Citizens munity Bancorp(CZWI) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Presents the unaudited consolidated financial statements for the period ended September 30, 2021 Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | Total Assets | $1,753,477 | $1,649,095 | $104,382 | 6.33% | | Loans Receivable, net | $1,231,822 | $1,220,538 | $11,284 | 0.92% | | Securities AFS | $234,425 | $144,233 | $90,192 | 62.53% | | Deposits | $1,408,315 | $1,295,256 | $113,059 | 8.73% | | Total Liabilities | $1,587,551 | $1,488,531 | $99,020 | 6.65% | | Total Stockholders' Equity | $165,926 | $160,564 | $5,362 | 3.34% | Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (YoY) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (YoY) | |:---|:---|:---|:---|:---|:---|:---| | Total Interest & Dividend Income | $15,218 | $15,218 | $0 | $47,274 | $48,012 | -$738 | | Total Interest Expense | $3,309 | $3,309 | $0 | $7,989 | $11,129 | -$3,140 | | Net Interest Income before PLL | $11,909 | $11,909 | $0 | $39,285 | $36,883 | $2,402 | | Provision for Loan Losses | $0 | $1,500 | -$1,500 | $0 | $5,250 | -$5,250 | | Total Non-Interest Income | $5,062 | $5,062 | $0 | $11,415 | $13,678 | -$2,263 | | Total Non-Interest Expense | $10,724 | $10,724 | $0 | $30,007 | $32,847 | -$2,840 | | Net Income attributable to common stockholders | $4,997 | $3,480 | $1,517 | $15,209 | $9,155 | $6,054 | | Basic EPS | $0.47 | $0.31 | $0.16 | $1.41 | $0.82 | $0.59 | | Diluted EPS | $0.47 | $0.31 | $0.16 | $1.41 | $0.82 | $0.59 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (YoY) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (YoY) | |:---|:---|:---|:---|:---|:---|:---| | Net Income attributable to common stockholders | $4,997 | $3,480 | $1,517 | $15,209 | $9,155 | $6,054 | | Other comprehensive (loss) income, net of tax | -$828 | $885 | -$1,713 | -$258 | $1,375 | -$1,633 | | Comprehensive Income | $4,169 | $4,365 | -$196 | $14,951 | $10,530 | $4,421 | Consolidated Statement of Changes in Stockholders' Equity Changes in Stockholders' Equity (in thousands) | Metric | Jan 1, 2021 Balance | Sep 30, 2021 Balance | Change | |:---|:---|:---|:---| | Common Stock | $111 | $105 | -$6 | | Additional Paid-In Capital | $126,154 | $119,929 | -$6,225 | | Retained Earnings | $32,809 | $44,660 | $11,851 | | Accumulated Other Comprehensive Income | $1,490 | $1,232 | -$258 | | Total Stockholders' Equity | $160,564 | $165,926 | $5,362 | - The increase in total stockholders' equity was primarily driven by net income of $15,209 thousand for the nine months ended September 30, 2021, partially offset by common stock repurchases totaling $7,723 thousand and cash dividends paid of $2,511 thousand[19][310] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (YoY) | |:---|:---|:---|:---| | Net cash provided by operating activities | $17,620 | $16,070 | $1,550 | | Net cash used in investing activities | -$125,552 | -$35,536 | -$90,016 | | Net cash provided by financing activities | $90,833 | $79,100 | $11,733 | | Net (decrease) increase in cash and cash equivalents | -$17,099 | $59,634 | -$76,733 | | Cash and cash equivalents at end of period | $102,341 | $115,474 | -$13,133 | - Net cash used in investing activities significantly increased due to higher purchases of available-for-sale securities ($123,756 thousand in 2021 vs $20,956 thousand in 2020) and held-to-maturity securities ($34,114 thousand in 2021 vs $15,147 thousand in 2020)[25] Condensed Notes to Consolidated Financial Statements (Unaudited) NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines the Company's banking operations, services, and significant accounting policies - The Company operates as a bank holding company, with its wholly-owned subsidiary, Citizens Community Federal N.A. (the 'Bank'), providing traditional community banking services to businesses, agricultural operators, and consumers in Wisconsin and Minnesota through 25 branch locations[29][30][31] - The Bank sold its wholly-owned subsidiary, Wells Insurance Agency, on June 30, 2020[30] - The Company adopted ASU 2018-13 (Fair Value Measurement) and ASU 2018-15 (Intangibles - Goodwill and Other - Internal-Use Software) in the first quarter of 2020, with no material impact on financial statements[80][82] - ASU 2016-13 (Financial Instruments-Credit Losses), which changes credit loss accounting from an incurred loss to an expected credit loss methodology, is effective for the Company in the first quarter of 2023, with earlier adoption not currently planned[84] NOTE 2 – INVESTMENT SECURITIES Details the composition, fair value, and maturities of the Company's investment securities portfolio Investment Securities Composition (in thousands) | Security Type | Sep 30, 2021 (Fair Value) | Dec 31, 2020 (Fair Value) | Change | |:---|:---|:---|:---| | Available for Sale (AFS): | | | | | U.S. government agency obligations | $28,410 | $33,365 | -$4,955 | | Mortgage-backed securities | $120,802 | $40,991 | $79,811 | | Corporate debt securities | $41,218 | $17,462 | $23,756 | | Corporate asset-based securities | $34,615 | $35,827 | -$1,212 | | Trust preferred securities | $9,240 | $16,448 | -$7,208 | | Total AFS Securities | $234,425 | $144,233 | $90,192 | | Held to Maturity (HTM): | | | | | Mortgage-backed securities | $61,268 | $43,182 | $18,086 | | Total HTM Securities | $65,867 | $43,784 | $22,083 | - Gross sales of available-for-sale securities for the nine months ended September 30, 2021, were $9,118 thousand, resulting in gross gains of $92 thousand and gross losses of $14 thousand[89] - At September 30, 2021, the Company had $112,782 thousand in AFS securities with unrealized losses and $58,201 thousand in HTM securities with unrealized losses, which management does not consider to be other-than-temporary[94][96] NOTE 3 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS Details the loan portfolio segmentation, credit quality, allowance for loan losses, and impaired loan information Gross Loans by Type and Risk Rating (in thousands) as of Sep 30, 2021 | Loan Type | Pass (1 to 5) | Special Mention (6) | Substandard (7) | Doubtful (8) | Loss (9) | Total | |:---|:---|:---|:---|:---|:---|:---| | Commercial/Agricultural real estate | $867,342 | $2,302 | $16,624 | $0 | $0 | $886,518 | | C&I/Agricultural operating | $131,719 | $46 | $5,291 | $0 | $0 | $137,060 | | Residential mortgage | $98,742 | $0 | $4,960 | $0 | $0 | $103,702 | | Consumer installment | $27,367 | $0 | $252 | $0 | $0 | $27,619 | | SBA PPP loans | $31,301 | $0 | $0 | $0 | $0 | $31,301 | | Total Gross Loans | $1,156,471 | $2,348 | $27,127 | $0 | $0 | $1,286,200 | SBA PPP Loan Activity (in thousands) | Metric | 2020 Originations (Balance) | 2021 Originations (Balance) | Total Balance | |:---|:---|:---|:---| | Balance, Dec 31, 2020 | $123,702 | $0 | $123,702 | | 2021 Originations | $0 | $47,467 | $47,467 | | 2021 Forgiveness & Fee Accretion | -$120,581 | -$27,674 | -$148,255 | | Balance, Sep 30, 2021 | $3,121 | $28,180 | $31,301 | Allowance for Loan Losses (ALL) by Loan Type (in thousands) as of Sep 30, 2021 | Loan Type | Originated Loans | Other Acquired Loans | Total ALL | |:---|:---|:---|:---| | Commercial/Agricultural Real Estate | $11,898 | $1,097 | $12,995 | | C&I/Agricultural operating | $1,974 | $74 | $2,048 | | Residential Mortgage | $586 | $126 | $712 | | Consumer Installment | $275 | $30 | $305 | | Unallocated | $772 | $0 | $772 | | Total ALL | $15,505 | $1,327 | $16,832 | - Total loans individually evaluated for impairment were $37,191 thousand at September 30, 2021, including $11,499 thousand in purchased credit impaired (PCI) loans and $13,198 thousand in Troubled Debt Restructuring (TDR) loans[132][133] - TDR loans decreased to $15,689 thousand at September 30, 2021, from $18,477 thousand at December 31, 2020[139][140][142] NOTE 4 – MORTGAGE SERVICING RIGHTS Details mortgage servicing rights (MSR) activity, fair value, and key valuation assumptions Mortgage Servicing Rights Activity (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---| | MSR, beginning of period | $4,964 | $5,266 | | Increase from transfers | $256 | $858 | | Amortization | -$418 | -$1,322 | | Valuation allowance, beginning of period | -$1,102 | -$2,014 | | Valuation allowance recoveries | $382 | $1,294 | | MSR, net (end of period) | $4,082 | $4,082 | | Fair value of MSR, end of period | $4,161 | $4,161 | - The fair value of MSRs at September 30, 2021, was estimated using discount rates ranging from 9% to 12%[150] - Servicing fees totaled $354 thousand for the three months and $1,058 thousand for the nine months ended September 30, 2021[149] NOTE 5 – LEASES Provides information on the Company's operating leases, including costs, assets, liabilities, and terms Lease Information (in thousands) | Metric | 9 Months Ended Sep 30, 2021 | Dec 31, 2020 | |:---|:---|:---| | Total Lease Cost | $454 | N/A | | Operating Lease ROU Assets | $2,286 | $2,657 | | Operating Lease Liabilities | $2,354 | $2,762 | | Weighted Average Remaining Lease Term | 5.76 years | 6.32 years | | Weighted Average Discount Rate | 2.72% | 2.70% | - The Company's operating leases have remaining terms ranging from 1.50 to 6.75 years, with options to extend for up to 5 additional years[152] NOTE 6 – DEPOSITS Summarizes the Company's deposits by type and scheduled maturities, highlighting changes in composition Deposits by Type (in thousands) | Deposit Type | Sep 30, 2021 | Dec 31, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | Non-interest bearing demand deposits | $280,611 | $238,348 | $42,263 | 17.73% | | Interest bearing demand deposits | $381,315 | $301,764 | $79,551 | 26.36% | | Savings accounts | $229,623 | $196,348 | $33,275 | 16.95% | | Money market accounts | $291,242 | $245,549 | $45,693 | 18.61% | | Certificate accounts | $225,524 | $313,247 | -$87,723 | -28.01% | | Total Deposits | $1,408,315 | $1,295,256 | $113,059 | 8.73% | - Total deposits increased by $113,059 thousand, driven by growth in demand, savings, and money market accounts, partially offset by a significant decrease in certificate accounts[157][294] - At September 30, 2021, $155,717 thousand of certificate accounts are scheduled to mature in 2022[157] NOTE 7 – FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES AND OTHER BORROWINGS Details FHLB advances and other borrowings, including maturities, interest rates, and collateralization FHLB Advances and Other Borrowings (in thousands) | Borrowing Type | Sep 30, 2021 | Dec 31, 2020 | Change | |:---|:---|:---|:---| | FHLB Advances, net | $111,512 | $123,498 | -$11,986 | | Senior Notes | $28,856 | $28,856 | $0 | | Subordinated Notes | $30,000 | $30,000 | $0 | | Unamortized debt issuance costs | -$456 | -$528 | $72 | | Total Other Borrowings | $58,400 | $58,328 | $72 | | Total Borrowings | $169,912 | $181,826 | -$11,914 | - FHLB advances decreased by $12,000 thousand, primarily due to the termination of $8,000 thousand in advances and a $4,000 thousand advance maturity in 2021[306] - At September 30, 2021, the Bank had an available and unused borrowing capacity of approximately $162,875 thousand under its FHLB arrangement[159] - The FRB PPPLF program expired on July 30, 2021, and the Bank had no outstanding borrowings under this facility at September 30, 2021[168][307] NOTE 8 - CAPITAL MATTERS Provides regulatory capital requirements and ratios, demonstrating compliance with 'Well Capitalized' status Bank Capital Ratios as of Sep 30, 2021 | Capital Ratio | Actual Ratio | Minimum for Capital Adequacy | Minimum for Well Capitalized | |:---|:---|:---|:---| | Total Capital (to RWA) | 13.6% | 8.0% | 10.0% | | Tier 1 Capital (to RWA) | 12.4% | 6.0% | 8.0% | | Common Equity Tier 1 Capital (to RWA) | 12.4% | 4.5% | 6.5% | | Tier 1 Leverage Ratio (to Adjusted Total Assets) | 9.6% | 4.0% | 5.0% | - At September 30, 2021, the Bank was categorized as 'Well Capitalized' under Prompt Corrective Action Provisions, exceeding all minimum regulatory requirements[170][321] NOTE 9 – STOCK-BASED COMPENSATION Details the Company's stock-based compensation plans and the related compensation expense recognized - The 2018 Equity Incentive Plan has 350,000 shares reserved, with 163,974 restricted shares granted as of September 30, 2021[174] - Net compensation expense for restricted stock awards was $221 thousand for the three months and $614 thousand for the nine months ended September 30, 2021[176] - Stock option expense was $2 thousand for the three months and $7 thousand for the nine months ended September 30, 2021[180] NOTE 10 – FAIR VALUE ACCOUNTING Describes the fair value measurement hierarchy and presents financial instruments measured at fair value Assets Measured at Fair Value on a Recurring Basis (in thousands) as of Sep 30, 2021 | Asset Type | Fair Value | Level 1 | Level 2 | Level 3 | |:---|:---|:---|:---|:---| | U.S. government agency obligations | $28,410 | $0 | $28,410 | $0 | | Mortgage-backed securities | $120,802 | $0 | $120,802 | $0 | | Corporate debt securities | $41,218 | $0 | $41,218 | $0 | | Total Investment Securities | $234,425 | $0 | $234,425 | $0 | Assets Measured at Fair Value on a Nonrecurring Basis (in thousands) as of Sep 30, 2021 | Asset Type | Carrying Value | Fair Value (Level 3) | |:---|:---|:---| | Foreclosed and repossessed assets, net | $4 | $4 | | Impaired loans with allocated allowances | $7,976 | $7,976 | | Mortgage servicing rights | $4,082 | $4,161 | - Fair value for impaired loans and foreclosed assets is determined using third-party appraisals and/or internal valuations, with estimated costs to sell (10%-15%) as a significant unobservable input[190][191][193][194] NOTE 11—EARNINGS PER SHARE Provides the reconciliation of basic and diluted earnings per share Earnings Per Share (EPS) (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Net income attributable to common stockholders | $4,997 | $3,480 | $15,209 | $9,155 | | Weighted average common shares outstanding (basic) | 10,610 | 11,153 | 10,788 | 11,173 | | Basic earnings per share | $0.47 | $0.31 | $1.41 | $0.82 | | Weighted average common shares outstanding (diluted) | 10,623 | 11,153 | 10,798 | 11,173 | | Diluted earnings per share | $0.47 | $0.31 | $1.41 | $0.82 | NOTE 12 – OTHER COMPREHENSIVE INCOME (LOSS) Details the components of other comprehensive income (loss), including unrealized gains and losses on securities Other Comprehensive Income (Loss) (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Net unrealized (losses) gains arising during the period (before tax) | -$1,099 | $1,220 | -$278 | $2,052 | | Reclassification adjustment for gains included in net income (before tax) | -$42 | $0 | -$78 | -$156 | | Other comprehensive (loss) income, net of tax | -$828 | $885 | -$258 | $1,375 | | Accumulated Other Comprehensive Income (Loss), net of tax (End of Period) | N/A | N/A | $1,232 | $904 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition and results of operations for the reporting period FORWARD-LOOKING STATEMENTS - The report contains forward-looking statements, identified by words like 'anticipate,' 'believe,' 'expect,' and 'will,' which are subject to uncertainties in operations and the business environment[204] - Key factors that could affect actual results include financial market and economic conditions, impacts from the COVID-19 pandemic, interest rate risk, lending risk, and regulatory changes[205] GENERAL - This discussion analyzes the consolidated financial condition as of September 30, 2021, and results of operations for the three and nine months ended September 30, 2021, compared to the same periods in 2020[207] CRITICAL ACCOUNTING ESTIMATES - Critical accounting estimates include the Allowance for Loan Losses (ALL), Goodwill, Fair Value Measurements, and Income Taxes, all requiring significant management judgment[208][209][212][215][217] - The ALL is based on quarterly assessments of probable incurred losses, considering loan types, historical loss experience, borrower ability to repay, collateral values, and economic conditions[209] - Goodwill is tested for impairment annually at the reporting unit level, with no impairment identified as of December 31, 2020[212][214] STATEMENT OF OPERATIONS ANALYSIS Net Interest Income Analyzes net interest income and margin, highlighting impacts from SBA PPP loans and liability costs Net Interest Income (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (YoY) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (YoY) | |:---|:---|:---|:---|:---|:---|:---| | Net Interest Income | $13,688 | $11,909 | $1,779 | $39,285 | $36,883 | $2,402 | | Net Interest Margin | 3.34% | 3.11% | 0.23% | 3.29% | 3.36% | -0.07% | - Net interest income for the three months ended September 30, 2021, increased by $1.8 million, primarily due to a $1.9 million accretion of deferred fees from SBA PPP loans and lower liability costs[222] - The net interest margin for the three-month period increased by 23 basis points, driven by a 29 basis point increase in SBA PPP deferred loan fee accretion and 37 basis points of lower deposit costs[223] - For the nine months ended September 30, 2021, net interest income increased by $2.4 million, but the net interest margin decreased by 7 basis points[222][224] Provision for Loan Losses The provision for loan losses was $0 for the reporting periods in 2021, reflecting improved economic conditions Provision for Loan Losses (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (YoY) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (YoY) | |:---|:---|:---|:---|:---|:---|:---| | Provision for Loan Losses | $0 | $1,500 | -$1,500 | $0 | $5,250 | -$5,250 | - The $0 provision for loan losses in 2021 was positively impacted by reductions in ALL allocations for general economic conditions and lower loan deferral balances[240] - In 2020, the provision for loan losses was $1.5 million (three months) and $5.25 million (nine months) due to loan growth and increased qualitative factors related to pandemic uncertainty[240] Non-interest Income Non-interest income decreased due to lower loan servicing income and gains on sale of loans Non-Interest Income (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | |:---|:---|:---|:---|:---|:---|:---| | Service charges on deposit accounts | $463 | $431 | 7.42% | $1,256 | $1,336 | -5.99% | | Interchange income | $600 | $556 | 7.91% | $1,776 | $1,509 | 17.69% | | Loan servicing income | $842 | $1,144 | -26.40% | $2,560 | $3,144 | -18.58% | | Gain on sale of loans | $1,014 | $1,987 | -48.97% | $4,131 | $4,585 | -9.90% | | Net gains (losses) on investment securities | $73 | -$1 | N/M | $344 | $97 | 254.64% | | Total Non-Interest Income | $3,448 | $5,062 | -31.88% | $11,415 | $13,678 | -16.54% | - Loan servicing income decreased due to reduced capitalization of mortgage servicing rights from lower mortgage loan origination fees[246] - Gain on sale of loans decreased due to lower mortgage loan origination volumes[247] - Net gains on investment securities increased significantly, primarily due to unrealized gains on equity securities and realized gains on trust-preferred securities[250] Non-interest Expense Non-interest expense decreased, driven by lower mortgage servicing rights expense and advertising costs Non-Interest Expense (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | |:---|:---|:---|:---|:---|:---|:---| | Compensation and related benefits | $5,733 | $5,538 | 3.52% | $16,802 | $16,881 | -0.47% | | Data processing | $1,558 | $1,331 | 17.05% | $4,296 | $3,735 | 15.02% | | Mortgage servicing rights expense, net | $37 | $603 | -93.86% | $28 | $2,330 | -98.80% | | Advertising, marketing and public relations | $220 | $260 | -15.38% | $576 | $802 | -28.18% | | FDIC premium assessment | $148 | $188 | -21.28% | $395 | $436 | -9.40% | | Total Non-Interest Expense | $10,320 | $10,724 | -3.77% | $30,007 | $32,847 | -8.65% | - Mortgage servicing rights expense, net, decreased significantly due to the reversal of $1.3 million in previously recognized impairment charges[256] - Compensation expense for the three-month period increased due to higher incentive compensation, while the nine-month period saw a decrease due to lower variable mortgage production compensation[255] Income Taxes Income tax expense increased with a consistent effective tax rate compared to the prior year Income Tax Expense (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (YoY) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (YoY) | |:---|:---|:---|:---|:---|:---|:---| | Income tax expense | $1,800 | $1,267 | $533 | $5,484 | $3,309 | $2,175 | | Effective tax rate | 26.7% | 26.7% | 0.0% | 26.5% | 26.5% | 0.0% | BALANCE SHEET ANALYSIS Investment Securities The investment portfolio significantly increased, driven by purchases of mortgage-backed and corporate debt securities Investment Securities Portfolio (in millions) | Security Type | Sep 30, 2021 | Dec 31, 2020 | Change | |:---|:---|:---|:---| | Securities available for sale (AFS) | $234.4 | $144.2 | $90.2 | | Securities held to maturity (HTM) | $67.7 | $43.6 | $24.1 | | Total Investment Securities | $302.1 | $187.8 | $114.3 | - The increase in the AFS portfolio was primarily due to purchases of mortgage-backed securities and corporate debt securities[263] - The HTM portfolio increase was largely due to the purchase of agency mortgage-backed securities[264] Loans Total loans increased modestly, with originated loan growth offsetting reductions in SBA PPP loans Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2021 | Dec 31, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | Commercial/Agricultural real estate | $880,484 | $700,139 | $180,345 | 25.76% | | Residential mortgage | $103,702 | $137,646 | -$33,944 | -24.66% | | C&I/Agricultural operating | $137,060 | $149,338 | -$12,278 | -8.22% | | Consumer installment | $27,619 | $39,064 | -$11,445 | -29.30% | | SBA PPP loans | $31,301 | $123,702 | -$92,401 | -74.70% | | Gross Loans | $1,280,166 | $1,249,889 | $30,277 | 2.42% | | Loans receivable, net | $1,231,822 | $1,220,538 | $11,284 | 0.92% | - The originated loan portfolio (excluding SBA PPP loans) increased by $171.1 million, while total SBA PPP loans decreased by $92.4 million due to $148.3 million in debt forgiveness[269] - Acquired loans decreased by $69.4 million[269] Allowance for Loan Losses The allowance for loan losses modestly decreased, representing 1.38% of loans receivable (excluding SBA PPP loans) Allowance for Loan Losses (ALL) Ratios | Metric | Sep 30, 2021 | Dec 31, 2020 | |:---|:---|:---| | ALL to loans net of SBA PPP loans and deferred fees | 1.38% | 1.53% | | ALL to loans, end of period | 1.35% | 1.38% | | ALL to NCOs (annualized) | 3,988.63% | 1,659.49% | | NCOs (annualized) to average loans | 0.02% | 0.08% | - The ALL decreased to $16.8 million at September 30, 2021, from $17.0 million at December 31, 2020, primarily due to modest loan charge-offs[275] - The ALL represents management's estimate of probable and inherent credit losses, considering factors like historical loss experience, economic conditions, and collateral values[272][276] Nonperforming Loans, Potential Problem Loans and Foreclosed Properties Nonperforming assets increased slightly, while criticized loans decreased overall Nonperforming Assets (NPAs) (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | |:---|:---|:---|:---| | Total Nonaccrual Loans | $11,706 | $10,747 | $959 | | Accruing loans past due 90 days or more | $425 | $586 | -$161 | | Total Nonperforming Loans (NPLs) | $12,131 | $11,333 | $798 | | Other real estate owned | $2 | $156 | -$154 | | Other collateral owned | $2 | $41 | -$39 | | Total Nonperforming Assets (NPAs) | $12,135 | $11,530 | $605 | | NPAs to total assets | 0.69% | 0.70% | -0.01% | | NPLs to total loans | 0.97% | 0.92% | 0.05% | - The increase in NPAs was largely due to a $4.5 million commercial real estate loan secured by a senior living facility[282] - Nonaccrual TDR loans decreased to $4.3 million at September 30, 2021, from $6.7 million at December 31, 2020[284] Criticized Loans (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | |:---|:---|:---|:---| | Special mention loan balances | $2,548 | $6,672 | -$4,124 | | Substandard loan balances | $27,137 | $28,541 | -$1,404 | | Criticized loans, end of period | $29,685 | $35,213 | -$5,528 | - Hotel and restaurant sector loans totaled approximately $109 million and $41 million, respectively, at September 30, 2021[288][289][290] Mortgage Servicing Rights The fair market value of the MSR asset increased, leading to a reversal of impairment charges - The fair market value of the MSR asset increased from $3.3 million to $4.2 million between December 31, 2020, and September 30, 2021[292] - A $1.3 million reversal of previously recorded MSR impairment was recognized during the nine-month period ended September 30, 2021[292] - The MSR asset as a percentage of the servicing portfolio was 0.75% at September 30, 2021, up from 0.59% at December 31, 2020[293] Deposits Deposits increased significantly, driven by non-maturity deposit growth Deposits by Type (in thousands) | Deposit Type | Sep 30, 2021 | Dec 31, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | Non-interest bearing demand deposits | $280,611 | $238,348 | $42,263 | 17.73% | | Interest bearing demand deposits | $381,315 | $301,764 | $79,551 | 26.36% | | Savings accounts | $229,623 | $196,348 | $33,275 | 16.95% | | Money market accounts | $291,242 | $245,549 | $45,693 | 18.61% | | Certificate accounts | $225,524 | $313,247 | -$87,723 | -28.01% | | Total Deposits | $1,408,315 | $1,295,256 | $113,059 | 8.73% | - Total deposits increased by $113.1 million, primarily from non-maturity deposit growth in both retail and commercial segments[294] - Retail certificates of deposit decreased by $87.7 million as the Company chose not to match higher rate local retail certificate competition[294] Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings FHLB advances decreased due to terminations and maturities, while other borrowings remained stable FHLB Advances and Other Borrowings (in thousands) | Borrowing Type | Sep 30, 2021 | Dec 31, 2020 | Change | |:---|:---|:---|:---| | FHLB Advances, net | $111,512 | $123,498 | -$11,986 | | Senior Notes | $28,856 | $28,856 | $0 | | Subordinated Notes | $30,000 | $30,000 | $0 | | Total Borrowings | $169,912 | $181,826 | -$11,914 | - FHLB advances decreased by $12.0 million due to $8.0 million in terminated advances and a $4.0 million advance maturity[306] - The Bank's available and unused FHLB borrowing capacity increased to approximately $162.9 million at September 30, 2021[298][315] - The FRB PPPLF program expired on July 30, 2021, and the Bank had no outstanding borrowings under this facility[307][315] Stockholders' Equity Total stockholders' equity increased, driven by net income and partially offset by share repurchases Stockholders' Equity (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | |:---|:---|:---|:---| | Total Stockholders' Equity | $165,926 | $160,564 | $5,362 | - The increase in equity was due to net income of $15.2 million, partially offset by the repurchase of approximately 604 thousand common shares ($7.7 million) and cash dividends paid ($2.5 million)[310] - The Company repurchased approximately 144 thousand shares under a new share repurchase program adopted on July 23, 2021, with an additional 389 thousand shares authorized for repurchase[311][343][344] Liquidity and Asset / Liability Management The Company maintains adequate liquidity through deposits, investments, and borrowings - Primary sources of funds include deposits, loan amortizations, short-term investments, and borrowings[312] - The on-balance sheet liquidity ratio was 20.7% at September 30, 2021[312] - The Company has access to additional funds through FHLB borrowings ($162.9 million available) and other lines of credit[315][316] Off-Balance Sheet Liabilities Off-balance sheet liabilities primarily consist of unused commitments for lines of credit - Unused commitments totaled $320.1 million at September 30, 2021, an increase from $247.3 million at December 31, 2020[318] Capital Resources The Bank maintained capital levels exceeding 'Well Capitalized' requirements Bank Capital Ratios as of Sep 30, 2021 | Capital Ratio | Actual Ratio | Minimum for Well Capitalized | |:---|:---|:---:| | Total capital (to risk weighted assets) | 13.6% | 10.0% | | Tier 1 capital (to risk weighted assets) | 12.4% | 8.0% | | Common equity tier 1 capital (to risk weighted assets) | 12.4% | 6.5% | | Tier 1 leverage ratio (to adjusted total assets) | 9.6% | 5.0% | - The Bank was categorized as 'Well Capitalized' by the OCC at September 30, 2021[321] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Discusses the Company's exposure to interest rate risk and its management strategies - Interest rate risk is the Company's most significant market risk, managed by the Asset and Liability Management Committee (ALCO)[325][326] Estimated Changes in Economic Value of Equity (EVE) (in thousands) | Rate Shock | Sep 30, 2021 (% Change in EVE) | Dec 31, 2020 (% Change in EVE) | |:---|:---|:---| | +300 bp | -3% | 15% | | +200 bp | -2% | 11% | | +100 bp | -1% | 7% | | -100 bp | 6% | 0% | Projected Change in Net Interest Income (NII) Over One Year Horizon | Rate Shock | Sep 30, 2021 (% Change in NII) | Dec 31, 2020 (% Change in NII) | |:---|:---|:---| | +300 bp | -7% | 3% | | +200 bp | -4% | 3% | | +100 bp | -2% | 2% | | -100 bp | 1% | -1% | - The Company is now modestly liability sensitive, a shift from asset sensitivity in Q1 2021, due to planned actions including investment portfolio growth and loan growth[328] ITEM 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures as of September 30, 2021 - The Company's disclosure controls and procedures were effective as of September 30, 2021, providing reasonable assurance of achieving desired control objectives[335] - No material changes occurred in the Company's internal control over financial reporting during the most recently completed fiscal quarter[336] PART II – OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Discloses that legal proceedings are not expected to materially impact the Company's financial condition - Management believes that any liability from legal proceedings would not have a material adverse effect on the Company's business or financial condition[337] Item 1A. RISK FACTORS Refers readers to risk factors detailed in previous SEC filings for a comprehensive understanding of potential risks - Readers are directed to review risk factors described in Item 1A of the 2020 10-K and prior 10-Q filings for a complete understanding of potential risks[339] Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Details the Company's common stock repurchase activities under recent programs - The Company completed repurchases under its November 2020 stock repurchase program during the quarter ended September 30, 2021[343] - A new share repurchase program was adopted on July 23, 2021, authorizing the repurchase of up to approximately 5% of outstanding common stock (532,962 shares)[343] Issuer Purchases of Equity Securities (3 Months Ended Sep 30, 2021) | Period | Total Shares Purchased | Average Price Paid per Share | |:---|:---|:---| | July 1 - July 31, 2021 | 13,568 | $13.63 | | August 1 - August 31, 2021 | 130,000 | $13.90 | | September 1 - September 30, 2021 | 37,200 | $13.77 | | Total | 180,768 | $13.85 | - As of September 30, 2021, 389,028 shares remained authorized for repurchase under the July 2021 program[344] Item 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable to the Company for the reporting period Item 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company for the reporting period Item 5. OTHER INFORMATION This item is not applicable to the Company for the reporting period Item 6. EXHIBITS Lists the exhibits filed with the Form 10-Q, including amendments and certifications - Exhibits include an Amendment to the Bylaws, a Business Note Renewal, Rule 13a-14(a) Certifications from the CEO and CFO, and Section 1350 Certifications[349] SIGNATURES SIGNATURES Contains the required signatures of the Company's authorized officers confirming the report's submission - The report is signed by Stephen M. Bianchi, Chief Executive Officer, and James S. Broucek, Chief Financial Officer, on November 8, 2021[353][354][355]