Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Ames National Corporation
(the “Company”) is a bank holding company established in 1975 that owns and operates five bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), and United Bank & Trust NA (United Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.
The Company does not engage in any material business activities apart from its ownership of the Banks. Products and
services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. The Banks also offer investment services through a third-party broker-dealer. The Company employs fourteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training and the coordination of management activities, in addition to 205 full-time equivalent individuals employed by the Banks.
The Company
’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.
The principal sources of Company
revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks and (v) Merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
The Company had net
income of $3,928,000, or $0.42 per share, for the three months ended September 30, 2017, compared to net income of $3,804,000, or $0.41 per share, for the three months ended September 30, 2016.
The
increase in quarterly earnings can be primarily attributed to an increase in loan interest income and a lower provision for loan losses, offset in part by increases in interest expense.
N
et loan charge-offs (recoveries) totaled $105,000 and $(81,000) for the three months ended September 30, 2017 and 2016, respectively. The provision for loan losses totaled $57,000 and $235,000 for the three months ended September 30, 2017 and 2016, respectively.
The Company had net income of $
11,011,000, or $1.18 per share, for the nine months ended September 30, 2017, compared to net income of $11,710,000, or $1.26 per share, for the nine months ended September 30, 2016. The decrease in nine month earnings can be primarily attributed to a higher provision for loan losses and increases in interest expense, offset in part by an increase in loan interest income.
Net
loan charge-offs (recoveries) totaled $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The provision for loan losses totaled $1,222,000 and $441,000 for the nine months ended September 30, 2017 and 2016, respectively.
The following management discussion and analysis will provide a review of important items relating to:
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Key Performance Indicators and Industry Results
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Critical Accounting Policies
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Income Statement Review
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Asset Quality
Review and Credit Risk Management
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Liquidity and Capital Resources
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Forward-Looking Statements and Business Risks
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Challenges
Management has identified certain events or circumstances that may negatively impact the Company
’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 13, 2017.
K
ey Performance Indicators and Industry Results
Certain key
performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 5,787 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.
Selected Indicators for the Company and the Industry
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3 Months
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9 Months
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Ended
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Ended
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3 Months Ended
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Years Ended December 31,
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September 30, 2017
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June 30, 2017
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2016
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2015
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Company
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Company
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Industry*
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Company
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Industry
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Company
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Industry
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Return on assets
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1.15
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%
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1.07
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%
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1.01
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%
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1.14
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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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1.13
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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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9.08
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%
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8.64
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%
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8.17
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%
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10.11
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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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9.44
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%
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9.31
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%
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Net interest margin
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3.29
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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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3.22
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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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3.33
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%
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3.07
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%
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Efficiency ratio
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52.42
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%
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53.16
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%
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52.93
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%
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56.32
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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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53.59
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%
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59.91
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%
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Capital ratio
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12.70
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%
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12.41
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%
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12.37
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%
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9.69
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%
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12.60
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%
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9.48
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%
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12.00
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%
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9.59
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%
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*Latest available data
Key performances 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 annualized return on a
verage assets was 1.15% for the three months ended September 30, 2017 and 2016.
This ratio is calculated by dividing net income by average equity. It is used to measure the net income or
return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 9.08% and 8.91% for the three months ended September 30, 2017 and 2016, respectively. The increase in this ratio in 2017 from the previous period is primarily due to an increase in net income.
The net interest margin for the three months ended
September 30, 2017 and 2016 was 3.29% and 3.38%, respectively. The ratio is calculated by dividing net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. The decrease in this ratio in 2017 is primarily the result of an increase in the interest rates on deposits.
This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The
ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 52.42% and 50.71% for the three months ended September 30, 2017 and 2016, respectively. The efficiency ratio remained consistent with prior periods.
The average capital ratio is calculated by dividing
average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 12.70% as of September 30, 2017 is significantly higher than the industry average of 9.69% as of June 30, 2017.
Industry Results
The FDIC Quarterly Banking Profile reported the following results for the
second quarter of 2017:
Higher Net Interest Income Lifts Industry Earnings
Higher net interest income and restrained growth in operating expenses helped lift banking industry profi
ts in second quarter 2017. The 5,787 commercial banks and savings institutions insured by the FDIC reported net income of $48.3 billion for the quarter, an increase of $4.7 billion (10.7%) compared with the second quarter of 2016. Almost two out of every three banks, 63.4% reported year-over-year earnings improvement, while only 4.1% were unprofitable, down from 4.6% a year earlier. The average return on assets (ROA) rose to 1.14% from 1.06% the year before. This is the highest quarterly ROA for the industry since second quarter 2007.
Net Interest Margins Improve
Net operating revenue
—the sum of net interest income and total noninterest income—rose to $190.5 billion in the second quarter, an $11 billion (6.1%) increase from second quarter 2016. Most of the improvement consisted of higher net interest income, which was $10.3 billion (9.1%) higher than a year earlier. The increase in net interest income helped lift the industry’s net interest margin (NIM) to 3.22%, from 3.08% in second quarter 2016. This is the highest quarterly NIM since fourth quarter 2013. While 57.7% of all banks reported higher NIMs, the improvement was greatest at larger institutions. More of their assets reprice or mature in the short term, and they are better-positioned to benefit from rising short-term interest rates. Noninterest income totaled $66.8 billion, up $654 million (1%) from a year earlier. Income from asset servicing was $1 billion (93.9%) higher, while gains on asset sales were $1.6 billion (31.7%) lower. Trading income fell $313 million (4.5%).
Noninterest Expense Growth Is Moderate
Banks set aside $12 billion in loan-loss provisions during the second quarter, up $273 million (2.3
%) from the previous year. Slightly more than one-third of all banks—36.5%—increased their loss provisions versus second quarter 2016, while 32.2% reported lower provisions. Noninterest expenses totaled $108.6 billion, an increase of $3.5 billion (3.3%). Expenses for salaries and employee benefits were $2.1 billion (4.3%) higher than a year earlier, as the total number of employees rose by 48,019 (2.3%).
Noncurrent Loan Balances Decline Further
The amount of loans and leases that were noncurrent
—90 days or more past due or in nonaccrual status—fell for the 28th time in the last 29 quarters, declining by $8.4 billion (6.7%) in the three months ended June 30. Noncurrent balances declined in all major loan categories during the quarter. Noncurrent residential mortgage loans fell by $4.8 billion (7.9%), while noncurrent C&I loans declined by $2.2 billion (9.5%). The average noncurrent loan rate fell from 1.34% to 1.23% during the quarter, the lowest since third quarter 2007.
Banks Shift Their Reserve Allocations
Total loan-loss reserves posted a modest ($197
million, 0.2%) decline during the second quarter. The industry’s coverage ratio of reserves to noncurrent loans and leases rose from 97.5% to 104.3%, the highest level since third quarter 2007. Banks with assets greater than $1 billion, which account for 90% of the industry’s loss reserves, increased their reserves for credit card losses by $1.4 billion (4.3%), while reducing their reserves for commercial loan losses by $1.1 billion (3.3%) and their reserves for residential real estate loan losses by $922 million (5.5%).
Retained Earnings Drive Capital Growth
Equity capital increased by $38.7 billion (2
%) during the quarter. Retained earnings contributed $20 billion to the growth in capital, $322 million (1.6%) less than in second quarter 2016. Banks declared $28.3 billion in dividends in the quarter, up $5 billion (21.4%) from the year-earlier quarter. Lower long-term interest rates contributed to an $8 billion improvement in accumulated other comprehensive income, which was reflected in the equity capital increase. At the end of the quarter, 99.4% of all FDIC-insured institutions, representing 99.96% of total industry assets, met or exceeded the requirements for well-capitalized banks, as defined for Prompt Corrective Action purposes.
Banks Reduce
Their Federal Reserve Bank Balances
Industry assets surpassed $17 trillion for the first time at the end of the second quarter, rising by $100.8 billion (0.6
%) during the three months ended June 30. Banks reduced their balances at Federal Reserve banks by $102.4 billion (8%). They also reduced their investment securities by $15 billion (0.4%), as U.S. Treasury securities fell by $49.9 billion (9.7%), and mortgage-backed securities rose by $38 billion (1.9%). Securities held in available-for-sale accounts declined by $59 billion (9.7%), while securities in held-to-maturity accounts increased by $44 billion (4.7%). Assets in trading accounts increased by $18.7 billion (3.2%) during the quarter. The percentage of industry assets maturing or repricing in more than three years remained unchanged from the first quarter, at 35.4%. The all-time high level for this percentage—35.5%—occurred at the end of fourth quarter 2016.
The Annual Loan Growth Rate Slows for a Third Consecutive Quarter
Total loans and lease
s increased by $161.2 billion (1.7%) during the second quarter. All major loan categories posted increases, led by residential mortgage loans (up $35.1 billion, 1.8%), credit card balances (up $23.6 billion, 3.1%), and C&I loans (up $22.1 billion, 1.1%). Unused loan commitments increased by $25.9 billion (0.4%). For the 12 months ended June 30, total loans and leases increased by $337.6 billion (3.7%), while unused loan commitments rose by $274.8 billion (3.9%). The 12-month growth rate for total loans and leases has slowed in each of the last three quarters. A year ago, the 12-month loan growth rate was 6.7%. The 12-month growth rate in unused loan commitments has slowed for six consecutive quarters. In 2015, unused commitments increased 6.6%.
The
Number of Banking Employees Rises 2.3% Over the Past Year
The number of FDIC-insured commercial banks and savings institutions reporting financial results fell to 5,787 in the second quarter, from 5,856 in the first quarter. During the second quarter,
three insured institutions failed, while 62 institutions were absorbed by mergers. No new reporters were added during the quarter. The number of institutions on the FDIC’s Problem Bank List declined for a 25th consecutive quarter, from 112 to 105. This is the smallest number of problem banks since March 31, 2008, and is almost 90% below the peak of 888 at the end of March 2011. The number of full-time equivalent employees rose by 11,663 (0.6%) to 2,093,278 during the quarter, which was 48,019 higher than second quarter 2016 (2.3%). This is still 5.9% below the peak of 2,223,383 employees in first quarter 2007.
Critical Accounting Policies
The discussion contained in this Item 2 and other disclosures included within this report are based
, in part, on the Company’s audited December 31, 2016 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company
’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company
’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of th
e Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.
Fair Value and Other-Than-Temporary Impairment of Investment Securities
The Company
’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, it is at least reasonably possible that changes in management
’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
Goodwill
Goodwill arose in connection with t
wo acquisitions consummated in previous periods. 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 September 30, 2017, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation.
Income Statement Review
for the Three Months ended
September
30
, 20
1
7
and 201
6
The following highlights a comparative discussion of the major components of net income and their impact for the three month
s ended September 30, 2017 and 2016:
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.
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AVERAGE BALANCE SHEETS AND INTEREST RATES
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Three Months Ended September 30,
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2017
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2016
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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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ASSETS
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(dollars in thousands)
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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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77,788
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$
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920
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4.73
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%
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$
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88,265
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$
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1,014
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4.59
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%
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Agricultural
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67,951
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922
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5.43
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%
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73,879
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900
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4.87
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%
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Real estate
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623,214
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6,756
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4.34
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%
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555,002
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6,131
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4.42
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%
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Consumer and other
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10,514
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132
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5.03
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%
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21,513
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|
191
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3.56
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%
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Total loans (including fees)
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779,467
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8,730
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4.48
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%
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738,659
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|
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8,236
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4.46
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%
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Investment securities
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Taxable
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|
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275,498
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|
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1,558
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2.26
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%
|
|
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259,212
|
|
|
|
1,425
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|
|
|
2.20
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%
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Tax-exempt 2
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|
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230,249
|
|
|
|
1,862
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|
|
|
3.23
|
%
|
|
|
249,400
|
|
|
|
2,045
|
|
|
|
3.28
|
%
|
|
Total investment securities
|
|
|
505,747
|
|
|
|
3,420
|
|
|
|
2.70
|
%
|
|
|
508,612
|
|
|
|
3,470
|
|
|
|
2.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks and federal funds sold
|
|
|
27,183
|
|
|
|
115
|
|
|
|
1.69
|
%
|
|
|
25,533
|
|
|
|
87
|
|
|
|
1.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,312,397
|
|
|
$
|
12,265
|
|
|
|
3.74
|
%
|
|
|
1,272,804
|
|
|
$
|
11,793
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
49,366
|
|
|
|
|
|
|
|
|
|
|
|
55,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,361,763
|
|
|
|
|
|
|
|
|
|
|
$
|
1,328,536
|
|
|
|
|
|
|
|
|
|
1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%.
|
AVERAGE BALANCE SHEETS AND INTEREST RATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, savings accounts and money markets
|
|
$
|
712,550
|
|
|
$
|
685
|
|
|
|
0.38
|
%
|
|
$
|
658,522
|
|
|
$
|
325
|
|
|
|
0.20
|
%
|
|
Time deposits > $100,000
|
|
|
83,793
|
|
|
|
240
|
|
|
|
1.15
|
%
|
|
|
84,034
|
|
|
|
196
|
|
|
|
0.93
|
%
|
|
Time deposits < $100,000
|
|
|
113,112
|
|
|
|
244
|
|
|
|
0.86
|
%
|
|
|
123,648
|
|
|
|
233
|
|
|
|
0.75
|
%
|
|
Total deposits
|
|
|
909,455
|
|
|
|
1,169
|
|
|
|
0.51
|
%
|
|
|
866,204
|
|
|
|
754
|
|
|
|
0.35
|
%
|
|
Other borrowed funds
|
|
|
71,266
|
|
|
|
292
|
|
|
|
1.64
|
%
|
|
|
94,504
|
|
|
|
274
|
|
|
|
1.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing liabilities
|
|
|
980,721
|
|
|
|
1,461
|
|
|
|
0.60
|
%
|
|
|
960,708
|
|
|
|
1,028
|
|
|
|
0.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
200,934
|
|
|
|
|
|
|
|
|
|
|
|
188,419
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,132
|
|
|
|
|
|
|
|
|
|
|
|
8,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
172,976
|
|
|
|
|
|
|
|
|
|
|
|
170,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,361,763
|
|
|
|
|
|
|
|
|
|
|
$
|
1,328,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
10,804
|
|
|
|
3.29
|
%
|
|
|
|
|
|
$
|
10,765
|
|
|
|
3.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/average assets
|
|
$
|
12,265
|
|
|
|
3.60
|
%
|
|
|
|
|
|
$
|
11,793
|
|
|
|
3.55
|
%
|
|
|
|
|
|
Interest expense/average assets
|
|
$
|
1,461
|
|
|
|
0.43
|
%
|
|
|
|
|
|
$
|
1,028
|
|
|
|
0.31
|
%
|
|
|
|
|
|
Net interest income/average assets
|
|
$
|
10,804
|
|
|
|
3.17
|
%
|
|
|
|
|
|
$
|
10,765
|
|
|
|
3.24
|
%
|
|
|
|
|
Net Interest Income
For the
three months ended September 30, 2017 and 2016, the Company's net interest margin adjusted for tax exempt income was 3.29% and 3.38%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, 2017 totaled $10,152,000 compared to $10,050,000 for the three months ended September 30, 2016.
For the
three months ended September 30, 2017, interest income increased $535,000, or 5%, when compared to the same period in 2016. The increase from 2016 was primarily attributable to higher average balance of loans. The higher average balances of loans were due primarily to favorable economic conditions in our market areas.
Interest expense
increased $433,000, or 42%, for the three months ended September 30, 2017 when compared to the same period in 2016. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to competitive pressures.
Provision for Loan Losses
The Company
’s provision for loan losses was $57,000 and $235,000 for the three months ended September 30, 2017 and 2016, respectively. The decrease in the provision for loan losses was due primarily to an increase in specific reserves for one loan in 2016. Net loan charge-offs (recoveries) were $105,000 and $(81,000) for the three months ended September 30, 2017 and 2016, respectively. The increase net charge-offs related primarily to one commercial operating customer relationship. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.
Noninterest
Income and Expense
N
oninterest income decreased $144,000 for the three months ended September 30, 2017 compared to the same period in 2016. The decrease in noninterest income is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower gains on the sale of loans, offset in part by a 9% increase in wealth management income. The increase in wealth management income is primarily due to an revenue increases associated with an acquisition and higher revenues related to increases in assets under management, offset in part by lower one time estate fees. Exclusive of realized securities gains, noninterest income was 6% lower in the third quarter of 2017 compared to the same period in 2016.
Non
interest expense increased $184,000 or 3% for the three months ended September 30, 2017 compared to the same period in 2016 primarily as a result of lower other real estate owned income and higher occupancy costs. The decrease in other real estate income was due to the continuing lower levels of other real estate owned. The higher occupancy costs were primarily related to an increase in property tax expense. The efficiency ratio was 52.42% for the third quarter of 2017 as compared to 50.71% in 2016.
Income Taxes
The provision for income taxes
expense for the three months ended September 30, 2017 and 2016 was $1,730,000 and $1,903,000, respectively, representing an effective tax rate of 31% and 33%, respectively. The lower effective tax rate than the expected tax rate of 35% for both periods is primarily due to tax-exempt interest income. The initial recording of a valuation allowance on a deferred tax asset resulted in a higher effective tax rate in 2016.
Income Statement Review
for the
Nine
Months ended
September
30
, 2017 and 2016
The following highlights a comparative discussion of the major components of net income and their impact for the
nine months ended September 30, 2017 and 2016:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company
’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.
|
AVERAGE BALANCE SHEETS AND INTEREST RATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
77,471
|
|
|
$
|
2,613
|
|
|
|
4.50
|
%
|
|
$
|
94,121
|
|
|
$
|
3,192
|
|
|
|
4.52
|
%
|
|
Agricultural
|
|
|
69,093
|
|
|
|
2,703
|
|
|
|
5.22
|
%
|
|
|
75,211
|
|
|
|
2,754
|
|
|
|
4.88
|
%
|
|
Real estate
|
|
|
612,845
|
|
|
|
19,620
|
|
|
|
4.27
|
%
|
|
|
528,179
|
|
|
|
17,595
|
|
|
|
4.44
|
%
|
|
Consumer and other
|
|
|
11,121
|
|
|
|
411
|
|
|
|
4.92
|
%
|
|
|
21,897
|
|
|
|
584
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (including fees)
|
|
|
770,530
|
|
|
|
25,347
|
|
|
|
4.39
|
%
|
|
|
719,408
|
|
|
|
24,125
|
|
|
|
4.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
271,913
|
|
|
|
4,637
|
|
|
|
2.27
|
%
|
|
|
262,604
|
|
|
|
4,393
|
|
|
|
2.23
|
%
|
|
Tax-exempt 2
|
|
|
241,160
|
|
|
|
5,875
|
|
|
|
3.25
|
%
|
|
|
253,688
|
|
|
|
6,335
|
|
|
|
3.33
|
%
|
|
Total investment securities
|
|
|
513,073
|
|
|
|
10,512
|
|
|
|
2.73
|
%
|
|
|
516,292
|
|
|
|
10,728
|
|
|
|
2.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks and federal funds sold
|
|
|
36,633
|
|
|
|
365
|
|
|
|
1.33
|
%
|
|
|
34,930
|
|
|
|
297
|
|
|
|
1.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,320,236
|
|
|
$
|
36,224
|
|
|
|
3.66
|
%
|
|
|
1,270,630
|
|
|
$
|
35,150
|
|
|
|
3.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
49,268
|
|
|
|
|
|
|
|
|
|
|
|
54,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,369,504
|
|
|
|
|
|
|
|
|
|
|
$
|
1,325,619
|
|
|
|
|
|
|
|
|
|
1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%.
|
AVERAGE BALANCE SHEETS AND INTEREST RATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
Average
|
|
|
Revenue/
|
|
|
Yield/
|
|
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
balance
|
|
|
expense
|
|
|
rate
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, savings accounts and money markets
|
|
$
|
717,946
|
|
|
$
|
1,819
|
|
|
|
0.34
|
%
|
|
$
|
663,891
|
|
|
$
|
965
|
|
|
|
0.19
|
%
|
|
Time deposits > $100,000
|
|
|
82,956
|
|
|
|
671
|
|
|
|
1.08
|
%
|
|
|
86,632
|
|
|
|
590
|
|
|
|
0.91
|
%
|
|
Time deposits < $100,000
|
|
|
115,646
|
|
|
|
714
|
|
|
|
0.82
|
%
|
|
|
125,745
|
|
|
|
704
|
|
|
|
0.75
|
%
|
|
Total deposits
|
|
|
916,548
|
|
|
|
3,204
|
|
|
|
0.47
|
%
|
|
|
876,268
|
|
|
|
2,259
|
|
|
|
0.34
|
%
|
|
Other borrowed funds
|
|
|
75,662
|
|
|
|
863
|
|
|
|
1.52
|
%
|
|
|
84,261
|
|
|
|
796
|
|
|
|
1.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing liabilities
|
|
|
992,210
|
|
|
|
4,067
|
|
|
|
0.55
|
%
|
|
|
960,529
|
|
|
|
3,055
|
|
|
|
0.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
200,020
|
|
|
|
|
|
|
|
|
|
|
|
190,176
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,319
|
|
|
|
|
|
|
|
|
|
|
|
7,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
169,955
|
|
|
|
|
|
|
|
|
|
|
|
167,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,369,504
|
|
|
|
|
|
|
|
|
|
|
$
|
1,325,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
32,157
|
|
|
|
3.25
|
%
|
|
|
|
|
|
$
|
32,095
|
|
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/average assets
|
|
$
|
36,224
|
|
|
|
3.53
|
%
|
|
|
|
|
|
$
|
35,150
|
|
|
|
3.54
|
%
|
|
|
|
|
|
Interest expense/average assets
|
|
$
|
4,067
|
|
|
|
0.40
|
%
|
|
|
|
|
|
$
|
3,055
|
|
|
|
0.31
|
%
|
|
|
|
|
|
Net interest income/average assets
|
|
$
|
32,157
|
|
|
|
3.13
|
%
|
|
|
|
|
|
$
|
32,095
|
|
|
|
3.23
|
%
|
|
|
|
|
Net Interest Income
For the
nine months ended September 30, 2017 and 2016, the Company's net interest margin adjusted for tax exempt income was 3.25% and 3.37%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2017 totaled $30,100,000 compared to $29,877,000 for the nine months ended September 30, 2016.
For the
nine months ended September 30, 2017, interest income increased $1,235,000, or 4%, when compared to the same period in 2016. The increase from 2016 was primarily attributable to higher average balance of loans, offset in part by lower yields on loans. The higher average balances of loans were due primarily to favorable economic conditions in our market areas. The lower yields on loans were due primarily to competitive pressures.
Interest
expense increased $1,012,000, or 33%, for the nine months ended September 30, 2017 when compared to the same period in 2016. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to competitive pressures.
Provision for Loan Losses
The Company
’s provision for loan losses was $1,222,000 and $441,000 for the nine months ended September 30, 2017 and 2016, respectively. The increase in the provision for loan losses was due primarily to the increase in the specific reserve for one commercial credit and growth in the loan portfolio. Net loan charge-offs (recoveries) were $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The increase in the net loan charge-offs were related primarily to commercial operating loans with construction contractors. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.
Noninterest Income and Expense
Noninterest income
decreased $63,000 for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease in noninterest income is primarily due to decreases in gain on sale of loans and service fees, offset in part by an increase in security gains and other noninterest income. The decrease in the gain on the sale of loans is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower revenue. The increase in other noninterest income is primarily due to the collection of $73,000 on a court judgement previously deemed uncollectible by First Bank prior to the Company’s acquisition in 2014. Exclusive of realized securities gains, noninterest income was 5% lower for the nine months ended September 30, 2017 compared to the same period in 2016.
Noninterest expense
increased $504,000 or 3% for the nine months ended September 30, 2017 compared to the same period in 2016 primarily as a result of normal salary and benefit increases and higher data processing costs. Data processing increases were due to increasing technology costs. The efficiency ratio was 53.16% for the nine months ended September 30, 2017 as compared to 51.99% in same period in 2016.
Income Taxes
The provision for income taxes expense for the
nine months ended September 30, 2017 and 2016 was $4,662,000 and $5,087,000, respectively, representing an effective tax rate of 30% and 30%, respectively. The lower effective tax rate than the expected income tax rate of 35% for both periods is primarily due to tax-exempt interest income.
Balance Sheet Review
As of
September 30, 2017, total assets were $1,364,940,000, a $1,513,000 decrease compared to December 31, 2016. The decrease in assets was due primarily to a decrease in cash and due from banks and securities available for sale, offset by an increase in loans.
Investment Portfolio
The inves
tment portfolio totaled $506,610,000 as of September 30, 2017, a decrease of $9,469,000 from the December 31, 2016 balance of $516,080,000. The decrease in the investment portfolio was primarily due to sales, calls and maturities of state and political subdivision bonds.
On a
quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, 2017, gross unrealized losses of $783,000, are considered to be temporary in nature due to the interest rate environment of 2017 and other general economic factors. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.
At
September 30, 2017, the Company’s investment securities portfolio included securities issued by 266 government municipalities and agencies located within 24 states with a fair value of $243.4 million. At December 31, 2016, the Company’s investment securities portfolio included securities issued by 286 government municipalities and agencies located within 25 states with a fair value of $264.4 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of September 30, 2017 was $4.4 million (approximately 2.0% of the fair value of the governmental municipalities and agencies) represented by the Dubuque, Iowa Community School District to be repaid by sales tax revenues and property taxes.
The Company
’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.
The following table summarizes the total general obligation and revenue bonds in the Company
’s investment securities portfolios as of September 30, 2017 and December 31, 2016 identifying the state in which the issuing government municipality or agency operates.
(Dollars in thousands)
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Obligation bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
60,493
|
|
|
$
|
60,732
|
|
|
$
|
75,142
|
|
|
$
|
74,408
|
|
|
Texas
|
|
|
12,188
|
|
|
|
12,359
|
|
|
|
11,091
|
|
|
|
11,065
|
|
|
Pennsylvania
|
|
|
8,720
|
|
|
|
8,795
|
|
|
|
8,728
|
|
|
|
8,654
|
|
|
Washington
|
|
|
6,640
|
|
|
|
6,609
|
|
|
|
7,221
|
|
|
|
6,957
|
|
|
Other (20
17: 16 states; 2016: 17 states)
|
|
|
24,150
|
|
|
|
24,601
|
|
|
|
28,064
|
|
|
|
28,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general obligation bonds
|
|
$
|
112,191
|
|
|
$
|
113,096
|
|
|
$
|
130,246
|
|
|
$
|
129,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
118,886
|
|
|
$
|
120,175
|
|
|
$
|
126,750
|
|
|
$
|
126,964
|
|
|
Other (2017: 9 states; 2016: 10 states)
|
|
|
10,073
|
|
|
|
10,167
|
|
|
|
8,208
|
|
|
|
8,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds
|
|
$
|
128,959
|
|
|
$
|
130,342
|
|
|
$
|
134,958
|
|
|
$
|
135,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations of states and political subdivisions
|
|
$
|
241,150
|
|
|
$
|
243,438
|
|
|
$
|
265,204
|
|
|
$
|
264,448
|
|
As of
September 30, 2017 and December 31, 2016, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 5 revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table.
(
in th
ousands)
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds by revenue source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tax
|
|
$
|
72,894
|
|
|
$
|
73,917
|
|
|
$
|
77,586
|
|
|
$
|
78,085
|
|
|
Water
|
|
|
14,139
|
|
|
|
14,218
|
|
|
|
11,283
|
|
|
|
11,296
|
|
|
College and universities, primarily dormitory revenues
|
|
|
10,457
|
|
|
|
10,538
|
|
|
|
14,105
|
|
|
|
13,907
|
|
|
Leases
|
|
|
9,062
|
|
|
|
9,098
|
|
|
|
9,106
|
|
|
|
8,960
|
|
|
Electric
|
|
|
8,428
|
|
|
|
8,545
|
|
|
|
8,446
|
|
|
|
8,459
|
|
|
Other
|
|
|
13,979
|
|
|
|
14,026
|
|
|
|
14,432
|
|
|
|
14,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds by revenue source
|
|
$
|
128,959
|
|
|
$
|
130,342
|
|
|
$
|
134,958
|
|
|
$
|
135,106
|
|
Loan
Portfolio
The l
oan portfolio, net of the allowance for loan losses, totaled $764,229,000, $768,208,000 and $752,182,000 as of September 30, 2017, June 30, 2017 and December 31, 2016, respectively. The increase in the loan portfolio since December 31, 2016 is primarily due to steady loan demand, in the Ames and Des Moines markets. Loan demand has softened in the third quarter of 2017.
Deposits
Deposits totaled $
1,114,538,000, $1,126,771,000 and $1,109,409,000 as of September 30, 2017, June 30, 2017 and December 31, 2016, respectively. The increase in deposits since December 31, 2016 was primarily due to increases in public funds NOW account balances. The decrease in deposits since June 30, 2017 was primarily due to decreases in retail NOW and public funds money market account balances.
S
ecurities Sold Under Agreements to Repurchase
S
ecurities sold under agreements to repurchase totaled $39,001,000 as of September 30, 2017, a decrease of $19,336,000, or 33%, from the December 31, 2016 balance of $58,337,000. The decrease in primarily due to withdrawals from three commercial accounts.
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These
financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2016.
Asset Quality Review and Credit Risk Management
The Company
’s credit risk is historically centered in the loan portfolio, which on September 30, 2017 totaled $764,229,000 compared to $752,182,000 as of December 31, 2016. Net loans comprise 56% of total assets as of September 30, 2017. The object in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of a transaction and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 0.62% at September 30, 2017, as compared to 0.67% at December 31, 2016 and 0.40% at September 30, 2016. The Company’s level of problem loans as a percentage of total loans at September 30, 2017 of 0.62% is lower than the Company’s peer group (339 bank holding companies with assets of $1 billion to $3 billion) of 0.72% as of June 30, 2017.
I
mpaired loans, net of specific reserves, totaled $3,907,000 as of September 30, 2017 and have decreased $450,000 as compared to the impaired loans of $4,357,000 as of December 31, 2016.
A
loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.
The Company had TDRs of $
3,098,000 as of September 30, 2017, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000 as of December 31, 2016, all of which were included in impaired and nonaccrual loans.
TDR
s are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.
For
TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. A $530,000 specific reserve was established in the nine months ended September 30, 2017 on a TDR loan. The Company had $257,000 of net charge-offs related to TDRs for the nine months ended September 30, 2017 and none for the same period in 2016.
Loans past due
90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there is a strong reason that the credit should not be placed on non-accrual. As of September 30, 2017, non-accrual loans totaled $4,726,000 and there was one loan in the amount of $81,000 past due 90 days and still accruing. This compares to non-accrual loans of $5,077,000 and loans past due 90 days and still accruing totaled $22,000 as of December 31, 2016. Other real estate owned totaled $385,000 as of September 30, 2017 and $546,000 as of December 31, 2016.
The agricultural real estate and agricultural operating loan portfolio classifications
remain in a weakened position. The watch and special mention loans in these categories totaled $44,046,000 as of September 30, 2017 as compared to $38,492,000 as of December 31, 2016. The substandard loans in these categories totaled $2,582,000 as of September 30, 2017 as compared to $2,399,000 as of December 31, 2016. The increase in these categories is primarily due to the impact on agricultural loans of low grain prices, mitigated by indications of favorable yields in 2017.
The allowance for loan losses as a percentage of outstanding loans as of
September 30, 2017 was 1.44%, as compared to 1.38% at December 31, 2016. The allowance for loan losses totaled $11,140,000 and $10,507,000 as of September 30, 2017 and December 31, 2016, respectively. Net charge-offs (recoveries) of loans totaled $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively.
The allowance for loan losses is management
’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans.
Liquidity and Capital Resources
Liquidity management is the process by which the Company, through its Banks
’ Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of securities
available-for-sale; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, FHLB advances and other capital market sources.
As of
September 30, 2017, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.
The liquidity and capital resources d
iscussion will cover the following topics:
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Review
of the Company’s Current Liquidity Sources
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Review of Statements of Cash Flows
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Company Only Cash Flows
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Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in
Liquidity and Cash Flows Needs
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Review of the Company
’s Current Liquidity Sources
Liquid assets of cash
and due from banks and interest-bearing deposits in financial institutions as of September 30, 2017 and December 31, 2016 totaled $58,574,000 and $61,215,000, respectively, and provide an adequate level of liquidity given current economic conditions.
Other sources of
liquidity available to the Banks as of September 30, 2017 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $183,824,000, with $19,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,571,000, with no outstanding federal fund purchase balances as of September 30, 2017. The Company had securities sold under agreements to repurchase totaling $39,001,000 and term repurchase agreements of $13,000,000 as of September 30, 2017.
Total investments as of
September 30, 2017 were $506,610,000 compared to $516,080,000 as of December 31, 2016. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of September 30, 2017.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio
’s scheduled maturities and payments represent a significant source of liquidity.
Review of Statements of Cash Flows
Net c
ash provided by operating activities for the nine months ended September 30, 2017 totaled $13,553,000 compared to $14,585,000 for the nine months ended September 30, 2016. The decrease in cash provided by operating activities was primarily due to lower net income.
Net
cash used in investing activities for the nine months ended September 30, 2017 was $4,184,000 compared to $14,181,000 for the nine months ended September 30, 2016. The decrease of $9,997,000 in cash used in investing activities was primarily due to a net decrease in the change in the loan portfolio of $26,204,000, offset in part by lower levels of proceeds from the sale of securities of $6,981,000 and a net increase in the change in the interest bearing deposits.
Net cash
used in financing activities for the nine months ended September 30, 2017 totaled $15,759,000 compared to $3,105,000 for the nine months ended September 30, 2016. The change of $12,654,000 in net cash used in financing activities was primarily due to a decrease in securities sold under agreements to repurchase in 2017 of $19,336,000 as compared to a decrease of $4,432,000 in 2016 and a decrease in proceeds from short-term FHLB borrowings of $15,500,000, offset in part by an increase in deposits in 2017 of $5,129,000 as compared to a decrease of $12,358,000 in 2016. As of September 30, 2017, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.
Company Only Cash Flows
The Company
’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7,655,000 and $6,825,000 for the nine months ended September 30, 2017 and 2016, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.22 per share in 2017 from $0.21 per share in 2016.
The Company
, on an unconsolidated basis, has interest bearing deposits totaling $13,287,000 as of September 30, 2017 that are presently available to provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity
and Cash Flows Needs
No
other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of September 30, 2017 that are of concern to management.
Capital Resources
The Company
’s total stockholders’ equity as of September 30, 2017 totaled $173,329,000 and was $8,224,000 higher than the $165,105,000 recorded as of December 31, 2016. The increase in stockholders’ equity was primarily due to net income and an increase in accumulated other comprehensive income, reduced by dividends declared. The increase in other comprehensive income is created by lower market interest rates on the longer end of the interest yield curve compared to December 31, 2016, which resulted in higher fair values in the securities available-for-sale portfolio. At September 30, 2017 and December 31, 2016, stockholders’ equity as a percentage of total assets was 12.70% and 12.08%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2017.
Forward-Looking Statements and Business Risks
The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this
Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: economic conditions, particularly in the concentrated geographic area in which the Company and its affiliate banks operate; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements and Business Risks” in the Company’s Annual Report. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.