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. Wealth management services includes financial planning and managing trust, agencies, estates and investment brokerage accounts. The Company employs thirteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training and the coordination of management activities, in addition to 230 full-time equivalent individuals employed by the Banks, including employees from the Acquisition.
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.
On September 14, 2018, FNB purchased the stock of CCSB for approximately $14.8 million. First National will operate all three bank offices previously owned by Clarke County as branches of First National.
The Company had net income of $4,237,000, or $0.46 per share, for the three months ended March 31, 2019, compared to net income of $4,037,000, or $0.43 per share, for the three months ended March 31, 2018.
The increase in quarterly earnings can be primarily attributed to improved loan interest income, offset in part by elevated deposit interest expense, higher salary and employee benefits, data processing and occupancy expenses.
Net loan charge-offs (recoveries) totaled $(30,000) and $27,000 for the three months ended March 31, 2019 and 2018, respectively. The provision for loan losses totaled $98,000 and $29,000 for the three months ended March 31, 2019 and 2018, respectively.
The following management discussion and analysis will provide a review of important items relating to:
● Challenges
● Key Performance Indicators and Industry Results
● Critical Accounting Policies
● Income Statement Review
● Balance Sheet Review
● Asset Quality Review and Credit Risk Management
● Liquidity and Capital Resources
● Forward-Looking Statements and Business Risks
● Non-GAAP Financial Measures
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 12, 2019.
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 5,406 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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3 Months
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Ended
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March 31,
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Years Ended December 31,
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2019
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2018
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2017
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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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Return on assets
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1.17
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%
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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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Return on equity
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9.73
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%
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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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Net interest margin
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3.23
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%
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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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Efficiency ratio
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57.82
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%
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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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Capital ratio
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12.05
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%
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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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*Latest available data
Key performances indicators include:
● Return on Assets
This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on average assets was 1.17% and 1.19% for the three months ended March 31, 2019 and 2018, respectively. This ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in average assets.
● Return on Equity
This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was 9.73% and 9.55% for the three months ended March 31, 2019 and 2018, respectively. This ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in average equity.
● Net Interest Margin
The net interest margin for the three months ended March 31, 2019 and 2018 was 3.23% and 3.19%, 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.
● Efficiency Ratio
This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 57.82% and 57.45% for the three months ended March 31, 2019 and 2018, respectively. This ratio remained consistent when comparing 2019 to 2018.
● Capital Ratio
The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 12.05% as of March 31, 2019 is significantly higher than the industry average of 9.70% as of December 31, 2018.
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 percent 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 2 and other disclosures included within this report are based, in part, on the Company’s audited December 31, 2018 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 the 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 three 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 March 31, 2019, 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.
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 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)
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Three Months Ended March 31,
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2019
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2018
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Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
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Net interest income (GAAP)
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|
$
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10,970
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|
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$
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10,186
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Tax-equivalent adjustment
(1)
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|
293
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|
|
|
316
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|
|
Net interest income on an FTE basis (non-GAAP)
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11,263
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|
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|
10,502
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Average interest-earning assets
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$
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1,393,813
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$
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1,318,775
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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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|
3.19
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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, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.
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Income Statement Review
for the Three Months ended
March 31
, 20
1
9
and 201
8
The following highlights a comparative discussion of the major components of net income and their impact for the three months ended March 31, 2019 and 2018:
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 March 31,
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2019
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2018
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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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84,182
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$
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1,120
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|
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5.32
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%
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|
$
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73,424
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|
|
$
|
868
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|
|
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4.73
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%
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Agricultural
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|
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81,216
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|
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1,284
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|
|
|
6.32
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%
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68,557
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|
|
|
968
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|
|
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5.65
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%
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Real estate
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|
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714,021
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|
|
|
8,092
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|
|
|
4.53
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%
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|
|
632,041
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|
|
|
6,941
|
|
|
|
4.39
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%
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|
Consumer and other
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|
|
16,686
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|
|
|
205
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|
|
|
4.90
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%
|
|
|
8,827
|
|
|
|
112
|
|
|
|
5.08
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%
|
|
|
|
|
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
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Total loans (including fees)
|
|
|
896,105
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|
|
|
10,701
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|
|
|
4.78
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%
|
|
|
782,849
|
|
|
|
8,889
|
|
|
|
4.54
|
%
|
|
|
|
|
|
|
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|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
251,145
|
|
|
|
1,489
|
|
|
|
2.37
|
%
|
|
|
272,013
|
|
|
|
1,529
|
|
|
|
2.25
|
%
|
|
Tax-exempt 2
|
|
|
209,071
|
|
|
|
1,393
|
|
|
|
2.67
|
%
|
|
|
226,429
|
|
|
|
1,502
|
|
|
|
2.65
|
%
|
|
Total investment securities
|
|
|
460,216
|
|
|
|
2,882
|
|
|
|
2.50
|
%
|
|
|
498,442
|
|
|
|
3,031
|
|
|
|
2.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-earning assets
|
|
|
37,492
|
|
|
|
238
|
|
|
|
2.53
|
%
|
|
|
37,484
|
|
|
|
193
|
|
|
|
2.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,393,813
|
|
|
$
|
13,821
|
|
|
|
3.97
|
%
|
|
|
1,318,775
|
|
|
$
|
12,113
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
52,602
|
|
|
|
|
|
|
|
|
|
|
|
41,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,446,415
|
|
|
|
|
|
|
|
|
|
|
$
|
1,360,143
|
|
|
|
|
|
|
|
|
|
|
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 21%.
|
|
AVERAGE BALANCE SHEETS AND INTEREST RATES
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
786,677
|
|
|
$
|
1,517
|
|
|
|
0.77
|
%
|
|
$
|
721,246
|
|
|
$
|
830
|
|
|
|
0.46
|
%
|
|
Time deposits
|
|
|
213,970
|
|
|
|
842
|
|
|
|
1.57
|
%
|
|
|
195,073
|
|
|
|
531
|
|
|
|
1.09
|
%
|
|
Total deposits
|
|
|
1,000,647
|
|
|
|
2,359
|
|
|
|
0.94
|
%
|
|
|
916,319
|
|
|
|
1,362
|
|
|
|
0.59
|
%
|
|
Other borrowed funds
|
|
|
43,460
|
|
|
|
199
|
|
|
|
1.83
|
%
|
|
|
59,626
|
|
|
|
248
|
|
|
|
1.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing liabilities
|
|
|
1,044,107
|
|
|
|
2,558
|
|
|
|
0.98
|
%
|
|
|
975,945
|
|
|
|
1,611
|
|
|
|
0.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
220,155
|
|
|
|
|
|
|
|
|
|
|
|
206,726
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,863
|
|
|
|
|
|
|
|
|
|
|
|
8,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
174,290
|
|
|
|
|
|
|
|
|
|
|
|
169,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,446,415
|
|
|
|
|
|
|
|
|
|
|
$
|
1,360,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
11,263
|
|
|
|
3.23
|
%
|
|
|
|
|
|
$
|
10,502
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/average assets
|
|
$
|
13,821
|
|
|
|
3.82
|
%
|
|
|
|
|
|
$
|
12,113
|
|
|
|
3.56
|
%
|
|
|
|
|
|
Interest expense/average assets
|
|
$
|
2,558
|
|
|
|
0.71
|
%
|
|
|
|
|
|
$
|
1,611
|
|
|
|
0.47
|
%
|
|
|
|
|
|
Net interest income/average assets
|
|
$
|
11,263
|
|
|
|
3.11
|
%
|
|
|
|
|
|
$
|
10,502
|
|
|
|
3.09
|
%
|
|
|
|
|
Net Interest Income
For the three months ended March 31, 2019 and 2018, the Company's net interest margin adjusted for tax exempt income was 3.23% and 3.19%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended March 31, 2019 totaled $10,970,000 compared to $10,186,000 for the three months ended March 31, 2018.
For the three months ended March 31, 2019, interest income increased $1,731,000, or 15%, when compared to the same period in 2018. The increase from 2018 was primarily attributable to increased loan volume and rates, offset in part by recognition of nonaccrual interest income in 2018. The increase in loan volume was due to the Acquisition and a favorable lending environment in our market areas since March 31, 2018. Nonaccrual interest income recognized in the three months ended March 31, 2019 was $52,000 as compared to $282,000 for the same period in 2018. Loan interest rates increased in conjunction with general market interest rates, as the Federal Reserve Bank increased short term interest rate targets by 1.00% since March 31, 2018.
Interest expense increased $947,000, or 59%, for the three months ended March 31, 2019 when compared to the same period in 2018. The higher interest expense for the period is primarily attributable to higher rates on deposits due to market interest rates and competitive pressures.
Provision for Loan Losses
The Company’s provision for loan losses was $98,000 and $29,000 for the three months ended March 31, 2019 and 2018, respectively. Net loan charge-offs (recoveries) were $(30,000) and $27,000 for the three months ended March 31, 2019 and 2018, respectively. While the current provision for loan losses are not related to agricultural loans, the Iowa agricultural economy remains challenged as the result of the current low grain prices and potential tariff concerns on Iowa exports.
Noninterest Income and Expense
Noninterest income increased $162,000 for the three months ended March 31, 2019 compared to the same period in 2018. The increase in noninterest income is primarily due to the Acquisition and higher wealth management income. The increase in wealth management income was primarily related to growth in the assets under management, fueled by a growing equity market and new account relationships.
Noninterest expense increased $592,000 or 9% for the three months ended March 31, 2019 compared to the same period in 2018 primarily as a result of the Acquisition. Salaries and benefits was the largest component of the increase in noninterest expense which also includes normal salary and employee benefit increases, offset in part by a one-time $1,000 bonus paid to full-time employees in 2018. The efficiency ratio was 57.8% for the first quarter of 2019 as compared to 57.4% in 2018.
Income Taxes
The provision for income taxes expense for the three months ended March 31, 2019 and 2018 was $1,104,000 and $1,020,000, respectively, representing an effective tax rate of 21% and 20%, respectively. The lower than expected effective tax rate for both periods is primarily due to tax-exempt interest income.
Balance Sheet Review
As of March 31, 2019, total assets were $1,472,317,000, a $16,630,000 increase compared to December 31, 2018. The increase in assets, primarily interest bearing deposits, was funded primarily by deposits.
Investment Portfolio
The investment portfolio totaled $455,554,000 as of March 31, 2019, a decrease of $3,418,000 from the December 31, 2018 balance of $458,971,000. The decrease in securities available-for-sale is primarily due to payments and maturities on the entire portfolio, offset in part by increases in the unrealized gain on the investment portfolio as market interest rates caused an increase in the fair value of the investment portfolio.
On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of March 31, 2019, gross unrealized losses of $1,802,000, are considered to be temporary in nature due to the interest rate environment of 2019 and other general economic factors. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.
At March 31, 2019, the Company’s investment securities portfolio included securities issued by 249 government municipalities and agencies located within 17 states with a fair value of $214.6 million. At December 31, 2018, the Company’s investment securities portfolio included securities issued by 263 government municipalities and agencies located within 16 states with a fair value of $216.0 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of March 31, 2019 was $3.9 million (approximately 2.0% of the fair value of the governmental municipalities and agencies) represented by the West Des Moines, Iowa Community School District to be repaid by sales tax revenues and property taxes.
The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.
The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of March 31, 2019 and December 31, 2018 identifying the state in which the issuing government municipality or agency operates.
(Dollars in thousands)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Obligation bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
62,217
|
|
|
$
|
62,304
|
|
|
$
|
59,935
|
|
|
$
|
59,481
|
|
|
Texas
|
|
|
10,803
|
|
|
|
10,880
|
|
|
|
11,822
|
|
|
|
11,803
|
|
|
Pennsylvania
|
|
|
9,171
|
|
|
|
9,235
|
|
|
|
9,167
|
|
|
|
9,144
|
|
|
Washington
|
|
|
6,878
|
|
|
|
6,842
|
|
|
|
6,905
|
|
|
|
6,762
|
|
|
Other (2019: 12 states; 2018: 12 states)
|
|
|
16,966
|
|
|
|
17,118
|
|
|
|
17,138
|
|
|
|
17,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general obligation bonds
|
|
$
|
106,035
|
|
|
$
|
106,379
|
|
|
$
|
104,967
|
|
|
$
|
104,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
$
|
101,017
|
|
|
$
|
100,873
|
|
|
$
|
104,589
|
|
|
$
|
103,925
|
|
|
Other (2019: 6 states; 2018: 7 states)
|
|
|
7,281
|
|
|
|
7,306
|
|
|
|
7,691
|
|
|
|
7,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds
|
|
$
|
108,298
|
|
|
$
|
108,179
|
|
|
$
|
112,280
|
|
|
$
|
111,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations of states and political subdivisions
|
|
$
|
214,333
|
|
|
$
|
214,558
|
|
|
$
|
217,247
|
|
|
$
|
215,955
|
|
As of March 31, 2019 and December 31, 2018, 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)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds by revenue source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tax
|
|
$
|
58,482
|
|
|
$
|
58,648
|
|
|
$
|
60,422
|
|
|
$
|
60,322
|
|
|
Water
|
|
|
13,856
|
|
|
|
13,767
|
|
|
|
13,863
|
|
|
|
13,644
|
|
|
College and universities, primarily dormitory revenues
|
|
|
7,610
|
|
|
|
7,593
|
|
|
|
8,183
|
|
|
|
8,139
|
|
|
Leases
|
|
|
9,112
|
|
|
|
9,080
|
|
|
|
8,958
|
|
|
|
8,861
|
|
|
Other
|
|
|
19,238
|
|
|
|
19,091
|
|
|
|
20,854
|
|
|
|
20,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue bonds by revenue source
|
|
$
|
108,298
|
|
|
$
|
108,179
|
|
|
$
|
112,280
|
|
|
$
|
111,567
|
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Loan Portfolio
The loan portfolio, net of the allowance for loan losses, totaled $886,557,000, $890,461,000 and $772,495,000 as of March 31, 2019, December 31, 2018 and March 31, 2018, respectively. Loan demand has moderated since year end. The increase in the loan portfolio since March 31, 2018 is primarily due to the Acquisition.
Deposits
Deposits totaled $1,252,514,000, $1,221,084,000 and $1,170,424,000 as of March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The increase in deposits since December 31, 2018 was primarily due to public fund balances in NOW accounts. The increase in deposits since March 31, 2018 is primarily due to the Acquisition.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase totaled $32,397,000 as of March 31, 2019, a decrease of $8,278,000, or 20%, from the December 31, 2018 balance of $40,674,000. The decrease was due primarily to a decrease in the balances of one existing customer.
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, 2018.
Asset Quality Review and Credit Risk Management
The Company’s credit risk is historically centered in the loan portfolio, which on March 31, 2019 totaled $886,557,000 compared to $890,461,000 as of December 31, 2018. Net loans comprise 60% of total assets as of March 31, 2019. 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 an agreement 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 0.38% at March 31, 2019, as compared to 0.38% at December 31, 2018 and 0.55% at March 31, 2018. The Company’s level of problem loans as a percentage of total loans at March 31, 2019 of 0.38% is lower than the Iowa State Average peer group of FDIC insured institutions as of December 31, 2018, of 0.58%.
Impaired loans, net of specific reserves, totaled $2,980,000 as of March 31, 2019 and have increased $247,000 as compared to the impaired loans of $2,733,000 as of December 31, 2018.
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 $2,662,000 as of March 31, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $2,350,000 as of December 31, 2018, all of which were included in impaired and nonaccrual loans.
TDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.
For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. There were no charge-offs related to TDRs for the three months ended March 31, 2019 and 2018. No additional specific reserves were provided for the three months ended March 31, 2019. A $12,000 specific reserve was established in the three months ended March 31, 2018.
Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on non-accrual. As of March 31, 2019, non-accrual loans totaled $3,339,000 and there were $50,000 of loans past due 90 days and still accruing. This compares to non-accrual loans of $3,234,000 and loans past due 90 days and still accruing totaled $150,000 as of December 31, 2018. Other real estate owned totaled $565,000 and $830,000 as of March 31, 2019 and December 31, 2018, respectively.
The agricultural real estate and agricultural operating loan portfolio classifications remain elevated as a result of lower grain prices. The watch and special mention loans in these categories totaled $51,422,000 as of March 31, 2019 as compared to $47,808,000 as of December 31, 2018. The substandard loans in these categories totaled $10,633,000 as of March 31, 2019 as compared to $9,592,000 as of December 31, 2018. The Iowa agricultural economy remains challenged as the result of the current low grain prices and tariff concerns on Iowa exports.
The allowance for loan losses as a percentage of outstanding loans as of March 31, 2019 was 1.31%, as compared to 1.30% at December 31, 2018. The allowance for loan losses totaled $11,812,000 and $11,684,000 as of March 31, 2019 and December 31, 2018, respectively. Net charge-offs (recoveries) of loans totaled $(30,000) and $27,000 for the three months ended March 31, 2019 and 2018, 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 March 31, 2019, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.
The liquidity and capital resources discussion will cover the following topics:
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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 March 31, 2019 and December 31, 2018 totaled $82,871,000 and $56,442,000, respectively, and provide an adequate level of liquidity given current economic conditions.
Other sources of liquidity available to the Banks as of March 31, 2019 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $197,066,000, with $2,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,739,000, with no outstanding federal fund purchase balances as of March 31, 2019. The Company had securities sold under agreements to repurchase totaling $32,397,000 as of March 31, 2019.
Total investments as of March 31, 2019 were $455,554,000 compared to $458,971,000 as of December 31, 2018. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of March 31, 2019.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.
Review of Statements of Cash Flows
Net cash provided by operating activities for the three months ended March 31, 2019 totaled $6,284,000 compared to $6,353,000 for the three months ended March 31, 2018. The cash flow from operations in 2019 is comparable to the same period in 2018.
Net cash used in investing activities for the three months ended March 31, 2019 was $19,679,000 compared to $25,859,000 for the three months ended March 31, 2018. The decrease of $6,180,000 in cash used in investing activities was primarily due to a lower level of purchases of investments; greater maturities and calls of investments; and a decrease in loan balances; offset in part by higher balances in interest bearing deposits in financial institutions.
Net cash provided by financing activities for the three months ended March 31, 2019 totaled $7,144,000 compared to $15,594,000 for the three months ended March 31, 2018. The decrease in cash provided by financing activities was $8,450,000. The decrease was primarily due to smaller increases in deposit balances and larger decreases in repurchase balances; offset in part by a lessor amount of repayments on FHLB advances. As of March 31, 2019, 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 $3,198,000 and $2,570,000 for the three months ended March 31, 2019 and 2018, 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 $0.24 per share in 2019 from $0.23 per share in 2018.
The Company, on an unconsolidated basis, has interest bearing deposits totaling $14,671,000 as of March 31, 2019 that are presently available to provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs
No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of March 31, 2019 that are of concern to management.
Capital Resources
The Company’s total stockholders’ equity as of March 31, 2019 totaled $177,777,000 and was $4,912,000 higher than the $172,865,000 recorded as of December 31, 2018. The increase in stockholders’ equity was primarily due to net income and an increase in other comprehensive income, offset in part by dividends declared. The increase in other comprehensive income is created by lower market interest rates compared to December 31, 2018, which resulted in higher fair values in the securities available-for-sale portfolio. At March 31, 2019 and December 31, 2018, stockholders’ equity as a percentage of total assets was 12.07% and 11.88%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of March 31, 2019.
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.