Attached files
| file | filename |
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| EX-11 - EXHIBIT 11 - HILLS BANCORPORATION | ex11.htm |
| EX-31.1 - EXHIBIT 31-1 - HILLS BANCORPORATION | ex31.htm |
| EX-23 - EXHIBIT 23 - HILLS BANCORPORATION | ex23.htm |
| EX-21 - EXHIBIT 21 - HILLS BANCORPORATION | ex21.htm |
| EX-32 - EXHIBIT 32 - HILLS BANCORPORATION | ex32.htm |
| EX-31.2 - EXHIBIT 31-2 - HILLS BANCORPORATION | ex31-2.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2010.
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Commission File Number 0-12668.
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HILLS BANCORPORATION
(Exact name of Registrant as specified in its charter)
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Iowa
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42-1208067
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(State or Other Jurisdiction of Incorporation or Organization)
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(IRS Employer Identification No.)
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131 Main Street, Hills, Iowa 52235
(Address of principal executive offices)
Registrant's telephone number, including area code: (319) 679-2291
Securities Registered pursuant to Section 12 (b) of the Act: None
Securities Registered pursuant to Section 12 (g) of the Act:
No par value common stock
Title of Class
Indicate by check mark if the Registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YesoNoþ
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. Yesþ Noo
Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yeso Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registrant S-K (§229.405 of this chapter) is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer oSmaller Reporting Companyo
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNoþ
While it is difficult to determine the market value of shares owned by nonaffiliates (within the meaning of such term under the applicable regulations of the Securities and Exchange Commission), the Registrant estimates that the aggregate market value of the Registrant's common stock held by nonaffiliates on January 31, 2011 (based upon reports of beneficial ownership that approximately 81% of the shares are so owned by nonaffiliates and upon the last independently appraised fair value of the Registrant’s common stock of $58.50 per share) was $208,538,051.
The number of shares outstanding of the Registrant's common stock as of February 28, 2011 is 4,397,418 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated March 18, 2011 for the Annual Meeting of the Shareholders of the Registrant to be held April 18, 2011 (the Proxy Statement) are incorporated by reference in Part III of this Form 10-K.
1
HILLS BANCORPORATION
FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
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Item 1.
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3
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6
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8
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9
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10
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16
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Item 1A.
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33
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Item 1B.
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38
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Item 2.
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39
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Item 3.
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40
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Item 4.
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40
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Part II
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Item 5.
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41
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Item 6.
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44
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Item 7.
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45
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Item 7A.
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67
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Item 8.
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68
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Item 9.
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111
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Item 9A.
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111
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Item 9B.
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112
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Part III
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Item 10.
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112
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Item 11.
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112
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Item 12.
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112
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Item 13.
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112
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Item 14.
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112
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Part IV
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Item 15.
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113
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PART I
References in this report to “we,” “us,” “our,” “Bank,” or the “Company” or similar terms refer to Hills Bancorporation and its subsidiary.
Item 1. Business
GENERAL
Hills Bancorporation (the "Company") is a holding company principally engaged, through its subsidiary bank, in the business of banking. The Company was incorporated December 12, 1982 and all operations are conducted within the state of Iowa. The Company became owner of 100% of the outstanding stock of Hills Bank and Trust Company, Hills, Iowa (“Hills Bank and Trust” or the “Bank”) as of January 23, 1984 when stockholders of Hills Bank and Trust exchanged their shares for shares of the Company. Effective July 1, 1996, the Company formed a new subsidiary, Hills Bank, which acquired for cash all the outstanding shares of a bank in Lisbon, Iowa. Subsequently an office of Hills Bank was opened in Mount Vernon, Iowa, a community that is contiguous to Lisbon. Effective November 17, 2000, Hills Bank was merged into Hills Bank and Trust. On September 20, 1996, another subsidiary, Hills Bank Kalona, acquired cash and other assets and assumed the deposits of the Kalona, Iowa office of Boatmen's Bank Iowa, N.A. Effective October 26, 2001, Hills Bank Kalona was merged into Hills Bank and Trust.
Through its internet website (www.hillsbank.com), the Company makes available, free of charge, by link to the internet website of the Securities and Exchange Commission (www.sec.gov), the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission, as soon as reasonably practicable after they are filed or furnished.
The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers. The Bank is actively engaged in all areas of commercial banking, including acceptance of demand, savings and time deposits; making commercial, real estate, agricultural and consumer loans; maintaining night and safe deposit facilities; and performing collection, exchange and other banking services tailored for individual customers. The Bank administers estates, personal trusts, and pension plans and provides farm management and investment advisory and custodial services for individuals, corporations and nonprofit organizations. The Bank makes commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans. In addition, the Bank earns substantial fees from originating mortgages that are sold in the secondary residential real estate market without mortgage servicing rights being retained.
Real Estate Loans
Real estate loans totaled $1.335 billion and comprised 83.96% of the Bank’s loan portfolio as of December 31, 2010. The Bank’s real estate loans include construction loans and mortgage loans.
Item 1. Business (Continued)
Mortgage Loans. The Bank offers residential, commercial and agricultural real estate loans. As of December 31, 2010, mortgage loans totaled $1.224 billion and comprised 76.93% of the Bank’s loan portfolio.
Residential real estate loans totaled $628.6 million and were 39.51% of the Bank’s loan portfolio as of December 31, 2010. These loans include first and junior liens on 1-to-4 family residences. The Bank originates 1-to-4 family mortgage loans to individuals and businesses within its trade area. The Bank retains a portion of its residential mortgages it originates, and sells the remainder of the loans to third parties. Interest rates for residential real estate mortgages are determined by competitive pricing factors on the secondary market and within the Bank’s trade area. Collateral for residential real estate mortgages is generally the underlying property. Generally, repayment of these loans is from monthly principal and interest payments from the borrower’s personal cash flows and liquidity, and collateral values are a function of residential real estate values in the markets that the Bank serves.
Commercial real estate loans totaled $302.0 million and were 18.99% of the Bank’s loan portfolio at December 31, 2010. The Bank originates loans for commercial properties to individuals and businesses within its trade area. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for commercial real estate loans range from one to five years with an amortization period of 25 years or less. The Bank offers both fixed and variable rate loans for commercial real estate.
Multi-family real estate loans totaled $202.6 million and were 12.74% of the Bank’s loan portfolio at December 31, 2010. Multi-family real estate loans are made to individuals and businesses in the Bank’s trade area. These loans are primarily secured by properties such as apartment complexes. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for commercial real estate loans range from one to five years with an amortization period of less than 25 years or less. Generally, interest rates for multi-family loans are fixed for the loan term.
Mortgage loans secured by farmland totaled $90.4 million and were 5.69% of the Bank’s loan portfolio at December 31, 2010. Loans for farmland are made to individuals and businesses within the Bank’s trade area. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for real estate loans secured by farmland range from one to five years with an amortization period of 25 years or less. Generally, interest rates are fixed for mortgage loans secured by farmland.
Construction Loans. The Bank offers loans both to individuals that are constructing personal residences and to real estate developers and building contractors for the acquisition of land for development and the construction of homes and commercial properties. The Bank makes these loans to established borrowers in the Bank’s trade area. Construction loans generally have a term of one year or less, with interest payable at maturity. Interest rate arrangements are variable for construction projects. Generally, collateral for construction loans is the underlying construction project.
As of December 31, 2010, construction loans for personal residences totaled $25.2 million and were 1.59% of the Bank’s loan portfolio. Construction loans for land development and commercial projects totaled $86.6 million and were 5.44% of the Bank’s loan portfolio. In total, construction loans totaled $111.8 million and were 7.03% of the Bank’s loan portfolio as of December 31, 2010.
Commercial and Financial Loans
The Bank’s commercial and financial loan portfolio totaled $141.6 million and comprised 8.90% of the total loan portfolio at December 31, 2010. The Bank’s commercial and financial loans include loans to contractors, retailers and other businesses. The Bank provides a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment. Although most loans are made on a secured basis, loans may be made on an unsecured basis where warranted by the overall financial condition of the borrower. Terms of commercial and financial loans generally range from one to five years. Interest rates for commercial loans can be fixed or variable.
Item 1. Business (Continued)
Commercial and Financial Loans (continued)
The Bank’s commercial and financial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of personal guarantees, if applicable. The primary repayment risks of commercial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value.
Agricultural Loans
Agricultural loans include loans made to finance agricultural production and other loans to farmers and farming operations. These loans totaled $65.0 million and constituted 4.09% of the total loan portfolio at December 31, 2010. Agricultural loans, most of which are secured by crops and machinery, are provided to finance capital improvement and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower’s control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. Agricultural loans generally have a term of one year and may have a fixed or variable rate.
Consumer Lending
The Bank offers consumer loans including personal loans and automobile loans. These consumer loans typically have shorter terms and lower balances. At December 31, 2010, consumer loans totaled $23.6 million and were 1.48% of the Bank’s total loan portfolio.
Loans to State and Political Subdivisions
Loans to State and Political Subdivisions include only tax-exempt loans. These loans totaled $25.0 million and comprised 1.57% of the Bank’s total loan portfolio at December 31, 2010. Tax-exempt loans increased $15.2 million in 2010. The Bank participated in 2010 in the Midwest Disaster Bond program and was able to offer customers certain real estate loans at tax-exempt interest rates.
The Bank has an established formal loan origination policy. In general, the loan origination policy attempts to reduce the risk of credit loss to the Bank by requiring, among other things, maintenance of minimum loan to value ratios, evidence of appropriate levels of insurance carried by borrowers and documentation of appropriate types and amounts of collateral and sources of expected payment. The collateral relied upon in the loan origination policy is generally the property being financed by the Bank. The source of expected payment is generally the income produced from the property being financed. Personal guarantees are required of individuals owing or controlling at least 20% of the ownership of an entity. Limited or proportional guarantees may be accepted in circumstances if approved by the Company’s Board of Directors. Financial information provided by the borrower is verified as considered necessary by reference to tax returns, or audited, reviewed or compiled financial statements. The Bank does not originate subprime or alt A loans. In order to modify, restructure or otherwise change the terms of a loan, the Bank’s policy is to evaluate each borrower situation individually. Modifications, restructures, extensions and other changes are done to improve the Bank’s position and to protect the Bank’s capital. If a borrower is not current with its payments, any additional loans to such borrowers are evaluated on an individual borrower basis.
The Bank’s business is not seasonal, except that loan origination fees are driven by interest rate movements and are higher in a low rate environment due to customer demand. As of December 31, 2010, the Company had no employees and the Bank had 350 full-time and 73 part-time employees.
Item 1. Business (Continued)
The Company’s results for the year ended December 31, 2010 were affected by the national economic recession and local economic conditions. Continued low interest rates resulted in increased net interest income as total interest expense was reduced by $9.3 million. The provision for loan losses was $8.9 million for the year ended December 31, 2010 as compared to $11.9 million for the year ended December 31, 2009. The provision for loan losses was $11.5 million including the flood-related provision of $4.4 million for the year ended December 31, 2008. The decrease in the provision expense for 2010 reflected a decrease in net charge-offs in 2010, and management’s evaluation of the Company’s loan portfolio and economic conditions in the Company’s trade area. The current trend remains for continued high levels of loan loss reserves, primarily as a result of the current economic conditions in the Company’s trade area. See further discussion of the current economic conditions under Item 1, Economic Conditions, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2010, net charge offs were $8.9 million or 0.58% of average loans outstanding. The Company did experience steady defaults and foreclosures in 2010 resulting from an increased number of 1-to-4 family residential loans with delinquent payments (as reflected in loans > 90 days past due). Although the Company experienced an increase in defaults and foreclosures during 2010, the Company believes such increase has been less than the level of increase experienced in other regions of the United States. This is due, in part, to the fact that the Company’s trade area did not experience the dramatic rise and subsequent decline in real estate values over the last several years.
Restructured loans totaled $22.4 million as of December 31, 2010. The Company restructured loans for two of its borrowers during 2010, for a total of $9.1 million. Total restructured debt is less than 1.5% of the Company’s total loan portfolio as of December 31, 2010. The increase in restructured loans is reflective of the general economic conditions in the Company’s trade area. Although the number and amount of restructured loans are not material to the Company’s total loan portfolio, each borrower is evaluated individually in order to provide the greatest likelihood of collection of the borrower’s debts to the Company.
For additional discussion of the impact of the current economic recession on the financial condition and results of operations of the Company, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Johnson County and Linn County
The Bank’s trade area includes the Johnson County communities of Iowa City, Coralville, Hills and North Liberty, located near Interstate 80 and Interstate 380 in Eastern Iowa. These communities have a combined population of approximately 100,300. Johnson County, Iowa has a population of approximately 132,500. The University of Iowa in Iowa City has approximately 30,800 students and 32,200 full and part-time employees, including 6,200 employees of The University of Iowa Hospitals and Clinics.
The Bank operates offices in the Linn County, Iowa communities of Lisbon, Marion, Mount Vernon and Cedar Rapids, Iowa. Lisbon has a population of approximately 2,200 and Mount Vernon, located two miles from Lisbon, has a population of about 4,400. Both communities are within easy commuting distances to Cedar Rapids and Iowa City, Iowa. Cedar Rapids has a metropolitan population of approximately 159,100, including approximately 31,400 from adjoining Marion, Iowa and is located approximately 10 miles west of Lisbon, Iowa and approximately 25 miles north of Iowa City on Interstate 380. The total population of Linn County is approximately 212,700. The largest employer in the Cedar Rapids area is Rockwell Collins, Inc., manufacturer of communications instruments, with about 9,400 employees.
Item 1. Business (Continued)
Other large employers in the Johnson and Linn County areas and their approximate number of employees are as follows (Data source is Corridor Business Journal):
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Employer
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Type of Business
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Employees
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Hy-Vee Food Stores
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Grocery Stores
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4,000
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Cedar Rapids and Linn-Mar School Districts
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Education
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3,800
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AEGON USA, Inc.
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Insurance
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3,700
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St. Luke's Hospital
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Health Care
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3,000
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Mercy Medical Center
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Health Care
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2,800
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Heartland Express, Inc.
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Trucking
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2,700
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Wal-Mart Stores, Inc.
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Discount Store
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2,000
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Kirkwood Community College
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Education
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1,900
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Iowa City Community School District
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Education
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1,600
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Veteran's Administration Medical Center
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Health Care
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1,600
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Pearson Educational Measurement
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Information Services - Computers
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1,400
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Mercy Iowa City
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Health Care
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1,300
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ACT, Inc.
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Educational Testing Service
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1,200
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City of Cedar Rapids
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City Government
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1,200
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Alliant Energy
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Energy
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1,200
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Quaker Oats Company
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Cereals and Chemicals
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1,100
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Washington County
The Bank has offices located in Kalona and Wellman, Iowa, which are in Washington County. Kalona is located approximately 20 miles south of Iowa City. Wellman is located approximately 5 miles west of Kalona. Kalona has a population of approximately 2,500 and Wellman has a population of about 1,500. The population of Washington County is approximately 21,600. Both Kalona and Wellman are primarily agricultural communities, but are located within easy driving distance for employment in Iowa City, Coralville and North Liberty (combined population 99,600) and Washington, Iowa (population 7,000).
Item 1. Business (Continued)
COMPETITION
Competition among financial institutions in attracting and retaining deposits and making loans is intense. Traditionally, the Company’s most direct competition for deposits has come from commercial banks, savings institutions and credit unions doing business in its areas of operation. Increasingly, the Company has experienced additional competition for deposits from nonbanking sources, such as securities firms, insurance companies, money market mutual funds and financial services subsidiaries of commercial and manufacturing companies. Competition for loans comes primarily from other commercial banks, savings institutions, consumer finance companies, credit unions, mortgage banking companies, insurance companies and other institutional lenders. The Company competes primarily on the basis of products offered, customer service and price. A number of institutions with which the Company competes enjoy the benefits of fewer regulatory constraints and lower cost structures including favorable income tax treatments. Some have greater assets and capital than the Company does and, thus, are better able to compete on the basis of price than the Company is. Technological advances, which may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties, could make it more difficult for the Company to compete in the future.
Effective March 13, 2000, securities firms and insurance companies that elect to become financial holding companies were allowed to acquire banks and other financial institutions. This has increased the number of competitors and intensified the competitive environment in which the Company conducts business. The increasingly competitive environment is primarily a result of changes in regulations and changes in technology and product delivery systems. These competitive trends are likely to continue.
The Bank is in direct competition for loans and deposits and financial services with a number of other banks and credit unions in Johnson, Linn and Washington County. A comparison of the number of office locations and deposits in the three counties as of June, 2010 (most recent date of available data from the FDIC and national credit union websites) is as follows:
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Johnson County
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Linn County
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Washington County
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Offices
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Deposits (in millions)
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Offices
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Deposits (in millions)
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Offices
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Deposits (in millions)
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Hills Bank and Trust Company
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6 | $ | 1,028 | 6 | $ | 286 | 2 | $ | 88 | |||||||||||||||
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Branches of largest competing national bank
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7 | 207 | 8 | 829 | 1 | 21 | ||||||||||||||||||
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Largest competing independent bank
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8 | 501 | 8 | 493 | 2 | 171 | ||||||||||||||||||
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Largest competing credit union
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7 | 752 | 9 | 525 | 1 | 1 | ||||||||||||||||||
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All other bank and credit union offices
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29 | 557 | 75 | 2,699 | 7 | 207 | ||||||||||||||||||
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Total Market in County
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57 | $ | 3,045 | 106 | $ | 4,832 | 13 | $ | 488 | |||||||||||||||
Effective July 1, 2004, all limitations on bank office locations of Iowa law were repealed, effectively allowing statewide branching. Since that date, banks have been allowed to establish an unlimited number of offices in any location in Iowa subject to regulatory approval. Since July 1, 2006, nine new offices have been added in Johnson County and five in Linn County, while the population base has increased by 18,200, or 5.57%, in the two counties in the last four years. The number of banking offices in Washington County has increased by two while its population has remained stable. The total deposits in the three counties increased $1.6 billion or 24.2%, since July 1, 2006.
Item 1. Business (Continued)
THE ECONOMY
The Bank’s primary trade territory is Johnson, Linn and Washington Counties, Iowa. The table that follows shows employment information as of December 31, 2010, regarding the labor force and unemployment levels in the three counties in which the Bank has office locations along with comparable data on the United States and the State of Iowa.
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Labor Force
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Unemployed
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Rate %
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United States
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153,690,000 | 14,485,000 | 9.4 | % | ||||||||
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State of Iowa
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1,675,800 | 106,000 | 6.3 | % | ||||||||
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Johnson County
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81,100 | 3,500 | 4.3 | % | ||||||||
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Linn County
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122,300 | 7,400 | 6.0 | % | ||||||||
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Washington County
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12,300 | 600 | 4.9 | % | ||||||||
The unemployment rate for the Bank’s prime market area is favorable and the rate historically has been lower than the unemployment rates for both the United States and the State of Iowa. The unemployment rates in 2009 were 10.0% for the United States, 6.6% for the State of Iowa and 4.4%, 6.4% and 5.6% for Johnson, Linn and Washington Counties, respectively. As noted within the employment table of large employers in Johnson and Linn County, the University of Iowa’s impact on the local economy is very important in maintaining acceptable employment levels. The FY 2010-2011 budget for the University of Iowa, including the University of Iowa Hospital and Clinics, is $2.8 billion with state appropriations of approximately $255 million, or about 9.1% of the total. The state appropriations decreased from $259 million, or about 1.5%, from the FY 2009 – 2010 budget. The University of Iowa Hospitals and Clinics have a FY 2010-2011 budget of $830 million with 9.19% coming from State of Iowa appropriations. The state appropriations for the University of Iowa Hospitals and Clinics increased from 8.60% in the FY 2009-2010 budget.
It is difficult to predict how the national economic struggles and the proposed budget cuts by the newly elected governor for the State of Iowa will impact the State of Iowa going forward. It is unclear what impact the stress of the State budget will continue to have on the University of Iowa and the University of Iowa Hospitals and Clinics. Johnson and Linn Counties have been one of the strongest economic areas in Iowa and have had substantial economic growth in the past ten years. The largest segment of the employed population is employed in manufacturing, management, professional or related occupations.
The economies in the counties continue to be enhanced by local Iowa colleges and the University of Iowa. In addition to providing quality employment, they enroll students who provide economic benefits to the area. The following table indicates Fall 2010 enrollment.
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College
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City
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Enrollment
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The University of Iowa
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Iowa City
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30,825
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Coe College
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Cedar Rapids
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1,336
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Cornell College
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Mount Vernon
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1,191
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Kirkwood Community College
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Cedar Rapids, Iowa City and Washington
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18,456
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Mount Mercy College
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Cedar Rapids
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1,643
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Item 1. Business (Continued)
The Bank also serves a number of smaller communities in Johnson, Linn and Washington counties that are more dependent upon the agricultural economy, which historically has been affected by commodity prices and weather. The average price per acre of farm land continues to be an important factor to consider when reviewing the local economy. The average price per acre in Iowa in 2010 was $5,064 compared to $4,371 in 2009, a 15.85% increase. The range of average land prices in Johnson, Linn and Washington counties is between $5,588 and $5,750 per acre. The three counties average increase was 13.53% in 2010. The Bank’s total agricultural loans comprise about 4.09% of the Bank’s total loans.
SUPERVISION AND REGULATION
Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Iowa Superintendent of Banking (the “Superintendent”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the “SEC”). The effect of applicable statutes, regulations and regulatory policies can be significant and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiary Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds and the depositors, rather than the stockholders, of financial institutions. The enforcement powers available to federal and state banking regulators are substantial and include, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions.
The following is a summary of the material elements of the regulatory framework applicable to the Company and its subsidiary Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiary Bank.
Regulation of the Company
General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the “BHCA”). According to Federal Reserve Board policy, bank/financial holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank/financial holding company may not be able to provide support. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiary as the Federal Reserve may require.
Item 1. Business (Continued)
Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares), (ii) acquiring all or substantially all of the assets of another bank or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. On approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking . . . as to be a proper incident thereto.” Under current regulations of the Federal Reserve, the Company either directly or through non-bank subsidiaries would be permitted to engage in a variety of banking-related businesses, including the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person from acquiring “control” of a bank holding company without prior notice to the appropriate federal bank regulator. “Control” is defined in certain cases as the acquisition of 10% or more of the outstanding shares of a bank or a bank holding company depending on the circumstances surrounding the acquisition.
Regulatory Capital Requirements
Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 4%.
The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentration of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. Current Federal Reserve minimum requirements for a well capitalized organization experiencing significant growth are a leverage ratio of 5%, a Tier 1 risk-based capital ratio of 6% and total risk-based capital ratio of 10%. As of December 31, 2010, the Company had regulatory capital in excess of the Federal Reserve’s minimum and well-capitalized definition requirements, with a leverage ratio of 9.70%, with total Tier 1 risk-based capital ratio of 12.33% and a total risk-based capital ratio of 13.59%.
Item 1. Business (Continued)
Dividends. The Iowa Business Corporation Act (“IBCA”) allows the Company to make distributions, including cash dividends, to its shareholders unless, after giving effect to such distributions, either (i) the Company would not be able to pay its debts as they become due in the ordinary course of business or (ii) the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed to satisfy preferential shareholder rights, if any, that are superior to the rights of those receiving the distribution. Additionally, the Federal Reserve has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Regulation of the Bank
General. The Bank is an Iowa-chartered bank, the deposit accounts of which are insured by the FDIC. As an Iowa-chartered, FDIC insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the Superintendent of Banking of the State of Iowa (the “Superintendent”), as the chartering authority for Iowa banks, and the FDIC, as the Bank’s primary federal regulator.
Deposit Insurance. The deposits of the Bank are insured up to regulatory limits set by the FDIC, and, accordingly in 2010, were subject to deposit insurance assessments based on the Federal Deposit Insurance Reform Act of 2005, as adopted and effective on April 21, 2006. The FDIC maintains the Deposit Insurance Fund (“DIF”) by assessing depository institutions an insurance premium (assessment). The amount assessed to each institution is based on statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the DIF. The FDIC assesses higher rates to those institutions that pose greater risks to the insurance fund. These assessments included a prepayment of three years of insurance premiums which was paid by the Bank on December 30, 2009. The prepayment was intended to cover the Bank’s premiums for 2010, 2011 and 2012. The FDIC Board approved a final rule (the “rule”) on February 7, 2011 that changes the assessment base from domestic deposits to average assets minus average tangible equity, adopts a new large-bank pricing assessment scheme and sets a target size for the Deposit Insurance Fund. The changes will go into effect beginning with the second quarter of 2011 and will be payable at the end of September 2011. The rule finalizes a target size for the DIF at 2 percent of insured deposits. It also implements a lower assessment rate schedule when the DIF reaches 1.15 percent and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent.
In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation (FICO), a mixed-ownership government corporation established in the 1980’s to recapitalize the Federal Savings and Loan Insurance Corporation. The current annualized assessment rate is 1.02 basis points, or approximately .255 basis points per quarter. These assessments will continue until the FICO bonds mature in 2019.
Item 1. Business (Continued)
Capital Requirements. Among the requirements and restrictions imposed upon state banks by the Superintendent are the requirements to maintain reserves against deposits, restrictions on the nature and amount of loans, and restrictions relating to investments, opening of bank offices and other activities of state banks. Changes in the capital structure of state banks are also approved by the Superintendent. State banks must have a Tier 1 risk-based leverage ratio of 6.5% plus a fully funded loan loss reserve. In certain instances, the Superintendent may mandate higher capital, but the Superintendent has not imposed such a requirement on the Bank. In determining the Tier 1 risk-based leverage ratio, the Superintendent uses total equity capital without unrealized securities gains and the allowance for loan losses less any intangible assets. At December 31, 2010, the Tier 1 risk-based leverage ratio of the Bank was 9.66% and exceeded the ratio required by the Superintendent.
Capital adequacy for banks took on an added dimension with the establishment of a formal system of prompt corrective action under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). This system uses bank capital levels to trigger supervisory actions designed to quickly correct banking problems. Capital adequacy zones are used by the federal banking agencies to trigger these actions. The ratios and the definition of “adequate capital” are the same as those used by the agencies in their capital adequacy guidelines.
Federal law provides the federal banking regulators of the Bank with broad power to take prompt corrective action to resolve the problems of undercapitalized banking institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Under prompt corrective action, banks that are inadequately capitalized face a variety of mandatory and discretionary supervisory actions. For example, “undercapitalized banks” must restrict asset growth, obtain prior approval for business expansion, and have an approved plan to restore capital. “Critically undercapitalized banks” must be placed in receivership or conservatorship within 90 days unless some other action would result in lower long-term costs to the deposit insurance fund.
Supervisory Assessments. All Iowa banks are required to pay supervisory assessments to the Superintendent to fund the Superintendent’s examination and supervision operations. Effective July 1, 2002, the Superintendent changed the method of computation of the supervisory assessment from billing for each state examination completed based on an hourly rate, to billing on an annual basis based on the assets of the bank, the expected hours needed to conduct examinations of that size bank and an additional amount if more work is required. For fiscal 2010, the Bank’s Iowa supervisory assessment total was $126,806.
Community Investment and Consumer Protection Laws. The Community Reinvestment Act requires insured institutions to offer credit products and take other actions that respond to the credit needs of the community. Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act and the Fair Housing Act.
Dividends. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2010. Notwithstanding the availability of funds for dividends, however, the Superintendent may prohibit the payment of any dividends by the Bank if the Superintendent determines such payment would constitute an unsafe or unsound practice. The ability of the Company to pay dividends to its stockholders is dependent upon dividends paid by the Bank. The Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends. To maintain acceptable capital ratios in the Bank, certain of its retained earnings are not available for the payment of dividends. To maintain a ratio of total risk-based capital to assets of 8%, $49,864,000 of the Bank’s total retained earnings of $185,076,000 as of December 31, 2010 are available for the payment of dividends to the Company.
Item 1. Business (Continued)
Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company and its subsidiary, on investments in the stock or other securities of the Company and its subsidiary and the acceptance of the stock or other securities of the Company or its subsidiary as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiary, to principal stockholders of the Company, and to “related interests” of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiary or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.
Branching Authority. Historically, Iowa’s intrastate branching statutes have been rather restrictive when compared with those of other states. Effective July 1, 2004, all limitations on bank office locations were repealed, which effectively allowed statewide branching. Since that date, banks have been allowed to establish an unlimited number of offices in any location in Iowa subject only to regulatory approval.
Under the Riegle-Neal Act, both state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to “opt-out” of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Iowa permits interstate bank mergers, subject to certain restrictions, including a prohibition against interstate mergers involving an Iowa bank that has been in existence and continuous operation for fewer than five years.
State Bank Activities. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the Bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the Bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.
Item 1. Business (Continued)
Financial Privacy. In accordance with the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB Act”), federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financial institutions this decade has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U. S. Treasury Department has issued a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Item 1. Business (Continued)
CONSOLIDATED STATISTICAL INFORMATION
The following consolidated statistical information reflects selected balances and operations of the Company and the Bank for the periods indicated.
The following tables show (1) average balances of assets, liabilities and stockholders’ equity, (2) interest income and expense on a tax equivalent basis, (3) interest rates and interest differential and (4) changes in interest income and expense.
AVERAGE BALANCES
(Average Daily Basis)
|
Years Ended December 31
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
ASSETS
|
||||||||||||
|
Cash and cash equivalents
|
$ | 50,282 | $ | 36,138 | $ | 21,308 | ||||||
|
Taxable securities
|
107,031 | 110,883 | 114,717 | |||||||||
|
Nontaxable securities
|
98,753 | 99,142 | 96,771 | |||||||||
|
Federal funds sold
|
473 | 19,440 | 863 | |||||||||
|
Loans, net
|
1,519,344 | 1,479,823 | 1,406,447 | |||||||||
|
Property and equipment, net
|
26,588 | 24,258 | 22,208 | |||||||||
|
Other assets
|
60,230 | 48,681 | 37,370 | |||||||||
| $ | 1,862,701 | $ | 1,818,365 | $ | 1,699,684 | |||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||||||
|
Noninterest-bearing demand deposits
|
$ | 180,851 | $ | 170,627 | $ | 155,017 | ||||||
|
Interest-bearing demand deposits
|
235,380 | 219,545 | 182,554 | |||||||||
|
Savings deposits
|
368,517 | 321,208 | 255,026 | |||||||||
|
Time deposits
|
634,703 | 643,413 | 588,691 | |||||||||
|
Short-term borrowings
|
46,670 | 40,810 | 84,119 | |||||||||
|
FHLB borrowings
|
194,651 | 237,556 | 261,399 | |||||||||
|
Other liabilities
|
18,440 | 16,605 | 14,198 | |||||||||
|
Redeemable common stock held by
|
||||||||||||
|
Employee Stock Ownership Plan
|
23,923 | 23,357 | 23,010 | |||||||||
|
Stockholders' equity
|
159,566 | 145,244 | 135,670 | |||||||||
| $ | 1,862,701 | $ | 1,818,365 | $ | 1,699,684 | |||||||
Item 1. Business (Continued)
INTEREST INCOME AND EXPENSE
|
Years Ended December 31
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Income:
|
||||||||||||
|
Loans (1)
|
$ | 88,495 | $ | 89,184 | $ | 89,525 | ||||||
|
Taxable securities
|
3,380 | 3,786 | 4,734 | |||||||||
|
Nontaxable securities (1)
|
5,067 | 5,187 | 5,204 | |||||||||
|
Federal funds sold
|
74 | 55 | 18 | |||||||||
|
Total interest income
|
97,016 | 98,212 | 99,481 | |||||||||
|
Expense:
|
||||||||||||
|
Interest-bearing demand deposits
|
1,053 | 1,390 | 1,571 | |||||||||
|
Savings deposits
|
2,073 | 3,137 | 3,397 | |||||||||
|
Time deposits
|
16,074 | 20,742 | 23,897 | |||||||||
|
Short-term borrowings
|
523 | 631 | 1,818 | |||||||||
|
FHLB borrowings
|
8,116 | 11,241 | 12,860 | |||||||||
|
Total interest expense
|
27,839 | 37,141 | 43,543 | |||||||||
|
Net interest income
|
$ | 69,177 | $ | 61,071 | $ | 55,938 | ||||||
|
(1) Presented on a tax equivalent basis using a rate of 35% for the three years presented.
|
||||||||||||
Item 1. Business (Continued)
INTEREST RATES AND INTEREST DIFFERENTIAL
|
Years Ended December 31
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Average yields:
|
||||||||||||
|
Loans (1)
|
5.81 | % | 6.01 | % | 6.35 | % | ||||||
|
Loans (tax equivalent basis) (1)
|
5.82 | 6.03 | 6.37 | |||||||||
|
Taxable securities
|
3.16 | 3.41 | 4.13 | |||||||||
|
Nontaxable securities
|
3.34 | 3.40 | 3.50 | |||||||||
|
Nontaxable securities (tax equivalent basis)
|
5.13 | 5.23 | 5.38 | |||||||||
|
Federal funds sold
|
0.26 | 0.16 | 2.05 | |||||||||
|
Average rates paid:
|
||||||||||||
|
Interest-bearing demand deposits
|
0.45 | 0.63 | 0.86 | |||||||||
|
Savings deposits
|
0.56 | 0.98 | 1.33 | |||||||||
|
Time deposits
|
2.53 | 3.22 | 4.06 | |||||||||
|
Short-term borrowings
|
1.06 | 1.48 | 2.09 | |||||||||
|
FHLB borrowings
|
4.17 | 4.73 | 4.92 | |||||||||
|
Yield on average interest-earning assets
|
5.53 | 5.69 | 6.15 | |||||||||
|
Rate on average interest-bearing liabilities
|
1.87 | 2.52 | 3.15 | |||||||||
|
Net interest spread (2)
|
3.66 | 3.17 | 3.00 | |||||||||
|
Net interest margin (3)
|
3.95 | 3.55 | 3.47 | |||||||||
|
(1)
|
Non-accruing loans are not significant and have been included in the average loan balances for purposes of this computation.
|
|
(2)
|
Net interest spread is the difference between the yield on average interest-earning assets and the yield on average interest-paying liabilities stated on a tax equivalent basis using a federal rate of 35% for the three years presented. The net interest spread increased 49 basis points in 2010 and increased 17 basis points in 2009.
|
|
(3)
|
Net interest margin is net interest income, on a tax equivalent basis, divided by average interest-earning assets. The net interest margin increased 40 basis points in 2010 and increased 8 basis points in 2009. The net interest margin increased in 2010 due to the continued low rate environment. The Company was able to reprice interest-bearing liabilities downward more quickly that the decline in average yields on earning assets.
|
Item 1. Business (Continued)
CHANGES IN INTEREST INCOME AND EXPENSE
|
Changes Due
|
Changes Due
|
Total
|
||||||||||
|
To Volume
|
To Rates
|
Changes
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Year ended December 31, 2010:
|
||||||||||||
|
Change in interest income:
|
||||||||||||
|
Loans
|
$ | 2,294 | $ | (2,983 | ) | $ | (689 | ) | ||||
|
Taxable securities
|
(75 | ) | (331 | ) | (406 | ) | ||||||
|
Nontaxable securities
|
(20 | ) | (100 | ) | (120 | ) | ||||||
|
Federal funds sold
|
19 | - | 19 | |||||||||
| $ | 2,218 | $ | (3,414 | ) | $ | (1,196 | ) | |||||
|
Change in interest expense:
|
||||||||||||
|
Interest-bearing demand deposits
|
(100 | ) | 437 | 337 | ||||||||
|
Savings deposits
|
(499 | ) | 1,563 | 1,064 | ||||||||
|
Time deposits
|
281 | 4,387 | 4,668 | |||||||||
|
Short-term borrowings
|
(107 | ) | 215 | 108 | ||||||||
|
FHLB borrowings
|
2,030 | 1,095 | 3,125 | |||||||||
| 1,605 | 7,697 | 9,302 | ||||||||||
|
Change in net interest income
|
$ | 3,823 | $ | 4,283 | $ | 8,106 | ||||||
|
Year ended December 31, 2009:
|
||||||||||||
|
Change in interest income:
|
||||||||||||
|
Loans
|
$ | 4,657 | $ | (4,998 | ) | $ | (341 | ) | ||||
|
Taxable securities
|
(191 | ) | (757 | ) | (948 | ) | ||||||
|
Nontaxable securities
|
127 | (144 | ) | (17 | ) | |||||||
|
Federal funds sold
|
37 | - | 37 | |||||||||
| $ | 4,630 | $ | (5,899 | ) | $ | (1,269 | ) | |||||
|
Change in interest expense:
|
||||||||||||
|
Interest-bearing demand deposits
|
(321 | ) | 502 | 181 | ||||||||
|
Savings deposits
|
(1,142 | ) | 1,402 | 260 | ||||||||
|
Time deposits
|
(2,222 | ) | 5,377 | 3,155 | ||||||||
|
Short-term borrowings
|
912 | 275 | 1,187 | |||||||||
|
FHLB borrowings
|
1,206 | 413 | 1,619 | |||||||||
| (1,567 | ) | 7,969 | 6,402 | |||||||||
|
Change in net interest income
|
$ | 3,063 | $ | 2,070 | $ | 5,133 | ||||||
Rate/volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Loan fees included in interest income are not material. Interest on nontaxable securities and loans is shown at tax equivalent amounts.
Item 1. Business (Continued)
LOANS
The following table shows the composition of loans (before deducting the allowance for loan losses) as of December 31 for each of the last five years. The table does not include loans held for sale to the secondary market.
|
December 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||
|
Agricultural
|
$ | 65,004 | $ | 64,598 | $ | 64,198 | $ | 60,004 | $ | 49,223 | ||||||||||
|
Commercial and financial
|
141,619 | 153,997 | 162,170 | 132,070 | 111,441 | |||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
25,232 | 25,821 | 29,343 | 33,209 | 26,266 | |||||||||||||||
|
Construction, land development and commercial
|
86,552 | 95,955 | 111,006 | 89,935 | 87,933 | |||||||||||||||
|
Mortgage, farmland
|
90,448 | 87,300 | 83,499 | 66,554 | 53,822 | |||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
519,533 | 470,328 | 444,474 | 423,177 | 420,642 | |||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
109,036 | 114,742 | 117,086 | 115,604 | 111,077 | |||||||||||||||
|
Mortgage, multi-family
|
202,630 | 190,180 | 180,525 | 167,718 | 166,540 | |||||||||||||||
|
Mortgage, commercial
|
302,020 | 295,070 | 270,158 | 247,749 | 231,408 | |||||||||||||||
|
Loans to individuals
|
23,627 | 25,405 | 26,823 | 29,069 | 32,167 | |||||||||||||||
|
Obligations of state and political subdivisions
|
24,959 | 9,745 | 8,218 | 7,220 | 6,558 | |||||||||||||||
| $ | 1,590,660 | $ | 1,533,141 | $ | 1,497,500 | $ | 1,372,309 | $ | 1,297,077 | |||||||||||
|
Less allowance for loan losses
|
29,230 | 29,160 | 27,660 | 19,710 | 17,850 | |||||||||||||||
| $ | 1,561,430 | $ | 1,503,981 | $ | 1,469,840 | $ | 1,352,599 | $ | 1,279,227 | |||||||||||
There were no foreign loans outstanding for any of the years presented.
MATURITY DISTRIBUTION OF LOANS
The following table shows the principal payments due on loans as of December 31, 2010:
|
Amount
|
One Year
|
One To
|
Over Five
|
|||||||||||||
|
Of Loans
|
Or Less (1)
|
Five Years
|
Years
|
|||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||
|
Commercial
|
$ | 202,996 | $ | 107,820 | $ | 91,026 | $ | 4,150 | ||||||||
|
Real Estate
|
1,338,720 | 254,838 | 901,076 | 182,806 | ||||||||||||
|
Other
|
48,944 | 11,877 | 18,258 | 18,809 | ||||||||||||
|
Totals
|
$ | 1,590,660 | $ | 374,535 | $ | 1,010,360 | $ | 205,765 | ||||||||
|
The types of interest rates applicable to these principal payments are shown below:
|
||||||||||||||||
|
Fixed rate
|
$ | 795,020 | $ | 138,387 | $ | 546,389 | $ | 110,244 | ||||||||
|
Variable rate
|
795,640 | 236,148 | 463,971 | 95,521 | ||||||||||||
| $ | 1,590,660 | $ | 374,535 | $ | 1,010,360 | $ | 205,765 | |||||||||
|
(1)
|
A significant portion of the commercial loans are due in one year or less. A significant percentage of the loans will be re-evaluated prior to their maturity and are likely to be extended.
|
Item 1. Business (Continued)
IMPAIRED LOANS AND NON-PERFORMING ASSETS
The following table summarizes the Company's impaired loans and non-performing assets as of December 31 for each of the years presented:
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||
|
Nonaccrual loans
|
$ | 3,848 | $ | 5,360 | $ | 1,327 | $ | 4,948 | $ | 879 | ||||||||||
|
Accruing loans past due 90 days or more
|
5,345 | 7,009 | 5,049 | 6,019 | 4,983 | |||||||||||||||
|
Restructured loans
|
22,355 | 15,135 | 4,478 | - | - | |||||||||||||||
|
Total impaired loans (1)
|
31,548 | 27,504 | 10,854 | 10,967 | 5,862 | |||||||||||||||
|
Other real estate
|
2,233 | 3,227 | 5,155 | 473 | 801 | |||||||||||||||
|
Non-performing assets (includes impaired loans and other real estate)
|
33,781 | 30,731 | 16,009 | 11,440 | 6,663 | |||||||||||||||
|
Loans held for investment
|
1,590,660 | 1,533,141 | 1,497,500 | 1,372,309 | 1,297,077 | |||||||||||||||
|
Ratio of allowance for loan losses to loans held for investment
|
1.84 | % | 1.90 | % | 1.85 | % | 1.44 | % | 1.38 | % | ||||||||||
|
Ratio of allowance for loan losses to impaired loans
|
92.65 | 106.02 | 254.84 | 179.72 | 336.23 | |||||||||||||||
|
Ratio of impaired loans to total loans held for investment
|
1.98 | 1.79 | 0.72 | 0.80 | 0.45 | |||||||||||||||
|
Ratio of non-performing assets to total assets
|
1.75 | 1.68 | 0.90 | 0.69 | 0.43 | |||||||||||||||
|
(1)
|
The Company has revised the total of impaired loans from previous filings. The revised total has decreased by $47,761,000, $41,332,000, $28,616,000, and $8,819,000 as of December 31, 2009, 2008, 2007, and 2006, respectively. The revision was made to align with the regulatory definition of impaired loans. In previous filings, the Company included all loans that were evaluated for potential impairment as part of our quarterly allowance for loan loss calculation in the non-performing loan total. The Company revised the presentation of impaired loans to include only nonaccrual loans, accruing loans greater than 90 days past due and restructured loans. The resulting change in the presentation of impaired loan total does not have any impact on the allowance for loan loss policy, allowance for loan loss calculation or the provision for loan loss for any periods presented. The loans that were removed from the presentation were evaluated for potential impairment. As these loans were not considered impaired, the appropriate allocation was calculated using historical loss rates, as adjusted for qualitative factors. The revised impaired loan presentation allows the Company to better compare itself to its appropriate peer group as the revised impaired loan presentation corresponds with the regulatory definition.
|
The ratio of allowance for loan losses to impaired loans decreased to 92.65% as of December 31, 2010 compared to 106.02% as of the same period in 2009. This decrease is due to losses recognized on impaired loans for the year ended December 31, 2010. The impaired loans of $31,548,000 had an allocated reserve of $810,000 as of December 31, 2010. See Note 3 to the Consolidated Financial Statements for additional disclosures on impaired loans.
Item 1. Business (Continued)
The following table summarizes the Company's impaired loans as of December 31 of each of the years presented:
|
December 31, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
| Accruing loans | Accruing loans | |||||||||||||||||||||||
|
Non-accrual
|
past due
|
Restructured
|
Non-accrual
|
past due
|
Restructured
|
|||||||||||||||||||
|
loans (1)
|
90 days
|
loans
|
loans (1)
|
90 days
|
loans
|
|||||||||||||||||||
|
(Amounts In Thousands)
|
(Amounts In Thousands)
|
|||||||||||||||||||||||
|
Agriculture
|
$ | - | $ | 104 | $ | - | $ | - | $ | 8 | $ | - | ||||||||||||
|
Commercial and financial
|
2,647 | 1,045 | 2,301 | 958 | 280 | 3,134 | ||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
- | 271 | - | - | 260 | - | ||||||||||||||||||
|
Construction, land development and commercial
|
1,546 | 145 | 2,118 | 2,645 | 1,202 | 2,442 | ||||||||||||||||||
|
Mortgage, farmland
|
147 | - | - | - | 172 | - | ||||||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
1,783 | 3,053 | 779 | 1,534 | 3,528 | 1,672 | ||||||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
26 | 483 | 963 | - | 140 | 613 | ||||||||||||||||||
|
Mortgage, multi-family
|
1,837 | - | 4,775 | - | 906 | 4,867 | ||||||||||||||||||
|
Mortgage, commercial
|
260 | 229 | 11,419 | 223 | 469 | 2,407 | ||||||||||||||||||
|
Loans to individuals
|
- | 15 | - | - | 44 | - | ||||||||||||||||||
| $ | 8,246 | $ | 5,345 | $ | 22,355 | $ | 5,360 | $ | 7,009 | $ | 15,135 | |||||||||||||
|
December 31, 2008
|
December 31, 2007
|
|||||||||||||||||||||||
| Accruing loans | Accruing loans | |||||||||||||||||||||||
|
Non-accrual
|
past due
|
Restructured
|
Non-accrual
|
past due
|
Restructured
|
|||||||||||||||||||
|
loans (1)
|
90 days
|
loans
|
loans
|
90 days
|
loans
|
|||||||||||||||||||
|
(Amounts In Thousands)
|
(Amounts In Thousands)
|
|||||||||||||||||||||||
|
Agriculture
|
$ | - | $ | - | $ | - | $ | 109 | $ | 34 | $ | - | ||||||||||||
|
Commercial and financial
|
661 | 429 | 199 | 491 | 795 | - | ||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
1,325 | 208 | 1,010 | 369 | - | - | ||||||||||||||||||
|
Construction, land development and commercial
|
- | 515 | 3,269 | 302 | 750 | - | ||||||||||||||||||
|
Mortgage, farmland
|
- | - | - | - | - | - | ||||||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
549 | 2,741 | - | - | 3,897 | - | ||||||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
- | 363 | - | 18 | 211 | - | ||||||||||||||||||
|
Mortgage, multi-family
|
- | 90 | - | - | - | - | ||||||||||||||||||
|
Mortgage, commercial
|
- | 605 | - | 3,659 | 222 | - | ||||||||||||||||||
|
Loans to individuals
|
- | 98 | - | - | 110 | - | ||||||||||||||||||
| $ | 2,535 | $ | 5,049 | $ | 4,478 | $ | 4,948 | $ | 6,019 | $ | - | |||||||||||||
|
December 31, 2006
|
||||||||||||||||||||||||
| Accruing loans | ||||||||||||||||||||||||
|
Non-accrual
|
past due
|
Restructured
|
||||||||||||||||||||||
|
loans
|
90 days
|
loans
|
||||||||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||||||
|
Agriculture
|
$ | 445 | $ | 25 | $ | - | ||||||||||||||||||
|
Commercial and financial
|
212 | 307 | - | |||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
- | 506 | - | |||||||||||||||||||||
|
Construction, land development and commercial
|
- | 695 | - | |||||||||||||||||||||
|
Mortgage, farmland
|
44 | 43 | - | |||||||||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
- | 1,783 | - | |||||||||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
- | 47 | - | |||||||||||||||||||||
|
Mortgage, multi-family
|
- | - | - | |||||||||||||||||||||
|
Mortgage, commercial
|
178 | 1,157 | - | |||||||||||||||||||||
|
Loans to individuals
|
- | 420 | - | |||||||||||||||||||||
| $ | 879 | $ | 4,983 | $ | - | |||||||||||||||||||
(1) Includes gross non-accrual loans. There were $4,398,000, $0 and $1,208,000 of restructured loans included within non-accrual loans as of December 31, 2010, 2009 and 2008, respectively.
Item 1. Business (Continued)
Impaired loans increased by $4.0 million from December 31, 2009 to December 31, 2010. Impaired loans include any loan that has been placed on nonaccrual status, loans past due 90 days or more and still accruing interest and restructured loans. Impaired loans also include loans that, based on management’s evaluation of current information and events, the Bank expects to be unable to collect in full according to the contractual terms of the original loan agreement. The increase in impaired loans is due mainly to the restructuring of one large commercial mortgage borrower with an aggregate loan balance of $8.8 million during the year ended December 31, 2010. This increase is offset by pay downs of $0.8 million from two unrelated first mortgage borrowers, pay downs of $0.5 million from two unrelated construction and land development borrowers and $0.8 million of recognized losses from two unrelated commercial borrowers, which the Bank had adequately reserved for in previous quarters. The losses were determined after further review of the real estate values and collateral position for the customer’s properties. The increase of impaired loans from 2009 to 2010 is further offset by a decrease in loans greater than 90 days past due and still accruing interest of $1.7 million. Most of the impaired loans are secured by real estate and are believed to be adequately collateralized.
For loans that are collateral dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral that can be identified as uncollectible. In general, this is the amount that the carrying value of the loan exceeds the related appraised value. Generally, it is the Company’s policy not to rely on appraisals that are older than one year prior to the date the impairment is being measured. The most recent appraisal values may be adjusted if, in the Company’s judgment, experience and other market data indicate that the property’s value, use, condition, exit market or other variables affecting its value may have changed since the appraisal was performed, consistent with the December 2006 joint interagency guidance on the allowance for loan losses. The charge off or loss adjustment supported by an appraisal is considered the minimum charge off. Any adjustments made to the appraised value are to provide additional charge off or loss allocations based on the applicable facts and circumstances. In instances where there is an estimated decline in value, a loss allocation may be provided or a charge off taken pending confirmation of the amount of the loss from an updated appraisal. Upon receipt of the new appraisals, an additional loss allocation may be provided or charge off taken based on the appraised value of the collateral. On average, appraisals are obtained within one month of order.
The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge offs. When an updated appraisal value has been obtained, the Company has used the appraisal amount in determining the appropriate charge off or required reserve. The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company’s loss experience with the type of property in question. Any information utilized in addition to the appraisal is intended to identify additional charge offs or provisions, not to override the appraised value.
For flood-related properties located in Linn County, Iowa, the Company has not used external appraisals to determine the fair market value of collateral. Due to the wide-spread flooding in June 2008, there was a lack of appropriate arms-length transactions to support useful appraisals especially for 1-to-4 family residences. Instead, the Company has utilized assessed values and independent realtor market evaluations on individual properties. The Company believes these tools have been an appropriate measure in estimating the fair market value of such properties in this situation.
The Company does not have a significant amount of loans that are past due less than 90 days where there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms.
Loans 90 days past due that are still accruing interest decreased $1.7 million from December 31, 2009 to December 31, 2010. Real estate loans make up approximately $5.6 million, or 68%, of total non-accrual loans as of December 31, 2010. As of December 31, 2010 and 2009, loans 90 days past due and accruing were 0.34% and 0.46% of total loans, respectively. The average balance of the past due loans also decreased in 2010 as compared to 2009. The average past due loan balance was $73,000 as of December 31, 2010 compared to $95,000 as of December 31, 2009. The loans 90 days past due and still accruing are believed to be adequately collateralized. Loans are placed on non-accrual status when management believes the collection of future principal and interest is not reasonably assured.
Item 1. Business (Continued)
The increase in non-accrual loans from December 31, 2009 to December 31, 2010 relates to two borrower relationships that had an aggregate balance of approximately $4.4 million as of December 31, 2010 which was offset by the payoff for two borrowers of $1.1 million. Non-accrual loans represent 0.52% of total loans as of December 31, 2010 compared to 0.35% of total loans as of December 31, 2009. The non-accrual loans are considered to be impaired loans for purposes of reviewing the adequacy of the loan loss reserve. Interest income was reduced by $384,000, $293,000 and $93,000 for the years ended December 31, 2010, 2009 and 2008, respectively, by the classification of the loans as non-accrual.
The Bank regularly reviews a substantial portion of the loans in the portfolio and assesses whether the loans are impaired in accordance with ASC 310. If the loans are impaired, the Bank determines if a specific allowance is appropriate. In addition, the Bank's management also reviews and, where determined necessary, provides allowances for particular loans based upon (1) reviews of specific borrowers and (2) management’s assessment of areas that management considers are of higher credit risk, including loans that have been restructured. Loans that are determined not to be impaired and for which there are no specific allowances are classified into one or more risk categories. Based upon the risk category assigned, the Bank allocates a percentage, as determined by management, for a required allowance needed. The determination concerning the appropriate percentage begins with historical loss experience factors, which are then adjusted for levels and trends in past due loans, levels and trends in charged-off and recovered loans, trends in volume growth, trends in problem and watch loans, trends in restructured loans, local economic trends and conditions, industry and other conditions, and effects of changing interest rates.
The Company has no individual borrower or borrowers engaged in the same or similar industry exceeding 10% of total loans. The Company has no interest-bearing assets, other than loans, that meet the non-accrual, past due, restructured or potential problem loan criteria.
The Bank may modify the terms of a loan to maximize the collection of amounts due. In most cases, the modification is either a reduction in interest rate, conversion to interest only payments or an extension of the maturity date. Generally, the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term, so concessionary modification is granted to the borrower that would otherwise not be considered. Restructured loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. The Bank restructured loans with an aggregate principal amount totaling $9.3 million and $11.5 million during the years ended December 31, 2010 and 2009, respectively. All of the loans are considered to be troubled debt restructurings as defined under FASB ASC 310-40. Of the $9.3 million restructured in 2010, $8.8 million related to one customer relationship and consisted of five loans. The loans were re-written into two notes using the “Policy Statement on Prudent Commercial Real Estate Loan Workouts” issued by the joint interagency regulators, including the Bank’s main regulator, the FDIC, in October 2009. The first note was equal to 80% of the updated 2009 appraised value for the property with a maturity date of five years. The interest rate for the first note is 5.95% and is considered a market interest rate by the Company. The second note was for the remaining loan balance with a five year maturity and a below market interest rate of 4.0%. At the time of the restructure, the second note was fully charged off which did not impact the allowance requirement as the Company had already factored this information into the December 31, 2009 allowance for loan loss calculation. The restructure was completed as it allowed the debt that is recorded on the books to be supported by an updated appraisal.
The Bank has commitments to lend additional borrowings to restructured loan customers. These commitments are in the normal course of business and allow the borrowers to build pre-sold homes and commercial property and which increase their overall cash flow. The additional borrowings are not used to facilitate payments on these loans.
Item 1. Business (Continued)
Below is a summary of information for restructured loans:
|
December 31, 2010
|
||||||||||||
|
Number of
|
Recorded
|
Commitments
|
||||||||||
|
contracts
|
investment
|
outstanding
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Agriculture
|
- | $ | - | - | ||||||||
|
Commercial and financial
|
2 | 2,301 | 155 | |||||||||
|
Real estate:
|
||||||||||||
|
Construction, 1 to 4 family residential
|
- | - | 1,106 | |||||||||
|
Construction, land development and commercial
|
4 | 2,118 | 2,008 | |||||||||
|
Mortgage, farmland
|
- | - | - | |||||||||
|
Mortgage, 1 to 4 family first liens
|
3 | 779 | - | |||||||||
|
Mortgage, 1 to 4 family junior liens
|
2 | 963 | - | |||||||||
|
Mortgage, multi-family
|
3 | 4,775 | - | |||||||||
|
Mortgage, commercial
|
4 | 11,419 | - | |||||||||
|
Loans to individuals
|
- | - | - | |||||||||
| 18 | $ | 22,355 | $ | 3,269 | ||||||||
|
December 31, 2009
|
||||||||||||
|
Number of
|
Recorded
|
|||||||||||
|
contracts
|
investment
|
|||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Agriculture
|
- | $ | - | |||||||||
|
Commercial and financial
|
2 | 3,134 | ||||||||||
|
Real estate:
|
||||||||||||
|
Construction, 1 to 4 family residential
|
- | - | ||||||||||
|
Construction, land development and commercial
|
5 | 2,442 | ||||||||||
|
Mortgage, farmland
|
- | - | ||||||||||
|
Mortgage, 1 to 4 family first liens
|
7 | 1,672 | ||||||||||
|
Mortgage, 1 to 4 family junior liens
|
1 | 613 | ||||||||||
|
Mortgage, multi-family
|
3 | 4,867 | ||||||||||
|
Mortgage, commercial
|
2 | 2,407 | ||||||||||
|
Loans to individuals
|
- | - | ||||||||||
| 20 | $ | 15,135 | ||||||||||
Residential real estate loan products that include features such as loan-to-values in excess of 100%, interest only payments or adjustable-rate mortgages, which expose a borrower to payment increases in excess of changes in the market interest rate, increase the credit risk of a loan. The Bank has not offered and does not offer this type of loan product.
Item 1. Business (Continued)
Specific allowances for losses on impaired loans are established if the loan balances exceed the net present value of the relevant future cash flows or the fair value of the relevant collateral if the loan is collateral dependent.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Bank's loan loss experience for the year ended December 31, 2010:
|
Agricultural
|
Commercial and Financial
|
Real Estate:
Construction
and land
development
|
Real estate:
Mortgage, farmland
|
Real estate:
Mortgage, 1 to
4 family
|
Real estate:
Mortgage, multi-
family and commercial
|
Other
|
Total
|
|||||||||
|
2010
|
||||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||
|
Beginning balance
|
$ 2,967
|
$ 7,090
|
$ 4,811
|
$ 1,417
|
$ 7,484
|
$ 4,742
|
$ 649
|
$ 29,160
|
||||||||
|
Charge-offs
|
(18)
|
(3,647)
|
(1,202)
|
(52)
|
(4,343)
|
(1,507)
|
(423)
|
(11,192)
|
||||||||
|
Recoveries
|
248
|
946
|
81
|
44
|
583
|
152
|
283
|
2,337
|
||||||||
|
Provision
|
(1,027)
|
2,353
|
704
|
73
|
4,228
|
2,270
|
324
|
8,925
|
||||||||
|
Ending balance
|
$ 2,170
|
$ 6,742
|
$ 4,394
|
$ 1,482
|
$ 7,952
|
$ 5,657
|
$ 833
|
$ 29,230
|
||||||||
The ratio of net charge-offs to average net loans outstanding during the year ended December 31, 2010 was 0.58%.
Item 1. Business (Continued)
The following table summarizes the Bank's loan loss experience for the years ended December 31, 2009, 2008, 2007, and 2006:
|
Year Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||
|
Balance, beginning
|
$ | 27,660 | $ | 19,710 | $ | 17,850 | $ | 15,360 | ||||||||
|
Charge-offs:
|
||||||||||||||||
|
Agricultural
|
82 | 99 | 343 | 40 | ||||||||||||
|
Commercial and financial
|
5,161 | 1,359 | 1,422 | 677 | ||||||||||||
|
Real estate:
|
||||||||||||||||
|
Construction, 1 to 4 family residential
|
124 | 47 | 45 | 8 | ||||||||||||
|
Construction, land development and commercial
|
312 | 15 | - | 13 | ||||||||||||
|
Mortgage, farmland
|
22 | - | 58 | - | ||||||||||||
|
Mortgage, 1 to 4 family first liens
|
1,438 | 1,205 | 141 | 128 | ||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
1,626 | 964 | 321 | 308 | ||||||||||||
|
Mortgage, multi-family
|
398 | 92 | - | 72 | ||||||||||||
|
Mortgage, commercial
|
1,774 | 104 | 57 | - | ||||||||||||
|
Loans to individuals
|
515 | 604 | 531 | 627 | ||||||||||||
| 11,452 | 4,489 | 2,918 | 1,873 | |||||||||||||
|
Recoveries:
|
||||||||||||||||
|
Agricultural
|
20 | 61 | 44 | 44 | ||||||||||||
|
Commercial and financial
|
415 | 340 | 479 | 643 | ||||||||||||
|
Real estate:
|
||||||||||||||||
|
Construction, 1 to 4 family residential
|
49 | - | 2 | 2 | ||||||||||||
|
Construction, land development and commercial
|
- | - | - | - | ||||||||||||
|
Mortgage, farmland
|
1 | 4 | 18 | 6 | ||||||||||||
|
Mortgage, 1 to 4 family first liens
|
49 | 25 | 89 | 144 | ||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
187 | 79 | 130 | 44 | ||||||||||||
|
Mortgage, multi-family
|
- | 95 | 2 | - | ||||||||||||
|
Mortgage, commercial
|
7 | 33 | 58 | 27 | ||||||||||||
|
Loans to individuals
|
277 | 295 | 427 | 442 | ||||||||||||
| 1,005 | 932 | 1,249 | 1,352 | |||||||||||||
|
Net charge-offs
|
10,447 | 3,557 | 1,669 | 521 | ||||||||||||
|
Provision charged to expense (1)
|
11,947 | 11,507 | 3,529 | 3,011 | ||||||||||||
|
Balance, ending
|
$ | 29,160 | $ | 27,660 | $ | 19,710 | $ | 17,850 | ||||||||