UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number: 001-36808

 

COUNTY BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Wisconsin

39-1850431

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

860 North Rapids Road

Manitowoc, WI

54221

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (920) 686-9998

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

o

  

Accelerated filer

 

o

 

 

 

 

Non-accelerated filer

 

o  (Do not check if a small reporting company)

  

Small reporting company

 

x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 14, 2015, the registrant had 5,733,919 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Consolidated Balance Sheets

1

 

Consolidated Statements of Operations

2

 

Consolidated Statements of Comprehensive Income

3

 

Consolidated Statements of Shareholders’ Equity

4

 

Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

32

Exhibit Index

33

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2015 and December 31, 2014

(Unaudited)

 

 

 

March 31,

2015

 

 

December 31,

2014

 

 

 

(dollars in thousands, except per share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,743

 

 

$

10,480

 

Securities available-for-sale, at fair value

 

 

81,165

 

 

 

81,282

 

FHLB Stock, at cost

 

 

1,470

 

 

 

1,252

 

Loans held for sale

 

 

9,376

 

 

 

4,114

 

Loans, net of allowance for loan losses of $10,269 in 2015; $10,603 in 2014

 

 

624,798

 

 

 

637,519

 

Premises and equipment, net

 

 

4,484

 

 

 

4,596

 

Loan servicing rights

 

 

7,807

 

 

 

7,746

 

Other real estate owned, net

 

 

5,128

 

 

 

7,137

 

Cash surrender value of bank owned life insurance

 

 

10,934

 

 

 

10,863

 

Deferred tax asset, net

 

 

1,938

 

 

 

2,321

 

Accrued interest receivable and other assets

 

 

4,566

 

 

 

4,446

 

Total assets

 

$

781,409

 

 

$

771,756

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

66,779

 

 

$

81,534

 

Interest-bearing

 

 

541,662

 

 

 

523,935

 

Total deposits

 

 

608,441

 

 

 

605,469

 

Other borrowings

 

 

5,646

 

 

 

23,857

 

Advances from FHLB

 

 

33,000

 

 

 

28,000

 

Subordinated debentures

 

 

12,372

 

 

 

12,372

 

Accrued interest payable and other liabilities

 

 

7,406

 

 

 

7,015

 

Total liabilities

 

 

666,865

 

 

 

676,713

 

 

 

 

 

 

 

 

 

 

Small Business Lending Fund redeemable preferred stock-variable rate,

   noncumulative, nonparticipating, $1,000 stated value; 15,000 shares authorized and

   issued, $15,000 redemption amount

 

$

15,000

 

 

$

15,000

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Preferred stock-variable rate, non-cumulative, nonparticipating,$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; 6,143,689 shares issued and

   5,733,919 shares outstanding at March 31, 2015 and 4,908,560 shares issued and

   4,498,790 shares outstanding at December 31, 2014

 

 

18

 

 

 

5

 

Surplus

 

 

33,988

 

 

 

16,970

 

Retained earnings

 

 

61,433

 

 

 

59,254

 

Treasury stock, at cost, 409,770 shares at March 31, 2015 and December 31, 2014

 

 

(4,572

)

 

 

(4,572

)

Accumulated other comprehensive income

 

 

677

 

 

 

386

 

Total shareholders' equity

 

 

99,544

 

 

 

80,043

 

Total liabilities and shareholders' equity

 

$

781,409

 

 

$

771,756

 

 

See accompanying notes to consolidated financial statements.

 

 

 

1


 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended March 31, 2015 and 2014

(Unaudited)

 

 

 

March 31,

2015

 

 

March 31,

2014

 

 

 

(dollars in thousands except per share data)

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,628

 

 

$

7,082

 

Taxable securities

 

 

229

 

 

 

228

 

Tax-exempt securities

 

 

106

 

 

 

126

 

Federal funds sold and other

 

 

18

 

 

 

26

 

Total interest and dividend income

 

 

7,981

 

 

 

7,462

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

1,478

 

 

 

1,558

 

Federal funds purchased and other borrowed funds

 

 

218

 

 

 

320

 

Subordinated debentures

 

 

120

 

 

 

120

 

Total interest expense

 

 

1,816

 

 

 

1,998

 

Net interest income

 

 

6,165

 

 

 

5,464

 

Provision for (recovery of) loan losses

 

 

(602

)

 

 

 

Net interest income after provision for loan losses

 

 

6,767

 

 

 

5,464

 

Non-interest income:

 

 

 

 

 

 

 

 

Services charges

 

 

220

 

 

 

95

 

Gain on sale of loans, net

 

 

93

 

 

 

88

 

Loan servicing fees

 

 

1,253

 

 

 

1,299

 

Other

 

 

309

 

 

 

328

 

Total non-interest income

 

 

1,875

 

 

 

1,810

 

Non-interest expense:

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

2,720

 

 

 

2,581

 

Occupancy

 

 

81

 

 

 

80

 

Write-down of other real estate owned

 

 

182

 

 

 

685

 

Other

 

 

1,635

 

 

 

1,235

 

Total non-interest expense

 

 

4,618

 

 

 

4,581

 

Income before income taxes

 

 

4,024

 

 

 

2,693

 

Income tax expense

 

 

1,498

 

 

 

1,003

 

NET INCOME

 

$

2,526

 

 

$

1,690

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

0.44

 

 

$

0.35

 

Diluted

 

$

0.43

 

 

$

0.34

 

 

See accompanying notes to consolidated financial statements.

 

 

 

2


 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three months ended March 31, 2015 and 2014

(Unaudited)

 

 

 

March 31,

2015

 

 

March 31,

2014

 

 

 

(dollars in thousands)

 

Net income

 

$

2,526

 

 

$

1,690

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gains on securities available for sale

 

 

479

 

 

 

323

 

Income tax expense

 

 

(188

)

 

 

(127

)

Total other comprehensive income

 

 

291

 

 

 

196

 

Comprehensive income

 

$

2,817

 

 

$

1,886

 

 

See accompanying notes to consolidated financial statements.

 

 

3


 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2015 and 2014

(Unaudited)

 

 

 

Preferred

Stock

 

 

Common

Stock

 

 

Surplus

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Shareholders'

Equity

 

 

 

(dollars in thousands)

 

Balance at December 31, 2013

 

$

8,000

 

 

$

5

 

 

$

16,004

 

 

$

(3,683

)

 

$

51,514

 

 

$

(31

)

 

$

71,809

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,690

 

 

 

 

 

 

1,690

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

196

 

 

 

196

 

Stock compensation expense, net of tax

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

(4

)

Purchase of treasury stock (10,000 shares)

 

 

 

 

 

 

 

 

 

 

 

(125

)

 

 

 

 

 

 

 

 

(125

)

Cash dividends declared on preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

Cash dividends declared on SBLF preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

 

 

 

(38

)

Proceeds from sale of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2014

 

$

8,000

 

 

$

5

 

 

$

16,000

 

 

$

(3,808

)

 

$

53,086

 

 

$

165

 

 

$

73,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

8,000

 

 

$

5

 

 

$

16,970

 

 

$

(4,572

)

 

$

59,254

 

 

$

386

 

 

$

80,043

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,526

 

 

 

 

 

 

2,526

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

291

 

 

 

291

 

Stock compensation expense, net of tax

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

53

 

Cash dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(229

)

 

 

 

 

 

(229

)

Cash dividends declared on preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

Cash dividends declared on SBLF preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

 

 

 

(38

)

Proceeds from sale of common stock (1,220,750 shares)

 

 

 

 

 

13

 

 

 

16,965

 

 

 

 

 

 

 

 

 

 

 

 

16,978

 

Balance at March 31, 2015

 

$

8,000

 

 

$

18

 

 

$

33,988

 

 

$

(4,572

)

 

$

61,433

 

 

$

677

 

 

$

99,544

 

 

See accompanying notes to consolidated financial statements.

 

 

 

4


 

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2015 and 2014

(Unaudited)

 

 

 

March 31,

2015

 

 

March 31,

2014

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

2,526

 

 

$

1,690

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of premises and equipment

 

 

151

 

 

 

147

 

Provision for (recovery of) loan losses

 

 

(602

)

 

 

 

Realized loss on sales of other real estate owned

 

 

373

 

 

 

 

Write-down of other real estate owned

 

 

182

 

 

 

685

 

Realized loss on sales of premises and equipment

 

 

4

 

 

 

 

Increase in cash surrender value of bank owned life insurance

 

 

(71

)

 

 

(67

)

Deferred income tax expense

 

 

194

 

 

 

 

Stock compensation expense, net

 

 

53

 

 

 

(4

)

Net amortization of securities

 

 

147

 

 

 

111

 

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

(120

)

 

 

314

 

Loans held for sale

 

 

(5,262

)

 

 

(374

)

Loan servicing rights

 

 

(61

)

 

 

(138

)

Accrued interest payable and other liabilities

 

 

391

 

 

 

(313

)

Net cash provided by (used in) operating activities

 

 

(2,095

)

 

 

2,051

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from maturities and call of securities available for sale

 

 

2,011

 

 

 

2,661

 

Purchases of securities available for sale

 

 

(1,561

)

 

 

(2,740

)

Purchases of FHLB stock

 

 

(218

)

 

 

 

Loan originations and principal collections, net

 

 

13,323

 

 

 

4,110

 

Proceeds from sales of premises and equipment

 

 

11

 

 

 

15

 

Purchases of premises and equipment

 

 

(54

)

 

 

(209

)

Capitalized additions to other real estate owned

 

 

(39

)

 

 

-

 

Proceeds from sales of other real estate owned

 

 

1,493

 

 

 

1,255

 

Net cash provided by investing activities

 

 

14,966

 

 

 

5,092

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in demand and savings deposits

 

 

(6,726

)

 

 

(3,335

)

Net (increase) decrease in certificates of deposits

 

 

9,698

 

 

 

(12,905

)

Net change in other borrowings

 

 

(18,211

)

 

 

(525

)

Proceeds from FHLB Advances

 

 

5,000

 

 

 

 

Repayment of FHLB Advances

 

 

 

 

 

(5,000

)

Payments to acquire treasury stock

 

 

 

 

 

(125

)

Proceeds from issuance of common stock

 

 

16,978

 

 

 

 

Dividends paid on common stock

 

 

(229

)

 

 

 

Dividends paid on preferred stock

 

 

(80

)

 

 

(80

)

Dividends paid on SBLF preferred stock

 

 

(38

)

 

 

(38

)

Net cash provided by (used in) financing activities

 

 

6,392

 

 

 

(22,008

)

Net change in cash and cash equivalents

 

 

19,263

 

 

 

(14,865

)

Cash and cash equivalents, beginning of period

 

 

10,480

 

 

 

71,780

 

Cash and cash equivalents, end of period

 

$

29,743

 

 

$

56,915

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

1,853

 

 

$

1,917

 

Income taxes

 

 

220

 

 

 

1,000

 

Noncash investing activities:

 

 

 

 

 

 

 

 

Transfer from loans to other real estate owned

 

$

 

 

$

 

Loans charged off

 

 

149

 

 

 

3

 

See accompanying notes to consolidated financial statements.

5


 

 

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. (the “Company”) and its subsidiaries have been prepared, in the opinion of management, to reflect all adjustments necessary for a fair presentiation of the financial position, results of operations, and cash flows for the interim period.  The results of operations for the three months ended March 31, 2015 may not necessarily be indicative of the results to be expected for the entire fiscal year.

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 (“U.S. GAAP”).  Certain information in footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2014.

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.

 

 

NOTE 2 – EARNINGS PER SHARE

Earnings per common share ("EPS") 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

 

 

 

March 31,

 

 

 

2015

 

 

2014*

 

Net income from continuing operations (for EPS purposes)

 

$

2,526

 

 

$

1,690

 

Less:  preferred stock dividends

 

 

118

 

 

 

118

 

Income available to common shareholders for basic EPS

 

$

2,408

 

 

$

1,572

 

 

 

 

 

 

 

 

 

 

Average number of common shares issued

 

 

6,193

 

 

 

5,249

 

Less: weighted average treasury shares

 

 

410

 

 

 

355

 

Less: weighted average nonvested equity incentive plan shares

 

 

348

 

 

 

425

 

Weighted average number of common shares outstanding

 

 

5,435

 

 

 

4,469

 

Effect of dilutive options

 

 

120

 

 

 

93

 

Weighted average number of common shares outstanding

   used to calculate diluted earnings per common share

 

 

5,555

 

 

 

4,562

 

 

*

10-for-1 Stock split adjusted

 

6


 

NOTE 3 – SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale as of March 31, 2015 and December 31, 2014 are as follows (dollars in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

2,005

 

 

$

6

 

 

$

-

 

 

$

2,011

 

Municipal securities

 

 

42,851

 

 

 

362

 

 

 

(22

)

 

 

43,191

 

Mortgage-backed securities

 

 

35,193

 

 

 

791

 

 

 

(21

)

 

 

35,963

 

 

 

$

80,049

 

 

$

1,159

 

 

$

(43

)

 

$

81,165

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

2,006

 

 

$

1

 

 

$

(2

)

 

$

2,005

 

Municipal securities

 

 

41,751

 

 

 

237

 

 

 

(139

)

 

 

41,849

 

Mortgage-backed securities

 

 

36,889

 

 

 

636

 

 

 

(97

)

 

 

37,428

 

 

 

$

80,646

 

 

$

874

 

 

$

(238

)

 

$

81,282

 

The amortized cost and fair value of securities at March 31, 2015 and December 31, 2014, by contractual maturity, are shown below (dollars in thousands).  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

 

March 31, 2015

 

 

 

 

 

 

 

 

Due in one year or less

 

$

3,749

 

 

$

3,761

 

Due from one to five years

 

 

40,736

 

 

 

41,071

 

Due from five to ten years

 

 

371

 

 

 

370

 

Due after ten years

 

 

 

 

 

 

Mortgage-backed securities

 

 

35,193

 

 

 

35,963

 

 

 

$

80,049

 

 

$

81,165

 

December 31, 2014

 

 

 

 

 

 

 

 

Due in one year or less

 

$

2,007

 

 

$

2,011

 

Due from one to five years

 

 

41,750

 

 

 

41,843

 

Due from five to ten years

 

 

 

 

 

 

Due after ten years

 

 

 

 

 

 

Mortgage-backed securities

 

 

36,889

 

 

 

37,428

 

 

 

$

80,646

 

 

$

81,282

 

There were no sales for realized gains or losses for the three months ended March 31, 2015 and 2014, 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-temorarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Municipal securities

 

 

5,122

 

 

 

(21

)

 

 

453

 

 

 

(1

)

 

 

5,575

 

 

 

(22

)

Mortgage-backed securities

 

 

1,567

 

 

 

(5

)

 

 

2,366

 

 

 

(16

)

 

 

3,933

 

 

 

(21

)

 

 

$

6,689

 

 

$

(26

)

 

$

2,819

 

 

$

(17

)

 

$

9,508

 

 

$

(43

)

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

997

 

 

$

(2

)

 

$

 

 

$

 

 

$

997

 

 

$

(2

)

Municipal securities

 

 

16,724

 

 

 

(100

)

 

 

3,736

 

 

 

(39

)

 

 

20,460

 

 

 

(139

)

Mortgage-backed securities

 

 

6,698

 

 

 

(33

)

 

 

5,651

 

 

 

(64

)

 

 

12,349

 

 

 

(97

)

 

 

$

24,419

 

 

$

(135

)

 

$

9,387

 

 

$

(103

)

 

$

33,806

 

 

$

(238

)

7


 

The unrealized loss on the investments at March 31, 2015 and December 31, 2014 is 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 does not consider these investments to be other-than-temporarily impaired at March 31, 2015 and December 31, 2014.

 

 

NOTE 4 – LOANS

The components of loans were as follows (dollars in thousands):  

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Agricultural loans

 

$

408,217

 

 

$

415,164

 

Commercial real estate loans

 

 

137,227

 

 

 

137,517

 

Commercial loans

 

 

49,416

 

 

 

53,745

 

Residential real estate loans

 

 

39,895

 

 

 

40,885

 

Installment and consumer other

 

 

312

 

 

 

811

 

  Total gross loans

 

 

635,067

 

 

 

648,122

 

Allowance for loan losses

 

 

(10,269

)

 

 

(10,603

)

    Loans, net

 

$

624,798

 

 

$

637,519

 

 

Changes in the allowance for loan losses by segment at March 31, 2015 and 2014 were as follows (dollars in thousands) :

 

 

 

March 31,

 

 

March 31,

 

 

 

2015

 

 

2014

 

Balance, beginning of year

 

$

10,603

 

 

$

10,495

 

Recovery for loan losses

 

 

(602

)

 

 

-

 

Loans charged off

 

 

(149

)

 

 

(3

)

Recoveries

 

 

417

 

 

 

32

 

Balance, end of period

 

$

10,269

 

 

$

10,524

 

 

8


 

The following table presents the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2015 and December 31, 2014 (dollars in thousands) :

 

 

 

March 31, 2015

 

 

 

Individually

Evaluated for

Impairment

 

 

Collectively

Evaluated for

Impairment

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

198

 

 

$

3,494

 

 

$

3,692

 

Commercial real estate loans

 

 

338

 

 

 

2,548

 

 

 

2,886

 

Commercial loans

 

 

1,746

 

 

 

575

 

 

 

2,321

 

Residential real estate loans

 

 

227

 

 

 

1,140

 

 

 

1,367

 

Installment and consumer other

 

 

-

 

 

 

3

 

 

 

3

 

Total ending allowance for loan losses

 

 

2,509

 

 

 

7,760

 

 

 

10,269

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

 

10,270

 

 

 

397,947

 

 

 

408,217

 

Commercial real estate loans

 

 

4,043

 

 

 

133,184

 

 

 

137,227

 

Commercial loans

 

 

8,834

 

 

 

40,582

 

 

 

49,416

 

Residential real estate loans

 

 

1,781

 

 

 

38,114

 

 

 

39,895

 

Installment and consumer other

 

 

 

 

 

312

 

 

 

312

 

Total loans

 

 

24,928

 

 

 

610,139

 

 

 

635,067

 

Net loans

 

$

22,419

 

 

$

602,379

 

 

$

624,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Individually

Evaluated for

Impairment

 

 

Collectively

Evaluated for

Impairment

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

242

 

 

$

3,214

 

 

$

3,456

 

Commercial real estate loans

 

 

519

 

 

 

2,807

 

 

 

3,326

 

Commercial loans

 

 

1,848

 

 

 

572

 

 

 

2,420

 

Residential real estate loans

 

 

285

 

 

 

1,107

 

 

 

1,392

 

Installment and consumer other

 

 

 

 

 

9

 

 

 

9

 

Total ending allowance for loan losses

 

 

2,894

 

 

 

7,709

 

 

 

10,603

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

 

10,897

 

 

 

404,267

 

 

 

415,164

 

Commercial real estate loans

 

 

3,041

 

 

 

134,476

 

 

 

137,517

 

Commercial loans

 

 

8,910

 

 

 

44,835

 

 

 

53,745

 

Residential real estate loans

 

 

1,996

 

 

 

38,889

 

 

 

40,885

 

Installment and consumer other

 

 

 

 

 

811

 

 

 

811

 

Total loans

 

 

24,844

 

 

 

623,278

 

 

 

648,122

 

Net loans

 

$

21,950

 

 

$

615,569

 

 

$

637,519

 

9


 

The following table presents the aging of the recorded investment in past due loans at March 31, 2015 and December 31, 2014:

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90+ Days

Past Due

 

 

Total

Past Due

 

 

Loans Not

Past Due

 

 

Total

Loans

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

2,743

 

 

$

-

 

 

$

392

 

 

$

3,135

 

 

$

405,082

 

 

$

408,217

 

Commercial real estate loans

 

 

-

 

 

 

-

 

 

 

2,418

 

 

 

2,418

 

 

 

134,809

 

 

 

137,227

 

Commercial loans

 

 

132

 

 

 

-

 

 

 

3,140

 

 

 

3,272

 

 

 

46,144

 

 

 

49,416

 

Residential real estate loans

 

 

50

 

 

 

-

 

 

 

352

 

 

 

402

 

 

 

39,493

 

 

 

39,895

 

Installment and consumer other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

312

 

 

 

312

 

Total

 

$

2,925

 

 

$

-

 

 

$

6,302

 

 

$

9,227

 

 

$

625,840

 

 

$

635,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural loans

 

$

355

 

 

$

9

 

 

$

238

 

 

$

602

 

 

$

414,562

 

 

$

415,164

 

Commercial real estate loans

 

 

-

 

 

 

-

 

 

 

2,592

 

 

 

2,592

 

 

 

134,925

 

 

 

137,517

 

Commercial loans

 

 

-

 

 

 

42

 

 

 

3,366

 

 

 

3,408

 

 

 

50,337

 

 

 

53,745

 

Residential real estate loans

 

 

6

 

 

 

-

 

 

 

534

 

 

 

540

 

 

 

40,345

 

 

 

40,885

 

Installment and consumer other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

811

 

 

 

811

 

Total

 

$

361

 

 

$

51

 

 

$

6,730

 

 

$

7,142

 

 

$

640,980

 

 

$

648,122

 

 

The following table lists information on nonaccrual, restructured, and certain past due loans:

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Nonaccrual loans, 90 days or more past due

 

$

6,302

 

 

$

6,730

 

Nonaccrual loans 30-89 days past due

 

 

132

 

 

 

200

 

Nonaccrual loans, less than 30 days past due

 

 

6,400

 

 

 

4,625

 

Restructured loans not on nonaccrual status

 

 

826

 

 

 

846

 

90 days or more past due and still accruing

 

 

-

 

 

 

-

 

 

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days at March 31, 2015 and December 31, 2014 (in thousands):

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Agricultural loans

 

$

1,058

 

 

$

1,293

 

Commercial real estate loans

 

 

5,992

 

 

 

5,163

 

Commercial loans

 

 

4,278

 

 

 

3,409

 

Residential real estate loans

 

 

1,506

 

 

 

1,690

 

  Total

 

$

12,834

 

 

$

11,555

 

 

 

 

Troubled Debt Restructurings

The Company has allocated approximately $326,000 and $538,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDR”) at March 31, 2015 and December 31, 2014, respectively.  The Company has no additional lending commitments at March 31, 2015 and December 31, 2014 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 of performance according to the modified terms of the loan.  Once this assurance is reached, the TDR is classified as a restructured loan;  At March 31, 2015, there were $4,509,000 TDR loans, of which $3,683,000 were classified as nonaccrual and $826,000 were classified as restructured and accruing.  There were no unfunded commitments on these loans.  At December 31, 2014, there were $4,573,000 TDR loans, of which $3,727,000 were classified as nonaccrual and $846,000 were classified as restructured and accruing, and there were no unfunded commitments on these loans.

10


 

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.

Low Satisfactory.  Credits classified as low satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.  Low satisfactory credits may be newer to the bank or have less of an 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.

Special Mention. 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. Credits classified as substandard 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.

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 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. If the loan is impaired then the loan loss reserves for the loan is 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.

11


 

Based on the most recent analysis performed by management, the risk category of loans by class of loans is as follows as of March 31, 2015 and December 31, 2014 (dollars in thousands):

 

 

 

As of March 31, 2015

 

 

 

Sound/

Acceptable/

Satisfactory/

Low Satisfactory

 

 

Watch

 

 

Special

Mention

 

 

Substandard

 

 

Total

Loans

 

Agricultural loans

 

$

347,736

 

 

$

43,108

 

 

$

7,103

 

 

$

10,270

 

 

$

408,217

 

Commercial real estate loans

 

 

117,270

 

 

 

9,655

 

 

 

6,259

 

 

 

4,043

 

 

 

137,227

 

Commercial loans

 

 

35,761

 

 

 

3,752

 

 

 

1,069

 

 

 

8,834

 

 

 

49,416

 

Residential real estate loans

 

 

30,126

 

 

 

4,540

 

 

 

3,448

 

 

 

1,781

 

 

 

39,895

 

Installment and consumer other

 

 

312

 

 

 

 

 

 

 

 

 

 

 

 

312

 

Total

 

$

531,205

 

 

$

61,055

 

 

$

17,879

 

 

$

24,928

 

 

$

635,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

 

 

Sound/

Acceptable/

Satisfactory/

Low Satisfactory

 

 

Watch

 

 

Special

Mention

 

 

Substandard

 

 

Total

Loans

 

Agricultural loans

 

$

342,598

 

 

$

59,078

 

 

$

2,591

 

 

$

10,897

 

 

$

415,164

 

Commercial real estate loans

 

 

104,609

 

 

 

23,540

 

 

 

6,327

 

 

 

3,041

 

 

 

137,517

 

Commercial loans

 

 

36,205

 

 

 

7,568

 

 

 

1,062

 

 

 

8,910

 

 

 

53,745

 

Residential real estate loans

 

 

29,738

 

 

 

6,288

 

 

 

2,863

 

 

 

1,996

 

 

 

40,885

 

Installment and consumer other

 

 

811

 

 

 

 

 

 

 

 

 

 

 

 

811

 

Total

 

$

513,961

 

 

$

96,474

 

 

$

12,843

 

 

$

24,844

 

 

$

648,122

 

 

NOTE 5 – 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 mortgage and other loans serviced for others were approximately $437.1 million and $429.3 million at March 31, 2015 and December 31, 2014, respectively.  The fair value of these rights were approximately $11.3 million and $10.0 million, respectively.  The fair value of servicing rights was determined using an assumed discount rate of 10 percent and prepayment speeds primarily ranging from 4 percent to 9 percent, depending upon the stratification of the specific right, and nominal credit losses.

The following summarizes servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Loan servicing rights:

 

 

 

 

 

 

 

 

  Balance, beginning of period

 

$

7,746

 

 

$

7,529

 

    Additions

 

 

778

 

 

 

3,414

 

    Disposals

 

 

(232

)

 

 

(1,243

)

    Amortization

 

 

(485

)

 

 

(1,954

)

  Balance, end of period

 

$

7,807

 

 

$

7,746

 

 

NOTE 6 – DEPOSITS

Deposits are summarized as follows at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Demand deposits

 

$

66,779

 

 

$

81,534

 

Savings

 

 

148,325

 

 

 

140,296

 

Certificates of deposit

 

 

393,337

 

 

 

383,639

 

Total deposits

 

$

608,441

 

 

$

605,469

 

At March 31, 2015 and December 31, 2014, brokered deposits amounted to $145.1 million and $125.4 million, respectively, and are included in savings and certificates of deposit categories.

12


 

 

 

NOTE 7 – EQUITY INCENTIVE PLAN

Under the Company’s 2012 Equity Incentive Compensation Plan (the “Plan”), the Company may grant options and issue restricted stock to its directors, officers and employees for shares of common stock. Both qualified and non-qualified stock options and restricted stock may be granted and issued, respectively, 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 has a cliff vesting period of five years from the date of issuance.

The status of the Company’s Plan and changes in the Plan as of March 31, 2015 are as follows (aggregate intrinsic value in thousands):

 

 

 

March 31, 2015

 

 

 

Number

of

Options

 

 

Weighted-Average

Exercise Price

 

 

Aggregate

Intrinsic

Value (1)

 

Outstanding, beginning of year

 

 

336,051

 

 

$

11.57

 

 

 

 

 

Granted

 

 

69,167

 

 

 

19.28

 

 

 

 

 

Exercised

 

 

(10,000

)

 

 

6.90

 

 

 

 

 

Forfeited/expired

 

 

 

 

 

 

 

 

 

 

Outstanding, end of period

 

 

395,218

 

 

$

12.89

 

 

$

2,684

 

Options exercisable at period-end

 

 

220,400

 

 

$

11.23

 

 

$

1,863

 

Weighted-average fair value of options granted during

   the period (2)

 

 

 

 

 

$

5.05

 

 

 

 

 

 

 

(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 March 31, 2015 and December 31, 2014. 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 (“RSA”) as of March 31, 2015 are as follows:

 

 

 

March 31, 2015

 

 

 

RSAs

 

 

Weighted

Average Grant

Price

 

Outstanding, beginning of year

 

 

34,080

 

 

$

12.88

 

Granted

 

 

14,379

 

 

 

19.71

 

Vested

 

 

 

 

 

 

Forfeited/expired

 

 

 

 

 

 

Outstanding, end of period

 

 

48,459

 

 

$

14.90

 

For the three months ended March 31, 2015 and 2014, share-based compensation expense, including options and restricted stock awards, applicable to the Plan was $53,000 and $(4,000), respectively.

As of March 31, 2015, unrecognized share-based compensation expense related to nonvested options amounted to $818,000 and is expected to be recognized over a weighted average period of 2.49 years.

 

 

NOTE 8 – 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. 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, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet

13


 

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.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2015 and December 31, 2014, that the Company and Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2015, the most recent notification from the banking regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are 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 (dollars in thousands):

 

 

 

Actual

 

 

Minimum For

Capital Adequacy

Purposes:

 

 

Minimum To Be Well

Capitalized Under

Prompt Corrective

Action Provisions:

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

135,057

 

 

 

19.15

%

 

$

56,429

 

 

 

8.00

%

 

Not applicable

 

 

 

 

 

Bank

 

 

115,511

 

 

 

16.38

%

 

 

56,416

 

 

 

8.00

%

 

$

70,520

 

 

 

10.00

%

Tier 1 Capital (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

126,240

 

 

 

17.90

%

 

 

42,322

 

 

 

6.00

%

 

Not applicable

 

 

 

 

 

Bank

 

 

106,673

 

 

 

15.13

%

 

 

42,312

 

 

 

6.00

%

 

 

56,416

 

 

 

8.00

%

Tier 1 Capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

126,240

 

 

 

16.14

%

 

 

31,286

 

 

 

4.00

%

 

Not applicable

 

 

 

 

 

Bank

 

 

106,673

 

 

 

13.65

%

 

 

31,265

 

 

 

4.00

%

 

 

39,081

 

 

 

5.00

%

Tier 1 Common Equity Ratio (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

90,868

 

 

 

12.88

%

 

 

31,741

 

 

 

4.50

%

 

Not applicable

 

 

 

 

 

Bank

 

 

106,673

 

 

 

15.13

%

 

 

31,734

 

 

 

4.50

%

 

 

45,838

 

 

 

6.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

115,471

 

 

 

17.16

%

 

$

53,819

 

 

 

8.00

%

 

Not applicable

 

 

 

 

 

Bank

 

 

112,725

 

 

 

16.77

%

 

 

53,778

 

 

 

8.00

%

 

$

67,223

 

 

 

10.00

%

Tier 1 Capital (to risk weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

107,029

 

 

 

15.91

%

 

 

26,909

 

 

 

4.00

%

 

Not applicable

 

 

 

 

 

Bank

 

 

104,289

 

 

 

15.51

%

 

 

26,889

 

 

 

4.00

%

 

 

40,334

 

 

 

6.00

%

Tier 1 Capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

107,029

 

 

 

14.32

%

 

 

29,901

 

 

 

4.00

%

 

Not applicable

 

 

 

 

 

Bank

 

 

104,289

 

 

 

13.96

%

 

 

29,880

 

 

 

4.00

%

 

 

37,351

 

 

 

5.00

%

The Basel III Capital Rules, which became effective January 1, 2015, revised th prompt corrective action requirements by: (i) introducing a Common Equity Tier 1 ratio requirement at each level (other than critically undercapitalized), with the required Common Equity Tier 1 ratio being 6.5% for “well-capitalized” status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for “well-capitalized” status being 8% (compared to the prior ratio of 6%); and (iii) eliminating the former provision that provided that a bank with a composite supervisory rating of 1 may have a 3% Leverage Ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk based capital requirement for any prompt corrective action category.

 

NOTE 9 – 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

14


 

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 shall not be 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:

Cash and Cash Equivalents and Interest-Bearing Deposits in Banks

The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

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.

15


 

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 with no significant change in credit risk, fair values are based on carrying values. 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, where applicable.

Loans Held 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. 

Loan Servicing Rights

Fair value is based on market prices for comparable loan servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

Other Real Estate Owned

Loans on which the underlying collateral has been repossessed are adjusted to fair value upon transfer to other real estate owned. 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. Due to the significance of the unobservable inputs, all other real estate owned are 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.

Other Borrowings

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.

Advances from 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.

Subordinated Debentures

The carrying amounts approximate fair value.

Accrued Interest

The carrying amounts approximate fair value.

16


 

Commitments to Extend Credit and Standby Letters of Credit

As of March 31, 2015 and December 31, 2014, the carrying and fair values of the commitment to extend credit and standby letters of credit are not considered significant.

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total

Fair

Value

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

 

 

$

2,011

 

 

$

 

 

$

2,011

 

Municipal securities

 

 

 

 

 

43,191

 

 

 

 

 

 

43,191

 

Mortgage-backed securities

 

 

 

 

 

35,963

 

 

 

 

 

 

35,963

 

Total assets at fair value

 

$

 

 

$

81,165

 

 

$

 

 

$

81,165

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

 

 

$

2,005

 

 

$

 

 

$

2,005

 

Municipal securities

 

 

 

 

 

41,849

 

 

 

 

 

 

41,849

 

Mortgage-backed securities

 

 

 

 

 

37,428

 

 

 

 

 

 

37,428

 

Total assets at fair value

 

$

 

 

$

81,282

 

 

$

 

 

$

81,282

 

 

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 (dollars in thousands):

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Impairment

Losses

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

22,419

 

 

$

2,509

 

Other real estate owned

 

 

 

 

 

 

 

 

5,128

 

 

 

182

 

Total assets at fair value

 

$

 

 

$

 

 

$

27,547

 

 

$

2,691

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

21,950

 

 

$

2,894

 

Other real estate owned

 

 

 

 

 

 

 

 

7,137

 

 

 

1,190

 

Total assets at fair value

 

$

 

 

$

 

 

$

29,087

 

 

$

4,084

 

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis are as follows:

 

March 31, 2015

 

 

Valuation

Techniques

 

Unobservable

Inputs

 

Range

(Average)

Impaired loans

 

Evaluation of collateral

 

Estimation of value

 

NM*

Other real estate owned

 

Appraisal

 

Appraisal adjustment

 

3%-28% (10%)

 

 

 

 

 

 

 

December 31, 2014

 

 

Valuation

Techniques

 

Unobservable

Inputs

 

Range

(Average)

Impaired loans

 

Evaluation of collateral

 

Estimation of value

 

NM*

Other real estate owned

 

Appraisal

 

Appraisal adjustment

 

3%-28% (9%)

 

 

 *

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 receivables, 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

17


 

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 are as follows (dollars in thousands):

 

 

 

March 31,

2015

 

 

December 31,

2014

 

 

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Input

Level

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,743

 

 

$

29,743

 

 

$

10,480

 

 

$

10,480

 

 

1

FHLB Stock

 

 

1,470

 

 

 

1,470

 

 

 

1,252

 

 

 

1,252

 

 

2

Securities available for sale

 

 

81,165

 

 

 

81,165

 

 

 

81,282

 

 

 

81,282

 

 

2

Loans, net of allowance for loan losses

 

 

624,798

 

 

 

635,448

 

 

 

637,519

 

 

 

647,973

 

 

3

Loans held for sale

 

 

9,376

 

 

 

9,376

 

 

 

4,114

 

 

 

4,114

 

 

3

Accrued interest receivable

 

 

2,386

 

 

 

2,386

 

 

 

2,219

 

 

 

2,219

 

 

2

Loan servicing rights

 

 

7,807

 

 

 

11,331

 

 

 

7,746

 

 

 

10,043

 

 

3

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time

 

 

393,337

 

 

 

398,238

 

 

 

383,639

 

 

 

388,141

 

 

3

Other deposits

 

 

215,104

 

 

 

215,104

 

 

 

221,830

 

 

 

221,830

 

 

1

Other borrowings

 

 

5,646

 

 

 

5,646

 

 

 

23,857

 

 

 

23,857

 

 

3

Advances from FHLB

 

 

33,000

 

 

 

33,580

 

 

 

28,000

 

 

 

28,510

 

 

3

Subordinated debentures

 

 

12,372

 

 

 

12,372

 

 

 

12,372

 

 

 

12,372

 

 

3

Accrued interest payable

 

 

1,246

 

 

 

1,246

 

 

 

1,284

 

 

 

1,284

 

 

2

 

 

NOTE 10 – OTHER REAL ESTATE OWNED

Changes in other real estate owned are as follows (dollars in thousands):

 

 

 

March 31,

2015

 

 

March 31,

2014

 

Balance, beginning of year

 

$

7,137

 

 

$

16,083

 

Assets foreclosed

 

 

 

 

 

 

Write-down of other real estate owned

 

 

(182

)

 

 

(685

)

Net loss on sales of other real estate owned

 

 

(373

)

 

 

 

Capitalized additions to other real estate owned

 

 

39

 

 

 

 

Proceeds from sale of other real estate owned

 

 

(1,493

)

 

 

(1,255

)

Balance, end of period

 

$

5,128

 

 

$

14,143

 

 

Expenses applicable to other real estate owned include the following (dollars in thousands):

 

 

 

March 31,

2015

 

 

March 31,

2014

 

Net loss (gain) on sales of other real estate owned

 

$

373

 

 

$

-

 

Write-down of other real estate owned

 

 

182

 

 

 

685

 

Operating expenses, net of rental income

 

 

(31

)

 

 

50

 

 

 

$

524

 

 

$

735

 

 

 

 

 

 

 

 

18


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections titled “Forward-Looking Statements” and “Risk Factors” and other sections of the Company’s December 31, 2014 Annual Report on Form 10-K.  Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

Overview

County Bancorp, Inc. (“we,” “us,” “our” or the “Company”) is a Wisconsin corporation founded in May 1996 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Our primary activities consist of holding the stock of our wholly-owned subsidiary bank, Investors Community Bank (the “Bank”) headquartered in Manitowoc, WI, and providing a wide range of banking and related business activities through the Bank and our other subsidiaries.

In addition to the Bank, we have two wholly-owned subsidiaries, County Bancorp Statutory Trust II and County Bancorp Statutory Trust III, which are Delaware statutory trusts.  The Bank is the sole shareholder of ICB Investments Corp, a wholly-owned Nevada subsidiary, and is the sole member of Investor Insurance Services, LLC and ABS 1, LLC, which are both Wisconsin limited liability companies.  

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans, and the interest we pay on interest-bearing liabilities, such as deposits. We generate most of our revenue from interest on loans and investments and loan- and deposit-related fees. Our loan portfolio consists of a mix of agricultural, commercial real estate, commercial and industrial, multi-family and construction, residential real estate and consumer loans. Our primary source of funding is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance through various metrics, including our pre-tax net income, net interest margin, efficiency ratio, return on average assets and return on average common shareholders’ equity, earnings per share, and non-performing assets to total assets. We must also maintain appropriate regulatory leverage and risk-based capital ratios.

On January 22, 2015, we closed our initial public offering (“IPO”), in which we offered 1,357,000 shares of common stock for gross proceeds of $21.4 million.  Of the 1,375,000 shares sold, 1,210,750 shares were sold by the Company and 146,250 shares were sold by certain selling shareholders.  The Company did not receive any proceeds from the sale of shares by the selling shareholders.  The offer and sale of all shares of the IPO were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to a registration statement on Form S-1 (File No. 333-200081), which was declared effective by the SEC on January 13, 2015.

The net proceeds from our IPO were  $16.9 million after deducting underwriting discounts and commissions of  $1.2 million and other offering expenses of  $921 thousand for total expenses of  $2.1 million.

Operational Highlights

·

Total assets were $781.4 million at March 31, 2015 compared to $771.8 million at December 31, 2014; an increase of 1.3%.

·

Net income was up $0.8 million from $1.7 million for the quarter ended March 31, 2014, to $2.5 million for the quarter ended March 31, 2015.

·

Other real estate owned decreased $2.0 million, or 28.1%, from December 31, 2014 to March 31, 2015.

·

On February 17, 2015, declared our first quarterly dividend of $.04 per common share which was paid on March 13, 2015.

·

A negative provision for loan losses of $602 thousand was recorded for the three months ended March 31, 2015 compared to $0 for the three months ended March 31, 2014.

·

The allowance for loan losses as a percentage of gross loans was 1.62% at March 31, 2015 compared to 1.64% at December 31, 2014.

·

Non-performing assets as a percentage of total assets was 2.30% at March 31, 2015 compared to 2.42% at December 31, 2014.

19


 

Selected Quarterly Financial Data

 

 

 

Three months ended

(unaudited)

 

 

Year ended

 

 

 

March 31,

2015

 

 

March 31,

2014

 

 

December 31,

2014

 

Selected Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

7,981

 

 

$

7,462

 

 

$

30,897

 

Interest expense

 

 

1,816

 

 

 

1,998

 

 

 

7,537

 

Net interest income

 

 

6,165

 

 

 

5,464

 

 

 

23,360

 

Provision for (recovery of ) loan losses

 

 

(602

)

 

 

 

 

 

589

 

Net interest income after provision for (recovery of) loan losses

 

 

6,767

 

 

 

5,464

 

 

 

22,771

 

Non-interest income

 

 

1,875

 

 

 

1,810

 

 

 

7,148

 

Non-interest expense

 

 

4,618

 

 

 

4,581

 

 

 

17,025

 

Income tax expense

 

 

1,498

 

 

 

1,003

 

 

 

4,684

 

Net income

 

$

2,526

 

 

$

1,690

 

 

$

8,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.44

 

 

$

0.35

 

 

$

1.73

 

Diluted

 

$

0.43

 

 

$

0.34

 

 

$

1.69

 

Cash dividends per common share

 

$

0.04

 

 

$

 

 

$

 

Weighted average common shares - basic

 

 

5,435,428

 

 

 

4,469,123

 

 

 

4,469,450

 

Weighted average common shares - diluted

 

 

5,555,521

 

 

 

4,561,678

 

 

 

4,580,917

 

Common shares outstanding, end of period *

 

 

5,733,919

 

 

 

4,463,790

 

 

 

4,498,790

 

* March 31, 2014 split-adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

781,409

 

 

$

737,569

 

 

$

771,756

 

Securities

 

 

81,165

 

 

 

73,298

 

 

 

81,282

 

Total loans

 

 

635,067

 

 

 

565,057

 

 

 

648,122

 

Allowance for loan losses

 

 

(10,269

)

 

 

(10,524

)

 

 

(10,603

)

Total deposits

 

 

608,441

 

 

 

600,068

 

 

 

605,469

 

Other borrowings

 

 

38,646

 

 

 

30,644

 

 

 

51,857

 

Subordinated debentures

 

 

12,372

 

 

 

12,372

 

 

 

12,372

 

Total shareholders' equity

 

 

99,544

 

 

 

73,448

 

 

 

80,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

1.29

%

 

 

0.91

%

 

 

1.10

%

Return on average common shareholders' equity (1)

 

 

11.09

%

 

 

9.70

%

 

 

11.37

%

Net interest margin

 

 

3.33

%

 

 

3.15

%

 

 

3.29

%

Interest rate spread

 

 

3.05

%

 

 

2.91

%

 

 

3.07

%

Non-interest income to average assets

 

 

0.96

%

 

 

0.98

%

 

 

0.96

%

Non-interest expense to average assets

 

 

2.36

%

 

 

2.47

%

 

 

2.28

%

Net overhead ratio (3)

 

 

1.40

%

 

 

1.49

%

 

 

1.32

%

Efficiency ratio (1)

 

 

50.53

%

 

 

53.56

%

 

 

50.99

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

2.02

%

 

 

2.25

%

 

 

1.78

%

Allowance for loan losses to:

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans

 

 

1.62

%

 

 

1.86

%

 

 

1.64

%

Nonperforming loans

 

 

80.01

%

 

 

82.72

%

 

 

91.76

%

Net charge-offs to average loans

 

 

(0.04

)%

 

 

0.00

%

 

 

0.08

%

Nonperforming assets to total assets (2)

 

 

2.30

%

 

 

3.64

%

 

 

2.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' common equity to assets

 

 

11.72

%

 

 

8.87

%

 

 

9.33

%

Tier 1 risk-based capital (Bank)

 

 

15.13

%

 

 

16.71

%

 

 

15.51

%

Total risk-based capital (Bank)

 

 

16.38

%

 

 

17.97

%

 

 

16.77

%

Leverage ratio (Bank)

 

 

13.65

%

 

 

13.25

%

 

 

13.96

%

20


 

(1)

The return on average common shareholders’ equity and the efficiency ratio are not recognized under generally accepted accounting principles of the United States, or U.S. GAAP, and is therefore considered to be non-GAAP financial measures.  See below for reconciliations of the return on average common shareholders’ equity and the efficiency ratio to its most comparable U.S. GAAP measure.

(2)

Non-performing assets consist of nonaccrual loans and other real estate owned.

(3)

Net overhead ratio represents the difference between noninterest expense and noninterest income, divided by average assets.

 

Non-GAAP Financial Measures:

“Efficiency ratio” is defined as non-interest expenses, excluding gains and losses, and write-down of other real estate owned, divided by operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities.  In our judgment, the adjustments made to non-interest expense allow investors to better asses our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.

 

 

 

Three months ended

 

 

Year ended

 

 

 

March 31,

2015

 

 

March 31,

2014

 

 

December 31,

2014

 

Efficiency Ratio GAAP to Non-GAAP reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

$

4,618

 

 

$

4,581

 

 

$

17,025

 

Less: net loss on sales and write-downs of OREO

 

 

(555

)

 

 

(685

)

 

 

(1,468

)

Adjusted non-interest expense (non-GAAP)

 

$

4,063

 

 

$

3,896

 

 

$

15,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

6,165

 

 

$

5,464

 

 

$

23,360

 

Non-interest income

 

 

1,875

 

 

 

1,810

 

 

 

7,148

 

Operating revenue

 

$

8,040

 

 

$

7,274

 

 

$

30,508

 

Efficiency ratio

 

 

50.53

%

 

 

53.56

%

 

 

50.99

%

 

Return on average common shareholders’ equity is a non-GAAP based financial measure calculated using non-GAAP based amounts.  The most directly comparable U.S. GAAP based measure is return on average shareholders’ equity.  We calculate return on average common shareholders’ equity by excluding the average preferred shareholders’ equity and the related dividends.  Management uses the return on average common shareholders’ equity in order to review our core operating results.  Management believes that this is a better measure of our performance.

 

Return on Average Common Shareholders' Equity GAAP

   to Non-GAAP reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

Return on average common shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Return on average shareholders' equity

 

 

9.19

%

 

 

7.69

%

 

 

9.02

%

Effect of excluding average preferred shareholders' equity

 

 

1.89

%

 

 

2.01

%

 

 

2.35

%

Return on average common shareholders' equity

 

 

11.08

%

 

 

9.70

%

 

 

11.37

%

Results of Operations

Operating revenue is comprised of interest income and non-interest income.  Net interest income increased by 12.8% to $6.2 million for the three months ended March 31, 2015 from March 31, 2014 while non-interest income increased 3.6% to $1.9 million over the same period.

21


 

Analysis of Net Interest Income

Net interest income is the largest component of our income, and is dependent on the amounts and yields on interest-earning assets as compared to the amounts of and rates paid on interest bearing liabilities.  The following table reflects the components of net interest income for the three months ended March 31, 2015 and 2014 (dollars in thousands):

 

 

 

Three months ended

 

 

 

March 31, 2015

 

 

March 31, 2014

 

 

 

Average

Balance (1)

 

 

Income/

Expense

 

 

Yields/

Rates

 

 

Average

Balance (1)

 

 

Income/

Expense

 

 

Yields/

Rates

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

80,682

 

 

$

335

 

 

 

1.66

%

 

$

72,422

 

 

$

354

 

 

 

1.96

%

Loans (2)

 

 

645,089

 

 

 

7,628

 

 

 

4.73

%

 

 

581,185

 

 

 

7,082

 

 

 

4.87

%

Interest bearing deposits due from other banks

 

 

25,594

 

 

 

18

 

 

 

0.28

%

 

 

49,395

 

 

 

26

 

 

 

0.21

%

Total interest-earning assets

 

$

751,365

 

 

$

7,981

 

 

 

4.25

%

 

$

703,002

 

 

$

7,462

 

 

 

4.25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(10,571

)

 

 

 

 

 

 

 

 

 

 

(10,573

)

 

 

 

 

 

 

 

 

Other assets

 

 

42,872

 

 

 

 

 

 

 

 

 

 

 

49,868

 

 

 

 

 

 

 

 

 

Total assets

 

$

783,666

 

 

 

 

 

 

 

 

 

 

$

742,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, money market, interest checking

 

 

149,379

 

 

 

174

 

 

 

0.47

%

 

 

121,845

 

 

 

145

 

 

 

0.48

%

Time deposits

 

 

397,477

 

 

 

1,304

 

 

 

1.31

%

 

 

427,192

 

 

 

1,413

 

 

 

1.32

%

Total interest-bearing deposits

 

$

546,856

 

 

$

1,478

 

 

 

1.08

%

 

$

549,037

 

 

$

1,558

 

 

 

1.14

%

Other borrowings

 

 

12,900

 

 

 

95

 

 

 

2.95

%

 

 

13,894

 

 

 

226

 

 

 

6.51

%

FHLB advances

 

 

32,556

 

 

 

123

 

 

 

1.51

%

 

 

21,222

 

 

 

94

 

 

 

1.77

%

Junior subordinated debentures

 

 

12,372

 

 

 

120

 

 

 

3.88

%

 

 

12,372

 

 

 

120

 

 

 

3.88

%

Total interest-bearing liabilities

 

$

604,684

 

 

$

1,816

 

 

 

1.20

%

 

$

596,525

 

 

$

1,998

 

 

 

1.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

 

60,987

 

 

 

 

 

 

 

 

 

 

 

51,151

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

8,030

 

 

 

 

 

 

 

 

 

 

 

6,789

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

673,701

 

 

 

 

 

 

 

 

 

 

 

654,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBLF preferred stock (3)

 

 

15,000

 

 

 

 

 

 

 

 

 

 

 

15,000

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

94,965

 

 

 

 

 

 

 

 

 

 

 

72,832

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

783,666

 

 

 

 

 

 

 

 

 

 

$

742,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

 

6,165

 

 

 

 

 

 

 

 

 

 

 

5,464

 

 

 

 

 

Interest rate spread (4)

 

 

 

 

 

 

 

 

 

 

3.05

%

 

 

 

 

 

 

 

 

 

 

2.91

%

Net interest margin (5)

 

 

 

 

 

 

 

 

 

 

3.33

%

 

 

 

 

 

 

 

 

 

 

3.15

%

Ratio of interest-earning assets to interest -bearing

   liabilities

 

 

1.24

 

 

 

 

 

 

 

 

 

 

 

1.18

 

 

 

 

 

 

 

 

 

 

 

(1)

Average balances are calculated on amortized cost.

(2)

Includes loan fee income, nonaccruing loan balances, and interest received on such loans.

(3)

The SBLF preferred stock refers to our Series C noncumulative perpetual preferred stock issued to the U.S. Treasury through the U.S. Treasury’s Small Business Lending Fund program.

(4)

Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest bearing liabilities.

(5)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the

22


 

prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume (dollars in thousands).

 

 

 

Three months ended March 31, 2015 v. 2014

 

 

 

Increase (Decrease)

Due to Change in Average

 

 

 

Volume

 

 

Rate

 

 

Net

 

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

59

 

 

$

(78

)

 

$

(19

)

Loans

 

 

747

 

 

 

(201

)

 

 

546

 

Federal funds sold and interest-bearing deposits with

   banks

 

 

(22

)

 

 

14

 

 

 

(8

)

Total interest income

 

 

784

 

 

 

(265

)

 

 

519

 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, money market and interest checking

 

 

32

 

 

 

(3

)

 

 

29

 

Time deposits

 

 

(98

)

 

 

(11

)

 

 

(109

)

Other borrowings

 

 

40

 

 

 

(11

)

 

 

29

 

FHLB advances

 

 

(15

)

 

 

(116

)

 

 

(131

)

Junior subordinated debentures

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

(41

)

 

 

(141

)

 

 

(182

)

Net interest income

 

$

825

 

 

$

(124

)

 

$

701

 

 

Provision for Loan Losses

Based on our analysis of the components of the allowance for loan losses and continued improved asset quality trends, management recorded a provision for loan losses of ($602) thousand for the three months ended March 31, 2015 compared to a provision of $0 for the three months ended March 31, 2014.  During the first quarter of 2015, we experienced a reduction of loan impairments of 13.3% from $2.9 million at December 31, 2014 to $2.5 million at March 31, 2015.  In addition, we were able to recover $417 thousand in loans that had been previously written-off, partially off-set by $149 thousand of new charge-offs.

There have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan losses from what was previously outlined in our 2014 Annual Report on Form 10-K. Based upon this methodology, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan losses of $10.3 million, or 1.62% of total loans, was appropriate as of March 31, 2015.  This is compared to $10.6 million, or 1.64% of total loans at December 31, 2014.

Non-Interest Income

Non-interest income for the three months ended March 31, 2015 increased by 3.6% from March 31, 2014 of $1.8 million to $1.9 million.  The increase was primarily the result of an increase in service charges offset by a decrease in loan servicing fees which was caused by a decrease in volume and activity of loan servicing rights income.  The following table reflects the components of non-interest income for the three months ended March 31, 2015 and 2014 (dollars in thousands):

 

 

 

Three months ended

 

 

 

March 31,

2015

 

 

March 31,

2014

 

Service charges

 

$

220

 

 

$

95

 

Gain on sale of loans, net

 

 

93

 

 

 

88

 

Loan servicing fees

 

 

1,192

 

 

 

1,161

 

Loan servicing rights

 

 

61

 

 

 

138

 

Other

 

 

309

 

 

 

328

 

Total non-interest income

 

$

1,875

 

 

$

1,810

 

 

Non-Interest Expense

Non-interest expense remained relatively consistent for the three months ended March 31, 2015 with an increase of less than $0.1 million or 0.8% from the three months ended March 31, 2014.  The increase is primarily the result of higher performance based

23


 

compensation offset by lower expenses associated with the write-down of our OREO properties.  The following table reflects the components of our non-interest expense for the three months ended March 31, 2015 and 2014 (dollars in thousands):

 

 

 

Three months ended

 

 

 

March 31,

2015

 

 

March 31,

2014

 

Employee compensation and benefits

 

$

2,720

 

 

$

2,581

 

Occupancy

 

 

81

 

 

 

80

 

Write-down of other real estate owned

 

 

182

 

 

 

685

 

Other

 

 

1,635

 

 

 

1,235

 

Total non-interest expense

 

$

4,618

 

 

$

4,581

 

 

Income taxes

The Company accounts for income taxes in accordance with income tax accounting guidance, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not the some portion or all of the deferred tax asset will not be realized.

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 2011.

The Company recognizes interest and penalties on income taxes as a component of other non-interest expense.

Financial Condition

Total assets increased $9.7 million, or 1.3%, from $771.7 million at December 31, 2014 to $781.4 million at March 31, 2015.  An increase of cash and due from banks of $19.3 million during the quarter was offset by a decrease in loan of $13.1 million, limiting growth in total assets.

Total liabilities decreased $9.8 million or 1.5%, from $676.7 million at December 31, 2014 to $666.9 million at March 31, 2015.  This decrease is attributed to the repayment of a $15.0 million Federal Discount Window advance that was taken out at the end of 2014 to meet short-term cash needs partially offset by a $5.0 million advance from the Federal Home Loan Bank.

Shareholders’ equity increased $19.5 million or 24.4% to $99.5 million at March 31, 2015 from $80.0 million at December 31, 2014.  This increase was the result of first quarter income of $2.5 million and the approximately $17.0 million of net proceeds from our IPO that closed on January 22, 2015.

Net Loans

Total net loans decreased by $12.7 million, or 2.0%, from $637.5 million at December 31, 2014 to $624.8 million at March 31, 2015. The decrease in loans was due primarily to commercial and agriculture loan pay-downs which was partially offset by organic growth.

24


 

The following tables set forth the composition of our loan portfolio at the dates indicated (dollars in thousands):

 

 

 

March 31,

2015

 

 

December 31,

2014

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

Agriculture loans

 

$

408,217

 

 

 

64.3

%

 

$

415,164

 

 

 

64.1

%

Commercial real estate loans

 

 

137,227

 

 

 

21.6

%

 

 

137,517

 

 

 

21.2

%

Commercial loans

 

 

49,416

 

 

 

7.8

%

 

 

53,745

 

 

 

8.3

%

Residential real estate loans

 

 

39,895

 

 

 

6.3

%

 

 

40,885

 

 

 

6.3

%

Installment and consumer other

 

 

312

 

 

 

0.0

%

 

 

811

 

 

 

0.1

%

Total gross loans

 

$

635,067

 

 

 

100.0

%

 

$

648,122

 

 

 

100.0

%

Allowance for loan losses

 

 

(10,269

)

 

 

 

 

 

 

(10,603

)

 

 

 

 

Loans, net

 

$

624,798

 

 

 

 

 

 

$

637,519

 

 

 

 

 

 

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of all or some of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of probable incurred losses in the loan portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to, detailed reviews of individual loans, historical and current trends in loan charge-offs for the various portfolio segments evaluated, the level of the allowance in relation to total loans and to historical loss levels, levels and trends in non-performing and past due loans, volume of and migratory direction of adversely graded loans, external factors including regulatory, reputation, and competition, and management’s assessment of economic conditions. Our board of directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem credits. Management continuously reviews these policies and procedures and makes further improvements as needed. The adequacy of our allowance for loan losses and the effectiveness of our internal policies and procedures are also reviewed periodically by our regulators and our auditors and external loan review personnel. Our regulators may advise us to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is taken under consideration by management, and we may recognize additions to the allowance as a result.

We continually refine our methodology for determining the allowance for loan losses by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreements; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to us.

At March 31, 2015 and December 31, 2014, the allowance for loan losses was $10.3 million and $10.6 million, respectively which resulted in a ratio to total loans of 1.62% and 1.64%, respectively.  The decreased allowance was the result of reduced loan impairments and loan recoveries that took place during the three months ended March 31, 2015.

25


 

Charge-offs and recoveries by loan category for the three months ended March 31, 2015 and 2014 are as follows (dollars in thousands):

 

 

 

Three months ended

 

 

 

March 31,

2015

 

 

March 31,

2014

 

Balance, beginning of period

 

$

10,603

 

 

$

10,495

 

Loans charged off:

 

 

 

 

 

 

 

 

Agriculture loans

 

 

 

 

 

 

Commercial real estate loans

 

 

36

 

 

 

 

Commercial loans

 

 

113

 

 

 

3

 

Residential real estate loans

 

 

 

 

 

 

Installment and consumer other

 

 

 

 

 

 

Total loans charged off

 

$

149

 

 

$

3

 

Recoveries:

 

 

 

 

 

 

 

 

Agriculture loans

 

 

1

 

 

 

7

 

Commercial real estate loans

 

 

1

 

 

 

 

Commercial loans

 

 

415

 

 

 

25

 

Residential real estate loans

 

 

 

 

 

 

Installment and consumer other

 

 

 

 

 

 

Total recoveries

 

 

417

 

 

 

32

 

Net loans recovered

 

$

(268

)

 

$

(29

)

Provision for (recovery of) loan losses

 

 

(602

)

 

 

 

Allowance for loan losses, end of period

 

$

10,269

 

 

$

10,524

 

 

 

 

 

 

 

 

 

 

Selected loan quality ratios:

 

 

 

 

 

 

 

 

Net charge-offs to average loans

 

 

(0.04

)%

 

 

(0.0050

)%

Allowance for loan losses to total loans

 

 

1.62

%

 

 

1.86

%

Allowance for loan losses to nonperforming assets

  and performing troubled debt restructurings

 

 

54.66

%

 

 

34.72

%

 

Loan Servicing

As part of our growth and risk management strategy, we have actively developed a loan participation and loan sales network. Our ability to sell loan participations and whole loans benefits us by freeing up capital and funding to lend to new customers as well as to increase non-interest income through the recognition of loan sale and servicing revenue. Because we continue to service these loans, we are able to maintain a relationship with the customer. Additionally, we receive a servicing fee that offsets some of the cost of administering the loan, while maintaining the customer relationship.  

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. The Company subsequently measures 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.

Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter-to-quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the servicing right and may result in a reduction to non-interest income.

Servicing assets measured using the amortization method are evaluated and measured for impairment. 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.

26


 

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.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of loan servicing rights is netted against loan servicing fee income.

The loan servicing portfolio is shown below (dollars in thousands):

 

 

 

March 31,

2015

 

 

December 31,

2014

 

Total loans

 

$

635,067

 

 

$

648,122

 

Less: nonqualified loan sales included below

 

 

(5,646

)

 

 

(8,894

)

Loans serviced:

 

 

 

 

 

 

 

 

Agricultural

 

 

422,064

 

 

 

413,933

 

Commercial

 

 

10,124

 

 

 

10,419

 

Commercial real estate

 

 

4,887

 

 

 

4,941

 

Total loans serviced

 

 

437,075

 

 

 

429,293

 

Total loans and loans serviced

 

$

1,066,496

 

 

$

1,068,521

 

 

Securities

Our securities portfolio is predominately composed of municipal securities, investment grade mortgage-backed securities, and U.S. Government and agency securities. We classify substantially all of our securities as available for sale. We do not engage in active securities trading in carrying out our investment strategies.

Securities decreased to $81.2 million at March 31, 2015 from $81.3 million at December 31, 2014. The decrease in the portfolio was due to normal pay downs during the quarter ended March 31, 2015.

The following table sets forth the amortized cost and fair values of our securities portfolio at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

 

 

March 31, 2015

 

 

December 31, 2014

 

 

 

Amortized

Cost

 

 

Fair

Value

 

 

Amortized

Cost

 

 

Fair

Value

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

$

42,851

 

 

$

43,191

 

 

$

41,751

 

 

$

41,849

 

Mortgage-backed securities

 

 

35,193

 

 

 

35,963

 

 

 

36,889

 

 

 

37,428

 

U.S. Government and agency securities

 

 

2,005

 

 

 

2,011

 

 

 

2,006

 

 

 

2,005

 

Total available for sale

 

$

80,049

 

 

$

81,165

 

 

$

80,646

 

 

$

81,282

 

 

Deposits

Deposits are the major source of our funds for lending and other investment purposes. Deposits are attracted principally from within our primary market area through the offering of a broad variety of deposit instruments including checking accounts, money market accounts, regular savings accounts, term certificate accounts (including “jumbo” certificates in denominations of $100,000 or more) and retirement savings plans. As of March 31, 2015 and December 31, 2014, the distribution by type of deposit accounts was as follows (dollars in thousands):

 

 

 

March 31, 2015

 

 

December 31, 2014

 

 

 

Amount

 

 

% of Deposits

 

 

Amount

 

 

% of Deposits

 

Time deposits

 

$

293,498

 

 

 

48.3

%

 

$

296,921

 

 

 

49.0

%

Brokered deposits

 

 

145,108

 

 

 

23.8

%

 

 

125,396

 

 

 

20.7

%

Money market accounts

 

 

71,075

 

 

 

11.7

%

 

 

69,742

 

 

 

11.5

%

Demand, noninterest-bearing

 

 

66,779

 

 

 

11.0

%

 

 

81,534

 

 

 

13.5

%

NOW accounts and interest checking

 

 

26,920

 

 

 

4.4

%

 

 

27,312

 

 

 

4.5

%

Savings

 

 

5,061

 

 

 

0.8

%

 

 

4,564

 

 

 

0.8

%

Total deposits

 

$

608,441

 

 

 

100.0

%

 

$

605,469

 

 

 

100.0

%

27


 

 

Liquidity Management and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions and competition.

Management adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, (4) the objectives of our interest-rate risk and investment policies and (5) the risk tolerance of management and our board of directors.

Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash provided by (used in) operating activities was $(2.1) million and $2.1 million for the three months ended March 31, 2015 and 2014, respectively. Net cash provided by investing activities, which consists primarily of purchases of and proceeds from the sale, maturities/ calls, and principal repayments of securities available for sale, as well as loan purchases, sales and originations, net of repayments was $15.0 million and $5.1 million for the three months ended March 31, 2015 and 2014, respectively.  Net cash provided by (used in) financing activities, consisting primarily of the activity in deposit accounts,  FHLB and Federal Discount advances, and proceeds from our IPO was $6.4 million and $(22.0) million for the three months ended March 31, 2015 and 2014, respectively.

At March 31, 2015, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital of $106.7 million, or 13.65% of average total assets, which is above the required level of $39.1 million, or 5.0% of adjusted total assets, and total risk-based capital of $115.5 million, or 16.38% of risk-weighted assets, which is above the required level of $70.5 million, or 10.0% of risk-weighted assets.

At the holding company level, our primary sources of liquidity are dividends from the Bank, investment income and net proceeds from investment sales, borrowings and capital offerings. The main uses of liquidity are the payment of interest to holders of our junior subordinated debentures and interest and payment of dividends to preferred shareholders.  The Bank is subject to certain regulatory limitations regarding its ability to pay dividends to the Company; however, we do not believe that the Company will be adversely affected by these dividend limitations.  At March 31, 2015, there were $55.2 million of retained earnings available for the payment of dividends by the Bank to us.

Off-Balance Sheet Arrangement

As of March 31, 2015, there were no significant changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.  We continue to believe that we have adequate capital and liquidity available from various sources to fund projected obligations and commitments.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

 

 

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2015. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

There are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Projections of any

28


 

evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended) that occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

29


 

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We and our subsidiaries may be involved from time-to-time in ordinary routine litigation incidental to our respective businesses.  Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.  

Item 1A. Risk Factors.

See “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2014.  There have been no material changes to the risk factors since then.  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sale of Equity Securities

On March 6, 2015 the Company issued 5,000 common shares in connection with an option exercise granted under the Company’s Management Incentive Plan.  On March 17, 2015, the Compensation Committee approved the issuance of 14,379 shares of restricted stock at an exercise price of $19.71 per share under our 2012 Equity Incentive Compensation Plan.  The Company is in the process of completing the Form S-8 to register the shares issuable under our equity incentive plans, however, the shares were unregistered as of March 31, 2015.  

The Company received $34,500 of proceeds from the option exercise described above.  Due to the immaterial amount, these proceeds were deposited into one of our cash accounts and used to fund Company operations. The Company believes the unregistered issuances were exempt from registration requirements pursuant to section 4(a)(2) of the Securities Act of 1933, as amended.  The recipients of the shares acknowledged the restriction to which the shares are subject and that they were acquiring the shares for investment purposes and not with a view towards their distribution.

The Company did not repurchase any shares of its common stock during the quarter ended March 31, 2015.

Use of Proceeds from Public Offering of Common Stock

On January 22, 2015, we closed our IPO, in which we offered 1,357,000 shares of common stock for gross proceeds of $21.4 million.  Of the 1,375,000 shares sold, 1,210,750 shares were sold by the Company and 146,250 shares were sold by certain selling shareholders.  The Company did not receive any proceeds from the sale of shares by the selling shareholders.  The offer and sale of all shares of the IPO were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File No. 333-200081), which was declared effective by the SEC on January 13, 2015.

The net proceeds from our IPO were  $16.9 million after deducting underwriting discounts and commissions of $1.2 million and other offering expenses of $921 thousand for total expenses of approximately $2.1 million.  There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 16, 2015 pursuant to Rule 424(b) under the Exchange Act.  

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

 

 

30


 

Item 6. Exhibits.

 

Exhibit

Number

 

Description

 

 

 

 

 

 

  31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1*

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2*

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Filed herewith.

 

 

 

31


 

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 thereunto duly authorized.

 

 

 

County Bancorp, Inc.

 

 

 

 

Date:  May 14, 2015

 

By:

/s/ Timothy J. Schneider

 

 

 

Timothy J. Schneider

 

 

 

President

 

 

 

 

Date:  May 14, 2015

 

By:

/s/ Gary R. Abramowicz

 

 

 

Gary R. Abramowicz

 

 

 

Chief Financial Officer

 

 

 

32


 

Exhibit Index

 

Exhibit

Number

 

Description

 

 

 

  31.1

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33