HILLS BANCORPORATION The following is management's discussion and analysis of the financial condition ofHills Bancorporation ("Hills Bancorporation" or "the Company") and its banking subsidiaryHills Bank and Trust Company ("the Bank") for the dates and periods indicated. The discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying footnotes.
Special Note Regarding Forward Looking Statements
This report contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Actual results may differ materially from those included in the forward-looking statements. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, the following: •The strength ofthe United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets.
•The effects of recent financial market disruptions and/or an economic recession, and monetary and other governmental actions designed to address such disruptions, including in response to the COVID-19 pandemic.
•The financial strength of the counterparties with which the Company or the Company's customers do business and as to which the Company has investment or financial exposure. •The credit quality and credit agency ratings of the securities in the Company's investment securities portfolio, a deterioration or downgrade of which could lead to recognition of an allowance for credit losses or other-than-temporary impairment of the affected securities and the recognition of an impairment loss. •The effects of, and changes in, laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters as well as any laws otherwise affecting the Company, including, but not limited to, potential changes inU.S. tax laws and regulations. •The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of theBoard of Governors of theFederal Reserve System . •The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.
•The ability of the Company to obtain new customers and to retain existing customers.
•The timely development and acceptance of products and services, including products and services offered through alternative electronic delivery channels.
•Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.
•The ability of the Company to develop and maintain secure and reliable technology systems.
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•The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.
•Consumer spending and saving habits which may change in a manner that affects the Company's business adversely.
•The economic impact of natural disasters, diseases and/or pandemics, including any extended impact from the COVID-19 pandemic, and terrorist attacks and military actions.
•Business combinations and the integration of acquired businesses and assets which may be more difficult or expensive than expected.
•The costs, effects and outcomes of existing or future litigation.
•Changes in accounting policies and practices that may be adopted by state and
federal regulatory agencies and the
•The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with theSecurities and Exchange Commission .
COVID-19: Update on Company Action and Ongoing Risks
InDecember 2019 , a novel coronavirus (COVID-19) was reported inChina , and, inMarch 2020 , theWorld Health Organization declared it a pandemic. OnMarch 12, 2020 , the President ofthe United States declared the COVID-19 outbreak inthe United States a national emergency. The COVID-19 pandemic caused significant economic dislocation inthe United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place at home, which resulted in an unprecedented slow-down in economic activity and a related increase in unemployment throughout most of 2020 and into 2021. Government response to the COVID-19 pandemic was sweeping, including passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act which was signed into law onMarch 27, 2020 .Congress , theFederal Reserve Bank and the otherU.S. state and federal financial regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from the COVID-19 pandemic. In addition, the federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed measures to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. The broaderU.S. and global economies slowly began reopening during the first half of 2021 as vaccines against COVID-19 became widely available. However, labor and supply disruptions resulting from the global pandemic continue, and the emergence of a new and more infectious variant of COVID-19 is creating ongoing health and safety concerns that may lead to further disruptions in local, national and global economies. While significant progress has been made to combat the outbreak of COVID-19, and while it appears that the epidemiological and macroeconomic conditions are trending in a positive direction as ofSeptember 30, 2021 , if there is a resurgence in the virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. Lending Assistance The Bank continues to work with customers to determine how best to serve them, including providing short-term modifications for customers primarily through deferrals of principal only payments for three to six months. Throughout 2020, COVID-19 related payment deferrals provided for customers totaled approximately 14.82% of total loans. As ofSeptember 30, 2021 andDecember 31, 2020 , COVID-19 related payment deferrals were approximately 0.13% and 1.20% of total loans, respectively.
The Bank continues to assist customers through this difficult time in the best
manner possible by providing
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HILLS BANCORPORATION Relief Supplemental Appropriations Act 2021 in lateDecember 2020 , the Bank provided additional PPP loans in 2021 totaling$58.34 million throughSeptember 30, 2021 to further assist our customers. The PPP loans have a two or five year term and earn interest at 1%. Loans funded through the PPP program are fully guaranteed by theU.S. government if certain criteria are met. The Bank believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As ofSeptember 30, 2021 , the Bank has outstanding PPP loan balances of$24.55 million and has received total forgiveness payments of$160.48 million from the SBA. Financial Exposures The COVID-19 pandemic continues to represent an unprecedented challenge to the global economy in general and the financial services sector in particular. However, given the emergence of a new and more infectious variant of COVID-19 along with the hesitancy of a significant portion of theU.S. population to become vaccinated, there is still significant uncertainty regarding the overall length of the pandemic and the aggregate impact that it will have on global and regional economies, including uncertainties regarding the potential positive effects of governmental actions taken in response to the pandemic. Our credit administration continues to closely monitor and analyze the higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the board of directors. Based on the Company's capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, we currently expect to be able to manage the economic risks and uncertainties associated with the pandemic and remain adequately capitalized. However, the Company may be required to make additional loan loss provisions as warranted by the fluid COVID-19 situation. Page 54
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Critical Accounting Policies
On
Post-ASC 326 CECL Adoption: The preparation of financial statements in accordance with the accounting principles generally accepted inthe United States ("U.S. GAAP") requires management to make a number of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain substantial inherent uncertainties. Management has made significant estimates in several areas, including the allowance for credit losses (see Note 5 - Loans and Note 4 - Securities) and the fair value of debt securities (see Note 4 - Securities). We have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company's financial statements are appropriate. For a further description of our accounting policies, see Note 1 - Summary of Significant Accounting Policies in the financial statements included in this Form 10-Q. The allowance for credit losses for loans represents management's estimate of all expected credit losses over the expected contractual life of our existing loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. We employ a disciplined process and methodology to establish our allowance for credit losses that has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. Based upon this methodology, management establishes an asset-specific allowance for loans that do not share risk characteristics with other loans based on the amount of expected credit losses calculated on those loans and charges off amounts determined to be uncollectible. Factors we consider in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. When a loan does not share risk characteristics with other loans, we measure expected credit loss as the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan's effective interest rate except that, for collateral- dependent loans, credit loss is measured as the difference between the amortized cost basis in the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. In accordance with our appraisal policy, the fair value of collateral-dependent loans is based upon independent third-party appraisals or on collateral valuations prepared by in-house evaluations. Once a third-party appraisal is greater than one year old, or if its determined that market conditions, changes to the property, changes in intended use of the property or other factors indicate that an appraisal is no longer reliable, we perform an internal collateral valuation to assess whether a change in collateral value requires an additional adjustment to carrying value. When we receive an updated appraisal or collateral valuation, management reassesses the need for adjustments to the loan's expected credit loss measurements and, where appropriate, records an adjustment. If the calculated expected credit loss is determined to be permanent, fixed or nonrecoverable, the credit loss portion of the loan will be charged off against the allowance for credit losses. Loans designated having significantly increased credit risk are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status. In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk Page 55
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HILLS BANCORPORATION characteristics or areas of risk concentration. Credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and purpose. This model calculates an expected life-of-loan loss percentage for each loan category by considering the probability of default using historical life-of-loan analysis periods for agricultural, 1 to 4 family first and junior liens, commercial and consumer segments, and the severity of loss, based on the aggregate net lifetime losses incurred per loan class. The component of the allowance for credit losses for loans that share common risk characteristics also considers factors for each loan class to adjust for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio related to: •Lending policies and procedures; •International, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets; •The nature of the loan portfolio, including the terms of the loans; •The experience, ability and depth of the lending management and other relevant staff; •The volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans; •The quality of our loan review and process; •The value of underlying collateral for collateral-dependent loans; •The existence and effect of any concentrations of credit and changes in the level of such concentrations; and •The effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. Such factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the bank reduces, on a straight-line basis over the remaining life of the loans, the adjustments so that model reverts back to the historical rates of default and severity of loss. The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. The allowance for credit losses for loans, as reported in our consolidated balance sheet, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. For further information on the allowance for credit losses for loans, see Note 1 - Summary of Significant Accounting Policies and Note 5 - Loans in the notes to the financial statements of this Form 10-Q. Pre-ASC 326 CECL Adoption: The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America . The financial information contained within these financial statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policies to be those which are related to the allowance for loan losses. The Company's allowance for loan losses methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan losses that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in impaired loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and the state of certain industries. Determinations relating to the possible level of future loan losses are based in part on subjective judgments by management. Future loan losses in excess of current estimates, could materially adversely affect our results of operations or financial position. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly. This discussion of the Company's critical accounting policies should be read in conjunction with the Company's consolidated financial statements and the accompanying notes presented elsewhere herein, as well as other relevant portions of Management's Discussion and Analysis of Financial Condition and Results of Operations. Page 56
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Overview
This overview highlights selected information and may not contain all of the
information that is important to you in understanding our performance during the
period. For a more complete understanding of trends, events, commitments,
uncertainties, liquidity, capital resources, and critical accounting estimates,
you should carefully read this entire report.
The Company is a holding company engaged in the business of commercial banking.
The Company's subsidiary is Hills Bank and Trust Company , Hills, Iowa (the
"Bank"), which is wholly-owned. The Bank was formed in Hills, Iowa in 1904.
The Bank is a full-service commercial bank extending its services to
individuals, businesses, governmental units and institutional customers
primarily in the communities of Hills, Iowa City, Coralville , North Liberty ,
Lisbon , Mount Vernon , Kalona , Wellman , Cedar Rapids , Marion , and Washington ,
Iowa . At September 30, 2021 , the Bank has nineteen full-service locations.
Net income for the nine month period ended September 30, 2021 was $41.93 million
compared to $30.22 million for the same nine months of 2020, an increase of
38.77%. The $11.72 million increase in net income was caused by a number of
factors. The principal factors in the increase in net income for the first nine
months of 2021 are a reversal in the credit loss reserves of $4.56 million ,
primarily due to improvements in economic factor forecasts, historical loss
rates and net recoveries year-to-date; an increase in noninterest income of
$5.06 million ; and an increase in net interest income of $4.05 million .
The Company achieved a return on average assets of 1.32% and a return on average
equity of 12.14% for the twelve months ended September 30, 2021 , compared to the
twelve months ended September 30, 2020 , which were 1.22% and 11.00%,
respectively. The return on average assets and return on average equity for the
nine months ended September 30, 2021 were 1.43% and 13.32%, respectively,
compared to the nine months ended September 30, 2020 , which were 1.16% and
10.33%, respectively. Dividends of $0.94 per share were paid in January 2021 to
2,701 shareholders. The dividend paid in January 2020 was $0.89 per share.
The Company's net interest income is the largest component of revenue and it is
primarily a function of the average earning assets and the net interest margin
percentage. The Company achieved a net interest margin on a tax-equivalent
basis of 2.83% for the nine months ended September 30, 2021 compared to 3.05%
for the same nine months of 2020. Average earning assets were $3.823 billion
year to date in 2021 and $3.362 billion in 2020.
Highlights noted on the balance sheet as of
•Total assets were$4.086 billion , an increase of$305.47 million sinceDecember 31, 2020 . •Cash and cash equivalents were$869.10 million , an increase of$294.79 million sinceDecember 31, 2020 . A portion of the increase can be attributed to increased savings with the current negative economic environment due to the pandemic and equity investors fleeing volatile capital markets in an effort to preserve principal. Also, cash and cash equivalents included approximately$100 million of temporary public funds. •Net loans were$2.630 billion , a decrease of$88.02 million sinceDecember 31, 2020 . The decrease is primarily attributable to the Bank receiving$120.07 million of PPP loan forgiveness payments from the SBA for the nine months endedSeptember 30, 2021 . Loans held for sale decreased$33.21 million sinceDecember 31, 2020 . •Tax credit real estate increased by$3.35 million for the nine months endedSeptember 30, 2021 , primarily attributable to a$4.18 million investment in a multi-family affordable housing rental property. •Deposits increased$275.69 million sinceDecember 31, 2020 . A portion of the increase can be attributed to increased savings with the current negative economic environment due to the pandemic. Also, deposit growth included approximately$100 million in temporary public funds. •Liabilities as ofSeptember 30, 2021 include$4.58 million of allowance for credit losses on off-balance sheet credit exposures under CECL compared to zero under the incurred loss model as ofDecember 31, 2020 . Reference is made to Note 7 for a discussion of fair value measurements which relate to methods used by the Company in recording assets and liabilities on its financial statements. Page 57
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Financial Condition
The COVID-19 pandemic has created significant uncertainty regarding projecting loan demand throughout 2021.
The following table sets forth the composition of the loan portfolio as of
September 30, 2021 December 31, 2020
Amount Percent Amount Percent
(Amounts In Thousands) (Amounts In Thousands)
Agricultural $ 94,210 3.55 % $ 94,842 3.50 %
Commercial and financial 228,181 8.60 286,242 10.56
Real estate:
Construction, 1 to 4 family residential 73,167 2.76 71,117 2.62
Construction, land development and commercial 118,623 4.47 111,913 4.13
Mortgage, farmland 241,650 9.11 247,142 9.12
Mortgage, 1 to 4 family first liens 898,333 33.85 892,089 32.92
Mortgage, 1 to 4 family junior liens 115,308 4.34 127,833 4.72
Mortgage, multi-family 389,805 14.69 374,014 13.80
Mortgage, commercial 410,050 15.45 417,139 15.39
Loans to individuals 32,235 1.21 31,325 1.16
Obligations of state and political subdivisions 52,299 1.97 56,488 2.08
$ 2,653,861 100.00 % $ 2,710,144 100.00 %
Net unamortized fees and costs 927 938
$ 2,654,788 $ 2,711,082
Less allowance for credit losses (2021) and loan
losses (2020) 35,590 37,070
$ 2,619,198 $ 2,674,012
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HILLS BANCORPORATION The Bank has an established formal loan origination policy. In general, the loan origination policy attempts to reduce the risk of credit loss to the Bank by requiring, among other things, maintenance of minimum loan to value ratios, evidence of appropriate levels of insurance carried by borrowers and documentation of appropriate types and amounts of collateral and sources of expected payment. The collateral relied upon in the loan origination policy is generally the property being financed by the Bank. The source of expected payment is generally the income produced from the property being financed. Personal guarantees are required of individuals owning or controlling at least 20% of the ownership of an entity. Limited or proportional guarantees may be accepted in circumstances if approved by the Company's Board of Directors. Financial information provided by the borrower is verified as considered necessary by reference to tax returns, or audited, reviewed or compiled financial statements. The Bank does not originate subprime loans. In order to modify, restructure or otherwise change the terms of a loan, the Bank's policy is to evaluate each borrower situation individually. Modifications, restructures, extensions and other changes are done to improve the Bank's position and to protect the Bank's capital. If a borrower is not current with its payments, any additional loans to such borrowers are evaluated on an individual borrower basis. The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge offs. When an updated appraisal value has been obtained, the Company has used the appraisal amount in determining the appropriate charge off or required reserve. The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company's loss experience with the type of property in question. Any information utilized in addition to the appraisal is intended to identify additional charge offs or provisions, not to override the appraised value. In accordance with Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues, and Staff Accounting Bulletin No. 119, which aligns the staff's guidance with FASB ASC Topic 326, or CECL, the Company determines and assigns ratings to loans using factors that include the following: an assessment of the financial condition of the borrower; a realistic determination of the 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. Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific reserve. In the event a collateral shortfall is identified during the credit review process, the Company will work with the borrower for a principal reduction and/or a pledge of additional collateral and/or additional guarantees. In the event that these options are not available, the loan may be subject to a downgrade of the credit risk rating. If the Company determines a loan amount or portion thereof, is uncollectible, the loan's credit risk rating may be downgraded and the uncollectible amount charged-off or recorded as a specific allowance for losses. The Bank's credit and legal departments undertake a thorough and ongoing analysis to determine if additional specific reserves and/or charge-offs are appropriate and to begin a workout plan for the loan to minimize actual losses. Page 59
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The following table presents the allowance for credit losses as of September 30,
2021 and December 31, 2020 by loan category, the percentage of the allowance for
each category to the total allowance, and the percentage of all loans in each
category to total loans:
September 30, 2021 December 31, 2020
% of Total % of Loans to % of Total % of Loans to
Amount Allowance Total Loans Amount Allowance Total Loans
(In Thousands) (In Thousands)
Agricultural $ 2,118 5.95 % 3.55 % $ 2,508 6.77 % 3.50 %
Commercial and financial 4,348 12.22 8.60 4,885 13.18 10.56
Real estate:
Construction, 1 to 4 family
residential 762 2.14 2.76 907 2.45 2.62
Construction, land development
and commercial 1,535 4.31 4.47 1,412 3.81 4.13
Mortgage, farmland 4,663 13.10 9.11 4,173 11.26 9.12
Mortgage, 1 to 4 family first
liens 7,922 22.26 33.85 10,871 29.32 32.92
Mortgage, 1 to 4 family junior
liens 2,942 8.27 4.34 1,497 4.04 4.72
Mortgage, multi-family 3,713 10.43 14.69 4,462 12.04 13.80
Mortgage, commercial 6,505 18.28 15.45 4,953 13.36 15.39
Loans to individuals 633 1.78 1.21 752 2.03 1.16
Obligations of state and
political subdivisions 449 1.26 1.97 650 1.74 2.08
$ 35,590 100.00 % 100.00 % $ 37,070 100.00 % 100.00 %
The allowance for credit losses (ACL) totaled $35.59 million at September 30,
2021 compared to the allowance for loan losses under the incurred loss method of
$37.07 million at December 31, 2020 . The percentage of the allowance to
outstanding loans was 1.34% and 1.37% at September 30, 2021 and December 31,
2020 , respectively. The allowance was based on management's consideration of a
number of factors, including composition of the loan portfolio, loans with
higher credit risks and the overall amount of loans outstanding. Due to the
adoption of ASC 326 (CECL) in 2021, the ACL under CECL will not be comparable to
the allowance for loan losses in 2020. The changes in the ACL in 2021 compared
to December 31, 2020 is the result of the following factors: $2.75 million
increase upon adoption of ASC 326 (CECL) on January 1, 2021 ; changes after
adoption for the nine months ended September 30, 2021 include improvements in
the economic factor forecasts, primarily Iowa unemployment, used in the ACL
calculation which resulted in a decrease of $1.14 million ; decrease in loan
volume which resulted in a decrease of $0.75 million ; changes in prepayment and
curtailment rates resulting in a decrease of $1.03 million ; decreases in
historical loss rates along with net recoveries resulting in a decrease of $2.07
million ; decreases in the individually analyzed loans reserve of $0.42 million ;
and increases in qualitative factors determined necessary by management which
resulted in an increase of $0.71 million .
The adequacy of the allowance is reviewed quarterly and adjusted as appropriate
after consideration has been given to the impact of economic conditions on the
borrowers' ability to repay, loan collateral values, past collection experience,
the risk characteristics of the loan portfolio and such other factors that
deserve current recognition. The growth of the loan portfolio and the trends in
problem and watch loans are significant elements in the determination of the
provision for credit losses. Quantitative factors include the Company's
historical loss experience, which is then adjusted for levels and trends in past
due, levels and trends in charged-off and recovered loans, trends in volume
growth, trends in problem and watch loans, trends in restructured loans, local
economic trends and conditions, industry and other conditions, and effects of
changing interest rates.
Management has determined that the allowance for credit losses was adequate at
September 30, 2021 , and that the loan portfolio is diversified and secured,
without undue concentration in any specific risk area. This process involves a
high degree of management judgment; however, the allowance for credit losses is
based on a comprehensive, well documented, and
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HILLS BANCORPORATION consistently applied analysis of the Company's loan portfolio. This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors. The relative level of allowance for credit losses is reviewed and compared to industry data. This review encompasses levels of total collateral-dependent loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs. Investment securities available for sale held by the Company increased by$92.89 million fromDecember 31, 2020 toSeptember 30, 2021 . The fair value of securities available for sale was$5.69 million more than the amortized cost of such securities as ofSeptember 30, 2021 . AtDecember 31, 2020 , the fair value of the securities available for sale was$11.70 million more than the amortized cost of such securities. Deposits increased$275.69 million in the first nine months of 2021 primarily due to increased savings with the current negative economic environment. In the opinion of the Company's management, the Company continues to have sufficient liquidity resources available to fund expected additional loan growth. Brokered deposits are included in total deposits and totaled$51.58 million as ofSeptember 30, 2021 with an average rate of 0.36%. Brokered deposits were$74.08 million as ofDecember 31, 2020 with an average interest rate of 0.34%. As ofSeptember 30, 2021 andDecember 31, 2020 , brokered deposits were 1.49% and 2.32% of total deposits, respectively.Federal Home Loan Bank (FHLB) borrowings were$105 million as ofSeptember 30, 2021 andDecember 31, 2020 . The FHLB funding source is considered when loan growth exceeds core deposit increases and the interest rates on funds borrowed from the FHLB are favorable compared to other funding alternatives.
Dividends and Equity
InJanuary 2021 ,Hills Bancorporation paid a dividend of$8.77 million or$0.94 per share. The dividend paid inJanuary 2020 was$0.89 per share. After payment of the dividend and the adjustment for accumulated other comprehensive income, stockholders' equity as ofSeptember 30, 2021 totaled$436.30 million . OnJanuary 1, 2015 , the final rules of theFederal Reserve Board went into effect implementing inthe United States the Basel III regulatory capital reforms from theBasel Committee on Banking Supervision . The final rule also adopted changes to the agencies' regulatory capital requirements that meet the requirements of section 171 and section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the BASEL III rules, the minimum capital ratios are 4% for Tier 1 Leverage Capital Ratio, 4.5% for the Common Equity Tier 1 Capital Ratio, 6% for the Tier 1 Risk-Based Capital Ratio and 8% for the Total Risk-Based Capital Ratio. As ofMarch 31, 2020 , the Bank elected to use the Community Bank Leverage Ratio (CBLR) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act. Under the CBLR framework, the Bank is required to maintain a CBLR of greater than 9%. The CARES Act reduced the minimum ratio to 8% beginning in the 2nd quarter of 2020 throughDecember 31, 2020 , increasing to 8.5% for 2021 and returning to 9% beginningJanuary 1, 2022 . As ofSeptember 30, 2021 andDecember 31, 2020 , the Company had regulatory capital in excess of theFederal Reserve's minimum and well-capitalized definition requirements. The actual amounts and capital ratios as ofSeptember 30, 2021 andDecember 31, 2020 are presented below (amounts in thousands): Actual For Capital Adequacy Purposes Amount Ratio Ratio As ofSeptember 30, 2021 : Company: Community Bank Leverage ratio$ 478,368 11.99 % 8.500 % Bank: Community Bank Leverage ratio 478,951 12.01 8.500 Page 61
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Actual For Capital Adequacy Purposes
Amount Ratio Ratio
As of December 31, 2020 :
Company:
Community Bank Leverage ratio $ 452,123 11.91 % 8.00 %
Bank:
Community Bank Leverage ratio 453,073 11.94 8.00
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HILLS BANCORPORATION
Discussion of operations for the nine months ended
Net Income Overview Net income increased$11.72 million for the nine months endedSeptember 30, 2021 compared to the first nine months of 2020. Total net income was$41.93 million in 2021 and$30.22 million in the comparable period in 2020, an increase of 38.77%. The changes in net income in 2021 from the first nine months of 2020 were primarily the result of the following: •Net interest income increased by$4.05 million , before credit loss expense, attributable in large part to a$7.31 million decrease in interest rate expense. •For the nine months endedSeptember 30, 2021 , a reversal of credit loss reserves was recorded totaling$4.56 million . This represents a decrease of$9.06 million from the provision for loan losses under the incurred loss model of$4.50 million for the nine months endedSeptember 30, 2020 . •Noninterest income increased by$5.06 million . •Noninterest expenses increased by$2.96 million . •Income tax expense increased by$3.49 million . For the nine month period endedSeptember 30, 2021 andSeptember 30, 2020 basic earnings per share was$4.50 and$3.22 , respectively. Diluted earnings per share was$4.50 for the nine months endedSeptember 30, 2021 compared to$3.22 for the same period in 2020. The Company's net income for the period was driven primarily by three important factors. The first important factor is credit loss expense recorded under CECL. The majority of the Company's interest-earning assets are in loans outstanding, which amounted to more than$2.630 billion atSeptember 30, 2021 . Expected credit loss expense is computed on a quarterly basis and is a result of management's determination of the quality of the loan portfolio. The expense reflects a number of factors, including the size of the loan portfolio, the overall composition of the loan portfolio and loan concentrations, the borrowers' ability to repay, past loss experience, loan collateral values, the level of collateral-dependent loans and loans past due ninety days or more.
In
addition, management considers the credit quality of the loans based on management's review of problem and watch loans, including loans with historically higher credit risk. Credit loss expense was a reduction of expense of$4.56 million in 2021 under CECL compared to an expense of$4.50 million in 2020 under the incurred loss model. The decrease is attributable to improvements in the economic factor forecasts, primarilyIowa unemployment, and continued improvement in asset quality, relative to the sizable expense taken for the first half of 2020 from management increases to qualitative factors as a result of the significant economic uncertainties surrounding the pandemic. The Company believes that credit loss expense is expected to be dependent on the Company's loan growth, local economic conditions, including, but not limited to, conditions associated with the COVID-19 pandemic and the attendant risks and uncertainties related thereto, asset quality and will continue to have potential volatility for the foreseeable future resulting from the adoption of CECL in the first quarter and the uncertainties due to the COVID-19 pandemic. The second important factor affecting the Company's net income is the interaction between changes in net interest margin and changes in average volumes of the Bank's earnings assets. Net interest income of$79.45 million for the first nine months of 2021 was derived from the Company's$3.823 billion of average earning assets during that period and its tax-equivalent net interest margin of 2.83%. Average earning assets in the nine months endedSeptember 30, 2020 were$3.362 billion and the tax-equivalent net interest margin was 3.05%. Net interest income for the Company increased primarily as a result of the continued low interest rates on interest bearing deposits resulting in decreased interest expenses. The Company expects net interest compression to impact earnings for the foreseeable future due to competition for loans and deposits combined with the interest rate decreases by theFederal Reserve Board . The Company believes growth in net interest income will be contingent on the growth of the Company's earning assets and maintaining yield on loans. The third significant factor affecting the Company's net income is noninterest income, primarily net gain on the sale of loans and trust fees. The net gain on the sale of loans was$6.24 million and$4.86 million for the nine months endedSeptember 30, 2021 and 2020, respectively, an increase of 28.48% for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly. The volume of activity in these types of loans is directly related to the level of interest rates and has been significantly impacted by theFederal Reserve Board's reduction of the federal funds rate to 0.25%, resulting in a significant amount of mortgage loan refinance activity. Trust fees were$9.65 million and$7.45 million for the nine months endedSeptember 30, 2021 and 2020, respectively, an increase of 29.46% for the nine months endedSeptember 30, 2021 compared to the same period in 2020. This is primarily driven by the increase in assets under management of$0.45 billion from$1.98 billion as ofSeptember 30, 2020 to$2.43 billion as ofSeptember 30, 2021 . Page 63
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Discussion of operations for the nine months ended
Net Interest Income
Net interest income increased for the nine months endedSeptember 30, 2021 compared to the comparable period in 2020. The increase was a result of the continued low interest rates on interest bearing deposits resulting in decreased interest expenses. The decrease in interest expense more than compensated for the decrease in interest income associated with the low rate environment. Net interest income is the excess of the interest and fees earned on interest-earning bearing assets over the interest expense of the interest-bearing liabilities. The factors that have the greatest impact on net interest income are the average volume of earning assets for the period and the net interest margin. The net interest margin for the first nine months of 2021 was 2.83% compared to 3.05% in 2020 for the same period. Interest expense decreased$7.31 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to decreasing interest rates on deposits. The measure is shown on a tax-equivalent basis using a tax rate of 21% to make the interest earned on taxable and non-taxable assets more comparable. The change in average balances and average rates between periods and the effect on the net interest income on a tax equivalent basis for the nine months ended in 2021 compared to the comparable period in 2020 are shown in the following table: Increase (Decrease) in Net Interest Income Change in Average Change in Volume Balance Average Rate Changes Rate Changes Net Change (Amounts in Thousands) Interest income: Loans, net$ (40,757) (0.07) %$ (1,648) $ (1,406) $ (3,054) Taxable securities 58,102 (0.52) 607 (634) (27) Nontaxable securities 23,396 (0.33) 468 (548) (80) Federal funds sold 419,563 (0.24) 1,134 (1,283) (149)$ 460,304 $ 561 $ (3,871) $ (3,310) Interest expense: Interest-bearing demand deposits$ 200,364 (0.32) %$ (804) $ 2,423 $ 1,619 Savings deposits 219,772 (0.19) (499) 1,434 935 Time deposits (37,519) (0.46) 638 2,246 2,884 FHLB borrowings (80,000) (0.10) 1,789 81 1,870 Interest-bearing other liabilities (1) (0.79) - - -$ 302,616 $ 1,124 $ 6,184 $ 7,308 Change in net interest income$ 1,685 $ 2,313 $ 3,998 Rate/volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Interest on nontaxable securities and loans is shown on a tax-equivalent basis.
A summary of the net interest spread and margin is as follows:
(Tax Equivalent Basis) 2021 2020
Yield on average interest-earning assets 3.30 % 3.88 %
Rate on average interest-bearing liabilities 0.63 1.08
Net interest spread 2.67 % 2.80 %
Effect of noninterest-bearing funds 0.16 0.25
Net interest margin (tax equivalent interest income divided by average interest-earning assets)
2.83 % 3.05 %
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Discussion of operations for the nine months ended
In pricing loans and deposits, the Bank considers theU.S. Treasury indexes as benchmarks in determining interest rates. TheFederal Open Market Committee met six times during the first nine months of 2021. The target rate decreased to 0.25% as ofMarch 31, 2020 . Interest rates on loans are generally affected by the target rate since interest rates for theU.S. Treasury market normally increase or decrease when theFederal Reserve Board raises or lowers the federal funds rate. As ofSeptember 30, 2021 , the rate indexes for the one, three and five year indexes were 0.09%, 0.53% and 0.98%, respectively. The one year index decreased 25.00% from 0.12% atSeptember 30, 2020 , the three year index increased 231.25% and the five year index increased 250.00%. The three year index was 0.16% and the five year index was 0.28% atSeptember 30, 2020 . The targeted federal funds rate was 0.25% atSeptember 30, 2021 and 2020. The Company anticipates short term and long term rates in the indexes to remain consistent throughout 2021.
Credit Loss Expense
Credit loss expense was a reduction of expense of$4.56 million for the nine months endedSeptember 30, 2021 compared to an expense of$4.50 million in 2020 under the incurred loss model, a decrease of expense of$9.06 million . Credit loss expense is the amount necessary to adjust the allowance for credit losses to the level considered by management to appropriately account for the estimated current expected credit losses within the Bank's loan portfolio. The credit loss expense taken to fund the allowance for credit losses is computed on a quarterly basis and is a result of management's determination of the quality of the loan portfolio. The expense reflects a number of factors, including the size of the loan portfolio, the overall composition of the loan portfolio and loan concentrations, the impact on the borrowers' ability to repay, past loss experience, loan collateral values, the level of collateral-dependent loans and loans past due ninety days or more. In addition, management considers the credit quality of the loans based on management's review of problem and watch loans, including loans with historically higher credit risks. Also, under CECL, a significant component in estimating expected credit losses are economic forecasts such asIowa unemployment, national real gross domestic product (GDP), all-transactions house price index forIowa ,Iowa real GDP, and the commercial real estate price index (CRE Index). The Company believes that credit loss expense is expected to be dependent on the Company's loan growth, local economic conditions, including, but not limited to, conditions associated with the COVID-19 pandemic and the attendant risks and uncertainties related thereto, asset quality and will continue to have potential volatility for the foreseeable future resulting from the adoption of CECL in the first quarter and the uncertainties due to the COVID-19 pandemic. The allowance for credit losses balance is affected by charge-offs, net of recoveries, for the periods presented. For the nine months endedSeptember 30, 2021 and 2020, recoveries were$2.19 million and$1.28 million , respectively; and charge-offs were$0.86 million in 2021 and$2.48 million in 2020. The allowance for credit losses totaled$35.59 million atSeptember 30, 2021 compared to$37.07 million for the allowance for loan losses under the incurred loss model as ofDecember 31, 2020 . The allowance represented 1.34% and 1.37% of loans held for investment atSeptember 30, 2021 andDecember 31, 2020 .
Noninterest Income
The following table sets forth the various categories of noninterest income for
the nine months ended
Nine Months Ended September
30,
2021 2020 $ Change % Change
(Amounts in thousands)
Net gain on sale of loans $ 6,243 $ 4,859 $ 1,384 28.48 %
Trust fees 9,645 7,450 2,195 29.46
Service charges and fees 8,729 7,427 1,302 17.53
Other noninterest income 647 462 185 40.04
Gain on sale of investment securities - 10 (10) (100.00)
$ 25,264 $ 20,208 $ 5,056 25.02
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Discussion of operations for the nine months ended
In the nine months endedSeptember 30, 2021 and 2020, the net gain on sale of loans was$6.24 million and$4.86 million , respectively. The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly. The volume of activity, margin and demand in these types of loans is directly related to the level of interest rates. The primary reason for the increase in 2021 compared to 2020 is the increased margin per loan in 2021. The servicing of the loans sold into the secondary market is not retained by the Company so these loans do not provide an ongoing stream of income. Trust fees increased$2.20 million to$9.65 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020. This is due to the increase in assets under management of$0.45 billion from$1.98 billion as ofSeptember 30, 2020 to$2.43 billion as ofSeptember 30, 2021 . Service charges and fees increased$1.30 million to$8.73 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020, primarily due to increased debit card interchange fees from increased volume of transactions.
Other noninterest income categories experienced marginal period-to-period
fluctuations for the nine months ended
Noninterest Expenses
The following table sets forth the various categories of noninterest expenses
for the nine months ended
Nine Months Ended September
30,
2021 2020 $ Change % Change
(Amounts in thousands)
Salaries and employee benefits $ 31,484 $ 29,818 $ 1,666 5.59 %
Occupancy 3,135 3,248 (113) (3.48)
Furniture and equipment 5,523 5,778 (255) (4.41)
Office supplies and postage 1,268 1,333 (65) (4.88)
Advertising and business development 1,480 1,479 1 0.07
Outside services 9,781 8,020 1,761 21.96
FDIC insurance assessment 777 617 160 25.93
Other noninterest expense 1,668 1,861 (193) (10.37)
$ 55,116 $ 52,154 $ 2,962 5.68
In the nine months ended September 30, 2021 and 2020, salaries and employee
benefits expense increased $1.67 million . The increase is primarily the result
of increased variable compensation due to the increase in loans originated for
sale and processing of PPP loans.
Outside services increased $1.76 million to $9.78 million for the nine months
ended September 30, 2021 compared to the same period in 2020, primarily due to
increases in data processing expenses with the continued increases in mortgage
refinance activity and other non-interest income.
Other noninterest expense categories experienced marginal period-to-period
fluctuations for the nine months ended
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Discussion of operations for the three months ended
Net Income Overview
Net income increased$1.70 million for the three months endedSeptember 30, 2021 compared to the same period in 2020. Total net income was$13.13 million in 2021 and$11.43 million in the comparable period in 2020, an increase of 14.83%. For the three month periods endedSeptember 30, 2021 and 2020 basic earnings per share was$1.41 and$1.22 , respectively. Diluted earnings per share was$1.41 for the three months endedSeptember 30, 2021 compared to$1.22 for the same period in 2020. Net Interest Income Net interest income increased for the three months endedSeptember 30, 2021 compared to the comparable period in 2020. The increase was a result of the continued low interest rates on interest bearing deposits resulting in decreased interest expenses. The decrease in interest expense more than compensated for the decrease in interest income associated with the low rate environment. Net interest income is the excess of the interest and fees earned on interest-earning bearing assets over the interest expense of the interest-bearing liabilities. The factors that have the greatest impact on net interest income are the average volume of earning assets for the period and the net interest margin. Interest expense decreased$2.29 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to decreasing interest rates on deposits. The net interest margin for the three months endedSeptember 30, 2021 was 2.82% compared to 2.90% in 2020 for the same period. The measure is shown on a tax-equivalent basis using a tax rate of 21% to make the interest earned on taxable and non-taxable assets more comparable. The change in average balances and average rates between periods and the effect on the net interest income on a tax equivalent basis for the three months ended in 2021 compared to the comparable period in 2020 are shown in the following table: Increase (Decrease) in Net Interest Income Change in Change in Volume Average Balance Average Rate Changes Rate Changes Net Change (Amounts in Thousands) Interest income: Loans, net$ (111,056) 0.07 %$ (1,428) $ 663$ (765) Taxable securities 79,512 (0.49) 295 (244) 51 Nontaxable securities 35,003 (0.35) 231 (194) 37 Federal funds sold 350,448 0.05 89 97 186$ 353,907 $ (813) $ 322$ (491) Interest expense: Interest-bearing demand deposits$ 155,850 (0.20) %$ (159) $ 541$ 382 Savings deposits 235,776 (0.09) (143) 249 106 Time deposits (85,287) (0.48) 435 740 1,175 FHLB borrowings (80,000) (0.12) 600 30 630 Interest-bearing other liabilities (3) 0.12 - - -$ 226,336 $ 733 $ 1,560 $ 2,293 Change in net interest income$ (80) $ 1,882 $ 1,802 Rate/volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Interest on nontaxable securities and loans is shown on a tax-equivalent basis. Page 67
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HILLS BANCORPORATION Discussion of operations for the three months ended
A summary of the net interest spread and margin is as follows:
(Tax Equivalent Basis) 2021 2020
Yield on average interest-earning assets 3.24 % 3.62 %
Rate on average interest-bearing liabilities 0.57 0.96
Net interest spread 2.67 % 2.66 %
Effect of noninterest-bearing funds 0.15 0.24
Net interest margin (tax equivalent interest income divided by average interest-earning assets)
2.82 % 2.90 %
Credit Loss Expense
Credit loss expense was an expense of $0.08 million for the three months ended
September 30, 2021 compared to a reduction of expense of $0.16 million in 2020
under the incurred loss model, an increase of expense of $0.24 million . Credit
loss expense is the amount necessary to adjust the allowance for credit losses
to the level considered by management to appropriately account for the estimated
current expected credit losses within the Bank's loan portfolio. The credit loss
expense taken to fund the allowance for credit losses is computed on a quarterly
basis and is a result of management's determination of the quality of the loan
portfolio. The expense reflects a number of factors, including the size of the
loan portfolio, the overall composition of the loan portfolio and loan
concentrations, the impact on the borrowers' ability to repay, past loss
experience, loan collateral values, the level of collateral-dependent loans and
loans past due ninety days or more. In addition, management considers the
credit quality of the loans based on management's review of problem and watch
loans, including loans with historically higher credit risks. The Company
believes that credit loss expense is expected to be dependent on the Company's
loan growth, local economic conditions, including, but not limited to,
conditions associated with the COVID-19 pandemic and the attendant risks and
uncertainties related thereto, asset quality and will continue to have potential
volatility for the foreseeable future resulting from the adoption of CECL in the
first quarter and the uncertainties due to the COVID-19 pandemic.
The allowance for credit losses balance is affected by charge-offs, net of
recoveries, for the periods presented. For the three months ended September 30,
2021 and 2020, recoveries were $0.65 million and $0.47 million , respectively;
and charge-offs were $0.59 million in 2021 and $0.87 million in 2020.
Noninterest Income
The following table sets forth the various categories of noninterest income for
the three months ended
Three Months Ended September
30,
2021 2020 $ Change % Change
(Amounts in thousands)
Net gain on sale of loans $ 1,512 $ 2,303 $ (791) (34.35) %
Trust fees 3,568 2,494 1,074 43.06
Service charges and fees 3,075 2,636 439 16.65
Other noninterest income 89 77 12 15.58
$ 8,244 $ 7,510 $ 734 9.77
Trust fees increased $1.07 million to $3.57 million for the three months ended
September 30, 2021 compared to the same period in 2020. This is due to the
increase in assets under management of $0.45 billion from $1.98 billion as of
September 30, 2020 to $2.43 billion as of September 30, 2021 . Service charges
and fees increased $0.44 million to $3.08 million for the three months ended
September 30, 2021 compared to the same period in 2020, primarily due to
increased debit card interchange fees from increased volume of transactions.
Other noninterest income categories experienced marginal period-to-period
fluctuations for the three months ended September 30, 2021 .
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Discussion of operations for the three months ended
Noninterest Expenses
The following table sets forth the various categories of noninterest expenses
for the three months ended
Three Months Ended
September 30,
2021 2020 $ Change % Change
(Amounts in thousands)
Salaries and employee benefits $ 10,281 $ 10,108 $ 173 1.71 %
Occupancy 955 1,067 (112) (10.50)
Furniture and equipment 1,652 2,028 (376) (18.54)
Office supplies and postage 428 425 3 0.71
Advertising and business development 496 340 156 45.88
Outside services 3,496 2,818 678 24.06
FDIC insurance assessment 267 223 44 19.73
Other noninterest expense 623 1,046 (423) (40.44)
$ 18,198 $ 18,055 $ 143 0.79
Outside services increased $0.68 million to $3.50 million compared to the same
period in 2020, primarily due to increases in data and card processing expenses
with the continued increase in mortgage refinance activity and other
non-interest income.
Other noninterest expense decreased for the three months ended September 30,
2021 compared to the same period in 2020 due to a legal settlement in 2020 that
did not recur.
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Income Taxes
Federal and state income tax expenses were $12.23 million and $8.74 million for
the nine months ended September 30, 2021 and 2020, respectively. Income taxes as
a percentage of income before taxes were 22.58% in 2021 and 22.43% in 2020.
Liquidity
The Company actively monitors and manages its liquidity position with the objective of maintaining sufficient cash flows to fund operations, meet client commitments, take advantage of market opportunities and provide a margin against unforeseeable liquidity needs. Federal funds sold and investment securities available for sale are readily marketable assets. Maturities of all investment securities are managed to meet the Company's normal liquidity needs, to respond to market changes or to adjust the Company's interest rate risk position. Investment securities available for sale comprised 12.27% of the Company's total assets atSeptember 30, 2021 compared to 10.80% atDecember 31, 2020 . The Company has historically maintained a stable deposit base and a relatively low level of large deposits, which has mitigated the volatility in the Company's liquidity position. As ofSeptember 30, 2021 , the Company had borrowed$105.00 million from theFederal Home Loan Bank ("FHLB") ofDes Moines . Advances are used as a means of providing both long and short-term, fixed-rate funding for certain assets and for managing interest rate risk. The Company had additional borrowing capacity available from the FHLB of approximately$748.05 million atSeptember 30, 2021 . As additional sources of liquidity, the Company has the ability to borrow up to$10.00 million from theFederal Reserve Bank of Chicago , and has lines of credit with three banks totaling$538.95 million . The borrowings under these credit lines would be secured by the Bank's investment securities. The combination of high levels of potentially liquid assets, low dependence on volatile liabilities and additional borrowing capacity provided sources of liquidity for the Company which management considered sufficient atSeptember 30, 2021 .
As of
Contractual Obligations
There have been no material changes with regard to contractual obligations
disclosed in the Company's Form 10-K for the year ended
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