Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - HILLS BANCORPORATION | exhibit3263018.htm |
| EX-31 - EXHIBIT 31 - HILLS BANCORPORATION | exhibit3163018.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
Commission file number: 0-12668
Hills Bancorporation
Incorporated in Iowa | I.R.S. Employer Identification |
No. 42-1208067 | |
131 MAIN STREET, HILLS, IOWA 52235
Telephone number: (319) 679-2291
Indicate by checkmark 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.
þ Yes o No
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).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated Filer þ |
Non-accelerated filer o | Small Reporting Company o |
Emerging Growth Company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
SHARES OUTSTANDING | |
CLASS | July 31, 2018 |
Common Stock, no par value | 9,352,074 |
HILLS BANCORPORATION
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
Page | ||
Number | ||
Item 1. | Financial Statements | |
Item 2. | ||
Item 3. | ||
Item 4. | ||
Part II | ||
OTHER INFORMATION | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Page 3
HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Share Amounts)
June 30, 2018 | December 31, 2017 | ||||||
ASSETS | (Unaudited) | ||||||
Cash and cash equivalents | $ | 148,231 | $ | 154,353 | |||
Investment securities available for sale at fair value (amortized cost June 30, 2018 $292,170; December 31, 2017 $286,296) | 288,501 | 285,155 | |||||
Stock of Federal Home Loan Bank | 12,173 | 15,005 | |||||
Loans held for sale | 5,757 | 5,162 | |||||
Loans, net of allowance for loan losses (June 30, 2018 $29,510; December 31, 2017 $29,400) | 2,474,291 | 2,431,165 | |||||
Property and equipment, net | 38,046 | 37,857 | |||||
Tax credit real estate investment | 9,425 | 10,076 | |||||
Accrued interest receivable | 11,047 | 10,772 | |||||
Deferred income taxes, net | 8,921 | 8,806 | |||||
Goodwill | 2,500 | 2,500 | |||||
Other assets | 4,063 | 2,509 | |||||
Total Assets | $ | 3,002,955 | $ | 2,963,360 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Liabilities | |||||||
Noninterest-bearing deposits | $ | 386,020 | $ | 363,817 | |||
Interest-bearing deposits | 2,010,990 | 1,924,748 | |||||
Total deposits | $ | 2,397,010 | $ | 2,288,565 | |||
Federal Home Loan Bank borrowings | 215,000 | 295,000 | |||||
Accrued interest payable | 1,506 | 1,290 | |||||
Other liabilities | 19,147 | 23,481 | |||||
Total Liabilities | $ | 2,632,663 | $ | 2,608,336 | |||
Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP) | $ | 46,144 | $ | 43,308 | |||
STOCKHOLDERS' EQUITY | |||||||
Common stock, no par value; authorized 20,000,000 shares; issued June 30, 2018 10,321,836 shares; December 31, 2017 10,320,315 shares | $ | — | $ | — | |||
Paid in capital | 51,899 | 48,930 | |||||
Retained earnings | 356,003 | 341,558 | |||||
Accumulated other comprehensive loss | (3,724 | ) | (2,446 | ) | |||
Treasury stock at cost (June 30, 2018 948,170 shares; December 31, 2017 985,161 shares) | (33,886 | ) | (33,018 | ) | |||
Total Stockholders' Equity | $ | 370,292 | $ | 355,024 | |||
Less maximum cash obligation related to ESOP shares | 46,144 | 43,308 | |||||
Total Stockholders' Equity Less Maximum Cash Obligation Related to ESOP Shares | $ | 324,148 | $ | 311,716 | |||
Total Liabilities & Stockholders' Equity | $ | 3,002,955 | $ | 2,963,360 | |||
See Notes to Consolidated Financial Statements.
Page 4
HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts In Thousands, Except Per Share Amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||
Interest income: | ||||||||||||||
Loans, including fees | $ | 26,968 | $ | 24,845 | $ | 52,996 | $ | 48,735 | ||||||
Investment securities: | ||||||||||||||
Taxable | 682 | 407 | 1,245 | 800 | ||||||||||
Nontaxable | 866 | 809 | 1,755 | 1,642 | ||||||||||
Federal funds sold | 548 | 72 | 1,099 | 136 | ||||||||||
Total interest income | $ | 29,064 | $ | 26,133 | $ | 57,095 | $ | 51,313 | ||||||
Interest expense: | ||||||||||||||
Deposits | $ | 4,540 | $ | 2,283 | $ | 8,404 | $ | 4,411 | ||||||
Short-term borrowings | — | 27 | — | 49 | ||||||||||
FHLB borrowings | 1,701 | 1,872 | 3,575 | 3,705 | ||||||||||
Total interest expense | $ | 6,241 | $ | 4,182 | $ | 11,979 | $ | 8,165 | ||||||
Net interest income | $ | 22,823 | $ | 21,951 | $ | 45,116 | $ | 43,148 | ||||||
Provision for loan losses | 711 | 2,511 | (54 | ) | 1,697 | |||||||||
Net interest income after provision for loan losses | $ | 22,112 | $ | 19,440 | $ | 45,170 | $ | 41,451 | ||||||
Noninterest income: | ||||||||||||||
Net gain on sale of loans | $ | 443 | $ | 380 | $ | 774 | $ | 696 | ||||||
Trust fees | 3,007 | 2,024 | 5,648 | 3,903 | ||||||||||
Service charges and fees | 2,408 | 2,228 | 4,636 | 4,360 | ||||||||||
Other noninterest income | 376 | 369 | 804 | 1,283 | ||||||||||
$ | 6,234 | $ | 5,001 | $ | 11,862 | $ | 10,242 | |||||||
Noninterest expenses: | ||||||||||||||
Salaries and employee benefits | $ | 8,823 | $ | 8,593 | $ | 17,107 | $ | 16,573 | ||||||
Occupancy | 1,022 | 1,019 | 2,123 | 2,061 | ||||||||||
Furniture and equipment | 1,490 | 1,436 | 2,964 | 2,865 | ||||||||||
Office supplies and postage | 461 | 510 | 895 | 971 | ||||||||||
Advertising and business development | 607 | 705 | 1,237 | 1,495 | ||||||||||
Outside services | 2,347 | 1,858 | 4,925 | 3,866 | ||||||||||
FDIC insurance assessment | 213 | 212 | 431 | 419 | ||||||||||
Other noninterest expense | 717 | 868 | 1,254 | 1,362 | ||||||||||
$ | 15,680 | $ | 15,201 | $ | 30,936 | $ | 29,612 | |||||||
Income before income taxes | $ | 12,666 | $ | 9,240 | $ | 26,096 | $ | 22,081 | ||||||
Income taxes | 2,603 | 2,783 | 5,175 | 6,750 | ||||||||||
Net income | $ | 10,063 | $ | 6,457 | $ | 20,921 | $ | 15,331 | ||||||
Earnings per share: | ||||||||||||||
Basic | $ | 1.07 | $ | 0.69 | $ | 2.23 | $ | 1.64 | ||||||
Diluted | $ | 1.07 | $ | 0.69 | $ | 2.23 | $ | 1.64 | ||||||
See Notes to Consolidated Financial Statements.
Page 5
HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (Amounts In Thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||
Net income | $ | 10,063 | $ | 6,457 | $ | 20,921 | $ | 15,331 | ||||||
Other comprehensive income (loss) | ||||||||||||||
Securities: | ||||||||||||||
Net change in unrealized (loss) income on securities available for sale | $ | (271 | ) | $ | 1,726 | $ | (2,528 | ) | $ | 3,099 | ||||
Reclassification adjustment for net gains realized in net income | — | — | — | — | ||||||||||
Income taxes | 67 | (660 | ) | 630 | (1,186 | ) | ||||||||
Other comprehensive (loss) income on securities available for sale | $ | (204 | ) | $ | 1,066 | $ | (1,898 | ) | $ | 1,913 | ||||
Derivatives used in cash flow hedging relationships: | ||||||||||||||
Net change in unrealized income (loss) on derivatives | $ | 472 | $ | (134 | ) | $ | 1,526 | $ | 215 | |||||
Income taxes | (117 | ) | 51 | (380 | ) | (82 | ) | |||||||
Other comprehensive income (loss) on cash flow hedges | $ | 355 | $ | (83 | ) | $ | 1,146 | $ | 133 | |||||
Other comprehensive income (loss), net of tax | $ | 151 | $ | 983 | $ | (752 | ) | $ | 2,046 | |||||
Comprehensive income | $ | 10,214 | $ | 7,440 | $ | 20,169 | $ | 17,377 | ||||||
See Notes to Consolidated Financial Statements.
Page 6
HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Amounts In Thousands, Except Share Amounts)
Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Unearned ESOP Shares | Treasury Stock | Maximum Cash Obligation Related To ESOP Shares | Total | |||||||||||||||||||||
Balance, December 31, 2016 | $ | 44,606 | $ | 319,982 | $ | (3,359 | ) | $ | — | $ | (31,178 | ) | $ | (40,781 | ) | $ | 289,270 | ||||||||||
Issuance of 90,346 shares of common stock | 4,139 | — | — | — | 4 | — | 4,143 | ||||||||||||||||||||
Issuance of 2,402 shares of common stock under the employee stock purchase plan | 113 | — | — | — | — | — | 113 | ||||||||||||||||||||
Unearned restricted stock compensation | 201 | — | — | — | — | — | 201 | ||||||||||||||||||||
Forfeiture of 1,734 shares of common stock | (66 | ) | (66 | ) | |||||||||||||||||||||||
Share-based compensation | 97 | — | — | — | — | — | 97 | ||||||||||||||||||||
Income tax benefit related to share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||
Change related to ESOP shares | — | — | — | — | — | (1,266 | ) | (1,266 | ) | ||||||||||||||||||
Net income | — | 15,331 | — | — | — | — | 15,331 | ||||||||||||||||||||
Cash dividends ($0.70 per share) | — | (6,486 | ) | — | — | — | — | (6,486 | ) | ||||||||||||||||||
Purchase of 25,727 shares of common stock | — | — | — | — | (1,307 | ) | — | (1,307 | ) | ||||||||||||||||||
Other comprehensive income | — | — | 2,046 | — | — | — | 2,046 | ||||||||||||||||||||
Balance, June 30, 2017 | $ | 49,090 | $ | 328,827 | $ | (1,313 | ) | $ | — | $ | (32,481 | ) | $ | (42,047 | ) | $ | 302,076 | ||||||||||
Balance, December 31, 2017 | $ | 48,930 | $ | 341,558 | $ | (2,446 | ) | $ | — | $ | (33,018 | ) | $ | (43,308 | ) | $ | 311,716 | ||||||||||
Issuance of 93,254 shares of common stock | 2,721 | — | — | — | 2,331 | — | 5,052 | ||||||||||||||||||||
Issuance of 4,283 shares of common stock under the employee stock purchase plan | 214 | — | — | — | — | — | 214 | ||||||||||||||||||||
Unearned restricted stock compensation | 165 | — | — | — | — | — | 165 | ||||||||||||||||||||
Forfeiture of 2,762 shares of common stock | (131 | ) | — | — | — | — | — | (131 | ) | ||||||||||||||||||
Change related to ESOP shares | — | — | — | — | — | (2,836 | ) | (2,836 | ) | ||||||||||||||||||
Net income | — | 20,921 | — | — | — | — | 20,921 | ||||||||||||||||||||
Cash dividends ($0.75 per share) | — | (7,002 | ) | — | — | — | — | (7,002 | ) | ||||||||||||||||||
Reclassification of stranded tax effects due to the Tax Cuts and Jobs Act | — | 526 | (526 | ) | — | — | — | — | |||||||||||||||||||
Purchase of 56,263 shares of common stock | — | — | — | — | (3,199 | ) | — | (3,199 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | (752 | ) | — | — | — | (752 | ) | ||||||||||||||||||
Balance, June 30, 2018 | $ | 51,899 | $ | 356,003 | $ | (3,724 | ) | $ | — | $ | (33,886 | ) | $ | (46,144 | ) | $ | 324,148 | ||||||||||
See Notes to Consolidated Financial Statements.
Page 7
HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts In Thousands)
Six Months Ended June 30, | |||||||
2018 | 2017 | ||||||
Cash Flows from Operating Activities | |||||||
Net income | $ | 20,921 | $ | 15,331 | |||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: | |||||||
Depreciation | 1,642 | 1,514 | |||||
Provision for loan losses | (54 | ) | 1,697 | ||||
Share-based compensation | — | 97 | |||||
Forfeiture of common stock | (131 | ) | (66 | ) | |||
Compensation expensed through issuance of common stock | 339 | 139 | |||||
Provision for deferred income taxes | 135 | (1,412 | ) | ||||
Net gain on sale of other real estate owned and other repossessed assets | (6 | ) | (56 | ) | |||
Increase in accrued interest receivable | (275 | ) | (726 | ) | |||
Amortization of premium on investment securities, net | 258 | 296 | |||||
(Increase) decrease in other assets | (1,541 | ) | 843 | ||||
(Decrease) increase in accrued interest payable and other liabilities | (2,427 | ) | 938 | ||||
Loans originated for sale | (73,464 | ) | (65,166 | ) | |||
Proceeds on sales of loans | 73,643 | 68,762 | |||||
Net gain on sales of loans | (774 | ) | (696 | ) | |||
Net cash and cash equivalents provided by operating activities | $ | 18,266 | $ | 21,495 | |||
Cash Flows from Investing Activities | |||||||
Proceeds from maturities of investment securities available for sale | $ | 42,728 | $ | 39,396 | |||
Purchases of investment securities available for sale | (46,028 | ) | (22,433 | ) | |||
Loans made to customers, net of collections | (43,134 | ) | (93,045 | ) | |||
Proceeds on sale of other real estate owned and other repossessed assets | 55 | 239 | |||||
Purchases of property and equipment | (1,831 | ) | (1,662 | ) | |||
Income from tax credit real estate, net | 651 | 286 | |||||
Net cash and cash equivalents used in investing activities | $ | (47,559 | ) | $ | (77,219 | ) | |
Cash Flows from Financing Activities | |||||||
Net increase in deposits | $ | 108,445 | $ | 49,678 | |||
Net decrease in other borrowings | — | (21,213 | ) | ||||
Net (decrease) increase in FHLB borrowings | (80,000 | ) | 30,000 | ||||
Issuance of common stock, net of costs | 4,713 | 3,766 | |||||
Stock options exercised | — | 238 | |||||
Purchase of treasury stock | (3,199 | ) | (1,307 | ) | |||
Proceeds from the issuance of common stock through the employee stock purchase plan | 214 | 113 | |||||
Dividends paid | (7,002 | ) | (6,486 | ) | |||
Net cash and cash equivalents provided by financing activities | $ | 23,171 | $ | 54,789 | |||
(Continued)
Page 8
HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) (Amounts In Thousands) | |||||||
Six Months Ended June 30, | |||||||
2018 | 2017 | ||||||
Decrease in cash and cash equivalents | $ | (6,122 | ) | $ | (935 | ) | |
Cash and cash equivalents: | |||||||
Beginning of period | 154,353 | 38,197 | |||||
End of period | $ | 148,231 | $ | 37,262 | |||
Supplemental Disclosures | |||||||
Cash payments for: | |||||||
Interest paid to depositors | $ | 8,188 | $ | 4,420 | |||
Interest paid on other obligations | 3,575 | 3,754 | |||||
Income taxes paid | 4,357 | 6,851 | |||||
Noncash activities: | |||||||
Increase in maximum cash obligation related to ESOP shares | $ | 2,836 | $ | 1,266 | |||
Transfers to other real estate owned | 62 | 80 | |||||
Sale and financing of other real estate owned | — | 262 | |||||
See Notes to Consolidated Financial Statements.
Page 9
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. | Summary of Significant Accounting Policies |
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with instructions for Form 10-Q and Regulation S-X. These financial statements include all adjustments (consisting of normal recurring accruals) which in the opinion of management are considered necessary for the fair presentation of the financial position and results of operations for the periods shown. Certain prior year amounts have been reclassified to conform to the current year presentation. The Company considers that it operates as one business segment, a commercial bank.
Operating results for the six month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K Annual Report of Hills Bancorporation and subsidiary (the “Company”) for the year ended December 31, 2017 filed with the Securities Exchange Commission on March 5, 2018. The consolidated balance sheet as of December 31, 2017, has been derived from the audited consolidated financial statements for that period.
The Company evaluated subsequent events through the filing date of its quarterly report on Form 10-Q with the SEC.
Revenue Recognition
Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit and investment securities as these activities are not subject to the requirements of ASC 606. Interest income on loans and investment securities is recognized on the accrual method in accordance with written contracts.
Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606 are the following: Service charges and fees on deposit accounts represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue which includes interchange income, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Trust income represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received.
Effect of New Financial Accounting Standards:
In May 2014, The FASB and International Accounting Standards Board (IASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of promised good or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The adoption of ASU 2014-09 by the Company did not have a material impact and required additional disclosures on our material noninterest income streams discussed in revenue recognition above.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 created Subtopic 321-10, Investments-Equity Securities
Page 10
which is applicable to all entities except those in industries that account for substantially all investments at fair value through earnings or the change in net assets. Under this new subtopic, equity securities are generally required to be measured at fair value with unrealized holding gains and losses reflected in net income. ASU 2016-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company adopted ASU 2016-01 for the period ending March 31, 2018. There was no material impact on the financial statements however it required a change in disclosure and related methodology located in Note 6 Fair Value Measurements.
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases. The ASU provides guidance requiring lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. Under this new ASU, lessees will recognize right-of use assets and lease liabilities for most leases currently accounted for as operating leases under generally accepted accounting principles. For public companies, ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of analyzing a comprehensive list of lease agreements. The adoption of ASU 2016-02 by the Company is not expected to have a material impact.
In March 2016, the FASB issued ASU No. 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 applies to all entities that offer certain prepaid stored - value products. The ASU provides guidance for the derecognition of financial liabilities related to the issuance of these products and aligns the recognition of breakage to current authoritative guidance. For public companies, ASU 2016-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted ASU 2016-04 for the period ending March 31, 2018. There was no material impact on the financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (CECL). The ASU changes the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. For public companies, ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, early adoption is permitted for the fiscal year beginning after December 15, 2018. The Company is in the process of implementing a software solution to assist in the analysis of historical loan data to determine the CECL model that will be implemented. We expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is adopted. The amount of the one-time cumulative-effect adjustment has not yet been determined.
In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323), Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This ASU adds an SEC paragraph and amends other Topics pursuant to an SEC staff Announcement made at the September 22, 2016 Emerging Issues Task Force (EITF) meeting. The SEC paragraph applies to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU provides that a company should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. If the company does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then in addition to making a statement to that effect, the company should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the company when adopted. Additional qualitative disclosures should include a description of the effect of the accounting policies that the company expects to apply and a comparison to the company's current accounting policies. Also, the company should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed.
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In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 250), Simplifying the Test for Goodwill Impairment. The ASU simplifies the goodwill impairment test by requiring a company to perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized when the carrying amount exceeds fair value. For public companies, ASU 2017-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2017-04 by the Company is not expected to have a material impact.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. This ASU requires companies to change the recognition and presentation of the effects of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and requiring companies to present all of the elements of hedge accounting that affect earnings in the same income statement line as the hedged item. Furthermore, the standard eases the requirements for effectiveness testing, hedge documentation and applying the critical terms match method and introduces new alternatives that will permit companies to reduce the risk of material error corrections if they misapply the shortcut method. For public companies, ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018. The adoption of ASU 2017-12 by the Company is not expected to have a material impact.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted ASU 2018-02 for the period ending March 31, 2018 and elected the specific identification method accounting policy. There was a $0.53 million reclassification recorded in stockholders' equity.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU 2018-07 by the Company is not expected to have a material impact.
Note 2. | Earnings Per Share |
Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that would occur from the exercise of common stock options outstanding. ESOP shares are considered outstanding for this calculation unless unearned.
The computation of basic and diluted earnings per share for the periods presented is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||
Common shares outstanding at the beginning of the period | 9,378,414 | 9,337,397 | 9,335,154 | 9,264,227 | ||||||||||
Weighted average number of net shares (redeemed) issued | (4,470 | ) | (2,552 | ) | 52,041 | 65,871 | ||||||||
Weighted average shares outstanding (basic) | 9,373,944 | 9,334,845 | 9,387,195 | 9,330,098 | ||||||||||
Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method | 4,162 | 4,551 | 3,996 | 5,299 | ||||||||||
Weighted average number of shares (diluted) | 9,378,106 | 9,339,396 | 9,391,191 | 9,335,397 | ||||||||||
Net income (In thousands) | $ | 10,063 | $ | 6,457 | $ | 20,921 | $ | 15,331 | ||||||
Earnings per share: | ||||||||||||||
Basic | $ | 1.07 | $ | 0.69 | $ | 2.23 | $ | 1.64 | ||||||
Diluted | $ | 1.07 | $ | 0.69 | $ | 2.23 | $ | 1.64 | ||||||
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Note 3. | Other Comprehensive Income (Loss) |
The following table summarizes the balances of each component of accumulated other comprehensive income (AOCI), included in stockholders’ equity, at June 30, 2018 and December 31, 2017:
June 30, 2018 | December 31, 2017 | ||||||
(amounts in thousands) | |||||||
Net unrealized loss on available-for-sale securities | $ | (3,669 | ) | $ | (1,141 | ) | |
Net unrealized loss on derivatives used for cash flow hedges | (1,293 | ) | (2,819 | ) | |||
Tax effect | $ | 1,238 | $ | 1,514 | |||
Net-of-tax amount | $ | (3,724 | ) | $ | (2,446 | ) | |
Note 4. | Securities |
The carrying values of investment securities at June 30, 2018 and December 31, 2017 are summarized in the following table (dollars in thousands):
June 30, 2018 | December 31, 2017 | ||||||||||||
Amount | Percent | Amount | Percent | ||||||||||
Securities available for sale | |||||||||||||
U.S. Treasury | $ | 80,440 | 27.89 | % | $ | 54,318 | 19.05 | % | |||||
Other securities (FHLB, FHLMC and FNMA) | 34,753 | 12.04 | 43,959 | 15.42 | |||||||||
State and political subdivisions | 173,308 | 60.07 | 186,878 | 65.53 | |||||||||
Total securities available for sale | $ | 288,501 | 100.00 | % | $ | 285,155 | 100.00 | % | |||||
Investment securities have been classified in the consolidated balance sheets according to management’s intent. Available-for-sale securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. There were no trading or held to maturity securities as of June 30, 2018 or December 31, 2017. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of June 30, 2018 and December 31, 2017 (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
June 30, 2018: | |||||||||||||||
U.S. Treasury | $ | 81,541 | $ | 5 | $ | (1,106 | ) | $ | 80,440 | ||||||
Other securities (FHLB, FHLMC and FNMA) | 35,426 | — | (673 | ) | 34,753 | ||||||||||
State and political subdivisions | 175,203 | 239 | (2,134 | ) | 173,308 | ||||||||||
Total | $ | 292,170 | $ | 244 | $ | (3,913 | ) | $ | 288,501 | ||||||
December 31, 2017: | |||||||||||||||
U.S. Treasury | $ | 54,696 | $ | — | $ | (378 | ) | $ | 54,318 | ||||||
Other securities (FHLB, FHLMC and FNMA) | 44,470 | 1 | (512 | ) | 43,959 | ||||||||||
State and political subdivisions | 187,130 | 722 | (974 | ) | 186,878 | ||||||||||
Total | $ | 286,296 | $ | 723 | $ | (1,864 | ) | $ | 285,155 | ||||||
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The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at June 30, 2018, were as follows (in thousands):
Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 44,049 | $ | 43,970 | |||
Due after one year through five years | 175,532 | 173,535 | |||||
Due after five years through ten years | 71,768 | 70,175 | |||||
Due over ten years | 821 | 821 | |||||
Total | $ | 292,170 | $ | 288,501 | |||
As of June 30, 2018 investment securities with a carrying value of $14.72 million were pledged to collateralize repurchase agreements, derivative financial instruments, and other borrowings.
The following table shows the fair value, gross unrealized losses and the percentage of fair value represented by gross unrealized losses of applicable investment securities owned by the Company, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017 (in thousands):
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||
June 30, 2018 Description of Securities | # | Fair Value | Unrealized Loss | % | # | Fair Value | Unrealized Loss | % | # | Fair Value | Unrealized Loss | % | |||||||||||||||||||||||||||||
U.S. Treasury | 32 | $ | 77,979 | $ | (1,106 | ) | 1.42 | % | — | $ | — | $ | — | — | % | 32 | $ | 77,979 | $ | (1,106 | ) | 1.42 | % | ||||||||||||||||||
Other securities (FHLB, FHLMC and FNMA) | 5 | 12,386 | (116 | ) | 0.94 | 9 | 22,367 | (557 | ) | 2.49 | 14 | 34,753 | (673 | ) | 1.94 | ||||||||||||||||||||||||||
State and political subdivisions | 377 | 95,078 | (1,503 | ) | 1.58 | 68 | 15,635 | (631 | ) | 4.04 | 445 | 110,713 | (2,134 | ) | 1.93 | ||||||||||||||||||||||||||
Total temporarily impaired securities | 414 | $ | 185,443 | $ | (2,725 | ) | 1.47 | % | 77 | $ | 38,002 | $ | (1,188 | ) | 3.13 | % | 491 | $ | 223,445 | $ | (3,913 | ) | 1.75 | % | |||||||||||||||||
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||
December 31, 2017 Description of Securities | # | Fair Value | Unrealized Loss | % | # | Fair Value | Unrealized Loss | % | # | Fair Value | Unrealized Loss | % | |||||||||||||||||||||||||||||
U.S. Treasury | 22 | $ | 54,318 | $ | (378 | ) | 0.70 | % | — | $ | — | $ | — | — | % | 22 | $ | 54,318 | $ | (378 | ) | 0.70 | % | ||||||||||||||||||
Other securities (FHLB, FHLMC and FNMA) | 9 | 21,411 | (83 | ) | 0.39 | 9 | 22,547 | (429 | ) | — | 18 | 43,958 | (512 | ) | 1.16 | ||||||||||||||||||||||||||
State and political subdivisions | 241 | 58,803 | (573 | ) | 0.97 | 65 | 14,944 | (401 | ) | 2.68 | 306 | 73,747 | (974 | ) | 1.32 | ||||||||||||||||||||||||||
Total temporarily impaired securities | 272 | $ | 134,532 | $ | (1,034 | ) | 0.77 | % | 74 | $ | 37,491 | $ | (830 | ) | 2.21 | % | 346 | $ | 172,023 | $ | (1,864 | ) | 1.08 | % | |||||||||||||||||
The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are temporary and not other-than-temporary impairments. None of the unrealized losses in the above table was due to the deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest.
Page 14
The unrealized losses are due to changes in interest rates. The Company has not recognized any unrealized loss in income because management does not have the intent to sell the securities included in the previous table. Management has concluded that it is more likely than not that the Company will not be required to sell these securities prior to recovery of the amortized cost basis.
Note 5. | Loans |
Classes of loans are as follows:
June 30, 2018 | December 31, 2017 | ||||||
(Amounts In Thousands) | |||||||
Agricultural | $ | 81,171 | $ | 88,580 | |||
Commercial and financial | 219,693 | 218,632 | |||||
Real estate: | |||||||
Construction, 1 to 4 family residential | 68,918 | 69,738 | |||||
Construction, land development and commercial | 115,452 | 109,595 | |||||
Mortgage, farmland | 227,124 | 215,286 | |||||
Mortgage, 1 to 4 family first liens | 862,818 | 831,591 | |||||
Mortgage, 1 to 4 family junior liens | 148,018 | 144,200 | |||||
Mortgage, multi-family | 318,244 | 336,810 | |||||
Mortgage, commercial | 380,862 | 361,196 | |||||
Loans to individuals | 26,607 | 26,417 | |||||
Obligations of state and political subdivisions | 53,965 | 57,626 | |||||
$ | 2,502,872 | $ | 2,459,671 | ||||
Net unamortized fees and costs | 929 | 894 | |||||
$ | 2,503,801 | $ | 2,460,565 | ||||
Less allowance for loan losses | 29,510 | 29,400 | |||||
$ | 2,474,291 | $ | 2,431,165 | ||||
Page 15
Changes in the allowance for loan losses, the allowance for loan losses applicable to impaired loans and the related loan balance of impaired loans for the three and six months ended June 30, 2018 were as follows:
Three Months Ended June 30, 2018 | |||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
(Amounts In Thousands) | |||||||||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 2,253 | $ | 4,658 | $ | 2,780 | $ | 3,709 | $ | 8,655 | $ | 5,794 | $ | 1,061 | $ | 28,910 | |||||||||||||||
Charge-offs | (5 | ) | (176 | ) | — | — | (205 | ) | (53 | ) | (108 | ) | (547 | ) | |||||||||||||||||
Recoveries | 17 | 193 | 2 | 19 | 147 | 13 | 45 | 436 | |||||||||||||||||||||||
Provision | (194 | ) | 365 | 272 | (253 | ) | 305 | (57 | ) | 273 | 711 | ||||||||||||||||||||
Ending balance | $ | 2,071 | $ | 5,040 | $ | 3,054 | $ | 3,475 | $ | 8,902 | $ | 5,697 | $ | 1,271 | $ | 29,510 | |||||||||||||||
Six Months Ended June 30, 2018 | |||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
(Amounts In Thousands) | |||||||||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 2,294 | $ | 4,837 | $ | 2,989 | $ | 3,669 | $ | 8,668 | $ | 5,700 | $ | 1,243 | $ | 29,400 | |||||||||||||||
Charge-offs | (5 | ) | (206 | ) | — | — | (326 | ) | (54 | ) | (223 | ) | (814 | ) | |||||||||||||||||
Recoveries | 29 | 441 | 145 | 19 | 245 | 17 | 82 | 978 | |||||||||||||||||||||||
Provision | (247 | ) | (32 | ) | (80 | ) | (213 | ) | 315 | 34 | 169 | (54 | ) | ||||||||||||||||||
Ending balance | $ | 2,071 | $ | 5,040 | $ | 3,054 | $ | 3,475 | $ | 8,902 | $ | 5,697 | $ | 1,271 | $ | 29,510 | |||||||||||||||
Ending balance, individually evaluated for impairment | $ | 189 | $ | 706 | $ | 36 | $ | 13 | $ | 71 | $ | 443 | $ | 60 | $ | 1,518 | |||||||||||||||
Ending balance, collectively evaluated for impairment | $ | 1,882 | $ | 4,334 | $ | 3,018 | $ | 3,462 | $ | 8,831 | $ | 5,254 | $ | 1,211 | $ | 27,992 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Ending balance | $ | 81,171 | $ | 219,693 | $ | 184,370 | $ | 227,124 | $ | 1,010,836 | $ | 699,106 | $ | 80,572 | $ | 2,502,872 | |||||||||||||||
Ending balance, individually evaluated for impairment | $ | 3,718 | $ | 3,524 | $ | 942 | $ | 4,276 | $ | 6,980 | $ | 7,958 | $ | 60 | $ | 27,458 | |||||||||||||||
Ending balance, collectively evaluated for impairment | $ | 77,453 | $ | 216,169 | $ | 183,428 | $ | 222,848 | $ | 1,003,856 | $ | 691,148 | $ | 80,512 | $ | 2,475,414 | |||||||||||||||
Page 16
Changes in the allowance for loan losses for the three and six months ended June 30, 2017 were as follows:
Three Months Ended June 30, 2017 | |||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
(Amounts In Thousands) | |||||||||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 2,505 | $ | 3,899 | $ | 3,094 | $ | 3,507 | $ | 8,172 | $ | 4,358 | $ | 915 | $ | 26,450 | |||||||||||||||
Charge-offs | (39 | ) | (237 | ) | (114 | ) | — | (63 | ) | (43 | ) | (110 | ) | (606 | ) | ||||||||||||||||
Recoveries | 29 | 210 | 29 | — | 234 | 49 | 44 | 595 | |||||||||||||||||||||||
Provision | (154 | ) | 714 | 156 | 502 | (3 | ) | 1,050 | 246 | 2,511 | |||||||||||||||||||||
Ending balance | $ | 2,341 | $ | 4,586 | $ | 3,165 | $ | 4,009 | $ | 8,340 | $ | 5,414 | $ | 1,095 | $ | 28,950 | |||||||||||||||
Six Months Ended June 30, 2017 | |||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
(Amounts In Thousands) | |||||||||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 2,947 | $ | 4,531 | $ | 2,890 | $ | 3,417 | $ | 7,677 | $ | 4,045 | $ | 1,023 | $ | 26,530 | |||||||||||||||
Charge-offs | (39 | ) | (457 | ) | (114 | ) | — | (208 | ) | (43 | ) | (298 | ) | (1,159 | |||||||||||||||||