securities | $ | 14,745 | $ | - | $ | (152 | ) | $ | 14,593 |
| Municipal securities | 149,203 | 4,736 | (285 | ) | 153,654 | ||||
| Mortgage-backed securities | 127,804 | 7,872 | (298 | ) | 135,378 | ||||
| Corporate bonds | 32,500 | 21 | (10 | ) | 32,511 | ||||
| Asset-backed securities | 16,664 | 55 | (1 | ) | 16,718 | ||||
| $ | 340,916 | $ | 12,684 | $ | (746 | ) | $ | 352,854 |
The amortized cost and fair value of securities at September 30, 2021 and December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Amortized | Fair | |||
|---|---|---|---|---|
| Cost | Value | |||
| (dollars in thousands) | ||||
| September 30, 2021 | ||||
| Due in one year or less | $ | - | $ | - |
| Due from one to five years | - | - | ||
| Due from five to ten years | 70,469 | 70,373 | ||
| Due after ten years | 113,813 | 115,455 | ||
| Asset-backed securities | 16,012 | 16,178 | ||
| Mortgage-backed securities | 132,242 | 136,205 | ||
| $ | 332,536 | $ | 338,211 | |
| December 31, 2020 | ||||
| Due in one year or less | $ | - | $ | - |
| Due from one to five years | - | - | ||
| Due from five to ten years | 55,024 | 55,120 | ||
| Due after ten years | 141,424 | 145,638 | ||
| Asset-backed securities | 16,664 | 16,718 | ||
| Mortgage-backed securities | 127,804 | 135,378 | ||
| $ | 340,916 | $ | 352,854 |
Proceeds from the sale of available-for-sale securities were $33.9 million for the three and nine months ended September 30, 2021, which resulted in a loss of $1.5 million. For the three months ended September 30, 2020, proceeds from the sale of available-for-sale securities were $7.7 million which resulted in a gain of $0.1 million. For the nine months ended September 30, 2020, proceeds from the sale of available-for-sale securities were $35.5 million which resulted in a gain of $0.7 million.
At September 30, 2021 and December 31, 2020, there were $31.2 million and $23.0 million, respectively, of securities pledged at the Federal Reserve Bank to secure municipal customer deposits.
Federal Home Loan Bank (FHLB) advances were secured by $5.5 million and $5.8 million of FHLB stock at September 30, 2021 and December 31, 2020, respectively.
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020:
| Less Than 12 Months | 12 Months or Greater | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||
| Value | Losses | Value | Losses | Value | Losses | ||||||||||
| (dollars in thousands) | |||||||||||||||
| September 30, 2021 | |||||||||||||||
| U.S. government and agency securities | $ | - | $ | - | $ | 10,378 | $ | (85 | ) | $ | 10,378 | $ | (85 | ) | |
| Municipal securities | 67,126 | (1,100 | ) | 6,500 | (283 | ) | 73,626 | (1,383 | ) | ||||||
| Mortgage-backed securities | 33,244 | (960 | ) | - | - | 33,244 | (960 | ) | |||||||
| Corporate bonds | 27,463 | (287 | ) | - | - | 27,463 | (287 | ) | |||||||
| Asset-backed securities | - | - | - | - | - | - | |||||||||
| $ | 127,833 | $ | (2,347 | ) | $ | 16,878 | $ | (368 | ) | $ | 144,711 | $ | (2,715 | ) | |
| December 31, 2020 | |||||||||||||||
| U.S. government and agency securities | $ | 12,217 | $ | (134 | ) | $ | 2,376 | $ | (18 | ) | $ | 14,593 | $ | (152 | ) |
| Municipal securities | 30,849 | (285 | ) | - | - | 30,849 | (285 | ) | |||||||
| Mortgage-backed securities | 7,781 | (298 | ) | - | - | 7,781 | (298 | ) | |||||||
| Corporate bonds | 7,990 | (10 | ) | - | - | 7,990 | (10 | ) | |||||||
| Asset-backed securities | 3,817 | (1 | ) | - | - | 3,817 | (1 | ) | |||||||
| $ | 62,654 | $ | (728 | ) | $ | 2,376 | $ | (18 | ) | $ | 65,030 | $ | (746 | ) |
The unrealized losses on the investments at September 30, 2021 and December 31, 2020 were due to market conditions as well as normal fluctuations and pricing inefficiencies. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell the investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2021 and December 31, 2020.
NOTE5 - LOANS
The components of loans were as follows:
| September 30, | December 31, | |||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| (dollars in thousands) | ||||||
| Agricultural loans | $ | 631,833 | $ | 606,881 | ||
| Commercial real estate loans | 247,520 | 235,969 | ||||
| Commercial loans | 86,813 | 115,087 | ||||
| Residential real estate loans | 36,873 | 38,084 | ||||
| Installment and consumer other | 1,919 | 264 | ||||
| Total gross loans | 1,004,958 | 996,285 | ||||
| Allowance for loan losses | (10,715 | ) | (14,808 | ) | ||
| Net loans | $ | 994,243 | $ | 981,477 |
Net unamortized deferred costs totalling $0.7 million and $0.3 million as of September 30, 2021 and December 31, 2020, respectively, are included in the total gross loans above.
Changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2021 and 2020 were as follows:
| For the Three Months Ended September 30, 2021 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Beginning Balance | Provision for Loan Losses | Loans Charged Off | Loan Recoveries | Ending Balance | ||||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 8,874 | $ | (588 | ) | $ | - | $ | - | $ | 8,286 | |
| Commercial real estate loans | 1,819 | (105 | ) | (125 | ) | 8 | 1,597 | |||||
| Commercial loans | 565 | 47 | - | - | 612 | |||||||
| Residential real estate loans | 208 | 12 | - | - | 220 | |||||||
| Installment and consumer other | - | - | - | - | - | |||||||
| Total | $ | 11,466 | $ | (634 | ) | $ | (125 | ) | $ | 8 | $ | 10,715 |
| For the Nine Months Ended September 30, 2021 | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Beginning Balance | Provision for Loan Losses | Loans Charged Off | Loan Recoveries | Ending Balance | ||||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 10,859 | $ | (2,573 | ) | $ | - | $ | - | $ | 8,286 | |
| Commercial real estate loans | 3,139 | (2,038 | ) | (125 | ) | 621 | 1,597 | |||||
| Commercial loans | 805 | (274 | ) | - | 81 | 612 | ||||||
| Residential real estate loans | 5 | 215 | - | - | 220 | |||||||
| Installment and consumer other | - | - | - | - | - | |||||||
| Total | $ | 14,808 | $ | (4,670 | ) | $ | (125 | ) | $ | 702 | $ | 10,715 |
| For the Three Months Ended September 30, 2020 | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Beginning Balance | Provision for Loan Losses | Loans Charged Off | Loan Recoveries | Ending Balance | ||||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 12,670 | $ | (444 | ) | $ | - | $ | - | $ | 12,226 | |
| Commercial real estate loans | 3,859 | 491 | - | 1 | 4,351 | |||||||
| Commercial loans | 1,954 | (47 | ) | - | - | 1,907 | ||||||
| Residential real estate loans | 85 | 3 | - | - | 88 | |||||||
| Installment and consumer other | 1 | (1 | ) | - | - | - | ||||||
| Unallocated | - | 77 | - | - | 77 | |||||||
| Total | $ | 18,569 | $ | 79 | $ | - | $ | 1 | $ | 18,649 | ||
| For the Nine Months Ended September 30, 2020 | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Beginning Balance | Provision for Loan Losses | Loans Charged Off | Loan Recoveries | Ending Balance | ||||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 11,737 | $ | 466 | $ | - | $ | 23 | $ | 12,226 | ||
| Commercial real estate loans | 1,913 | 2,375 | - | 63 | 4,351 | |||||||
| Commercial loans | 1,599 | 451 | (144 | ) | 1 | 1,907 | ||||||
| Residential real estate loans | 15 | 73 | - | - | 88 | |||||||
| Installment and consumer other | 3 | (3 | ) | - | - | - | ||||||
| Unallocated | - | 77 | - | - | 77 | |||||||
| Total | $ | 15,267 | $ | 3,439 | $ | (144 | ) | $ | 87 | $ | 18,649 |
The following tables present the balances in the allowance for loan losses and the recorded balance in loans by portfolio segment and based on impairment method as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | ||||||
|---|---|---|---|---|---|---|
| Individually <br>Evaluated for <br>Impairment | Collectively <br>Evaluated for <br>Impairment | Total | ||||
| (dollars in thousands) | ||||||
| Allowance for loan losses: | ||||||
| Agricultural loans | $ | 1,728 | $ | 6,558 | $ | 8,286 |
| Commercial real estate loans | - | 1,597 | 1,597 | |||
| Commercial loans | 129 | 483 | 612 | |||
| Residential real estate loans | - | 220 | 220 | |||
| Installment and consumer other | - | - | - | |||
| Total ending allowance for loan losses | 1,857 | 8,858 | 10,715 | |||
| Loans: | ||||||
| Agricultural loans | 36,829 | 595,004 | 631,833 | |||
| Commercial real estate loans | - | 247,520 | 247,520 | |||
| Commercial loans | 2,230 | 84,583 | 86,813 | |||
| Residential real estate loans | - | 36,873 | 36,873 | |||
| Installment and consumer other | - | 1,919 | 1,919 | |||
| Total loans | 39,059 | 965,899 | 1,004,958 | |||
| Net loans | $ | 37,202 | $ | 957,041 | $ | 994,243 |
| December 31, 2020 | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Individually <br>Evaluated for <br>Impairment | Collectively <br>Evaluated for <br>Impairment | Total | ||||
| (dollars in thousands) | ||||||
| Allowance for loan losses: | ||||||
| Agricultural loans | $ | 3,504 | $ | 7,355 | $ | 10,859 |
| Commercial real estate loans | 672 | 2,467 | 3,139 | |||
| Commercial loans | 86 | 719 | 805 | |||
| Residential real estate loans | - | 5 | 5 | |||
| Installment and consumer other | - | - | - | |||
| Total ending allowance for loan losses | 4,262 | 10,546 | 14,808 | |||
| Loans: | ||||||
| Agricultural loans | 63,777 | 543,104 | 606,881 | |||
| Commercial real estate loans | 7,077 | 228,892 | 235,969 | |||
| Commercial loans | 2,818 | 112,269 | 115,087 | |||
| Residential real estate loans | 59 | 38,025 | 38,084 | |||
| Installment and consumer other | - | 264 | 264 | |||
| Total loans | 73,731 | 922,554 | 996,285 | |||
| Net loans | $ | 69,469 | $ | 912,008 | $ | 981,477 |
The following tables present loans individually evaluated for impairment by class of loans at September 30, 2021 and December 31, 2020:
| September 30, 2021 | ||||||
|---|---|---|---|---|---|---|
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | ||||
| (dollars in thousands) | ||||||
| With no related allowance: | ||||||
| Agricultural loans | $ | 7,237 | $ | 6,883 | $ | - |
| Commercial real estate loans | - | - | - | |||
| Commercial loans | 1,918 | 1,914 | - | |||
| Residential real estate loans | - | - | - | |||
| $ | 9,155 | $ | 8,797 | $ | - | |
| With an allowance recorded: | ||||||
| Agricultural loans | $ | 32,292 | $ | 29,946 | $ | 1,728 |
| Commercial real estate loans | - | - | - | |||
| Commercial loans | 347 | 316 | 129 | |||
| Residential real estate loans | - | - | - | |||
| $ | 32,639 | $ | 30,262 | $ | 1,857 | |
| Total | $ | 41,794 | $ | 39,059 | $ | 1,857 |
| December 31, 2020 | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | ||||
| (dollars in thousands) | ||||||
| With no related allowance: | ||||||
| Agricultural loans | $ | 20,245 | $ | 20,120 | $ | - |
| Commercial real estate loans | 288 | 288 | - | |||
| Commercial loans | 2,504 | 2,481 | - | |||
| Residential real estate loans | 61 | 59 | - | |||
| $ | 23,098 | $ | 22,948 | $ | - | |
| With an allowance recorded: | ||||||
| Agricultural loans | $ | 47,971 | $ | 43,657 | $ | 3,504 |
| Commercial real estate loans | 8,245 | 6,790 | 672 | |||
| Commercial loans | 357 | 336 | 86 | |||
| Residential real estate loans | - | - | - | |||
| $ | 56,573 | $ | 50,783 | $ | 4,262 | |
| Total | $ | 79,671 | $ | 73,731 | $ | 4,262 |
The following table presents the aging of the recorded investment in past due loans at September 30, 2021 and December 31, 2020:
| 30-59 Days <br>Past Due | 60-89 Days <br>Past Due | 90+ Days <br>Past Due | Total <br>Past Due | Loans Not <br>Past Due | Total <br>Loans | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||||||||
| September 30, 2021 | ||||||||||||
| Agricultural loans | $ | 70 | $ | 92 | $ | 1,582 | $ | 1,744 | $ | 630,089 | $ | 631,833 |
| Commercial real estate loans | - | - | - | - | 247,520 | 247,520 | ||||||
| Commercial loans | - | - | 17 | 17 | 86,796 | 86,813 | ||||||
| Residential real estate loans | 26 | - | - | 26 | 36,847 | 36,873 | ||||||
| Installment and consumer other | - | - | - | - | 1,919 | 1,919 | ||||||
| Total | $ | 96 | $ | 92 | $ | 1,599 | $ | 1,787 | $ | 1,003,171 | $ | 1,004,958 |
| December 31, 2020 | ||||||||||||
| Agricultural loans | $ | 47 | $ | - | $ | 5,041 | $ | 5,088 | $ | 601,793 | $ | 606,881 |
| Commercial real estate loans | 82 | - | 4,283 | 4,365 | 231,604 | 235,969 | ||||||
| Commercial loans | - | - | 96 | 96 | 114,991 | 115,087 | ||||||
| Residential real estate loans | 4 | - | - | 4 | 38,080 | 38,084 | ||||||
| Installment and consumer other | - | - | - | - | 264 | 264 | ||||||
| Total | $ | 133 | $ | - | $ | 9,420 | $ | 9,553 | $ | 986,732 | $ | 996,285 |
The following table presents the recorded investment in nonaccrual loans by class of loan:
| September 30, | December 31, | |||
|---|---|---|---|---|
| 2021 | 2020 | |||
| (dollars in thousands) | ||||
| Agricultural loans | $ | 27,576 | $ | 35,067 |
| Commercial real estate loans | - | 6,093 | ||
| Commercial loans | 316 | 405 | ||
| Residential real estate loans | - | 59 | ||
| Total | $ | 27,892 | $ | 41,624 |
The following tables present the average recorded investment and interest income recognized on impaired loans by portfolio segment for the three and nine months ended September 30, 2021 and 2020:
| As of and for the Three Months Ended September 30, 2021 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | ||||||
| (dollars in thousands) | ||||||||||
| Agricultural loans | $ | 39,529 | $ | 36,829 | $ | 1,728 | $ | 37,103 | $ | 669 |
| Commercial real estate loans | - | - | - | 1,361 | - | |||||
| Commercial loans | 2,265 | 2,230 | 129 | 2,367 | 51 | |||||
| Residential real estate loans | - | - | - | - | - | |||||
| Total | $ | 41,794 | $ | 39,059 | $ | 1,857 | $ | 40,831 | $ | 720 |
| As of and for the Nine Months Ended September 30, 2021 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | ||||||
| (dollars in thousands) | ||||||||||
| Agricultural loans | $ | 39,529 | $ | 36,829 | $ | 1,728 | $ | 50,303 | $ | 1,698 |
| Commercial real estate loans | - | - | - | 3,539 | - | |||||
| Commercial loans | 2,265 | 2,230 | 129 | 2,524 | 104 | |||||
| Residential real estate loans | - | - | - | 30 | - | |||||
| Total | $ | 41,794 | $ | 39,059 | $ | 1,857 | $ | 56,396 | $ | 1,802 |
| As of and for the Three Months Ended September 30, 2020 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | ||||||
| (dollars in thousands) | ||||||||||
| Agricultural loans | $ | 68,145 | $ | 64,384 | $ | 3,801 | $ | 61,640 | $ | 1,507 |
| Commercial real estate loans | 9,411 | 9,311 | 2,926 | 9,331 | 59 | |||||
| Commercial loans | 3,027 | 2,930 | 1,207 | 2,906 | 4 | |||||
| Residential real estate loans | 61 | 60 | - | 60 | - | |||||
| Total | $ | 80,644 | $ | 76,685 | $ | 7,934 | $ | 73,937 | $ | 1,570 |
| As of and for the Nine Months Ended September 30, 2020 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | ||||||
| (dollars in thousands) | ||||||||||
| Agricultural loans | $ | 68,145 | $ | 64,384 | $ | 3,801 | $ | 61,609 | $ | 3,877 |
| Commercial real estate loans | 9,411 | 9,311 | 2,926 | 6,497 | 199 | |||||
| Commercial loans | 3,027 | 2,930 | 1,207 | 2,396 | 73 | |||||
| Residential real estate loans | 61 | 60 | - | 61 | 1 | |||||
| Total | $ | 80,644 | $ | 76,685 | $ | 7,934 | $ | 70,563 | $ | 4,150 |
Impaired loans include nonaccrual loans, troubled debt restructured loans, and loans that are 90 days or more past due and still accruing. For nonaccrual loans included in impaired loans, the interest income that would have been recognized had those loans been performing in accordance with their original terms would have been approximately $0.5 million and $1.7 million for the three months ended September 30, 2021 and 2020, respectively, and $1.3 million and $4.5 million for the nine months ended September 30, 2021 and 2020, respectively.
Troubled Debt Restructurings
The Company allocated approximately $1.5 million and $3.8 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDR”) at September 30, 2021 and December 31, 2020, respectively. The Company had no additional lending commitments at September 30, 2021 or December 31, 2020 to customers with outstanding loans that were classified as TDRs.
A TDR on nonaccrual status is classified as a nonaccrual loan until evaluation supports reasonable assurance of repayment and there has been a satisfactory period of performance according to the modified terms of the loan. Once this assurance is reached, the TDR is returned to accrual status. The following table presents the TDRs and related allowance for loan losses by loan class at September 30, 2021 and December 31, 2020:
| Non-Accrual | Restructured and Accruing | Total | Allowance for Loan Losses Allocated | |||||
|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||||
| September 30, 2021 | ||||||||
| Agricultural loans | $ | 23,094 | $ | 4,856 | $ | 27,950 | $ | 1,519 |
| Commercial real estate loans | - | - | - | - | ||||
| Commercial loans | 17 | 1,830 | 1,847 | 3 | ||||
| Total | $ | 23,111 | $ | 6,686 | $ | 29,797 | $ | 1,522 |
| December 31, 2020 | ||||||||
| Agricultural loans | $ | 27,223 | $ | 15,690 | $ | 42,913 | $ | 3,494 |
| Commercial real estate loans | 1,810 | 984 | 2,794 | 315 | ||||
| Commercial loans | 68 | 1,918 | 1,986 | 4 | ||||
| Total | $ | 29,101 | $ | 18,592 | $ | 47,693 | $ | 3,813 |
The following table provides the number of loans modified in a troubled debt restructuring by class for the three and nine months ended September 30, 2021 and 2020:
| For the Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| September 30, 2021 | September 30, 2020 | |||||||
| Number of <br>Loans | Recorded Investment | Number of <br>Loans | Recorded <br>Investment | |||||
| (dollars in thousands) | ||||||||
| Troubled debt restructurings: | ||||||||
| Agricultural loans | 8 | $ | 2,327 | - | $ | - | ||
| Total | 8 | $ | 2,327 | - | $ | - | ||
| For the Nine Months Ended | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| September 30, 2021 | September 30, 2020 | |||||||
| Number of <br>Loans | Recorded Investment | Number of <br>Loans | Recorded Investment | |||||
| (dollars in thousands) | ||||||||
| Troubled debt restructurings: | ||||||||
| Agricultural loans | 13 | $ | 3,913 | 8 | $ | 2,872 | ||
| Total | 13 | $ | 3,913 | 8 | $ | 2,872 |
The following table provides the troubled debt restructurings for the three and nine months ended September 30, 2021 and 2020 grouped by type of concession:
| For the Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| September 30, 2021 | September 30, 2020 | |||||||
| Number of <br>Loans | Recorded Investment | Number of <br>Loans | Recorded <br>Investment | |||||
| (dollars in thousands) | ||||||||
| Agricultural loans | ||||||||
| Combination of extension of term and interest rate <br>concessions | 8 | $ | 2,327 | - | $ | - | ||
| Total | 8 | $ | 2,327 | - | $ | - | ||
| For the Nine Months Ended | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| September 30, 2021 | September 30, 2020 | |||||||
| Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||
| (dollars in thousands) | ||||||||
| Agricultural loans | ||||||||
| Payment concessions | - | $ | - | 1 | $ | 231 | ||
| Term concessions | - | - | 1 | 484 | ||||
| Extension of interest-only payments | 5 | 1,586 | 2 | 75 | ||||
| Capitalized interest | - | - | 1 | 153 | ||||
| Combination of payment concessions and interest rate <br>concessions | - | - | 3 | 1,929 | ||||
| Combination of extension of term and interest rate <br>concessions | 8 | 2,327 | - | - | ||||
| Total | 13 | $ | 3,913 | 8 | $ | 2,872 |
No troubled debt restructurings defaulted within twelve months of the restructure date during the three and nine months ended September 30, 2021 and September 30, 2020.
The CAA extended Section 4013 of the CARES Act, which allows financial institutions to elect to suspend troubled debt restructuring accounting under certain circumstances when the temporary restructuring is related to the COVID-19 pandemic. The Company has elected to implement Section 4013, and the balance of those loans modified under Section 4013 was $0.2 million and $16.8 million at June 30, 2021 and December 31, 2020, respectively.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes agricultural, commercial, and commercial real estate loans individually by classifying the credits as to credit risk. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits with total exposure in excess of $300,000. The Company uses the following definitions for credit risk ratings:
Sound. Credits classified as sound show very good probability of ongoing ability to meet and/or exceed obligations.
Acceptable. Credits classified as acceptable show a good probability of ongoing ability to meet and/or exceed obligations.
Satisfactory. Credits classified as satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.
LowSatisfactory. Credits classified as low satisfactory show fair probability of ongoing ability to meet and/or exceed obligations. Low satisfactory credits may be newer or have a less established track record of financial performance, inconsistent earnings, or may be going through an expansion.
Watch. Credits classified as watch show some questionable probability of ongoing ability to meet and/or exceed obligations.
SpecialMention. Credits classified as special mention show potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.
Substandard- Performing. Credits classified as substandard - performing generally have well-defined weaknesses. Collateral coverage is adequate, and the loans are not considered impaired. Payments are being made and the loans are on accrual status.
Substandard- Impaired. Credits classified as substandard-impaired generally have well-defined weaknesses that jeopardize the repayment of the debt. They have a distinct possibility that a loss will be sustained if the deficiencies are not corrected. Loans are considered impaired. Loans are either exhibiting signs of delinquency, are on non-accrual or are identified as a TDR.
Doubtful. Credits classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable.
The Company categorizes residential real estate, installment and consumer other loans as satisfactory at the time of origination based on information obtained as to the ability of the borrower(s) to service their debt, such as current financial information, employment status and history, historical payment experience, credit scores and type and amount of collateral among other factors. The Company updates relevant information on these types of loans at the time of refinance, troubled debt restructuring or other indications of financial difficulty, downgrading as needed using the same category descriptions as for agricultural, commercial, and commercial real estate loans. In addition, the Company further considers current payment status as an indicator of which risk category to assign the loan.
The greater the level of deteriorated risk as indicated by a loan’s assigned risk category, the greater the likelihood a loss will occur in the future. If the loan is substandard
- impaired, then the loan loss reserves for the loan are recorded at the loss level of impairment. If the loan is not impaired, then its loan loss reserves are determined by the application of a loss rate that increases with risk in accordance with the allowance for loan loss analysis.
The Bank will not accrue interest on any loan past due 90 days or more. Furthermore, the Bank will place any loan on non-accrual status for which payment in full of principal and interest is not expected. A loan shall be placed on non-accrual as soon as it is determined that payment in full of interest and/or principal is unlikely. The Bank’s chief credit officer may approve the placement of a loan on non-accrual prior to 90 days past due.
Based on the most recent analysis performed by management, the risk category of loans by class of loans was as follows as of September 30, 2021 and December 31, 2020:
| As of September 30, 2021 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sound/ <br>Acceptable/ <br>Satisfactory/ <br>Low Satisfactory | Watch | Special <br>Mention | Substandard Performing | Substandard <br>Impaired | Total <br>Loans | |||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 484,545 | $ | 100,044 | $ | 6,927 | $ | 12,741 | $ | 27,576 | $ | 631,833 |
| Commercial real estate loans | 226,818 | 19,425 | - | 1,277 | - | 247,520 | ||||||
| Commercial loans | 78,840 | 4,956 | 538 | 2,163 | 316 | 86,813 | ||||||
| Residential real estate loans | 36,673 | 200 | - | - | - | 36,873 | ||||||
| Installment and consumer other | 1,919 | - | - | - | - | 1,919 | ||||||
| Total | $ | 828,795 | $ | 124,625 | $ | 7,465 | $ | 16,181 | $ | 27,892 | $ | 1,004,958 |
| As of December 31, 2020 | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Sound/ <br>Acceptable/ <br>Satisfactory/ <br>Low Satisfactory | Watch | Special <br>Mention | Substandard Performing | Substandard <br>Impaired | Total <br>Loans | |||||||
| (dollars in thousands) | ||||||||||||
| Agricultural loans | $ | 374,595 | $ | 155,546 | $ | 1,854 | $ | 34,452 | $ | 40,434 | $ | 606,881 |
| Commercial real estate loans | 200,208 | 26,266 | - | 3,402 | 6,093 | 235,969 | ||||||
| Commercial loans | 103,488 | 8,022 | 647 | 2,566 | 364 | 115,087 | ||||||
| Residential real estate loans | 37,758 | 267 | - | - | 59 | 38,084 | ||||||
| Installment and consumer other | 264 | - | - | - | - | 264 | ||||||
| Total | $ | 716,313 | $ | 190,101 | $ | 2,501 | $ | 40,420 | $ | 46,950 | $ | 996,285 |
NOTE 6 - LOAN SERVICING RIGHTS
Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates. The unpaid principal balances of loans serviced for others were approximately $839.4 million and $812.6 million at September 30, 2021 and December 31, 2020, respectively. The fair value of these rights were approximately $19.4 million and $18.4 million at September 30, 2021 and December 31, 2020, respectively.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. The Company’s portfolio of loans serviced for others is mostly comprised of fixed rate loans. Generally, as market interest rates rise, prepayments on fixed rate loans decrease due to a decline in refinancing activity, which results in an increase in the fair value of servicing rights. However, due to the cross-collateralization of loans in the portfolio and the government guarantee programs under which many of the loans were originated, prepayments on the portfolio tend to be muted in comparison to other types of loans, such as mortgage loans. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they were applied at a different time.
The fair value of servicing rights at September 30, 2021 was determined using an assumed discount rate of 15.13% percent and a weighted average run-off rate of 17.24%, ranging from 16.71% to 24.47%, depending upon loan type, the stratification of the specific right, and nominal credit losses. The fair value of servicing rights at December 31, 2020 was determined using an assumed discount rate of 14.3% and a weighted average run-off rate of 16.59%, ranging from 16.02% to 24.72%, depending upon the stratification of the specific right, and nominal credit losses.
Changes to the fair value are reported in loan servicing fees within the consolidated statements of operations.
The following tables summarize servicing rights capitalized, along with the aggregate activity in related valuation allowances for periods indicated.
| For the Three Months Ended September 30, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| (dollars in thousands) | ||||||
| Balance, beginning of period | $ | 19,478 | $ | 16,486 | ||
| Additions, net | 1,631 | 1,268 | ||||
| Fair value changes: | ||||||
| Decay due to increases in principal paydowns or runoff | (1,083 | ) | (386 | ) | ||
| Due to changes in valuation inputs or assumptions | (613 | ) | (165 | ) | ||
| Balance, end of period | $ | 19,413 | $ | 17,203 | ||
| For the Nine Months Ended September 30, | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| 2021 | 2020 | |||||
| (dollars in thousands) | ||||||
| Balance, beginning of period | $ | 18,396 | $ | 15,921 | ||
| Additions, net | 4,993 | 2,814 | ||||
| Fair value changes: | ||||||
| Decay due to increases in principal paydowns or runoff | (2,213 | ) | (1,378 | ) | ||
| Due to changes in valuation inputs or assumptions | (1,763 | ) | (154 | ) | ||
| Balance, end of period | $ | 19,413 | $ | 17,203 |
NOTE 7 - DEPOSITS
Deposits are summarized as follows at September 30, 2021 and December 31, 2020:
| September 30, | December 31, | |||
|---|---|---|---|---|
| 2021 | 2020 | |||
| (dollars in thousands) | ||||
| Demand deposits | $ | 168,008 | $ | 163,202 |
| NOW and interest checking | 143,843 | 96,624 | ||
| Savings | 17,258 | 7,367 | ||
| Money market accounts | 415,813 | 344,250 | ||
| Certificates of deposit | 262,658 | 304,580 | ||
| National time deposits | 16,333 | 44,347 | ||
| Brokered deposits | 157,583 | 80,456 | ||
| Total deposits | $ | 1,181,496 | $ | 1,040,826 |
NOTE 8-ADVANCES FROM FHLB AND OTHER BORROWINGS
The Bank had advances outstanding from the FHLB in the amount of $85.0 million and $129.0 million on September 30, 2021 and December 31, 2020, respectively. These advances, rates, and maturities were as follows:
| September 30, | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Maturity | Rate | 2021 | 2020 | ||||||
| (dollars in thousands) | |||||||||
| Fixed rate, fixed term | 01/04/2021 | 0.23 | % | $ | - | $ | 29,000 | ||
| Fixed rate, fixed term | 04/12/2021 | 1.92 | % | - | 8,000 | ||||
| Fixed rate, fixed term | 05/03/2021 | 0.00 | % | - | 4,000 | ||||
| Fixed rate, fixed term | 06/15/2021 | 1.39 | % | - | 5,000 | ||||
| Fixed rate, fixed term | 08/16/2021 | 2.29 | % | - | 3,000 | ||||
| Fixed rate, fixed term | 12/30/2021 | 2.29 | % | 2,000 | 2,000 | ||||
| Fixed rate, fixed term | 03/18/2022 | 1.03 | % | 15,000 | 15,000 | ||||
| Fixed rate, fixed term | 03/25/2022 | 0.75 | % | 10,000 | 10,000 | ||||
| Fixed rate, fixed term | 05/16/2022 | 0.00 | % | 5,000 | - | ||||
| Fixed rate, fixed term | 11/16/2022 | 0.38 | % | 20,000 | 20,000 | ||||
| Fixed rate, putable, 2 years no call | 01/12/2023 | 2.03 | % | 8,000 | 8,000 | ||||
| Fixed rate, fixed term | 03/23/2023 | 1.26 | % | 10,000 | 10,000 | ||||
| Fixed rate, fixed term | 03/27/2023 | 0.82 | % | 15,000 | 15,000 | ||||
| $ | 85,000 | $ | 129,000 |
The terms of security agreements with the FHLB require the Bank to pledge collateral for its borrowings. The collateral consists of qualifying first mortgage loans and stock of the FHLB. At September 30, 2021 and December 31, 2020, the Bank had pledged qualifying mortgage loans of $494.8 million and $367.6 million, respectively.
As of September 30, 2021 and December 31, 2020, the Bank also had a line-of-credit available with the Federal Reserve Bank of Chicago. Borrowings under this line of credit are limited by the amount of collateral pledged by the Bank, which totaled $52.8 million and $111.5 million in loans at September 30, 2021 and December 31, 2020, respectively. The borrowings available to the Company were $45.7 million and $83.3 million, as of September 30, 2021 and December 31, 2020, respectively. There were no outstanding advances included in other borrowings at September 30, 2021 and December 31, 2020.
Other borrowings are borrowings as a result of sold loans that do not qualify for sale accounting. These agreements are recorded as financing transactions as the Bank maintains effective control over the transferred loans. The dollar amount of the loans underlying the sale agreements continues to be carried in the Bank’s loan portfolio, and the transfer is reported as a secured borrowing with pledge of collateral. At September 30, 2021 and December 31, 2020, the amounts of these borrowings were $0.1 million and $0.2 million, respectively.
Also included in other borrowings is the financing lease for our full-service banking location in Manitowoc, Wisconsin. This branch location was owned by the Bank and was sold to a third party in March 2020. The Bank is leasing back a portion of the building for its full-service branch. Under the terms of the current lease which began on March 2, 2020, the Company is obligated to pay monthly rent of $16 thousand with an initial lease term of ten years with two renewal options of five years each. As of September 30, 2021 and December 31, 2020, the liability remaining under the financing lease was $1.2 million and $1.3 million, respectively.
The Company largely funded the Small Business Administration’s Paycheck Protection Program (“PPP”) loans through the Federal Reserve’s PPP Liquidity Facility, which allowed for 12-month advances collateralized by PPP loans at an interest rate of 0.35%. The balance of these advances was $11.5 million and $47.5 million at September 30, 2021 and December 31, 2020, respectively, and were secured by PPP loans of the same amount.
The following table sets forth information concerning balances and interest rates on other borrowings as of and for the periods indicated:
| September 30, | December 31, | |||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| (dollars in thousands) | ||||||
| Balance outstanding at end of period | $ | 12,844 | $ | 49,006 | ||
| Average amount outstanding during the period | 25,534 | 61,483 | ||||
| Maximum amount outstanding at any month-end | 49,917 | 93,709 | ||||
| Weighted average interest rate during the period | 0.44 | % | 0.42 | % | ||
| Weighted average interest rate at end of period | 0.51 | % | 0.39 | % |
NOTE 9 - SUBORDINATED DEBENTURES
The following is a summary of the carrying values, including unamortized issuance costs, of the Company’s subordinated debt as of the dates indicated:
| As<br> of September 30, 2021 | As<br> of <br>December 31, 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Balance<br> Outstanding | Interest<br> Rate | Interest<br> Reset Date | Call<br> Date | Maturity<br> Date | Balance<br> Outstanding | |||||
| (dollars in thousands) | ||||||||||
| Junior<br> subordinated notes issued to County Bancorp Statutory Trust II (1)(2) | $ | 6,186 | 1.646 | % | 12/15/2021 | N/A | 09/15/2035 | $ | 6,186 | |
| Junior subordinated<br> notes issued to County Bancorp Statutory Trust III (1)(3) | 6,186 | 1.806 | % | 12/15/2021 | N/A | 06/15/2036 | 6,186 | |||
| Junior subordinated<br> notes issued to Fox River Valley Capital Trust I (4) | 3,610 | 6.40 | % | 11/30/2023 | N/A | 05/30/2033 | 3,336 | |||
| 5.875% Fixed-to-Floating<br> rate subordinated notes (5) | 29,686 | 5.875 | % | 06/01/2023 | 06/01/2023 | 06/01/2028 | 29,545 | |||
| 7.00%<br> Fixed-to-Floating rate subordinated notes (6) | 21,930 | 7.00 | % | 06/30/2025 | 06/30/2025 | 06/30/2030 | 21,858 | |||
| Total<br> subordinated debentures | $ | 67,598 | $ | 67,111 | ||||||
| (1) | The Company formed wholly owned subsidiary business trusts County Bancorp Statutory Trust II (“Trust II”) and County Bancorp Statutory Trust III (“Trust III”) (together, the “Trusts”), which are both Delaware statutory trusts. The Company owns all of the outstanding common securities of Trust II and Trust III, which qualify as Tier 1 capital for regulatory purposes. The Trusts used the proceeds from the issuance of their capital securities to buy floating rate junior subordinated deferrable interest debentures (“debentures”) issued by the Company. These debentures are the Trusts’ only assets, and interest payments from these debentures finance the distributions paid on the capital securities. These debentures are unsecured, rank junior, and are subordinate in the right of payment to all senior debt of the Company. | |||||||||
| --- | --- | |||||||||
| (2) | The debentures issued to Trust II bear an interest rate of three-month LIBOR plus 1.53% through maturity. | |||||||||
| --- | --- | |||||||||
| (3) | The debentures issued to Trust III bear an interest rate of three-month LIBOR plus 1.69% through maturity. | |||||||||
| --- | --- | |||||||||
| (4) | In connection with the merger with Fox River Valley Bancorp, Inc., the Company acquired all of the common securities of Fox River Valley’s wholly-owned subsidiary, Fox River Valley Capital Trust I, a Delaware statutory trust (the “FRV Trust I”), which qualify as Tier 1 capital for regulatory purposes. The debentures of the Company owned by FRV Trust I carry an interest rate equal to 5-year LIBOR plus 3.40%, which resets every five years. | |||||||||
| --- | --- | |||||||||
| (5) | The notes bear interest at a fixed rate of 5.875% per year, from and including May 30, 2018 to, but excluding, June 1, 2023. From and including June 1, 2023 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current 3-month LIBOR plus 2.88%. The notes qualify as Tier 2 capital of the Company. Debt issuance costs of $0.9 million are being amortized over the life of the notes. | |||||||||
| --- | --- | |||||||||
| (6) | The notes bear interest at a fixed rate of 7.00% per year, from and including June 30, 2020 to, but excluding, June 30, 2025. From and including June 30, 2025 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term secured overnight financing rate (SOFR) plus 687.5 basis points. The notes qualify as Tier 2 capital of the Company. The Company incurred $0.6 million of costs related to the issuance of the notes. These costs have been capitalized and are being amortized over the life of the notes. | |||||||||
| --- | --- |
NOTE 10 - EQUITY INCENTIVEPLAN
Under the Company’s 2021 Long Term Incentive Plan (the “Plan”), the Company may grant options to purchase shares of common stock and issue restricted stock to its directors, officers, and employees. Both qualified and non-qualified stock options and restricted stock may be granted and issued, respectively, under the Plan. As of September 30, 2021, 270,455 options or shares of restricted stock remained available under the Plan.
The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. Vesting periods range from one to five years from the date of grant. The restricted stock vesting periods range from one to five years from the date of issuance.
Activity in outstanding stock options for the nine months ended September 30, 2021 were as follows:
| September 30, 2021 | |||||||
|---|---|---|---|---|---|---|---|
| Number <br>of <br>Options | Weighted-Average <br>Exercise Price | Aggregate <br>Intrinsic <br>Value (1) | |||||
| (dollars in thousands except option and per share data) | |||||||
| Outstanding, beginning of year | 249,667 | $ | 19.75 | ||||
| Granted | 6,070 | 24.73 | |||||
| Exercised | (51,101 | ) | 18.59 | ||||
| Forfeited/expired | (9,177 | ) | 20.38 | ||||
| Outstanding, end of period | 195,459 | $ | 3,105 | ||||
| Options exercisable at period-end | 134,422 | $ | 2,144 | ||||
| Weighted-average fair value of options granted during the period (2) | $ | 8.03 | |||||
| (1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2021. This amount changes based on changes in the market value of the Company’s stock. | ||||||
| --- | --- | ||||||
| (2) | The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. | ||||||
| --- | --- |
Activity in restricted stock awards and restricted stock units for the nine months ended September 30, 2021 was as follows:
| September 30, 2021 | |||||
|---|---|---|---|---|---|
| Restricted Stock Awards | Weighted <br>Average Grant <br>Price | ||||
| Outstanding, beginning of year | 6,299 | $ | 24.80 | ||
| Granted | - | - | |||
| Vested | (3,500 | ) | 22.90 | ||
| Forfeited/expired | (493 | ) | 27.15 | ||
| Outstanding, end of period | 2,306 | $ | 27.19 | ||
| September 30, 2021 | |||||
| --- | --- | --- | --- | --- | --- |
| Restricted Stock Units | Weighted <br>Average Grant <br>Price | ||||
| Outstanding, beginning of year | 66,856 | $ | 19.38 | ||
| Granted | 42,437 | 22.87 | |||
| Vested | (17,849 | ) | 20.27 | ||
| Forfeited/expired | (3,332 | ) | 18.25 | ||
| Outstanding, end of period | 88,112 | $ | 20.92 | ||
| Restricted shares vested not yet issued, end of period | 9,779 |
For the three months ended September 30, 2021 and 2020, share-based compensation expenses, including options and restricted stock awards and units, applicable to the plan was $0.2 million. For the nine months ended September 30, 2021 and 2020, share-based compensation expense, including options and restricted stock awards and units, applicable to the Plan was $0.7 million.
As of September 30, 2021, unrecognized share-based compensation expense related to nonvested share-based compensation instruments amounted to $1.1 million and is expected to be recognized over a weighted average period of 2.29 years.
NOTE 11 - REGULATORY MATTERS
The Company (on a consolidated basis) and Bank are each subject to various regulatory capital requirements administered by the federal and state banking agencies. The Basel III rules, a comprehensive capital framework for U.S. banking organizations, includes quantitative measures designed to ensure capital adequacy. The Basel III rules designed the capital conservation buffer to absorb losses during periods of economic stress and effectively increase the minimum required risk-weighted capital ratios. The Basel III rules require the Company and the Bank to maintain:
| (i) | Tier 1 Common Equity ratio to risk weighted assets minimum of 4.50% plus a 2.50% “capital conservation buffer” (effectively resulting in minimum Tier 1 Common Equity ratio of 7.00%); |
|---|---|
| (ii) | Tier 1 Capital ratio to risk weighted assets minimum of 6.00% plus the capital conservation buffer (effectively resulting in a minimum Tier 1 Capital to risk-based capital ratio of 8.50%); |
| --- | --- |
| (iii) | Total Capital ratio to risk weighted assets minimum of 8.00% plus the capital conservation buffer (effectively resulting in a minimum Total Capital to risk weighted assets ratio of 10.50%); and |
| --- | --- |
| (iv) | Tier 1 Leverage Capital ratio minimum of 4.00%. |
| --- | --- |
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (applicable only to the Bank), the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Management believed, as of September 30, 2021 and December 31, 2020, that the Company and Bank met all capital adequacy requirements to which they were subject.
As of September 30, 2021, the most recent notification from the banking regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There were no conditions or events since the notification that management believes have changed the Bank’s category
The Company and Bank’s actual capital amounts and ratios are presented in the following table:
| Actual | Minimum<br> For <br>Capital Adequacy <br>Purposes <br>(including the capital <br>conservation buffer): | Minimum<br> To Be Well <br>Capitalized Under <br>Prompt Corrective <br>Action Provisions: | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||
| (dollars in thousands) | |||||||||||||||
| September 30, 2021 | |||||||||||||||
| Total Capital<br> (to risk weighted assets): | |||||||||||||||
| Consolidated | $ | 252,398 | 19.05 | % | $ | 139,122 | 10.50 | % | Not<br> applicable | ||||||
| Bank | 213,766 | 16.18 | % | 138,710 | 10.50 | % | $ | 132,104 | 10.00 | % | |||||
| Tier 1 Capital<br> (to risk weighted assets): | |||||||||||||||
| Consolidated | 190,067 | 14.35 | % | $ | 112,622 | 8.50 | % | Not<br> applicable | |||||||
| Bank | 203,051 | 15.37 | % | 112,289 | 8.50 | % | 105,684 | 8.00 | % | ||||||
| Tier 1 Capital<br> (to average assets): | |||||||||||||||
| Consolidated | 190,067 | 12.64 | % | 60,132 | 4.00 | % | Not<br> applicable | ||||||||
| Bank | 203,051 | 13.37 | % | 60,765 | 4.00 | % | 75,957 | 5.00 | % | ||||||
| Tier 1 Common<br> Equity Ratio (to risk weighted assets): | |||||||||||||||
| Consolidated | 166,085 | 12.54 | % | $ | 92,748 | 7.00 | % | Not<br> applicable | |||||||
| Bank | 203,051 | 15.37 | % | 92,473 | 7.00 | % | 85,868 | 6.50 | % | ||||||
| December 31,<br> 2020 | |||||||||||||||
| Total Capital<br> (to risk weighted assets): | |||||||||||||||
| Consolidated | $ | 246,275 | 19.50 | % | $ | 132,603 | 10.50 | % | Not<br> applicable | ||||||
| Bank | 211,864 | 16.83 | % | 132,174 | 10.50 | % | $ | 125,880 | 10.00 | % | |||||
| Tier 1 Capital<br> (to risk weighted assets): | |||||||||||||||
| Consolidated | 180,135 | 14.26 | % | 107,345 | 8.50 | % | Not<br> applicable | ||||||||
| Bank | 197,056 | 15.65 | % | 106,998 | 8.50 | % | 100,704 | 8.00 | % | ||||||
| Tier 1 Capital<br> (to average assets): | |||||||||||||||
| Consolidated | 180,135 | 13.01 | % | 55,403 | 4.00 | % | Not<br> applicable | ||||||||
| Bank | 197,056 | 14.06 | % | 56,047 | 4.00 | % | 70,059 | 5.00 | % | ||||||
| Tier 1 Common<br> Equity Ratio (to risk weighted assets): | |||||||||||||||
| Consolidated | 156,427 | 12.39 | % | 88,402 | 7.00 | % | Not<br> applicable | ||||||||
| Bank | 197,056 | 15.65 | % | 88,116 | 7.00 | % | 81,822 | 6.50 | % |
NOTE****12 - FAIR VALUE MEASUREMENTS
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.
ASC 820-10 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1-Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2-Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3-Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments recorded at fair value on a recurring basis:
Securities Available-for-Sale
Where quoted prices are available in an active market, the Company classifies the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.
If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes and credit spreads.
Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. government and agency securities, corporate bonds and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in Level 3.
Loan Servicing Rights
The Company’s loan servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed, and default rate. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the valuation hierarchy.
Derivative Instruments
The Company's derivative instruments consist of interest rate swaps, which are accounted for as cash flow hedges. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| Level 1 <br>Inputs | Level 2 <br>Inputs | Level 3 <br>Inputs | Total <br>Fair <br>Value | |||||
|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||||
| September 30, 2021 | ||||||||
| Securities available for sale: | ||||||||
| U.S. government and agency securities | $ | - | $ | 12,324 | $ | - | $ | 12,324 |
| Municipal securities | - | 128,552 | - | 128,552 | ||||
| Mortgage-backed securities | - | 136,205 | - | 136,205 | ||||
| Corporate bonds | - | 44,952 | - | 44,952 | ||||
| Asset-backed securities | - | 16,178 | - | 16,178 | ||||
| Loan servicing rights (1) | - | - | 19,413 | 19,413 | ||||
| Total assets at fair value | $ | - | $ | 338,211 | $ | 19,413 | $ | 357,624 |
| Derivative instruments, interest rate swaps | - | 1,234 | - | 1,234 | ||||
| Total liabilities at fair value | $ | - | $ | 1,234 | $ | - | $ | 1,234 |
| December 31, 2020 | ||||||||
| Securities available for sale: | ||||||||
| U.S. government and agency securities | $ | - | $ | 14,593 | $ | - | $ | 14,593 |
| Municipal securities | - | 153,654 | - | 153,654 | ||||
| Mortgage-backed securities | - | 135,378 | - | 135,378 | ||||
| Corporate bonds | - | 32,511 | - | 32,511 | ||||
| Asset-backed securities | - | 16,718 | - | 16,718 | ||||
| Loan servicing rights (1) | - | - | 18,396 | 18,396 | ||||
| Total assets at fair value | $ | - | $ | 352,854 | $ | 18,396 | $ | 371,250 |
| Derivative instruments, interest rate swaps | - | 1,914 | - | 1,914 | ||||
| Total liabilities at fair value | $ | - | $ | 1,914 | $ | - | $ | 1,914 |
| (1) | See Note 6 for quantitative information on the significant inputs and a rollforward of activity related to the loan servicing rights. | |||||||
| --- | --- |
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy for which a nonrecurring change in fair value has been recorded:
| Level 1 <br>Inputs | Level 2 <br>Inputs | Level 3 <br>Inputs | ||||
|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||
| September 30, 2021 | ||||||
| Impaired loans | $ | - | $ | - | $ | 28,405 |
| Other real estate owned | - | - | 914 | |||
| Total assets at fair value | $ | - | $ | - | $ | 29,319 |
| December 31, 2020 | ||||||
| Impaired loans | $ | - | $ | - | $ | 46,521 |
| Other real estate owned | - | - | 1,077 | |||
| Total assets at fair value | $ | - | $ | - | $ | 47,598 |
The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis were as follows:
| September 30, 2021 | |||
|---|---|---|---|
| Valuation<br><br> <br>Techniques | Unobservable<br><br> <br>Inputs | Range<br><br> <br>(Average) | |
| Impaired loans | Evaluation of collateral | Estimation of value | NM* |
| Other real estate owned | Appraisal | Appraisal adjustment | 6%-8% (7%) |
| December 31, 2020 | |||
| --- | --- | --- | --- |
| Valuation<br><br> <br>Techniques | Unobservable<br><br> <br>Inputs | Range<br><br> <br>(Average) | |
| Impaired loans | Evaluation of collateral | Estimation of value | NM* |
| Other real estate owned | Appraisal | Appraisal adjustment | 6%-9% (7%) |
| * | Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivable, inventory, a variety of equipment, and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered include aging of receivables, condition of the collateral, potential market for the collateral, and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful. | ||
| --- | --- |
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments were as follows:
| September 30, | December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||
| Carrying <br>Amount | Fair <br>Value | Carrying <br>Amount | Fair <br>Value | Input <br>Level | ||||||
| (dollars in thousands) | ||||||||||
| Financial assets: | ||||||||||
| Cash and cash equivalents | $ | 105,131 | $ | 105,131 | $ | 19,084 | $ | 19,084 | 1 | |
| Interest earning cash at other financial institutions | 417 | 417 | 416 | 416 | 1 | |||||
| FHLB Stock | 5,485 | 5,485 | 5,758 | 5,758 | 2 | |||||
| Securities available for sale | 338,211 | 338,211 | 352,854 | 352,854 | 2 | |||||
| Loans, net of allowance for loan losses | 994,243 | 1,005,973 | 981,477 | 991,342 | 3 | |||||
| Loans held for sale | 11,139 | 11,139 | 35,976 | 35,976 | 3 | |||||
| Accrued interest receivable | 4,898 | 4,898 | 3,240 | 3,240 | 2 | |||||
| Loan servicing rights | 19,413 | 19,413 | 18,396 | 18,396 | 3 | |||||
| Financial liabilities: | ||||||||||
| Deposits: | ||||||||||
| Time | 436,574 | 428,618 | 419,542 | 426,092 | 2 | |||||
| Other deposits | 744,922 | 744,922 | 621,284 | 621,284 | 1 | |||||
| Other borrowings | 12,844 | 12,844 | 49,006 | 49,006 | 3 | |||||
| Advances from FHLB | 85,000 | 85,769 | 129,000 | 130,361 | 2 | |||||
| Subordinated debentures | 67,598 | 66,293 | 67,111 | 67,111 | 3 | |||||
| Accrued interest payable | 2,124 | 2,124 | 2,496 | 2,496 | 2 | |||||
| Derivative instruments, interest rate swaps | 1,234 | 1,234 | 1,914 | 1,914 | 2 |
NOTE****13 - OTHER REAL ESTATE OWNED
Changes in other real estate owned were as follows:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, | September 30, | ||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||
| (dollars in thousands) | |||||||||||
| Balance, beginning of period | $ | 914 | $ | 2,629 | $ | 1,077 | $ | 5,521 | |||
| Assets foreclosed | - | 768 | 360 | 767 | |||||||
| Write-down of other real estate owned | - | - | - | (1,360 | ) | ||||||
| Net loss on sales of other real estate owned | - | (9 | ) | (17 | ) | (13 | ) | ||||
| Proceeds from sale of other real estate owned | - | (324 | ) | (506 | ) | (1,851 | ) | ||||
| Balance, end of period | $ | 914 | $ | 3,064 | $ | 914 | $ | 3,064 |
Expenses applicable to other real estate owned included in non-interest expense included the following:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, | September 30, | ||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||
| (dollars in thousands) | |||||||||||
| Net loss on sales of other real estate owned | $ | - | $ | (9 | ) | $ | (17 | ) | $ | (13 | ) |
| Write-down of other real estate owned | - | - | - | (1,360 | ) | ||||||
| Operating income (expenses), net of rental income | 2 | (51 | ) | (69 | ) | (217 | ) | ||||
| $ | 2 | $ | (60 | ) | $ | (86 | ) | $ | (1,590 | ) |
NOTE14 - DERIVATIVE FINANCIAL INSTRUMENTS
On June 15, 2018, the Company executed an interest rate swap to manage interest rate risk on two sets of its trust preferred securities. This derivative contract involves the receipt of floating rate interest from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. This instrument is designated as a cash flow hedge as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with three-month LIBOR advances. The change in the fair value of this hedging instrument is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.
The Company had two outstanding interest rate swaps designated as a cash flow hedge each with an aggregate notional value of $6.0 million at September 30, 2021 and December 31, 2020. Both interest rate swaps mature on June 15, 2028. A pre-tax unrealized gain of $0.7 million was recognized in accumulated other comprehensive income for the nine months ended September 30, 2021, and a pre-tax loss of $1.2 million was recognized in accumulated other comprehensive income for the nine months ended September 30, 2020. There was no ineffective portion of this hedge.
The Company is exposed to credit risk in the event of nonperformance by the interest rate swaps counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate swaps. The Company monitors counterparty risk in accordance with the provisions of FASB ASC 815. In addition, the interest rate swap agreements contain language outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits. Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. The Company was required to pledge $2.4 million of cash as collateral to the counterparty as of September 30, 2021.
NOTE15 - SUBSEQUENT EVENTS
Management evaluated subsequent events through the date the financial statements were issued.
There were no other significant events or transactions occurring after September 30, 2021, but prior to November 5, 2021, that provided additional evidence about conditions that existed at September 30, 2021.
Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIALINFORMATION
The following unaudited pro forma condensed combined financial information and accompanying notes show the impact on the historical financial conditions and results of operations of Nicolet and County and have been prepared to illustrate the effects of the County merger under the acquisition method of accounting.
The unaudited pro forma condensed combined balance sheet as of September 30, 2021 and unaudited pro forma combined statements of income for the nine months ended September 30, 2021 and for the year ended December 31, 2020, have been prepared to reflect the merger of Nicolet and County, after giving effect to the adjustments described in the notes to the pro forma condensed combined financial information. In the merger, County common shareholders, in exchange for the shares of County common stock held immediately prior to the merger (other than certain cancelled shares) and at the election of each shareholder, have the right to receive cash of $37.18 or 0.48 shares of Nicolet common stock, subject to proration procedures such that 1,237,000 shares of County common stock will be exchanged for cash, and the remaining shares will be exchanged for Nicolet common stock. Total consideration is estimated to consist of approximately $49 million in cash and an aggregate of approximately 2.3 million shares of Nicolet common stock, subject to adjustments as described herein, having an estimated aggregate value of approximately $171 million (based on the closing price of Nicolet common stock of $73.03 on December 2, 2021), representing an aggregate purchase price of approximately $220 million.
The merger will be accounted for as an acquisition transaction. Under the acquisition method of accounting, Nicolet records the assets and liabilities of the acquired entity at its fair value on the closing date of the merger. The pro forma condensed consolidated balance sheet as of September 30, 2021 has been prepared based on the historical consolidated balance sheets of Nicolet and County, assuming the transaction was consummated on September 30, 2021. The pro forma condensed combined statements of income for the nine months ended September 30, 2021 and for the year ended December 31, 2020 have been prepared based on the historical consolidated statements of income for Nicolet and County, assuming the transaction was consummated on January 1, 2020.
The selected unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate either the operating results that would have occurred had the merger been consummated as of the date indicated, or future results of operations or financial condition. The selected unaudited pro forma condensed combined financial information is based upon assumptions and adjustments that Nicolet believes are reasonable. Only such adjustments as have been noted in the accompanying notes have been applied in order to give effect to the merger transaction. Such assumptions and adjustments are subject to change as future events materialize and fair value estimates are refined.
The unaudited pro forma condensed combined financial information should be read in conjunction with:
| · | the accompanying notes to the unaudited pro forma condensed combined financial information; |
|---|---|
| · | Nicolet’s Annual Report on Form 10-K for the year ended December 31, 2020, and its Form 10-Q for<br>the quarterly periods ended March 31, 2021, June 30, 2021, and September 30, 2021; |
| · | County’s unaudited consolidated financial statements and accompanying notes as of and for the nine<br>months ended September 30, 2021, included in County’s Quarterly Report on Form 10-Q for the quarterly period ended September 30,<br>2021; and |
| · | County’s audited consolidated financial statements and accompanying notes as of and for the year<br>ended December 31, 2020, included in County’s Annual Report on Form 10-K for the year ended December 31, 2020. |
NICOLET BANKSHARES, INC.
COMBINED WITH COUNTY BANCORP, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (Unaudited)
As of September 30, 2021
| **** | Historical | **** | Pro Forma | **** | **** | Nicolet and County | **** | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | Nicolet | **** | County | **** | Adjustments | **** | **** | Pro Forma Combined | **** | ||||
| Cash and cash equivalents, including certificates of deposits in other banks | $ | 1,374,684 | $ | 105,548 | $ | (56,899 | ) | A,B | $ | 1,423,333 | |||
| Investment securities, including equity securities | 773,082 | 338,211 | — | 1,111,293 | |||||||||
| Loans held for sale | 193,645 | 11,139 | 204,784 | ||||||||||
| Loans | 3,533,198 | 1,004,958 | (7,700 | ) | C | 4,530,456 | |||||||
| Allowance for credit losses | (38,399 | ) | (10,715 | ) | (5,485 | ) | D | (54,599 | ) | ||||
| Other real estate owned, net | 4,453 | 914 | (100 | ) | E | 5,267 | |||||||
| Bank owned life insurance | 100,690 | 31,885 | 132,575 | ||||||||||
| Goodwill | 255,431 | — | 77,822 | F | 333,253 | ||||||||
| Core deposit intangible | 14,523 | 2 | 3,198 | G | 17,723 | ||||||||
| Other assets | 196,513 | 58,051 | 5,394 | H | 259,958 | ||||||||
| Total Assets | $ | 6,407,820 | $ | 1,539,993 | $ | 16,230 | $ | 7,964,043 | |||||
| Deposits | $ | 5,428,774 | $ | 1,181,496 | $ | 3,500 | I | $ | 6,613,770 | ||||
| Borrowings | 144,233 | 165,442 | 11,800 | J | 321,475 | ||||||||
| Other liabilities | 105,535 | 15,736 | 13,870 | K | 135,141 | ||||||||
| Total Liabilities | 5,678,542 | 1,362,674 | 29,170 | 7,070,386 | |||||||||
| Preferred equity | — | 8,000 | (8,000 | ) | L | — | |||||||
| Common stock & Additional paid-in capital | 425,487 | 34,672 | 136,204 | A,M | 596,363 | ||||||||
| Retained earnings | 297,299 | 131,415 | (137,912 | ) | A,M | 290,802 | |||||||
| Accumulated other comprehensive income | 6,492 | 3,232 | (3,232 | ) | M | 6,492 | |||||||
| Total Stockholders’ Equity (Common) | 729,278 | 169,319 | (4,940 | ) | 893,657 | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | 6,407,820 | $ | 1,539,993 | $ | 16,230 | $ | 7,964,043 | |||||
| Outstanding shares | 11,952 | 6,053 | 2,340 | A | 14,292 |
See accompanying Notes to the Unaudited Pro Forma Condensed CombinedFinancial Information.
NICOLET BANKSHARES, INC.
COMBINED WITH COUNTY BANCORP, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME(Unaudited)
| Nine Months Ended September 30, 2021 | Pro<br> Forma | Nicolet and County | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except per share data) | Nicolet | County | **** | Adjustments | **** | **** | Pro Forma Combined | ||||
| Interest income | $ | 113,924 | $ | 41,917 | $ | 1,925 | A | $ | 157,766 | ||
| Interest expense | 9,528 | 9,524 | (3,825 | ) | B | 15,227 | |||||
| Net interest income | 104,396 | 32,393 | 5,750 | 142,539 | |||||||
| Provision for credit losses | 6,500 | (4,670 | ) | — | 1,830 | ||||||
| Noninterest income | 51,300 | 9,171 | 60,471 | ||||||||
| Noninterest expense | 89,889 | 26,567 | 436 | D | 116,892 | ||||||
| Income before income tax expense | 59,307 | 19,667 | 5,314 | 84,288 | |||||||
| Income tax expense | 14,960 | 4,888 | 1,328 | F | 21,176 | ||||||
| Net income | 44,347 | 14,779 | 3,986 | 63,112 | |||||||
| Less: dividends on preferred equity | — | 239 | — | 239 | |||||||
| Net income<br> attributable to common | $ | 44,347 | $ | 14,540 | $ | 3,986 | $ | 62,873 | |||
| Weighted average common shares outstanding | |||||||||||
| Basic | 10,098 | 6,166 | 2,340 | G | 12,438 | ||||||
| Diluted | 10,503 | 6,221 | 2,340 | G | 12,843 | ||||||
| Earnings per common share | |||||||||||
| Basic | $ | 4.39 | $ | 2.36 | $ | 5.05 | |||||
| Diluted | $ | 4.22 | $ | 2.34 | $ | 4.90 | |||||
| Year<br> Ended December 31, 2020 | Pro<br> Forma | Nicolet and County | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| (In thousands, except per share data) | Nicolet | County | Adjustments | **** | **** | Pro Forma Combined | |||||
| Interest income | $ | 149,202 | $ | 55,475 | $ | 2,567 | A | $ | 207,244 | ||
| Interest<br> expense | 19,864 | 18,499 | (5,100 | ) | B | 33,263 | |||||
| Net interest income | 129,338 | 36,976 | 7,667 | 173,981 | |||||||
| Provision for credit losses | 10,300 | 2,984 | 8,900 | C | 22,184 | ||||||
| Noninterest income | 62,626 | 14,250 | — | 76,876 | |||||||
| Noninterest<br> expense | 100,719 | 39,645 | 19,582 | D,E | 159,946 | ||||||
| Income before income<br> tax expense | 80,945 | 8,597 | (20,815 | ) | 68,727 | ||||||
| Income<br> tax expense | 20,476 | 3,118 | (5,204 | ) | F | 18,390 | |||||
| Net income | 60,469 | 5,479 | (15,611 | ) | 50,337 | ||||||
| Less: Net<br> income attributable to noncontrolling interest | 347 | — | 347 | ||||||||
| Net income attributable<br> to Nicolet | 60,122 | 5,479 | (15,611 | ) | 49,990 | ||||||
| Less: dividends<br> on preferred equity | — | 368 | — | 368 | |||||||
| Net income<br> attributable to common | $ | 60,122 | $ | 5,111 | $ | (15,611 | ) | $ | 49,622 | ||
| Weighted average common shares outstanding | |||||||||||
| Basic | 10,337 | 6,477 | 2,340 | G | 12,677 | ||||||
| Diluted | 10,541 | 6,505 | 2,340 | G | 12,881 | ||||||
| Earnings per common share | |||||||||||
| Basic | $ | 5.82 | $ | 0.79 | $ | 3.91 | |||||
| Diluted | $ | 5.70 | $ | 0.79 | $ | 3.85 |
See accompanying Notes to the Unaudited ProForma Condensed Combined Financial Information.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Note 1. Basis of Presentation
The accompanying unaudited pro form condensed combined financial information and related notes were prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed combined income statement for the nine months ended September 30, 2021, and for the year ended December 31, 2020, combine the historical consolidated statements of income of Nicolet and County, giving effect to the merger as if it had been completed on January 1, 2020. The accompanying unaudited pro forma condensed combined balance sheet as of September 30, 2021 combines the historical consolidated balance sheets of Nicolet and County, giving effect to the merger as if it had been completed on September 30, 2021.
The unaudited pro forma condensed combined financial information and explanatory notes have been prepared to illustrate the effects of the merger involving Nicolet and County under the acquisition method of accounting with Nicolet treated as the acquirer. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined company had the companies actually been combined at the beginning of each period presented, nor does it necessarily indicate the results of operations in future periods or the future financial position of the combined company. Under the acquisition method of accounting, the assets and liabilities of County, as of the effective time of the merger, will be recorded by Nicolet at their respective fair values, and the excess of the merger consideration over the fair value of the net assets acquired will be allocated to goodwill.
County common shareholders, in exchange for the shares of County common stock held immediately prior to the merger (other than certain cancelled shares) and at the election of each shareholder, have the right to receive cash of $37.18 or 0.48 shares of Nicolet common stock, subject to proration procedures such that 1,237,000 shares of County common stock will be exchanged for cash, and the remaining shares will be exchanged for Nicolet common stock. Total consideration is estimated to consist of approximately $49 million in cash and an aggregate of approximately 2.3 million shares of Nicolet common stock, subject to adjustments as described herein, having an estimated aggregate value of approximately $171 million (based on the closing price of Nicolet common stock of $73.03 on December 2, 2021), representing an aggregate purchase price of approximately $220 million.
The pro forma allocation of the purchase price reflected in the unaudited pro forma condensed combined financial information is subject to adjustment. For purposes of the unaudited pro forma condensed combined balance sheet, the purchase price consideration has been allocated to the assets acquired and liabilities assumed of County based upon management’s preliminary estimate of their fair values as of September 30, 2021. Nicolet has not completed the valuation analysis and calculations in sufficient detail necessary to arrive at the required estimates of the fair value of County assets acquired or liabilities assumed, other than a preliminary estimate for intangible assets and certain financial assets and financial liabilities. In addition, certain County nonfinancial assets and liabilities are presented at their respective carrying amounts and should be treated as preliminary values. Any differences between the fair value of the consideration transferred and the fair value of the assets acquired and liabilities assumed will be recorded as goodwill. Accordingly, the purchase price allocation and related adjustments reflected in these unaudited pro forma condensed combined financial statements are preliminary and subject to revision based on the final determination of fair value.
Note 2. Preliminary Purchase Price Allocation for County
The following table summarizes the preliminary purchase price allocation of the estimated merger consideration to the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of County using County’s unaudited consolidated balance sheet as of September 30, 2021.
| (In thousands, except per share data) | County Net Assets at Fair Value | ||
|---|---|---|---|
| Cash and cash equivalents | $ | 97,548 | |
| Investment securities | 338,211 | ||
| Loans held for sale | 11,139 | ||
| Loans | 997,258 | ||
| Allowance for credit losses | (7,300 | ) | |
| Other real estate owned, net | 814 | ||
| Core deposit intangible | 3,200 | ||
| Other assets | 92,927 | ||
| Total Assets | $ | 1,533,797 | |
| Deposits | $ | 1,184,996 | |
| Borrowings | 177,242 | ||
| Other liabilities | 29,606 | ||
| Total Liabilities | 1,391,844 | ||
| Net assets acquired | $ | 141,953 | |
| Purchase price: | |||
| Shares of County outstanding | 6,112 | ||
| Less: County shares with cash election | (1,237 | ) | |
| Shares of County with stock election | 4,875 | ||
| Exchange ratio | 0.48 | ||
| Pro Forma Nicolet shares to be issued | 2,340 | ||
| Nicolet closing stock price on December 2, 2021 | $ | 73.03 | |
| Pro Forma stock consideration | $ | 170,876 | |
| Pro Forma cash consideration | $ | 48,899 | |
| Total Pro Forma purchase price | $ | 219,775 | |
| Preliminary goodwill | $ | 77,822 |
Note 3. Pro Forma Adjustments to the Unaudited Condensed CombinedBalance Sheet
The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined balance sheet. All taxable adjustments were calculated using a 27% tax rate, which represents Nicolet’s statutory rate, to arrive at deferred tax asset or liability adjustments. All adjustments are based on preliminary assumptions and valuations, which are subject to change.
| A. | Total pro forma purchase price consideration of approximately $220 million comprised of the issuance of approximately 2.3 million shares of Nicolet common stock at a price of $73.03, based on the Nicolet closing stock price on December 2, 2021 (the last trading day prior to the consummation of the acquisition), for pro forma stock consideration of approximately $171 million and pro forma cash consideration of approximately $49 million. | ||
|---|---|---|---|
| B. | Total pro forma cash adjustment is comprised of the cash consideration of approximately $49 million (noted in A above) and the redemption of County preferred equity of approximately $8 million (noted in L below). | ||
| --- | --- | ||
| C. | Adjustment to loans to reflect estimated fair value adjustments, which include lifetime credit loss expectations for loans, current interest rates and liquidity. | ||
| --- | --- | ||
| D. | Adjustment to the allowance for credit losses include the following. | ||
| --- | --- | ||
| (In thousands) | September 30, 2021 | ||
| --- | --- | --- | --- |
| Reversal of historical County allowance for credit losses | $ | 10,715 | |
| Estimate of lifetime credit losses for PCD loans | (7,300 | ) | |
| Estimate of lifetime credit losses for non-PCD loans | (8,900 | ) | |
| Cumulative pro forma adjustments to the allowance for credit losses | $ | (5,485 | ) |
| E. | Adjustment of $100,000 to mark County’s other real estate owned to fair value, based on Nicolet’s assessment of property resolution. | ||
| --- | --- | ||
| F. | Adjustment to record estimated goodwill associated with the merger of $77.8 million. | ||
| G. | Adjustment to eliminate County’s existing core deposit intangible and record a new core deposit intangible of $3.2 million. | ||
| H. | Adjustment to deferred tax related to all fair value marks noted in these pro forma adjustments to the condensed combined balance sheet. | ||
| I. | Adjustment to reflect current market rate of interest on deposits of $3.5 million. | ||
| J. | Adjustment to mark County’s borrowings to fair value. | ||
| K. | Adjustment to record estimated merger-related transaction costs of $19 million, net of deferred taxes of $5.1 million. | ||
| L. | Adjustment to reflect the redemption of County’s preferred equity. | ||
| M. | Adjustment to eliminate County’s common equity and record the issuance of Nicolet pro forma stock consideration (as noted in A above). |
Note 4. Pro Forma Adjustments to the Unaudited Condensed CombinedStatements of Income
Pro forma net income includes one-time estimated merger-related transaction costs (see item E below), as well as the Day 2 adjustment to record provision expense and the corresponding increase to the allowance for credit losses (see item C below, as well as Note 3 item D above), but does not reflect potential synergies and other estimated cost savings that may arise from the combination.
| A. | Net fair value adjustments to reflect the estimated accretion of the net discount on acquired loans. For purposes of the pro forma impact, the net discount accretion was estimated using a period of 3 years. |
|---|---|
| B. | Net fair value adjustments to interest expense for deposits assuming straight-line amortization over a 3 year weighted average life, and for borrowings assuming straight-line amortization over the remaining life of the related borrowing. |
| C. | Adjustment to record provision expense on County’s non-PCD loans, including adoption of the current expected credit losses (“CECL”) methodology for the County loan portfolio (Day 2). |
| D. | Net adjustment to core deposit intangible amortization to eliminate County core deposit intangible amortization and record estimated amortization of acquired core deposit intangible. Core deposit intangible will be amortized using the sum-of-the-years digits method over ten years. |
| E. | Adjustment to reflect merger-related transaction costs of $19 million. |
| F. | Adjustment to income tax expense to record the income tax effects of pro forma adjustments at the estimated statutory effective tax rate of 27%. |
| G. | Adjustments to weighted average shares to eliminate the weighted average shares of County common stock outstanding, and record the issuance of Nicolet common stock, calculated on the stock election shares using the exchange ratio of 0.48 per share. |