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 214 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 fees 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; and (vi) professional fees. 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 $4,099,000, or $0.44 per share, for the three months ended June 30, 2016, compared to net income of $3,365,000, or $0.36 per share, for the three months ended June 30, 2015. Total equity capital as of June 30, 2016 totaled $170.1 million or 12.8 % of total assets.
The increase in quarterly earnings can be primarily attributed to increased loan interest income, a lower provision for loan losses, and lower other real estate owned expenses, offset in part by lower securities gains.
Net loan recoveries totaled $19,000 and $24,000 for the three months ended June 30, 2016 and 2015, respectively. The provision for loan losses totaled $14,000 and $922,000 for the three months ended June 30, 2016 and 2015, respectively.
The Company had net income of $7,906,000, or $0.85 per share, for the six months ended June 30, 2016, compared to net income of $7,000,000, or $0.75 per share, for the six months ended June 30, 2015.
The increase in year to date earnings can be primarily attributed to increased loan interest income, a lower provision for loan losses, and lower other real estate owned expenses, offset in part by lower net securities gains.
Net loan charge-offs totaled $59,000 for the six months ended June 30, 2016 and net loan recoveries totaled $34,000 for the six months ended June 30, 2015. The provision for loan losses totaled $206,000 and $999,000 for the six months ended June 30, 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.
K
ey 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 6,122 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
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3 Months
Ended
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6 Months
Ended
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3 Months ended
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Years Ended December 31,
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June 30, 2016
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March 31, 2016
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2015
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2014
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Company
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Company
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Industry*
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Company
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Industry *
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Company
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Industry
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Return on assets
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1.23
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%
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1.19
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%
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1.16
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%
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0.97
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%
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1.13
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%
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1.04
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%
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1.21
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%
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1.01
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%
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Return on equity
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9.82
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%
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9.55
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%
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9.28
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%
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8.62
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%
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9.44
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%
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9.31
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%
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10.09
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%
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9.03
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%
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Net interest margin
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3.36
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%
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3.36
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%
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3.36
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%
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3.10
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%
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3.33
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%
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3.07
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%
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3.31
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%
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3.14
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%
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Efficiency ratio
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51.36
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%
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52.64
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%
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53.91
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%
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59.85
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%
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53.59
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%
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59.91
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%
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53.37
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%
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61.88
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%
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Capital ratio
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12.51
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%
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12.51
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%
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12.50
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%
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9.61
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%
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12.00
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%
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9.59
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%
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12.05
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%
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9.46
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%
|
*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 1.23% and 1.01% for the three months ended June 30, 2016 and 2015, respectively. The increase in this ratio in 2016 from the previous period is primarily due to an increase in net income associated with increased loan interest income, lower provision for loan losses 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 was at 9.82% and 8.48% for the three months ended June 30, 2016 and 2015, respectively. The increase in this ratio in 2016 from the previous period is primarily due to an increase in net income associated with increased loan interest income, lower provision for loan losses and lower other real estate owned expenses.
●
Net Interest Margin
The net interest margin for the three months ended June 30, 2016 and 2015 was 3.36% and 3.32%, 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 was 51.36% and 54.88% for the three months ended June 30, 2016 and 2015, respectively. The decrease in the efficiency ratio was due primarily to the decrease in the other real estate owned expenses, offset in part by a decrease in the securities gains.
●
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 12.51% as of June 30, 2016 is significantly higher than the industry average as of March 31, 2016.
Industry Results
The FDIC Quarterly Banking Profile reported the following results for the first quarter of 2016:
Higher Expenses for Credit Losses Weigh on First-Quarter Earnings
Higher expenses for loan losses and lower noninterest income from trading and asset servicing contributed to a $765 million (1.9%) decline in quarterly earnings for FDIC-insured institutions in first quarter 2016. Most of the year-over-year drop in net income was concentrated among the largest banks. More than half of all banks—61.4%—reported higher quarterly earnings compared with first quarter 2015. Only 5% of banks reported negative net income in the quarter, down from 5.7% the year before. The average return on assets in the first quarter was 0.97%, down from 1.02% in first quarter 2015.
Net Interest Margins Improve From Year-Ago Levels
Net operating revenue—the sum of net interest income and total noninterest income—totaled $172.9 billion in the quarter, up $4.6 billion (2.7%) from the year earlier. Net interest income was $6.7 billion (6.4%) higher, while total noninterest income was $2.2 billion (3.4%) lower. The improvement in net interest income was attributable to wider net interest margins, as average asset yields increased more rapidly than average funding costs, and to a 3.7% increase in average interest-earning assets compared with first quarter 2015. The average net interest margin rose to 3.10%, from 3.02% the year before, as 57% of banks reported year-over-year improvement in their margins. The drop in noninterest income was concentrated among larger banks, and reflected a $1.9 billion (24.9%) decline in trading income, as well as a $736 million (46%) decline in servicing income.
Aggregate Loan-Loss Provisions Continue to Rise
Banks set aside $12.5 billion in provisions for loan losses in the first quarter, a year-over-year increase of $4.2 billion (49.7%). This is the largest quarterly increase since fourth quarter 2012, and marks the seventh consecutive quarter that loan-loss provisions have increased. Slightly more than one-third of all banks—35.6%—reported higher quarterly loss provisions than the year before. Most of the increase in loss provisions occurred at larger banks. Quarterly provision expenses at banks with assets greater than $10 billion were $4.1 billion (54.8%) higher than in first quarter 2015, while total provisions at banks with less than $10 billion in assets were $140 million (15.8%) higher.
Loan Losses Post Second Consecutive Quarterly Increase
Quarterly net charge-offs (NCOs) totaled $10.1 billion, an increase of $1.1 billion (12.3%) compared with a year earlier. This is the second consecutive quarter that NCOs have posted a year-over-year increase, following 21 quarters in a row in which NCOs fell. NCOs of commercial and industrial (C&I) loans were $1.1 billion (144.7%) higher than in first quarter 2015. Smaller year-over-year NCO increases were reported in credit cards, auto loans, real estate construction and development loans, and agricultural production loans. The average NCO rate in the first quarter was 0.46%, compared with 0.43% a year earlier. Fewer than half of all banks—41.9%—reported year-over-year increases in quarterly NCOs.
Noncurrent C&I Loans Increase by $9.3 Billion
The amount of loan balances that were noncurrent—90 days or more past due or in nonaccrual status—rose by $3.3 billion (2.4%) during the first three months of 2016. This is the first quarterly increase in total noncurrent loan balances in 24 quarters, driven by a $9.3 billion (65.1%) increase in noncurrent C&I loans. This is the largest quarterly increase in noncurrent C&I loans since first quarter 1987. Most of the increase occurred at larger banks. At institutions with assets greater than $10 billion, noncurrent C&I loans rose by $8.9 billion (82.1%). At institutions with less than $10 billion in assets, noncurrent C&I balances increased by $415 million (12%). A large part of the weakness in C&I loans is attributable to loans to the energy sector, especially oil and gas producers. Sharply lower energy prices have reduced the ability of many borrowers to service their debts, and a large share of the direct lending exposure of the banking industry to these borrowers is held by larger banks. The average noncurrent loan rate rose from 1.56% to 1.58% during the quarter. This is still the second-lowest noncurrent rate for the industry since year-end 2007. For C&I loans, the average noncurrent rate rose from 0.78% to 1.24%. This is the highest noncurrent rate for C&I loans since year-end 2011. Noncurrent rates declined for all other major loan categories in the first quarter.
Loss Reserves Increase for the First Time in Six Years
As a result of the increase in noncurrent loans, the industry’s coverage ratio of loan-loss reserves to noncurrent loans posted its first quarterly decline in 14 quarters, falling from 86% at the end of 2015 to 85.5% at the end of March. Banks increased their loan-loss reserves by $2.1 billion (1.8%), as they added more in loan-loss provisions ($12.5 billion) than they took out in net charge-offs ($10.1 billion). This is the first time in six years that the industry’s aggregate loan-loss reserves have increased. Banks with assets greater than $1 billion, which itemize their reserves for major loan categories, reported a $3.3 billion (10.4%) increase in their reserves for estimated losses on non-real-estate commercial loans in the first quarter.
Equity Capital Increases by $39.3 Billion
An increase in retained earnings and higher market values in securities portfolios helped lift the equity capital of insured institutions by $39.3 billion (2.2%) during the first quarter. This is the largest quarterly increase in equity since third quarter 2009. While net income was lower than the year before, banks reduced their cash dividends by $1.6 billion (7.1%) compared with first quarter 2015. As a result, retained earnings totaled $18.3 billion, a year-over-year increase of $815 million (4.7%). In addition, accumulated other comprehensive income increased by $17.3 million.
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 June 30, 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 June 30, 2016
The following highlights a comparative discussion of the major components of net income and their impact for the three months ended June 30, 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 June 30,
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
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|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
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|
Average
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|
|
Revenue/
|
|
|
Yield/
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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|
|
|
|
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|
(dollars in thousands)
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
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|
Loans 1
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
93,880
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|
|
$
|
1,073
|
|
|
|
4.57
|
%
|
|
$
|
98,176
|
|
|
$
|
1,165
|
|
|
|
4.75
|
%
|
|
Agricultural
|
|
|
77,100
|
|
|
|
938
|
|
|
|
4.87
|
%
|
|
|
76,666
|
|
|
|
909
|
|
|
|
4.74
|
%
|
|
Real estate
|
|
|
522,043
|
|
|
|
5,822
|
|
|
|
4.46
|
%
|
|
|
486,460
|
|
|
|
5,459
|
|
|
|
4.49
|
%
|
|
Consumer and other
|
|
|
22,163
|
|
|
|
197
|
|
|
|
3.55
|
%
|
|
|
17,665
|
|
|
|
179
|
|
|
|
4.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (including fees)
|
|
|
715,186
|
|
|
|
8,030
|
|
|
|
4.49
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%
|
|
|
678,967
|
|
|
|
7,712
|
|
|
|
4.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
263,108
|
|
|
|
1,472
|
|
|
|
2.24
|
%
|
|
|
280,097
|
|
|
|
1,566
|
|
|
|
2.24
|
%
|
|
Tax-exempt 2
|
|
|
254,342
|
|
|
|
2,138
|
|
|
|
3.36
|
%
|
|
|
267,175
|
|
|
|
2,275
|
|
|
|
3.41
|
%
|
|
Total investment securities
|
|
|
517,450
|
|
|
|
3,610
|
|
|
|
2.79
|
%
|
|
|
547,272
|
|
|
|
3,841
|
|
|
|
2.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks and federal funds sold
|
|
|
47,610
|
|
|
|
114
|
|
|
|
0.96
|
%
|
|
|
47,734
|
|
|
|
101
|
|
|
|
0.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,280,246
|
|
|
$
|
11,754
|
|
|
|
3.67
|
%
|
|
|
1,273,973
|
|
|
$
|
11,654
|
|
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
54,989
|
|
|
|
|
|
|
|
|
|
|
|
64,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,335,235
|
|
|
|
|
|
|
|
|
|
|
$
|
1,338,273
|
|
|
|
|
|
|
|
|
|
|
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 June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
680,576
|
|
|
$
|
332
|
|
|
|
0.20
|
%
|
|
$
|
669,375
|
|
|
$
|
292
|
|
|
|
0.17
|
%
|
|
Time deposits > $100,000
|
|
|
85,585
|
|
|
|
194
|
|
|
|
0.91
|
%
|
|
|
88,520
|
|
|
|
206
|
|
|
|
0.93
|
%
|
|
Time deposits < $100,000
|
|
|
125,692
|
|
|
|
230
|
|
|
|
0.73
|
%
|
|
|
143,658
|
|
|
|
271
|
|
|
|
0.75
|
%
|
|
Total deposits
|
|
|
891,853
|
|
|
|
756
|
|
|
|
0.34
|
%
|
|
|
901,553
|
|
|
|
769
|
|
|
|
0.34
|
%
|
|
Other borrowed funds
|
|
|
78,070
|
|
|
|
258
|
|
|
|
1.32
|
%
|
|
|
83,944
|
|
|
|
303
|
|
|
|
1.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing liabilities
|
|
|
969,923
|
|
|
|
1,014
|
|
|
|
0.42
|
%
|
|
|
985,497
|
|
|
|
1,072
|
|
|
|
0.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
190,941
|
|
|
|
|
|
|
|
|
|
|
|
187,305
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,352
|
|
|
|
|
|
|
|
|
|
|
|
6,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
167,019
|
|
|
|
|
|
|
|
|
|
|
|
158,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
$
|
1,335,235
|
|
|
|
|
|
|
|
|
|
|
$
|
1,338,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
10,740
|
|
|
|
3.36
|
%
|
|
|
|
|
|
$
|
10,582
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/average assets
|
|
$
|
11,754
|
|
|
|
3.52
|
%
|
|
|
|
|
|
$
|
11,654
|
|
|
|
3.48
|
%
|
|
|
|
|
|
Interest expense/average assets
|
|
$
|
1,014
|
|
|
|
0.30
|
%
|
|
|
|
|
|
$
|
1,072
|
|
|
|
0.32
|
%
|
|
|
|
|
|
Net interest income/average assets
|
|
$
|
10,740
|
|
|
|
3.22
|
%
|
|
|
|
|
|
$
|
10,582
|
|
|
|
3.16
|
%
|
|
|
|
|
Net Interest Income
For the three months ended June 30, 2016 and 2015, the Company's net interest margin adjusted for tax exempt income was 3.36% and 3.32%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended June 30, 2016 totaled $9,992,000 compared to $9,787,000 for the three months ended June 30, 2015.
For the three months ended June 30, 2016, interest income increased $147,000, or 1%, 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 normal maturities and calls and to a lessor extent sales.
Interest expense decreased $58,000, or 5%, for the three months ended June 30, 2016 when compared to the same period in 2015. The lower interest expense for the period is primarily attributable to lower cost of funds on borrowed funds balances.
Provision for Loan Losses
The Company’s provision for loan losses was $14,000 and $922,000 for the three months ended June 30, 2016 and 2015, respectively. Net loan recoveries were $19,000 and $24,000 for the three months ended June 30, 2016 and 2015, respectively. The loan portfolio credit quality gauged by total impaired loans and past due loan volume remains favorable in comparison to our peers. However, the agricultural economy has weakened as declining grain prices have caused lower profitability for our agricultural borrowers.
Noninterest Income and Expense
Noninterest income decreased $481,000 for the three months ended June 30, 2016 compared to the same period in 2015. The decrease in noninterest income is primarily due to lower gains on the sale of securities, offset in part by 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 1% lower in the second quarter of 2016 compared to the same period in 2015.
Noninterest expense decreased $571,000 or 9% for the three months ended June 30, 2016 compared to the same period in 2015 primarily as a result of a decrease in other real estate owned expenses. The sale of a substantial portion of the other real estate owned in 2015 was reflected in the lower other real estate owned expenses in 2016, while the 2015 expense was due to an impairment write down. The efficiency ratio for the second quarter of 2016 was 51.36%, compared to 54.88% in 2015.
Income Taxes
The provision for income taxes expense for the three months ended June 30, 2016 and 2015 was $1,683,000 and $1,216,000, respectively, representing an effective tax rate of 29% 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.
Income Statement Review
for the Six Months ended June 30, 2016
The following highlights a comparative discussion of the major components of net income and their impact for the six months ended June 30, 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
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
98,194
|
|
|
$
|
2,180
|
|
|
|
4.44
|
%
|
|
$
|
94,815
|
|
|
$
|
2,181
|
|
|
|
4.60
|
%
|
|
Agricultural
|
|
|
75,884
|
|
|
|
1,854
|
|
|
|
4.89
|
%
|
|
|
75,353
|
|
|
|
1,774
|
|
|
|
4.71
|
%
|
|
Real estate
|
|
|
513,507
|
|
|
|
11,462
|
|
|
|
4.46
|
%
|
|
|
482,905
|
|
|
|
10,809
|
|
|
|
4.48
|
%
|
|
Consumer and other
|
|
|
22,091
|
|
|
|
393
|
|
|
|
3.56
|
%
|
|
|
16,882
|
|
|
|
347
|
|
|
|
4.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (including fees)
|
|
|
709,676
|
|
|
|
15,889
|
|
|
|
4.48
|
%
|
|
|
669,955
|
|
|
|
15,111
|
|
|
|
4.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
264,319
|
|
|
|
2,967
|
|
|
|
2.25
|
%
|
|
|
276,329
|
|
|
|
3,133
|
|
|
|
2.27
|
%
|
|
Tax-exempt 2
|
|
|
255,855
|
|
|
|
4,290
|
|
|
|
3.35
|
%
|
|
|
266,029
|
|
|
|
4,561
|
|
|
|
3.43
|
%
|
|
Total investment securities
|
|
|
520,174
|
|
|
|
7,257
|
|
|
|
2.79
|
%
|
|
|
542,358
|
|
|
|
7,694
|
|
|
|
2.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks and federal funds sold
|
|
|
39,680
|
|
|
|
210
|
|
|
|
1.06
|
%
|
|
|
50,782
|
|
|
|
194
|
|
|
|
0.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,269,530
|
|
|
$
|
23,356
|
|
|
|
3.68
|
%
|
|
|
1,263,095
|
|
|
$
|
22,999
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
54,614
|
|
|
|
|
|
|
|
|
|
|
|
64,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,324,144
|
|
|
|
|
|
|
|
|
|
|
$
|
1,327,652
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
666,603
|
|
|
$
|
641
|
|
|
|
0.19
|
%
|
|
$
|
648,848
|
|
|
$
|
559
|
|
|
|
0.17
|
%
|
|
Time deposits > $100,000
|
|
|
87,945
|
|
|
|
393
|
|
|
|
0.89
|
%
|
|
|
91,474
|
|
|
|
414
|
|
|
|
0.90
|
%
|
|
Time deposits < $100,000
|
|
|
126,805
|
|
|
|
471
|
|
|
|
0.74
|
%
|
|
|
142,743
|
|
|
|
558
|
|
|
|
0.78
|
%
|
|
Total deposits
|
|
|
881,353
|
|
|
|
1,505
|
|
|
|
0.34
|
%
|
|
|
883,065
|
|
|
|
1,531
|
|
|
|
0.35
|
%
|
|
Other borrowed funds
|
|
|
79,084
|
|
|
|
522
|
|
|
|
1.32
|
%
|
|
|
89,052
|
|
|
|
641
|
|
|
|
1.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing liabilities
|
|
|
960,437
|
|
|
|
2,027
|
|
|
|
0.42
|
%
|
|
|
972,117
|
|
|
|
2,172
|
|
|
|
0.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
191,064
|
|
|
|
|
|
|
|
|
|
|
|
190,753
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,049
|
|
|
|
|
|
|
|
|
|
|
|
6,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
165,594
|
|
|
|
|
|
|
|
|
|
|
|
158,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
$
|
1,324,144
|
|
|
|
|
|
|
|
|
|
|
$
|
1,327,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
21,329
|
|
|
|
3.36
|
%
|
|
|
|
|
|
$
|
20,827
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/average assets
|
|
$
|
23,356
|
|
|
|
3.53
|
%
|
|
|
|
|
|
$
|
22,999
|
|
|
|
3.46
|
%
|
|
|
|
|
|
Interest expense/average assets
|
|
$
|
2,027
|
|
|
|
0.31
|
%
|
|
|
|
|
|
$
|
2,172
|
|
|
|
0.33
|
%
|
|
|
|
|
|
Net interest income/average assets
|
|
$
|
21,329
|
|
|
|
3.22
|
%
|
|
|
|
|
|
$
|
20,827
|
|
|
|
3.14
|
%
|
|
|
|
|
Net Interest Income
For the six months ended June 30, 2016 and 2015, the Company's net interest margin adjusted for tax exempt income was 3.36% and 3.30%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the six months ended June 30, 2016 totaled $19,827,000 compared to $19,233,000 for the six months ended June 30, 2015.
Interest income increased $450,000, or 2% for the six months ended June 30, 2016, 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 normal maturities and calls and to a lessor extent sales.
Interest expense decreased $145,000, or 7%, for the six months ended June 30, 2016 when compared to the same period in 2015. The lower interest expense for the period is primarily attributable to lower average balances and lower average rates on borrowed funds. This decrease in average borrowed funds balances and rates is primarily due to the repayment of loans related to financing agreements in 2016.
Provision for Loan Losses
The Company’s provision for loan losses was $206,000 and $999,000 for the six months ended June 30, 2016 and 2015, respectively. Net loan charge-offs were $59,000 and net loan recoveries were $34,000 for the six months ended June 30, 2016 and 2015, respectively. The provision for loan losses in 2016 and 2015 was due primarily to accommodate additional loan growth.
Noninterest Income and Expense
Noninterest income decreased $148,000 for the six months ended June 30, 2016 compared to the same period in 2015. The decrease in noninterest income is primarily due to lower realized securities gains of $266,000, offset in part by higher wealth management income of $156,000 compared to the prior year. The increase in wealth management income is due primarily to increases in estate fees. Exclusive of realized securities gains, noninterest income was 3% higher in the six months ended June 30, 2016 compared to the same period in 2015.
Noninterest expense decreased $276,000 or 2% for the six months ended June 30, 2016 compared to the same period in 2015 primarily as a result of lower other real estate owned expenses of $707,000. This decrease is due to an impairment write down in 2015, with no impairment write downs in 2016. Offsetting this decrease in expenses is a 5% increase in salaries and employee benefits. This increase is mainly due to normal salary increases along with costs associated with additional lending and support staff. The efficiency ratio for the six months ended June 30, 2016 was 52.64%, compared to 54.81% for the six months ended June 30, 2015.
Income Taxes
The provision for income taxes expense for the six months ended June 30, 2016 and 2015 was $3,185,000 and $2,576,000, respectively, representing an effective tax rate of 29% and 27%, respectively. The increase in effective rate is due primarily to the impact of a lower level of tax-exempt interest income in 2016 compared to 2015.
Balance Sheet Review
As of June 30, 2016, total assets were $1,328,847,000, a $2,100,000 increase compared to December 31, 2015. The increase in assets was due primarily to an increase in loans and to a lessor extent interest bearing deposits in other banks. This increase was offset in part by a decrease in securities. The increase in interest bearing deposits in other banks was due primarily to excess liquidity from decreases in the securities and cash and due from banks.
Investment Portfolio
The investment portfolio totaled $528,801,000 as of June 30, 2016, a decrease of $8,832,000 or 2% 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 June 30, 2016, gross unrealized losses of $374,000, 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 June 30, 2016, the Company’s investment securities portfolio included securities issued by 281 government municipalities and agencies located within 24 states with a fair value of $268.0 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 June 30, 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 June 30, 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
|
|
$
|
67,261
|
|
|
$
|
68,463
|
|
|
$
|
77,735
|
|
|
$
|
78,255
|
|
|
Texas
|
|
|
11,158
|
|
|
|
11,518
|
|
|
|
10,712
|
|
|
|
10,967
|
|
|
Pennsylvania
|
|
|
9,353
|
|
|
|
9,515
|
|
|
|
8,389
|
|
|
|
8,448
|
|
|
Other (2016: 17 states; 2015: 17 states)
|
|
|
33,531
|
|
|
|
34,411
|
|
|
|
34,850
|
|
|
|
35,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general obligation bonds
|
|
$
|
121,303
|
|
|
$
|
123,907
|
|
|
$
|
131,686
|
|
|
$
|
133,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
132,064
|
|
|
$
|
135,304
|
|
|
$
|
134,333
|
|
|
$
|
136,705
|
|
|
Other (2016: 10 states; 2015: 9 states)
|
|
|
8,657
|
|
|
|
8,835
|
|
|
|
7,752
|
|
|
|
7,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds
|
|
$
|
140,721
|
|
|
$
|
144,139
|
|
|
$
|
142,085
|
|
|
$
|
144,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations of states and political subdivisions
|
|
$
|
262,024
|
|
|
$
|
268,046
|
|
|
$
|
273,771
|
|
|
$
|
277,597
|
|
As of June 30, 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
|
|
$
|
86,082
|
|
|
$
|
88,550
|
|
|
$
|
88,299
|
|
|
$
|
90,145
|
|
|
College and universities, primarily dormitory revenues
|
|
|
11,585
|
|
|
|
11,837
|
|
|
|
12,153
|
|
|
|
12,298
|
|
|
Water
|
|
|
10,393
|
|
|
|
10,617
|
|
|
|
10,446
|
|
|
|
10,548
|
|
|
Leases
|
|
|
8,834
|
|
|
|
9,011
|
|
|
|
9,900
|
|
|
|
9,939
|
|
|
Electric
|
|
|
8,435
|
|
|
|
8,701
|
|
|
|
8,950
|
|
|
|
9,141
|
|
|
Other
|
|
|
15,392
|
|
|
|
15,423
|
|
|
|
12,337
|
|
|
|
12,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds by revenue source
|
|
$
|
140,721
|
|
|
$
|
144,139
|
|
|
$
|
142,085
|
|
|
$
|
144,501
|
|
Loan Portfolio
The loan portfolio, net of the allowance for loan losses of $10,135,000, totaled $712,941,000 as of June 30, 2016, an increase of $11,613,000, or 1.7%, from the December 31, 2015 balance of $701,328,000. The increase in the loan portfolio is primarily due to steady loan demand for most of our affiliate banks.
Other Real Estate Owned
Other real estate owned was $1,054,000 as of June 30, 2016, compared to $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 $1,065,365,000 as of June 30, 2016, a decrease of $8,828,000, or 0.8%, from the December 31, 2015 balance of $1,074,193,000. The decrease in deposits was primarily due to a decrease in demand deposits and other time deposits balances, offset in part by an increase in money market account balances.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase totaled $41,946,000 as of June 30, 2016, a decrease of $12,344,000, or 23%, from the December 31, 2015 balance of $54,290,000 associated with one commercial account.
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 June 30, 2016 totaled $712,941,000 compared to $701,328,000 as of December 31, 2015. Net loans comprise 53.7% of total assets as of June 30, 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 June 30, 2016, as compared to 0.24% at December 31, 2015 and 0.30% at June 30, 2015. The Company’s level of problem loans as a percentage of total loans at June 30, 2016 of 0.35% is lower than the Company’s peer group (343 bank holding companies with assets of $1 billion to $3 billion) of 0.85% as of March 31, 2016.
Impaired loans, net of specific reserves, totaled $2,105,000 as of June 30, 2016 and have increased $726,000 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 $1,420,000 as of June 30, 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 six months ended June 30, 2016 and no charge-offs related to TDRs for the six months ended June 30, 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 June 30, 2016, non-accrual loans totaled $2,470,000 and there was an $85,000 loan 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 $1,054,000 as of June 30, 2016 and $1,250,000 as of December 31, 2015.
The allowance for loan losses as a percentage of outstanding loans as of June 30, 2016 was 1.40%, as compared to 1.40% at December 31, 2015. The allowance for loan losses totaled $10,135,000 and $9,988,000 as of June 30, 2016 and December 31, 2015, respectively. Net charge-offs of loans totaled $59,000 for the six months ended June 30, 2016 as compared to net recoveries of loans of $34,000 for the six months ended June 30, 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 June 30, 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 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 June 30, 2016 and December 31, 2015 totaled $51,535,000 and $50,999,000, respectively, and provide an adequate level of liquidity given current economic conditions.
Other sources of liquidity available to the Banks as of June 30, 2016 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $151,450,000, with $29,800,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $106,947,000, with $959,000 outstanding federal fund purchase balances as of June 30, 2016. The Company had securities sold under agreements to repurchase totaling $41,946,000 and term repurchase agreements of $13,000,000 as of June 30, 2016.
Total investments as of June 30, 2016 were $528,801,000 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 June 30, 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 six months ended June 30, 2016 totaled $9,866,000 compared to the $10,801,000 for the six months ended June 30, 2015. The decrease of $935,000 in net cash provided by operating activities was primarily due to changes in loans held for sale and a decrease in the provision for loan losses.
Net cash used in investing activities for the six months ended June 30, 2016 was $817,000 compared to $23,724,000 for the six months ended June 30, 2015. The decrease of $22,907,000 in cash used in investing activities was primarily due to a lower level of purchases of securities available-for-sale and a lower net increase in loans, offset in part by changes in securities sold under agreements to repurchase.
Net cash provided by (used in) financing activities for the six months ended June 30, 2016 totaled $(12,755,000) compared to $15,503,000 for the six months ended June 30, 2015. The change of $28,258,000 in net cash (used in) financing activities was primarily due to a decrease in deposits in 2016 of $8,810,000 as compared to an increase in deposits in 2015 of $27,327,000, offset in part by changes in FHLB borrowings. As of June 30, 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 Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $4,325,000 and $4,050,000 for the six months ended June 30, 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 totaled $9,478,000 as of June 30, 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 June 30, 2016 that are of concern to management.
Capital Resources
The Company’s total stockholders’ equity as of June 30, 2016 totaled $170,087,000 and was $8,837,000 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 June 30, 2016 and December 31, 2015, stockholders’ equity as a percentage of total assets was 12.80% and 12.15%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of June 30, 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.