Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates five bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), and United Bank & Trust NA (United Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.
The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. The Banks also offer investment services through a third-party broker-dealer. The Company employs thirteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems and the coordination of management activities, in addition to 203 full-time equivalent individuals employed by the Banks.
The Company’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.
The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Company and Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service charges on deposit accounts maintained at the Banks and (v) Merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; (vi) professional fees; and (vii) other real estate owned expenses. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
The Company had net income of $3,807,000, or $0.41 per share, for the three months ended March 31, 2016, compared to net income of $3,635,000, or $0.39 per share, for the three months ended March 31, 2015. Total equity capital as of March 31, 2016 totaled $165.5 million or 12.4% of total assets.
The increase in quarterly earnings can be primarily attributed to increased loan interest income, higher net securities gains, and lower other real estate owned expenses.
Net loan charge-offs totaled $78,000 for the three months ended March 31, 2016 and net loan recoveries totaled $10,000 for the three months ended March 31, 2015. The provision for loan losses totaled $192,000 and $77,000 for the three months ended March 31, 2016 and 2015, respectively.
The following management discussion and analysis will provide a review of important items relating to:
●
Challenges
●
Key Performance Indicators and Industry Results
●
Critical Accounting Policies
●
Income Statement Review
●
Balance Sheet Review
●
Asset Quality Review and Credit Risk Management
●
Liquidity and Capital Resources
●
Forward-Looking Statements and Business Risks
Challenges
Management has identified certain events or circumstances that may negatively impact the Company’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 11, 2016.
Key Performance Indicators and Industry Results
Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 6,182 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.
Selected Indicators for the Company and the Industry
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
2013
|
|
|
|
Company
|
|
|
Company
|
|
|
Industry *
|
|
|
Company
|
|
|
Industry
|
|
|
Company
|
|
|
Industry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on assets
|
|
|
1.16
|
%
|
|
|
1.13
|
%
|
|
|
1.04
|
%
|
|
|
1.21
|
%
|
|
|
1.01
|
%
|
|
|
1.14
|
%
|
|
|
1.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on equity
|
|
|
9.28
|
%
|
|
|
9.44
|
%
|
|
|
9.31
|
%
|
|
|
10.09
|
%
|
|
|
9.03
|
%
|
|
|
9.76
|
%
|
|
|
9.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
3.36
|
%
|
|
|
3.33
|
%
|
|
|
3.07
|
%
|
|
|
3.31
|
%
|
|
|
3.14
|
%
|
|
|
3.18
|
%
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
53.91
|
%
|
|
|
53.59
|
%
|
|
|
59.91
|
%
|
|
|
53.37
|
%
|
|
|
61.88
|
%
|
|
|
52.78
|
%
|
|
|
60.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratio
|
|
|
12.50
|
%
|
|
|
12.00
|
%
|
|
|
9.59
|
%
|
|
|
12.05
|
%
|
|
|
9.46
|
%
|
|
|
11.67
|
%
|
|
|
9.41
|
%
|
*Latest available data
Key performances indicators include:
●
Return on Assets
This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on average assets was 1.16% and 1.10% for the three months ended March 31, 2016 and 2015, respectively. The increase in this ratio in 2016 from the previous period is due to an increase in net income associated with increased loan interest income, higher net securities gains, and lower other real estate owned expenses.
●
Return on Equity
This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity remained relatively unchanged at 9.28% and 9.25% for the three months ended March 31, 2016 and 2015, respectively.
●
Net Interest Margin
The net interest margin for the three months ended March 31, 2016 and 2015 was 3.36% and 3.27%, respectively. The ratio is calculated by dividing net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. The increase in this ratio in 2016 is primarily the result of an increase in the average balance of loans, offset in part by a decrease in the average balances of investment securities.
●
Efficiency Ratio
This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio remained relatively unchanged at 53.91% and 54.76% for the three months ended March 31, 2016 and 2015, respectively.
●
Capital Ratio
The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 12.50% as of March 31, 2016 is significantly higher than the industry average as of December 31, 2015.
Industry Results
The FDIC Quarterly Banking Profile reported the following results for the fourth quarter of 2015:
Earnings and Profitability Register Year-Over-Year Improvement
Declines in expenses for litigation at a few large banks combined with moderate revenue growth to lift fourth-quarter net income at FDIC-insured institutions to $40.8 billion, an increase of $4.4 billion (11.9%) compared with fourth quarter 2014. The improving trend in earnings was widespread. More than half of all banks, or 56.6%, reported year-over-year increases in quarterly net income. Meanwhile, the percentage of banks reporting negative quarterly net income fell to 9.1%, from 9.9% in the year-ago year. The average return on assets (ROA) rose to 1.03% from 0.95% in fourth quarter 2014.
Margins Improve at Large Banks
Net operating revenue—the sum of net interest income and total noninterest income—totaled $174.3 billion in the fourth quarter, up $6.8 billion (4.1%) from a year earlier. More than two-thirds of all banks, or 68%, reported year-over-year growth in revenues. Noninterest income was $3 billion (5%) higher, as servicing income rose by $2.1 billion (178%), and gains on asset sales were $984 million (32%) higher. Net interest income increased by $3.9 billion (3.6%) compared with fourth quarter 2014. The average net interest margin (NIM) was 3.13%, slightly higher than the 3.12% average the year before. This is the first time in five years that the average quarterly NIM hasn’t been lower than the year earlier. Most of the margin improvement occurred at larger banks, whose asset portfolios were better-positioned to benefit from the increase in short-term interest rates late in the quarter. Only 45% of all banks reported year-over-year NIM improvement.
Litigation Expenses Fall 80%
Total noninterest expenses were $2.7 billion (2.5%) lower than in the year-ago quarter. Itemized litigation expenses at a few of the largest banks totaled $616 million, a decline of $2.4 billion (80%) from fourth quarter 2014. Salary and employee benefit expenses were $1.2 billion (2.5%) higher, while expenses for premises and other fixed assets rose $313 million (2.7%).
Loss Provisions Rise to Three-Year High
Provisions for loan and lease losses increased year over year for a sixth consecutive quarter, rising by $3.8 billion (45.5%). The $12 billion in provisions that banks set aside in the fourth quarter is the largest quarterly total in three years. About 37% of banks reported higher quarterly provisions, while a similar proportion reported reductions in their loss provisions.
Charge-Offs Rise in C&I, Consumer Portfolios
Net charge-offs totaled $10.6 billion in the fourth quarter, an increase of $690 million (7%) from a year earlier. This is the first year-over-year increase in quarterly charge-offs in 22 quarters. Net charge-offs of loans to commercial and industrial (C&I) borrowers rose by $512 million (43.4%), as lower oil prices adversely affected some energy sector borrowers. Credit card charge-offs were $292 million (5.6%) higher, an increase largely in line with the growth in total credit card balances. Net charge-offs of auto loans increased by $105 million (15.9%). All other major loan categories had lower charge-offs than a year ago. The average net charge-off rate in the fourth quarter was 0.49%, almost unchanged from the 0.48% average in fourth quarter 2014.
Pace of Loan Growth Accelerates
Total assets increased by $167.8 billion (1.1%) during the quarter. Total loans and leases rose by $197.3 billion (2.3%), as credit card balances had a largely seasonal $41.7 billion (5.8%) increase, C&I loans increased by $39.6 billion (2.2%), and nonfarm nonresidential real estate loans rose by $31.6 billion (2.6%). In addition, loans to nondepository financial institutions increased $17.1 billion (6.5%), and multifamily residential real estate loans rose by $15 billion (4.6%). Loans to small businesses and farms increased $7.1 billion (1.1%). Investment securities holdings grew by $49.6 billion (1.5%). Banks reduced their balances with Federal Reserve banks by $42 billion (3.4%), with most of the decline occurring at a few of the largest banks. Assets in trading accounts fell by $22.1 billion (3.8%).
Deposits Continue to Fund Asset Growth
Total deposits increased by $199.4 billion (1.7%) during the fourth quarter, as deposits in domestic offices rose by $255.9 billion (2.4%), and foreign office deposits declined by $56.5 billion (4.2%). Interest-bearing domestic deposits were up $215.1 billion (2.8%), while noninterest-bearing deposits rose by $40.7 billion (1.4%). Banks reduced their nondeposit liabilities by $35.9 billion (1.8%) during the quarter.
Problem List’ Falls Below 200 Institutions
The number of FDIC-insured commercial banks and savings institutions reporting quarterly financial results declined from 6,270 to 6,182 in the fourth quarter. Mergers absorbed 81 institutions in the three months ended December 31, while two insured institutions failed. No new charters were added in the fourth quarter. Banks reported 2,033,758 full-time equivalent employees in the quarter, down from 2,038,490 in the third quarter and 2,047,945 a year ago.
Critical Accounting Policies
The discussion contained in this Item 2 and other disclosures included within this report are based, in part, on the Company’s audited December 31, 2015 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of this Annual Report entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.
Fair Value and Other-Than-Temporary Impairment of Investment Securities
The Company’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, it is at least reasonably possible that changes in management’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
Goodwill
Goodwill arose in connection with two acquisitions. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. At March 31, 2016, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation.
Income Statement Review
for the Three Months ended March 31, 2016
The following highlights a comparative discussion of the major components of net income and their impact for the three months ended March 31, 2016 and 2015:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.
AVERAGE BALANCE SHEETS AND INTEREST RATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
99,726
|
|
|
$
|
1,103
|
|
|
|
4.42
|
%
|
|
$
|
91,417
|
|
|
$
|
1,016
|
|
|
|
4.44
|
%
|
Agricultural
|
|
|
74,668
|
|
|
|
916
|
|
|
|
4.91
|
%
|
|
|
74,025
|
|
|
|
865
|
|
|
|
4.68
|
%
|
Real estate
|
|
|
507,753
|
|
|
|
5,642
|
|
|
|
4.44
|
%
|
|
|
479,311
|
|
|
|
5,351
|
|
|
|
4.47
|
%
|
Consumer and other
|
|
|
22,019
|
|
|
|
196
|
|
|
|
3.57
|
%
|
|
|
16,091
|
|
|
|
168
|
|
|
|
4.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (including fees)
|
|
|
704,166
|
|
|
|
7,857
|
|
|
|
4.46
|
%
|
|
|
660,844
|
|
|
|
7,400
|
|
|
|
4.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
265,529
|
|
|
|
1,495
|
|
|
|
2.25
|
%
|
|
|
272,519
|
|
|
|
1,566
|
|
|
|
2.30
|
%
|
Tax-exempt 2
|
|
|
257,369
|
|
|
|
2,155
|
|
|
|
3.35
|
%
|
|
|
264,869
|
|
|
|
2,286
|
|
|
|
3.45
|
%
|
Total investment securities
|
|
|
522,898
|
|
|
|
3,650
|
|
|
|
2.79
|
%
|
|
|
537,388
|
|
|
|
3,852
|
|
|
|
2.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks and federal funds sold
|
|
|
31,750
|
|
|
|
96
|
|
|
|
1.21
|
%
|
|
|
53,863
|
|
|
|
93
|
|
|
|
0.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,258,814
|
|
|
$
|
11,603
|
|
|
|
3.69
|
%
|
|
|
1,252,095
|
|
|
$
|
11,345
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
54,239
|
|
|
|
|
|
|
|
|
|
|
|
64,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,313,053
|
|
|
|
|
|
|
|
|
|
|
$
|
1,316,912
|
|
|
|
|
|
|
|
|
|
1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%.
AVERAGE BALANCE SHEETS AND INTEREST RATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, savings accounts and money markets
|
|
$
|
652,629
|
|
|
$
|
310
|
|
|
|
0.19
|
%
|
|
$
|
628,094
|
|
|
$
|
267
|
|
|
|
0.17
|
%
|
Time deposits > $100,000
|
|
|
90,306
|
|
|
|
199
|
|
|
|
0.88
|
%
|
|
|
91,179
|
|
|
|
208
|
|
|
|
0.91
|
%
|
Time deposits < $100,000
|
|
|
127,918
|
|
|
|
241
|
|
|
|
0.75
|
%
|
|
|
145,100
|
|
|
|
287
|
|
|
|
0.79
|
%
|
Total deposits
|
|
|
870,853
|
|
|
|
750
|
|
|
|
0.34
|
%
|
|
|
864,373
|
|
|
|
762
|
|
|
|
0.35
|
%
|
Other borrowed funds
|
|
|
80,098
|
|
|
|
263
|
|
|
|
1.32
|
%
|
|
|
94,217
|
|
|
|
338
|
|
|
|
1.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing liabilities
|
|
|
950,951
|
|
|
|
1,013
|
|
|
|
0.43
|
%
|
|
|
958,590
|
|
|
|
1,100
|
|
|
|
0.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
191,189
|
|
|
|
|
|
|
|
|
|
|
|
194,239
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,745
|
|
|
|
|
|
|
|
|
|
|
|
6,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
164,168
|
|
|
|
|
|
|
|
|
|
|
|
157,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,313,053
|
|
|
|
|
|
|
|
|
|
|
$
|
1,316,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
10,588
|
|
|
|
3.36
|
%
|
|
|
|
|
|
$
|
10,245
|
|
|
|
3.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/average assets
|
|
$
|
11,603
|
|
|
|
3.53
|
%
|
|
|
|
|
|
$
|
11,345
|
|
|
|
3.45
|
%
|
|
|
|
|
Interest expense/average assets
|
|
$
|
1,013
|
|
|
|
0.31
|
%
|
|
|
|
|
|
$
|
1,100
|
|
|
|
0.33
|
%
|
|
|
|
|
Net interest income/average assets
|
|
$
|
10,588
|
|
|
|
3.23
|
%
|
|
|
|
|
|
$
|
10,245
|
|
|
|
3.11
|
%
|
|
|
|
|
Net Interest Income
For the three months ended March 31, 2016 and 2015, the Company's net interest margin adjusted for tax exempt income was 3.36% and 3.27%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended March 31, 2016 totaled $9,835,000 compared to $9,445,000 for the three months ended March 31, 2015.
For the three months ended March 31, 2016, interest income increased $303,000, or 2.9%, when compared to the same period in 2015. The increase from 2015 was primarily attributable to higher average balance of loans, offset in part by lower average balances of investment securities. The higher average balances of loans were due primarily to favorable economic conditions that fueled loan demand over much of the past year. The lower average balances of investments were primarily due to maturities and calls.
Interest expense decreased $87,000, or 7.9%, for the three months ended March 31, 2016 when compared to the same period in 2015. The lower interest expense for the period is primarily attributable to lower average borrowed funds balances and lower average time deposit balances, offset by higher average money market and savings balances. This decrease in time deposit and corresponding increase in money market and savings accounts is due in part to the continued low market interest rate environment.
Provision for Loan Losses
The Company’s provision for loan losses was $192,000 and $77,000 for the three months ended March 31, 2016 and 2015, respectively. Net loan charge-offs were $78,000 and net loan recoveries were $10,000 for the three months ended March 31, 2016 and 2015, respectively. The additional provision was made primarily to accommodate additional loan growth at one of our affiliate banks. Credit quality factors relating to impaired loans and past due loan volume remain favorable and comparable to those at year end for the Company. However, the agricultural economy has weakened as declining grain prices have caused lower profitability for our agricultural borrowers.
Noninterest Income and Expense
Noninterest income increased $333,000 for the three months ended March 31, 2016 compared to the same period in 2015. The increase in noninterest income is primarily due to higher gains on the sale of securities and higher wealth management income. The increase in wealth management income is due primarily to increases in estate fees. Exclusive of realized securities gains, noninterest income was 8% higher in the first quarter of 2016 compared to the same period in 2015.
Noninterest expense increased $296,000 or 4.8% for the three months ended March 31, 2016 compared to the same period in 2015 primarily as a result of increases in salaries and benefits, offset in part by a decrease in other real estate owned expense. The increase in salaries and benefits is mainly due to normal salary increases and additional lending and support staff. Other real estate owned expenses decreased due to losses in 2015 with no losses in 2016. The efficiency ratio for the first quarter of 2016 was 53.91%, compared to 54.76% in 2015.
Income Taxes
The provision for income taxes expense for the three months ended March 31, 2016 and 2015 was $1,501,000 and $1,360,000, respectively, representing an effective tax rate of 28% and 27%, respectively. The increase in effective rate is due primarily to impact of a lower level of tax-exempt interest income in 2016 compared to the same quarter in 2015.
Balance Sheet Review
As of March 31, 2016, total assets were $1,334,899,000, an $8,152,000 increase compared to December 31, 2015. The increase in assets was due primarily to an increase in interest bearing deposits in other banks, offset in part by a decrease in securities and loans. The increase in interest bearing deposits in other banks was due primarily to excess liquidity from decreases in the securities and loan portfolios and increases in public fund deposits.
Investment Portfolio
The investment portfolio totaled $523,273,000 as of March 31, 2016, a decrease of $14,360,000 or 3% from the December 31, 2015 balance of $537,633,000. The decrease in the investment portfolio was primarily due to sales, maturities and pay downs of state and political subdivision bonds and U.S. government mortgage-backed securities.
On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of March 31, 2016, gross unrealized losses of $664,000, are considered to be temporary in nature due to the interest rate environment of 2016 and other general economic factors. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.
At March 31, 2016, the Company’s investment securities portfolio included securities issued by 282 government municipalities and agencies located within 24 states with a fair value of $270.4 million. At December 31, 2015, the Company’s investment securities portfolio included securities issued by 283 government municipalities and agencies located within 24 states with a fair value of $277.6 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of March 31, 2016 was $5.1 million (approximately 1.9 % of the fair value of the governmental municipalities and agencies) represented by the Dubuque, Iowa Community School District to be repaid by sales tax revenues and property taxes.
The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.
The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of March 31, 2016 and December 31, 2015 identifying the state in which the issuing government municipality or agency operates.
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Obligation bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
73,682
|
|
|
$
|
74,556
|
|
|
$
|
77,735
|
|
|
$
|
78,255
|
|
Texas
|
|
|
10,128
|
|
|
|
10,432
|
|
|
|
10,712
|
|
|
|
10,967
|
|
Pennsylvania
|
|
|
8,845
|
|
|
|
8,935
|
|
|
|
8,389
|
|
|
|
8,448
|
|
Minnesota
|
|
|
5,226
|
|
|
|
5,344
|
|
|
|
8,401
|
|
|
|
8,510
|
|
Other (2016: 16 states; 2015: 16 states)
|
|
|
24,795
|
|
|
|
25,367
|
|
|
|
26,449
|
|
|
|
26,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general obligation bonds
|
|
$
|
122,676
|
|
|
$
|
124,634
|
|
|
$
|
131,686
|
|
|
$
|
133,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
134,702
|
|
|
$
|
137,456
|
|
|
$
|
134,333
|
|
|
$
|
136,705
|
|
Other (2016: 9 states; 2015: 9 states)
|
|
|
8,246
|
|
|
|
8,304
|
|
|
|
7,752
|
|
|
|
7,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds
|
|
$
|
142,948
|
|
|
$
|
145,760
|
|
|
$
|
142,085
|
|
|
$
|
144,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations of states and political subdivisions
|
|
$
|
265,624
|
|
|
$
|
270,394
|
|
|
$
|
273,771
|
|
|
$
|
277,597
|
|
As of March 31, 2016 and December 31, 2015, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 8 revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table.
(
in th
ousands)
|
|
2016
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds by revenue source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tax
|
|
$
|
86,811
|
|
|
$
|
88,981
|
|
|
$
|
88,299
|
|
|
$
|
90,145
|
|
College and universities, primarily dormitory revenues
|
|
|
12,149
|
|
|
|
12,357
|
|
|
|
12,153
|
|
|
|
12,298
|
|
Water
|
|
|
10,440
|
|
|
|
10,607
|
|
|
|
10,446
|
|
|
|
10,548
|
|
Leases
|
|
|
9,094
|
|
|
|
9,153
|
|
|
|
9,900
|
|
|
|
9,939
|
|
Electric
|
|
|
8,941
|
|
|
|
9,176
|
|
|
|
8,950
|
|
|
|
9,141
|
|
Other
|
|
|
15,513
|
|
|
|
15,486
|
|
|
|
12,337
|
|
|
|
12,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds by revenue source
|
|
$
|
142,948
|
|
|
$
|
145,760
|
|
|
$
|
142,085
|
|
|
$
|
144,501
|
|
Loan Portfolio
The loan portfolio, net of the allowance for loan losses of $10,102,000, totaled $695,627,000 as of March 31, 2016, a decrease of $5,701,000, or 0.8%, from the December 31, 2015 balance of $701,328,000. The decrease in the loan portfolio is primarily due to loan payoffs of two loans in excess of loan demand for the first quarter.
Other Real Estate Owned
Other real estate owned was $1,124,000 as of March 31, 2016, nearly unchanged from $1,250,000 as of December 31, 2015, respectively. Due to potential changes in the real estate markets, it is at least reasonably possible that management’s assessments of fair value will change in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.
Deposits
Deposits totaled $1,083,854,000 as of March 31, 2016, an increase of $9,661,000, or 0.9%, from the December 31, 2015 balance of $1,074,193,000. The increase in deposits was primarily due to increases in public funds.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase totaled $50,380,000 as of March 31, 2016, a decrease of $3,910,000, or 7%, from the December 31, 2015 balance of $54,290,000.
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2015.
Asset Quality Review and Credit Risk Management
The Company’s credit risk is historically centered in the loan portfolio, which on March 31, 2016 totaled $695,627,000 compared to $701,328,000 as of December 31, 2015. Net loans comprise 52.1% of total assets as of March 31, 2016. The object in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of a transaction and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 0.35% at March 31, 2016, as compared to 0.24% at December 31, 2015 and 0.36% at March 31, 2015. The Company’s level of problem loans as a percentage of total loans at March 31, 2016 of 0.35% is lower than the Company’s peer group (329 bank holding companies with assets of $1 billion to $3 billion) of 0.83% as of December 31, 2015.
Impaired loans, net of specific reserves, totaled $2,116,000 as of March 31, 2016 and have increased $737,000 as compared to the impaired loans of $1,379,000 as of December 31, 2015. The increase in impaired loans since December 31, 2015 is primarily due to a deterioration of one credit relationship in the commercial operating portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.
The Company had TDRs of $806,000 as of March 31, 2016, of which all were included in impaired loans and on nonaccrual status. The Company had TDRs of $780,000 as of December 31, 2015, all of which were included in impaired and nonaccrual loans.
TDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.
For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. The Company had no charge-off related to TDRs for the three months ended March 31, 2016 and no charge-offs related to TDRs for the three months ended March 31, 2015.
Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there is a strong reason that the credit should not be placed on non-accrual. As of March 31, 2016, non-accrual loans totaled $2,486,000 and there were no loans past due 90 days and still accruing. This compares to non-accrual loans of $1,815,000 and loans past due 90 days and still accruing totaled $75,000 as of December 31, 2015. Other real estate owned totaled $1,124,000 as of March 31, 2016 and $1,250,000 as of December 31, 2015.
The allowance for loan losses as a percentage of outstanding loans as of March 31, 2016 was 1.43%, as compared to 1.40% at December 31, 2015. The allowance for loan losses totaled $10,102,000 and $9,988,000 as of March 31, 2016 and December 31, 2015, respectively. Net charge-offs of loans totaled $78,000 for the three months ended March 31, 2016 as compared to net recoveries of loans of $10,000 for the three months ended March 31, 2015.
The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans.
Liquidity and Capital Resources
Liquidity management is the process by which the Company, through its Banks’ Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of securities available-for-sale; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, FHLB advances and other capital market sources.
As of March 31, 2016, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.
The liquidity and capital resources discussion will cover the following topics:
|
●
|
Review of the Company’s Current Liquidity Sources
|
|
●
|
Review of the Company’s Current Liquidity Sources
|
|
●
|
Review of Statements of Cash Flows
|
|
●
|
Company Only Cash Flows
|
|
●
|
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs
|
Review of the Company’s Current Liquidity Sources
Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of March 31, 2016 and December 31, 2015 totaled $81,360,000 and $50,999,000, respectively, and provide a level of liquidity.
Other sources of liquidity available to the Banks as of March 31, 2016 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $177,444,000, with $15,500,000 of outstanding FHLB advances at March 31, 2016. Federal funds borrowing capacity at correspondent banks was $106,750,000, with no outstanding federal fund purchase balances as of March 31, 2016. The Company had securities sold under agreements to repurchase totaling $50,380,000 and term repurchase agreements of $13,000,000.
Total investments as of March 31, 2016 were $523,272,000 compared to $537,633,000 as of December 31, 2015. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of March 31, 2016.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.
Review of Statements of Cash Flows
Net cash provided by operating activities for the three months ended March 31, 2016 totaled $6,342,000 compared to the $6,581,000 for the three months ended March 31, 2015. The increase of $239,000 in net cash provided by operating activities was primarily due to changes in assets and liabilities.
Net cash used in investing activities for the three months ended March 31, 2016 was $9,582,000 compared to $41,844,000 for the three months ended March 31, 2015. The decrease in cash used in investing activities of $32,262,000 was primarily due to investment activity and changes in loans.
Net cash provided by financing activities for the three months ended March 31, 2016 totaled $856,000 compared to $36,477,000 for the three months ended March 31, 2015. The decrease of $35,621,000 in net cash provided by financing activities was primarily due to the change in deposits and securities sold under repurchase agreements. As of March 31, 2016, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.
Company Only Cash Flows
The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Company requires adequate liquidity to pay its expenses and pay stockholder dividends. Dividends paid by the Banks to the Company amounted to $2,150,000 and $1,900,000 for the three months ended March 31, 2016 and 2015, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.21 per share in 2016 from $0.20 per share in 2015.
The Company, on an unconsolidated basis, has interest bearing deposits and marketable investment securities totaling $8,762,000 as of March 31, 2016 that are presently available to provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs
No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of March 31, 2016 that are of concern to management.
Capital Resources
The Company’s total stockholders’ equity as of March 31, 2016 totaled $165,472,000 and was $4,220,000 higher than the $161,250,000 recorded as of December 31, 2015. The increase in stockholders’ equity was primarily due to net income and an increase in accumulated other comprehensive income, reduced by dividends declared. The increase in other comprehensive income is created by 2016 market interest rates trending lower, which resulted in higher fair values in the securities available-for-sale portfolio. At March 31, 2016 and December 31, 2015, stockholders’ equity as a percentage of total assets was 12.40% and 12.15%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of March 31, 2016.
Forward-Looking Statements and Business Risks
The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: economic conditions, particularly in the concentrated geographic area in which the Company and its affiliate banks operate; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements and Business Risks” in the Company’s Annual Report. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.