FIRST NORTHERN COMMUNITY BANCORP Introduction
This overview highlights selected information in this Annual Report on Form 10-K and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should carefully read this entire Annual Report on Form 10-K. For a discussion of changes in results of operations comparing the years endedDecember 31, 2018 and 2017 for the Company and its subsidiary, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onMarch 8, 2019 . Our subsidiary,First Northern Bank of Dixon , is aCalifornia state-chartered bank that derives most of its revenues from lending and deposit taking in theSacramento Valley region ofNorthern California . Interest rates, business conditions and customer confidence all affect our ability to generate revenues. In addition, the regulatory environment and competition can challenge our ability to generate those revenues.
Financial highlights for 2019 include:
The Company reported net income of$14.7 million for 2019, a 17.3% increase compared to net income of$12.6 million for 2018. Net income per common share for 2019 was$1.15 , an increase of 16.2% compared to net income per common share of$0.99 for 2018. Net income per common share on a fully diluted basis was$1.14 for 2019, an increase of 17.5% compared to net income per common share on a fully diluted basis of$0.97 for 2018. Net interest income totaled$47.1 million for 2019, an increase of 6.3% from$44.3 million in 2018, primarily due to increased average loan volumes and rates, increased investment securities volumes and rates, increased rates on interest bearing due from banks, increased average certificates of deposit volumes and rates, which was partially offset by decreased average due from banks volume and increased average interest-bearing transaction, savings and money market account volumes and rates. There was no provision for loan losses in 2019 compared to provision for loan loss of$2.1 million in 2018. Net charge-offs were$466 thousand in 2019 compared to$411 thousand in 2018. The decrease in the provision for loan losses was primarily due to limited loan growth coupled with improvements in credit quality and decreased non-performing assets and associated specific reserves. Non-interest income totaled$7.2 million for each of the periods ended in 2019 and 2018. Gain on sale of loans held-for sale and mortgage brokerage income increased in 2019 compared to 2018, which was partially offset by a decrease in other non-interest income. Non-interest expenses totaled$33.9 million for 2019, up 5.5% from$32.2 million in 2018. The increase was primarily due to increases in salaries and employee benefits due to increased staffing levels, occupancy and equipment expense due to the opening of an administrative office space and a branch in the second half of 2019, data processing expenses as a result of enhanced IT infrastructure and outsourcing of core processing and other real estate owned expense primarily due to a write-down on other real estate owned. The increase in non-interest expenses was partially offset by a reversal ofFDIC assessments expense due to the receipt of credits applied in the second half of 2019.
The Company reported total assets of
Investments increased to$342.9 million as ofDecember 31, 2019 , a 9.0% increase from$314.6 million as ofDecember 31, 2018 .U.S. Treasury securities totaled$43.3 million as ofDecember 31, 2019 , down 14.7% from$50.7 million as ofDecember 31, 2018 ; securities ofU.S. government agencies and corporations totaled$53.9 million , up 28.1% from$42.1 million as ofDecember 31, 2018 ; obligations of state and political subdivisions totaled$27.0 million , up 41.0% from$19.2 million as ofDecember 31, 2018 ; collateralized mortgage obligations totaled$79.4 million , up 24.5% from$63.8 million as ofDecember 31, 2018 ; and mortgage-backed securities totaled$139.3 million , up 0.3% from$138.9 million as ofDecember 31, 2018 . Loans (including loans held-for-sale), net of allowance, increased to$773.0 million as ofDecember 31, 2019 , a 1.0% increase from$765.7 million as ofDecember 31, 2018 . Commercial loans totaled$106.1 million as ofDecember 31, 2019 , down 15.2% from$125.2 million as ofDecember 31, 2018 ; commercial real estate loans were$451.8 million , up 7.5% from$420.1 million as ofDecember 31, 2018 ; agriculture loans were$115.8 million , down 6.4% from$123.6 million as ofDecember 31, 2018 ; residential mortgage loans were$64.9 million , up 27.2% from$51.1 million as ofDecember 31, 2018 ; residential construction loans were$15.2 million , down 24.4% from$20.1 million as ofDecember 31, 2018 ; and consumer loans totaled$26.8 million , down 24.2% from$35.4 million as ofDecember 31, 2018 . 26
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Deposits increased to
Stockholders' equity increased to
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the allowance for loan losses, other real estate owned, investments, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: Allowance for Loan Losses The Company believes the allowance for loan losses accounting policy is critical because the loan portfolio represents the largest asset on the consolidated balance sheet, and there is significant judgment used in determining the adequacy of the allowance for loan losses. The Company maintains an allowance for loan losses resulting from the inability of borrowers to make required loan payments. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is based on the Company's periodic evaluation of the factors mentioned below, as well as other pertinent factors. The allowance for loan losses consists of an allocated component and a general component. The components of the allowance for loan losses represent an estimate. The allocated component of the allowance for loan losses reflects expected losses resulting from analyses developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are based on regular analyses of all loans where the internal credit rating is at or below a predetermined classification. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The historical loan loss element is determined using analysis that examines loss experience. The allocated component of the allowance for loan losses also includes consideration of concentrations and changes in portfolio mix and volume. The general portion of the allowance reflects the Company's estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. Uncertainty surrounding the strength and timing of economic cycles also affects estimates of loss. There are many factors affecting the allowance for loan losses; some are quantitative while others require qualitative judgment. Although the Company believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from Company estimates, additional provision for credit losses could be required that could adversely affect earnings or financial position in future periods. Impaired Loans A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured in a troubled debt restructuring, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. An impaired loan is measured based upon the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price, or the fair value of collateral if the loan is collateral dependent. If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by a charge to the allowance for loan losses. 27
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Other-than-temporary Impairment in
Debt securities with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate debt securities, from rising interest rates. At each consolidated financial statement date, management assesses each debt security in an unrealized loss position to determine if impaired debt securities are temporarily impaired or if the impairment is other than temporary. This assessment includes consideration regarding the duration and severity of impairment, the credit quality of the issuer and a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. Other-than-temporary impairment is recognized in earnings if one of the following conditions exists: 1) the Company's intent is to sell the security; 2) it is more likely than not that the Company will be required to sell the security before the impairment is recovered; or 3) the Company does not expect to recover its amortized cost basis. If, by contrast, the Company does not intend to sell the security and will not be required to sell the security prior to recovery of the amortized cost basis, the Company recognizes only the credit loss component of other-than-temporary impairment in earnings. The credit loss component is calculated as the difference between the security's amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security's fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.
Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, such as loans held-for-sale, loans held-for-investment and certain other assets. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company's quarterly valuation process. For additional discussion, see Note 13 to the Consolidated Financial Statements in this Form 10-K.
Share-Based Payment
The Company determines the fair value of stock options at grant date using the
Black-Scholes-Merton pricing model that takes into account the stock price at
the grant date, the exercise price, the expected dividend yield, stock price
volatility, and the risk-free interest rate over the expected life of the
option. The Black-Scholes-Merton model requires the input of highly subjective
assumptions including the expected life of the stock-based award and stock price
volatility. The estimates used in the model involve inherent uncertainties and
the application of Management's judgment. As a result, if other assumptions had
been used, our recorded stock-based compensation expense could have been
materially different from that reflected in these financial statements. The fair
value of non-vested restricted common shares generally equals the stock price at
grant date. In addition, we are required to estimate the expected forfeiture
rate and only recognize expense for those share-based awards expected to
vest. If our actual forfeiture rate is materially different from the estimate,
the share-based compensation expense could be materially different. For
additional discussion, see Note 15 to the Consolidated Financial Statements in
this Form 10-K.
Accounting for Income Taxes
Income taxes reported in the consolidated financial statements are computed
based on an asset and liability approach. We recognize the amount of taxes
payable or refundable for the current year, and deferred tax assets and
liabilities for the expected future tax consequences that have been recognized
in the financial statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the consolidated
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse. We record net deferred tax assets to the extent it is
more-likely-than-not that they will be realized. In evaluating our ability to
recover the deferred tax assets, Management considers all available positive and
negative evidence, including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies and recent financial
operations. In projecting future taxable income, Management develops assumptions
including the amount of future state and federal pretax operating income, the
reversal of temporary differences, and the implementation of feasible and
prudent tax planning strategies. These assumptions require significant judgment
about the forecasts of future taxable income and are consistent with the plans
and estimates being used to manage the underlying business. The Company files
consolidated federal and combined state income tax returns.
A "more-likely-than-not" recognition threshold must be met before a tax benefit
can be recognized in the consolidated financial statements. For tax positions
that meet the more-likely-than-not threshold, an enterprise may recognize only
the largest amount of tax benefit that is greater than fifty percent likely of
being realized upon ultimate settlement with the taxing authority. To the
extent tax authorities disagree with these tax positions, our effective tax
rates could be materially affected in the period of settlement with the taxing
authorities. For additional discussion, see Note 18 to the Consolidated
Financial Statements in this Form 10-K.
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Mortgage Servicing Rights
Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Retained interests (mortgage servicing rights) in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer. Fair values are estimated using discounted cash flows based on a current market interest rate. The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The recorded value of mortgage servicing rights is included in other assets on the Consolidated Balance Sheets initially at fair value, and is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum.
Impact of Recently Issued Accounting Standards
InMarch 2019 , the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements. These amendments align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance (Issue 1). This ASU also requires lessors within the scope of Topic 942, Financial Services - Depository and Lending, to present all "principal payments received under leases" within investing activities (Issue 2). Finally, this ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard (Issue 3). Issue 1 and Issue 2 are effective for public companies for fiscal years beginning afterDecember 15, 2019 , and interim periods within those fiscal years. Issue 3 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . The Company adopted Issue 3 of ASU 2019-01 onJanuary 1, 2019 , which did not have a significant impact on its consolidated financial statements. See Note 9 to the Consolidated Financial Statements in this Form 10-K. InNovember 2018 , the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The guidance clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather should be accounted for in accordance with the leases standard. The effective date and transition requirements are the same as the effective dates and transition requirements in the credit losses standard, ASU 2016-13. The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements. InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2016-13, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments are effective for public companies for annual periods beginning afterDecember 15, 2019 . Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . OnOctober 16, 2019 , the FASB voted to delay the adoption of ASU 2016-13 untilJanuary 1, 2023 for small reporting companies with less than$250 million in public float as defined in theSEC's rules. The Company qualifies for this delay in adoption. The Company is currently evaluating the potential impact of ASU 2016-13 on our financial statements. In that regard, the Company has formed a cross-functional working group, under the direction of our Chief Financial Officer and ourChief Credit Officer . The working group is comprised of individuals from various functional areas including credit risk, finance and information technology, among others. The Company is currently working through its implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other things. The Company is also in the process of implementing a third-party vendor solution to assist us in the application of ASU 2016-13. The adoption of ASU 2016-13 could result in an increase in the Company's allowance for loan losses as a result of changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that the Company establish an allowance for expected credit losses for certain debt securities and other financial assets. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, the Company expects that the impact of adoption will be significantly influenced by the composition, characteristics and quality of its loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date. 29 -------------------------------------------------------------------------------- InApril 2019 , the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. These amendments clarify and improve areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement. The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements. InMay 2019 , the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. These amendments provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments-Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement-Overall, and 825-10. The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements. InNovember 2019 , the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. This ASU amends the effective dates of ASU 2017-12 (Hedging); ASU 2016-13 (Credit Losses) and ASU 2016-02 (Leases). It pushes back by one year the effective date for all other entities, and also distinguishes that smaller reporting companies as defined by theSEC are considered for purposes of ASU No. 2016-13 only, as an other entity. This standard was effective immediately.
ASU
2017-12, Derivatives and Hedging (Topic 815) was effective for the Company onJanuary 1, 2019 and did not have a significant impact on its consolidated financial statements. The Company adopted ASU 2016-02, Leases (Topic 842) onJanuary 1, 2019 , which resulted in the Company's recognition of a right-of-use asset of$4,417,000 included in Interest receivable and other assets and lease liabilities of$4,812,000 included in Interest payable and other liabilities on the Condensed Consolidated Balance Sheets. The Company qualifies as a smaller reporting company as defined by theSEC and as such, the Company is allowed to delay the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) toJanuary 1, 2023 . See discussion above on the expected impact of ASU 2016-13. InNovember 2019 , the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries. This ASU permits organizations to record expected recoveries on assets purchased with credit deterioration. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements. InDecember 2019 , the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether certain exceptions apply in a given period. This ASU also improves financial statement preparers' application of income tax-related guidance and simplifies GAAP for: a) Franchise taxes that are partially based on income; b) Transactions with a government that result in a step up in the tax basis of goodwill; c) Separate financial statements of legal entities that are not subject to tax; and d) Enacted changes in tax laws in interim periods. For public business entities, ASU 2019-12 is effective for fiscal years beginning afterDecember 15, 2020 , and interim periods within those fiscal years. The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements. 30
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STATISTICAL INFORMATION AND DISCUSSION
The following statistical information and discussion should be read in
conjunction with the Selected Financial Data included in Part II (Item 6) and
the audited consolidated financial statements and accompanying notes included in
Part II (Item 8) of this Annual Report on Form 10-K.
The following tables present information regarding the consolidated average
assets, liabilities and stockholders' equity, the amounts of interest income
from average earning assets and the resulting yields, and the amount of interest
expense paid on interest-bearing liabilities. Average loan balances include
non-performing loans. Interest income includes proceeds from loans on
non-accrual status only to the extent cash payments have been received and
applied as interest income. Tax-exempt income is not shown on a tax equivalent
basis.
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential
(Dollars in thousands)
2019 2018 2017
Average Average Average
Balance Percent Balance Percent Balance Percent
ASSETS
Cash and Due From
Banks $ 127,977 10.2 % $ 139,957 11.5 % $ 156,638 13.3 %
Certificates of
Deposit 12,538 1.0 % 4,160 0.3 % 6,923 0.6 %
Investment Securities 319,418 25.5 % 293,259 24.1 % 296,924 25.2 %
Loans (1) 741,466 59.3 % 739,243 60.6 % 677,522 57.5 %
Stock in Federal Home
Loan Bank and other
equity securities, at
cost 6,405 0.5 % 5,884 0.5 % 5,218 0.4 %
Other Real Estate
Owned 840 0.1 % 185 0.0 % - -
Other Assets 41,899 3.4 % 36,460 3.0 % 34,759 3.0 %
Total Assets $ 1,250,543 100.0 % $ 1,219,148 100.0 % $ 1,177,984 100.0 %
LIABILITIES &
STOCKHOLDERS' EQUITY
Deposits:
Demand $ 408,551 32.7 % $ 394,106 32.3 % $ 361,729 30.7 %
Interest-Bearing
Transaction Deposits 308,917 24.7 % 307,727 25.2 % 293,464 24.9 %
Savings and MMDAs 334,672 26.8 % 333,788 27.4 % 335,709 28.5 %
Time Certificates 58,128 4.6 % 67,177 5.5 % 77,705 6.6 %
Other Liabilities 16,313 1.3 % 11,743 1.0 % 10,860 0.9 %
Stockholders' Equity 123,962 9.9 % 104,607 8.6 % 98,517 8.4 %
Total Liabilities and
Stockholders' Equity $ 1,250,543 100.0 % $ 1,219,148 100.0 % $ 1,177,984 100.0 %
(1) Average balances for loans include loans held-for-sale and non-accrual loans
and are net of the allowance for loan losses.
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Net Interest Earnings
Average Balances, Yields and Rates
(Dollars in thousands)
2019 2018 2017
Yields Yields Yields
Interest Earned/ Interest Earned/ Interest Earned/
Average Income/ Rates Average Income/ Rates Average Income/ Rates
Assets Balance Expense Paid Balance Expense Paid Balance Expense Paid
Total Loans,
Including
Loan Fees(1) $ 741,466 $ 39,097 5.27 % $ 739,243 $ 37,189 5.03 % $ 677,522 $ 33,115 4.89 %
Due From
Banks 98,593 2,148 2.18 % 114,350 2,163 1.89 % 131,478 1,428 1.09 %
Certificates
of Deposit 12,538 355 2.83 % 4,160 104 2.50 % 6,923 72 1.04 %
Investment
Securities:
Taxable 306,473 6,637 2.17 % 283,500 5,500 1.94 % 279,711 4,762 1.70 %
Non-taxable
(2) 12,945 300 2.32 % 9,759 143 1.47 % 17,213 257 1.49 %
Total
Investment
Securities 319,418 6,937 2.17 % 293,259 5,643 1.92 % 296,924 5,019 1.69 %
Other
Earning
Assets 6,405 456 7.12 % 5,884 518 8.80 % 5,218 383 7.34 %
Total
Earning
Assets $ 1,178,420 $ 48,993 4.16 % $ 1,156,896 $ 45,617 3.94 % $ 1,118,065 $ 40,017 3.58 %
Cash and Due
from Banks 29,384 25,607 25,160
Other Real
Estate Owned 840 185 -
Interest
Receivable
and Other
Assets 41,899 36,460 34,759
Total Assets $ 1,250,543 $ 1,219,148 $ 1,177,984 (1) Average balances for loans include loans held-for-sale and non-accrual loans
and are net of the allowance for loan losses, but non-accrued interest
thereon is excluded. Includes amortization of deferred loan fees and costs.
(2) Interest income and yields on tax-exempt securities are not presented on a
taxable equivalent basis.
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Continuation of
Net Interest Earnings
Average Balances, Yields and Rates
(Dollars in thousands)
2019 2018 2017
Yields Yields Yields
Liabilities and Interest Earned/ Interest Earned/ Interest Earned/Stockholders' Average Income/ Rates Average
Income/ Rates Average Income/ Rates Equity
Balance Expense Paid Balance Expense Paid Balance Expense PaidInterest-Bearing
Deposits:
Interest-Bearing
Transaction Deposits$ 308,917 $ 505 0.16 %$ 307,727 $ 428 0.14 %$ 293,464 $ 246 0.08 % Savings and MMDAs 334,672 981 0.29 % 333,788 559 0.17 % 335,709 530 0.16 % Time Certificates 58,128 373 0.64 % 67,177 281 0.42 % 77,705 303 0.39 % Total Interest-Bearing Deposits 701,717 1,859 0.26 % 708,692 1,268 0.18 % 706,878 1,079 0.15 % Demand Deposits 408,551 394,106 361,729 Total Deposits 1,110,268$ 1,859 0.17 % 1,102,798$ 1,268 0.11 % 1,068,607$ 1,079 0.10 % Interest payable and Other Liabilities 16,313 11,743 10,860 Stockholders' Equity 123,962 104,607 98,517 Total Liabilities and Stockholders' Equity$ 1,250,543 $ 1,219,148 $ 1,177,984 Net Interest Income and Net Interest Margin (1)$ 47,134 4.00 %$ 44,349 3.83 %$ 38,938 3.48 % Net Interest Spread (2) 3.90 % 3.76 % 3.43 %
(1) Net interest margin is computed by dividing net interest income by total average interest-earning assets.
(2) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
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Analysis of Changes
in Interest Income and Interest Expense
(Dollars in thousands)
Following is an analysis of changes in interest income and expense (dollars in
thousands) for 2019 over 2018. Changes not solely due to interest rate or volume
have been allocated proportionately to interest rate and volume.
2019 Over 2018
Interest
Volume Rate Change
Increase (Decrease) in Interest Income:
Loans$ 113 $ 1,795 $ 1,908 Due From Banks (321 ) 306 (15 ) Certificates of Deposit 235 16 251 Investment Securities - Taxable 462 675
1,137
Investment Securities - Non-taxable 57 100 157
Other Earning Assets 43 (105 ) (62 )
589 2,787 3,376
Increase (Decrease) in Interest Expense:
Deposits:
Interest-Bearing Transaction Deposits 2 75 77
Savings and MMDAs 2 420 422
Time Certificates (42 ) 134 92
(38 ) 629 591
Increase in Net Interest Income: $ 627 $ 2,158 $ 2,785
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INVESTMENT PORTFOLIO
Composition of Investment Securities
The mix of investment securities held by the Company at
2019 2018 2017
Investment securities available-for-sale (at fair value): U.S. Treasury Securities$ 43,255 $ 50,682 $ 18,464 Securities ofU.S. Government Agencies and Corporations 53,912 42,076 21,109 Obligations of State and Political Subdivisions 27,031 19,168 23,208 Collateralized Mortgage Obligations 79,420 63,799 66,083 Mortgage-Backed Securities 139,279 138,912 151,877 Total Investments$ 342,897 $ 314,637 $ 280,741 Maturities of Investment Securities The following table is a summary of the relative maturities (dollars in thousands) and projected yields of the Company's investment securities as ofDecember 31, 2019 . The yields on tax-exempt securities are shown on a tax equivalent basis. Period to Maturity After One But After Five But Within One Year Within Five Years Within Ten Years Amount Yield Amount Yield Amount Yield
Investment securities available-for-sale (at fair value):U.S. Treasury Securities$ 15,495 2.09 %$ 27,760 2.32 % $ - - Securities ofU.S. Government Agencies and Corporations 19,575 2.39 % 25,429 1.98 % 8,415 2.08 % Obligations of State and Political Subdivisions 778 4.43 % 7,185 3.12 % 8,149 3.35 % Collateralized Mortgage Obligations 1,867 3.60 % 74,727 2.09 % 2,826 2.72 % Mortgage-Backed Securities 336 1.67 % 137,339 2.10 % 1,604 2.82 % TOTAL$ 38,051 2.36 %$ 272,440 2.14 %$ 20,994 2.72 % After Ten Years Total Amount Yield Amount Yield Investment securities available-for-sale (at fair value): U.S. Treasury Securities $ - -$ 43,255 2.24 % Securities ofU.S. Government Agencies and Corporations 493 3.58 % 53,912 2.16 % Obligations of State & Political Subdivisions 10,919 3.26 % 27,031 3.28 % Collateralized Mortgage Obligations - - 79,420 2.15 % Mortgage-Backed Securities - - 139,279 2.11 % TOTAL$ 11,412 3.28 %$ 342,897 2.23 % 35
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LOAN PORTFOLIO
Composition of Loans
The mix of loans, net of deferred origination fees and costs and allowance for
loan losses and excluding loans held-for-sale, at December 31 for the previous
five fiscal years is as follows (dollars in thousands):
December 31,
2019 2018 2017
Balance Percent Balance Percent Balance Percent
Commercial $ 106,140 13.6 % $ 125,177 16.1 % $ 135,015 18.0 %
Commercial Real
Estate 451,774 58.0 % 420,106 54.2 % 398,346 53.2 %
Agriculture 115,751 14.8 % 123,626 15.9 % 113,555 15.2 %
Residential Mortgage 64,943 8.3 % 51,064 6.6 % 42,081 5.6 %
Residential
Construction 15,212 1.9 % 20,124 2.6 % 21,299 2.8 %
Consumer 26,825 3.4 % 35,397 4.6 % 38,900 5.2 %
780,645 100.0 % 775,494 100.0 % 749,196 100.0 %
Allowance for loan
losses (12,356 ) (12,822 ) (11,133 )
Net deferred
origination fees and
costs 584 721 1,049
TOTAL $ 768,873 $ 763,393 $ 739,112
2016 2015
Balance Percent Balance Percent
Commercial $ 126,311 18.6 % $ 136,095 22.2 %
Commercial Real Estate 344,210 50.6 % 292,316 47.6 %
Agriculture 101,905 15.0 % 84,813 13.8 %
Residential Mortgage 40,237 5.9 % 43,375 7.0 %
Residential Construction 23,650 3.5 % 12,110 2.0 %
Consumer 43,250 6.4 % 45,386 7.4 %
679,563 100.0 % 614,095 100.0 %
Allowance for loan losses (10,899 ) (9,251 )
Net deferred origination fees and costs 1,106 1,009
TOTAL $ 669,770 $ 605,853
Commercial loans are primarily for financing the needs of a diverse group of
businesses located in the Bank's market area. Commercial real estate loans
generally fall into two categories, owner-occupied and non-owner occupied. Real
estate construction loans are generally for financing the construction of
single-family residential homes for individuals and builders we believe are
well-qualified. These loans are secured by real estate and have short
maturities. Residential mortgage loans, which are secured by real estate,
include owner-occupied and non-owner occupied properties in the Bank's market
area. Loans are considered agriculture loans when the primary source of
repayment is from the sale of an agricultural or agricultural-related product or
service. Such loans are secured and/or unsecured to producers and processors of
crops and livestock. The Bank also makes loans to individuals for investment
purposes.
As shown in the comparative figures for loan mix during 2019 and 2018, total
loans increased as a result of increases in commercial real estate loans and
residential mortgage loans, which were partially offset by decreases in
commercial loans, agriculture loans, residential construction loans and consumer
loans.
36--------------------------------------------------------------------------------
Maturities and Sensitivities of Loans to Changes in Interest Rates
Loan maturities of the loan portfolio at
Maturing Fixed Rate Variable Rate Total
Within one year $ 8,317 $ 64,807 $ 73,124
After one year through five years 94,495 49,836 144,331
After five years 136,931 426,259 563,190
Total $ 239,743 $ 540,902 $ 780,645 Non-Accrual, Past Due, OREO and Restructured Loans It is generally the Company's policy to discontinue interest accruals once a loan is past due for a period of 90 days as to interest or principal payments. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected and an appropriate period of performance has been demonstrated. The following tables summarize the Company's non-accrual loans by loan category (dollars in thousands), net of guarantees of theState of California andU.S. Government , including its agencies and its government-sponsored agencies atDecember 31, 2019 , 2018, 2017, 2016, and 2015. At December 31, 2019 At December 31, 2018 Gross Guaranteed Net Gross Guaranteed Net Commercial$ 266 $ 170 $ 96 $ 750 $ 300 $ 450 Commercial real estate 466 45 421 381 56 325 Agriculture - - - 4,830 776 4,054 Residential mortgage 172 - 172 100 - 100 Residential construction - - - - - - Consumer 253 - 253 191 - 191 Total non-accrual loans$ 1,157 $ 215 $ 942 $ 6,252 $ 1,132 $ 5,120 At December 31, 2017 At December 31, 2016 Gross Guaranteed Net Gross Guaranteed Net Commercial$ 1,057 $ 32$ 1,025 $ 5,000 $ 2,000 $ 3,000 Commercial real estate 1,724 70 1,654 540 81 459 Agriculture - - - - - - Residential mortgage 781 - 781 654 - 654 Residential construction - - - - - - Consumer 205 - 205 103 - 103 Total non-accrual loans$ 3,767 $ 102 $ 3,665 $ 6,297 $ 2,081 $ 4,216 37
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At December 31, 2015
Gross Guaranteed Net
Commercial $ 112 $ 57 $ 55
Commercial real estate 964 95 869
Agriculture - - -
Residential mortgage 1,092 - 1,092
Residential construction - - -
Consumer 560 - 560
Total non-accrual loans $ 2,728 $ 152 $ 2,576
Non-accrual loans amounted to $1,157,000 at December 31, 2019 and were comprised
of three commercial loans totaling $266,000 , two commercial real estate loans
totaling $466,000 , one residential mortgage loan totaling $172,000 and four
consumer loans totaling $253,000 . Non-accrual loans amounted to $6,252,000 at
December 31, 2018 and were comprised of two commercial loans totaling $750,000 ,
two commercial real estate loans totaling $381,000 , five agriculture loans
totaling $4,830,000 , two residential mortgage loans totaling $100,000 , and one
consumer loan totaling $191,000 .
If interest on non-accrual loans had been accrued, such interest income would
have approximated $139,000 and $377,000 during the years ended December 31, 2019
and 2018, respectively. Income actually recognized for these loans approximated
$475,000 and $23,000 for the years ended December 31, 2019 and 2018,
respectively. The increase in nonaccrual interest was primarily due to payoffs
received on five loans during 2019 which resulted in recoveries of contractually
due interest.
Loans for which it is probable that payment of interest and principal will not
be made in accordance with the contractual terms of the loan agreement are
considered impaired. Non-performing impaired loans are non-accrual loans and
loans that are 90 days or more past due and still accruing. Total non-performing
impaired loans at December 31, 2019 and 2018, consisting of loans on non-accrual
status totaled $1,157,000 and $6,252,000 , respectively. A restructuring of a
loan can constitute a troubled debt restructuring if the Company for economic or
legal reasons related to the borrower's financial difficulties grants a
concession to the borrower that it would not otherwise consider. A loan that is
restructured in a troubled debt restructuring is considered an impaired
loan. Performing impaired loans, which consisted of loans modified as troubled
debt restructurings, totaled $3,318,000 and $4,622,000 at December 31, 2019 and
2018, respectively. The Company expects to collect all principal and interest
due from performing impaired loans. These loans are not on non-accrual
status. No assurance can be given that the existing or any additional collateral
will be sufficient to secure full recovery of the obligations owed under these
loans.
The Company had no loans 90 days past due and still accruing as of the periods
ended
38
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As the following table illustrates, total non-performing assets, which consists
of loans on non-accrual status, loans past due 90-days and still accruing and
Other Real Estate Owned ("OREO") net of guarantees of the State of California
and U.S. Government , including its agencies and its government-sponsored
agencies, decreased $5,270,000 , or 84.8%, to $942,000 from December 31, 2018 to
December 31, 2019 . Non-performing assets net of guarantees represent 0.1% and
0.5% of total assets at December 31, 2019 and 2018, respectively. The Bank's
management believes that the $1,157,000 in non-accrual loans were appropriately
reflected at their fair value at December 31, 2019 . However, no assurance can be
given that the existing or any additional collateral will be sufficient to
secure full recovery of the obligations owed under these loans.
At December 31, 2019 At
Gross Guaranteed Net Gross Guaranteed Net
(dollars in
thousands)
Non-accrual loans $ 1,157 $ 215 $ 942 $ 6,252 $ 1,132 $ 5,120
Loans 90 days past
due and still
accruing - - - - - -
Total non-performing
loans 1,157 215 942 6,252 1,132 5,120 Other real estate owned - - - 1,092 - 1,092 Total non-performing assets 1,157 215 942 7,344 1,132 6,212 Non-performing loans (net of guarantees) to total loans 0.1 % 0.7 % Non-performing assets (net of guarantees) to total assets 0.1 % 0.5 % Allowance for loan and lease losses to non-performing loans (net of guarantees) 1,311.7 %
250.4 %
At December 31, 2017 At December 31, 2016
Gross Guaranteed Net Gross Guaranteed Net
(dollars in
thousands)
Non-accrual loans $ 3,767 $ 102 $ 3,665 $ 6,297 $ 2,081 $ 4,216
Loans 90 days past
due and still
accruing 45 - 45 - - -
Total non-performing
loans 3,812 102 3,710 6,297 2,081 4,216
Other real estate
owned - - - - - -
Total non-performing
assets 3,812 102 3,710
6,297 2,081 4,216
Non-performing loans
(net of guarantees)
to total loans 0.5 % 0.6 %
Non-performing assets
(net of guarantees)
to total assets 0.3 % 0.4 %
Allowance for loan
and lease losses
to non-performing
loans (net of
guarantees) 300.1 % 258.5 %
At December 31, 2015
Gross Guaranteed Net
(dollars in thousands)
Non-accrual loans $ 2,728 $ 152 $ 2,576
Loans 90 days past due and still accruing 2 - 2
Total non-performing loans 2,730 152 2,578
Other real estate owned - - -
Total non-performing assets 2,730 152 2,578
Non-performing loans (net of guarantees) to total
loans 0.4 %
Non-performing assets (net of guarantees) to total assets
0.3 %
Allowance for loan and lease losses
to non-performing loans (net of guarantees) 358.8 %
OREO consists of property that the Company has acquired by deed in lieu of
foreclosure or through foreclosure proceedings, and property that the Company
does not hold title to but is in actual control of, known as in-substance
foreclosure. The estimated fair value of the property is determined prior to
transferring the balance to OREO. The balance transferred to OREO is the
estimated fair value of the property less estimated cost to sell. Impairment may
be deemed necessary to bring the book value of the loan equal to the appraised
value. Appraisals or loan officer evaluations are then conducted periodically
thereafter charging any additional impairment to the appropriate expense
account. The Company had no OREO as of the year ended December 31, 2019 . The
Company had one commercial real estate property classified as OREO totaling
$1,092,000 as of the year ended December 31, 2018 .
39
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Potential Problem Loans
The Company manages asset quality and credit risk by maintaining diversification
in its loan portfolio and through review processes that include analysis of
credit requests and ongoing examination of outstanding loans and delinquencies,
with particular attention to portfolio dynamics and loan mix. The Company
strives to identify loans experiencing difficulty early enough to correct the
problems, to record charge-offs promptly based on realistic assessments of
collectability and current collateral values and to maintain an adequate
allowance for loan losses at all times. Asset quality reviews of loans and
other non-performing assets are administered using credit risk rating standards
and criteria similar to those employed by state and federal banking regulatory
agencies. The federal banking regulatory agencies utilize the following
definitions for assets adversely classified for supervisory purposes:
"Substandard Assets: a substandard asset is inadequately protected by the
current sound worth and paying capacity of the obligor or of the collateral
pledged, if any. Assets so classified must have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected." "Doubtful Assets: An asset classified doubtful
has all the weaknesses inherent in one classified substandard with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions, and values, highly
questionable and improbable." Other Real Estate Owned" and loans rated
Substandard and Doubtful are deemed "classified assets." This category, which
includes both performing and non-performing assets, receives an elevated level
of attention regarding collection.
Commercial loans, whether secured or unsecured, generally are made to support
the short-term operations and other needs of small businesses. These loans are
generally secured by the receivables, equipment, and other real property of the
business and are susceptible to the related risks described above. Problem
commercial loans are generally identified by periodic review of financial
information that may include financial statements, tax returns, and payment
history of the borrower. Based on this information, the Company may decide to
take any of several courses of action, including demand for repayment, requiring
the borrower to provide a significant principal payment and/or additional
collateral or requiring similar support from guarantors. Notwithstanding, when
repayment becomes unlikely based on the borrower's income and cash flow,
repossession or foreclosure of the underlying collateral may become
necessary. Collateral values may be determined by appraisals obtained through
Bank-approved, licensed appraisers, qualified independent third parties,
purchase invoices, or other appropriate documentation. Appropriate valuations
are obtained at origination of the credit and periodically thereafter (generally
every 3-12 months depending on the collateral type and market conditions), once
repayment is questionable, and the loan has been deemed classified.
Commercial real estate loans generally fall into two categories, owner-occupied
and non-owner occupied. Loans secured by owner occupied real estate are
primarily susceptible to changes in the market conditions of the related
business. This may be driven by, among other things, industry changes,
geographic business changes, changes in the individual financial capacity of the
business owner, general economic conditions and changes in business cycles.
These same risks apply to commercial loans whether secured by equipment,
receivables or other personal property or unsecured. Problem commercial real
estate loans are generally identified by periodic review of financial
information that may include financial statements, tax returns, payment history
of the borrower, and site inspections. Based on this information, the Company
may decide to take any of several courses of action, including demand for
repayment, requiring the borrower to provide a significant principal payment
and/or additional collateral or requiring similar support from guarantors.
Notwithstanding, when repayment becomes unlikely based on the borrower's income
and cash flow, repossession or foreclosure of the underlying collateral may
become necessary. Losses on loans secured by owner-occupied real estate,
equipment, or other personal property generally are dictated by the value of
underlying collateral at the time of default and liquidation of the
collateral. When default is driven by issues related specifically to the
business owner, collateral values tend to provide better repayment support and
may result in little or no loss. Alternatively, when default is driven by more
general economic conditions, underlying collateral generally has devalued more
and results in larger losses due to default. Loans secured by non-owner occupied
real estate are primarily susceptible to risks associated with swings in
occupancy or vacancy and related shifts in lease rates, rental rates or room
rates. Most often, these shifts are a result of changes in general economic or
market conditions or overbuilding and resultant over-supply of space. Losses are
dependent on the value of underlying collateral at the time of default. Values
are generally driven by these same factors and influenced by interest rates and
required rates of return as well as changes in occupancy costs. Collateral
values may be determined by appraisals obtained through Bank-approved, licensed
appraisers, qualified independent third parties, sales invoices, or other
appropriate means. Appropriate valuations are obtained at origination of the
credit and periodically thereafter (generally every 3-12 months depending on the
collateral type and market conditions), once repayment is questionable, and the
loan has been deemed classified.
Agricultural loans, whether secured or unsecured, generally are made to
producers and processors of crops and livestock. Repayment is primarily from the
sale of an agricultural product or service. Agricultural loans are generally
secured by inventory, receivables, equipment, and other real
property. Agricultural loans primarily are susceptible to changes in market
demand for specific commodities. This may be exacerbated by, among other things,
industry changes, changes in the individual financial capacity of the business
owner, general economic conditions and changes in business cycles, as well as
changing weather conditions. Problem agricultural loans are generally identified
by periodic review of financial information that may include financial
statements, tax returns, crop budgets, payment history, and crop
inspections. Based on this information, the Company may decide to take any of
several courses of action, including demand for repayment, requiring the
borrower to provide a significant principal payment and/or additional collateral
or requiring similar support from guarantors. Notwithstanding, when repayment
becomes unlikely based on the borrower's income and cash flow, repossession or
foreclosure of the underlying collateral may become necessary. Collateral values
may be determined by appraisals obtained through Bank-approved, licensed
appraisers, qualified independent third parties, purchase invoices, or other
appropriate documentation. Appropriate valuations are obtained at origination of
the credit and periodically thereafter (generally every 3-12 months depending on
the collateral type and market conditions), once repayment is questionable, and
the loan has been deemed classified.
40
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Residential mortgage loans, which are secured by real estate, are primarily
susceptible to three risks; non-payment due to diminished or lost income,
over-extension of credit, a lack of borrower's cash flow to sustain payments,
and shortfalls in collateral value. In general, non-payment is due to loss of
employment and follows general economic trends in the marketplace, particularly
the upward movement in the unemployment rate, loss of collateral value, and
demand shifts. Problem residential mortgage loans are generally identified via
payment default. Based on this information, the Company may decide to take any
of several courses of action, including demand for repayment, requiring the
borrower to provide a significant principal payment and/or additional collateral
or requiring similar support from guarantors. Notwithstanding, when repayment
becomes unlikely based on the borrower's income and cash flow, repossession or
foreclosure of the underlying collateral may become necessary. Collateral values
may be determined by appraisals obtained through Bank-approved, licensed
appraisers, qualified independent third parties, purchase invoices, or other
appropriate documentation. Appropriate valuations are obtained at origination of
the credit and periodically thereafter (generally every 3-12 months depending on
the collateral type and market conditions), once repayment is questionable, and
the loan has been deemed classified.
Construction loans, whether owner occupied or non-owner occupied residential
development loans, are not only susceptible to the related risks described above
but the added risks of construction itself, including cost over-runs,
mismanagement of the project, or lack of demand and market changes experienced
at time of completion. Again, losses are primarily related to underlying
collateral value and changes therein as described above. Problem construction
loans are generally identified by periodic review of financial information that
may include financial statements, tax returns and payment history of the
borrower. Based on this information, the Company may decide to take any of
several courses of action, including demand for repayment, requiring the
borrower to provide a significant principal payment and/or additional collateral
or requiring similar support from guarantors, or repossession or foreclosure of
the underlying collateral. Collateral values may be determined by appraisals
obtained through Bank-approved, licensed appraisers, qualified independent third
parties, purchase invoices, or other appropriate documentation. Appropriate
valuations are obtained at origination of the credit and periodically thereafter
(generally every 3-12 months depending on the collateral type and market
conditions), once repayment is questionable, and the loan has been deemed
classified.
Consumer loans, whether unsecured or secured, are primarily susceptible to four
risks: non-payment due to diminished or lost income, over-extension of credit, a
lack of borrower's cash flow to sustain payments, and shortfall in collateral
value. In general, non-payment is due to loss of employment and will follow
general economic trends in the marketplace, particularly the upward movements in
the unemployment rate, loss of collateral value, and demand shifts. Problem
consumer loans are generally identified via payment default. Based on this
information, the Company may decide to take any of several courses of action,
including demand for repayment, requiring the borrower to provide a significant
principal payment and/or additional collateral or requiring similar support from
guarantors. Notwithstanding, when repayment becomes unlikely based on the
borrower's income and cash flow, repossession or foreclosure of the underlying
collateral may become necessary. Collateral values may be determined by
appraisals obtained through Bank-approved, licensed appraisers, qualified
independent third parties, purchase invoices, or other appropriate
documentation. Appropriate valuations are obtained at origination of the credit
and periodically thereafter (generally every 3-12 months depending on the
collateral type and market conditions), once repayment is questionable, and the
loan has been deemed classified.
Once a loan becomes delinquent or repayment becomes questionable, a Company
collection officer will address collateral shortfalls with the borrower and
attempt to obtain additional collateral or a principal payment. If this is not
forthcoming and payment of principal and interest in accordance with the
contractual terms of the loan agreement becomes unlikely, the Company will
consider the loan to be impaired and will estimate its probable loss, using the
present value of future cash flows discounted at the loan's effective interest
rate, the loan's observable market price, or the fair value of the collateral if
the loan is collateral dependent. For collateral dependent loans, the Company
will utilize a recent valuation of the underlying collateral less estimated
costs of sale, and charge-off the loan down to the estimated net realizable
amount. Depending on the length of time until final collection, the Company may
periodically revalue the estimated loss and take additional charge-offs or
specific reserves as warranted. Revaluations may occur as often as every 3-12
months depending on the underlying collateral and volatility of values. Final
charge-offs or recoveries are taken when the collateral is liquidated and the
actual loss is confirmed. Unpaid balances on loans after or during collection
and liquidation may also be pursued through legal action and attachment of wages
or judgment liens on the borrower's other assets.
41
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Excluding the non-performing loans cited previously, loans totaling $8,749,000
and $15,926,000 were classified as substandard or doubtful loans, representing
potential problem loans at December 31, 2019 and 2018, respectively. In
Management's opinion, the potential loss related to these problem loans was
sufficiently covered by the Bank's existing loan loss reserve (Allowance for
Loan Losses) at December 31, 2019 and 2018. The ratio of the Allowance for Loan
Losses to total loans at December 31, 2019 and 2018 was 1.58% and 1.65%,
respectively.
SUMMARY OF LOAN LOSS EXPERIENCE
The Company's allowance for credit losses is maintained at a level considered
adequate to provide for losses that can be estimated based upon specific and
general conditions. These include conditions unique to individual borrowers, as
well as overall credit loss experience, the amount of past due, non-performing
loans and classified loans, recommendations of regulatory authorities,
prevailing economic conditions and other factors. A portion of the allowance is
specifically allocated to classified loans whose full collectability is
uncertain. Such allocations are determined by Management based on loan-by-loan
analyses. In addition, loans with similar characteristics not usually criticized
using regulatory guidelines are analyzed based on the historical loss rates and
delinquency trends, grouped by the number of days the payments on these loans
are delinquent. Last, allocations are made to non-criticized and classified
commercial loans and residential real estate loans based on historical loss
rates, and other statistical data. The remainder of the allowance is considered
to be unallocated. The unallocated allowance is established to provide for
probable losses that have been incurred as of the reporting date but not
reflected in the allocated allowance. It addresses additional qualitative
factors consistent with Management's analysis of the level of risks inherent in
the loan portfolio, which are related to the risks of the Company's general
lending activity. Included in the unallocated allowance is the risk of losses
that are attributable to national or local economic or industry trends which
have occurred but have yet been recognized in past loan charge-off history
(external factors). The external factors evaluated by the Company include:
economic and business conditions, external competitive issues, and other
factors. Also included in the unallocated allowance is the risk of losses
attributable to general attributes of the Company's loan portfolio and credit
administration (internal factors). The internal factors evaluated by the Company
include: loan review system, adequacy of lending Management and staff, loan
policies and procedures, problem loan trends, concentrations of credit, and
other factors. By their nature, these risks are not readily allocable to any
specific loan category in a statistically meaningful manner and are difficult to
quantify. Management assigns a range of estimated risk to the qualitative risk
factors described above based on Management's judgment as to the level of risk
and assigns a quantitative risk factor from the range of loss estimates to
determine the appropriate level of the unallocated portion of the
allowance. Management considered the $12,356,000 allowance for credit losses to
be adequate as a reserve against losses as of December 31, 2019 .
42
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Analysis of the Allowance for Loan Losses
(Dollars in thousands)
2019 2018 2017 2016 2015
Balance at Beginning of Year
$ 9,251 $ 8,583 Provision for Loan Losses - 2,100 600 1,800 650 Loans Charged-Off: Commercial (638 ) (509 ) (681 ) (446 ) (44 ) Commercial Real Estate - (142 ) - (15 ) (7 ) Agriculture (98 ) - - - - Residential Mortgage - - (121 ) (13 ) (211 ) Residential Construction - - - - - Consumer (43 ) (34 ) (33 ) (65 ) (175 ) Total Charged-Off (779 ) (685 ) (835 ) (539 ) (437 ) Recoveries: Commercial 209 46 302 37 102 Commercial Real Estate - - - - 18 Agriculture - - - 81 - Residential Mortgage 74 34 96 1 219 Residential Construction 21 131 5 5 60 Consumer 9 63 66 263 56 Total Recoveries 313 274 469 387 455 Net (Charge-offs) Recoveries (466 ) (411 ) (366 ) (152 ) 18 Balance at End of Year$ 12,356 $ 12,822 $ 11,133
Ratio of Net (Charge-Offs)
Recoveries
During the Year to Average
Loans
Outstanding During the Year (0.06 %) (0.05 %) (0.05 %) (0.02 %) 0.00 %
Allowance as a percentage of
Total Loans 1.58 % 1.65 % 1.49 % 1.60 % 1.51 %
Allowance as a percentage of
Non-performing loans, net of
guarantees 1,311.7 % 250.4 % 300.1 % 258.5 % 358.8 %
43
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Allocation of the Allowance for Loan Losses
The Allowance for Loan Losses has been established as a general component
available to absorb probable inherent losses throughout the loan portfolio. The
following table is an allocation of the Allowance for Loan Losses balance on the
dates indicated (dollars in thousands):
December 31, 2019 December 31, 2018 December 31, 2017
Allocation of Allocation of Allocation of
Allowance for Loan Allowance as a % of Loans as a % of Allowance for Loan Allowance as a % of Loans as a % of Allowance for Loan Allowance as a % of Loans as a % of
Losses Balance Total Allowance Total Loans, net Losses Balance Total Allowance Total Loans, net Losses Balance Total Allowance Total Loans, net
Loan Type:
Commercial $ 2,354 19.1 % 13.6 % $ 3,198 25.0 % 16.1 % $ 2,625 23.7 % 18.0 %
Commercial Real Estate 6,846 55.4 % 58.0 % 5,890 45.9 % 54.2 % 5,460 49.0 % 53.2 %
Agriculture 2,054 16.6 % 14.8 % 1,632 12.7 % 15.9 % 1,547 13.9 % 15.2 %
Residential Mortgage 466 3.8 % 8.3 % 643 5.0 % 6.6 % 628 5.6 % 5.6 %
Residential Construction 201 1.6 % 1.9 % 318 2.5 % 2.6 % 360 3.2 % 2.8 %
Consumer 236 1.9 % 3.4 % 279 2.2 % 4.6 % 342 3.1 % 5.2 %
Unallocated 199 1.6 % - 862 6.7 % - 171 1.5 % -
Total $ 12,356 100.0 % 100.0 % $ 12,822 100.0 % 100.0 % $ 11,133 100.0 % 100.0 %
December 31, 2016 December 31, 2015
Allocation of
Allowance for Loan Allowance as a % of Loans as a % of Allocation of Allowance Allowance as a % of Loans as a % of
Losses Balance Total Allowance Total Loans, net for Loan Losses Balance Total Allowance Total Loans, net
Loan Type:
Commercial $ 3,571 32.8 % 18.3 % $ 3,097 33.5 % 22.0 %
Commercial Real Estate 3,910 35.9 % 50.9 % 3,343 36.1 % 47.8 %
Agriculture 1,262 11.6 % 15.0 % 1,060 11.5 % 13.9 %
Residential Mortgage 660 6.0 % 5.9 % 739 8.0 % 7.0 %
Residential Construction 440 4.0 % 3.5 % 334 3.6 % 1.9 %
Consumer 498 4.6 % 6.4 % 641 6.9 % 7.4 %
Unallocated 558 5.1 % - 37 0.4 % -
Total $ 10,899 100.0 % 100.0 % $ 9,251 100.0 % 100.0 %
The Bank believes that any breakdown or allocation of the allowance into loan
categories lends an appearance of exactness, which does not exist, because the
allowance is available for all loans. The allowance breakdown shown above is
computed taking actual experience into consideration but should not be
interpreted as an indication of the specific amount and allocation of actual
charge-offs that may ultimately occur.
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Deposits
The following table sets forth the average amount and the average rate paid on
each of the listed deposit categories (dollars in thousands) during the periods
specified:
2019 2018 2017
Average Amount Average Rate Average Amount Average Rate Average Amount Average Rate
Deposit Type:
Non-interest-Bearing
Demand $ 408,551 - $ 394,106 - $ 361,729 -
Interest-Bearing
Demand (NOW) $ 308,917 0.16 % $ 307,727 0.14 % $ 293,464 0.08 %
Savings and MMDAs $ 334,672 0.29 % $ 333,788 0.17 % $ 335,709 0.16 %
Time $ 58,128 0.64 % $ 67,177 0.42 % $ 77,705 0.39 %
The following table sets forth by time remaining to maturity the Bank's time
deposits over
Three months or less$ 4,738
Over three months through twelve months 5,104
Over twelve months 6,035 Total$ 15,877 Short-Term Borrowings
The Company had no secured borrowings and no Federal Funds purchased at
Additional short-term borrowings available to the Company consist of a line of credit and advances from theFederal Home Loan Bank ("FHLB") secured under terms of a blanket collateral agreement by a pledge of FHLB stock and certain other qualifying collateral such as commercial and mortgage loans. AtDecember 31, 2019 , the Company had collateral borrowing capacity from the FHLB of$349,068,000 and at such date, also had unsecured Federal Funds lines of credit totaling$82,000,000 with correspondent banks. Long-Term Borrowings
The Company had no long-term borrowings at
Supplemental Compensation Plans
The Company and the Bank maintain an unfunded non-contributory defined benefit
pension plan ("Salary Continuation Plan") and related split dollar plan for a
select group of highly compensated employees. Eligibility to participate in the
Salary Continuation Plan is limited to a select group of management or highly
compensated employees of the Bank that are designated by the Board.
Additionally, the Company and the Bank adopted a supplemental executive
retirement plan ("SERP") in 2006. The SERP is intended to integrate the various
forms of retirement payments offered to executives. There are currently three
participants in the SERP. At December 31, 2019 , the accrued benefit liability
was $5,871,000 , of which $3,891,000 was recorded in interest payable and other
liabilities and $1,980,000 was recorded in accumulated other comprehensive
income (loss), net, in the Consolidated Balance Sheets. At December 31, 2018 ,
the accrued benefit liability was $5,322,000 , of which $3,640,000 was recorded
in interest payable and other liabilities and $1,682,000 was recorded in
accumulated other comprehensive income (loss), net, in the Consolidated Balance
Sheets.
The Company and the Bank maintain an unfunded non-contributory defined benefit
pension plan ("Directors' Retirement Plan") and related split dollar plan for
the directors of the Bank. At December 31, 2019 , the accrued benefit liability
was $820,000 , of which $798,000 was recorded in interest payable and other
liabilities and $22,000 was recorded in accumulated other comprehensive income
(loss), net, in the Consolidated Balance Sheets. At December 31, 2018 , the
accrued benefit liability was $787,000 , of which $827,000 was recorded in
interest payable and other liabilities and ($40,000 ) was recorded in accumulated
other comprehensive income (loss), net, in the Consolidated Balance Sheets.
For additional information, see Note 17 to the Consolidated Financial Statements in this Form 10-K.
45
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Overview
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net income for the year ended December 31, 2019 , was $14.7 million , representing
an increase of $2.2 million , or 17.3%, compared to net income of $12.6 million
for the year ended December 31, 2018 . The increase in net income was principally
attributable to a $3.4 million increase in interest income and $2.1 million
decrease in provision for loan loss, which was partially offset by a $0.6
million increase in interest expense, $1.8 million increase in non-interest
expense and a $0.9 million increase in provision for income taxes.
Total assets increased by $42.7 million , or 3.4%, to $1.29 billion as of
December 31, 2019 , compared to $1.25 billion at December 31, 2018 . The increase
in total assets was mainly due to a $28.3 million increase in investment
securities, $7.3 million increase in net loans (including loans held-for-sale),
a $7.1 million increase in certificates of deposit and a $5.2 million increase
in interest receivable and other assets, which was partially offset by a $4.5
million decrease in cash and cash equivalents and $1.1 million decrease in other
real estate owned. Total deposits increased $14.0 million , or 1.3%, to $1.14
billion as of December 31, 2019 , compared to $1.12 billion at December 31, 2018 .
46
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Results of Operations
Net Interest Income
Net interest income is the excess of interest and fees earned on the Bank's
loans, investment securities, federal funds sold and banker's acceptances over
the interest expense paid on deposits, mortgage notes and other borrowed funds
which are used to fund those assets. Net interest income is primarily affected
by the yields on the Bank's interest-earning assets and interest-bearing
liabilities outstanding during the period. The $2,785,000 increase in the
Bank's net interest income in 2019 from 2018 was driven by both increased
volumes and interest rates. Average investment securities growth was the
primary driver from a volume perspective, contributing $519,000 in additional
interest income compared to 2018. This was partially offset by a decrease of
$321,000 in interest income due to a decrease in average due from bank
balances. Increasing interest rates drove increases in interest income from
loans and investments by $1,795,000 and $775,000 , respectively, while the rates
paid on interest bearing deposit accounts increased interest expense by
$629,000 . See "Analysis of Changes in Interest Income and Interest Expense" set
forth on page 34 of this Annual Report on Form 10-K for a discussion of the
effects of interest rates and loan/deposit volume on net interest income.
The Federal Reserve influences the general market rates of interest, including
the deposit and loan rates offered by many financial institutions. Our loan
portfolio is significantly affected by changes in the prime interest rate. The
prime interest rate, which is the rate offered on loans to borrowers with strong
credit, was 4.50% at December 31, 2017 . During 2018, the prime rate increased
100 basis points (25 basis points in each of March, June, September, and
December) to end the year at 5.50%. During 2019, the prime rate decreased 75
basis points (25 basis points in each of August, September, and October) to end
the year at 4.75%. The effective federal funds rate, which is the cost of
immediately available overnight funds, was 1.50% at December 31, 2017 . During
2018, the effective federal funds rate increased 100 basis points (25 basis
points in each of March, June, September and December) to end the period at
2.50%. During 2019, the effective federal funds rate decreased 75 basis points
(25 basis points in each of July, September and October) to end the period at
1.75%.
We are primarily funded by core deposits, with non-interest-bearing demand
deposits historically being a significant source of funds. This lower-cost
funding base is expected to have a positive impact on our net interest income
and net interest margin in a rising interest rate environment. Federal
prohibitions on the payment of interest on demand deposits were repealed in
2011. Nonetheless, we have not experienced any significant additional costs as a
result. However, as market interest rates have increased, we have increased the
interest rates we pay on most of our interest-bearing deposit products.
The nature and impact of future changes in interest rates and monetary policy on
the business and earnings of the Company cannot be predicted. For additional
information, see "The Effects of Changes or Increases in, or Supervisory
Enforcement of, Banking or Other Laws and Regulations or Governmental Fiscal or
Monetary Policies Could Adversely Affect Us" in "Risk Factors (Item 1A) of this
Report on Form 10-K.
Interest income on loans for 2019 was up 5.1% from 2018, increasing from
$37,189,000 to $39,097,000 . The increase in interest income on loans was the
result of a 24 basis point increase in loan yields and 0.3% increase in average
loan volume.
Interest income on investment securities for 2019 was up 22.9% from 2018,
increasing from $5,643,000 to $6,937,000 . The increase in interest income on
investment securities was the result of an 8.9% increase in average investment
securities volume and a 25 basis point increase in investment securities
yields. The Bank's strategy in 2019 was to use its excess cash to purchase
investment securities and increase the investment portfolio. Investment
securities yields were 2.17% and 1.92% for 2019 and 2018, respectively.
Interest income on interest-bearing due from banks for 2019 was down 0.7% from
2018, decreasing from $2,163,000 to $2,148,000 . The decrease in interest income
on interest-bearing due from banks was the result of a 13.8% decrease in average
balances of interest-bearing due from banks, which was partially offset by a 29
basis point increase in yield on interest-bearing due from banks.
Interest income on certificates of deposit for 2019 was up 241.4% from 2018,
increasing from $104,000 to $355,000 . The increase in interest income on
certificates of deposit was the result of a 201.4% increase in average balances
of certificates of deposit and a 33 basis point increase in yield on
certificates of deposit.
Interest expense on deposits for 2019 was up 46.6% from 2018, increasing from
$1,268,000 to $1,859,000 . The increase in interest expense on deposits was the
result of an 8 basis point increase in interest rates paid on interest-bearing
deposits, which was partially offset by a 1.0% decrease in average balances of
interest-bearing deposits.
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The mix of deposits for the previous three years was as follows (dollars in
thousands):
2019 2018 2017
Average Balance Percent Average Balance Percent Average Balance Percent
Non-interest-Bearing
Demand $ 408,551 36.9 % $ 394,106 35.7 % $ 361,729 33.8 % Interest-Bearing Demand (NOW) 308,917 27.8 % 307,727 27.9 % 293,464 27.5 % Savings and MMDAs 334,672 30.1 % 333,788 30.3 % 335,709 31.4 % Time 58,128 5.2 % 67,177 6.1 % 77,705 7.3 % Total$ 1,110,268 100.0 %$ 1,102,798 100.0 %$ 1,068,607 100.0 % Loan yields increased in 2019 and 2018 and deposit expense increased in 2019 and 2018. The Bank's net interest margin (net interest income divided by average earning assets) was 4.00% in 2019 and 3.83% in 2018. The net spread between the rate for total earning assets and the rate for interest-bearing deposits and borrowed funds increased 14 basis points from 2018 to 2019. The increase in the net spread was primarily due to an overall increase in interest rates on earning assets, which was partially offset by an increase in interest rates on interest-bearing deposits. Provision for Loan Losses The provision for loan losses is established by charges to earnings based on management's overall evaluation of the collectability of the loan portfolio. Based on this evaluation, the provision for loan losses decreased to$0 in 2019 from$2,100,000 in 2018, primarily due to limited loan growth coupled with improvements in credit quality and decreased non-performing assets and associated specific reserves in 2019. The amount of loans charged-off increased in 2019 to$779,000 from$685,000 in 2018, and recoveries increased to$313,000 in 2019 from$274,000 in 2018. The increase in charge-offs was due to an increase in charge-offs on commercial, agriculture and consumer loans, which was partially offset by a decrease in charge-offs on commercial real estate loans. The ratio of the Allowance for Loan Losses to total loans atDecember 31, 2019 was 1.58% compared to 1.65% atDecember 31, 2018 . The ratio of the Allowance for Loan Losses to total non-accrual loans and loans past due 90 days or more, net of guarantees was 1,311.7% atDecember 31, 2019 , compared to 250.4% atDecember 31, 2018 . 48
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Non-Interest Income and Expenses
Non-interest income consisted primarily of service charges on deposit accounts,
net realized gains on loans held-for-sale, and other income. Service charges on
deposit accounts decreased $15,000 in 2019 over 2018. Net realized gains on
loans held-for-sale increased $277,000 in 2019 over 2018. The increase in 2019
was primarily due to an increase in the volume of loan sales. Other income
decreased $291,000 in 2019 over 2018. The decrease was primarily due to a
decrease in miscellaneous income, which was partially offset by an increase in
mortgage brokerage income.
Non-interest expenses consisted primarily of salaries and employee benefits,
occupancy and equipment expense, data processing expense, stationery and
supplies expense, advertising and other expenses. Non-interest expenses
increased to
Following is an analysis of the increase or decrease in the components of non-interest expenses (dollars in thousands) during the periods specified:
2019 over 2018
Amount Percent
Salaries and Employee Benefits $ 1,151 5.5 %
Occupancy and Equipment 381 13.7 %
Data Processing 622 28.4 %
Stationery and Supplies (94 ) (24.2 %)
Advertising 61 16.4 %
Directors Fees (9 ) (3.0 %)
OREO Expense and Impairment 281 1,221.7 %
Other Expense (616 ) (11.6 %)
Total $ 1,777 5.5 %
The increase in salaries and employee benefits in 2019 was primarily due to a 7%
increase in regular salaries, a 29% increase in commissions and a 16% increase
in group insurance. The increase in regular salaries expense and group
insurance was primarily due to current year salary increases and an increase in
the number of full-time equivalent employees, which was partially due to
staffing hired for a new branch which opened in the fourth quarter of 2019. The
increase in commissions was primarily due to an increase in mortgage originations. The increase in occupancy and equipment expense was primarily due to rent expense and other expenses associated with the opening of an administrative office space in the third quarter of 2019 and a new branch in the fourth quarter of 2019. The increase in data processing expense was primarily due to costs associated with enhanced IT infrastructure as a result of a decision to outsource core processing and network infrastructure to third parties. The increase in other real estate owned expense was primarily due to a writedown on an existing commercial real estate property that was sold prior to year-end 2019. The decrease in other expenses was primarily due to a reversal ofFDIC assessments expense due to the receipt of credits applied in the third and fourth quarters of 2019 and a decrease in amortization of low-income housing tax credit investments in 2019. 49 -------------------------------------------------------------------------------- Income Taxes The provision for income taxes is primarily affected by the tax rate, the level of earnings before taxes and the level of tax-exempt income. In 2019, tax expense increased to$5,670,000 from$4,744,000 in 2018, due to an increase in income before taxes. Non-taxable municipal bond income was$300,000 and$143,000 for the years endedDecember 31, 2019 and 2018, respectively. Liquidity Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset growth, while satisfying the withdrawal demands of deposit customers and any debt repayment requirements. The Bank's principal sources of liquidity are core deposits and loan and investment payments and prepayments. Providing a secondary source of liquidity is the available-for-sale investment portfolio. The Company held$342,897,000 in total investment securities atDecember 31, 2019 . Under certain deposit, borrowing, and other arrangements, the Company must hold and pledge investment securities as collateral. AtDecember 31, 2019 , such collateral requirements totaled approximately$37,943,000 . As a smaller source of liquidity, the Bank can utilize existing credit arrangements. The Company's primary source of liquidity on a stand-alone basis is dividends from the Bank. As discussed in Part I (Item 1) of this Annual Report on Form 10-K, dividends from the Bank are subject to regulatory and corporate law restrictions. Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets. The Bank experiences seasonal swings in deposits, which impact liquidity. Management has sought to address these seasonal swings by scheduling investment maturities and developing seasonal credit arrangements with theFederal Home Loan Bank ,Federal Reserve Bank and Federal Funds lines of credit with correspondent banks. In addition, the ability of the Bank's real estate department to originate and sell loans into the secondary market has provided another tool for the management of liquidity. As ofDecember 31, 2019 , the Company has not created any special purpose entities to securitize assets or to obtain off-balance sheet funding. The liquidity position of the Bank is managed daily, thus enabling the Bank to adapt its position according to market fluctuations. Liquidity is measured by various ratios, the most common of which is the ratio of net loans (including loans held-for-sale) to deposits. This ratio was 67.9% onDecember 31, 2019 and 68.1% onDecember 31, 2018 . AtDecember 31, 2019 and 2018, the Bank's ratio of core deposits to total assets was 86.9% and 88.7%, respectively. Core deposits include demand deposits, interest-bearing transaction deposits, savings and money market deposit accounts, and time deposits$250,000 or less. Core deposits are important in maintaining a strong liquidity position as they represent a stable and relatively low-cost source of funds. Management believes that the Bank's liquidity position was adequate in 2019. This is best illustrated by the change in the Bank's net non-core ratio, which explains the degree of reliance on non-core liabilities to fund long-term assets. AtDecember 31, 2019 , the Bank's net core funding dependence ratio, the difference between non-core funds, time deposits$250,000 or more and brokered time deposits under$250,000 , and short-term investments to long-term assets, was (7.96%) as ofDecember 31, 2019 and (12.14%) as ofDecember 31, 2018 . This ratio indicated atDecember 31, 2019 , the Bank did not significantly rely upon non-core deposits and borrowings to fund the Bank's long-term assets, namely loans and investments. The Bank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate liquidity to support future growth. The Bank also believes that its liquidity position remains strong to meet both present and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in material changes with respect to the Bank's liquidity. 50 -------------------------------------------------------------------------------- Commitments
The following table details the amounts and expected maturities of commitments
as of
Maturities by period
Less than More than 5
Commitments Total 1 year 1-3 years 3-5 years years
Commitments to extend credit
Commercial $ 86,497 $ 63,500 $ 14,848 $ 5,630 $ 2,519
Commercial Real Estate 13,667 1,544 3,162 - 8,961
Agriculture 23,921 14,494 4,857 121 4,449
Residential Mortgage 991 - - - 991
Residential Construction 22,533 20,104 2,133 - 296
Consumer 50,925 13,503 5,551 7,946 23,925
Commitments to sell loans 1,240 1,240 - - -
Standby Letters of Credit 2,455 2,256 199 - -
Total $ 202,229 $ 116,641 $ 30,750 $ 13,697 $ 41,141
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit in
the form of loans or through standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the balance sheet. The contract amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments. These loans have been sold to third parties
without recourse, subject to customary default, representations and warranties,
recourse for breaches of the terms of the sales contracts and payment default
recourse.
Financial instruments, whose contract amounts represent credit risk at
2019 2018
Undisbursed loan commitments $ 198,534 $ 201,983
Standby letters of credit 2,455 2,974
Commitments to sell loans 1,240 570
$ 202,229 $ 205,527
The Bank expects its liquidity position to remain strong in 2020 as the Bank
expects to continue to grow into existing markets. The stock market remained
volatile this past year, but with the overall trend being favorable. While the
Bank did not experience an outflow of deposits in 2019, the potential of
outflows still exists if the stock market values continue to improve. Regardless
of the outcome, the Bank believes that it has the means to provide adequate
liquidity for funding normal operations in 2020.
51
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Capital
The Company believes a strong capital position is essential to the Company's
continued growth and profitability. A solid capital base provides depositors and
shareholders with a margin of safety, while allowing the Company to take
advantage of profitable opportunities, support future growth and provide
protection against any unforeseen losses.
At December 31, 2019 , stockholders' equity totaled $132.9 million , an increase
of $20.5 million from $112.5 million at December 31, 2018 . The increase was
primarily due to net income of $14.7 million . Also affecting capital in 2019
was paid in capital in the amount of $0.6 million resulting from employee stock
purchases and stock plan accruals. See the section entitled "Business - Capital
Standards" for additional information.
The capital of the Company and the Bank historically have been maintained at a
level that is in excess of regulatory guidelines for a "well capitalized"
institution. The policy of annual stock dividends has, over time, allowed the
Company to match capital and asset growth through retained earnings and a
managed program of geographic growth.
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