HILLS BANCORPORATION The following discussion by management is presented regarding the financial results for the Company for the dates and periods indicated. The discussion should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document. For a discussion on the comparison of results of operations for the years endedDecember 31, 2020 and 2019, refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Annual Form 10-K filed with theSEC onMarch 5, 2021 .
An overview of the year 2021 is presented following the section discussing a special note regarding forward looking statements.
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 financial market disruptions and/or an economic recession, and monetary and other governmental actions designed to address such disruptions and recession, 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 on the affected securities and the recognition of a credit 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.
•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.
•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.
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•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
Our response to COVID-19 continues to be focused on how we can best serve our employees, customers, and communities. We implemented additional safety measures to achieve appropriate social distancing for both customers and employees throughout our locations. We have continued to adjust procedures and restrictions based on local conditions and generally in alignment with guidance from theCenters for Disease Control . Drive-thru services remain available as well as all ATM's to complete needed transactions. Customers are also able to directly contact our bankers through calling the customer contact center, engaging with a digital banker via the HERE byHills Bank app, or throughHills Bank Online which is available 24/7. 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 ofDecember 31, 2021 andDecember 31, 2020 , COVID-19 related payment deferrals were approximately 0.12% and 1.20% of total loans, respectively. The Bank continues to assist customers through this difficult time in the best manner possible by providing$127.10 million of Paycheck Protection Program (PPP) loans throughDecember 31, 2020 . With the passage of the Coronavirus Response and Relief Supplemental Appropriations Act 2021 in lateDecember 2020 , the Bank provided additional PPP loans in 2021 totaling$58.34 million throughDecember 31, 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 ofDecember 31, 2021 , the Bank has outstanding PPP loan balances of$5.34 million and for the year endedDecember 31, 2021 has received total forgiveness payments of$140.1 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 multiple new and more infectious variants 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 continue 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.
Overview
The Company is a bank holding company engaged, through its wholly-owned subsidiary bank, in the business of commercial banking. The Company's subsidiary isHills Bank and Trust Company ,Hills, Iowa . The Bank was formed inHills, Iowa in 1904. The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and Page 29 -------------------------------------------------------------------------------- Table of Contents institutional customers primarily in the communities ofHills, Iowa City,Coralville ,North Liberty ,Lisbon ,Mount Vernon ,Kalona ,Wellman ,Cedar Rapids ,Marion andWashington ,Iowa .
The Company's net income for 2021 was
The Bank's net interest income is the largest component of the Bank's revenue, and is a function of the average earning assets and the net interest margin percentage. Net interest margin is the ratio of net interest income to average earning assets. For the years endedDecember 31, 2021 and 2020, the Bank achieved a net interest margin of 2.75% and 3.00%, respectively. For the year endedDecember 31, 2021 , net interest income on a tax equivalent basis increased by$2.82 million . In 2021, net interest income increased$1.77 million due to growth of$424.15 million in the Bank's average earning assets and decreases in certficates of deposit and FHLB borrowings as well as increased$1.05 million due to interest rate changes.
Highlights with respect to items on the Company's balance sheet as of
•Total assets were
•Cash and cash equivalents were$781.92 million , an increase of$207.61 million sinceDecember 31, 2020 . A substantial 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. •Loans, net of allowance for credit losses and unamortized fees and costs, totaling$2.631 billion , a decrease of$87.18 million sinceDecember 31, 2020 . The decrease is primarily attributable to the forgiveness of PPP loans totaling a net of$81.16 million for the year endedDecember 31, 2021 . Loans held for sale decreased$38.23 million sinceDecember 31, 2020 due to the slowdown in mortgage loan refinance activity later in 2021. •Tax credit real estate increased by$2.54 million for the year endedDecember 31, 2021 , primarily attributable to a$4.18 million investment in a multi-family affordable housing rental property. •Deposit growth of$341.43 million in 2021. Deposits increased to$3.534 billion and included$51.59 million of brokered deposits. A substantial portion of the increase can be attributed to increased savings with the current negative economic environment due to the pandemic.
•FHLB borrowings decreased
•Liabilities as ofDecember 31, 2021 include$3.85 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 .
•Stockholders' equity increased
Reference is made to Note 13 of the Company's consolidated financial statements for a discussion of fair value measurements which relate to methods used by the Company in recording certain assets and liabilities on its consolidated financial statements. The return on average equity was 11.29% in 2021 compared to 9.82% in 2020. The Company remains well-capitalized as ofDecember 31, 2021 with total risk-based capital at 20.24% and Tier 1 risk-based capital at 17.25%. The minimum regulatory guidelines are 8% and 6% respectively. The Company paid a dividend per share of$0.940 in 2021,$0.890 in 2020 and$0.820 in the year endedDecember 31, 2019 .
A detailed discussion of the financial position and results of operations follows this overview.
Page 30-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies 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 credit losses. Allowance for Credit Losses
On
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 3 - Loans and Note 2 - Securities) and the fair value of debt securities (see Note 2 - 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-K. 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 Page 31 -------------------------------------------------------------------------------- Table of Contents 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 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 credit loss expense 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 a credit loss expense, 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 3 - Loans in the notes to the financial statements of this Form 10-K.
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.
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Financial Position
Year End Amounts 2021 2020 2019 2018 2017
(Amounts In Thousands)
Total assets $ 4,044,562 $ 3,782,362 $ 3,302,550 $ 3,044,037 $ 2,963,360
Investment securities 555,900 416,544 366,368 331,098 300,160
Loans held for sale 5,716 43,947 8,400 1,984 5,162
Loans, net 2,625,062 2,674,012 2,606,277 2,591,085 2,431,165
Deposits 3,533,994 3,192,568 2,661,364 2,421,124 2,288,565
Federal Home Loan Bank borrowings - 105,000 185,000 215,000 295,000
Redeemable common stock 50,013 47,329 51,826 48,870 43,308
Stockholders' equity 438,450 416,076 375,211 334,882 311,716
Total assets at December 31, 2021 increased $262.20 million , or 6.93%, from the
prior year-end. The largest growth in assets in 2021 occurred in Cash and Cash
Equivalents, which increased $207.61 million as of December 31, 2021 compared to
December 31, 2020 . Net Loans decreased $(48.95) million for the year ended
December 31, 2021 . Loans held for sale to the secondary market decreased
$(38.23) million for the year ended December 31, 2021 . Loans held for
investment represent the largest component of the Bank's earning assets. Loans
held for investment were $2.661 billion and $2.711 billion at December 31, 2021
and 2020, respectively.
The local economy that generated consistent demand for loans was a significant
factor in the trend of increasing net loans in past years. The trend of
increasing Net Loans did slow in 2021 and 2020 and may not continue, and as a
result, may not be indicative of future performance. The primary reason for the
decrease in 2021 was the forgiveness of PPP loans totaling a net of $81.16
million that were provided to customers in response to the COVID-19 pandemic as
discussed previously. Without the decrease due to PPP loan forgiveness, loans
held for investment increased $30.61 million .
Commercial and financial loans represent a significant portion of the loan
growth. These loans increased $16.92 million in 2021 excluding the impact of PPP
loans. Construction loans, both 1 to 4 family residential and land development
and commercial, had significant growth totaling $24.48 million in 2021.
Agricultural loans increased $12.09 million in 2021 though farmland mortgages
decreased $14.40 million due to significant competition in the Bank's trade
area.
On a net basis, the Company collected $52.02 million in loan payments from
customers and the SBA for the year ended December 31, 2021 compared to loan
originations of $72.14 million for the year ended December 31, 2020 , primarily
due to the collections from the forgiveness of PPP loans. The Company does not
engage in significant participation activity and does not purchase
participations from outside its established trade area. The Company's policy
allows for the purchase or sale of participations related to existing customers
or to participate in community development activity. The Company held
participations purchased of $17.18 , $19.83 and $15.17 million as of December 31,
2021 , 2020 and 2019, respectively. The participations purchased were less than
one percent of loans held for investment for each of the three years.
The Company did not experience a material change in the composition of its loans
held for investment in 2021 or 2020. Residential real estate loans, including
first and junior liens, were $1,023.91 million and $1,019.92 million as of
December 31, 2021 and 2020, respectively. The dollar total of residential real
estate loans increased 0.39% in 2021 and decreased 3.78% in 2020. Residential
real estate loans were 38.49% of the loan portfolio at December 31, 2021 and
37.63% at December 31, 2020 . Commercial real estate loans totaled $401.38
million at December 31, 2021 , a 3.78% decrease over the December 31, 2020 total
of $417.14 million . Commercial real estate loans increased 3.72% in 2020.
Commercial real estate loans represented 15.09%, 15.39% and 15.24% of the
Company's loan portfolio as of December 31, 2021 , 2020 and 2019, respectively.
The Company monitors its commercial real estate level so that it does not have a
concentration in that category that exceeds 300% of its capital. Commercial
real estate loan concentration was 155.64% of capital as of December 31, 2021 .
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The following table shows the composition of loans (before deducting the
allowance for credit losses) as of December 31 for each of the last five years.
The table does not include loans held for sale to the secondary market.
2021 2020 2019 2018 2017
Agricultural $ 106,933 $ 94,842 $ 91,317 $ 92,673 $ 88,580
Commercial and financial 222,002 286,242 221,323 229,501 218,632
Real estate:
Construction, 1 to 4 family residential 80,486 71,117 80,209 72,279 69,738
Construction, land development and
commercial 127,021 111,913 108,410 113,807 109,595
Mortgage, farmland 232,744 247,142 242,730 236,454 215,286
Mortgage, 1 to 4 family first liens 909,564 892,089 910,742 912,059 831,591
Mortgage, 1 to 4 family junior liens 114,342 127,833 149,227 152,625 144,200
Mortgage, multi-family 382,792 374,014 350,761 352,434 336,810
Mortgage, commercial 401,377 417,139 402,181 383,314 361,196
Loans to individuals 32,687 31,325 32,308 30,072 26,417
Obligations of state and political
subdivisions 50,285 56,488 49,896 52,725 57,626
$ 2,660,233 $
2,710,144
299 938 933 952 894
$ 2,660,532 $
2,711,082
35,470 37,070 33,760 37,810 29,400
$ 2,625,062 $ 2,674,012 $ 2,606,277 $ 2,591,085 $ 2,431,165 There were no foreign loans outstanding for any of the years presented.
The following table shows the principal payments due on loans as ofDecember 31, 2021 : Amounts Due in Amounts Due in Amounts Due in Amounts Due in Amount One Year One To Five To Fifteen Over Fifteen Of Loans Or Less (1) Five Years Years Years (Amounts In Thousands) Commercial and Agricultural$ 1,553,275 $ 411,079 $ 1,018,784 $ 92,625 $ 30,787 Real Estate (2) 1,022,975 154,595 638,276 196,627 33,477 Other 83,983 6,035 28,579 23,031 26,338 Totals$ 2,660,233 $ 571,709 $ 1,685,639 $ 312,283 $ 90,602 The types of interest rates applicable to these principal payments are shown below: Fixed rate$ 1,695,079 $ 401,352 $ 1,064,357 $ 140,711 $ 88,659 Variable rate 965,154 170,357 621,282 171,572 1,943$ 2,660,233 $ 571,709 $ 1,685,639 $ 312,283 $ 90,602 (1)A significant portion of the commercial loans are due in one year or less. A significant percentage of the loans will be re-evaluated prior to their maturity and are likely to be extended. (2)Commercial, multi-family, construction 1 to 4 family residential, construction land development and commercial, and agricultural real estate loans are reflected in the Commercial and Agricultural total. Page 34 -------------------------------------------------------------------------------- Table of Contents The overall economy in the Company's trade area,Johnson ,Linn andWashington Counties, remains in stable condition with levels of unemployment below national and state levels. The following table shows unemployment and estimated median income information as ofDecember 31, 2021 , 2020 and 2019. Unemployment Rate % Median Income 2021 2020 2019 2021 2020 2019 United States 3.9 % 6.7 % 3.5 %$ 67,521 $ 68,703 $ 63,179 State of Iowa 3.5 % 3.1 % 2.7 % 64,386 62,995 61,082 Johnson County 2.5 % 2.8 % 2.2 % 68,510 66,353 64,337 Linn County 3.3 % 3.8 % 3.1 % 69,363 66,163 70,375 Washington County 2.5 % 2.7 % 2.5 % 68,975 63,938 61,450 Competition for quality loans and deposits may continue to be a challenge. The increased competition for both loans and deposits could result in a lower interest rate margin that could result in lower net interest income if the volume of loans and deposits does not increase to offset any such reduction in the interest margin. Total deposits increased by$341.43 million in 2021. Deposits increased by$531.20 million in 2020. As ofJune 30, 2021 (latest data available from theFDIC ),Johnson County total deposits were$11.077 billion and the Company's deposits were$2.272 billion , which represent a 20.51% market share. The Company had nine office locations inJohnson County as ofJune 30, 2021 . The total banking locations inJohnson County was 48 as ofJune 30, 2021 . AtJune 30, 2020 , the Company's deposits were$2.060 billion or a 21.71% market share. As ofJune 30, 2021 ,Linn County total deposits were$8.580 billion and there were 102 total banking locations in the county. The sevenLinn County offices of the Company had deposits of$764 million or a 8.9% share of the market. The Company'sLinn County deposits atJune 30, 2020 were$612 million and represented a 7.9% market share. As ofJune 30, 2021 , the Company's threeWashington County offices had deposits of$287 million which was 34.5% of the County's total deposits of$832 million .Washington County had a total of 14 banking locations as ofJune 30, 2021 . In 2020, the Company'sWashington County deposits were$254 million or a 33.0% market share.
The following tables show the amounts of the Company's average deposits and
average rates paid on such deposits for the years ended
December 31,
2021 Rate 2020 Rate 2019 Rate
(Amounts In Thousands)
Average noninterest-bearing deposits $ 578,931 - $ 459,664 - $ 366,682 -
Average interest-bearing demand deposits 1,062,059 0.22 % 876,595 0.48 % 716,848 0.87 %
Average savings deposits 1,093,560 0.17 875,091 0.32 851,503 0.92
Average time deposits 643,934 1.63 695,468 2.07 661,548 2.19
$ 3,378,484 $ 2,906,818 $ 2,596,581
Uninsured deposits $ 884,402 $ 687,612 $ 550,489 Time certificates issued in amounts of
2021 Rate
(Amounts In Thousands)
3 months or less $ 7,507 0.93 %
3 through 6 months 11,307 1.03
6 through 12 months 28,553 0.79
Over 12 months 41,150 2.07
$ 88,517
Portion uninsured $ 40,517
Investment securities increased $139.36 million in 2021. In 2020, investment
securities increased by $50.18 million . The investment portfolio consists of
$551.35 million of securities that are stated at fair value, with any unrealized
gain or loss, net of
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income taxes, reported as a separate component of stockholders' equity. The
securities portfolio is used for liquidity and pledging purposes and to provide
a rate of return that is acceptable to management.
The following tables show the carrying value of the investment securities held
by the Bank, including stock of the Federal Home Loan Bank , as of December 31,
2021 , 2020 and 2019 and the maturities and weighted average yields of the
investment securities, computed using amortized cost on a tax-equivalent basis
using a federal tax rate of 21%, as of December 31, 2021 :
December 31,
2021 2020 2019
(Amounts In Thousands)
Carrying value:
U.S. Treasury $ 243,925 $ 148,646 $ 128,585
Other securities (FHLB, FHLMC and FNMA) 34,467 35,160 15,229
Stock of the Federal Home Loan Bank 4,546 8,172 11,065
Mortgage-backed securities and collateralized mortgage obligations
9,446 - -
Obligations of state and political subdivisions 263,516 224,566 211,489
$ 555,900 $ 416,544 $ 366,368
December 31, 2021
Weighted
Carrying Average
Value Yield
(Amounts In Thousands)
U.S. Treasury
Within 1 year $ 32,793 2.22 %
From 1 to 5 years 188,881 1.22
From 5 to 10 years $ 22,251 0.97
$ 243,925
Other securities (FHLB, FHLMC and FNMA ), maturities:
Within 1 year $ - - %
From 1 to 5 years 34,467 0.42
From 5 to 10 years - -
$ 34,467
Stock of the Federal Home Loan Bank $ 4,546 4.45 %
Obligations of state and political subdivisions, maturities:
Within 1 year $ 36,442 1.45 %
From 1 to 5 years 85,794 2.25
From 5 to 10 years 93,113 2.39
Over 10 years 48,167 1.78
$ 263,516
Mortgage Backed Securities
From 1 to 5 years $ 2,385 1.25 %
From 5 to 10 years 7,061 1.51
$ 9,446
Total $ 555,900
Page 36-------------------------------------------------------------------------------- Table of Contents As ofDecember 31, 2021 , the Company held no investment securities exceeding 10% of stockholders' equity, other than securities of theU.S. Government agencies and corporations. The Company does not hold any investments inFNMA preferred stock, any pooled trust preferred stocks or other preferred stock type investments. See Note 2 to the Company's Consolidated Financial Statements. During 2021, the major funding source for the growth in loans and other assets was the$341.43 million increase in deposits. In 2020, the major source of funding for the growth in loans was deposit growth of$531.20 million . Brokered deposits totaled$51.59 million and$74.08 million as ofDecember 31, 2021 and 2020, respectively. Total advances from the FHLB were$0.00 million atDecember 31, 2021 and$105.00 million in 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. Stockholders' equity was$438.45 million atDecember 31, 2021 compared to$416.08 million atDecember 31, 2020 . The Company's capital resources are discussed in detail in the Liquidity and Capital Resources section. Over the last five years, the Company has realized cumulative earnings of$196.88 million and paid shareholders dividends of$38.24 million , or 19.42% of earnings, while maintaining capital ratios in excess of regulatory requirements. The following table presents the return on average assets, return on average stockholders' equity, the dividend payout ratio and average stockholders' equity to average assets ratio for the years endedDecember 31, 2021 , 2020 and 2019: 2021 2020 2019 Return on average assets 1.21 % 1.09 % 1.40 % Return on average stockholders' equity 11.29
9.82 11.23
Dividend payout ratio 18.24
21.54 16.90
Average stockholders' equity to average assets ratio 10.70 11.07 12.45
Net Income Overview
Net income and diluted earnings per share for the last three years are as
presented below:
Earnings Per
Year Net Income % (Decrease) Increase Share - Diluted
(In Thousands)
2021 $ 48,085 24.42 % $ 5.16
2020 38,647 (14.72) 4.12
2019 45,318 23.26 4.85
Net income for 2021 increased by $9.44 million or 24.42% and diluted earnings
per share increased by 25.24%. In 2021, net interest income, before credit loss
expense, increased by $2.89 million due to the following reasons: 1) decrease in
interest income of $6.44 million primarily due to decreases in interest rates
and 2) decrease in interest expense of $9.33 million due to interest rate
decreases and decreases in the volume of certificates of deposit and FHLB
borrowings. Noninterest income increased by $5.13 million , the credit loss
expense decreased by $9.87 million and total noninterest expenses increased by
$5.71 million .
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Annual fluctuations in the Company's net income are driven primarily by three
important factors. The first important factor is net interest margin. Net
interest income of $104.46 million in 2021 was derived from the Company's $3.866
billion of average earning assets and its net interest margin of 2.75%, compared
to $3.442 billion of average earning assets and a 3.00% net interest margin in
2020. The importance of net interest margin is illustrated by the fact that a
decrease or an increase in the net interest margin of 10 basis points would
result in a $3.87 million decrease or increase in income before taxes. Net
interest income for the Company increased primarily due to the continued low
interest rates on interest bearing deposits resulting in decreased interest
expense of $9.33 million compared to 2020. $7.34 million of the decrease in
interest expense was due to interest rate decreases and $1.99 million was
primarily due to volume decreases in certificates of deposit and FHLB
borrowings. 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 the Federal 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 second significant factor affecting the Company's net income is the credit
loss expense recorded under CECL. The majority of the Company's interest-earning
assets are in loans outstanding, which amounted to $2.666 billion at the end of
2021. The Company's allowance for credit losses was $35.47 million at
December 31, 2021 . Expected credit loss expense is computed on a quarterly
basis and 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 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,
current economic conditions, reasonable and supportable economic forecasts,
adjustments for prepayments and curtailments, 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 $5.51 million in 2021 under CECL compared
to an expense of $4.36 million in 2020 and a reduction of expense of $2.88
million in 2019 under the incurred loss model. The decrease is attributable to
improvements in the economic factor forecasts, primarily Iowa unemployment in
the first quarter 2021, 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 uncertainties due to the COVID-19 pandemic.
The third significant factor affecting the Company's net income is noninterest
income, primarily net gain on the sale of loans, services charges and trust
fees. The net gain on the sale of loans was $7.59 million and $6.68 million for
the years ended December 31, 2021 and 2020, respectively, an increase of 13.63%
for the year ended December 31, 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 the Federal Reserve Board's reduction of the federal funds rate to
0.25%, resulting in a significant amount of mortgage loan refinance activity.
Services charges and fees were $11.77 million and $10.19 million for the years
ended December 31, 2021 and 2020, respectively, an increase of 15.59% for the
year ended December 31, 2021 compared to the same period in 2020. This is
primarily due to an increase in debit and credit card interchange fees of $1.52
million compared to 2020 with increased usage activity. Trust fees were $13.52
million and $10.28 million for the years ended December 31, 2021 and 2020,
respectively, an increase of 31.59% for the year ended December 31, 2021
compared to the same period in 2020. This is primarily driven by the increase in
assets under management of $0.37 billion from $2.18 billion as of December 31,
2020 to $2.55 billion as of December 31, 2021 and increased investment
transaction activity.
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Net Interest Income
Net interest income is the excess of the interest and fees received on
interest-earning assets over the interest paid on the interest-bearing
liabilities. The factors that have the greatest impact on net interest income
are the volume of average earning assets and interest-bearing liabilities and
the net interest margin. The volume of average earning assets has continued to
grow each year, primarily due to excess cash for 2021. The volume of
interest-bearing liabilities also grew in 2021 due to growth of interest-bearing
demand and savings deposits. The net interest margin was 2.75% in 2021, 3.00% in
2020 and 3.18% in 2019. The measure is shown on a tax-equivalent basis using a
rate of 21% for 2021, 2020 and 2019 to make the interest earned on taxable and
nontaxable assets more comparable. Interest income and expense for 2021, 2020
and 2019 are indicated on the following table:
Years Ended December 31,
2021 2020 2019
(Amounts In Thousands)
Income:
Loans (1) $ 114,202 $ 120,814 121,862
Taxable securities 3,604 3,512 3,239
Nontaxable securities (1) 5,177 5,201 5,168
Interest-bearing cash and cash equivalents 983 945 3,980
Total interest income$ 123,966 $ 130,472 $ 134,249 Expense: Interest-bearing demand deposits 2,385 4,258 6,232 Savings deposits 1,827 2,841 7,825 Time deposits 10,500 14,454 14,483 FHLB borrowings 2,915 5,399 6,333 Total interest expense$ 17,627 $ 26,952 $ 34,873 Net interest income$ 106,339 $ 103,520 $ 99,376 (1) Presented on a tax equivalent basis using a rate of 21% for 2021, 2020 and 2019. Interest income includes certain loan origination and document preparation fees, which comprise approximately 2.0% of the amounts indicated.
Net interest income on a tax-equivalent basis changed in 2021 as follows:
Change In Change In Increase (Decrease)
Average Average Volume Rate Net
Balance Rate Changes Changes Change
(Amounts In Thousands)
Interest income:
Loans, net $ (60,288) (0.14) % $ (2,959) $ (3,653) $ (6,612)
Taxable securities 68,311 (0.51) 1,005 (913) 92
Nontaxable securities 27,333 (0.34) 724 (748) (24)
Interest-bearing cash and cash equivalents 388,817 (0.13) 1,009 (971) 38
Federal funds sold (19) (0.09) - - -
$ 424,154 $ (221) $ (6,285) $ (6,506)
Interest expense:
Interest-bearing demand deposits $ 185,464 (0.26) % $ (887) $ 2,760 $ 1,873
Savings deposits 218,469 (0.16) (609) 1,623 1,014
Time deposits (51,535) (0.44) 1,108 2,846 3,954
Other borrowings (3) (0.46) - - -
FHLB borrowings (79,198) (0.11) 2,369 115 2,484
Interest-bearing other liabilities - - - - -
$ 273,197 $ 1,981 $ 7,344 $ 9,325
Change in net interest income $ 1,760 $ 1,059 $ 2,819
Page 39-------------------------------------------------------------------------------- Table of Contents 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. Loan fees included in interest income are not material. Interest on nontaxable securities and loans is shown at tax equivalent amounts.
Net interest income on a tax equivalent basis changed in 2020 as follows:
Change In Increase (Decrease)
Average Change In Volume Rate Net
Balance Average Rate Changes Changes Change
(Amounts In Thousands)
Interest income:
Loans, net $ 93,443 (0.21) % $ 6,531 $ (7,579) $ (1,048)
Taxable securities 37,196 (0.32) 847 (574) 273
Nontaxable securities 6,698 (0.07) 183 (150) 33
Interest-bearing cash and cash equivalents 172,147 (1.83) 3,621 (6,654) (3,033)
Federal funds sold 112 (2.78) 3 (5) (2)
$ 309,596 $ 11,185 $ (14,962) $ (3,777)
Interest expense:
Interest-bearing demand deposits $ 159,747 (0.39) % $ (1,410) $ 3,384 $ 1,974
Savings deposits 23,588 (0.59) 634 4,350 4,984
Time deposits 33,920 (0.12) (784) 813 29
Other borrowings 1 (1.71) - - -
FHLB borrowings (32,375) - 946 (12) 934
Interest-bearing other liabilities - - - - -
$ 184,881 $ (614) $ 8,535 $ 7,921
Change in net interest income $ 10,571 $ (6,427) $ 4,144
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A summary of the average yields, average rates paid, net interest spread and
margin is as follows:
Years Ended December 31,
2021 2020 2019
Average yields:
Loans (1) 4.30 % 4.44 % 4.64 %
Loans (tax equivalent basis) (1) 4.32 4.46 4.67
Taxable securities 1.45 1.96 2.27
Nontaxable securities 1.74 1.99 2.04
Nontaxable securities (tax equivalent basis) 2.31 2.65 2.72
Interest-bearing cash and cash equivalents 0.13 0.26 2.09
Federal funds sold 0.03 0.11 2.89
Average rates paid:
Interest-bearing demand deposits 0.22 0.48 0.87
Savings deposits 0.17 0.32 0.92
Time deposits 1.63 2.07 2.19
Short-term borrowings 0.47 0.93 2.64
FHLB borrowings 2.82 2.93 2.93
Yield on average interest-earning assets 3.20 3.78 4.29
Rate on average interest-bearing liabilities 0.61 1.02 1.42
Net interest spread (2) 2.59 2.76 2.86
Net interest margin (3) 2.75 3.00 3.18
(1)Non-accruing loans have been included in the average loan balances for
purposes of this computation.
(2)Net interest spread is the difference between the yield on average
interest-earning assets and the yield on average interest-paying liabilities
stated on a tax equivalent basis using a federal rate of 21% for 2021, 2020 and
2019. The net interest spread decreased 17 basis points in 2021 compared to
2020 and the net interest spread decreased 10 basis points compared to 2019.
(3)Net interest margin is net interest income, on a tax equivalent basis,
divided by average interest-earning assets. The net interest margin decreased
25 basis points in 2021. The net interest margin decreased 18 basis points in
2020 compared to 2019.
In March 2020 , the Federal Open Market Committee decreased the target rate to
0.25%. Interest rates on loans are generally affected by the target rate since
interest rates for the U.S. Treasury market normally correlate to the Federal
Reserve Board federal funds rate. In pricing of loans and deposits, the Bank
considers the U.S. Treasury indexes as benchmarks in determining interest
rates. As of December 31, 2021 , the average rate indexes for the one, three and
five year indexes were 0.39%, 0.97% and 1.26%, respectively. The one year index
increased 290.00% from December 31, 2020 , the three year index increased 470.59%
and the five year index increased 250.00%.
CECL Adoption and Allowance for Credit Losses (ACL)
The framework requires that management's estimate reflects credit losses over the full remaining expected life of each credit and considers expected future changes in macroeconomic conditions. The adoption resulted in the recognition onJanuary 1, 2021 of cumulative effect adjustments of$2.75 million related to the ACL for loans and$3.58 million related to the ACL on off-balance sheet credit exposures. Credit loss expense was a reduction of expense of$5.51 million for the year endedDecember 31, 2021 compared to an expense of$4.36 million in 2020 under the incurred loss model, a decrease of expense of$9.87 million . The credit loss expense includes expense of$0.27 million related to the ACL on off-balance sheet credit exposures. 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 Page 41 -------------------------------------------------------------------------------- Table of Contents loans based on management's review of special mention and substandard loans, including loans with historical higher credit risks. Also, under CECL, a significant component in estimating expected credit losses are economic forecasts such asIowa unemployment, all-transactions house price index forIowa andIowa real GDP. 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 and the uncertainties due to the COVID-19 pandemic. The percentage of the allowance to outstanding loans was 1.33% and 1.37% atDecember 31, 2021 and 2020, respectively. The credit loss expense totaled a reduction of expense of$5.51 million in 2021, an expense of$4.36 million in 2020 and a reduction of expense of$2.88 million in 2019. Loan recoveries net of charge-offs were$1.43 million in 2021, loan charge-offs net of recoveries were$1.05 million in 2020 and loan charge-offs net of recoveries were$1.17 million in 2019. Management has determined that the allowance for credit losses was appropriate atDecember 31, 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 and well-documented 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 peers. This review encompasses levels of total nonperforming loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs. However, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio or uncertainty in the general economy will require that management continue to evaluate the adequacy of the ACL and make additional provisions in future periods as deemed necessary. 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 nonaccrual 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 payment 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 we determine that a loan amount, or portion thereof, is uncollectible, the loan's credit risk rating is immediately downgraded and the uncollectible amount is charged-off. The Bank's credit and legal departments undertake a thorough and ongoing analysis to determine if an additional specific reserve and/or charge-offs are appropriate and to begin a workout plan for the loan to minimize realized loss. In certain circumstances, the Bank may modify the terms of a loan to maximize the collection of amounts due. In most cases, the modification is either a reduction in interest rate, conversion to interest only payments, deferral of payments or extension of the maturity date. Generally, the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term, so concessionary modification is granted to the borrower that otherwise would not be considered. TDR loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. The Bank's TDR loans occur on a case-by-case basis in connection with ongoing loan collection processes.
The Bank regularly reviews loans in the portfolio and assesses whether the loans are nonperforming. If the loans are nonperforming, the Bank determines if a specific reserve is appropriate. In addition, the Bank's management also reviews and, where determined necessary, provides allowances for particular loans based upon (1) reviews of specific borrowers and (2) management's assessment of areas that management considers are of higher credit risk, including loans that have been restructured.
The extent to which collateral secures collateral-dependent loans and changes in the extent to which collateral secures its collateral-dependent loans are described below. Collateral-dependent loans decreased$4.10 million fromDecember 31, 2020 toDecember 31, 2021 . Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and TDR loans. Collateral-dependent loans also include loans that, based on management's evaluation of current information and events, the Company expects to be unable to collect in full according to the contractual terms of the original loan agreement. Collateral-dependent loans were 0.63% of loans held for investment as ofDecember 31, 2021 and 0.76% as ofDecember 31, 2020 . The decrease in collateral-dependent loans is due to a decrease of$0.55 million in loans with a specific reserve, a decrease in nonaccrual loans of$0.36 million , a decrease in 90 days or more accruing loans of$0.86 million and a decrease in TDR loans of$2.33 million fromDecember 31, 2020 toDecember 30, 2021 . There were no significant changes noted in the extent to which collateral secures collateral-dependent loans. See Note 1 Adoption of New Financial Accounting Standard for further discussion of the allowance for credit losses for loans held for investment. A description of the Bank's credit quality indicators are discussed in Note 3 to the Company's Consolidated Financial Statements. Page 42 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the Company's impaired loans and non-performing assets as ofDecember 31 for each of the years presented: 2021 2020 2019 2018 2017 (Amounts In Thousands) Nonaccrual loans (1)$ 8,491 $ 8,849
1,056 606 370 971
Specific reserve loans 20 573 243 8,247 12,950
Troubled debt restructurings ("TDR loans")(1)
(3) 7,921 10,251 9,308 8,539 8,470
Total non-performing loans $ 16,633 $ 20,729 $ 20,925 $ 27,985 $ 31,487
Other real estate - - - - -
Non-performing assets (includes impaired loans
and other real estate) $ 16,633 $ 20,729 $2,660,233
1.33 % 1.37 % 1.28 % 1.44 % 1.20 %
Ratio of allowance for credit losses to
non-performing loans 213.25 178.83 161.34 135.11 93.37
Ratio of non-performing loans to total loans
held for investment 0.63 0.76 0.79 1.06 1.28
Ratio of non-performing assets to total assets 0.41 0.55 0.63 0.92 1.06
(1)The gross interest income that would have been recorded if the loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period was
$0.46 million in 2021 and $0.66 million in 2020. The amount of interest income
on the loans that was included in income was $0.44 million in 2021 and $0.57
million in 2020.
(2)The accruing loans past due 90 days or more are still believed to be
adequately collateralized. Loans are placed on nonaccrual status when
management believes the collection of future principal and interest is not
reasonably assured.
(3)Total TDR loans were $10.20 , $13.22 , $13.71 , $13.38 and $12.09 million as of
December 31, 2021 , 2020, 2019, 2018 and 2017, respectively. Included in the
total nonaccrual loans were $2.28 , $2.97 , $4.34 , $4.84 and $3.62 million of TDR
loans as of December 31, 2021 , 2020, 2019, 2018 and 2017, respectively.
The ratio of allowance for credit losses to non-performing loans increased to
213.25% as of December 31, 2021 compared to 178.83% as of December 31, 2020 .
The increase in 2021 is primarily due to the reduction in non-performing loans
compared to 2020. The ratio of non-performing loans to total gross loans was
0.63% and 0.76% at December 31, 2021 and 2020, respectively. The decrease in
the 2021 ratio is primarily due to the decrease in TDR loans and accruing loans
past due 90 days or more.
Other factors that are considered in determining the credit quality of the
Company's loan portfolio are the vacancy rates for both residential and
commercial space, current equity the borrower has in the property and overall
financial strength of the customer including cash flow to continue to fund loan
payments. The Company also considers the state of the total economy including
unemployment levels. In most instances, the borrowers have used in their rental
projections of income at least a 10% vacancy rate. As of December 31, 2021 , the
unemployment levels in Johnson County and Linn County were 2.5% and 3.3%,
respectively, compared to 2.8% and 3.8% in December of 2020. These levels
compare favorably to the State of Iowa at 3.5% and the national unemployment
level at 3.9% in December 2021 compared to 3.1% and 6.7%, respectively in
December 2020 .
The residential rental vacancy rates in 2020 and 2021 in Johnson and Linn County
were estimated between 6.0% and 8.0%. The State of Iowa vacancy rate is 7.5% and
the national rate is 5.6% with the Midwest rate at 6.5%. These vacancy rates
one year ago were 8.5%, 6.5% and 7.8%, respectively. The Company continues to
consider those vacancy rates among other factors in its current evaluation of
the real estate portion of its loan portfolio. Favorable vacancy rates may not
continue in 2021, and vacancy rates may rise and affect the overall quality of
the loan portfolio.
See Note 3 to the Company's Consolidated Financial Statements for additional disclosures on loans.
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SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for credit losses balance is also affected by the charge-offs and
recoveries for the periods presented. For the years ended December 31, 2021 ,
2020 and 2019, recoveries were $2.74 million , $1.87 million and $1.80 million ,
respectively; charge-offs were $1.32 million , $2.92 million and $2.97 million in
2021, 2020 and 2019, respectively.
Overall credit quality may deteriorate in 2022. Such deterioration could cause
increases in non-performing loans, allowance for credit losses, credit loss
expense and net charge-offs. Management will monitor changing market conditions
as a part of its allowance for credit loss methodology. The following table
summarizes the Bank's loan loss experience for the years ended December 31 for
each of the years presented:
Real Estate: Real Estate:
Construction Real Estate: Real Estate: Mortgage,
Commercial and and land Mortgage, Mortgage, 1 to multi-family and
Agricultural Financial development farmland 4 family commercial Other Total
(Amounts In Thousands)
2021
Allowance for credit losses:
Beginning balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070
Impact of adopting ASC 326 (328) 298 327 763 522 1,396 (232) 2,746
Charge-offs (106) (136) (3) (1) (482) (265) (323) (1,316)
Recoveries 142 1,103 94 25 964 263 152 2,743
Credit loss (benefit) expense 45 (1,881) (437) (1,527) (1,874) (311) 212 (5,773)
Ending balance $ 2,261 $ 4,269 $ 2,300 $ 3,433 $ 11,498 $ 10,498 $ 1,211 $ 35,470
Net charge-offs/(net recoveries)
to average net loans outstanding (0.04) % (0.38) % (0.05) % (0.01) % (0.05) % - % 0.20 % (0.05) %
Real Estate: Real Estate:
Construction Real Estate: Real Estate: Mortgage,
Commercial and and land Mortgage, Mortgage, 1 to multi-family and
Agricultural Financial development farmland 4 family commercial Other Total
(Amounts In Thousands)
2020
Allowance for loan losses:
Beginning balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760
Charge-offs (43) (1,425) (43) (1) (738) (291) (381) (2,922)
Recoveries 63 670 118 10 784 49 180 1,874
Provision 88 652 (355) 214 1,684 1,798 277 4,358
Ending balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070
Net charge-offs/(net recoveries)
to average net loans outstanding (0.02) % 0.30 % (0.04) % - % - % 0.03 % 0.24 % 0.04 %
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Real Estate: Real Estate:
Construction Real Estate: Real Estate: Mortgage,
Commercial and and land Mortgage, Mortgage, 1 to multi-family and
Agricultural Financial development farmland 4 family commercial Other Total
(Amounts In Thousands)
2019
Allowance for loan losses:
Beginning balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810
Charge-offs (266) (981) (45) (6) (896) (341) (434) (2,969)
Recoveries 95 646 8 5 700 180 165 1,799
Provision (218) (503) (656) (21) (1,682) (145) 345 (2,880)
Ending balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760
Net charge-offs/(net recoveries)
to average net loans outstanding 0.19 % 0.15 % 0.02 % - % 0.02 % 0.02 % 0.33 % 0.04 %
Real Estate: Real Estate:
Construction Real Estate: Real Estate: Mortgage,
Commercial and and land Mortgage, Mortgage, 1 to multi-family and
Agricultural Financial development farmland 4 family commercial Other Total
(Amounts In Thousands)
2018
Allowance for loan losses:
Beginning balance $ 2,294 $ 4,837 $ 2,989 $ 3,669 $ 8,668 $ 5,700 $ 1,243 $ 29,400
Charge-offs (95) (585) - - (830) (251) (561) (2,322)
Recoveries 119 1,057 148 30 612 107 162 2,235
Provision 471 517 155 273 4,066 2,609 406 8,497
Ending balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810
Net charge-offs/(net recoveries)
to average net loans outstanding (0.03) % (0.21) % (0.08) % (0.01) % 0.02 % 0.02 % 0.48 % - %
Real Estate: Real Estate:
Construction Real Estate: Real Estate: Mortgage,
Commercial and and land Mortgage, Mortgage, 1 to multi-family and
Agricultural Financial development farmland 4 family commercial Other Total
(Amounts In Thousands)
2017
Allowance for loan losses:
Beginning balance $ 2,947 $ 4,531 $ 2,890 $ 3,417 $ 7,677 $ 4,045 $ 1,023 $ 26,530
Charge-offs (167) (583) (114) (3) (553) (130) (554) (2,104)
Recoveries 146 1,183 662 - 661 376 258 3,286
Provision (632) (294) (449) 255 883 1,409 516 1,688
Ending balance $ 2,294 $ 4,837 $ 2,989 $ 3,669 $ 8,668 $ 5,700 $ 1,243 $ 29,400
Net charge-offs/(net recoveries)
to average net loans outstanding 0.02 % (0.29) % (0.31) % - % (0.01) % (0.04) % 0.36 % (0.05) %
Page 45-------------------------------------------------------------------------------- Table of Contents ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES The following table presents the allowance for credit losses by type of loans, the percentage of the allocation for each category to the total allowance and the percentage of all loans in each category to total loans as ofDecember 31, 2021 , 2020, 2019, 2018 and 2017: 2021 2020 % of Total % of Loans % of Total % of Loans Amount Allowance to Total Loans Amount Allowance to Total Loans (In Thousands) (In Thousands) Agricultural $ 2,261 6.37 % 4.02 % $ 2,508 6.77 % 3.50 % Commercial and financial 4,269 12.04 8.35 4,885 13.18 10.56 Real estate: Construction, 1 to 4 family residential 818 2.31 3.03 907 2.45 2.62 Construction, land development and commercial 1,482 4.18 4.77 1,412 3.81 4.13 Mortgage, farmland 3,433 9.68 8.75 4,173 11.26 9.12 Mortgage, 1 to 4 family first liens 8,340 23.52 34.19 10,871 29.32 32.92 Mortgage, 1 to 4 family junior liens 3,158 8.90 4.30 1,497 4.04 4.72 Mortgage, multi-family 3,715 10.47 14.39 4,462 12.04 13.80 Mortgage, commercial 6,783 19.12 15.09 4,953 13.36 15.39 Loans to individuals 771 2.17 1.23 752 2.03 1.16 Obligations of state and political subdivisions 440 1.24 1.88 650 1.74 2.08$ 35,470 100.00 % 100.00 %$ 37,070 100.00 % 100.00 % 2019 2018 Agricultural$ 2,400 7.11 % 3.46 %$ 2,789 7.38 % 3.53 % Commercial and financial 4,988 14.77 % 8.39 5,826 15.41 % 8.73 Real estate: Construction, 1 to 4 family residential 1,113 3.30 % 3.04 1,297 3.43 % 2.75 Construction, land development and commercial 1,486 4.40 % 4.11 1,995 5.28 % 4.33 Mortgage, farmland 3,950 11.70 % 9.20 3,972 10.51 % 9.00 Mortgage, 1 to 4 family first liens 9,045 26.79 % 34.51 10,750 28.43 % 34.71 Mortgage, 1 to 4 family junior liens 1,593 4.72 % 5.65 1,766 4.67 % 5.81 Mortgage, multi-family 3,823 11.32 % 13.29 4,083 10.80 % 13.41 Mortgage, commercial 4,036 11.95 % 15.24 4,082 10.80 % 14.58 Loans to individuals 853 2.53 % 1.22 723 1.91 % 1.14 Obligations of state and political subdivisions 473 1.41 1.89 527 1.38 2.01$ 33,760 100.00 % 100.00 %$ 37,810 100.00 % 100.00 % Page 46
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2017
% of Total % of Loans
Amount Allowance to Total Loans
(In Thousands)
Agricultural $ 2,294 7.80 % 3.60 %
Commercial and financial 4,837 16.45 % 8.89
Real estate:
Construction, 1 to 4 family residential 1,193 4.06 % 2.84
Construction, land development and commercial 1,796 6.11 % 4.46
Mortgage, farmland 3,669 12.48 % 8.75
Mortgage, 1 to 4 family first liens 7,369 25.07 % 33.81
Mortgage, 1 to 4 family junior liens 1,299 4.42 % 5.86
Mortgage, multi-family 2,791 9.49 % 13.69
Mortgage, commercial 2,909 9.89 % 14.69
Loans to individuals 782 2.66 % 1.07
Obligations of state and political subdivisions 461 1.57 2.34
$ 29,400 100.00 % 100.00 %
The Company believes that the allowance for credit losses is at a level
commensurate with the overall risk exposure of the loan portfolio. However, if
economic conditions deteriorate, certain borrowers may experience difficulty and
the level of non-performing loans, charge-offs and delinquencies could rise and
require increases in the allowance for credit losses. The Company will continue
to monitor the adequacy of the allowance on a quarterly basis and will consider
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.
Noninterest Income
The following table sets forth the various categories of noninterest income for
the years ended
Year Ended December 31, $ Change % Change
2021 2020 2019 2021/2020 2020/2019 2021/2020 2020/2019
(Amounts in thousands)
Net gain on sale of loans
$ 910 $ 3,139 13.63 % 88.70 % Trust fees 13,521 10,275 9,579 3,246 696 31.59 7.27 Service charges and fees 11,774 10,186 10,276 1,588 (90) 15.59 (0.88) Other noninterest income 581 1,187 1,426 (606) (239) (51.05) (16.76) Gain (loss) on sale of investment securities $ -$ 10 $ (28) (10) 38 (100.00) (135.71)
$ 33,464 $ 28,336 $ 24,792 $ 5,128 $ 3,544 18.10 % 14.29 % The noninterest income of the Company was$33.46 million in 2021 compared to$28.34 million in 2020. The increase of$5.13 million in 2021 was the result of a combination of factors discussed below. The net gain on the sale of loans was$7.59 million and$6.68 million for the years endedDecember 31, 2021 and 2020, respectively, an increase of 13.63% for the year endedDecember 31, 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. The servicing Page 47 -------------------------------------------------------------------------------- Table of Contents 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 were$13.52 million and$10.28 million for the years endedDecember 31, 2021 and 2020, respectively, an increase of 31.59% for the year endedDecember 31, 2021 compared to the same period in 2020. This is primarily driven by the increase in assets under management of$0.37 billion from$2.18 billion as ofDecember 31, 2020 to$2.55 billion as ofDecember 31, 2021 and increased investment transaction activity. The trust assets that are the most volatile are those that are held in common stocks, which amount to approximately 71% of assets under management. In 2021, the Dow Jones Industrial Average increased 18.73%. Services charges and fees were$11.77 million and$10.19 million for the years endedDecember 31, 2021 and 2020, respectively, an increase of 15.59% for the year endedDecember 31, 2021 compared to the same period in 2020. This is primarily due to an increase in debit and credit card interchange fees of$1.52 million compared to 2020 with increased usage activity.
Other noninterest income decreased
Noninterest Expenses
The following table sets forth the various categories of noninterest expenses
for the year ended
Year Ended December 31, $ Change % Change
2021 2020 2019 2021/2020 2020/2019 2021/2020 2020/2019
(Amounts in thousands)
Salaries and employee
benefits $ 42,458 $ 40,621 $ 36,709 $ 1,837 $ 3,912 4.52 % 10.66 %
Occupancy 4,152 4,343 4,336 (191) 7 (4.40) 0.16
Furniture and equipment 7,276 7,357 6,795 (81) 562 (1.10) 8.27
Office supplies and
postage 1,739 1,799 1,841 (60) (42) (3.34) (2.28)
Advertising and business
development 2,132 2,082 2,595 50 (513) 2.40 (19.77)
Outside services 12,592 11,069 10,360 1,523 709 13.76 6.84
FDIC insurance assessment 1,043 856 194 187 662 21.85 341.24
Other noninterest expense 9,949 7,504 4,434 2,445 3,070 32.58 69.24
$ 81,341 $ 75,631 $ 67,264 $ 5,710 $ 8,367 7.55 % 12.44 %
Total noninterest expenses were
Salaries and employee benefits increased
Outside services increased
Other noninterest expenses increased$2.44 million in 2021 primarily due to$7.69 million in fees incurred from the prepayment of FHLB borrowings compared to$2.53 million of FHLB prepayment fees and$2.68 million of interest rate swap termination fees paid in 2020. Page 48
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Income Taxes
Income tax expense was$14.01 ,$11.28 and$12.55 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Income taxes as a percentage of income before income taxes were 22.56% in 2021, 22.59% in 2020 and 21.69% in 2019. The amount of tax credits were$0.48 ,$0.05 and$0.53 million for 2021, 2020, and 2019, respectively. Effects of Inflation The consolidated financial statements and the accompanying notes have been prepared in accordance with accounting principles generally accepted inthe United States of America . These principles require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact in the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Liquidity and interest rate adjustments are features of the Company's asset/liability management, which are important to the maintenance of acceptable performance levels. Item 7A of this Form 10-K contains a more thorough discussion of interest rate risk. The Company attempts to maintain a balance between monetary assets and monetary liabilities to offset the potential effects of changing interest rates.
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of sufficient cash flows to fund operations, to meet depositor withdrawals, to provide for our customers' credit needs and to meet maturing obligations and existing commitments. The Company's principal source of funds is deposits. Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, federal funds purchased, advances from the FHLB, advances on bank lines of credit, brokered deposit relationships and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan and investment securities maturities and payments, expected deposit flows and the objectives set by the Company's asset-liability management, liquidity and contingency funding policies. As ofDecember 31, 2021 , the Company had additional borrowing capacity available from the FHLB of$865.06 million . In addition, the Company had$554.18 million in borrowing capacity available through secured and unsecured lines of credit with correspondent banks. The Company had$0.25 million outstanding under those federal funds lines as ofDecember 31, 2021 . On an unconsolidated basis, the Company had cash balances of$2.18 million as ofDecember 31, 2021 . In 2021, the Company received dividends of$12.27 million from its subsidiary Bank and used those funds to pay dividends to its stockholders of$8.77 million and to fund purchases of treasury stock under the 2005 Stock Repurchase Program. The total purchase of treasury stock under the 2005 Stock Repurchase Program totaled$3.57 and$8.55 million for the years endedDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 and 2020, stockholders' equity, before deducting for the maximum cash obligation related to the ESOP, was$488.46 million and$463.41 million , respectively. This measure of stockholders' equity as a percent of total assets was 12.08% atDecember 31, 2021 and 12.26% atDecember 31, 2020 . As ofDecember 31, 2021 , total equity, after deducting the maximum cash value related to the ESOP, was 10.84% of assets compared to 11.00% of assets at the prior year end.
The Company and the Bank are subject to the Federal Deposit Insurance
Corporation Improvement Act of 1991, and the Bank is subject to Prompt
Corrective Action Rules as determined and enforced by the
The Bank is classified as "well-capitalized" by
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On a consolidated basis, 2021 cash flows from operations provided $85.07
million , net increases in deposits provided $341.43 million and net collections
on loans to customers provided $52.02 million . These cash flows were invested
$245.38 million in purchases of investment securities. In addition, $1.46
million was used to purchase property and equipment and leasehold improvements
and $4.18 million was used to invest in a tax credit real estate property.
The Bank has a contingency funding plan to address liquidity issues in times of
crisis. The primary source of funding will be the Bank's customer deposit
base. The Bank has established alternative sources of funding available to
increase liquidity. The availability of the funding sources is tested on an
annual basis. The Bank performs quarterly stress testing to determine if the
Bank has an appropriate amount of funding sources to address potential liquidity
needs. At December 31, 2021 , the Bank had total outstanding loan commitments and
unused portions of lines of credit totaling $621.50 million (see Note 15 to the
Company's Consolidated Financial Statements). Management believes that its
liquidity levels are sufficient at this time, but the Bank may increase its
liquidity by limiting the growth of its assets, by selling more loans in the
secondary market or selling portions of loans to other banks through
participation agreements. Another liquidity source includes obtaining
additional funds from the Federal Home Loan Bank (FHLB). As of December 31,
2021 , the Bank can obtain an additional $865.06 million from the FHLB based on
the current real estate mortgage loans held. In addition, the Bank has arranged
$544.18 million of credit lines at three banks. The borrowings under these
credit lines would be secured by the Bank's investment securities. Other
liquidity sources include a $10.00 million line of credit with the Federal
Reserve Bank of Chicago and various sources of brokered deposits.
The following table shows outstanding balances, weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average interest rates of Federal Home Loan Bank borrowings during 2021, 2020
and 2019:
2021 2020 2019
(Amounts In Thousands)Outstanding balance as of December 31 $ -$ 105,000 $ 185,000 Weighted average interest rate at year end 2.82 % 2.93 % 2.93 % Maximum month-end balance 105,000 185,000 215,000 Average month-end balance 101,895 181,093 212,500 Weighted average interest rate for the year 2.82 % 2.93 % 2.93 % The Bank has off-balance sheet commitments to fund additional borrowings of customers. Contractual commitments to fund loans are met from the proceeds of federal funds sold or investment securities and additional borrowings. Many of the contractual commitments to extend credit will not be funded because they represent the credit limits on credit cards and home equity lines of credits. Page 50 -------------------------------------------------------------------------------- Table of Contents As disclosed in Note 15 to the Company's Consolidated Financial Statements, the Company has certain obligations and commitments to make future payments under contracts. The following table summarizes significant contractual obligations and other commitments as ofDecember 31, 2021 : Payments Due By Period (Amounts In Thousands) Less Than One - Three - More Than Total One Year Three Years Five Years Five Years Contractual obligations: Long-term debt obligations $ - $ -
$ - $ - $ - Operating lease obligations
2,881 371 535 493 1,482
Total contractual obligations: $ 2,881 $ 371 $ 535 $ 493 $ 1,482
Other commitments:
Lines of credit $ 614,324 $ 460,198 $ 124,826 $ 24,376 $ 4,924
Standby letters of credit 7,179 7,179 - - -
Total other commitments $ 621,503 $ 467,377 $ 124,826 $ 24,376 $ 4,924
The Company and the Bank have no additional material commitments or plans that
will materially affect liquidity or capital resources. Property and equipment
may be acquired in cash purchases, or they may be financed if favorable terms
are available.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is to changes in interest rates.
Interest rate risk is the risk to current or anticipated earnings or capital
arising from movements in interest rates. Interest rate risk arises from
repricing risk, basis risk, yield curve risk and options risk. Repricing risk
is the difference between the timing of rate changes and the timing of cash
flows. Basis risk is the difference from changing rate relationships among
different yield curve affecting Bank activities. Yield curve risk is the
difference from changing rate relationships across the spectrum of maturities.
Option risk is the difference resulting from interest-related options imbedded
in Bank products. The Bank's primary source of interest rate risk exposure
arises from repricing risk. To measure this risk the Bank uses a static gap
measurement system that identifies the repricing gaps across the full maturity
spectrum of the Bank's assets and liabilities and an earnings simulation
approach. The gap schedule is known as the interest rate sensitivity report.
The report reflects the repricing characteristics of the Bank's assets and
liabilities. The report details the calculation of the gap ratio. This ratio
indicated the amount of interest-earning assets repricing within a given period
in comparison to the amount of interest-bearing liabilities repricing within the
same period of time. A gap ratio of 1.0 indicates a matched position, in which
case the effect on net interest income due to interest rate movements will be
minimal. A gap ratio of less than 1.0 indicates that more liabilities than
assets reprice within the time period, and a ratio greater than 1.0 indicates
that more assets reprice than liabilities.
The Company's asset/liability management, or its management of interest rate
risk, is focused primarily on evaluating and managing net interest income given
various risk criteria. Factors beyond the Company's control, such as market
interest rates and competition, may also have an impact on the Company's
interest income and interest expense. In the absence of other factors, the
Company's overall yield on interest-earning assets will increase as will its
cost of funds on its interest-bearing liabilities when market interest rates
increase over an extended period of time. Inversely, the Company's yields and
cost of funds will decrease when market rates decline. The Company is able to
manage these swings to some extent by attempting to control the maturity or rate
adjustments of its interest-earning assets and interest-bearing liabilities over
given periods of time.
The Bank maintains an Asset/Liability Committee, which meets at least quarterly
to review the interest rate sensitivity position and to review and develop
various strategies for managing interest rate risk within the context of the
following factors: 1) capital adequacy, 2) asset/liability mix, 3) economic
outlook, 4) market characteristics and 5) the interest rate forecast. In
addition, the Bank uses a simulation model to review various assumptions
relating to interest rate movement. The model attempts to limit rate risk even
if it appears the Bank's asset and liability maturities are perfectly matched
and a favorable interest margin is present. The Bank's policy is to generally
maintain a balance between profitability and interest rate risk.
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The Bank uses derivative financial instruments, when needed, to manage the
impact of changes in interest rates on future interest income or interest
expense. The Bank is exposed to credit-related losses in the event of
nonperformance by the counterparties to these derivative instruments, but
believe the risk of these losses has been minimized by entering into the
contracts with large, stable financial institutions. The estimated fair market
value of these derivative instruments are presented in Note 17 to the
Consolidated Financial Statements.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Company's operations,
management has implemented an asset/liability program designed to mitigate the
Company's interest rate sensitivity. The program emphasizes the origination of
adjustable rate loans, which are held in the portfolio, the investment of excess
cash in short or intermediate term interest-earning assets, and the solicitation
of transaction deposit accounts, which are less sensitive to changes in interest
rates and can be re-priced rapidly.
The table set forth below includes the portion of the balances in
interest-bearing checking, savings and money market accounts that management has
estimated to mature within one year. The classifications are used because the
Bank's historical data indicates that these have been very stable deposits
without much interest rate fluctuation. Historically, these accounts would not
need to be adjusted upward as quickly in a period of rate increases so the
interest risk exposure would be less than the re-pricing schedule indicates. The
FHLB borrowings are classified based on either their due date or if they are
callable on their most likely call date based on the interest rate.
Repricing
Maturities Days More Than
Immediately 2-30 31-90 91-180 181-365 One Year Total
(Amounts in Thousands)Earning assets: Excess Cash$ 752,985 $ - $ - $ - $ - $ -$ 752,985 Federal funds sold - - - - - - - Investment securities - 2,704
11,346 36,317 18,495 487,038 555,900
Loans 10,834 285,704 60,100 114,160 167,225 2,028,225 2,666,248
Total earning assets 763,819 288,408 71,446 150,477 185,720 2,515,263 3,975,133
Sources of funds: Interest-bearing checking and savings accounts 136,417 - - - - 2,167,223
2,303,640
Certificates of deposit - 23,507 42,034 82,355 172,868 276,489 597,253
FHLB borrowings - - - - - - -
Federal funds and repurchase
agreements 249 - - - - - 249
136,666 23,507 42,034 82,355 172,868 2,443,712 2,901,142
Other sources, primarily
noninterest-bearing - - - - - 1,070,804 1,070,804
Total sources 136,666 23,507 42,034 82,355 172,868 3,514,516 3,971,946
Interest
Rate Gap $ 627,153 $ 264,901 $ 29,412 $ 68,122 $ 12,852 $ (999,253) $ 3,187
Cumulative Interest
Rate Gap at December 31, 2021 $ 627,153 $ 892,054 $ 921,466 $ 989,588 $ 1,002,440 $ 3,187
Gap Ratio 5.59 12.27 1.70 1.83 1.07 0.72
Cumulative Gap Ratio 5.59 6.57 5.56 4.48 3.19 1.00
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Based on the data following, net interest income should decline with
instantaneous increases in interest rates while net interest income should
increase with instantaneous declines in interest rates. Generally, during
periods of increasing interest rates, the Company's interest rate sensitive
liabilities would re-price faster than its interest rate sensitive assets
causing a decline in the Company's interest rate spread and margin. This would
tend to reduce net interest income because the resulting increase in the
Company's cost of funds would not be immediately offset by an increase in its
yield on earning assets. In times of decreasing interest rates, fixed rate
assets could increase in value and the lag in re-pricing of interest rate
sensitive assets could be expected to have a positive effect on the Company's
net interest income.
The following table, which presents principal cash flows and related weighted
average interest rates by expected maturity dates, provides information about
the Company's loans, investment securities and deposits that are sensitive to
changes in interest rates.
2022 2023 2024 2025 2026 Thereafter Total Fair Value
(Amounts In Thousands)
Assets:
Loans, fixed:
Balance $ 401,352 $ 81,748 $ 168,627 $ 444,786 $ 369,196 $ 229,370 $ 1,695,079 $ 1,451,558
Average interest rate 3.93 % 4.51 % 4.21 % 3.91 % 3.76 % 2.43 % 3.74 %
Loans, variable:
Balance $ 170,357 $ 78,954 $ 75,639 $ 261,210 $ 205,479 $ 173,515 $ 965,154 $ 1,161,122
Average interest rate 3.60 % 4.14 % 4.31 % 3.77 % 3.57 % 3.40 % 3.70 %
Investments (1):
Balance $ 73,781 $ 60,885 $ 79,654 $ 81,239 $ 89,749 $ 170,592 $ 555,900 $ 555,900
Average interest rate 1.98 % 2.19 % 1.48 % 0.92 % 1.25 % 1.99 % 1.66 %
Liabilities:
Liquid deposits (2):
Balance $ - $ - $ - $ - $ - $ - $ 2,303,640 $ 2,303,642
Average interest rate - % - % - % - % - % - % 0.15 %
Deposits, certificates:
Balance $ 320,764 $ 174,043 $ 63,193 $ 23,108 $ 16,145 $ - $ 597,253 $ 603,424
Average interest rate 1.11 % 2.51 % 1.16 % 0.79 % 0.95 % - % 1.51 %
1.11
(1)Includes all available-for-sale investments, federal funds and Federal Home
Loan Bank stock.
(2)Includes NOW and other demand, savings and money market funds.
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