UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20222023 or
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 0-32637
AMES NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Iowa | 42-1039071 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
405 | 50010 |
(Address of principal executive offices) | (Zip Code) |
(515) 232-6251
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |
Common Stock, $2.00 par value | ATLO | The NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2022,2023, the aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sale price for the registrant’s common stock in the NASDAQ Capital Market, was $195,666,659.$159,160,907.
The number of shares outstanding of the registrant’s common stock on February 28, 2023,29, 2024, was 8,992,167.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, as filed with the Securities and Exchange Commission on or about March 10, 2023,12, 2024, are incorporated by reference into Part III of this Form 10-K.
General
Ames National Corporation (the "Company") is an Iowa corporation and bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company owns 100% of the stock of six bank subsidiaries consisting of one national bank and five state-chartered banks, as described below. All of the Company’s operations are conducted in the State of Iowa and primarily within the central, north-central and south-central Iowa counties of Boone, Clarke, Hancock, Marshall, Polk, Story, Taylor and Union where the Company’s banking subsidiaries are located. The Company does not engage in any material business activities apart from its ownership of its banking subsidiaries and the management of its own loan portfolios. The principal executive offices of the Company are located at 405 5th Street, Ames, Iowa 50010. The Company’s telephone number is (515) 232-6251 and website address is www.amesnational.com.
The Company was organized and incorporated on January 21, 1975 under the laws of the State of Iowa to serve as a holding company for its principal banking subsidiary, First National Bank, Ames, Iowa ("First National") located in Ames, Iowa. In 1983, the Company acquired the stock of State Bank & Trust Co. ("State Bank") located in Nevada, Iowa; in 1991, the Company, through a newly-chartered state bank known as Boone Bank & Trust Co. ("Boone Bank"), acquired certain assets and assumed certain liabilities of the former Boone State Bank & Trust Company located in Boone, Iowa; in 1995, the Company acquired the stock of Reliance State Bank, (”Reliance Bank”) located in Story City, Iowa; in 2002, the Company chartered and commenced operations of a new banking organization, United Bank & Trust Co. (“United Bank”), located in Marshalltown, Iowa; and in 2019, the Company acquired the stock of Iowa State Savings Bank (“Iowa State Bank”) located in Creston, Iowa. First National, State Bank, Boone Bank, Reliance Bank, United Bank and Iowa State Bank are each operated as a wholly-owned subsidiary of the Company. These six financial institutions are referred to in this Form 10-K collectively as the “Banks” and individually as a “Bank”.
The principal sources of Company revenue are: (i) interest and fees earned on loans made or held by the Company and Banks; (ii) interest on investments, primarily on bonds, held by the Banks; (iii) fees on wealth management services; (iv) service charges on deposit accounts maintained at the Banks; (v) merchant and card fees; (vi) gain on the sale of loans; and (vii) securities gains. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing costs primarily associated with maintaining the Banks’ loan and deposit functions; (iv) occupancy expenses for maintaining the Banks’ facilities; (v) professional fees; and (vi) business development. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposit accounts and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
The Banks’ lending activities consist primarily of short-term and medium-term commercial, multi-family and agricultural real estate loans, residential real estate loans, agricultural and business operating loans and lines of credit, equipment loans, vehicle loans, personal loans and lines of credit, home improvement loans and origination of mortgage loans for sale into the secondary market. The Banks also offer a variety of checking, savings and time deposits, cash management services, merchant credit card processing, safe deposit boxes, wire transfers, direct deposit and automated/video teller machine access. Five of the six Banks also offer trust services, which includes wealth management services.
The Company provides various services to the Banks which include, but are not limited to, management assistance, internal auditing services, human resources services and administration, compliance management, marketing assistance and coordination, loan review, support with respect to computer systems and related procedures, financial reporting, property appraisals, training and the coordination of management activities.
Banking Subsidiaries
First National Bank, Ames, Iowa. First National is a nationally-chartered, commercial bank insured by the FDIC. It was organized in 1903 and became a wholly owned subsidiary of the Company in 1975 through a bank holding company reorganization whereby the then shareholders of First National exchanged all of their First National stock for stock in the Company. In 2014, First National completed the purchase of a bank with offices in West Des Moines, Iowa. In 2018, First National completed the purchase of a bank with offices located in Osceola, Iowa (the “Clarke County Acquisition”).Iowa. First National provides full-service banking to businesses and residents within the Ames community through its three Ames offices; the Greater Des Moines area through its three offices located in Ankeny and West Des Moines; and South Central Iowa through its two offices in Osceola. It provides a variety of products and services designed to meet the needs of the markets it serves. It has an experienced staff of bank officers including many who have spent the majority of their banking careers with First National and who emphasize long-term customer relationships.
As of December 31, 2022,2023, First National had capital of $76.8$84.8 million and 122119 full-time equivalent employees. Full-time equivalents represent the number of people a business would employ if all its employees were employed on a full-time basis. It is calculated by dividing the total number of hours worked by all full and part-time employees by the number of hours a full-time individual would work for a given period of time. First National had net income for the years ended December 31, 20222023 and 20212022 of approximately $10.4$5.5 million and $13.1$10.4 million, respectively. Total assets as of December 31, 20222023 and 20212022 were approximately $1.12$1.14 billion and $1.11$1.12 billion, respectively.
State Bank & Trust Co., Nevada, Iowa. State Bank is an Iowa, state-chartered, FDIC insured commercial bank. State Bank was acquired by the Company in 1983 through a stock transaction whereby the then shareholders of State Bank exchanged all their State Bank stock for stock in the Company. State Bank was organized in 1939 and provides full-service banking to businesses and residents within the Nevada area from its Nevada location. It has a strong presence in agricultural, commercial and residential real estate lending.
As of December 31, 2022,2023, State Bank had capital of $12.9$15.2 million and 2021 full-time equivalent employees. State Bank had net income for the years ended December 31, 20222023 and 20212022 of approximately $2.6$1.4 million and $3.3$2.6 million, respectively. Total assets as of December 31, 20222023 and 20212022 were approximately $215.5$201.7 million and $208.9$215.5 million, respectively.
Boone Bank & Trust Co., Boone, Iowa. Boone Bank is an Iowa, state-chartered, FDIC insured commercial bank. Boone Bank was organized in 1992 by the Company under a new state charter in connection with a purchase and assumption transaction whereby Boone Bank purchased certain assets and assumed certain liabilities of the former Boone State Bank & Trust Company in exchange for a cash payment. It provides full-service banking to businesses and residents within the Boone community and surrounding area. It is actively engaged in agricultural, consumer and commercial lending, including real estate, operating and equipment loans. It conducts business from its main office and a full-service office, both located in Boone.
As of December 31, 2022,2023, Boone Bank had capital of $7.6$9.7 million and 20 full-time equivalent employees. Boone Bank had net income for the years ended December 31, 20222023 and 20212022 of approximately $1.3 million$740 thousand and $1.9$1.3 million, respectively. Total assets as of December 31, 20222023 and 20212022 were approximately $158.2$149.4 million and $159.0$158.2 million, respectively.
Reliance State Bank, Story City, Iowa. Reliance Bank is an Iowa, state-chartered, FDIC insured commercial bank. Reliance Bank was organized in 1928. Reliance Bank was acquired by the Company in 1995 through a stock transaction whereby the then shareholders of Reliance Bank exchanged all their Reliance Bank stock for stock in the Company. In 2012, Reliance Bank completed the purchase of a bank office of Liberty Bank, F.S.B. located in Garner, Iowa. Reliance Bank provides full-service banking to businesses and residents within the Story City and Garner communities and surrounding areas. While its primary emphasis is in agricultural lending, Reliance Bank also provides the traditional lending services typically offered by community banks. It conducts business from its main office located in Story City and a full-service office located in Garner.
As of December 31, 2022,2023, Reliance Bank had capital of $21.3$23.8 million and 3432 full-time equivalent employees. Reliance Bank had net income for the years ended December 31, 20222023 and 20212022 of approximately $2.4$1.7 million and $3.2$2.4 million, respectively. Total assets as of December 31, 20222023 and 20212022 were approximately $303.0$313.3 million and $285.6$303.0 million, respectively.
United Bank & Trust Co., Marshalltown, Iowa. United Bank is an Iowa, state-chartered, FDIC insured commercial bank. It was chartered as a national bank in 2002 and converted to a state charter in 2022. It offers a broad range of deposit and loan products, as well as wealth management services to customers located in the Marshalltown and surrounding Marshall County area. It conducts business from its main office and a full-service office, both located in Marshalltown.
As of December 31, 2022,2023, United Bank had capital of $8.8$9.9 million and 18 full-time equivalent employees. United Bank had net income for the years ended December 31, 20222023 and 20212022 of approximately $1.0 million and $1.2 million.million, respectively. Total assets as of December 31, 20222023 and 20212022 were approximately $129.8$118.5 million and $126.4$129.8 million, respectively.
Iowa State Savings Bank, Creston, Iowa. Iowa State Bank is an Iowa, state-chartered, FDIC insured commercial bank. Iowa State Bank was organized in 1883. Iowa State Bank was acquired by the Company in 2019 through a stock transaction for cash (“Iowa State Bank Acquisition”). Iowa State Bank provides full-service banking to businesses and residents within Creston, Iowa and the surrounding areas. While its primary emphasis is in agricultural lending, Iowa State Bank also provides the traditional lending services typically offered by community banks. It conducts business from its main office located in Creston and full-service offices located in Creston and Lenox.
As of December 31, 2022,2023, Iowa State Bank had capital of $21.4$23.4 million and 3334 full-time equivalent employees. Iowa State Bank had net income for year ended December 31, 20222023 and 20212022 of approximately $2.3$2.0 million and $2.1$2.3 million, respectively. Total assets as of December 31, 20222023 and 20212022 were approximately $258.5$254.7 million and $252.4$258.5 million, respectively.
Business Strategy and Operations
As a multi-bank holding company for six community banks, the Company emphasizes strong personal relationships to provide products and services that meet the needs of the Banks’ customers. The Company seeks to achieve growth and maintain a strong return on equity. To accomplish these goals, the Banks focus on small-to-medium size businesses that traditionally wish to develop an exclusive relationship with a single bank. The Banks, individually and collectively, have the size to give the personal attention required by business owners, in addition to the credit expertise to help businesses meet their goals.
The Banks offer a full range of deposit services that are typically available in most financial institutions, including checking accounts, savings accounts and time deposits of various types, ranging from money market accounts to longer-term certificates of deposit. One major goal in developing the Banks' product mix is to keep the product offerings as simple as possible, both in terms of the number of products and the features and benefits of the individual services. The transaction accounts and time certificates are tailored to each Bank's principal market area at rates competitive in that Bank’s market. In addition, retirement accounts such as Individual Retirement Accounts (IRAs) are available. The FDIC insures all deposit accounts up to the maximum coverage limits. The Banks solicit these accounts from small-to-medium sized businesses in their respective primary trade areas, from individuals who live and/or work within these areas, and from public entities within these areas. No material portion of the Banks' deposits has been obtained from a single person or from a few persons. Therefore, the Company does not believebelieves that the loss of the deposits of any person or of a few persons would not have an adverse effect on the Banks' operations or erode their deposit base.
Loans are provided to creditworthy borrowers regardless of their race, color, national origin, religion, sex, age, marital status, disability, receipt of public assistance or any other basis prohibited by law. The Banks intend to fulfill this commitment while maintaining prudent credit standards. In the course of fulfilling this obligation to meet the credit needs of the communities which they serve, the Banks give consideration to each credit application regardless of the fact that the applicant may reside in a low to moderate income neighborhood, and without regard to the geographic location of the residence, property or business within their market areas.
The Banks provide innovative, quality financial services, such as: Online Banking, Mobile Banking, Private Banking and Wealth Management that meet the evolving banking needs of their customers and communities. The loan programs and acceptance of certain loans may vary from time-to-time depending on the funds available and regulations governing the banking industry. The Banks offer all basic types of credit to their local communities and surrounding rural areas, including commercial, agricultural and consumer loans. The types of loans within these categories are as follows:
Commercial and Construction Loans. Commercial loans are typically made to sole proprietors, partnerships, corporations, limited liability companies and other business entities including municipalities where the loan is to be used primarily for business purposes. These loans are typically secured by assets owned by the borrower and may involve personal guarantees given by the owners of the business. Approximately 54%55% of the loan portfolio consists of loans made for commercial purposes.
The types of commercial loans the Banks offer include:
● | commercial real estate loans, including owner occupied properties |
● | multi-family real estate loans |
● | operating and working capital loans |
● | loans to finance equipment and other capital purchases |
● | business lines of credit |
● | term loans |
● | construction loans |
● | financing guaranteed under Small Business Administration programs |
● | letters of credit |
Agricultural Loans. The Banks, by virtue of their location in central, north-central and south-central Iowa, are directly and indirectly involved in agriculture and agri-business lending. This includes short-term seasonal lending associated with cyclical crop and livestock production, intermediate term lending for machinery, equipment and breeding stock acquisition and long-term real estate lending. These loans are typically secured by the crops, livestock, equipment or real estate being financed. The basic tenets of the Banks' agricultural lending philosophy are strong, positive cash flows, adequate collateral positions, and sufficient liquidity to withstand short-term negative impacts if necessary. Applicable governmental subsidies and affiliated programs are utilized if warranted to accomplish these parameters. Approximately 22% of the loan portfolio consists of loans made for agricultural purposes.
1-4 Family Residential Loans. 1-4 family residential loans are typically available to finance homes, home improvements and home equity lines of credit. These loans are made on a secured basis. Approximately 23%22% of the loan portfolio consists of loans made for 1-4 family residential purposes.
Consumer Loans. Consumer loans are typically available to finance consumer purchases, such as automobiles, household furnishings and boats. These loans are made on both a secured and an unsecured basis. Approximately 1% of the loan portfolio consists of loans made for consumer purposes. The following types of consumer loans are available:
● | automobiles and trucks |
● | boats and recreational vehicles |
● | personal loans and lines of credit |
Other types of credit programs, such as loans to nonprofit organizations, to public entities, for community development and to other governmental programs also are available.
First National, Boone Bank, State Bank, United Bank and Iowa State Bank offer wealth management services typically found in a commercial bank with trust powers, including the administration of estates, conservatorships, personal and corporate trusts and agency accounts. Assets under management amount to $379.5$416.0 million and $401.8$379.5 million as of December 31, 20222023 and 2021,2022, respectively. The Banks also provide farm management, investment and custodial services for individuals, businesses and non-profit organizations.
The Banks earn income from the origination and referral of residential mortgages that are sold in the secondary real estate market without retaining the mortgage servicing rights.
The Banks offer traditional banking services, such as safe deposit boxes, wire transfers, direct deposit, automated/video teller machine access and automatic drafts (ACH) for various accounts.
Lending Credit Management
The Company strives to achieve sound credit risk management. In order to achieve this goal, the Company has established uniform credit policies and underwriting criteria for the Banks’ loan portfolios. The Banks diversify the types of loans offered and are subject to regular credit examinations, annual internal audits and annual review of large loans, as well as quarterly reviews of loans experiencing deterioration in credit quality. The Company attempts to identify potential problem loans early, charge off loans promptly and maintain an adequate allowance for loancredit losses. The Company has established credit guidelines for the Banks’ lending portfolios which include guidelines relating to the more commonly requested loan types, as follows:
Commercial Real Estate Loans - Commercial real estate loans, including agricultural real estate loans, are normally based on loan to appraisal value ratios that do not exceed 80% and are secured by a first priority lien position. Loans are typically subject to interest rate adjustments between five and seven years from origination. Fully amortized monthly repayment terms normally do not exceed twenty five years. Projections and cash flows that show ability to service debt within the amortization period are required. Property and casualty insurance is required to protect the Banks’ collateral interests. Commercial and agricultural real estate loans represent approximately 56%55% of the loan portfolio. Major risk factors for commercial real estate loans, as well as the other loan types described below, include a geographic concentration in our primary market areas in Iowa; the dependence of the local economy upon several large governmental entities, including Iowa State University and the Iowa Department of Transportation; and the health of Iowa’s agricultural sector that is heavily dependent on commodity prices, weather conditions, government programs and trade policies.
Commercial and Agricultural Operating Lines - These loans are typically made to businesses and farm operations with terms up to twelve months. The credit needs are generally seasonal with the source of repayment coming from the entity’s normal business cycle. Cash flow reviews are completed to establish the ability to service the debt within the terms of the loan. A first priority lien on the general assets of the business normally secures these types of loans. Loan-to-value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed by the principal(s).
Commercial and Agricultural Term Loans – These loans are made to businesses and farm operations to finance equipment, breeding stock and other capital expenditures. Term loans are normally secured by the asset being financed and are often additionally secured with the general assets of the business. Loan-to-value ratios generally do not exceed 75% of the cost or value of the assets. Loans are normally guaranteed by the principal(s). These loans also include Paycheck Protection Program (“PPP”) loans originated as a part of the CARES Act. Commercial and agricultural operating and term loans represent approximately 15%16% of the loan portfolio.
Residential First Mortgage Loans – Proceeds of these loans are used to buy or refinance the purchase of residential real estate with the loan secured by a first lien on the real estate. Most of the residential mortgage loans originated by the Banks (including servicing rights) are sold in the secondary mortgage market due to the higher interest rate risk inherent in the 15 and 30 year fixed rate terms consumers prefer. Loans that are originated and not sold in the secondary market generally have fixed rates of up to fifteen years. The maximum amortization of first mortgage residential real estate loans is 30 years. First mortgage residential loans are also referred to an unaffiliated company that originates these loans in exchange for a fee. The loan-to-value ratios normally do not exceed 90% without credit enhancements such as mortgage insurance. Property insurance is required on all loans to protect the Banks’ collateral position.
Home Equity Term Loans – These loans are normally for the purpose of home improvement or other consumer purposes and are secured by a junior mortgage on residential real estate. Loan-to-value ratios normally do not exceed 90% of market value.
Home Equity Lines of Credit - The Banks offer a home equity line of credit generally with a maximum term of 60 months unless the rate is variable, in which case the maximum term may be up to 15 years. These loans are secured by a junior mortgage on the residential real estate and normally do not exceed a loan-to-market value ratio of 90% with the interest adjusted quarterly. Residential first mortgage loans, home equity term loans and home equity lines of credit represent approximately 23%22% of the loan portfolio.
Consumer Loans – Consumer loans are normally made to consumers under the following guidelines. Automobiles - loans on new and used automobiles generally will not exceed 90% and 75% of the value, respectively. Recreational vehicles and boats will not exceed 90% and 66% of the value, respectively. Each of these loans is secured by a first priority lien on the assets and requires insurance to protect the Banks’ collateral position. Unsecured - Terms for unsecured loans generally do not exceed 12 months. Consumer and other loans represent approximately 1% of the loan portfolio.
Investments available-for-sale
The investment policy of the Company generally is to invest funds among various categories of investments and maturities based upon the Company’s need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, and to fulfill the Company’s asset/liability management policies. The Company’s investment portfolios are managed in accordance with a written investment policy adopted by the Board of Directors. It is the Company’s general policy to purchase investment securities which are U.S. Government securities, U.S. government agency, state and local government obligations, corporate debt securities and overnight federal funds.
Environmental, Social and Governance (“ESG”)
Human Capital
The Company is a bank holding company of six community banks, headquartered in Ames, Iowa. Our workforce is located in the following Iowa communities: Ames, Ankeny, Boone, Creston, Garner, Lenox, Marshalltown, Nevada, Osceola, Story City and West Des Moines. Our markets are comprised of metropolitan and rural areas alike, which results in a diversified customer base and workforce.
The Board of Directors is responsible for the benefit programs offered to our employees. The Company has a human resources officer, as does each affiliate Bank. The Presidents of the Banks and the human resources officers are responsible for compensation, recruitment, development and retention. The Company annually reviews a succession plan for key employees.
The Company employs approximately 270273 employees, of which 94%93% are full-time employees and the remaining 6%7% are part-time employees. Of the 270273 employees, 125127 employees were considered officers of the Company. As of December 31, 2022,2023, approximately 64%66% of our current workforce was female and 36%34% was male. Approximately 4%3% of our workforce consisted of ethnically diverse employees as of December 31, 2022.2023. There are no labor unions involved with the Company and we consider our relationship with our employees to be satisfactory. There are no employment contracts between the Company and any of its employees as of December 31, 2022.2023.
As part of our compensation philosophy, we believe that we must offer and maintain market competitive compensation and benefit programs for our employees in order to attract and retain talent. The goal of our compensation program is to create superior long-term value for our stockholders by attracting, motivating and retaining outstanding employees who serve our customers while generating financial performance that is consistently better than our peers. In addition to competitive base wages, the Company provides its employees with a comprehensive program of benefits, including comprehensive medical, vision and dental plans, long-term and short-term disability coverage, employee assistance programs, a 401(k) profit sharing plan, and a cash bonus based on bank performance. Our approach also produces longevity in our workforce. The average tenure of our employees is approximately eleven years.
The Company is committed to improving our recruiting and retention related to diversity and inclusion. To such ends, the Company has developed a Diversity and Inclusion Vision Statement. As the Company prepares for the workforce of the future, we are mindful of the importance of diversity and inclusion as a core component of these efforts.
Social/Sustainability
The Company encourages our employees to be engaged in our communities. This engagement consists of sponsorship of local activities and donations to charitable organizations in our communities. The United Way is one organization that our Company and employees are involved with through time and generous donations.
The Company contributed over $190$205 thousand to various charitable and community organizations in 2022.2023. Company employees volunteered approximately 10,00010,600 hours serving various charitable organizations in our Banks’ communities. A number of our employees serve in leadership positions for nonprofit or community service organizations.
Corporate Governance
The Board of Directors has separated the CEO and Board Chair positions, with the Board Chair being a director who is independent under the NASDAQ governance standards. TenNine of the twelveeleven board members are independent directors. All directors serving on Board committees are independent under NASDAQ governance standards. The Company has established an age limitation policy for directors. Three of the twelveeleven directors are female. All directors own Company stock and in their capacities as directors of the Banks participated in the Director Stock Incentive Plan adopted by each of the Banks. The Company CEO is excluded from the Director Stock Incentive Plan. Certain transactions in Company stock are prohibited, including short-selling and hedging.
A significant portion of compensation of the executive officers is dependent on the Company’s operating results. Executive officer performance is evaluated annually. The Company provides a limited amount of perquisites to its executive officers.
Market Area
The Company operates six commercial banks with locations in Boone, Clarke, Hancock, Marshall, Polk, Story, Taylor and Union Counties in central, north-central and south-central Iowa that all offer a full line of business and consumer loan and retail and commercial deposit services. All banks, except Reliance Bank, offer wealth management services.
First National is headquartered in Ames, Iowa with a population of 65,500.66,300. The major employers are Iowa State University, Ames Laboratory, Iowa Department of Transportation, Mary Greeley Medical Center, Ames Community Schools, City of Ames, Danfoss and McFarland Clinic. First National maintains three offices in the Des Moines metro area with a population of approximately 709,000.740,000. The major employers in the Des Moines metro market are State of Iowa, Principal Financial Group, Wells Fargo, UnityPoint Health, MercyMercyOne Medical, Center, Nationwide Insurance, Corteva Agriscience,Amazon, Hy-Vee Food CorpInc. and John Deere. First National maintains two offices in Osceola, Iowa with a population of 5,400.5,500. Osceola is the county seat of Clarke County. The major employers in Clarke County are Hormel Foods, Miller Products Co., SIMCO Drilling Equipment, Inc., Clarke County Hospital, and Lakeside Casino, Paul Mueller Company and Boyt Harness Company.Casino. Loan services primarily include primarily commercial and consumer types of credit, including operating lines, equipment loans and real estate loans.
Boone Bank is located in Boone, Iowa with a population of 12,500. Boone is the county seat of Boone County. The major employers are Fareway Stores, Inc., Iowa National Guard, Union Pacific Railroad, Boone County Hospital and CDS Global. Boone Bank provides lending services to the agriculture, commercial and real estate markets.
State Bank is located in Nevada, Iowa with a population of 7,000.6,900. Nevada is the county seat of Story County. The major employers are Story County Medical Center, Mid-American Manufacturing, Mid-States Millwright & Builders, Inc., Burke Corporation and Almaco. State Bank provides various types of loans with a major agricultural presence.
Reliance Bank is headquartered in Story City, Iowa with a population of 3,400. The major employers in the Story City area are Bethany Manor, American Packaging, M.H. Eby, Inc. and Record Printing. The Bank also maintains an office in Garner, Iowa with a population of 3,100. Garner is the county seat of Hancock County. The major employers in the Garner area are Iowa Mold & Tooling and Stellar Industries. All locations are in agricultural areas and the Bank has a strong presence in this type of lending.
United Bank is located in Marshalltown, Iowa with a population of 27,600.27,500. The major employers are Iowa Veterans Home, Marshalltown School District, JBS Swift & Co., Emerson Process Management/Fisher Division, Lennox Industries and UnityPoint Health. Marshalltown is the county seat of Marshall County. Loan services include primarily commercial and consumer types of credit including operating lines, equipment loans and real estate loans.
Iowa State Bank is headquartered in Union County in Creston, Iowa with a population of 7,600.7,500. Iowa State Bank has one additional office in Creston and an additional office located in Taylor County in Lenox, Iowa with a population of 1,500. The major employers are Bunn-O-Matic Corporation, Wellman Dynamics Corporation, Greater Regional Health, Southwestern Community College, Greater Regional Medical Center and Michael Foods, Inc. Creston is the county seat of Union County. All locations are in agricultural areas and the Bank has a strong presence in this type of lending.
Competition
The geographic market area served by the Banks is highly competitive with respect to both loans and deposits. The Banks compete principally with other commercial banks, savings and loan associations, credit unions, mortgage companies, finance divisions of auto and farm equipment companies, agricultural suppliers and other financial service providers. Some of these competitors are local, while others are statewide or nationwide. The major commercial bank competitors include First Interstate Bank, U.S. Bank National Association and Wells Fargo Bank, each of which maintains an office or offices within the Banks’ primary central Iowa trade areas. Among the advantages such larger banks have are their ability to finance extensive advertising campaigns and to allocate their investment assets to geographic regions of higher yield and demand. These larger banking organizations have much higher legal lending limits than the Banks and thus are better able to finance large regional, national and global commercial customers.
In order to compete with the other financial institutions in their primary trade areas, the Banks use, to the fullest extent possible, the flexibility which is accorded by independent status. This includes an emphasis on specialized services, local promotional activity and personal contacts by the Banks' officers, directors and employees. In particular, the Banks compete for deposits principally by offering depositors a wide variety of deposit programs, convenient office locations, hours and other services. The Banks compete for loans primarily by offering competitive interest rates, experienced local lending personnel and quality products and services.
As of December 31, 2022,2023, there were 48 FDIC insured institutions having approximately 127126 locations within Boone, Clarke, Hancock, Marshall, Polk, Story, Taylor and Union County, Iowa where the Banks' offices are located. First National, State Bank and Reliance Bank together have the largest percentage of deposits in Story County. Reliance Bank has the largest percentage of deposits in Hancock County.
The Banks also compete with the financial markets for funds. Yields on corporate and government debt securities and commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for funds with equity, money market, and insurance products offered by brokerage and insurance companies. This competitive trend will likely continue in the future.
The Company anticipates bank competition will continue to change materially over the next several years as more financial institutions, including the major regional and national banks, continue to consolidate. Credit unions, which are not subject to income taxes, have a significant competitive advantage and provide additional competition in the Company’s local markets. Financial technology, or fintech, companies and other non-bank competitors emerging provide competition in key areas of banking.
Supervision and Regulation
The following discussion refers to certain statutes and regulations affecting the banking industry in general. These references provide brief summaries and therefore do not purport to be complete and are qualified in their entirety by reference to those statutes and regulations. In addition, due to the numerous statutes and regulations that apply to and regulate the banking industry, many are not referenced below.
The Company and the Banks are subject to extensive federal and state regulation and supervision. Regulation and supervision of financial institutions is primarily intended to protect depositors and the FDIC rather than shareholders of the Company. The laws and regulations affecting banks and bank holding companies have changed significantly over recent years. There is reason to expect that similar changes may continue in the future. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of the Company. The Company is unable to predict the nature or the extent of the effects on its business and earnings that any fiscal or monetary policies or new federal or state legislation may have in the future.
The Company
The Company is a bank holding company by virtue of its ownership of the Banks, and is registered as such with the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"), which subjects the Company and the Banks to supervision and examination by the Federal Reserve. Under the BHCA, the Company files with the Federal Reserve annual reports of its operations and such additional information as the Federal Reserve may require.
Source of Strength to the Banks. The Federal Reserve takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve's position that in serving as a source of strength to its subsidiary banks, bank holding companies should use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. It should also maintain the financial flexibility and capital raising capacity to obtain additional resources for providing assistance to its subsidiary banks. A bank holding company's failure to meet its obligation or to serve as a source of strength to its subsidiary banks, will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice, or a violation of the Federal Reserve's regulations, or both.
Federal Reserve Approval. Bank holding companies must obtain the approval of the Federal Reserve before they: (i) acquire direct or indirect ownership or control of any voting stock of any bank if, after such acquisition, they would own or control, directly or indirectly, more than 5% of the voting stock of such bank; (ii) merge or consolidate with another bank holding company; or (iii) acquire substantially all of the assets of any additional banks.
Non-Banking Activities. With certain exceptions, the BHCA also prohibits bank holding companies from acquiring direct or indirect ownership or control of voting stock in any company other than a bank or a bank holding company unless the Federal Reserve finds the company's business to be incidental to the business of banking. When making this determination, the Federal Reserve in part considers whether allowing a bank holding company to engage in those activities would offer advantages to the public that would outweigh possible adverse effects. A bank holding company may engage in permissible non-banking activities on a de novo basis, if the holding company meets certain criteria and notifies the Federal Reserve within ten (10) business days after the activity has commenced.
Financial Holding Company. Under the Financial Services Modernization Act, eligible bank holding companies may elect (with the approval of the Federal Reserve) to become a "financial holding company." Financial holding companies are permitted to engage in certain financial activities through affiliates that had previously been prohibited activities for bank holding companies. Such financial activities include securities and insurance underwriting and merchant banking. At this time, the Company has not elected to become a financial holding company, but may choose to do so at some time in the future.
Control Transactions. The Change in Bank Control Act of 1978, as amended, requires a person or group of persons acquiring "control" of a bank holding company to provide the Federal Reserve with at least 60 days prior written notice of the proposed acquisition. Following receipt of this notice, the Federal Reserve has 60 days to issue a notice disapproving the proposed acquisition, but the Federal Reserve may extend this time period for up to another 30 days. An acquisition may be completed before the disapproval period expires if the Federal Reserve issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, would constitute the acquisition of control. In addition, any "company" would be required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (or 5% if the "company" is a bank holding company) or more of the outstanding shares of the Company, or otherwise obtain control over the Company.
Affiliate Transactions. The Company and the Banks are deemed affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Generally, the Federal Reserve Act: (i) limits the extent to which the financial institution or its subsidiaries may engage in "covered transactions" with an affiliate; and (ii) requires all transactions with an affiliate, whether or not "covered transactions," to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions.
State Law on Acquisitions. Iowa law permits bank holding companies to make acquisitions throughout the state. However, Iowa currently has a deposit concentration limit of 15% on the amount of deposits in the state that any one banking organization can control and continue to acquire banks or bank deposits (by acquisitions), which applies to all depository institutions doing business in Iowa.
Banking Subsidiaries
Applicable federal and state statutes and regulations governing a bank's operations relate, among other matters, to capital adequacy requirements, required reserves against deposits, investments, loans, legal lending limits, certain interest rates payable, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches and dealings with affiliated persons.
First National is a national bank subject to primary federal regulation and supervision by the Office of Comptroller of the Currency (“OCC”). The FDIC, as an insurer of the deposits to the maximum extent permitted by law, also has some limited regulatory authority over First National, as a national bank. State Bank, Boone Bank, Reliance Bank, United Bank and Iowa State Bank are state banks subject to regulation and supervision by the Iowa Division of Banking. The state Banks are also subject to regulation and examination by the FDIC, which insures their respective deposits to the maximum extent permitted by law. The federal laws that apply to the Banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for loans. The laws and regulations governing the Banks generally have been promulgated to protect depositors and the deposit insurance fund of the FDIC and not to protect stockholders of such institutions or their holding companies.
The OCC and FDIC each have authority to prohibit banks under their supervision from engaging in what it considers to be an unsafe and unsound practice in conducting their business. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires federal banking regulators to adopt regulations or guidelines in a number of areas to ensure bank safety and soundness, including internal controls, credit underwriting, asset growth, management compensation, ratios of classified assets to capital and earnings. FDICIA also contains provisions which are intended to change independent auditing requirements, restrict the activities of state-chartered insured banks, amend various consumer banking laws, limit the ability of "undercapitalized banks" to borrow from the Federal Reserve's discount window, require regulators to perform periodic on-site bank examinations and set standards for real estate lending.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“the Dodd-Frank Act”). Pursuant to the Dodd-Frank Act, the Banks are subject to regulations promulgated by the consumer protection bureau housed within the Federal Reserve, known as the Consumer Financial Protection Bureau (the “Bureau” or “CFPB”). The Bureau promulgates rules and orders with respect to consumer financial products and services and has substantial power to define the rights of consumers and responsibilities of lending institutions, such as the Banks. The Bureau will not, however, examine or supervise the Banks for compliance with such regulations; rather, enforcement authority will remain with the Banks’ primary federal regulator although the Banks may be required to submit reports or other materials to the Bureau upon its request.
Borrowing Limitations. Each of the Banks is subject to limitations on the aggregate amount of loans that it can make to any one borrower, including related entities. Subject to numerous exceptions based on the type of loans and collateral, applicable statutes and regulations generally limit loans to one borrower of 15% of total equity and reserves. Each of the Banks is in compliance with applicable loans to one borrower requirements.
FDIC Insurance. The deposit insurance coverage limit is $250,000 per depositor, per insured depository institution for each account ownership category. The FDIC has adopted a risk-based insurance assessment system under which depository institutions contribute funds to the FDIC insurance fund based on their risk classification. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after an administrative hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law.
Capital Adequacy Requirements. The Federal Reserve, the FDIC and the OCC (collectively, the "Agencies") have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for off-balance sheet items. The Agencies have also provided an optional community bank leverage ratio framework to provide a simple measure of capital adequacy for certain community banking organizations. Failure to achieve and maintain adequate capital levels may give rise to supervisory action through the issuance of a capital directive to ensure the maintenance of required capital levels. Each of the Banks is in compliance with capital level requirements as of December 31, 2022.2023.
Basel III Capital Requirements. Basel III Capital Rules: (i) introduced a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandates that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expanded the scope of the deductions from and adjustments to capital as compared to prior regulations. Under the Basel III Capital Rules, for most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and leasecredit losses, in each case, subject to the Basel III Capital Rules’ specific requirements.
Pursuant to the Basel III Capital Rules, the Company and Banks are subject to regulatory capital adequacy requirements promulgated by the Federal Reserve and the OCC. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by the regulators that could have a material adverse effect on the Company’s consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the Company and Banks’ assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Banks’ capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.
With respect to the Banks, the Basel III Capital Rules revised the Prompt Corrective Action (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act, by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well capitalized status being 8%; and (iii) eliminating the provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules did not change the total risk-based capital requirement for any PCA category.
The Basel III Capital Rules prescribe a standardized approach for risk weightings for a large and risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. Government and agency securities to 600% for certain equity exposures, and resulting in high-risk weights for a variety of asset classes.
Should the Company or Banks not meet the requirements of the Basel III Capital Rules, the Company and Banks would be subject to adverse regulatory action by their regulators, which action could result in material adverse consequences for the Company, Banks, and Company shareholders.
As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. Financial institutions first became eligible to elect to be subject to this new definition as of March 31, 2020.
As of December 31, 2022,2023, the Banks exceeded all of their regulatory capital requirements and were designated as “well capitalized” under federal guidelines. See Note 15 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Prompt Corrective Action. Regulations adopted by the Agencies impose even more stringent capital requirements under prompt corrective action. The FDIC and other Agencies must take certain "prompt corrective action" when a bank fails to meet capital requirements. The regulations establish and define five capital levels: (i) "well capitalized," (ii) "adequately capitalized," (iii) "undercapitalized," (iv) "significantly undercapitalized" and (v) "critically undercapitalized." Increasingly severe restrictions are imposed on the payment of dividends and management fees, asset growth and other aspects of the operations of institutions that fall below the category of being "adequately capitalized." Undercapitalized institutions are required to develop and implement capital plans acceptable to the appropriate federal regulatory agency. Such plans must require that any company that controls the undercapitalized institution must provide certain guarantees that the institution will comply with the plan until it is adequately capitalized. As of December 31, 2022,2023, each of the Banks was categorized as “well capitalized” under regulatory prompt corrective action provisions.
Restrictions on Dividends. The dividends paid to the Company by the Banks are the major source of Company cash flow. Various federal and state statutory provisions limit the amount of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order.
First National Bank, as a national bank, generally may pay dividends, without obtaining the express approval of the OCC, in an amount up to its retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits as defined by the OCC, consists of net income less dividends declared during the period. Boone Bank, Reliance Bank, State Bank, United Bank and Iowa State Bank are also restricted under Iowa law to paying dividends only out of their undivided profits. Additionally, the payment of dividends by the Banks is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and the Banks generally are prohibited from paying any dividends if, following payment thereof, the Bank would be undercapitalized.
Reserves Against Deposits
Prior to March 26, 2020, the Federal Reserve required all depository institutions to maintain reserves against their transaction accounts (primarily checking accounts) and non-personal time deposits. Generally, reserves of 3% had to be maintained against total transaction accounts of $640.6$691.7 million or less (subject to an exemption not in excess of the first $32.4$36.1 million of transaction accounts). A reserve of $18.246$19.668 million plus 10% of amounts in excess of $640.6$691.7 million had to be maintained in the event total transaction accounts exceeded $640.6$691.7 million. The balances maintained to meet the reserve requirements imposed by the Federal Reserve could be used to satisfy applicable liquidity requirements. Because required reserves were maintained in the form of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement was to reduce the earning assets of the Banks.
The Federal Reserve announced on March 15, 2020, that the reserve requirement ratios would be reduced to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. The annual indexation of the reserve requirement exemption amount and the low reserve tranche for 2023 is required by statute but will not affect depository institutions' reserve requirements, which will remain zero. Currently the Board has no plans to re-impose reserve requirements but retains the right to do so.
Regulatory Enforcement Authority
The enforcement powers available to federal and state banking regulators are substantial and include, among other things, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, enforcement actions must be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions, or inactions, may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Applicable law also requires public disclosure of final enforcement actions by the federal banking agencies.
National Monetary Policies
In addition to being affected by general economic conditions, the earnings and growth of the Banks are affected by the regulatory authorities’ policies, including the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply, credit conditions and interest rates. Among the instruments used to implement these objectives are open market operations in U.S. Government securities, changes in reserve requirements against bank deposits and the Federal Reserve Discount Rate, which is the interest rate charged member banks to borrow from the Federal Reserve Bank. These instruments are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve have had a material impact on the operating results of commercial banks in the past and are expected to have a similar impact in the future. The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and includes supervising and regulating banks, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Federal Reserve conducts research into the economy and releases numerous publications. Also important in terms of effect on banks are controls on interest rates paid by banks on deposits and types of deposits that may be offered by banks. The Federal Open Market Committee (“FOMC”), a committee within the Federal Reserve System, is charged under the United States of America (“USA”) law with overseeing the nation's open market operations (i.e., the Federal Reserve Banks buying and selling of USA government securities). This Federal Reserve committee makes key decisions about interest rates and the growth of the USA money supply. The FOMC is the principal organization of USA national monetary policy. The Committee sets monetary policy by specifying the short-term objective for the Federal Reserve Bank's open market operations, which is usually a target level for the federal funds rate (the rate that commercial banks charge between themselves for overnight loans).
Availability of Information on Company Website
The Company files periodic reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The Company makes available on or through its website free of charge all periodic reports filed by the Company with the SEC, including any amendments to such reports, as soon as reasonably practicable after such reports have been electronically filed with the SEC. The internet address of the Company’s website is: www.amesnational.com.
The Company will provide a paper copy of these reports free of charge upon written or telephonic request directed to John L. Pierschbacher, CFO, 405 5th Street, Ames, Iowa 50010 or (515) 232-6251 or by email request at info@amesnational.com. The information found on the Company’s website is not part of this or any other report the Company files with the SEC.
Information about our Executive Officers
The following table sets forth summary information about the executive officers of the Company and certain executive officers of the Banks. Each executive officer has served in his current position for the past five years with the exception of John P. Nelson, John L. Pierschbacher,Dan E. Johnson, Adam R. Snodgrass, Robert A. Thomas and Michael A. Wilson. Mr. NelsonJohnson was appointed president and chief executive officerPresident of the CompanyState Bank on June 29, 2018. Mr. Pierschbacher was appointed chief financial officer of the Company on June 29, 2018.January 16, 2023. Mr. Snodgrass was appointed as president of Iowa State Bank on October 25, 2019. Mr. Thomas was appointed as president of United Bank on July 1, 2020. Michael A. Wilson was appointed as executive vice president of innovation and corporate servicesChief Lending Officer on September 30, 2022.November 9, 2023.
Name | Age | Position with the Company or Bank and Principal Occupation and Employment During the Past Five Years |
Scott T. Bauer |
| President and Director of First National. |
|
| President and Director of State Bank; previously Senior Loan Officer of State Bank. |
John P. Nelson |
| Chief Executive Officer, President and Director of the Company. Director and Chairman of First National, State Bank and United Bank and Director of |
John L. Pierschbacher |
| Chief Financial Officer, Director and Secretary of the Company. Director and Chairman of Boone Bank and Reliance |
Jeffrey K. Putzier |
| President and Director of Boone Bank. |
Richard J. Schreier |
| President and Director of Reliance Bank. |
Adam R. Snodgrass |
| President and Director of Iowa State Bank; previously CEO, CFO and director of Iowa State Bank prior to the Iowa State Bank |
Robert A. Thomas | President and Director of United Bank; previously Senior Loan Officer of United Bank. | |
Michael A. Wilson |
| Chief Lending Officer; previously Executive Vice President of Innovation and Corporate |
Set forth below is a description of risk factors related to the Company’s business, provided to enable investors to assess, and be appropriately apprised of, certain risks and uncertainties the Company faces in conducting its business. An investor should carefully consider the risks described below and elsewhere in this Report, which could materially and adversely affect the Company’s business, results of operations or financial condition. The risks and uncertainties discussed below are also applicable to forward-looking statements contained in this Report and in other reports filed by the Company with the Securities and Exchange Commission. Given these risks and uncertainties, investors are cautioned not to place undue reliance on forward-looking statements.
Economic and Market Condition Risks
Changes in general business, economic and political conditions may adversely affect the Company’s business.
Our earnings and financial condition are affected by general business, economic and political conditions. For example, a depressed economic environment increases the likelihood of lower employment levels and recession, which could adversely affect our earnings and financial condition. General business and economic conditions that could affect us include short-term and long-term interest rates, inflation, fluctuations in both debt and equity capital markets and the strength of the national and local economies in which we operate. Political conditions can also affect our earnings through the introduction of new regulatory policies, changes in tax laws and changes in trade policies.
Our financial performance generally, and in particular the ability of customers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment not only in the markets where we operate but also in the state of Iowa generally and in the United States as a whole. A favorable business environment is generally characterized by, among other factors: economic growth; efficient capital markets; low inflation; low unemployment; high business and investor confidence; and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.
In particular, the national economy is now facing challenges due to the significant inflationary pressures that began building during late 2021 and throughout the course of 2022 and 2023, resulting in significant upward pressure on consumer and wholesale prices. In response, the FOMC has initiated a series of increases in the short-term federal funds interest rate in an effort to dampen economic activity and bring the rate of inflation back to the FOMC’s target range of two to three percent. These rate increases which are expected to continue into and during 2023, have the potential to overly reduce economic activity and tip the domestic economy into a recessionary period of slower or negative growth. As noted above, a period of depressed economic activity could adversely affect our business, financial condition and results of operation by, among other things, increasing the likelihood of borrower defaults on loan obligations, reducing collateral values and weakening demand for the Banks’ loan and deposit services.
Higher inflation may affect the Company’s interest rates, provision for loan lossescredit loss expenses and general operating expenses.
Consumer inflation, as measured by the Consumer Price Index for All Urban Consumers (“CPI”) has increased 3.4% and 6.5% for the yearyears ended December 31, 2022.2023 and 2022, respectively. This increase in inflation creates upward pressure on the cost of hiring, training, and retaining employees, other general operating expense and interest rates. The challenge for the Company will be keeping wages competitive and maintaining general operating expenses at their current levels, while balancing a potential decrease in net interest income due to the Company’s greater sensitivity to the repricing of its interest-bearing liabilities than its interest-earning assets in the short-term. The Company’s provision for loan lossescredit loss expenses may be impacted by the borrower’s ability to service their debt if inflation is prolonged.
Credit Risks
The Company’s business depends on our ability to successfully manage credit risk.
The operation of our business requires us to manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent underwriting standards, implement and observe appropriate procedures for monitoring our outstanding loans and ensure that our bankers follow those standards and procedures. The weakening of these standards or procedures for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, our inability to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers may negatively impact the quality of our loan portfolio, result in loan defaults, foreclosures and additional charge-offs and necessitate that we significantly increase our allowance for loancredit losses, therefore reducing our earnings. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition or results of operations.
The commercial real estate loan portfolio is a significant part of the Company’s business and subject to the risk of fluctuating collateral values.
Commercial real estate loans were a significant portion of our total loan portfolio as of December 31, 2022.2023. The market value of real estate securing these loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts, and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
If the loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that was anticipated at the time of originating the loan, which could cause an increase in charge-offs, resulting in the need to increase our provision for loan lossescredit loss expense and adversely affecting our operating results and financial condition.
If the Company’s actual loancredit losses exceed the allowance for loancredit losses or increase significantly, the Company’s net income will decrease.
We maintain anThe allowance for loancredit losses at a level believed to be adequate to absorb estimatedfor loans represents management's estimate of all expected credit losses inherent inover the expected contractual life of our existing loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; credit loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unidentified losses inherent in the current loan portfolio.
DeterminationDetermining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently subjective as it requires significant estimates and management’s judgment of credit risks and future trends, all of which may undergo material changes.uncertain. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loancredit losses to be funded through provisioncredit loss expense. In addition, bank regulatory agencies periodically review our allowance and may require an increase in the provisionallowance for loancredit losses or the recognition of additional loan charge-offs, based on judgments different from those of management. Also, if charge-offs in future periods exceed the allowance for loancredit losses or increase significantly; we will need additional provisionscredit loss expenses to increase the allowance. Any increase in provisioncredit loss expense will result in a decrease in net income and capital and may have a material adverse effect on our financial condition and results of operations.
Loans to agricultural-related borrowers are subject to factors beyond the Company’s control, including fluctuations in commodity and livestock prices, government trade policies and other risks, which could negatively impact the Company’s loan portfolio.
A significant portion of our loan portfolio consists of loans to borrowers who are directly or indirectly affected by the health of the Iowa agricultural economy. An extended period of low commodity and/or livestock prices, together with other risks to which our agricultural borrowers are subject, including poor weather conditions, higher input costs, changes in governmental support programs and uncertainty regarding governmental mandates affecting ethanol production, could result in reduced cash flows and profit margins, negatively affecting these borrowers and making it more difficult for them to repay their loan obligations to us. Moreover, uncertainty as to the status of tariffs on products that our agricultural borrowers export to foreign markets could result in further volatility and deterioration of the price of agricultural products, providing further challenges and risk to our portfolio of agricultural loans. A general decline in the agricultural economy could also negatively affect us by reducing the value of agricultural real estate which secures some of our agricultural loans, creating the potential for greater losses if these borrowers are unable to repay their loans and we are forced to rely on this collateral. Moreover, a general decline in the agricultural economy could also negatively impact some of our commercial borrowers whose businesses are directly or indirectly dependent on the health of the agricultural economy. All of these risks, which are beyond our control, could produce losses in our loan portfolio and adversely affect our financial condition or results of operations.
Liquidity and Interest Rate Risks
Fair values of investments in the Company’s securities portfolio may adversely change.
As of December 31, 2022,2023, the fair value of our securities portfolio was approximately $786.4$736.4 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of those securities. These factors include, but are not limited to, changes in interest rates, an unfavorable change in the liquidity of an investment, rating agency downgrades of the securities, reinvestment risk, liquidity risk, defaults by the issuer or individual mortgagors with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could result in realized losses that negatively impact earnings. The success of any investment activity is affected by general economic conditions. Unexpected volatility or illiquidity in the markets in which we hold securities could further reduce our liquidity and stockholders' equity. In 2022, theThe fair value of the securities portfolio has significantly declined due to risingan unrealized loss of $62.3 million as of December 31, 2023, resulting primarily from the negative impact of increased interest rates.rates on the fair value of the portfolio. To mitigate these risks,the risk of selling securities in an unrealized loss position to fund cash flow needs, we have access to lines of credit that provide additional liquidity, if needed.
Our investment securities are analyzed quarterly to determine whether, in the opinion of management, any of the securities have other-than-temporary impairment (OTTI).credit losses. To the extent that any portion of the unrealized losses in our portfolio of investment securities is determined to have OTTI and is credit loss, related, we will recognize a charge to our earnings in the quarter during which such determination is made, and our earnings and capital ratios will be adversely impacted. Generally, a fixed income security is determined to have OTTIcredit losses when it appears unlikely that we will receive all of the principal and interest due in accordance with the original terms of the investment. In addition to credit losses, losses are recognized for a security having an unrealized loss if we have the intent to sell the security or if it is more likely than not that we will be required to sell the security before collection of the principal amount.
Changes in interest rates could adversely affect the Company’s results of operations and financial condition.
TheOur earnings depend substantially on our interest rate spread, which is the difference between (i) the interest rates we earn on loans, securities, and other interest-earning assets, and (ii) the interest rates we pay on deposits, other borrowings, and other interest-bearing liabilities. We are exposed to interest rate risk because our interest-earning assets and interest-bearing liabilities do not react uniformly or concurrently to changes in interest rates since the two have different time periods for adjustment and can be tied to different measures of rates. Market interest rates are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities, including the Federal Reserve. Throughout 2022 and 2023, the FOMC increased its target forhas raised the short-term federal funds interest rate by 4.25%to its current targeted rate between 5.25% and 5.5% in 2022 after remaining stable during 2021. Intermediate and longer-term rates increased in 2022 after remaining low in 2021. Withan effort to curb inflation. As market interest rates significantly increasing during 2022 in responserise, we experience competitive pressures to inflationary pressure inincrease the economy, the Company’s challenge will be managing its interest expense, as the interest-bearing liabilities (deposits and other borrowings) reprice more quickly than earning assets (loans and investment securities), placing downward pressurerates we pay on thedeposits, which may decrease our net interest margin. A reduction inincome. In addition, inflationary pressures will increase our operating costs and could have a significant negative effect on our borrowers and the net interest marginvalues of collateral securing loans, which could negatively affect our resultsfinancial performance. In addition, certain of operations, including earnings. In responseour noninterest income and noninterest expenses are subject to this challenge, we model quarterly the changesadverse effect in income that would result from various changes ina rising interest rates. Management believesrate environment. We monitor our earning assets have the appropriate maturity and repricing characteristics to optimize earnings and interest rate risk positions.exposure; however, we can provide no assurance that our efforts will appropriately protect us in the future from interest rate risk exposure.
The inability to deploy liquidity may adversely affect the Company’s business.
Maintaining adequate liquidity is essential to the banking business. Excess liquidity or the inability to maintain liquidity through deposits, borrowing, sale of securities or other sources could have a substantial negative impact on our liquidity.
We maintain liquidity primarily through customer deposits and through access to other short-term funding sources, including advances from the Federal Home Loan Bank (FHLB), Federal Reserve Bank (FRB) overnight borrowings and purchased federal funds. If governmental programs or economic conditions change and generate excess liquidity due to increases in deposit balances, we might experience excess liquidity issues. Conversely, our liquidity could be negatively impacted if we are unable to maintain appropriate levels of liquidity through deposits, borrowing, sale of securities or other sources. Our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated increase or reductions in our liquidity. In such events, our cost of funds may decrease, but our investments options may become limited, thereby reducing our net interest income. This situation could have a material adverse impact on our results of operations and financial condition.
The Company relies on dividends and other payments from its Banks for substantially all of its revenue.
We are a separate and distinct legal entity from our Banks, and we receive substantially all of our operating cash flows from dividends and other payments from our Banks. These dividends and payments are the principal source of funds to pay dividends on our common stock.stock and pay our operating expenses. Various federal and state laws and regulations limit the amounts of dividends that our Banks may pay to us. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event our Banks are unable to pay dividends to us, we may not be able to pay our obligations or pay dividends on our common stock. The inability to receive dividends from our Banks could have a material adverse effect on our business, financial condition or results of operations.
Operational Risks
The Company may not be able to attract and retain key personnel and other skilled employees.
Our success depends, in large part, on the skills of our management team and our ability to recruit, retain recruit and motivate key officers and employees. Our senior management team has significant industry experience, and their knowledge and relationships would be difficult to replace. None of our executive officers have employment agreements in keeping with the past practice of the Company and the Banks. Leadership changes will occur from time to time, and we cannot predict whether significant resignations or retirements will occur or whether we will be able to recruit additional qualified personnel. Competition for senior executives and skilled personnel in the financial services and banking industry is considerable, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. We need to continue to attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the continued growth and successful operation of our business. In addition, as a provider of commercial and agricultural banking services, we must attract and retain qualified banking personnel to continue to grow our business, and competition for such personnel can be intense. Our ability to effectively compete for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be restricted by applicable banking laws and regulations. The loss of the services of any senior executive or other key personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse effect on our business, financial condition or results of operations. In addition, to attract and retain personnel with appropriate skills and knowledge to support our business, we may offer a variety of benefits, which could reduce our earnings or have a material adverse effect on our business, financial condition or results of operations.
The Company is subject to certain operational risks, including, but not limited to, data processing system failures, errors, data security breaches and customer or employee fraud.
There have been a number of publicized cases involving errors, fraud or other misconduct by employees of financial services firms in recent years. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. Employee fraud, errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors or misconduct could also subject us to civil claims for negligence.negligence or regulatory enforcement actions.
Although we maintain a system of internal controls and procedures designed to reduce the risk of loss from employee or customer fraud or misconduct and employee errorserrors; as well as insurance coverage to mitigate against some operational risks, including data processing system failures and errors and customer or employee fraud; these internal controls may fail to prevent or detect such an occurrence, or such an occurrence may not be insured or exceed applicable insurance limits.
In addition, there have also been a number of cases where financial institutions have been the victim of fraud related to unauthorized wire and automated clearinghouse transactions. The facts and circumstances of each case vary but generally involve criminals posing as customers (i.e., stealing bank customers’ identities) to transfer funds out of the institution quickly in an effort to place the funds beyond recovery prior to detection. Although we have policies and procedures in place to verify the authenticity of our customers and prevent identity theft, we can provide no assurances that these policies and procedures will prevent all fraudulent transfers. In addition, although we have safeguards in place, it is possible that our computer systems could be infiltrated by hackers or other intruders resulting in loss, destruction or misuse of our data or confidential information about our customers. We can provide no assurances that these safeguards will prevent all unauthorized infiltrations or breaches. Identity theft, successful unauthorized intrusions and similar unauthorized conduct could result in reputational damage and financial losses to the Company.
Security breaches involving us, the Banks or any third parties with which we do business could expose us to liability and litigation, adversely affecting our reputation and operating revenues.
In connection with our business, we collect and retain significant volumes of sensitive business and personally identifiable information, including social security numbers of our customers and other personally identifiable information of our customers and employees, on our data systems. We and the third parties with which we conduct business are subject to the risk of security breaches, which may be due to the failure of our data encryption technologies or otherwise, involving the receipt, transmission, and storage of confidential customer and other personally identifiable information, including account takeovers, unavailability of service, computer viruses, or other malicious code, cyberattacks, or other events, any of which may arise from human error, fraud or malice on the part of employees or third parties or from accidental technological failure. If one or more of these events occurs, it could result in the disclosure of confidential customer information, impairment of our ability to provide products and services to our customers, damage to our reputation with our customers and the market, additional costs (such as costs for repairing systems or adding new personnel or protection technologies), regulatory penalties, and financial losses for us, our customers and other third parties. Such events could also cause interruptions or malfunctions in the operations of our customers, or other third parties with which we engage in business. Such events could also damage our reputation with customers and third parties with whom we do business, which could lead to loss of customers and business opportunities and have a material adverse effect on our financial condition and results of operation.
Risks and exposures related to cybersecurity attacks have increased as a result of greater reliance on remote working, and are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, the proliferation of malicious actors internationally, and the expanding use of technology-based products and services by us and our customers. Cybersecurity risk and other security matters are also a major focus of regulatory authorities. We can provide no assurances that the safeguards we have in place or may implement in the future will prevent all unauthorized infiltrations or breaches and that we will not suffer losses related to a security breach in the future, which losses may be material. In addition, we may be required to expend additional resources to enhance our protective measures or to investigate and remediate any information security vulnerabilities or exposures.
An impairment charge of goodwill or other intangibles could have a material adverse impact on the Company’s results of operations and financial condition.
Because the Company haswe have grown in part through acquisitions, goodwill and intangible assets are included in the consolidated assets reflected in our financial statements. Goodwill and intangible assets were $14.4$13.9 million as of December 31, 2022.2023. Under generally accepted accounting principles (“GAAP”), we are required to test the carrying value of goodwill and intangible assets at least annually or sooner if events occur that indicate impairment could exist. These events or circumstances could include a significant change in the business climate, including a sustained decline in a reporting unit’s fair value, legal and regulatory factors, operating performance indicators, competition and other factors. GAAP requires us to assign and then test goodwill at the reporting unit level. If over a sustained period of time we experience a decrease in our stock price and market capitalization, which may serve as an estimate of the fair value of our reporting unit, this may be an indication of impairment. If the fair value of our reporting unit is less than its net book value, we may be required to record goodwill impairment charges in the future. In addition, if the revenue and cash flows generated from any of our other intangible assets isare not sufficient to support its net book value, we may be required to record an impairment charge. The amount of any impairment charge could be significant and could have a material adverse impact on our financial condition and results of operations for the period in which the charge is taken.
Changes in accounting policies or accounting standards, or changes in how accounting standards are interpreted or applied, could materially affect how the Company reports its results of operations and financial condition.
Our accounting policies are fundamental to determining and understanding our results of operation and financial condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Any changes in our accounting policies could materially affect our financial statements. From time to time, the Financial Accounting Standards Board (the “FASB”) and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, the SEC, banking regulators and our outside auditors) may change positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond our control, can be difficult to predict and could materially affect how we report our results of operations and financial condition. We may be required to apply a new or revised standard retroactively or apply an existing standard differently and retroactively, which may result in the Company being requiredneed to restate prior period financial statements in material amounts. Changes in these standards are continuously occurring, and given the current economic and regulatory environment, more significant changes may occur.occur in the future. The implementation of such changes could have a material adverse effect on our financial condition and results of operations.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the Current Expected Credit Loss model, or CECL. Under the CECL model, which we must adopt as of January 1, 2023, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. The CECL model differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses.
The Company is currently finalizing the CECL model and upon adoption of ASU 2016-13 (CECL) in the first quarter of 2023 anticipates an increase to the allowance for credit losses for loans and unfunded commitments liability of approximately $600 thousand to $1.0 million. See Note 1 to our consolidated financial statements included in Item 8 of this Report for further discussion.
The Company’s accounting policies and methods require management to make estimates about matters that are inherently uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure they comply with GAAP and reflect management's judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances. The application of that chosen accounting policy or method might result in us reporting different amounts than would have been reported under a different alternative. If management's estimates or assumptions areprove to be incorrect, we may experience a material loss.
We have identified three accounting policies as being "critical" to the presentation of our financial condition and results of operations because they require management to make particularly subjective and complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These critical accounting policies relate to (1) the allowance for credit losses, (2) the fair value and possible impairment losses on investmentof securities available for sale, (2) the allowance for loan losses,available-for-sale, and (3) impairment of goodwill. Because of the inherent uncertainty of the estimates required to apply these policies, no assurance can be given that application of alternative policies or methods might not result in the reporting of different amounts of the allowance for credit losses, the fair value of securities available for sale, the allowance for loan losses,available-for-sale, goodwill valuation and, accordingly, net income.
The Company’s operations are concentrated in Iowa.
Our operations are concentrated primarily in central, north-central and south-central Iowa. As a result of this geographic concentration, our results of operations may correlate to the economic conditions in this area. Any deterioration in economic conditions in central, north-central or south-central Iowa, particularly in the industries on which the area depends (including agriculture which, in turn, is dependent upon commodity prices, weather conditions, trade policies and government support programs), may adversely affect the quality of our loan portfolio and the demand for our products and services, and accordingly, our financial condition and results of operations.
Damage to the Company’s reputation could adversely affect our business.
Our business depends upon earning and maintaining the trust and confidence of our customers, investors, and employees. Damage to our reputation could cause significant harm to our business. Harm to our reputation could arise from numerous sources, including employee misconduct, compliance failures, litigation, breach of information security or other cybersecurity events, or governmental investigations, among other things. In addition, a failure to deliver appropriate standards of service, or a failure or perceived failure to treat customers and clients fairly could result in customer dissatisfaction, litigation, breach of information security, and heightened regulatory scrutiny, all of which could lead to lost revenue, higher operating costs and harm to our reputation. Adverse publicity about us, whether or not true, may also result in harm to our business. Should any events or circumstances that could undermine our reputation occur, there can be no assurance that the additional costs and expenses that we may incur in addressing such issues would not adversely affect our financial condition and results of operations.
Changes in technology could be costly or difficult to implement.
The financial services industry is continually undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements and there is a risk we could become less competitive if we are unable to take advantage of these improvements due to the cost limitations, difficulties in implementation or otherwise.
A breach of information security, compliance breach, or error by one of the Company’s agents or vendors could negatively affect the Company’s reputation and business.
We depend on data processing, communication and information exchange on a variety of computing platforms and networks over the Internet. A cyber-attack on our systems could result in the theft, loss or destruction of our information or the theft or improper use of confidential information about our customers, any of which could harm our reputation and expose us to financial losses. We cannot be certain all of our systems are entirely free from vulnerability to attack, despite safeguards which have been installed. We also outsource certain key aspects of our data processing and communication to certain third-party providers. While we have selected these third-party providers carefully, we cannot control their actions or their degree of compliance with their own systems of internal control. If information security is breached, or one of our service providers or vendors breaches compliance procedures, our or our customers’ information could be lost or misappropriated, resulting in financial loss or costs to us or damage to our customers or others. If information security is breached either on our systems or those of our vendors, our financial condition, results of operations, reputation and future prospects could be adversely affected.
Strategic and External Risks
The Company may have difficulty continuing to grow, and even if we do grow, our growth may strain our resources and limit our ability to expand operations successfully.
Our future profitability will depend in part on our continued ability to grow both loans and deposits; however, we may not be able to sustain our historical growth rate or be able to grow at all. In addition, our future success will depend on competitive factors and on the ability of our senior management to continue to maintain an appropriate system of internal controls and procedures and manage a growing number of customer relationships. We may not be able to implement changes or improvements to these internal controls and procedures in an efficient or timely manner and may discover deficiencies in existing systems and controls. Consequently, continued growth, if achieved, may place a strain on our operational infrastructure, which could have a material adverse effect on our financial condition and results of operations.
The Company faces competition from other financial institutions.
The banking and financial services business in our market area continues to be a highly competitive field and is becoming more competitive as a result of:
● | changes in regulations; |
● | changes in technology and product delivery systems; |
● | the accelerating pace of consolidation among financial services providers; and |
● | financial technology, or fintech, companies emerging in key areas of banking. |
It may be difficult for us to compete effectively in the market, and our results of operations could be adversely affected by the nature or pace of change in competition. We compete for loans, deposits and customers with various bank and non-bank financial services providers, many of which are much larger in total assets and capitalization, have greater access to capital markets, offer a broader array of financial services or, in the case of credit unions, do not pay federal income taxes. Our strategic planning efforts continue to focus on capitalizing on our strengths in local markets while working to identify opportunities for improvement to gain competitive advantages.
Federal Government spending and increase in monetary supply could adversely affect our business.
The banking and financial services business is negatively affected by increased federal government spending and increases in monetary supply. The increase in the balances of customers deposit accounts due to government stimulus programs and increase in the monetary supply puts a strain on the Company’s capital ratios. The increase in the money supply also contributes to inflation. Our business, financial condition and results of operations may be adversely affected by these changes if continued over a period of time.
The Company may be adversely affected by risks associated with completed and potential acquisitions.
We have in the past, and may in the future, acquire other financial institutions or bank offices when we believe such acquisitions support our business strategy. Acquisitions involve many risks including: (i) incurring time and expense associated with identifying, evaluating and negotiating potential acquisitions, resulting in management’s attention being diverted from operation of our existing business, (ii) the risk that the acquired business will not perform to our expectations, including a failure to realize anticipated synergies or costs savings, (iii) entering markets in which we have limited or no direct prior experience, (iv) difficulties or increased expenses associated with integrating the operations of the acquired business, (v) the potential for claims or unexpected liabilities arising out of the acquired business, and (vi) the potential loss of key employees or customers of the acquired business. There can be no assurance that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions we may undertake.
Current and future government regulations may increase the Company’s costs of doing business.
Current and future legislation and the policies established by federal and state regulatory authorities will affect our operations. We are subject to extensive supervision of, and examination by, federal and state regulatory authorities which may limit our growth and the return to our shareholders by restricting certain activities, such as:
● | the payment of dividends to our shareholders; |
● | the payment of dividends to the Company by the Banks; |
● | possible mergers with or acquisitions of or by other institutions; |
● | investment policies; |
● | loans and interest rates on loans; |
● | interest rates paid on deposits; |
● | expansion of branch offices; and/or |
● | the ability to provide or expand securities or trust services. |
The Dodd-Frank Act represented a comprehensive overhaul of the financial services industry within the United States and, among many other things, established the federal CFPB and required the CFPB and other federal agencies to implement many significant rules and regulations with which we must comply. Compliance with the law and regulations has resulted in additional costs, and not all the rules and regulations have been finalized.
We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that any changes may have on future business and earnings prospects, although the pace of the new and proposed regulations has slowed. The cost of compliance with future regulatory requirements may adversely affect our net income.
Severe weather, natural disasters, pandemics, acts of war or terrorism or other adverse external events could significantly impact our business.
Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The occurrence of any of the events in the future could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Risks related to the Company’s Stock
The Company may not pay dividends on its common stock in the future.
Holders of our common stock are entitled to receive only such dividends as our Board of Directors may declare out of funds legally available for such payments. However, our Board of Directors may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, we are a bank holding company, and our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. In addition, our ability to pay dividends depends primarily on our receipt of dividends from our Banks, the payment of which is subject to numerous limitations under federal and state banking laws, regulations and policies. See "Item 1. Business—Supervision and Regulation—Dividends." As a consequence of these various limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common stock. Any change in the level of our dividends or the suspension of the payment thereof could have a material adverse effect on the market price of our common stock.
Risk related to volatility of the Company’s stock.
The trading volume in our common stock on the NASDAQ Capital Market is relatively limited compared to those of companies with larger capitalization listed on the NASDAQ Capital Market, the NASDAQ Global Markets, the New York Stock Exchange or other consolidated reporting systems or stock exchanges. AConsequently, a change in the supply or demand for our common stock, or other events affecting our business, may have a more significant impact on the price of our stock than would be the case for more actively traded companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Risk Management and Strategy
Our information security program includes administrative, technical and physical safeguards and is designed to provide an appropriate level of protection to maintain the confidentiality, integrity and availability of our Company’s and our customers’ information. This includes protecting against known and evolving threats to the security of customer records and information, and against unauthorized access, compromise, or loss of customer records or information.
Our information security program is designed to continuously adapt to an evolving landscape of emerging threats and available technology. Through data gathering and evaluation of emerging threats from internal and external incidents and technology investments, security controls are regularly monitored and adjusted on an as needed basis. We have developed a data security strategy that is integrated within our overall risk management strategy and implemented through layers of controls embedded throughout our technology environment that establish multiple control points between threats and our assets. We test the effectiveness of our controls and data protection processes through internal and independent external audits and assessments, including regular penetration tests, vulnerability scans, disaster recovery tests and cyber exercises to simulate hacker attacks. Our information security program is supported by regular training of information technology employees and awareness training and activities for executives, directors, and employees companywide through which we communicate our information security policies, standards, processes and practices.
Further, our information security program is designed to provide oversight of third parties who store, process or have access to sensitive Company or customer data, and we require similar levels of protection from third-party service providers as are required for the Company. We maintain supplier risk assessment processes to identify risks associated with third-party service providers.
We employ business continuity, backup and disaster recovery procedures for systems that are used for storing, processing and transferring customer information, and we periodically test and validate our disaster recovery plans to validate our resilience capabilities. Additionally, we maintain insurance coverage that, subject to applicable terms and conditions, may cover certain aspects of cybersecurity and information risks. However, there can be no assurance that liabilities or losses we may incur will be covered under such policies or that the amount of insurance will be adequate.
Our information security program is designed and managed to be consistent with the framework and guidelines of the FFIEC Information Security IT Examination Handbook, FFIEC Business Continuity Planning Handbook and FFIEC Cybersecurity Assessment Tool. In general, the Company seeks to address cybersecurity risks through a comprehensive, cross-functional approach that is focused on confidentiality, security and availability of the information that the Company collects and stores by identifying, preventing, and mitigating cybersecurity threats and effectively responding to cyber threats when they occur. Along with periodically being examined by our regulators, the Company regularly engages external experts to audit, evaluate and validate our controls against these standard frameworks, and we adjust our cybersecurity policies, standards, processes and practices as necessary based on the information provided by these examinations, audits and evaluations.
Cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected the Company to date. While we are not currently aware of any cybersecurity threats that are reasonably likely to materially affect the Company there is no assurance that we will not be materially affected by such threats in the future. For additional information on our risks related to cybersecurity, see Item 1A, Risk Factors—Operational Risks.
Governance
Our Board of Directors and executive officers are responsible for oversight of our information technology framework, including cybersecurity, information security, information technology and business continuity. The Chief Information Officer (“CIO”) and other members of senior management report to the Board of Directors and executive officers at least annually and on an as needed basis. In the event of an immediate cyber threat to our business operations, the CIO would promptly initiate the Company’s incident response plan including notifying executive officers, Board of Directors and regulators.
While our Board of Directors provides oversight of our information technology environment, the ultimate responsibility for our processes for identifying, assessing and managing cybersecurity risks resides with management. The CIO, with assistance from internal and external resources, is responsible for the implementation and providing oversight to our organization and maintaining the appropriate level of expertise to manage and implement cybersecurity policies, programs and strategies. The CIO has served for over 30 years in information technology and various roles within the Company.
The Company's office is housed in the main office of First National located at 405 5th Street, Ames, Iowa and an office owned by the Company at 323 6th Street, Ames, Iowa. There is a lease agreement between the Company and First National. In addition to the main office owned by First National, First National conducts its business through seven full-service offices, the West Ames office, North Grand office, Ankeny office, West Glen office, Valley Junction office, Downtown Osceola office, and Jeffreys Drive office. The West Ames and North Grand offices are located in Ames, Iowa. The Ankeny office is located in Ankeny, Iowa. The West Glen office is located in West Des Moines, Iowa and is leased from the Company. The Valley Junction office is located in West Des Moines, Iowa. The Downtown Osceola and Jefferies Drive offices are located in Osceola, Iowa. A portion of the Ankeny and West Glen offices are leased to tenants for business purposes.
State Bank conducts its business from its main office located at 1025 Sixth Street, Nevada, Iowa.
Boone Bank conducts its business from its main office located at 716 Eighth Street, Boone, Iowa and from one additional office also located in Boone, Iowa.
Reliance Bank conducts its business from its main office located at 606 Broad Street, Story City, Iowa. Reliance also has a full-service office located in Garner, Iowa. A portion of the Story City office is leased to tenants for residential and business purposes.
United Bank conducts its business from its main office located at 2101 South Center Street, Marshalltown, Iowa and from a drive-up facility also located in Marshalltown, Iowa.
Iowa State Bank’s main office is located at 401 West Adams Street, Creston, Iowa. In addition to its main office, Iowa State Bank conducts its business through two full-service offices, the Highway 34 office and Lenox office. The Highway 34 office is located in Creston, Iowa.
All of the Bank offices are owned by the respective Banks, with the exception of First National’s West Glen office which is owned by the Company and leased to First National. All of the properties owned by the Banks are free of any mortgages. The West Glen office and Ames office owned by the Company isare subject to a $3.7$3.1 million mortgage.and $388 thousand mortgage, respectively.
The Banks are from time-to-time parties to various legal actions arising in the normalordinary course of business. The Company believes that there is no threatened or pending proceeding against the Company or the Banks, which, if determined adversely, would have a material adverse effect on the business or financial condition of the Company or the Banks.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On February 28, 2023,2024, the Company had approximately 249 shareholders of record and approximately 3,298 additional beneficial owners whose shares were held in nominee titles through brokerage or other accounts. The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “ATLO”. Trading in the Company’s common stock is, however, relatively limited. The closing price of the Company’s common stock was $24.22$18.46 on February 28, 2023.2024.
The Company declared aggregate annual cash dividends in 20222023 and 20212022 of approximately $9.7 million and $11.8 million, respectively, or $1.08 per share in 2022 and $1.29 per share in 2021. Dividends are typically declared in one quarter and then paid in the subsequent quarter. Beginning in July 2020 the dividends were declared and paid in the same quarter before returning to the previous practice in August 2021.share. In February 2023,2024, the Company declared a quarterly cash dividend of approximately $2.4 million or $0.27 per share, payable on May 15, 2023.2024.
The decision to declare cash dividends in the future and the amount thereof rests within the discretion of the Board of Directors of the Company and will be subject to, among other things, the future earnings, capital requirements and financial condition of the Company and certain regulatory restrictions imposed on the payment of dividends by the Banks. Such restrictions are discussed in greater detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources and in Note 15 (Regulatory Matters) to the Company’s financial statements included herein.
The Company does not maintain or sponsor any equity compensation plans covering the directors, its executives or employees of the Company or the Banks.
On November 14, 2022,8, 2023, the Board of Directors approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. This Stock Repurchase Plan replaced the previous Stock Repurchase Plan (approved in November 2021)2022) that expired in November 2022.2023. The Company did not purchase shares in 2023 and purchased 100,000 shares in 2022 and 30,580 shares in 2021 under the Stock Repurchase Plans that were in effect during 20222023 and 2021.2022.
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended December 31, 2022.2023.
Total | ||||||||||||||||
Number | Maximum | |||||||||||||||
of Shares | Number of | |||||||||||||||
Purchased as | Shares that | |||||||||||||||
Total | Part of | May Yet Be | ||||||||||||||
Number | Average | Publicly | Purchased | |||||||||||||
of Shares | Price Paid | Announced | Under | |||||||||||||
Period | Purchased | Per Share | Plans | The Plan | ||||||||||||
October 1, | - | $ | - | - | ||||||||||||
November 1, | - | $ | - | - | 100,000 | |||||||||||
December 1, | - | $ | - | - | 100,000 | |||||||||||
Total | - | - |
(1)
| The Stock Repurchase Plan adopted in November 2022 expired in November 2023 and no shares remain available for purchase under this plan as a result of the expiration. |
(2) | A successor Stock Repurchase Plan was approved and became effective on November 9, 2023 and authorized the purchase of up to 100,000 shares. This plan is scheduled to expire on November 13, 2024. No shares were purchased under this plan during November or December 2023. |
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following financial data of the Company for the three years ended December 31, 20202021 through 20222023 is derived from the Company's historical audited financial statements and related footnotes. The information set forth below should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this Annual Report.
Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
(dollars in thousands, except per share amounts) | 2022 | 2021 | 2020 | 2023 | 2022 | 2021 | ||||||||||||||||||
STATEMENT OF INCOME DATA | ||||||||||||||||||||||||
Interest income | $ | 61,553 | $ | 60,482 | $ | 62,941 | $ | 74,301 | $ | 61,553 | $ | 60,482 | ||||||||||||
Interest expense | 8,309 | 4,485 | 8,098 | 29,676 | 8,309 | 4,485 | ||||||||||||||||||
Net interest income | 53,244 | 55,997 | 54,843 | 44,625 | 53,244 | 55,997 | ||||||||||||||||||
Provision (credit) for loan losses | (874 | ) | (757 | ) | 5,681 | |||||||||||||||||||
Credit loss expense (benefit) | 789 | (874 | ) | (757 | ) | |||||||||||||||||||
Net interest income after provision (credit) for loan losses | 54,118 | 56,754 | 49,162 | |||||||||||||||||||||
Net interest income after credit loss expense (benefit) | 43,836 | 54,118 | 56,754 | |||||||||||||||||||||
Noninterest income | 9,687 | 10,537 | 10,620 | 9,215 | 9,687 | 10,537 | ||||||||||||||||||
Noninterest expense | 38,644 | 36,618 | 36,551 | 40,162 | 38,644 | 36,618 | ||||||||||||||||||
Income before provision for income tax | 25,161 | 30,673 | 23,231 | 12,889 | 25,161 | 30,673 | ||||||||||||||||||
Provision for income taxes | 5,868 | 6,760 | 4,381 | 2,072 | 5,868 | 6,760 | ||||||||||||||||||
Net income | $ | 19,293 | $ | 23,913 | $ | 18,850 | $ | 10,817 | $ | 19,293 | $ | 23,913 | ||||||||||||
DIVIDENDS AND EARNINGS PER SHARE DATA | ||||||||||||||||||||||||
Cash dividends declared* | $ | 9,739 | $ | 11,753 | $ | 6,859 | $ | 9,712 | $ | 9,739 | $ | 11,753 | ||||||||||||
Cash dividends declared per share* | $ | 1.08 | $ | 1.29 | $ | 0.75 | $ | 1.08 | $ | 1.08 | $ | 1.29 | ||||||||||||
Basic and diluted earnings per share | $ | 2.14 | $ | 2.62 | $ | 2.06 | $ | 1.20 | $ | 2.14 | $ | 2.62 | ||||||||||||
Weighted average shares outstanding | 9,033,410 | 9,114,379 | 9,148,244 | 8,992,167 | 9,033,410 | 9,114,379 | ||||||||||||||||||
BALANCE SHEET DATA | ||||||||||||||||||||||||
Total assets | $ | 2,134,926 | $ | 2,137,041 | $ | 1,975,648 | $ | 2,155,481 | $ | 2,134,926 | $ | 2,137,041 | ||||||||||||
Net loans | 1,226,011 | 1,144,108 | 1,129,505 | 1,277,812 | 1,226,011 | 1,144,108 | ||||||||||||||||||
Deposits | 1,897,957 | 1,878,019 | 1,716,446 | 1,811,831 | 1,897,957 | 1,878,019 | ||||||||||||||||||
Stockholders' equity | 149,098 | 207,778 | 209,486 | 165,788 | 149,098 | 207,778 | ||||||||||||||||||
Equity to assets ratio | 6.98 | % | 9.72 | % | 10.60 | % | 7.69 | % | 6.98 | % | 9.72 | % | ||||||||||||
FINANCIAL PERFORMANCE | ||||||||||||||||||||||||
Net income | $ | 19,293 | $ | 23,913 | $ | 18,850 | $ | 10,817 | $ | 19,293 | $ | 23,913 | ||||||||||||
Average assets | 2,134,947 | 2,082,705 | 1,866,188 | 2,140,034 | 2,134,947 | 2,082,705 | ||||||||||||||||||
Average stockholders' equity | 168,752 | 209,135 | 198,880 | 153,530 | 168,752 | 209,135 | ||||||||||||||||||
Return on assets (net income divided by average assets) | 0.90 | % | 1.15 | % | 1.01 | % | 0.51 | % | 0.90 | % | 1.15 | % | ||||||||||||
Return on equity (net income divided by average equity) | 11.43 | % | 11.43 | % | 9.48 | % | 7.05 | % | 11.43 | % | 11.43 | % | ||||||||||||
Net interest margin (net interest income divided by average earning assets)** | 2.55 | % | 2.83 | % | 3.13 | % | 2.20 | % | 2.62 | % | 2.83 | % | ||||||||||||
Efficiency ratio (noninterest expense divided by noninterest income plus net interest income) | 61.41 | % | 55.04 | % | 55.83 | % | 74.60 | % | 61.41 | % | 55.04 | % | ||||||||||||
Dividend payout ratio (dividends per share divided by net income per share)* | 50.47 | % | 49.24 | % | 36.41 | % | 90.00 | % | 50.47 | % | 49.24 | % | ||||||||||||
Dividend yield (dividends per share divided by closing year-end market price)* | 4.57 | % | 5.27 | % | 3.12 | % | 5.06 | % | 4.57 | % | 5.27 | % | ||||||||||||
Equity to assets ratio (average equity divided by average assets) | 7.90 | % | 10.04 | % | 10.66 | % | 7.17 | % | 7.90 | % | 10.04 | % |
| |
|
* Dividends are typically declared in one quarter and then paid in the subsequent quarter. Beginning in July 2020 the dividends were declared and paid in the same quarter before returning to the previous practice in August 2021.
** See page 32 for further discussion of this Non-GAAP financial measure.
The following discussion is provided for the consolidated operations of the Company and its Banks. The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.
The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes, including loans, deposits and wealth management services. Some Banks also offer investment services through a third-party broker-dealer. The Company employs 1924 individuals to assist the Banks with financial reporting, human resources, marketing, audit, compliance, technology systems, property appraisals, training and the coordination of management activities, in addition to 247243 full-time equivalent individuals employed by the Banks.
The Company’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision-making authority to provide customers with prompt response times and flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through the creation of a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to improve profitability while enabling the Banks to offer more competitive loan and deposit rates.
The principal sources of Company revenues and cash flows are: (i) interest and fees earned on loans made or held by the Company and Banks; (ii) interest on investments, primarily on bonds, held by the Banks; (iii) fees on wealth management services; (iv) service charges on deposit accounts maintained at the Banks; (v) merchant and card fees; (vi) gain on the sale of loans held for sale; and (vii) securities gains. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing costs primarily associated with maintaining the Banks’ loan and deposit functions; (iv) occupancy expenses for maintaining the Banks’ facilities; (v) professional fees; and (vi) business development. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposit accounts and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
The Company reported net income of $10.8 million for the year ended December 31, 2023 compared to $19.3 million for the year ended December 31, 2022 compared to $23.9 million for the year ended December 31, 2021.2022. This represents a decrease in net income of 19.3%44% when comparing 20222023 with 2021.2022. The decrease in earnings in 20222023 from 20212022 is primarily the result of higher interest expense on deposits and fewer Paycheck Protection Program (“PPP”) fees recognized into income,other borrowed funds and an increase in credit loss expense, offset in part by an increase in interest income on loans and taxable securities.loans. Earnings per share for 20222023 were $2.14$1.20 compared to $2.62$2.14 in 2021.2022. All six Banks demonstrated profitable operations during 20222023 and 2021.2022.
The Company’s return on average equity for 2023 was 7.05% compared to 11.43% in both 2022 and 2021. The return on average equity stayed the same due to a reduction in both earnings and equity.2022. The return on average assets for 20222023 was 0.90%0.51% compared to 1.15%0.90% in 2021.2022. The decrease in return on average equity and return on average assets when comparing 20222023 to 20212022 was primarily a result of a reduction in earnings.
The following discussion will provide a summary review of important items relating to:
● | Challenges, Risks and Uncertainties |
|
|
|
|
● | Critical Accounting Policies |
● | Non-GAAP Financial Measures |
● | Income Statement Review |
● | Balance Sheet Review |
● | Asset Quality Review and Credit Risk Management |
● | Liquidity and Capital Resources |
● | Interest Rate Risk |
● | Inflation |
● | Forward-Looking Statements and Business Risks |
Challenges, Risks and Uncertainties
Management has identified certain events or circumstances that have the potential to negatively impact the Company’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges.
● | If short-term interest rates remain elevated or continue to increase over a relatively short period of time due to |
● | If market interest rates in the three to five year term remain at low levels as compared to the short term interest rates, the interest rate environment may present a challenge to the Company. The Company’s earning assets (typically priced at market interest rates in the three to five year range) will reprice at lower interest rates, but the deposits generally reprice at short term interest rates, therefore the net interest income may decrease. Management believes Bank earning assets currently have the appropriate maturity and repricing characteristics to optimize earnings and the Banks’ interest rate risk positions. |
● | The agricultural |
The current economic environment, characterized by increasingelevated short-term interest rates in response to significant inflationary pressures in the economy and the potential for a period of slower or negative economic growth resulting from efforts to dampen economic activity, has heightened the level of challenges, risks and uncertainties facing our business, including the following:
● | Market interest rates |
● | We may experience a potential slowdown in demand for our products and services, including the demand for traditional loans, although we believe the decline may be offset, in whole or in part, due to inflation and higher interest rates; |
● | We may experience an increase in risk of delinquencies, defaults and foreclosures, as well as declining collateral values and further impairment of the ability of our borrowers to repay their loans, all of which may result in additional credit charges and other losses in our loan portfolio; |
● | Goodwill is currently evaluated for impairment quarterly and goodwill has been determined to not be impaired as of December 31, |
● | We have experienced a decline in the fair value of our investment portfolio as a result of the increasing interest rate environment. This trend may continue in the near term, which could result in |
● | In meeting our objective to maintain our capital levels and liquidity position, our Board of Directors could reduce, or determine to altogether forego, payment of future dividends in order to maintain and/or strengthen our capital and liquidity position. |
Key Performance Indicators
Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (FDIC) and are derived from 4,258 community banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter to quarter against the industry as a whole.
Selected Indicators for the Company and the Industry
Years Ended December 31, | ||||||||||||||||||||||||
2022 | 2021 | 2020 | ||||||||||||||||||||||
Company | Industry | Company | Industry | Company | Industry | |||||||||||||||||||
Return on assets | 0.90 | % | 1.15 | % | 1.15 | % | 1.25 | % | 1.01 | % | 1.09 | % | ||||||||||||
Return on equity | 11.43 | % | 12.01 | % | 11.43 | % | 11.61 | % | 9.48 | % | 9.72 | % | ||||||||||||
Net interest margin* | 2.55 | % | 3.45 | % | 2.83 | % | 3.27 | % | 3.13 | % | 3.39 | % | ||||||||||||
Efficiency ratio | 61.41 | % | 61.36 | % | 55.04 | % | 61.42 | % | 55.83 | % | 62.34 | % | ||||||||||||
Capital ratio | 7.90 | % | 10.51 | % | 10.04 | % | 10.16 | % | 10.66 | % | 10.32 | % |
|
Key performance indicators include:
|
|
This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company’s return on assets ratio lower than the industry average for 2022.
|
|
This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company’s return on equity ratio was lower than the industry average for 2022.
|
|
This ratio is calculated by dividing tax-equivalent net interest income by average earning assets. Earning assets consist primarily of loans and investments that earn interest. This ratio is used to measure how well the Company maintains interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposit accounts and other borrowings. The Company’s net interest margin was lower than the industry average for 2022.
|
|
This ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was similar to the industry average for 2022.
|
|
The capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio was lower than the industry average for 2022. The Company’s capital ratio for 2022 was lower than 2021 due to unrealized losses on the investment portfolio. Unrealized losses on the investment portfolio are excluded from regulatory capital. The Company’s tier 1 to average assets capital ratio was 9.1% and 9.0% as of December 31, 2022 and 2021, respectively.
Critical Accounting Policies
The discussion contained in this Item 7 and other disclosures included within this Annual Report are based on the Company’s audited consolidated financial statements which appear in Item 8 of this Annual Report. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loancredit losses, the fair value determination of investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.
Allowance for LoanCredit Losses
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the allowance for credit losses use the current expected credit loss (CECL) methodology. The following is a discussion of the methodologies used by the Company both pre- and post-adoption of ASC 326.
Post-ASC 326 CECL Adoption:
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 evaluations. If it is determined that market conditions, changes to the property, changes in intended use of the property or other factors indicate that an appraisal or evaluation is no longer reliable, we require a validation of the appraisal or evaluation to assess whether a change in collateral value requires an additional adjustment to carrying value. If the appraisal or evaluation cannot be validated, a new appraisal or evaluation will be obtained. When we receive an updated appraisal or evaluation, 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 as 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 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 using historical loss rate analysis for all loan pools.
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 loss rates and expected conditions over the remaining lives of the loans in the portfolio related to:
● | Lending policies and procedures, including changes in underwriting standards and collections; |
● | International, national, regional and local economic conditions; |
● | The nature and volume of the portfolio and terms of loans; |
● | The experience, depth, and ability of lending management; |
● | The volume and severity of past due loans and other similar conditions; |
● | The quality of the organization’s loan review system; |
● | The value of underlying collateral for collateral-dependent loans; |
● | The existence and effect of any concentrations of credit and changes in the levels of such concentrations; and |
● | The effect of other external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. |
Such factors are used to adjust the historical loss rates so that they reflect management’s 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, we reduce, on a straight-line basis over one year, the adjustments so that the model reverts back to the historical loss rates.
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 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 4 - Loans Receivable and Credit Disclosures in the notes to the financial statements of this Annual Report.
Pre-ASC 326 CECL Adoption:
The allowance for credit losses is established through a provision for loan lossescredit loss expense that is treated as an expense andwhich would be charged against earnings. Loans are charged against the allowance for loancredit losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loancredit losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loancredit losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, including economic disruption, high inflation levels, and rising interest rates, it is at least reasonably possible that changechanges in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
For further discussion concerning the allowance for loancredit losses and the process of establishing specific reserves, see the section of this Annual Report entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for LoanCredit Losses”.
The Company is currently finalizing the CECL model and upon adoption of ASU 2016-13 (CECL) in the first quarter of 2023 anticipates an increase to the allowance for credit losses for loans and unfunded commitments liability of approximately $600 thousand to $1.0 million. See Note 1 to the Company's Consolidated Financial Statements for further discussion.
Fair Value of Investment Securities
The Company’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary areevaluated for credit losses and reflected in earnings as realized losses.a credit loss expense. In estimating other-than-temporary impairmentcredit losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3)(2) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, it is at least reasonably possible that changes in management’s assessment of other-than-temporary impairment willcredit losses may occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
Goodwill
Goodwill arose in connection with four acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. The Company completed a quantitative assessment of goodwill as of October 1, 20222023 which indicated that goodwill was not impaired. Subsequently, the Company determined there were no adverse changes in criteria and key considerations to the previous assessment. Accordingly, the Company concluded that there is no impairment of goodwill as of December 31, 2022.2023. Goodwill may be impaired in the future if actual future test results differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.
Non-GAAP Financial Measures
This Annual Report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures are widely used in the financial institutions industry and provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP (dollars in thousands).
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP: | ||||||||
2022 | 2021 | |||||||
Net interest income (GAAP) | $ | 53,244 | $ | 55,997 | ||||
Tax-equivalent adjustment (1) | 690 | 823 | ||||||
Net interest income on an FTE basis (non-GAAP) | 53,934 | 56,820 | ||||||
Average interest-earning assets | $ | 2,114,234 | $ | 2,008,217 | ||||
Net interest margin on an FTE basis (non-GAAP) | 2.55 | % | 2.83 | % | ||||
Reconciliation of net interest income and annualized net interest spread on an FTE basis to GAAP: |
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
2022 | 2021 | 2023 | 2022 | |||||||||||||
Net interest income (GAAP) | $ | 53,244 | $ | 55,997 | $ | 44,625 | $ | 53,244 | ||||||||
Tax-equivalent adjustment (1) | 690 | 823 | 609 | 690 | ||||||||||||
Net interest income on an FTE basis (non-GAAP) | 53,934 | 56,820 | 45,234 | 53,934 | ||||||||||||
Average assets | $ | 2,134,947 | $ | 2,082,705 | ||||||||||||
Net interest spread on an FTE basis (non-GAAP) | 2.53 | % | 2.73 | % | ||||||||||||
Average interest-earning assets | $ | 2,059,506 | $ | 2,060,959 | ||||||||||||
Net interest margin on an FTE basis (non-GAAP) | 2.20 | % | 2.62 | % |
(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent for the years ended December 31, 2023 and 2022, |
Income Statement Review
The following highlights a comparative discussion of the major components of net income and their impact for the last two years.
Average Balances and Interest Rates
The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest-bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.detail (dollars in thousands).
ASSETS
2022 | 2021 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||||||||||||||||||||
balance | expense | rate | balance | expense | rate | balance | expense | rate | balance | expense | rate | |||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 72,844 | $ | 3,381 | 4.64 | % | $ | 105,265 | $ | 7,467 | 7.09 | % | $ | 85,914 | $ | 4,888 | 5.69 | % | $ | 72,844 | $ | 3,381 | 4.64 | % | ||||||||||||||||||||||||
Agricultural | 95,029 | 4,576 | 4.82 | % | 96,774 | 3,993 | 4.13 | % | 93,813 | 6,396 | 6.82 | % | 95,029 | 4,576 | 4.82 | % | ||||||||||||||||||||||||||||||||
Real estate | 985,084 | 37,342 | 3.79 | % | 924,905 | 35,697 | 3.86 | % | 1,047,109 | 44,792 | 4.28 | % | 985,084 | 37,342 | 3.79 | % | ||||||||||||||||||||||||||||||||
Consumer and other | 16,200 | 657 | 4.06 | % | 14,806 | 672 | 4.54 | % | 16,403 | 734 | 4.47 | % | 16,200 | 657 | 4.06 | % | ||||||||||||||||||||||||||||||||
Total loans (including fees) | 1,169,157 | 45,956 | 3.93 | % | 1,141,750 | 47,829 | 4.19 | % | 1,243,239 | 56,810 | 4.57 | % | 1,169,157 | 45,956 | 3.93 | % | ||||||||||||||||||||||||||||||||
Investment securities | ||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 742,675 | 12,101 | 1.63 | % | 562,568 | 8,861 | 1.58 | % | 654,718 | 12,674 | 1.94 | % | 693,636 | 12,101 | 1.74 | % | ||||||||||||||||||||||||||||||||
Tax-exempt (2) | 134,710 | 3,285 | 2.44 | % | 153,421 | 3,918 | 2.55 | % | ||||||||||||||||||||||||||||||||||||||||
Tax-exempt (3) | 111,401 | 2,901 | 2.60 | % | 130,474 | 3,285 | 2.52 | % | ||||||||||||||||||||||||||||||||||||||||
Total investment securities | 877,385 | 15,386 | 1.75 | % | 715,989 | 12,779 | 1.78 | % | 766,119 | 15,575 | 2.03 | % | 824,110 | 15,386 | 1.87 | % | ||||||||||||||||||||||||||||||||
Other interest-earning assets | 67,692 | 901 | 1.33 | % | 150,478 | 697 | 0.46 | % | 50,148 | 2,525 | 5.04 | % | 67,692 | 901 | 1.33 | % | ||||||||||||||||||||||||||||||||
Total interest-earning assets | 2,114,234 | $ | 62,243 | 2.94 | % | 2,008,217 | $ | 61,305 | 3.05 | % | 2,059,506 | $ | 74,910 | 3.64 | % | 2,060,959 | $ | 62,243 | 3.02 | % | ||||||||||||||||||||||||||||
Noninterest-earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 23,390 | 26,515 | 21,236 | 23,390 | ||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net | 18,213 | 16,971 | 20,904 | 18,213 | ||||||||||||||||||||||||||||||||||||||||||||
Other, less allowance for loan losses | (20,890 | ) | 31,002 | |||||||||||||||||||||||||||||||||||||||||||||
Other, less allowance for loan losses (2) | 38,388 | 32,385 | ||||||||||||||||||||||||||||||||||||||||||||||
Total noninterest-earning assets | 20,713 | 74,488 | 80,528 | 73,988 | ||||||||||||||||||||||||||||||||||||||||||||
TOTAL ASSETS | $ | 2,134,947 | $ | 2,082,705 | $ | 2,140,034 | $ | 2,134,947 |
(1) Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included. (2) Average investment balances include unrealized gains and losses. In reports prior to December 31, 2023 investment unrealized gains and losses were included in other noninterest-earning assets. (3) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 21% for the years ended December 31, 2023 and 2022. |
|
Average Balances and Interest Rates (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||||||||||||||||||||
balance | expense | rate | balance | expense | rate | balance | expense | rate | balance | expense | rate | |||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||||||||||||||||||
Savings, interest-bearing checking and money markets accounts | $ | 1,297,503 | $ | 5,498 | 0.42 | % | $ | 1,212,935 | $ | 1,908 | 0.16 | % | $ | 1,212,630 | $ | 16,794 | 1.38 | % | $ | 1,297,503 | $ | 5,498 | 0.42 | % | ||||||||||||||||||||||||
Time deposits | 206,401 | 1,818 | 0.88 | % | 234,626 | 2,434 | 1.04 | % | 255,434 | 7,677 | 3.01 | % | 206,401 | 1,818 | 0.88 | % | ||||||||||||||||||||||||||||||||
Total deposits | 1,503,904 | 7,316 | 0.49 | % | 1,447,561 | 4,342 | 0.30 | % | 1,468,064 | 24,471 | 1.67 | % | 1,503,904 | 7,316 | 0.49 | % | ||||||||||||||||||||||||||||||||
Other borrowed funds | 55,874 | 993 | 1.78 | % | 40,705 | 143 | 0.35 | % | 132,918 | 5,205 | 3.92 | % | 55,874 | 993 | 1.78 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 1,559,778 | 8,309 | 0.53 | % | 1,488,266 | 4,485 | 0.30 | % | 1,600,982 | 29,676 | 1.85 | % | 1,559,778 | 8,309 | 0.53 | % | ||||||||||||||||||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing checking | 397,436 | 375,167 | 373,704 | 397,436 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 8,981 | 10,137 | 11,818 | 8,981 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders' equity | 168,752 | 209,135 | 153,530 | 168,752 | ||||||||||||||||||||||||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,134,947 | $ | 2,082,705 | $ | 2,140,034 | $ | 2,134,947 | ||||||||||||||||||||||||||||||||||||||||
Net interest income (FTE) | $ | 53,934 | 2.55 | % | $ | 56,820 | 2.83 | % | $ | 45,234 | $ | 53,934 | ||||||||||||||||||||||||||||||||||||
Spread Analysis (FTE)(3) | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest income/average assets | $ | 62,243 | 2.92 | % | $ | 61,305 | 2.94 | % | ||||||||||||||||||||||||||||||||||||||||
Interest expense/average assets | 8,309 | 0.39 | % | 4,485 | 0.22 | % | ||||||||||||||||||||||||||||||||||||||||||
Net interest income/average assets | 53,934 | 2.53 | % | 56,820 | 2.73 | % | ||||||||||||||||||||||||||||||||||||||||||
Net interest spread (FTE) | 1.79 | % | 2.49 | % | ||||||||||||||||||||||||||||||||||||||||||||
Net interest margin (FTE)(4) | 2.20 | % | 2.62 | % |
(4) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report. |
Rate and Volume Analysis
The rate and volume analysis is used to determine how much of the change in interest income or expense is the result of a change in volume or a change in interest rate. For example, real estate loan interest income increased $1.6$7.4 million in 20222023 compared to 2021.2022. Increased volume of real estate loans increased interest income in 20222023 by $2.3$2.4 million and lowerhigher interest rates decreasedincreased interest income in 20222023 by $654 thousand.$5.0 million.
The following table sets forth, on a tax-equivalent basis, a summary of the changes in net interest income resulting from changes in volume and rates (in thousands).
2022 Compared to 2021 | 2023 Compared to 2022 | |||||||||||||||||||||||
Volume | Rate | Total (1) | Volume | Rate | Total (1) | |||||||||||||||||||
Interest income | ||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||
Commercial | $ | (1,926 | ) | $ | (2,160 | ) | $ | (4,086 | ) | $ | 666 | $ | 841 | $ | 1,507 | |||||||||
Agricultural | (73 | ) | 656 | 583 | (60 | ) | 1,880 | 1,820 | ||||||||||||||||
Real estate | 2,299 | (654 | ) | 1,645 | 2,440 | 5,010 | 7,450 | |||||||||||||||||
Consumer and other | 60 | (75 | ) | (15 | ) | 8 | 69 | 77 | ||||||||||||||||
Total loans (including fees) | 360 | (2,233 | ) | (1,873 | ) | 3,054 | 7,800 | 10,854 | ||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 2,949 | 291 | 3,240 | (722 | ) | 1,295 | 573 | |||||||||||||||||
Tax-exempt | (467 | ) | (166 | ) | (633 | ) | (487 | ) | 103 | (384 | ) | |||||||||||||
Total investment securities | 2,482 | 125 | 2,607 | (1,209 | ) | 1,398 | 189 | |||||||||||||||||
Other interest and dividend income | (544 | ) | 748 | 204 | (289 | ) | 1,913 | 1,624 | ||||||||||||||||
Total interest-earning assets | 2,298 | (1,360 | ) | 938 | 1,556 | 11,111 | 12,667 | |||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
Savings, interest-bearing checking and money market | 147 | 3,443 | 3,590 | (378 | ) | 11,674 | 11,296 | |||||||||||||||||
Time deposits | (271 | ) | (345 | ) | (616 | ) | 523 | 5,336 | 5,859 | |||||||||||||||
Total deposits | (124 | ) | 3,098 | 2,974 | 145 | 17,010 | 17,155 | |||||||||||||||||
Other borrowed funds | 71 | 779 | 850 | 2,250 | 1,962 | 4,212 | ||||||||||||||||||
Total interest-bearing liabilities | (53 | ) | 3,877 | 3,824 | 2,395 | 18,972 | 21,367 | |||||||||||||||||
Net interest income-earning assets | $ | 2,351 | $ | (5,237 | ) | $ | (2,886 | ) | $ | (839 | ) | $ | (7,861 | ) | $ | (8,700 | ) |
(1) | The change in interest due to both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the absolute value of the change in each. |
Net Interest Income
The Company’s largest contributing component to net income is net interest income, which is the difference between interest earned on earning assets and interest paid on interest-bearing liabilities. The volume of and yields earned on earning assets and the volume of and the rates paid on interest-bearing liabilities determine net interest income. Refer to the tables preceding this paragraph for additional detail. Interest earned and interest paid is also affected by general economic conditions, particularly changes in market interest rates, by government policies and the action of regulatory authorities. Net interest income divided by average earning assets is referred to as net interest margin. For the years December 31, 20222023 and 2021,2022, the Company's non-GAAP net interest margin was 2.55%2.20% and 2.83%2.62%, respectively, computed on an FTE basis. For further information, refer to the Non-GAAP Financial Measures section of this report.
Net interest income during 2023 and 2022 and 2021 totaled $53.2$44.6 million and $56.0$53.2 million, respectively, representing a 4.9%15.9% decrease in 20222023 compared to 2021.2022. Net interest income decreased in 20222023 as compared to 20212022 due primarily to fewer PPP fees recognized into income and an increase in market interest rates on core deposits. In addition to interest incomedeposits in excess of rate increases on PPP loans, fee income of $218 thousand and $4.3 million was recognized into interest income for the years ended December 31, 2022 and 2021, respectively.interest-earning assets.
The high level of competition in the local markets willmay continue to put downward pressure on the net interest margin of the Company. Currently, the Company’s primary market in Ames, Iowa, has fourteenfifteen banks, fivefour credit unions and several other financial investment companies. Multiple banks are also located in the Company’s other market areas in central, north-central and south-central Iowa creating similarly competitive environments.
Provision (Credit) for Loan LossesCredit Loss Expense (Benefit)
The provision (credit) for loan lossescredit loss expense reflects management's judgment of the expense to be recognized in order to maintain an adequate allowance for loancredit losses. The Company’s credit for loan lossesloss expense for the year ended December 31, 20222023 was ($874)$789 thousand compared to a credit for loan lossesloss benefit of ($757)874) thousand for the previous year. Net loan charge-offs totaled $50$213 thousand for the year ended December 31, 20222023 compared to net loan recoveriescharge-offs of $163$50 thousand for the previous year. The credit forloss expense in 2023 was primarily due to growth in the loan lossesportfolio and charge-offs in the agriculture loan portfolio. The credit loss benefit in 2022 was primarily due to a reduction in specific reserves and offset in part by growth in the loan portfolio. The credit for loan losses in 2021 was primarily due to loan recoveries, a reduction in specific reserves,Loans classified as substandard and improving economic conditions. Classified loans,substandard-impaired, excluding 1-4 family and consumer loans, decreased $24.7$7.5 million to $36.6$29.0 million in 20222023 primarily due to improving credit quality. Refer to the “Asset Quality Review and Credit Risk Management” discussion for additional details with regard to loancredit loss provision expense.
Management believes the allowance for loan losses is adequate to absorb probable losses in the current portfolio. This statement is based upon management's continuing evaluation of inherent risks in the current loan portfolio, current levels of classified assets and general economic factors. The Company will continue to monitor the allowance and make future adjustments to the allowance as conditions dictate. Due to potential changes in conditions and upon CECL adoption as described in Note 1, it is at least reasonably possible that change in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
Noninterest Income and Expense
Total noninterest income is comprised primarily of fee-based revenues from wealth management and trust services, bank-related service charges on deposit activities, net securities gains, merchant and card fees related to electronic processing of merchant and cash transactions and gain on the sale of loans held for sale.
Noninterest income during the years ended 2023 and 2022 and 2021 totaled $9.7$9.2 million and $10.5$9.7 million, respectively. The decrease in noninterest income in 20222023 compared to 20212022 is primarily due to fewer gains on sale of residential loans held for sale as refinancing volume has slowed and offset in part by an increasea decrease in wealth management income primarily due to growtha decline in assets under management and new account relationships.estate fees.
Noninterest expense for the Company consists of all operating expenses other than interest expense on deposits and other borrowed funds. Salaries and employee benefits are the largest component of the Company’s operating expenses and comprise 59% and 61% of noninterest expense in 20222023 and 2021, respectively.2022.
Noninterest expense during the years ended 2023 and 2022 and 2021 totaled $38.6$40.2 million and $36.6$38.6 million, respectively. The increase in noninterest expense is primarily due to data processing costs as a resultwire fraud loss of additional investments$523 thousand in technology2023, higher FDIC assessments and normal increases in salaries and benefits. The percentage of noninterest expense to average assets was 1.81%1.88% in 2022,2023, compared to 1.76%1.81% during 2021.2022.
Provision for Income Taxes
The provision for income taxes for 2023 and 2022 and 2021 was $5.9$2.1 million and $6.8$5.9 million, respectively. This amount represents an effective tax rate of 23.3%16.1% and 22.0%23.3%, respectively. The Company's federal income tax rate was 21% for the years ended December 31, 20222023 and 2021.2022. The increasedecrease in the effectiveincome tax expense and higher than expected tax rate in 2022 was due to a non-recurring $780 thousand adjustment to deferred taxes for the reduction in future Iowa bank franchise tax rates enacted in the second quarter of 2022. In 2021, the Company established a deferred tax valuation allowance of $396 thousand on a state tax net operating loss at the holding company. The effectivelower than expected tax rate in both years were also impacted by tax exempt2023 was primarily due to a higher proportion of tax-exempt interest income and New Markets Tax Credits.Credits to pretax income as compared to 2022.
Balance Sheet Review
The Company’s assets are comprised primarily of loans and investment securities. The majority of average earning asset maturity or repricing dates are generally five years or less for the combined portfolios as the assets are funded for the most part by short term deposits with either immediate availability or less than one-year average maturities. This exposes the Company to risk regarding changes in interest rates.
Total assets wereincreased to $2.16 billion in 2023 compared to $2.13 billion in 2022, and approximately the same in 2021.or 1.0%. The largest fluctuations in assets during 2022increase was primarily due to higher unrealized losses oninterest-bearing deposit and loan growth funded by other borrowings. The increase was offset in part by a decrease in securities available-for-sale due primarily to maturities in the investment portfolio as market interest rates have risen. In the same time period, increases in loan volume and purchases of investments were funded by federal funds sold and an increase in deposits and advances.portfolio.
Loan Portfolio
Net loans as of December 31, 20222023 totaled $1.23$1.28 billion, an increase of 7.2%4.2% from the $1.14$1.23 billion as of December 31, 2021.2022. Loans increased primarily due to increases in the 1-4 familycommercial operating, construction and commercial real estatemulti-family loan portfolios. Loans are the primary contributor to the Company’s revenues and cash flows. The average yield on loans was 218254 and 241206 basis points higher in 20222023 and 2021,2022, respectively, in comparison to the average tax-equivalent investment portfolio yields.
Types of Loans
The Company's loan portfolio consists of real estate, commercial, agricultural and consumer loans. As of December 31, 2022,2023, gross loans totaled approximately $1.24$1.29 billion, which equals approximately 65.4%71.4% of total deposits and 58.1%60.0% of total assets. The Iowa State Average Report (consisting of 246237 banks in the State of Iowa) loan to deposit ratio as of December 31, 20222023 was 72%77%. As of December 31, 2022,2023, the majority of the loans were originated directly by the Banks to borrowers within the Banks’ principal market areas. There are no foreign loans outstanding during the years presented.
Real estate loans include various types of loans for which the Banks hold real property as collateral and consist of loans primarily on commercial, agricultural, and multifamily properties and single-family residences. Real estate loans typically have fixed rates for up to five years, with the Company’s loan policy permitting a maximum fixed rate maturity of up to 15 years. The majority of construction loan volume is provided to contractors to construct 1-4 family residence and commercial buildings. The Banks also originate residential real estate loans for sale to the secondary market for a fee.
Commercial loans consist primarily of loans to businesses for various purposes, including revolving lines to finance current operations, floor-plans, inventory and accounts receivable; capital expenditure loans to finance equipment and other fixed assets; and letters of credit. These loans generally have short maturities of less than five years, have either adjustable or fixed rates and are unsecured or secured by inventory, accounts receivable, equipment and/or real estate.
Agricultural loans play an important part in the Banks’ loan portfolios. Iowa is a major agricultural state and is a national leader in both grain and livestock production. The Banks play a significant role in their communities in financing operating, livestock and real estate activities for area producers.
Consumer loans include loans extended to individuals for household, family and other personal expenditures not secured by real estate. Most of the Banks’ consumer lending is for vehicles, consolidation of personal debts and home improvements.
The interest rates charged on loans vary with the degree of risk and the amount and maturity terms of the loan. Competitive pressures, market interest rates, the availability of funds and government regulation further influence the rate charged on a loan. The Banks follow a loan policy, which has been approved by both the board of directors of the Company and the Banks and is overseen by both Company and Bank management. These policies establish lending limits, review and grading criteria and other guidelines such as loan administration and allowance for loancredit losses. Loans are approved by the Banks’ board of directors and/or designated officers in accordance with respective guidelines and underwriting policies of the Company. Credit limits generally vary according to the type of loan and the individual loan officer’s experience. Loans to any one borrower are limited by applicable state and federal banking laws.
Maturities and Sensitivities of Loans to Changes in Interest Rates as of December 31, 20222023
The contractual maturities of the Company's loan portfolio are as shown below. Actual maturities may differ from contractual maturities because individual borrowers may have the right to prepay loans with or without prepayment penalties (in thousands).
After one | After five | After one | After five | |||||||||||||||||||||||||||||||||||||
year but | years but | year but | years but | |||||||||||||||||||||||||||||||||||||
Within | within | within | After | Within | within | within | After | |||||||||||||||||||||||||||||||||
one year | five years | 15 years | 15 years | Total | one year | five years | 15 years | 15 years | Total | |||||||||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||||||||||||||||||
Construction | $ | 28,237 | $ | 13,304 | $ | 5,634 | $ | 4,054 | $ | 51,229 | $ | 32,992 | $ | 13,120 | $ | 16,391 | $ | 547 | $ | 63,050 | ||||||||||||||||||||
1-4 family residential | 9,075 | 118,036 | 116,875 | 41,059 | 285,045 | 9,522 | 109,744 | 123,169 | 46,969 | 289,404 | ||||||||||||||||||||||||||||||
Multi-family | 9,610 | 153,050 | 15,802 | 17,074 | 195,536 | |||||||||||||||||||||||||||||||||||
Commercial | 16,759 | 336,389 | 99,197 | 86,708 | 539,053 | 24,489 | 210,558 | 68,267 | 55,952 | 359,266 | ||||||||||||||||||||||||||||||
Agricultural | 4,562 | 25,131 | 55,614 | 74,112 | 159,419 | 5,787 | 27,612 | 51,857 | 76,261 | 161,517 | ||||||||||||||||||||||||||||||
Commercial | 28,659 | 32,898 | 14,568 | 1,015 | 77,140 | 31,390 | 36,138 | 21,156 | 1,045 | 89,729 | ||||||||||||||||||||||||||||||
Agricultural | 79,830 | 29,768 | 3,261 | 405 | 113,264 | 86,797 | 29,002 | 2,956 | 381 | 119,136 | ||||||||||||||||||||||||||||||
Consumer and other | 1,629 | 8,526 | 5,905 | 110 | 16,170 | 1,465 | 9,221 | 5,749 | 105 | 16,540 | ||||||||||||||||||||||||||||||
Total loans | $ | 168,751 | $ | 564,052 | $ | 301,054 | $ | 207,463 | $ | 1,241,320 | $ | 202,052 | $ | 588,445 | $ | 305,347 | $ | 198,334 | $ | 1,294,178 |
The following table shows the contractual maturities after one year of the Company’s loan portfolio by fixed- and variable-rate loans as of December 31, 20222023 (in thousands):
After one | After five | |||||||||||
year but | years but | |||||||||||
within | within | After | ||||||||||
five years | 15 years | 15 years | ||||||||||
Fixed-rate loans | ||||||||||||
Real Estate | ||||||||||||
Construction | $ | 8,455 | $ | 3,612 | $ | 2,044 | ||||||
1-4 family residential | 113,518 | 97,366 | 2,378 | |||||||||
Commercial | 331,784 | 70,322 | 81 | |||||||||
Agricultural | 23,143 | 21,738 | 937 | |||||||||
Commercial | 30,403 | 9,940 | - | |||||||||
Agricultural | 27,225 | 2,650 | 405 | |||||||||
Consumer and other | 8,170 | 5,903 | 10 | |||||||||
Total fixed-rate loans | 542,698 | 211,531 | 5,855 | |||||||||
Variable-rate loans | ||||||||||||
Real Estate | ||||||||||||
Construction | 4,849 | 2,022 | 2,010 | |||||||||
1-4 family residential | 4,518 | 19,509 | 38,681 | |||||||||
Commercial | 4,605 | 28,875 | 86,627 | |||||||||
Agricultural | 1,988 | 33,876 | 73,175 | |||||||||
Commercial | 2,495 | 4,628 | 1,015 | |||||||||
Agricultural | 2,543 | 611 | - | |||||||||
Consumer and other | 356 | 2 | 100 | |||||||||
Total variable-rate loans | 21,354 | 89,523 | 201,608 | |||||||||
Total loans | $ | 564,052 | $ | 301,054 | $ | 207,463 |
After one | After five | |||||||||||
year but | years but | |||||||||||
within | within | After | ||||||||||
five years | 15 years | 15 years | ||||||||||
Fixed-rate loans | ||||||||||||
Real Estate | ||||||||||||
Construction | $ | 8,379 | $ | 243 | $ | 317 | ||||||
1-4 family residential | 105,055 | 101,779 | 2,385 | |||||||||
Multi-family | 152,250 | 14,637 | 74 | |||||||||
Commercial | 201,911 | 39,089 | - | |||||||||
Agricultural | 26,000 | 19,021 | 834 | |||||||||
Commercial | 33,109 | 11,722 | - | |||||||||
Agricultural | 22,770 | 1,651 | 381 | |||||||||
Consumer and other | 8,797 | 5,749 | 8 | |||||||||
Total fixed-rate loans | 558,271 | 193,891 | 3,999 | |||||||||
Variable-rate loans | ||||||||||||
Real Estate | ||||||||||||
Construction | 4,741 | 16,148 | 230 | |||||||||
1-4 family residential | 4,689 | 21,390 | 44,584 | |||||||||
Multi-family | 800 | 1,165 | 17,000 | |||||||||
Commercial | 8,647 | 29,178 | 55,952 | |||||||||
Agricultural | 1,612 | 32,836 | 75,427 | |||||||||
Commercial | 3,029 | 9,434 | 1,045 | |||||||||
Agricultural | 6,232 | 1,305 | - | |||||||||
Consumer and other | 424 | - | 97 | |||||||||
Total variable-rate loans | 30,174 | 111,456 | 194,335 | |||||||||
Total loans | $ | 588,445 | $ | 305,347 | $ | 198,334 |
Loans Held For Sale
There was $154$124 thousand of mortgage origination funding awaiting delivery to the secondary market as of December 31, 20222023 and none$154 thousand as of December 31, 2021.2022. Residential mortgage loans are originated by the Banks and sold to several secondary mortgage market outlets based upon customer product preferences and pricing considerations. The mortgages are sold in the secondary market to eliminate interest rate risk and to generate secondary market fee income. It is not anticipated at the present time that loans held for sale will become a significant portion of total assets.
Investment Portfolio
Total investments as of December 31, 20222023 were $786.4$736.4 million, a decrease of $44.6$50.0 million or 5.4%6.4% from the prior year end. As of December 31, 20222023 and 2021,2022, the investment portfolio comprised 37%34% and 39%37% of total assets, respectively. The decrease in investments during 2023 is primarily due to a declinematurities in fair valueexcess of the portfolio due to interest rate increases during 2022.purchases. The decrease is offset in part by purchases of U.S. treasuries and municipal securities.lower unrealized losses in the investment portfolio.
Management’s process for obtaining and validating the fair value of investment securities is discussed in Note 16 of the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.Report.
Investment Maturities as of December 31, 20222023
The investments in the following table are reported by contractual maturity. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without prepayment penalties (in thousands).
After one | After five | After one | After five | |||||||||||||||||||||||||||||||||||||
year but | years but | year but | years but | |||||||||||||||||||||||||||||||||||||
Within | within | within | After | Within | within | within | After | |||||||||||||||||||||||||||||||||
one year | five years | ten years | ten years | Total | one year | five years | ten years | ten years | Total | |||||||||||||||||||||||||||||||
U.S. government treasuries | $ | 16,614 | $ | 171,012 | $ | 19,971 | $ | - | $ | 207,597 | $ | 42,176 | $ | 148,455 | $ | 9,457 | $ | - | $ | 200,088 | ||||||||||||||||||||
U.S. government agencies | 8,939 | 62,477 | 29,517 | - | 100,933 | 11,936 | 59,543 | 21,136 | - | 92,615 | ||||||||||||||||||||||||||||||
U.S. government mortgage-backed securities | 447 | 38,929 | 77,365 | - | 116,741 | 261 | 32,118 | 69,252 | 233 | 101,864 | ||||||||||||||||||||||||||||||
States and political subdivisions (1) | 13,133 | 104,432 | 157,768 | 10,670 | 286,003 | 15,371 | 133,008 | 114,062 | 7,450 | 269,891 | ||||||||||||||||||||||||||||||
Corporate bonds | 5,557 | 30,290 | 39,317 | - | 75,164 | 11,498 | 29,095 | 31,338 | - | 71,931 | ||||||||||||||||||||||||||||||
Total | $ | 44,690 | $ | 407,140 | $ | 323,938 | $ | 10,670 | $ | 786,438 | $ | 81,242 | $ | 402,219 | $ | 245,245 | $ | 7,683 | $ | 736,389 | ||||||||||||||||||||
Weighted average yield | ||||||||||||||||||||||||||||||||||||||||
U.S. government treasuries | 1.45 | % | 1.09 | % | 1.32 | % | n/a | 1.14 | % | 1.06 | % | 1.16 | % | 1.48 | % | n/a | 1.15 | % | ||||||||||||||||||||||
U.S. government agencies | 2.19 | % | 1.83 | % | 2.06 | % | n/a | 1.93 | % | 2.07 | % | 1.76 | % | 2.40 | % | n/a | 1.95 | % | ||||||||||||||||||||||
U.S government mortgage-backed securities | 2.34 | % | 1.88 | % | 0.95 | % | n/a | 1.25 | % | 2.42 | % | 1.84 | % | 0.96 | % | 2.14 | % | 1.23 | % | |||||||||||||||||||||
States and political subdivisions (1) | 2.15 | % | 2.10 | % | 2.38 | % | 2.44 | % | 2.27 | % | 2.13 | % | 2.29 | % | 2.40 | % | 2.83 | % | 2.35 | % | ||||||||||||||||||||
Corporate bonds | 2.91 | % | 2.82 | % | 2.70 | % | n/a | 2.76 | % | 2.51 | % | 2.91 | % | 2.72 | % | n/a | 2.77 | % | ||||||||||||||||||||||
Total | 1.99 | % | 1.66 | % | 1.97 | % | 2.44 | % | 1.82 | % | 1.62 | % | 1.83 | % | 1.99 | % | 2.81 | % | 1.87 | % |
(1) Yields on tax-exempt obligations of states and political subdivisions have been computed on a tax-equivalent basis using a federal income tax rate of 21 percent.
The Company's investment portfolio had an expected duration of 4.063.55 years and 4.074.06 years as of December 31, 2023 and 2022, and 2021, respectively.
At December 31, 20222023 and 2021,2022, the Company’s investment securities portfolio included securities issued by 289272 and 298289 government municipalities and agencies located within 30 and 28 states with a fair value of $286.0$269.9 million and $292.9$286.0 million, respectively. No one municipality or agency represents a concentration within this segment of the investment portfolio. Storm Lake, Iowa, general obligationOmaha, Nebraska, sewer revenue bonds with a fair value of $5.5$5.2 million (approximately 1.9% of the fair value of the government municipalities and subdivisions) represent the largest exposure to any one municipality or subdivision for the Company as of December 31, 2022; the bonds are repayable from the levy of continuing annual tax on all the taxable property within the territory of the city of Storm Lake.2023.
The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.
The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of December 31, 20222023 and 20212022 identifying the state in which the issuing government municipality or agency operates (in thousands):
2022 | 2021 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||
General Obligation bonds: | ||||||||||||||||
Iowa | $ | 66,168 | $ | 60,884 | $ | 72,128 | $ | 72,830 | ||||||||
Texas | 29,750 | 26,241 | 24,742 | 24,953 | ||||||||||||
Nebraska | 20,165 | 16,845 | 19,546 | 19,486 | ||||||||||||
Oregon | 11,049 | 10,079 | 4,757 | 4,864 | ||||||||||||
Washington | 10,911 | 9,898 | 11,013 | 11,241 | ||||||||||||
Other (2022: 16 states; 2021: 16 states) | 42,028 | 37,804 | 36,614 | 36,753 | ||||||||||||
Total general obligation bonds | $ | 180,071 | $ | 161,751 | $ | 168,800 | $ | 170,127 | ||||||||
Revenue bonds: | ||||||||||||||||
Iowa | $ | 57,330 | $ | 53,649 | $ | 61,718 | $ | 62,181 | ||||||||
Texas | 14,824 | 12,680 | 11,898 | 12,090 | ||||||||||||
Nebraska | 9,777 | 8,265 | 9,727 | 9,636 | ||||||||||||
Other (2022: 23 states; 2021: 21 states) | 55,177 | 49,658 | 38,405 | 38,825 | ||||||||||||
Total revenue bonds | $ | 137,108 | $ | 124,252 | $ | 121,748 | $ | 122,732 | ||||||||
Total obligations of states and political subdivisions | $ | 317,179 | $ | 286,003 | $ | 290,548 | $ | 292,859 |
2023 | 2022 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||
General Obligation bonds: | ||||||||||||||||
Iowa | $ | 59,721 | $ | 55,827 | $ | 66,168 | $ | 60,884 | ||||||||
Texas | 29,199 | 26,721 | 29,750 | 26,241 | ||||||||||||
Nebraska | 19,660 | 17,202 | 20,165 | 16,845 | ||||||||||||
Oregon | 9,885 | 9,299 | 11,049 | 10,079 | ||||||||||||
Washington | 9,632 | 8,860 | 10,911 | 9,898 | ||||||||||||
Connecticut | 8,700 | 8,183 | 8,701 | 7,936 | ||||||||||||
Other (2023: 15 states; 2022: 15 states) | 32,698 | 30,257 | 33,327 | 29,868 | ||||||||||||
Total general obligation bonds | $ | 169,495 | $ | 156,349 | $ | 180,071 | $ | 161,751 | ||||||||
Revenue bonds: | ||||||||||||||||
Iowa | $ | 48,645 | $ | 45,953 | $ | 57,330 | $ | 53,649 | ||||||||
Texas | 14,794 | 13,193 | 14,824 | 12,680 | ||||||||||||
Nebraska | 9,397 | 8,238 | 9,777 | 8,265 | ||||||||||||
Other (2023: 23 states; 2022: 23 states) | 50,144 | 46,158 | 55,177 | 49,658 | ||||||||||||
Total revenue bonds | $ | 122,980 | $ | 113,542 | $ | 137,108 | $ | 124,252 | ||||||||
Total obligations of states and political subdivisions | $ | 292,475 | $ | 269,891 | $ | 317,179 | $ | 286,003 |
As of December 31, 20222023 and 2021,2022, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities and water utilities. The revenue bonds are to be paid from 16 revenue sources in 20222023 and 2021.2022. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table (in thousands):
2022 | 2021 | 2023 | 2022 | |||||||||||||||||||||||||||||
Estimated | Estimated | Estimated | Estimated | |||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||
Revenue bonds by revenue source | ||||||||||||||||||||||||||||||||
Sales tax | $ | 31,768 | $ | 28,917 | $ | 31,632 | $ | 31,896 | $ | 29,409 | $ | 27,284 | $ | 31,768 | $ | 28,917 | ||||||||||||||||
Water | 21,754 | 19,792 | 22,611 | 22,924 | 20,394 | 18,968 | 21,754 | 19,792 | ||||||||||||||||||||||||
College and universities, primarily dormitory revenues | 19,550 | 17,368 | 17,169 | 17,353 | 16,944 | 15,340 | 19,550 | 17,368 | ||||||||||||||||||||||||
Sewer | 13,333 | 11,592 | 14,248 | 14,327 | 12,771 | 11,465 | 13,333 | 11,592 | ||||||||||||||||||||||||
Leases | 10,863 | 9,929 | 8,788 | 8,894 | 8,060 | 7,421 | 10,863 | 9,929 | ||||||||||||||||||||||||
Other | 39,840 | 36,654 | 27,300 | 27,338 | 35,402 | 33,064 | 39,840 | 36,654 | ||||||||||||||||||||||||
Total revenue bonds by revenue source | $ | 137,108 | $ | 124,252 | $ | 121,748 | $ | 122,732 | $ | 122,980 | $ | 113,542 | $ | 137,108 | $ | 124,252 |
Deposits
Total deposits were $1.90$1.81 billion and $1.88$1.90 billion as of December 31, 20222023 and 2021,2022, respectively. The increasedecrease of $19.9$86.1 million between the periods can be primarily attributed to increasesdecreases in interest-bearing core deposits, including commercialsavings and public funds,money market accounts as customers seek higher interest rates. A portion of the decline in savings and money market accounts was offset in part by a decreasean increase in time deposits. Balances fluctuate as customer liquidity needs vary and could be impacted by distressedprevailing market interest rates, competition, and economic conditions or additional government stimulus.conditions. Approximately 12% of deposits are tied to external indexes as of December 31, 2023. Deposit interest expense related to these deposits increase more quickly than our other deposit products in a rising interest rate environment.
The Company’s primary source of funds is customer deposits. The Banks attempt to attract noninterest-bearing deposits, which are a low-cost funding source. In addition, the Banks offer a variety of interest-bearing accounts designed to attract both short-term and longer-term deposits from customers. Interest-bearing accounts earn interest at rates established by Bank management based on competitive market factors and the Company’s need for funds. While 68.4%87.0% of the Banks’ certificates of deposit mature in the next year, it is anticipated that many of these certificates will be renewed. Rate sensitive certificates of deposits in excess of $250,000 are subject to somewhat higher volatility with regard to renewal volume as the Banks adjust rates based upon funding needs. In the event a substantial volume of certificates is not renewed, the Company believes it has sufficient liquid assets and borrowing lines to fund significant runoff. A sustained reduction in deposit volume would have a significant negative impact on the Company’s operations and liquidity. The Company had $11.4$6.9 million and $7.0$11.4 million of brokered deposits as of December 31, 20222023 and 2021,2022, respectively. The Company has approximately $389.0$590 million of estimated uninsured deposits as of December 31, 2022.2023. Approximately $173 million of estimated uninsured deposits were collateralized by pledged assets.
Average Deposits by Type
The following table sets forth the average balances for each major category of deposit and the weighted average interest rate paid for deposits during the years ended December 31, 20222023 and 20212022 (dollars in thousands).
2022 | 2021 | |||||||||||||||
Average | Average | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Non-interest bearing checking deposits | $ | 397,436 | 0.00 | % | $ | 375,167 | 0.00 | % | ||||||||
Interest bearing checking deposits | 612,419 | 0.47 | % | 564,780 | 0.13 | % | ||||||||||
Money market deposits | 457,053 | 0.48 | % | 436,320 | 0.21 | % | ||||||||||
Savings deposits | 228,031 | 0.18 | % | 211,835 | 0.11 | % | ||||||||||
Time certificates | 206,401 | 0.88 | % | 234,626 | 1.04 | % | ||||||||||
$ | 1,901,340 | $ | 1,822,728 |
2023 | 2022 | |||||||||||||||
Average | Average | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Non-interest bearing checking deposits | $ | 373,704 | 0.00 | % | $ | 397,436 | 0.00 | % | ||||||||
Interest bearing checking deposits | 609,965 | 1.61 | % | 612,419 | 0.47 | % | ||||||||||
Money market deposits | 395,351 | 1.45 | % | 457,053 | 0.48 | % | ||||||||||
Savings deposits | 207,314 | 0.59 | % | 228,031 | 0.18 | % | ||||||||||
Time certificates | 255,434 | 3.01 | % | 206,401 | 0.88 | % | ||||||||||
$ | 1,841,768 | $ | 1,901,340 |
Deposit Maturity
The following table shows the amounts and remaining maturities of time certificates of deposit that had balances in excess of the FDIC insurance limit of $250 thousand as of December 31, 20222023 and 20212022 (in thousands).
2022 | 2021 | 2023 | 2022 | |||||||||||||
3 months or less | $ | 14,444 | $ | 4,624 | $ | 32,036 | $ | 14,444 | ||||||||
Over 3 through 6 months | 13,261 | 8,578 | 15,808 | 13,261 | ||||||||||||
Over 6 through 12 months | 7,166 | 21,327 | 16,427 | 7,166 | ||||||||||||
Over 12 months | 8,015 | 6,264 | 3,961 | 8,015 | ||||||||||||
Total | $ | 42,886 | $ | 40,793 | $ | 68,232 | $ | 42,886 |
The following table shows the amounts and remaining maturities of estimated uninsured time certificates of deposit as of December 31, 20222023 and 20212022 (in thousands).
2022 | 2021 | 2023 | 2022 | |||||||||||||
3 months or less | $ | 8,862 | $ | 3,124 | $ | 21,942 | $ | 8,862 | ||||||||
Over 3 through 6 months | 8,010 | 7,608 | 11,174 | 8,010 | ||||||||||||
Over 6 through 12 months | 5,109 | 20,307 | 18,355 | 5,109 | ||||||||||||
Over 12 months | 8,616 | 13,838 | 7,701 | 8,616 | ||||||||||||
Total | $ | 30,597 | $ | 44,877 | $ | 59,172 | $ | 30,597 |
Borrowed Funds
Borrowed funds that may be utilized by the Company are comprised of the Federal Reserve Bank Term Funding Program (BTFP), FHLB advances, federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). Borrowed funds are an alternative funding source to deposits and can be used to fund the Company’s assets and unforeseen liquidity needs. The BTFP offers loans of up to one year in length to banks pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The BTFP allows for borrowing from the Federal Reserve Bank up to the par value of the pledged collateral. FHLB advances are loans from the FHLB that can mature daily or have longer maturities for fixed or floating rates of interest. Federal funds purchased are borrowings from other banks that mature daily. Repurchase agreements are similar to deposits as they are funds lent by various Bank customers; however, investment securities are pledged to secure such borrowings. The Company’s repurchase agreements reprice daily.
The following table summarizes the outstanding amount of, and the average rate on, borrowed funds as of December 31, 20222023 and 20212022 (dollars in thousands).
2022 | 2021 | |||||||||||||||
Average | Average | |||||||||||||||
Balance | Rate | Balance | Rate | |||||||||||||
Federal funds purchased and repurchase agreements | $ | 40,676 | 2.50 | % | $ | 39,851 | 0.25 | % | ||||||||
FHLB advances and other borrowings | 39,120 | 4.39 | % | 3,000 | 1.57 | % | ||||||||||
Total | $ | 79,796 | 3.43 | % | $ | 42,851 | 0.35 | % |
2023 | 2022 | |||||||||||||||
Average | Average | |||||||||||||||
Balance | Rate | Balance | Rate | |||||||||||||
Federal funds purchased and repurchase agreements | $ | 53,994 | 2.83 | % | $ | 40,676 | 2.50 | % | ||||||||
Other borrowings | 110,588 | 4.63 | % | 39,120 | 4.39 | % | ||||||||||
Total | $ | 164,582 | 4.04 | % | $ | 79,796 | 3.43 | % |
Average Annual Borrowed Funds
The following table sets forth the average amount of and the average rate paid on borrowed funds for the years ended December 31, 20222023 and 20212022 (dollars in thousands).
2022 | 2021 | 2023 | 2022 | |||||||||||||||||||||||||||||
Average | Average | Average | Average |
| Average |
| Average | |||||||||||||||||||||||||
Balance | Rate | Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||||||||
Federal funds purchased and repurchase agreements | $ | 41,143 | 1.17 | % | $ | 37,705 | 0.25 | % | $ | 48,602 | 2.80 | % | $ | 41,143 | 1.17 | % | ||||||||||||||||
FHLB advances and other borrowings | 14,731 | 3.49 | % | 3,000 | 1.57 | % | ||||||||||||||||||||||||||
Other borrowings | 84,316 | 4.56 | % | 14,731 | 3.49 | % | ||||||||||||||||||||||||||
Total | $ | 55,874 | 1.78 | % | $ | 40,705 | 0.35 | % | $ | 132,918 | 3.92 | % | $ | 55,874 | 1.78 | % |
Off-Balance-Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit that assist customers with their credit needs to conduct business. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. As of December 31, 2022,2023, the most likely impact of these financial instruments on revenues, expenses, or cash flows of the Company would come from unidentified credit risk causing higher provisioncredit loss expense for loan losses in future periods. These financial instruments are not expected to have a significant impact on the liquidity or capital resources of the Company. For additional information, including quantification of the amounts involved, see Note 14 of the “Notes to Consolidated Statements” and the “Liquidity and Capital Resources” section of this discussion.Annual Report.
Asset Quality Review and Credit Risk Management
The Company’s credit risk is centered in the loan portfolio, which on December 31, 2022,2023, totaled $1.23$1.28 billion as compared to $1.14$1.23 billion as of December 31, 2021,2022, an increase of 7.2%4.2%. Net loans comprise approximately 57%59% of total assets as of the end of 2022.2023. The objective in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of a transaction and to quantify and manage credit risk on a portfolio basis. As the following chart indicates, the Company’s non-performing assets have increaseddecreased by 13%5% from December 31, 20212022 and total $14.7$13.9 million as of December 31, 2022.2023. The Company’s level of non-performing loans as a percentage of loans of 1.19%1.08% as of December 31, 2022,2023, is higher than the Iowa State Average peer group of FDIC insured institutions as of December 31, 2022,2023, of 0.33%0.39%. Management believes that the allowance for loancredit losses as of December 31, 20222023 remains adequate based on its analysis of the non-performing assets and the portfolio as a whole.
Non-performing Assets
The following table sets forth information concerning the Company's non-performing assets for the past three years ended December 31, 20222023 (dollars in thousands):
2022 | 2021 | 2020 | 2023 | 2022 | 2021 | |||||||||||||||||||
Nonperforming assets: | ||||||||||||||||||||||||
Nonaccrual loans | $ | 14,722 | $ | 12,670 | $ | 15,273 | $ | 13,811 | $ | 14,722 | $ | 12,670 | ||||||||||||
Loans 90 days or more past due | - | 169 | 39 | 108 | - | 169 | ||||||||||||||||||
Total nonperforming loans | 14,722 | 12,839 | 15,312 | 13,919 | 14,722 | 12,839 | ||||||||||||||||||
Securities available-for-sale | - | - | - | - | - | - | ||||||||||||||||||
Other real estate owned | - | 218 | 218 | - | - | 218 | ||||||||||||||||||
Total nonperforming assets | $ | 14,722 | $ | 13,057 | $ | 15,530 | $ | 13,919 | $ | 14,722 | $ | 13,057 | ||||||||||||
Ratio of nonaccrual loans to total loans outstanding | 1.19 | % | 1.09 | % | 1.33 | % | 1.07 | % | 1.19 | % | 1.09 | % | ||||||||||||
Ratio of allowance for loan losses to nonaccrual loans | 106.62 | % | 131.18 | % | 112.72 | % | ||||||||||||||||||
Ratio of allowance for credit losses to nonaccrual loans | 121.47 | % | 106.62 | % | 131.18 | % |
The accrual of interest on nonaccrual and other impaired loans is generally discontinued at 90 days or when, in the opinion of management, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received and when principal obligations are expected to be recoverable. Interest income on restructured loans is recognized pursuant to the terms of the new loan agreement. Interest income on other impaired loans remaining on accrual is monitored and income is recognized based upon the terms of the underlying loan agreement. However, the recorded net investment in impaired loans, including accrued interest, is limited to the present value of the expected cash flows of the impaired loan or the observable fair value of the loan’s collateral.
Non-performing loans totaled $14.7$13.9 million as of December 31, 20222023 and were $1.9 million higher$803 thousand lower than the non-performing loans as of December 31, 2021.2022. The increasedecrease in non-performing loans was due primarily to one loan relationship in the commercial real estate portfolio.payments on nonaccrual loans. The Company considers non-performing loans to generally include nonaccrual loans, loans past due 90 days or more and still accruing and other loans that may or may not meet the former nonperforming criteria but are considered to meet the definition of impaired.
The allowance for loancredit losses related to these impaired loans was approximately $95$118 thousand and $1.4 million$95 thousand at December 31, 20222023 and 2021,2022, respectively. The average balances of impaired loans for the years ended December 31, 2023 and 2022 and 2021 were $13.0$12.7 million and $13.2$13.0 million, respectively. For the years ended December 31, 20222023 and 2021,2022, interest income, which would have been recorded under the original terms of nonaccrual loans, was approximately $733$768 thousand and $650$733 thousand, respectively. There were no loans$109 thousand and $169 thousand ofno loans greater than 90 days past due and still accruing interest as of December 31, 2023 and 2022, and 2021, respectively.
Summary of the Allowance for LoanCredit Losses
The provisionexpense for loancredit losses represents an expense charged againstrecorded through earnings is the amount necessary to maintain an adequatethe allowance for loan losses. The allowance for loancredit losses is management’s best estimateat the amount of probableexpected credit losses inherent inwithin the loanloans held for investment portfolio as of the balance sheet date. Factors considered in establishing an appropriateThe amount of expense and the corresponding level of allowance include: an assessmentfor credit losses for loans are based on our evaluation of the financial conditioncollectability of the borrower; a realistic determination of valueloan portfolio based on historical loss experience, reasonable and adequacy of underlying collateral; historical charge-offs; the condition of the local economy; the condition of the specific industry of the borrower; an analysis of the levelssupportable forecasts, and trends of loan categories;other significant qualitative and a review of delinquent and classified loans.quantitative factors.
The adequacy of the allowance for loancredit losses is evaluated quarterly by management, the Company and respective Bank boards. This evaluation focuses on specific loan reviews, changes in the type and volume of the loan portfolio given the current economic conditions and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the customer’s cash flow or collateral are sufficient to repay the loan; delinquent status; criticism of the loan in a regulatory examination; the accrual of interest has been suspended; or other reasons, including when the loan has other special or unusual characteristics which warrant special monitoring.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgment about information available to them at the time of their examination. Due to potential changes in conditions, it is at least reasonably possible that change in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
Analysis of the Allowance for LoanCredit Losses
The Company’s policy is to charge-off loans when, in management’s opinion, the loan is deemed uncollectible, although concerted efforts are made to maximize future recoveries. The following table sets forth information regarding changes in the Company's allowance for loan losses for the most recent three years (dollars in thousands):
2022 | 2021 | 2020 | ||||||||||
Balance at beginning of period | $ | 16,621 | $ | 17,215 | $ | 12,619 | ||||||
Charge-offs: | ||||||||||||
Real estate | ||||||||||||
Construction | - | - | - | |||||||||
1-4 Family residential | 23 | 34 | 18 | |||||||||
Commercial | - | - | 444 | |||||||||
Agricultural | - | - | - | |||||||||
Commercial | 41 | 113 | 628 | |||||||||
Agricultural | 7 | - | 48 | |||||||||
Consumer and other | 21 | 29 | 272 | |||||||||
Total charge-offs | 92 | 176 | 1,410 | |||||||||
Recoveries: | ||||||||||||
Real estate | ||||||||||||
Construction | - | - | 1 | |||||||||
1-4 Family residential | 8 | 268 | 6 | |||||||||
Commercial | 3 | 4 | 26 | |||||||||
Agricultural | - | - | - | |||||||||
Commercial | 4 | 5 | 14 | |||||||||
Agricultural | - | 48 | - | |||||||||
Consumer and other | 27 | 14 | 278 | |||||||||
Total recoveries | 42 | 339 | 325 | |||||||||
Net charge-offs (recoveries) | 50 | (163 | ) | 1,085 | ||||||||
Provisions charged (credited) to operations | (874 | ) | (757 | ) | 5,681 | |||||||
Balance at end of period | $ | 15,697 | $ | 16,621 | $ | 17,215 | ||||||
Average loans outstanding | $ | 1,169,157 | $ | 1,141,750 | $ | 1,138,265 | ||||||
Ratio of net charge-offs (recoveries) during the period to average loans outstanding | 0.00 | % | -0.01 | % | 0.10 | % | ||||||
Ratio of allowance for loan losses to total loans net of deferred fees | 1.26 | % | 1.43 | % | 1.50 | % |
The following table sets forth information regarding net charge-offs to average loans outstanding by loan type during the years ended December 31, 20222023 and 20212022 (in thousands).
2022 | 2021 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||
Net | Net | Net | Net | |||||||||||||||||||||||||||||||||||||||||||||
charge-offs | charge-offs | charge-offs | charge-offs | |||||||||||||||||||||||||||||||||||||||||||||
Net | (recoveries) | Net | (recoveries) | Net | (recoveries) | Net | (recoveries) | |||||||||||||||||||||||||||||||||||||||||
charge-offs | Average | to average | charge-offs | Average | to average | charge-offs | Average | to average | charge-offs | Average | to average | |||||||||||||||||||||||||||||||||||||
(recoveries) | Loans | loans | (recoveries) | Loans | loans | (recoveries) | Loans | loans | (recoveries) | Loans | loans | |||||||||||||||||||||||||||||||||||||
Net charge-offs (recoveries): | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction | $ | - | $ | 43,905 | 0.00 | % | $ | - | $ | 44,745 | 0.00 | % | $ | - | $ | 62,056 | 0.00 | % | $ | - | $ | 43,905 | 0.00 | % | ||||||||||||||||||||||||
1-4 Family residential | 15 | 266,029 | 0.01 | % | (234 | ) | 224,639 | -0.10 | % | (5 | ) | 287,062 | 0.00 | % | 15 | 266,029 | 0.01 | % | ||||||||||||||||||||||||||||||
Multi-family | - | 190,525 | 0.00 | % | - | 175,154 | 0.00 | % | ||||||||||||||||||||||||||||||||||||||||
Commercial | (3 | ) | 519,161 | 0.00 | % | (4 | ) | 504,343 | 0.00 | % | (5 | ) | 347,267 | 0.00 | % | (3 | ) | 344,007 | 0.00 | % | ||||||||||||||||||||||||||||
Agricultural | - | 155,989 | 0.00 | % | - | 151,178 | 0.00 | % | - | 160,199 | 0.00 | % | - | 155,989 | 0.00 | % | ||||||||||||||||||||||||||||||||
Commercial | 37 | 72,844 | 0.05 | % | 108 | 105,265 | 0.10 | % | 28 | 85,914 | 0.03 | % | 37 | 72,844 | 0.05 | % | ||||||||||||||||||||||||||||||||
Agricultural | 7 | 95,029 | 0.01 | % | (48 | ) | 96,774 | -0.05 | % | 198 | 93,813 | 0.21 | % | 7 | 95,029 | 0.01 | % | |||||||||||||||||||||||||||||||
Consumer and other | (6 | ) | 16,200 | -0.04 | % | 15 | 14,806 | 0.10 | % | (3 | ) | 16,403 | -0.02 | % | (6 | ) | 16,200 | -0.04 | % | |||||||||||||||||||||||||||||
Totals | $ | 50 | $ | 1,169,157 | 0.00 | % | $ | (163 | ) | $ | 1,141,750 | -0.01 | % | $ | 213 | $ | 1,243,239 | 0.02 | % | $ | 50 | $ | 1,169,157 | 0.00 | % |
GeneralPooled reserves for loan categories range from 1.10%0.64% to 1.97%2.69% of the outstanding loan balances as of December 31, 2022.2023. In general, as loan volume increases, the generalpooled reserve levels increase with that growth and as loan volume decreases, the generalpooled reserve levels decrease with that decline. The allowance relating to commercial real estate is the largest reserve component. Construction, commercial operating and agricultural operating loans have higher general reserve levels as a percentage than the other loan categories as management perceives more risk in this type of lending. Elements contributing to the higher risk level include a higher percentage of watch, special mention, substandard and impaired loans, and less favorable economic conditions for those portfolios. As of December 31, 2022,2023, commercial real estate loans have general reserves ranging from 1.34% to 1.61%a pooled reserve of 1.50%.
Other factors considered when determining the adequacy of the generalpooled reserve include historical losses; watch, substandard and impaired loan volume; the ability to collect past due loans; loan growth; loan-to-value ratios; loan administration; collateral values; and economic factors. The Company’s concentration risks include geographic concentration in Iowa; the local economy’s dependence upon several large governmental entity employers, including Iowa State University; and the health of Iowa’s agricultural sector that, in turn, is dependent on crop and livestock prices, weather conditions, trade policies and government programs. No assurances can be made that losses will remain at the relatively favorable levels experienced over the past five years.
Loans that the Banks have identified as having higher risk levels are reviewed individually in an effort to establish adequate loss reserves. These reserves are considered specific reserves and are directly impacted by the credit quality of the underlying loans. The specific reserves are dependent upon assumptions regarding the liquidation value of collateral and the cost of recovering collateral including legal fees. Changing the amount of specific reserves on individual loans has historically had a significant impact on the reallocation of the allowance among different parts of the portfolio. The following table sets forth information regarding changes in the Company's specific reserve on loans individually evaluated for impairment and loans individually evaluated for impairment for the most recent three years (dollars in thousands):
2022 | 2021 | 2020 | ||||||||||
Specific reserve on loans individually evaluated for impairment | $ | 95 | $ | 1,392 | $ | 1,819 | ||||||
Loans individually evaluated for impairment | $ | 14,386 | $ | 12,312 | $ | 15,273 | ||||||
Percentage increase (decrease) in specific reserve on loans individually evaluated for impairment | ||||||||||||
-93 | % | -23 | % | 770 | % | |||||||
Percentage increase (decrease) in loans individually evaluated for impairment | ||||||||||||
17 | % | -19 | % | 219 | % |
2023 | 2022 | 2021 | ||||||||||
Specific reserve on loans individually evaluated for credit losses | $ | 118 | $ | 95 | $ | 1,392 | ||||||
Loans individually evaluated for credit losses | $ | 13,794 | $ | 14,386 | $ | 12,312 | ||||||
Percentage increase (decrease) in specific reserve on loans individually evaluated for credit losses | 24 | % | -93 | % | -23 | % | ||||||
Percentage increase (decrease) in loans individually evaluated for credit losses | -4 | % | 17 | % | -19 | % |
Allocation of the Allowance for LoanCredit Losses
The following table sets forth information concerning the Company’s allocation of the allowance for loancredit losses for the most recent three years (dollars in thousands):
2022 | 2021 | 2020 | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||
Amount | % * | Amount | % * | Amount | % * | Amount | % * | Amount | % * | Amount | % * | |||||||||||||||||||||||||||||||||||||
Balance at end of period applicable to: | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at end of period | ||||||||||||||||||||||||||||||||||||||||||||||||
applicable to: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction | $ | 730 | 4 | % | $ | 675 | 4 | % | $ | 725 | 4 | % | $ | 408 | 5 | % | $ | 730 | 4 | % | $ | 675 | 4 | % | ||||||||||||||||||||||||
1-4 family residential | 3,028 | 23 | % | 2,752 | 21 | % | 2,581 | 19 | % | 3,333 | 22 | % | 3,028 | 23 | % | 2,752 | 21 | % | ||||||||||||||||||||||||||||||
Multi-family | 2,542 | 15 | % | 2,493 | 15 | % | 2,501 | 15 | % | |||||||||||||||||||||||||||||||||||||||
Commercial | 7,235 | 44 | % | 8,406 | 44 | % | 8,930 | 43 | % | 5,236 | 28 | % | 4,742 | 29 | % | 5,905 | 29 | % | ||||||||||||||||||||||||||||||
Agricultural | 1,625 | 13 | % | 1,584 | 13 | % | 1,595 | 13 | % | 1,238 | 13 | % | 1,625 | 13 | % | 1,584 | 13 | % | ||||||||||||||||||||||||||||||
Commercial | 1,153 | 6 | % | 1,170 | 7 | % | 1,453 | 11 | % | 1,955 | 7 | % | 1,153 | 6 | % | 1,170 | 7 | % | ||||||||||||||||||||||||||||||
Agricultural | 1,705 | 9 | % | 1,836 | 10 | % | 1,696 | 9 | % | 1,607 | 9 | % | 1,705 | 9 | % | 1,836 | 10 | % | ||||||||||||||||||||||||||||||
Consumer and other | 221 | 1 | % | 198 | 1 | % | 235 | 1 | % | 457 | 1 | % | 221 | 1 | % | 198 | 1 | % | ||||||||||||||||||||||||||||||
$ | 15,697 | 100 | % | $ | 16,621 | 100 | % | $ | 17,215 | 100 | % | $ | 16,776 | 100 | % | $ | 15,697 | 100 | % | $ | 16,621 | 100 | % |
* Percent of loans in each category to total loans.
Liquidity and Capital Resources
Liquidity management is the process by which the Company, through its Banks’ Asset and Liability Committees (ALCO), ensures adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity, and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, Federal Reserve BTFP, FHLB advances and other capital market sources.
As of December 31, 2022,2023, management believes that the level of liquidity and capital resources of the Company remain at a satisfactory level and compare favorably to that of other FDIC insured institutions. Management believesinstitutions and that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.
The liquidity and capital resources discussion will cover the following topics:
● | Review of the Company’s Current Liquidity Sources |
● | Review of the Consolidated Statements of Cash Flows |
● |
|
|
|
|
|
Review of the Company’s Current Liquidity Sources
Liquid assets of cash on hand, balances due from other banks and interest-bearing deposits in financial institutions for December 31, 2022 and 2021 totaled $27.9 million and $89.1 million, respectively. The lower balance of liquid assets as of December 31, 2022 primarily relates to decreased deposits at the Federal Reserve Bank as the funds were invested.
Other sources of liquidity available to the Banks as of December 31, 2022 include available borrowing capacity with the FHLB of $285.3 million and federal funds borrowing capacity at correspondent banks of $100.6 million. As of December 31, 2022, the Company had outstanding FHLB advances and other borrowings of $39.1 million, no federal funds purchased, and securities sold under agreements to repurchase of $40.7 million.
Total investments as of December 31, 2022, were $786.4 million compared to $831.0 million as of year-end 2021. The investment portfolio provides the Company with a significant amount of liquidity since all investments are classified as available-for-sale as of December 31, 2022 and 2021. The investments have pretax net unrealized losses of $83.6 million as of December 31, 2022 and pretax net unrealized gains of $3.8 million as of December 31, 2021.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity, and credit considerations. The portfolio’s scheduled maturities represent a significant source of liquidity.
Review of the Consolidated Statements of Cash Flows
Net cash provided by operating activities for the years ended December 31, 2022 and 2021 totaled $21.2 million and $30.5 million, respectively. The change in net cash provided by operating activities in 2022 was primarily due to a decrease in net income and proceeds from the sales of loans held for sale.
Net cash (used in) investing activities for the years ended December 31, 2022 and 2021 was ($127.4) million and ($268.6) million, respectively. The change in net cash (used in) investing activities in 2022 was primarily due to fewer purchases of securities and partially offset by a larger increase in loans.
Net cash provided by financing activities for the years ended December 31, 2022 and 2021 totaled $44.9 million and $154.1 million, respectively. The change in net cash provided by financing activities in 2022 was due primarily to a lower increase in deposits.
Review of Company Only Cash Flows
●
| Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flow Needs |
●
| Capital Resources
|
Review of the Company’s Current Liquidity Sources
Liquid assets of cash on hand, balances due from other banks and interest-bearing deposits in financial institutions for December 31, 2023 and 2022 totaled $55.1 million and $27.9 million, respectively. The higher balance of liquid assets as of December 31, 2023 primarily relates to increased deposits at the Federal Reserve Bank.
Other sources of liquidity available to the Banks as of December 31, 2023 include available borrowing capacity with the FHLB of $280.9 million and federal funds borrowing capacity at correspondent banks of $101.5 million. As of December 31, 2023, the Company had outstanding FHLB advances and other borrowings of $110.6 million, no federal funds purchased, and securities sold under agreements to repurchase of $54.0 million.
Total investments as of December 31, 2023, were $736.4 million compared to $786.4 million as of year-end 2022. The investment portfolio provides the Company with a significant amount of liquidity since all investments are classified as available-for-sale as of December 31, 2023 and 2022. The investments have pretax net unrealized losses of $62.3 million and $83.6 million as of December 31, 2023 and 2022, respectively.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity, and credit considerations. The portfolio’s scheduled maturities represent a significant source of liquidity.
Review of the Consolidated Statements of Cash Flows
Net cash provided by operating activities for the years ended December 31, 2023 and 2022 totaled $19.5 million and $21.2 million, respectively. The change in net cash provided by operating activities in 2023 was primarily due to higher interest expense paid on deposits and other borrowings resulting in a decrease in net income.
Net cash provided by (used in) investing activities for the years ended December 31, 2023 and 2022 was $18.8 million and ($127.4) million, respectively. The change in net cash provided by (used in) investing activities in 2023 was primarily due to fewer purchases of securities.
Net cash provided by (used in) financing activities for the years ended December 31, 2023 and 2022 totaled ($11.1) million and $44.9 million, respectively. The change in net cash provided by (used in) financing activities in 2023 was due primarily to a decrease in deposits and partially offset by new borrowings.
Review of Company Only Cash Flows
The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Company requires adequate liquidity to pay its expenses and pay stockholder dividends. In 2023, dividends from the Banks amounted to $10.0 million compared to $10.2 million in 2022. Various federal and state statutory provisions limit the amount of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order.
First National, as a national bank, generally may pay dividends, without obtaining the express approval of the OCC, in an amount up to its retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits, as defined by the OCC, consists of net income less dividends declared during the period. Boone Bank, Reliance Bank, State Bank, United Bank and Iowa State Bank are also restricted under Iowa law to paying dividends only out of their undivided profits. Additionally, the payment of dividends by the Banks is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and the Banks generally are prohibited from paying any dividends if, following payment thereof, the Bank would be undercapitalized.
The Company has unconsolidated cash and interest-bearing deposits totaling $1.9 million that is available as of December 31, 2023 to provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flow Needs
Commitments to extend credit totaled $262.7 million as of December 31, 2023 compared to a total of $262.9 million at the end of 2022. The timing of these credit commitments varies with the underlying borrowers; however, the Company believes it has satisfactory liquidity to fund these obligations as of December 31, 2023. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no other known trends in liquidity and cash flow needs as of December 31, 2023, that are of concern to management.
Capital Resources
The Company’s total stockholders’ equity increased to $165.8 million at December 31, 2023, from $149.1 million at December 31, 2022. As of December 31, 2023 and 2022, stockholders’ equity as a percentage of total assets was 7.7% and 7.0%, respectively. The increase in stockholders’ equity was primarily the result of a decrease in unrealized losses on the investment portfolio and 2021, stockholders’ equity as a percentage of total assets was 7.0% and 9.7%, respectively. The decrease in stockholders’ equity was primarily the result of an increase in unrealized losses on the investment portfolio precipitated by the significant increase in market interest rates during 2022, offset in part by the retention of net income in excess of dividends. The capital levels of the Company currently exceed applicable regulatory guidelines to be considered “well capitalized” as of December 31, 2023. Unrealized losses on the investment portfolio are excluded from regulatory capital.
From time to time, the Company’s board of directors has authorized stock repurchase plans. Stock repurchase plans allow the Company to proactively manage its capital position and return excess capital to shareholders. No shares of common stock were repurchased under stock repurchase plans in 2023 and 100,000 shares of common stock were repurchased in 2022. Unrealized losses on the investment portfolio are excluded from regulatory capital.
From time to time, the Company’s board of directors has authorized stock repurchase plans. Stock repurchase plans allow the Company to proactively manage its capital position and return excess capital to shareholders. 100,000 shares of common stock were repurchased under stock repurchase plans in 2022 and 30,580 shares of common stock were repurchased in 2021. Also see Part II, Item 5 - Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, included elsewhere in this Annual Report.
Interest Rate Risk
Interest rate risk refers to the impact that a change in interest rates may have on the Company’s earnings and capital. Management’s objectives are to control interest rate risk and to ensure predictable and consistent growth of earnings and capital. Interest rate risk management focuses on fluctuations in net interest income identified through computer simulations to evaluate volatility, varying interest rate, spread and volume assumptions. The risk is quantified and compared against tolerance levels.
The Company uses a third-party computer software simulation modeling program to measure its exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made such as prepayment speeds on loans, the slope of the Treasury yield curve, the rates and volumes of the Company’s deposits and the rates and volumes of the Company’s loans. This analysis measures the estimated change in net interest income in the event of hypothetical changes in interest rates.
Another measure of interest rate sensitivity is the gap ratio. This ratio indicates the amount of interest-earning assets repricing within a given period in comparison to the amount of interest-bearing liabilities repricing within the same period of time. A gap ratio of 1.0 indicates a matched position, in which case the effect on net interest income due to interest rate movements will be minimal. A gap ratio of less than 1.0 indicates that more liabilities than assets reprice within the time period, while a ratio greater than 1.0 indicates that more assets reprice than liabilities.
The simulation model process provides a dynamic assessment of interest rate sensitivity, whereas a static interest rate gap table is compiled as of a point in time. The model simulations differ from a traditional gap analysis, as a traditional gap analysis does not reflect the multiple effects of interest rate movement on the entire range of assets and liabilities and ignores the future impact of new business strategies.
Inflation
The primary impact of inflation on the Company’s operations is to increase asset yields, deposit costs and operating overhead. Unlike most industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than they would on non-financial companies. Although interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services, increases in inflation generally have resulted in increased interest rates. The effects of inflation can magnify the growth of assets and, if significant, require that equity capital increase at a faster rate than would be otherwise necessary.
Forward-Looking Statements and Business Risks
Certain statements contained in the foregoing Management’s Discussion and Analysis and elsewhere in this Annual Report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases and in oral and written statements made by or with the Company’s approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, asset quality, liquidity, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “projected”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statement. Factors that could cause actual results to differ from those discussed in the forward-looking statement include, but are not limited to:
● | Local, regional and national economic conditions and the impact they may have on the |
● | Adequacy of the allowance for credit losses and changes in the level of nonperforming assets and charge-offs. |
● | Inflation and interest rate,
|
● | Changes in the
|