The following discussion is provided for the consolidated operations of the Company and its Banks. 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. Some Banks also offer investment services through a third-party broker-dealer. The Company employs 13 individuals to assist with financial reporting, human resources, marketing, audit, compliance, technology systems, training and the coordination of management activities, in addition to 231 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 prompt response times and flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through the creation of a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to improve profitability while enabling the Banks to offer more competitive loan and deposit rates.
The principal sources of Company revenues and cash flows are: (i) interest and fees earned on loans made or held by the Company and Banks; (ii) interest on investments, primarily on bonds, held by the Banks; (iii) fees on wealth management services; (iv) service charges on deposit accounts maintained at the Banks; (v) merchant and card fees; (vi) gain on the sale of loans held for sale; and (vii) securities gains. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing costs primarily associated with maintaining the Banks’ loan and deposit functions; (iv) occupancy expenses for maintaining the Banks’ facilities; (v) professional fees; and (vi) business development. 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 deposit accounts 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 reported net income of $17,014,000 for the year ended December 31, 2018 compared to $13,697,000 for the year ended December 31, 2017. This represents an increase in net income of 24% when comparing 2018 with 2017. The improvement in earnings in 2018 from 2017 is primarily the result of improved loan interest income and decreased income tax expense, offset in part by elevated deposit interest expense and higher salary and employee benefits. Earnings per share for 2018 were $1.83 compared to $1.47 in 2017. All five Banks demonstrated profitable operations during 2018 and 2017.
The Company’s return on average equity for 2018 was 10.09% compared to 8.02% in 2017, and the return on average assets for 2018 was 1.23% compared to 1.00% in 2017. The increase in return on average equity and return on average assets when comparing 2018 to 2017 was primarily a result of higher net income. The increase in return on average equity and return on average assets when comparing 2018 to 2017 was primarily a result of higher net income.
The following discussion will provide a summary review of important items relating to:
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Liquidity and Capital Resources
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Forward-Looking Statements and Business Risks
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Non-GAAP Financial Measures
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Challenges
Management has identified certain events or circumstances that have the potential to 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.
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If interest rates increase significantly over a relatively short period of time due to improving national employment levels or higher inflationary numbers, the interest rate environment may present a challenge to the Company. Increases in interest rates may negatively impact the Company’s net interest margin if interest expense increases more quickly than interest income, thus placing downward pressure on net interest income. The Company’s earning assets (primarily its loan and investment portfolio) have longer maturities than its interest bearing liabilities (primarily deposits and other borrowings); therefore, in a rising interest rate environment, interest expense will tend to increase more quickly than interest income as the interest bearing liabilities reprice more quickly than earning assets, resulting in a reduction in net interest income. In response to this challenge, the Banks model quarterly the changes in income that would result from various changes in interest rates. Management believes Bank earning assets have the appropriate maturity and repricing characteristics to optimize earnings and the Banks’ interest rate risk positions.
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If market interest rates in the three to five year term remain at low levels as compared to the short term interest rates, the interest rate environment may present a challenge to the Company. The Company’s earning assets (typically priced at market interest rates in the three to five year range) will reprice at lower interest rates, but the deposits will not reprice at significantly lower interest rates, therefore the net interest income may decrease. Management believes Bank earning assets have the appropriate maturity and repricing characteristics to optimize earnings and the Banks’ interest rate risk positions.
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The agricultural community is subject to commodity price fluctuations. Extended periods of low commodity prices, higher input costs or poor weather conditions could result in reduced profit margins, reducing demand for goods and services provided by agriculture-related businesses, which, in turn, could affect other businesses in the Company’s market area. Moreover, the recent changes in U.S. trade policy, including the imposition of tariffs by the U.S. government and retaliatory tariffs imposed in response by foreign governments, could create further volatility for commodities prices as the volume of exports of agricultural products to these foreign markets could be adversely impacted. Any combination of these factors could produce losses within the Company's agricultural loan portfolio and in the commercial loan portfolio with respect to borrowers whose businesses are directly or indirectly impacted by the health of the agricultural economy.
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Key Performance
Indicators
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 (FDIC) and are derived from 5,406 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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Years Ended December 31,
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2018
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2017
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2016
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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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1.35
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%
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1.00
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%
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0.97
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%
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1.18
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%
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1.04
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%
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Return on equity
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10.09
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%
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11.98
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%
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8.02
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%
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8.64
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%
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9.38
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%
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9.32
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%
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Net interest margin
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3.23
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%
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3.40
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%
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3.25
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%
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3.25
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%
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3.36
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%
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3.13
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%
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Efficiency ratio
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55.90
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%
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56.27
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%
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52.70
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%
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57.94
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%
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51.95
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%
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58.28
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%
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Capital ratio
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12.18
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%
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9.70
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%
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12.48
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%
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9.62
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%
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|
12.60
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%
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9.48
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%
|
Key performance indicators include:
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 return on assets ratio is lower than that of the industry, primarily as a result of the Company’s net interest margin being lower than the industry.
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 equity ratio is lower than the industry primarily as a result of the Company’s higher capital ratio and lower net interest margin as compared to the industry.
This ratio is calculated by dividing net interest income by average earning assets. Earning assets consist primarily 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 deposit accounts and other borrowings. The Company’s net interest margin is in line with the industry net interest margin.
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 is slightly lower than the industry average.
The 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 is significantly higher than the industry average.
Industry Results
The FDIC Quarterly Banking Profile reported the following results for the fourth quarter of 2018
Net Income Rises $33.8 Billion Over Fourth Quarter 2017 to $59.1 Billion
The 5,406 FDIC-insured commercial banks and savings institutions reported quarterly net income of $59.1 billion in the fourth quarter, an increase of $33.8 billion (133.4%) from a year earlier. Improvement in quarterly net income was attributable to higher net operating revenue (the sum of net interest income and noninterest income) and lower income tax expenses. Assuming the effective tax rate before the new tax law, quarterly net income would have totaled an estimated $50.3 billion, up $7.9 billion (18.5%) from 12 months ago. The average return on assets was 1.33% for the quarter, up from 0.58% in fourth quarter 2017. The percentage of unprofitable banks in the fourth quarter declined to 6.5% from 16.6% a year ago.
Full-Year 2018 Net Income Grows to $236.7 Billion
Growth in net operating revenue (up $53.1 billion, or 7%), coupled with lower income tax expenses (down $36.9 billion, or 37.7%) and loan-loss provisions (down $1.1 billion, or 2.2%), lifted full-year 2018 net income to $236.7 billion, an improvement of $72.4 billion (44.1%) from 2017. Assuming the effective tax rate before the new tax law, full-year 2018 net income would have totaled an estimated $207.9 billion, compared with $183.1 billion in 2017. The average net interest margin (NIM) rose from 3.25% in 2017 to 3.40%, as average asset yields (up 43 basis points) exceeded average funding costs (up 28 basis points). The average return on assets for 2018 was 1.35%, up from 0.97% for 2017.
Net Interest Income Increases 8.1% From a Year Earlier
Quarterly net interest income rose to $140.2 billion, up $10.5 billion (8.1%) from a year earlier, owing to growth in interest-bearing assets and wider net interest margins (NIM). More than four out of five banks (82.6%) reported year-over-year increases in net interest income. NIM was 3.48% for the quarter, an improvement from the 3.31% margin reported a year ago, as average asset yields grew more rapidly than average funding costs. Banks with assets of $10 billion to $250 billion reported the largest annual increases in average asset yields (up 58 basis points) and average funding costs (up 40 basis points).
Loan-Loss Provisions Increase Modestly
Banks set aside $14 billion in loan-loss provisions during the fourth quarter, the highest level since fourth quarter 2012. Loan-loss provisions rose by $397.3 million (2.9%) from fourth quarter 2017, with close to 40% of all banks reporting increases. Loan-loss provisions as a% of net operating revenue declined from 8.3% at year-end 2017 to 8.2%.
Noninterest Income Expands From a Year Earlier
Noninterest income increased $1.6 billion (2.6%) from a year earlier, as all other noninterest income grew by $3.5 billion (11.9%) and net gains on sales of other assets rose by $393 million (120.3%). Despite the overall increase in noninterest income, trading revenue declined by $1.5 billion (25.9%) and servicing fees fell by $850.9 million (36.1%). Slightly more than half of all banks (53.6%) reported increases in noninterest income compared with the year-ago quarter.
Noninterest Expense Increases From Fourth Quarter 2017
Noninterest expense posted a modest increase of $194.9 million (0.2%) over the past 12 months. Increases in other noninterest expense (up $2.6 billion, or 5%) and salary and employee benefits (up $717 million, or 1.3%) were partially offset by a decline in premises and fixed asset expense (down $2.7 billion, or 22.5%). The average assets per employee increased from $8.4 million in fourth quarter 2017 to $8.7 million.
Net Charge-Offs Decline 4.6% From a Year Ago
Banks charged off $12.6 billion in uncollectable loans during the quarter, a decline of $ 605.9 million (4.6%) from a year ago. This marks the first time since third quarter 2015 that net charge-offs registered a year-over-year decline. Credit card balances registered the largest annual dollar increase in net-charge offs (up $347.7 million, or 4.4%), while commercial and industrial loans had the largest annual dollar decline (down $522.6 million, or 23.4%). The average net charge-off rate declined from 0.55% in fourth quarter 2017 to 0.50%.
Noncurrent Loan Rate Falls Below 1%
Noncurrent loan balances (90 days or more past due or in nonaccrual status) were $1 billion (1%) lower than the previous quarter. More than half of all banks (53.3%) reported lower noncurrent loan balances. The quarter-over-quarter decline was reflected in residential mortgages balances, which declined by $2 billion (4.4%), and commercial and industrial loan balances, which fell by $554.3 million (3.6%). Credit card balances continued to register the largest quarterly dollar increase, growing by $1.6 billion (13.8%). The average noncurrent rate was 0.99% during the current quarter, down 3 basis points from the previous quarter. This is the first time since second quarter 2007 that the noncurrent rate was below 1%.
Loan-Loss Reserves Increase From Third Quarter 2018
Loan-loss reserves totaled $124.7 billion at the end of the fourth quarter, an increase of $1 billion (0.8%) from third quarter 2018. The banking industry continued to build reserves, as loan-loss provisions of $14 billion exceeded net charge-offs of $12.6 billion. More than half of all banks (57.8%) reported a quarterly increase in loan-loss reserves. Banks that itemize their loan-loss reserves (banks with assets greater than $1 billion and representing 93% of total industry assets) reported higher reserves for credit card losses (up $997.4 million, or 2.5%) and lower reserves for residential real estate losses (down $556 million, or 4.4%). After declining for the past nine consecutive quarters, itemized reserves for losses on commercial loans reported quarterly growth of $409 million (1.3%).
Equity Capital Increases From the Third Quarter
Equity capital increased by $25.3 billion (1.3%) during the fourth quarter, led by accumulated other comprehensive income. Retained earnings rose by $70.8 billion (10.3%) from a year ago. Declared dividends in the fourth quarter totaled $52.7 billion, the highest level ever reported by the banking industry. At year-end 2018, 99.6% of all insured institutions, which account for 99.98% of total industry assets, met or exceeded the requirements for the well-capitalized category, as defined for Prompt Corrective Action purposes.
Total Assets Increase 1.5% During the Fourth Quarter
Total assets rose by $270.4 billion (1.5%) during the fourth quarter. Cash and balances due from depository institutions declined by $144.4 billion (7.9%) and total securities holdings grew by $93 billion (2.6%). U.S. Treasury securities increased $55.4 billion (11.2%) during the quarter, the largest quarterly dollar increase since fourth quarter 2014.
Total Loan and Lease Balances Rise 4.4% Over 12 Months
Total loan and lease balances were $213 billion (2.1%) higher compared with the previous quarter. All major loan categories registered quarterly increases. Commercial and industrial loans increased by $80.7 billion (3.9%), and consumer loans (including credit card balances) rose by $52.2 billion (3.1%). During the 12 months ended December 31, total loan and lease balances rose by $431.2 billion (4.4%), a slight increase from the 4% annual grow rate reported last quarter. All major loan categories reported year-over-year increases, led by commercial and industrial loans, which increased by $156.2 billion (7.8%), and consumer loans (including credit card balances), which rose by $64.9 billion (3.9%).
Deposits Increase 2.2% From the Previous Quarter
Total deposits increased by $292.6 billion (2.2%) from the third quarter, the largest quarterly dollar increase since fourth quarter 2012. Interest-bearing deposits grew by $296.5 billion (3.2%), while noninterest-bearing deposits fell by $ 5.4 billion (0.2%). Reliance on nondeposit liabilities declined by $47.5 billion (2.3%) from the previous quarter, as trade liabilities were reduced by $23.1 billion (8.9%) and other liabilities fell by $24.4 billion (6%).
The Number of Banks on the “Problem Bank List” Declines to 60
The number of banks on the FDIC’s “Problem Bank List” declined from 71 to 60 at year-end 2018, the fewest since first quarter 2007. Total assets of problem banks fell from $53.3 billion to $48.5 billion. During the fourth quarter, two new charters were added, 70 institutions were absorbed by mergers, and there were no bank failures. For full-year 2018, eight new charters were added, 259 institutions were absorbed by mergers, and there were no bank failures.
Critical Accounting Policies
The discussion contained in this Item 7 and other disclosures included within this Annual Report are based on the Company’s audited consolidated financial statements which appear in Item 8 of this Annual Report. 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 L
osses
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 change 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 change 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 acquisitions in 2018, 2014 and 2012. 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 December 31, 2018, Company’s management has completed the goodwill impairment analysis 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.
Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures are widely used in the financial institutions industry and provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP.
(dollars in thousands)
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
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2018
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2017
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Net interest income (GAAP)
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$
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42,124
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$
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40,213
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|
Tax-equivalent adjustment
(1)
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1,218
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|
|
|
2,700
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|
Net interest income on an FTE basis (non-GAAP)
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|
|
43,342
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|
|
|
42,913
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Average interest-earning assets
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|
$
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1,341,763
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|
|
$
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1,319,362
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Net interest margin on an FTE basis (non-GAAP)
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3.23
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%
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|
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3.25
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%
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(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent for the year ended December 31, 2018 and 35 percent for the year ended December 31, 2017, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans.
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Income Statement Review
The following highlights a comparative discussion of the major components of net income and their impact for the last two years.
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. Refer to the net interest income discussion following the tables for additional detail.
(dollars in thousands)
ASSETS
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2018
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2017
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Average
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Revenue/
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Yield/
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Average
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Revenue/
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Yield/
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balance
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expense
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rate
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balance
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expense
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rate
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Interest-earning assets
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Loans (1)
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Commercial
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$
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75,966
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$
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3,876
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5.10
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%
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$
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75,997
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$
|
3,477
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4.58
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%
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Agricultural
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72,005
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4,278
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|
5.94
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%
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68,382
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|
|
|
3,599
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|
|
|
5.26
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%
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Real estate
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|
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655,232
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|
29,288
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|
4.47
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%
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|
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616,821
|
|
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|
26,427
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|
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|
4.28
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%
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Consumer and other
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|
|
10,998
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|
|
|
572
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|
|
|
5.20
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%
|
|
|
10,968
|
|
|
|
545
|
|
|
|
4.97
|
%
|
|
|
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|
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|
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|
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|
Total loans (including fees)
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|
|
814,201
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|
|
|
38,014
|
|
|
|
4.67
|
%
|
|
|
772,168
|
|
|
|
34,048
|
|
|
|
4.41
|
%
|
|
|
|
|
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|
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|
|
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|
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|
|
|
|
|
|
|
|
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|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
266,725
|
|
|
|
6,188
|
|
|
|
2.32
|
%
|
|
|
269,212
|
|
|
|
6,130
|
|
|
|
2.28
|
%
|
Tax-exempt (2)
|
|
|
217,486
|
|
|
|
5,801
|
|
|
|
2.67
|
%
|
|
|
237,938
|
|
|
|
7,716
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
484,211
|
|
|
|
11,989
|
|
|
|
2.48
|
%
|
|
|
507,150
|
|
|
|
13,846
|
|
|
|
2.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest earning assets
|
|
|
43,351
|
|
|
|
942
|
|
|
|
2.17
|
%
|
|
|
40,044
|
|
|
|
601
|
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,341,763
|
|
|
$
|
50,945
|
|
|
|
3.80
|
%
|
|
|
1,319,362
|
|
|
$
|
48,495
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
21,274
|
|
|
|
|
|
|
|
|
|
|
|
21,702
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
15,458
|
|
|
|
|
|
|
|
|
|
|
|
15,766
|
|
|
|
|
|
|
|
|
|
Other, less allowance for loan losses
|
|
|
6,245
|
|
|
|
|
|
|
|
|
|
|
|
11,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets
|
|
|
42,977
|
|
|
|
|
|
|
|
|
|
|
|
49,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,384,740
|
|
|
|
|
|
|
|
|
|
|
$
|
1,368,680
|
|
|
|
|
|
|
|
|
|
(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 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2017.
|
Average Balances and Interest Rates (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW accounts and money markets
|
|
$
|
745,652
|
|
|
$
|
4,406
|
|
|
|
0.59
|
%
|
|
$
|
717,875
|
|
|
$
|
2,547
|
|
|
|
0.35
|
%
|
Time deposits
|
|
|
198,319
|
|
|
|
2,436
|
|
|
|
1.23
|
%
|
|
|
197,528
|
|
|
|
1,893
|
|
|
|
0.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
943,971
|
|
|
|
6,842
|
|
|
|
0.72
|
%
|
|
|
915,403
|
|
|
|
4,440
|
|
|
|
0.49
|
%
|
Other borrowed funds
|
|
|
50,446
|
|
|
|
761
|
|
|
|
1.51
|
%
|
|
|
73,049
|
|
|
|
1,142
|
|
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
994,417
|
|
|
|
7,603
|
|
|
|
0.76
|
%
|
|
|
988,452
|
|
|
|
5,582
|
|
|
|
0.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
213,535
|
|
|
|
|
|
|
|
|
|
|
|
202,120
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
8,085
|
|
|
|
|
|
|
|
|
|
|
|
7,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
168,703
|
|
|
|
|
|
|
|
|
|
|
|
170,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,384,740
|
|
|
|
|
|
|
|
|
|
|
$
|
1,368,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
43,342
|
|
|
|
3.23
|
%
|
|
|
|
|
|
$
|
42,913
|
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/average assets
|
|
|
|
|
|
$
|
50,945
|
|
|
|
3.68
|
%
|
|
|
|
|
|
$
|
48,495
|
|
|
|
3.54
|
%
|
Interest expense/average assets
|
|
|
|
|
|
|
7,603
|
|
|
|
0.55
|
%
|
|
|
|
|
|
|
5,582
|
|
|
|
0.41
|
%
|
Net interest income/average assets
|
|
|
|
|
|
|
43,342
|
|
|
|
3.13
|
%
|
|
|
|
|
|
|
42,913
|
|
|
|
3.14
|
%
|
Rate and Volume Analysis
The rate and volume analysis is used to determine how much of the change in interest income or expense is the result of a change in volume or a change in interest rate. For example, real estate loan interest income increased $2,862,000 in 2018 compared to 2017. Increased volume of real estate loans increased interest income in 2018 by $1,671,000 and higher interest rates increased interest income in 2018 by $1,191,000.
The following table sets forth, on a tax-equivalent basis, a summary of the changes in net interest income resulting from changes in volume and rates.
(dollars in thousands)
|
|
2018 Compared to 2017
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total (1)
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
399
|
|
|
$
|
399
|
|
Agricultural
|
|
|
198
|
|
|
|
481
|
|
|
|
679
|
|
Real estate
|
|
|
1,670
|
|
|
|
1,191
|
|
|
|
2,861
|
|
Consumer and other
|
|
|
2
|
|
|
|
25
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (including fees)
|
|
|
1,870
|
|
|
|
2,096
|
|
|
|
3,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(55
|
)
|
|
|
113
|
|
|
|
58
|
|
Tax-exempt
|
|
|
(629
|
)
|
|
|
(1,286
|
)
|
|
|
(1,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
(684
|
)
|
|
|
(1,173
|
)
|
|
|
(1,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest and dividend income
|
|
|
53
|
|
|
|
288
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,239
|
|
|
|
1,211
|
|
|
|
2,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW accounts and money markets
|
|
|
98
|
|
|
|
1,761
|
|
|
|
1,859
|
|
Time deposits
|
|
|
8
|
|
|
|
535
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
106
|
|
|
|
2,296
|
|
|
|
2,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds
|
|
|
(345
|
)
|
|
|
(36
|
)
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
(239
|
)
|
|
|
2,260
|
|
|
|
2,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income-earning assets
|
|
$
|
1,478
|
|
|
$
|
(1,049
|
)
|
|
$
|
429
|
|
(1)
|
The change in interest due to both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the absolute value of the change in each.
|
Net Interest Income
The Company’s largest contributing component to net income is net interest income, which is the difference between interest earned on earning assets and interest paid on interest bearing liabilities. The volume of and yields earned on earning assets and the volume of and the rates paid on interest bearing liabilities determine net interest income. Refer to the tables preceding this paragraph for additional detail. Interest earned and interest paid is also affected by general economic conditions, particularly changes in market interest rates, by government policies and the action of regulatory authorities. Net interest income divided by average earning assets is referred to as net interest margin. For the years December 31, 2018 and 2017, the Company's net interest margin was 3.23% and 3.25%, respectively, computed on a FTE basis.
Net interest income during 2018 and 2017 totaled $42,124,000 and $40,213,000, respectively, representing a 4.8% increase in 2018 compared to 2017. Net interest income increased in 2018 as compared to 2017 due primarily to increases in the average balance and rates of real estate loans, offset in part by increases in rates on deposits.
The high level of competition in the local markets will continue to put downward pressure on the net interest margin of the Company. Currently, the Company’s primary market in Ames, Iowa, has ten banks, six credit unions and several other financial investment companies. Multiple banks are also located in the Company’s other market areas in central, north-central and south-central Iowa creating similarly competitive environments.
Provision for Loan Losses
The provision for loan losses reflects management's judgment of the expense to be recognized in order to maintain an adequate allowance for loan losses. The Company’s provision for loan losses for the year ended December 31, 2018 was $639,000 compared to $1,520,000 for the previous year. The provision for loan losses in 2018 and 2017 was necessary to maintain an adequate allowance for loan loss on the increasing outstanding loan portfolio, as well as funding net charge offs of $276,000 and $706,000 for 2018 and 2017, respectively. Classified assets increased $26,229,000 due in part to several agricultural credits and a large hospitality credit, however the nonperforming loans have decreased from $4,828,000 in 2017 to $3,384,000 in 2018. Refer to the “Asset Quality and Credit Risk Management” discussion for additional details with regard to loan loss provision expense.
Management believes the allowance for loan losses is adequate to absorb probable losses in the current portfolio. This statement is based upon management's continuing evaluation of inherent risks in the current loan portfolio, current levels of classified assets and general economic factors. The Company will continue to monitor the allowance and make future adjustments to the allowance as conditions dictate. Due to potential changes in conditions, it is at least reasonably possible that change 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.
Noninterest Income and Expense
Total noninterest income is comprised primarily of fee-based revenues from wealth management and trust services, bank-related service charges on deposit activities, net securities gains, merchant and card fees related to electronic processing of merchant and cash transactions and gain on the sale of loans held for sale.
Noninterest income during the years ended 2018 and 2017 totaled $7,901,000 and $7,993,000, respectively. The decrease in noninterest income in 2018 compared to 2017 is primarily due to no security gains in 2018 as compared to $505,000 gains in 2017. Partially offsetting this decrease was higher wealth management income and a gain on the foreclosure of other real estate owned. The increase in wealth management income is primarily due to increases in estate fees in 2018. Excluding securities gains, noninterest income increased 5.5% in 2018 as compared to 2017.
Noninterest expense for the Company consists of all operating expenses other than interest expense on deposits and other borrowed funds. Salaries and employee benefits are the largest component of the Company’s operating expenses and comprise 64% and 63% of noninterest expense in 2018 and 2017, respectively.
Noninterest expense during the years ended 2018 and 2017 totaled $27,965,000 and $25,405,000, respectively, representing a 10.1% increase in 2018 compared to 2017. The primary reason for the increase in 2018 was increases in salary and benefits, professional fees and data conversion costs. The increase in salaries and benefits was due primarily to normal salary and employee benefit increases, the Clarke County Acquisition, one-time $1,000 bonuses paid to full-time employees and changes in the Company’s time off benefits. The increases in professional fees and data conversion costs were due primarily to the Clarke County Acquisition. The percentage of noninterest expense to average assets was 2.02 % in 2018, compared to 1.86% during 2017.
Provision for Income Taxes
The provision for income taxes for 2018 and 2017 was $4,406,000 and $7,585,000, respectively. This amount represents an effective tax rate of 21% and 36%, respectively. The Company's marginal federal income tax rates were 21% and 35% for the years ended December 31, 2018 and 2017. The difference between the Company's effective and marginal tax rate historically has been primarily related to investments made in tax exempt securities. However, the increase in the effective tax rate for 2017 was due primarily to the write down of $1,190,000 of the Company’s deferred income tax asset due to a decrease in the corporate federal income tax rates to 21% enacted in December 2017.
Balance Sheet Review
The Company’s assets are comprised primarily of loans and investment securities. Average earning asset maturity or repricing dates are generally five years or less for the combined portfolios as the assets are funded for the most part by short term deposits with either immediate availability or less than one year average maturities. This exposes the Company to risk with regard to changes in interest rates.
Total assets increased to $1,455,687,000 in 2018 compared to $1,375,060,000 in 2017, a 5.9% increase. Loan growth resulting from the Clarke County Acquisition was the primary driver of the increase in total assets, offset in part by a reduction in the securities portfolio.
Loan Portfolio
Net loans as of December 31, 2018 totaled $890,461,000, an increase of 15.4% from the $771,550,000 as of December 31, 2017. Loans increased primarily due to the Clarke County Acquisition and to a lesser extent due to loan demand, which remains favorable in 2018 as most markets provided additional lending opportunities, in particular the Ames and North Central Iowa markets. Loans are the primary contributor to the Company’s revenues and cash flows. The average yield on loans was 219 and 168 basis points higher in 2018 and 2017, respectively, in comparison to the average tax-equivalent investment portfolio yields. The change in the average yields is due primarily to the decrease in the yields on tax-exempt investments.
Types of Loans
The following table sets forth the composition of the Company's loan portfolio for the past five years ending at December 31, 2018.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
51,364
|
|
|
$
|
50,309
|
|
|
$
|
61,042
|
|
|
$
|
66,268
|
|
|
$
|
36,016
|
|
1-4 family residential
|
|
|
169,722
|
|
|
|
146,258
|
|
|
|
149,507
|
|
|
|
127,076
|
|
|
|
122,777
|
|
Commercial
|
|
|
389,532
|
|
|
|
350,626
|
|
|
|
315,702
|
|
|
|
251,889
|
|
|
|
257,054
|
|
Agricultural
|
|
|
103,652
|
|
|
|
81,790
|
|
|
|
73,032
|
|
|
|
62,530
|
|
|
|
57,449
|
|
Commercial
|
|
|
86,194
|
|
|
|
73,816
|
|
|
|
74,378
|
|
|
|
102,515
|
|
|
|
92,703
|
|
Agricultural
|
|
|
85,202
|
|
|
|
69,806
|
|
|
|
76,994
|
|
|
|
79,533
|
|
|
|
85,609
|
|
Consumer and other
|
|
|
16,566
|
|
|
|
10,345
|
|
|
|
12,130
|
|
|
|
21,599
|
|
|
|
15,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
902,232
|
|
|
|
782,950
|
|
|
|
762,785
|
|
|
|
711,410
|
|
|
|
667,371
|
|
Deferred loan fees, net
|
|
|
(87
|
)
|
|
|
(79
|
)
|
|
|
(96
|
)
|
|
|
(94
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans net of deferred fees
|
|
$
|
902,145
|
|
|
$
|
782,871
|
|
|
$
|
762,689
|
|
|
$
|
711,316
|
|
|
$
|
667,279
|
|
The Company's loan portfolio consists of real estate, commercial, agricultural and consumer loans. As of December 31, 2018, gross loans totaled approximately $902 million, which equals approximately 73.9% of total deposits and 62.0% of total assets. The Iowa State Average Report (consisting of 288 banks in the State of Iowa) loan to deposit ratio as of September 30, 2018 was 82%. As of December 31, 2018, the majority of the loans were originated directly by the Banks to borrowers within the Banks’ principal market areas. There are no foreign loans outstanding during the years presented.
Real estate loans include various types of loans for which the Banks hold real property as collateral and consist of loans primarily on commercial properties and single family residences. Real estate loans typically have fixed rates for up to five years, with the Company’s loan policy permitting a maximum fixed rate maturity of up to 15 years. The majority of construction loan volume is given to contractors to construct 1-4 family residence and commercial buildings and these loans generally have maturities of up to 12 months. The Banks also originate residential real estate loans for sale to the secondary market for a fee.
Commercial loans consist primarily of loans to businesses for various purposes, including revolving lines to finance current operations, floor-plans, inventory and accounts receivable; capital expenditure loans to finance equipment and other fixed assets; and letters of credit. These loans generally have short maturities, have either adjustable or fixed rates and are unsecured or secured by inventory, accounts receivable, equipment and/or real estate.
Agricultural loans play an important part in the Banks’ loan portfolios. Iowa is a major agricultural state and is a national leader in both grain and livestock production. The Banks play a significant role in their communities in financing operating, livestock and real estate activities for area producers.
Consumer loans include loans extended to individuals for household, family and other personal expenditures not secured by real estate. The majority of the Banks’ consumer lending is for vehicles, consolidation of personal debts, household appliances and improvements.
The interest rates charged on loans vary with the degree of risk and the amount and maturity of the loan. Competitive pressures, market interest rates, the availability of funds and government regulation further influence the rate charged on a loan. The Banks follow a loan policy, which has been approved by both the board of directors of the Company and the Banks, and is overseen by both Company and Bank management. These policies establish lending limits, review and grading criteria and other guidelines such as loan administration and allowance for loan losses. Loans are approved by the Banks’ board of directors and/or designated officers in accordance with respective guidelines and underwriting policies of the Company. Credit limits generally vary according to the type of loan and the individual loan officer’s experience. Loans to any one borrower are limited by applicable state and federal banking laws.
Maturities and Sensitivities of Loans to Changes in Intere
st Rates as of December 31,
20
1
8
The contractual maturities of the Company's loan portfolio are as shown below. Actual maturities may differ from contractual maturities because individual borrowers may have the right to prepay loans with or without prepayment penalties.
(dollars in thousands)
|
|
|
|
|
|
After one
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
year but
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
within
|
|
|
After
|
|
|
|
|
|
|
|
one year
|
|
|
five years
|
|
|
five years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
36,828
|
|
|
$
|
12,963
|
|
|
$
|
1,573
|
|
|
$
|
51,364
|
|
1-4 family residential
|
|
|
29,738
|
|
|
|
77,304
|
|
|
|
62,661
|
|
|
|
169,703
|
|
Commercial
|
|
|
36,070
|
|
|
|
270,067
|
|
|
|
83,395
|
|
|
|
389,532
|
|
Agricultural
|
|
|
11,452
|
|
|
|
40,726
|
|
|
|
51,473
|
|
|
|
103,651
|
|
Commercial
|
|
|
45,306
|
|
|
|
28,297
|
|
|
|
12,591
|
|
|
|
86,194
|
|
Agricultural
|
|
|
72,791
|
|
|
|
9,026
|
|
|
|
3,385
|
|
|
|
85,202
|
|
Consumer and other
|
|
|
1,919
|
|
|
|
7,296
|
|
|
|
7,371
|
|
|
|
16,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
234,104
|
|
|
$
|
445,679
|
|
|
$
|
222,449
|
|
|
$
|
902,232
|
|
|
|
After one
|
|
|
|
|
|
|
|
year but
|
|
|
|
|
|
|
|
within
|
|
|
After
|
|
|
|
five years
|
|
|
five years
|
|
|
|
|
|
|
|
|
|
|
Loan maturities after one year with:
|
|
|
|
|
|
|
|
|
Fixed rates
|
|
$
|
355,506
|
|
|
$
|
212,256
|
|
Variable rates
|
|
|
90,173
|
|
|
|
10,193
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
445,679
|
|
|
$
|
222,449
|
|
Loans Held For Sale
There was $401,000 of mortgage origination funding awaiting delivery to the secondary market as of December 31, 2018 and none as of December 31, 2017. Residential mortgage loans are originated by the Banks and sold to several secondary mortgage market outlets based upon customer product preferences and pricing considerations. The mortgages are sold in the secondary market to eliminate interest rate risk and to generate secondary market fee income. It is not anticipated at the present time that loans held for sale will become a significant portion of total assets.
Investment Portfolio
Total investments as of December 31, 2018 were $458,971,000, a decrease of $36.4 million or 7.3% from the prior year end. As of December 31, 2018 and 2017, the investment portfolio comprised 31% and 36% of total assets, respectively.
The following table presents the fair values, which represent the carrying values due to the available-for-sale classification, of the Company’s investment portfolio as of December 31, 2018 and 2017. This portfolio provides the Company with a significant amount of liquidity.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
U.S. government treasuries
|
|
$
|
7,800
|
|
|
$
|
6,367
|
|
U.S. government agencies
|
|
|
110,268
|
|
|
|
111,263
|
|
U.S. government mortgage-backed securities
|
|
|
70,382
|
|
|
|
81,780
|
|
State and political subdivisions
|
|
|
215,955
|
|
|
|
237,413
|
|
Corporate bonds
|
|
|
54,566
|
|
|
|
58,464
|
|
Equity securities
|
|
|
-
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
458,971
|
|
|
$
|
495,321
|
|
Investments in states and political subdivisions represent purchases of municipal bonds located primarily in the state of Iowa and contiguous states.
During the years ended December 31, 2018 and 2017, the Company did not recognize an other-than-temporary impairment. Management estimates at the present time there exists no other-than-temporary impairments in the securities available-for-sale portfolio at December 31, 2018; however, it is possible that the Company may incur impairment losses in 2019 and thereafter.
As of December 31, 2018, the Company did not have securities from a single issuer, except for the United States Government or its agencies, which exceeded 10% of consolidated stockholders’ equity.
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.
The valuation techniques used are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques are consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, a fair value hierarchy was established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
|
Level 1:
|
Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available.
|
|
Level 2:
|
Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.
|
|
Level 3:
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
|
Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Other securities available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the terms and conditions, among other things.
The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are esoteric or that have a complicated structure. The Company’s entire portfolio consists of traditional investments, nearly all of which are federal agency or mortgage pass-through securities, general obligation or revenue based municipal bonds and corporate bonds. Annually, the Company will validate prices supplied by the independent pricing service by comparison to prices obtained from third-party sources.
Investment Maturities as of December 31, 2018
The investments in the following table are reported by contractual maturity. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without prepayment penalties.
(dollars in thousands)
|
|
|
|
|
|
After one
|
|
|
After five
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
year but
|
|
|
years but
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
within
|
|
|
within
|
|
|
After
|
|
|
|
|
|
|
|
one year
|
|
|
five years
|
|
|
ten years
|
|
|
ten years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government treasuries
|
|
$
|
2,473
|
|
|
$
|
5,327
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,800
|
|
U.S. government agencies
|
|
|
12,429
|
|
|
|
71,610
|
|
|
|
26,229
|
|
|
|
-
|
|
|
|
110,268
|
|
U.S. government mortgage-backed securities
|
|
|
267
|
|
|
|
45,095
|
|
|
|
25,020
|
|
|
|
-
|
|
|
|
70,382
|
|
States and political subdivisions (1)
|
|
|
33,680
|
|
|
|
103,265
|
|
|
|
62,697
|
|
|
|
16,313
|
|
|
|
215,955
|
|
Corporate bonds
|
|
|
5,518
|
|
|
|
36,196
|
|
|
|
12,852
|
|
|
|
-
|
|
|
|
54,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,367
|
|
|
$
|
261,493
|
|
|
$
|
126,798
|
|
|
$
|
16,313
|
|
|
$
|
458,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government treasuries
|
|
|
2.32
|
%
|
|
|
2.06
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
2.15
|
%
|
U.S. government agencies
|
|
|
1.82
|
%
|
|
|
1.92
|
%
|
|
|
2.40
|
%
|
|
|
n/a
|
|
|
|
2.20
|
%
|
U.S government mortgage-backed securities
|
|
|
3.73
|
%
|
|
|
2.36
|
%
|
|
|
2.51
|
%
|
|
|
n/a
|
|
|
|
2.93
|
%
|
States and political subdivisions (1)
|
|
|
2.71
|
%
|
|
|
2.69
|
%
|
|
|
2.98
|
%
|
|
|
3.23
|
%
|
|
|
2.82
|
%
|
Corporate bonds
|
|
|
1.91
|
%
|
|
|
2.55
|
%
|
|
|
2.96
|
%
|
|
|
n/a
|
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2.15
|
%
|
|
|
2.44
|
%
|
|
|
2.82
|
%
|
|
|
3.23
|
%
|
|
|
2.57
|
%
|
(1) Yields on tax-exempt obligations of states and political subdivisions have been computed on a tax-equivalent basis.
At December 31, 2018 and 2017, the Company’s investment securities portfolio included securities issued by 263 and 258 government municipalities and agencies located within 16 and 22 states with a fair value of $215,955,000 and $237,413,000, respectively. 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 December 31, 2018 and 2017 was $3.8 million (approximately 1.8% of the fair value of the governmental municipalities) represented by the West Des Moines, Iowa Community School District to be repaid by sales tax revenues.
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 December 31, 2018 and 2017 identifying the state in which the issuing government municipality or agency operates.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Obligation bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
59,935
|
|
|
$
|
59,481
|
|
|
$
|
56,029
|
|
|
$
|
55,829
|
|
Texas
|
|
|
11,822
|
|
|
|
11,803
|
|
|
|
12,141
|
|
|
|
12,174
|
|
Pennsylvania
|
|
|
9,167
|
|
|
|
9,144
|
|
|
|
8,719
|
|
|
|
8,745
|
|
Washington
|
|
|
6,905
|
|
|
|
6,762
|
|
|
|
7,017
|
|
|
|
6,900
|
|
Other (2018: 12 states; 2017: 18 states)
|
|
|
17,138
|
|
|
|
17,198
|
|
|
|
22,023
|
|
|
|
22,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general obligation bonds
|
|
$
|
104,967
|
|
|
$
|
104,388
|
|
|
$
|
105,929
|
|
|
$
|
105,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
104,589
|
|
|
$
|
103,925
|
|
|
$
|
122,044
|
|
|
$
|
122,140
|
|
Other (2018: 7 states; 2017: 9 states)
|
|
|
7,691
|
|
|
|
7,642
|
|
|
|
9,376
|
|
|
|
9,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds
|
|
$
|
112,280
|
|
|
$
|
111,567
|
|
|
$
|
131,420
|
|
|
$
|
131,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations of states and political subdivisions
|
|
$
|
217,247
|
|
|
$
|
215,955
|
|
|
$
|
237,349
|
|
|
$
|
237,413
|
|
As of December 31, 2018 and 2017, 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 and water utilities. The revenue bonds are to be paid from 12 and 13 revenue sources in 2018 and 2017, respectively. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds by revenue source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tax
|
|
$
|
60,422
|
|
|
$
|
60,322
|
|
|
$
|
74,631
|
|
|
$
|
74,973
|
|
College and universities, primarily dormitory revenues
|
|
|
8,183
|
|
|
|
8,139
|
|
|
|
10,452
|
|
|
|
10,443
|
|
Water
|
|
|
13,863
|
|
|
|
13,644
|
|
|
|
12,763
|
|
|
|
12,611
|
|
Leases
|
|
|
8,958
|
|
|
|
8,861
|
|
|
|
9,383
|
|
|
|
9,331
|
|
Other
|
|
|
20,854
|
|
|
|
20,601
|
|
|
|
24,191
|
|
|
|
24,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds by revenue source
|
|
$
|
112,280
|
|
|
$
|
111,567
|
|
|
$
|
131,420
|
|
|
$
|
131,537
|
|
Deposits
Total deposits were $1,221,084,000 and $1,134,391,000 as of December 31, 2018 and 2017, respectively. The increase of $86,693,000 between the periods can be primarily attributed to Clarke County Acquisition.
The Company’s primary source of funds is customer deposits. The Banks attempt to attract noninterest-bearing deposits, which are a low-cost funding source. In addition, the Banks offer a variety of interest-bearing accounts designed to attract both short-term and longer-term deposits from customers. Interest-bearing accounts earn interest at rates established by Bank management based on competitive market factors and the Company’s need for funds. While nearly 55% of the Banks’ certificates of deposit mature in the next year, it is anticipated that a majority of these certificates will be renewed. Rate sensitive certificates of deposits in excess of $100,000 are subject to somewhat higher volatility with regard to renewal volume as the Banks adjust rates based upon funding needs. In the event a substantial volume of certificates is not renewed, the Company has sufficient liquid assets and borrowing lines to fund significant runoff. A sustained reduction in deposit volume would have a significant negative impact on the Company’s operation and liquidity. The Company had $6,805,000 and $11,116,000 of brokered deposits as of December 31, 2018 and 2017, respectively.
Average Deposits by Type
The following table sets forth the average balances for each major category of deposit and the weighted average interest rate paid for deposits during the years ended December 31, 2018 and 2017.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
|
$
|
213,535
|
|
|
|
0.00
|
%
|
|
$
|
202,120
|
|
|
|
0.00
|
%
|
Interest bearing demand deposits
|
|
|
341,286
|
|
|
|
0.64
|
%
|
|
|
326,468
|
|
|
|
0.36
|
%
|
Money market deposits
|
|
|
294,359
|
|
|
|
0.64
|
%
|
|
|
298,182
|
|
|
|
0.40
|
%
|
Savings deposits
|
|
|
110,007
|
|
|
|
0.30
|
%
|
|
|
93,225
|
|
|
|
0.21
|
%
|
Time certificates > $100,000
|
|
|
86,397
|
|
|
|
1.28
|
%
|
|
|
83,059
|
|
|
|
1.11
|
%
|
Time certificates < $100,000
|
|
|
111,922
|
|
|
|
1.19
|
%
|
|
|
114,469
|
|
|
|
0.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,157,506
|
|
|
|
|
|
|
$
|
1,117,523
|
|
|
|
|
|
Deposit Maturity
The following table shows the amounts and remaining maturities of time certificates of deposit that had balances of $100,000 and over as of December 31, 2018 and 2017.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
3 months or less
|
|
$
|
13,187
|
|
|
$
|
15,439
|
|
Over 3 through 12 months
|
|
|
36,252
|
|
|
|
34,464
|
|
Over 12 through 36 months
|
|
|
34,100
|
|
|
|
25,787
|
|
Over 36 months
|
|
|
7,155
|
|
|
|
9,259
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,694
|
|
|
$
|
84,949
|
|
Securities Sold Under an Agreement to Repurchase
Securities sold under agreements to repurchase totaled $40,674,000 and $37,425,000 as of December 31, 2018 and 2017, respectively an increase of 9%.
Borrowed Funds
Borrowed funds that may be utilized by the Company are comprised of FHLB advances, federal funds purchased and repurchase agreements. Borrowed funds are an alternative funding source to deposits and can be used to fund the Company’s assets and unforeseen liquidity needs. FHLB advances are loans from the FHLB that can mature daily or have longer maturities for fixed or floating rates of interest. Federal funds purchased are borrowings from other banks that mature daily. Securities sold under agreement to repurchase (repurchase agreements) are similar to deposits as they are funds lent by various Bank customers; however, investment securities are pledged to secure such borrowings. The Company has repurchase agreements that reprice daily. Term repurchase agreements are funds lent by a third party with securities pledged to secure such borrowings. These term repurchase agreements have longer terms.
The following table summarizes the outstanding amount of, and the average rate on, borrowed funds as of December 31, 2018 and 2017.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
40,674
|
|
|
|
1.73
|
%
|
|
$
|
37,425
|
|
|
|
0.77
|
%
|
FHLB advances
|
|
|
14,600
|
|
|
|
2.49
|
%
|
|
|
13,500
|
|
|
|
2.73
|
%
|
Other borrowings
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
13,000
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,274
|
|
|
|
1.93
|
%
|
|
$
|
63,925
|
|
|
|
1.76
|
%
|
Average Annual Borrowed Funds
The following table sets forth the average amount of, the average rate paid and maximum outstanding balance on, borrowed funds for the years ended December 31, 2018 and 2017.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and repurchase agreements
|
|
$
|
39,759
|
|
|
|
1.15
|
%
|
|
$
|
45,283
|
|
|
|
0.61
|
%
|
FHLB advances
|
|
|
6,571
|
|
|
|
2.32
|
%
|
|
|
14,944
|
|
|
|
2.64
|
%
|
Other borrowings
|
|
|
4,116
|
|
|
|
3.70
|
%
|
|
|
12,822
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,446
|
|
|
|
1.51
|
%
|
|
$
|
73,049
|
|
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount Outstanding during the Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and repurchase agreements
|
|
$
|
48,859
|
|
|
|
|
|
|
$
|
56,596
|
|
|
|
|
|
FHLB advances
|
|
$
|
36,400
|
|
|
|
|
|
|
$
|
27,400
|
|
|
|
|
|
Other borrowings
|
|
$
|
13,000
|
|
|
|
|
|
|
$
|
13,000
|
|
|
|
|
|
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 that assist customers with their credit needs to conduct business. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. As of December 31, 2018, the most likely impact of these financial instruments on revenues, expenses, or cash flows of the Company would come from unidentified credit risk causing higher provision expense for loan losses in future periods. These financial instruments are not expected to have a significant impact on the liquidity or capital resources of the Company. For additional information, including quantification of the amounts involved, see Note 14 of the “Notes to Consolidated Statements” and the “Liquidity and Capital Resources” section of this discussion.
Asset Quality Review and Credit Risk Management
The Company’s credit risk is centered in the loan portfolio, which on December 31, 2018, totaled $890,461,000 as compared to $771,550,000 as of December 31, 2017, an increase of 15.4%. Net loans comprise 61% of total assets as of the end of 2018. 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. As the following chart indicates, the Company’s non-performing assets have decreased by 19% from December 31, 2017 and total $4,214,000 as of December 31, 2018. The Company’s level of non-performing loans as a percentage of loans of 0.38% as of December 31, 2018, is lower than the Iowa State Average peer group of FDIC insured institutions as of December 31, 2018, of 0.58%. Management believes that the allowance for loan losses as of December 31, 2018 remains adequate based on its analysis of the non-performing assets and the portfolio as a whole.
Non-performing Assets
The following table sets forth information concerning the Company's non-performing assets for the past five years ended December 31, 2018.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
3,234
|
|
|
$
|
4,810
|
|
|
$
|
5,077
|
|
|
$
|
1,818
|
|
|
$
|
2,407
|
|
Loans 90 days or more past due
|
|
|
150
|
|
|
|
18
|
|
|
|
22
|
|
|
|
75
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
3,384
|
|
|
|
4,828
|
|
|
|
5,099
|
|
|
|
1,893
|
|
|
|
2,443
|
|
Securities available-for-sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other real estate owned
|
|
|
830
|
|
|
|
386
|
|
|
|
546
|
|
|
|
1,250
|
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
4,214
|
|
|
$
|
5,214
|
|
|
$
|
5,645
|
|
|
$
|
3,143
|
|
|
$
|
10,879
|
|
The accrual of interest on nonaccrual and other impaired loans is generally discontinued at 90 days or when, in the opinion of management, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received and when principal obligations are expected to be recoverable. Interest income on restructured loans is recognized pursuant to the terms of the new loan agreement. Interest income on other impaired loans remaining on accrual is monitored and income is recognized based upon the terms of the underlying loan agreement. However, the recorded net investment in impaired loans, including accrued interest, is limited to the present value of the expected cash flows of the impaired loan or the observable fair value of the loan’s collateral.
Impaired loans totaled $3,384,000 as of December 31, 2018 and were $1,444,000 lower than the impaired loans as of December 31, 2017. The Company considers impaired loans to generally include the non-performing loans (consisting of nonaccrual loans and loans past due 90 days or more and still accruing) and other loans that may or may not meet the former nonperforming criteria but are considered to meet the definition of impaired.
The allowance for loan losses related to these impaired loans was approximately $501,000 and $811,000 at December 31, 2018 and 2017, respectively. The average balances of impaired loans for the years ended December 31, 2018 and 2017 were $3,953,000 and $5,029,000, respectively. The decrease in the average balance of impaired loans was due primarily to payments received and charge offs. For the years ended December 31, 2018 and 2017, interest income, which would have been recorded under the original terms of nonaccrual loans, was approximately $350,000 and $379,000, respectively. There was $150,000 of loans greater than 90 days past due and still accruing interest as of December 31, 2018 and there was $18,000 of loans greater than 90 days past due and still accruing interest at December 31, 2017.
Summary of the Allowance for Loan Losses
The provision for loan losses represents an expense charged against earnings to maintain an adequate allowance for loan losses. 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; historical charge-offs; the condition of the local economy; 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.
The adequacy of the allowance for loan losses is evaluated quarterly by management, the Company and respective Bank boards. This evaluation focuses on specific loan reviews, changes in the type and volume of the loan portfolio given the current economic conditions and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the customer’s cash flow or collateral are sufficient to repay the loan; delinquent status; criticism of the loan in a regulatory examination; the accrual of interest has been suspended; or other reasons, including when the loan has other special or unusual characteristics which warrant special monitoring.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgment about information available to them at the time of their examination. Due to potential changes in conditions, it is at least reasonably possible that change 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.
Analysis of the Allowance for Loan Losses
The Company’s policy is to charge-off loans when, in management’s opinion, the loan is deemed uncollectible, although concerted efforts are made to maximize future recoveries. The following table sets forth information regarding changes in the Company's allowance for loan losses for the most recent five years.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
11,321
|
|
|
$
|
10,507
|
|
|
$
|
9,988
|
|
|
$
|
8,838
|
|
|
$
|
8,572
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
1-4 Family residential
|
|
|
23
|
|
|
|
7
|
|
|
|
15
|
|
|
|
25
|
|
|
|
151
|
|
Commercial
|
|
|
107
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
74
|
|
|
|
687
|
|
|
|
78
|
|
|
|
-
|
|
|
|
17
|
|
Agricultural
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
-
|
|
Consumer and other
|
|
|
63
|
|
|
|
44
|
|
|
|
39
|
|
|
|
5
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
325
|
|
|
|
738
|
|
|
|
132
|
|
|
|
69
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
50
|
|
|
|
25
|
|
1-4 Family residential
|
|
|
6
|
|
|
|
11
|
|
|
|
5
|
|
|
|
26
|
|
|
|
18
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
23
|
|
|
|
7
|
|
|
|
83
|
|
|
|
-
|
|
|
|
19
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
Consumer and other
|
|
|
20
|
|
|
|
14
|
|
|
|
9
|
|
|
|
12
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
49
|
|
|
|
32
|
|
|
|
127
|
|
|
|
120
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries)
|
|
|
276
|
|
|
|
706
|
|
|
|
5
|
|
|
|
(51
|
)
|
|
|
163
|
|
Provisions charged to operations
|
|
|
639
|
|
|
|
1,520
|
|
|
|
524
|
|
|
|
1,099
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
11,684
|
|
|
$
|
11,321
|
|
|
$
|
10,507
|
|
|
$
|
9,988
|
|
|
$
|
8,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
|
|
$
|
814,201
|
|
|
$
|
772,168
|
|
|
$
|
726,838
|
|
|
$
|
681,824
|
|
|
$
|
527,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs (recoveries) during the period to average loans outstanding
|
|
|
0.03
|
%
|
|
|
0.09
|
%
|
|
|
0.00
|
%
|
|
|
-0.01
|
%
|
|
|
0.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to total loans net of deferred fees
|
|
|
1.30
|
%
|
|
|
1.45
|
%
|
|
|
1.38
|
%
|
|
|
1.40
|
%
|
|
|
1.32
|
%
|
The allowance for loan losses increased to $11,684,000 at the end of 2018 in comparison to the allowance of $11,321,000 at year end 2017 as a result of provisions of $639,000, offset by net charge offs of $276,000. The provision for loan losses in 2018 was necessary to maintain an adequate allowance for loan loss on the increasing outstanding loan portfolio, as well as funding net charge offs. The allowance for loan losses increased to $11,321,000 at the end of 2017 in comparison to the allowance of $10,507,000 at year end 2016 as a result of provisions of $1,520,000, offset by net charge offs of $706,000. The provision for loan losses in 2017 was necessary to maintain an adequate allowance for loan loss on the increasing outstanding loan portfolio, as well as funding net charge offs. The allowance for loan losses increased to $10,507,000 at the end of 2016 in comparison to the allowance of $9,988,000 at year end 2015 as a result of provisions of $524,000, offset by net charge offs of $5,000. The provision for loan losses in 2016 was necessary to maintain an adequate allowance for loan loss on the outstanding loan portfolio, as net charge offs were not significant. The increase in the allowance for loan losses was provided due to growth in the Company’s loan portfolios and, to a lesser extent to provide for a specific reserve on impaired loans due primarily to one loan relationship identified in the fourth quarter of 2016. The allowance for loan loss on impaired loans increased $281,000 to $720,000 as of December 31, 2016. The allowance for loan losses increased to $9,988,000 at the end of 2015 in comparison to the allowance of $8,838,000 at year end 2014 as a result of provisions of $1,099,000 and net recoveries of $51,000. The higher provision for loan losses in 2015 as compared to 2014 was due primarily to increased outstanding loans in the construction and commercial real estate portfolios. Credit quality indicators in 2015 such as classified assets, impaired loans and past dues have improved versus prior year and remain at a favorable level as compared to peer banks. There was no significant change in the allowance for loan loss on impaired loans.
General reserves for loan categories range from 1.08% to 1.91% of the outstanding loan balances as of December 31, 2018. In general as loan volume increases, the general reserve levels increase with that growth and as loan volume decreases, the general reserve levels decrease with that decline. The loan provision recognized in 2018 was due primarily to an increase in the loan portfolio, as well as funding net charge offs. The loan provision recognized in 2017 was due primarily to an increase in the loan portfolio, as well as funding net charge offs. The loan provisions recognized in 2016 was primarily due to increases in the loan portfolio. The allowance relating to commercial real estate is the largest reserve component. Construction, commercial operating and agricultural operating loans have higher general reserve levels as a percentage than the other loan categories as management perceives more risk in this type of lending. Elements contributing to the higher risk level include a higher percentage of watch, special mention, substandard and impaired loans and less favorable economic conditions for those portfolios. As of December 31, 2018, commercial real estate loans have general reserves ranging from 1.24% to 1.47%.
Other factors considered when determining the adequacy of the general reserve include historical losses; watch, substandard and impaired loan volume; collecting past due loans; loan growth; loan-to-value ratios; loan administration; collateral values; and economic factors. The Company’s concentration risks include geographic concentration in Iowa; the local economy’s dependence upon several large governmental entity employers, including Iowa State University; and the health of Iowa’s agricultural sector that, in turn, is dependent on crop and livestock prices, weather conditions, trade policies and government programs. No assurances can be made that losses will remain at the relatively favorable levels experienced over the past five years.
Loans that the Banks have identified as having higher risk levels are reviewed individually in an effort to establish adequate loss reserves. These reserves are considered specific reserves and are directly impacted by the credit quality of the underlying loans. The specific reserves are dependent upon assumptions regarding the liquidation value of collateral and the cost of recovering collateral including legal fees. Changing the amount of specific reserves on individual loans has historically had a significant impact on the reallocation of the allowance among different parts of the portfolio. The following table sets forth information regarding changes in the Company's specific reserve on loans individually evaluated for impairment and loans individually evaluated for impairment for the most recent five years.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific reserve on loans individually evaluated for impairment
|
|
$
|
501
|
|
|
$
|
811
|
|
|
$
|
720
|
|
|
$
|
439
|
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
3,234
|
|
|
$
|
4,810
|
|
|
$
|
5,077
|
|
|
$
|
1,818
|
|
|
$
|
2,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increase (decrease) in specific reserve on loans individually evaluated for impairment
|
|
|
-38
|
%
|
|
|
13
|
%
|
|
|
64
|
%
|
|
|
30
|
%
|
|
|
-29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increase (decrease) in loans individually evaluated for impairment
|
|
|
-33
|
%
|
|
|
-5
|
%
|
|
|
179
|
%
|
|
|
-28
|
%
|
|
|
-7
|
%
|
Allocation of the Allowance for Loan Losses
.
The following table sets forth information concerning the Company’s allocation of the allowance for loan losses.
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
% *
|
|
|
Amount
|
|
|
% *
|
|
|
Amount
|
|
|
% *
|
|
|
Amount
|
|
|
%*
|
|
|
Amount
|
|
|
% *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
699
|
|
|
|
6
|
%
|
|
$
|
796
|
|
|
|
6
|
%
|
|
$
|
908
|
|
|
|
8
|
%
|
|
$
|
999
|
|
|
|
9
|
%
|
|
$
|
495
|
|
|
|
5
|
%
|
1-4 family residential
|
|
|
1,820
|
|
|
|
19
|
%
|
|
|
1,716
|
|
|
|
19
|
%
|
|
|
1,711
|
|
|
|
20
|
%
|
|
|
1,806
|
|
|
|
18
|
%
|
|
|
1,648
|
|
|
|
18
|
%
|
Commercial
|
|
|
4,615
|
|
|
|
43
|
%
|
|
|
4,734
|
|
|
|
45
|
%
|
|
|
3,960
|
|
|
|
41
|
%
|
|
|
3,557
|
|
|
|
36
|
%
|
|
|
3,214
|
|
|
|
38
|
%
|
Agricultural
|
|
|
1,198
|
|
|
|
11
|
%
|
|
|
997
|
|
|
|
11
|
%
|
|
|
861
|
|
|
|
9
|
%
|
|
|
760
|
|
|
|
9
|
%
|
|
|
737
|
|
|
|
10
|
%
|
Commercial
|
|
|
1,777
|
|
|
|
10
|
%
|
|
|
1,739
|
|
|
|
9
|
%
|
|
|
1,728
|
|
|
|
10
|
%
|
|
|
1,371
|
|
|
|
14
|
%
|
|
|
1,247
|
|
|
|
14
|
%
|
Agricultural
|
|
|
1,384
|
|
|
|
9
|
%
|
|
|
1,171
|
|
|
|
9
|
%
|
|
|
1,216
|
|
|
|
10
|
%
|
|
|
1,256
|
|
|
|
11
|
%
|
|
|
1,312
|
|
|
|
13
|
%
|
Consumer and other
|
|
|
191
|
|
|
|
2
|
%
|
|
|
168
|
|
|
|
1
|
%
|
|
|
123
|
|
|
|
2
|
%
|
|
|
239
|
|
|
|
3
|
%
|
|
|
185
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,684
|
|
|
|
100
|
%
|
|
$
|
11,321
|
|
|
|
100
|
%
|
|
$
|
10,507
|
|
|
|
100
|
%
|
|
$
|
9,988
|
|
|
|
100
|
%
|
|
$
|
8,838
|
|
|
|
100
|
%
|
* Percent of loans in each category to total loans.
Liquidity and Capital Resources
Liquidity management is the process by which the Company, through its Banks’ Asset and Liability Committees (ALCO), ensures 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 investment securities; 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 December 31, 2018, the level of liquidity and capital resources of the Company remain at a satisfactory level and compare favorably to that of other FDIC insured institutions. 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 Consolidated Statements of Cash Flows
|
|
●
|
Review of Company Only Cash Flows
|
|
●
|
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flow Needs
|
Review of the Company’s Current Liquidity Sources
Liquid assets of cash on hand, balances due from other banks and interest-bearing deposits in financial institutions for December 31, 2018 and 2017 totaled $56,442,000 and $69,420,000, respectively. The lower balance of liquid assets at December 31, 2018 primarily relates to a decrease in funds at the Federal Reserve Bank, partially offset by an increase in interest-bearing deposits at financial institutions.
Other sources of liquidity available to the Banks as of December 31, 2018 include available borrowing capacity with the FHLB of $171,611,000 and federal funds borrowing capacity at correspondent banks of $108,603,000. As of December 31, 2018, the Company had outstanding FHLB advances of $14,600,000, no federal funds purchased, securities sold under agreements to repurchase of $40,674,000 and no other borrowings.
Total investments as of December 31, 2018, were $458,971,000 compared to $495,322,000 as of year-end 2017. As of December 31, 2018 and 2017, the investment portfolio as a percentage of total assets was 32% and 36%, respectively. The investment portfolio provides the Company with a significant amount of liquidity since all investments are classified as available-for-sale as of December 31, 2018 and 2017 and have pretax net unrealized (losses) of $(5,433,000) and $(687,000), respectively.
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 represent a significant source of liquidity.
Review of the Consolidated Statements of Cash Flows
Net cash provided by operating activities for the years ended December 31, 2018 and 2017 totaled $20,705,000 and $18,846,000, respectively. The increase in net cash provided by operating activities in 2018 as compared to 2017 was primarily due to an increase in net income.
Net cash provided by (used in) investing activities for the years ended December 31, 2018 and 2017 was $8,635,000 and $(16,895,000), respectively. The change in net cash provided by investing activities in 2018 was primarily due to fewer purchases of securities in 2018 and a decrease in interest-bearing deposits in financial institutions, partially offset by a decrease in the proceeds from the sale of securities, an increase in the loan portfolio and cash used and cash used to acquire a bank.
Net cash (used in) financing activities for the years ended December 31, 2018 and 2017 totaled $(25,354,000) and $(5,031,000), respectively. The increase in net cash (used in) financing activities in 2018 was due primarily to payments on FHLB borrowings and an increase in deposits, partially offset by proceeds from short-term borrowings and changes in securities sold under agreement to repurchase. The change in net cash provided by (used in) financing activities in 2017 was due primarily to a decrease in the securities sold under agreements to repurchase and to a lesser extent an increase in deposits in 2017 as compared to the increase in deposits 2016.
Review of 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. In 2018, dividends from the Banks amounted to $11,968,000 compared to $10,355,000 in 2017. Various federal and state statutory provisions limit the amount 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.
First National and United Bank, as national banks, generally may pay dividends, without obtaining the express approval of the Office of the Comptroller of the Currency (“OCC”), in an amount up to their retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits, as defined by the OCC, consists of net income less dividends declared during the period. Boone Bank, Reliance Bank and State Bank are also restricted under Iowa law to paying dividends only out of their undivided profits. Additionally, the payment of dividends by the Banks is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and the Banks generally are prohibited from paying any dividends if, following payment thereof, the Bank would be undercapitalized.
The Company has unconsolidated cash and interest bearing deposits totaling $14,782,000 that were available at December 31, 2018 to provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flow Needs
Commitments to extend credit totaled $158,787,000 as of December 31, 2018 compared to a total of $153,294,000 at the end of 2017. The timing of these credit commitments varies with the underlying borrowers; however, the Company has satisfactory liquidity to fund these obligations as of December 31, 2018. 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 other known trends in liquidity and cash flow needs as of December 31, 2018, that are of concern to management.
Capital Resources
The Company’s total stockholders’ equity increased to $172,865,000 at December 31, 2018, from $170,753,000 at December 31, 2017. At December 31, 2018 and 2017, stockholders’ equity as a percentage of total assets was 11.9 % and 12.4%, respectively. The increase in stockholders’ equity was primarily the result of net income, offset in part by dividends declared. The capital levels of the Company currently exceed applicable regulatory guidelines as of December 31, 2018.
From time to time, the Company’s board of directors has authorized stock repurchase plans. Stock repurchase plans allow the Company to proactively manage its capital position and return excess capital to shareholders. 17,608 shares of common stock were repurchased under stock repurchase plans in 2018 and no shares of commons stock were repurchased in 2017. Also see Part II, Item 5 - Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, included elsewhere in this Annual Report.
Interest Rate Risk
Interest rate risk refers to the impact that a change in interest rates may have on the Company’s earnings and capital. Management’s objectives are to control interest rate risk and to ensure predictable and consistent growth of earnings and capital. Interest rate risk management focuses on fluctuations in net interest income identified through computer simulations to evaluate volatility, varying interest rate, spread and volume assumptions. The risk is quantified and compared against tolerance levels.
The Company uses a third-party computer software simulation modeling program to measure its exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made such as prepayment speeds on loans, the slope of the Treasury yield curve, the rates and volumes of the Company’s deposits and the rates and volumes of the Company’s loans. This analysis measures the estimated change in net interest income in the event of hypothetical changes in interest rates.
Another measure of interest rate sensitivity is the gap ratio. This ratio indicates the amount of interest-earning assets repricing within a given period in comparison to the amount of interest-bearing liabilities repricing within the same period of time. A gap ratio of 1.0 indicates a matched position, in which case the effect on net interest income due to interest rate movements will be minimal. A gap ratio of less than 1.0 indicates that more liabilities than assets reprice within the time period, while a ratio greater than 1.0 indicates that more assets reprice than liabilities.
The simulation model process provides a dynamic assessment of interest rate sensitivity, whereas a static interest rate gap table is compiled as of a point in time. The model simulations differ from a traditional gap analysis, as a traditional gap analysis does not reflect the multiple effects of interest rate movement on the entire range of assets and liabilities and ignores the future impact of new business strategies.
Inflation
The primary impact of inflation on the Company’s operations is to increase asset yields, deposit costs and operating overhead. Unlike most industries, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than they would on non-financial companies. Although interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services, increases in inflation generally have resulted in increased interest rates. The effects of inflation can magnify the growth of assets and, if significant, require that equity capital increase at a faster rate than would be otherwise necessary.
Forward-Looking Statements and Business Risks
Certain statements contained in the foregoing Management’s Discussion and Analysis and elsewhere in this Annual Report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases and in oral and written statements made by or with the Company’s approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “projected”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statement. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
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Local, regional and national economic conditions and the impact they may have on the Company and its customers, and management’s assessment of that impact on its estimates including, but not limited to, the allowance for loan losses and fair value of other real estate owned. Of particular relevance are the economic conditions in the concentrated geographic area in central, north-central and south-central Iowa in which the Banks conduct their operations.
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Adequacy of the allowance for loan losses and changes in the level of nonperforming assets and charge-offs.
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Changes in the fair value of securities available-for-sale and management’s assessments of other-than-temporary impairment of such securities.
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The effects of and changes in trade and monetary and fiscal policies and laws, including the changes in assessment rates established by the Federal Deposit Insurance Corporation for its Deposit Insurance Fund and interest rate policies of the Federal Open Market Committee of the Federal Reserve Board.
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Changes in sources and uses of funds, including loans, deposits and borrowings, including the ability of the Banks to maintain unsecured federal funds lines with correspondent banks.
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Changes imposed by regulatory agencies to increase capital to a level greater than the level currently required for well-capitalized financial institutions.
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Inflation and interest rate, securities market and monetary fluctuations.
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Political instability, acts of war or terrorism and natural disasters.
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The timely development and acceptance of new products and services and perceived overall value of these products and services by customers.
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Revenues being lower than expected.
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Changes in consumer spending, borrowings and savings habits.
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Changes in the financial performance and/or condition of the Company’s borrowers.
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Credit quality deterioration, which could cause an increase in the provision for loan losses.
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Technological changes and risks related to breaches of data security and cyber-attacks.
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The ability to increase market share and control expenses.
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Changes in the competitive environment among financial or bank holding companies and other financial service providers.
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The effect of changes in laws and regulations with which the Company and the Banks must comply, including developments and changes related to the implementation of the Dodd-Frank Act and the effect of the recent Federal tax reform on the operations of the Company and its customers.
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Changes in the securities markets.
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The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the FASB and other accounting standard setters, including the International Financial Reporting Standards.
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The costs and effects of legal and regulatory developments, including the resolution of regulatory or other governmental inquiries and the results of regulatory examinations or reviews.
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Recent changes in the U.S. trade policy, including imposition of tariffs by the U.S. government and retaliatory tariffs imposed by foreign governments and the potential negative effect of these actions on the Company’s borrowers.
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The ability of the Company to successfully integrate the operations of financial institutions it has acquired or may acquire in the future.
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The Company’s success at managing the risks involved in the foregoing items.
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Certain of the foregoing risks and uncertainties are discussed in greater detail under the heading “Risk Factors” in Item 1A herein.
These factors may not constitute all factors that could cause actual results to differ materially from those discussed in any forward-looking statement. The Company operates in a continually changing business environment and new facts emerge from time to time. The Company cannot predict such factors nor can it assess the impact, if any, of such factors on its financial condition or its results of operations. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results. The Company disclaims any responsibility to update any forward-looking statement provided in this document.