UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 20162018
Commission file number 0-11487
LAKELAND FINANCIAL CORPORATION
| Indiana | 35‑1559596 |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581‑1387
(Address of principal executive offices)
Telephone: (574) 267-6144
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, no par value | NASDAQNasdaq Global Select Market |
| (Title of class) | (Name of each exchange on which registered) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No__
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes __No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such other period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein and will not be contained, to the best of the registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.[X] ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, a smaller reporting company, or an emerging growth company. See definitionthe definitions of "accelerated filer“large accelerated filer”, “accelerated filer”, “smaller reporting company”, and large accelerated filer"“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] | Accelerated filer [ ] | Non-accelerated filerfiler* [ ] | Smaller reporting company [ ] | Emerging growth company [ ] |
*Do not check if a smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes __ No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on the Nasdaq Global Select Market on June 30, 2016,2018, the last business day of the registrant'sregistrant’s most recently completed second fiscal quarter, was approximately $735,085,498.$1,158,232,579.
Number of shares of common stock outstanding at February 21, 2017: 25,180,75919, 2019: 25,614,046
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on April 11, 20179, 2019 are incorporated by reference into Part III hereof.
LAKELAND FINANCIAL CORPORATION
Annual Report on Form 10-K
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PART I
The Company
Lakeland Financial Corporation ("(“Lakeland Financial"Financial”), an Indiana corporation incorporated in 1983, is a bank holding company headquartered in Warsaw, Indiana that provides, through its wholly-owned subsidiary Lake City Bank (the "Bank"“Bank” and together with Lakeland Financial, the "Company"“Company”), a broad array of products and services throughout its Northernnorthern and Centralcentral Indiana markets. The Company offers commercial and consumer banking services, as well as trust and wealth management, brokerage, and treasury management commercial services. The Company serves a wide variety of industries including, among others, commercial real estate, manufacturing, agriculture, construction, retail, wholesale, finance and insurance, accommodation and food services and health care. The Company'sCompany’s customer base is similarly diverse. The Company is not dependent upon any single industry or customer. At December 31, 2016,2018, Lakeland Financial had consolidated total assets of $4.3$4.9 billion and was the fourth largest independent bank holding company headquartered in the State of Indiana.
Company'sCompany’s Business. Lakeland Financial is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended. Lakeland Financial owns all of the outstanding stock of the Bank, a full-service commercial bank organized under Indiana law. Lakeland Financial conducts no business except that which is incident to its ownership of the outstanding stock of the Bank and the operation of the Bank. Although Lakeland Financial is a corporate entity, legally separate and distinct from its affiliates, bank holding companies such as Lakeland Financial are required to act as a source of financial strength for their subsidiary banks. The principal source of Lakeland Financial'sFinancial’s income is dividends from the Bank. There are certain regulatory restrictions on the extent to which subsidiary banks can pay dividends or otherwise supply funds to their holding companies. See the section captioned "Supervision“Supervision and Regulation"Regulation” below for further discussion of these matters. Lakeland Financial'sFinancial’s executive offices are located at 202 East Center Street, Warsaw, Indiana 46580,46581, and its telephone number is (574) 267-6144.
Bank'sBank’s Business. The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization. As of December 31, 20162018 the Bank had 4849 offices in fourteenfifteen counties throughout Northernnorthern and Centralcentral Indiana. TheIn January 2019, the Bank opened a 49its 50th office in the Indianapolis market in January 2017.downtown Indianapolis. The Bank'sBank’s deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"“FDIC”). The Bank'sBank’s activities cover all phases of commercial banking, including deposit products, commercial and consumer lending, retail and merchant credit card services, corporate treasury management services, and wealth advisory, trust and brokerage services.
We operate branch offices in fivefour geographical markets concentrated in Northernnorthern Indiana and foursix full service offices in Centralcentral Indiana in the Indianapolis market. We have divided our Northernnorthern Indiana markets into three distinct regions, the North Region, the South Region and the East Region. Our most mature market, the South Region, includes Kosciusko County and several contiguous counties. Warsaw is this region's primary city. The Bank entered the North Region in 1990, which includes portions of Elkhart and St. Joseph counties. This region includes the cities of Elkhart, Goshen and South Bend. The North Region represents relatively older markets for us with nearly 25 years of business activity. We entered the East Region in 1999, which includes Allen and DeKalb counties. Fort Wayne represents the primary city in this market. We have experienced rapid commercial loan growth in this market over the past 15 years. We entered the Indianapolis market in 2006 with the opening of a loan production office in Hamilton County and opened a full service retail and commercial branch in late 2011. The Bank currently operates fivesix branches in the Indianapolis footprint.
The Bank'sBank’s business strategy is focused on building long-term relationships with its customers based on top quality service, high ethical standards and safe and sound lending. The Bank operates as a community-based financial services organization augmented by experienced, centralized support in select critical areas. The Bank'sBank’s local market orientation is reflected in its regional management, which divides the Bank'sBank’s market area into five distinct geographic regions each headed by a retail and commercial regional manager. This arrangement allows decision making to be as close to the customer as possible and enhances responsiveness to local banking needs. Despite this local market,local-market, community-based focus, the Bank offers many of the products and services available at much larger regional and national competitors. While our strategy encompasses all phases of traditional community banking, including consumer lending and wealth advisory and trust services, we focus on building expansive commercial relationships and developing retail and commercial deposit gathering strategies through relationship-based client services. Substantially all of the Bank'sBank’s assets and income are located in and derived from the United States. At December 31, 2016,2018, the Company had 524553 full-time equivalent employees. The Company is not a party to any collective bargaining agreements, and employee relations are considered good.
Operating Segment. The Company's chief decision-makers monitor and evaluate financial performance on a Company-wide basis. All of the Company's financial service operations are similar and considered by management to be aggregated into one reportable operating segment. While the Company has assigned certain management responsibilities by region and business-line, the Company'sCompany’s chief decision-makers monitor and evaluate financial performance on a Company-wide basis. The majority of the
Company's Company’s revenue is from the business of banking and the Company'sCompany’s assigned regions have similar economic characteristics,
products, services and customers. Accordingly, all of the Company'sCompany’s operations are considered by management to be aggregated in one reportable operating segment.
Expansion Strategy. Since 1990, the Company has expanded from 17 offices in four Indiana counties to 49 branches50 offices in fifteen Indiana counties primarily through de novo branching. During this period, the Company has grown its assets from $286 million to $4.3$4.9 billion, a compound annual growth rate of 10.97%4%. Mergers and acquisitions have not played a role in this growth as the Company'sCompany’s expansion strategy has been driven by organic growth. The Company has opened six de novo branches in the past five years.years and plans to continue expansion in the Indianapolis market.
Over the past fifteen years, the Company has primarily targeted growth in the larger cities located in Northernnorthern Indiana and the Indianapolis market in Centralcentral Indiana. The Company believes these areas offer above average growth potential with attractive demographics and potential for commercial lending and deposit gathering opportunities. The Company considers expanding into a market when the Company believes that market would be receptive to its strategic plan to deliver broad-based financial services with a commitment to local communities. When entering new markets, the Company believes it is critical to attract experienced local management and staff with a similar philosophy in order to provide a basis for success. The Company leases office space in downtown Fort Wayne.
Competition. The financial services industry is highly competitive. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience. Our competitors include national and regional banks, thrifts, credit unions, farm credit services, finance companies, personal loan companies, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers, mutual fund companies and e-commerce and other internet-based companies offering financial services. Many of these competitors enjoy fewer regulatory constraints and some may have lower cost structures.
Forward-looking Statements
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as "believe," "expect," "anticipate," "project," "possible," "continue," "plan," "intend," "estimate," "may," "will," "would," "could," "should"“believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company'sCompany’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation:
| · | the effects of future economic, business and market conditions and changes, both domestic and foreign; |
| · | governmental monetary and fiscal policies; |
| · | the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators; |
| · | the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities; |
| · | changes in borrowers'borrowers’ credit risks and payment behaviors; |
| · | changes in the availability and cost of credit and capital in the financial markets; |
| · | the effects of disruption and volatility in capital markets on the value of our investment portfolio; |
| · | cyber-security risks and or cyber-security damage that could result from attacks on the Company'sCompany’s or third partythird-party service providers networks or data of the Company; |
| · | changes in the prices, values and sales volumes of residential and commercial real estate; |
| · | the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services; |
| · | changes in technology or products that may be more difficult or costly, or less effective than anticipated; |
| · | the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; |
| · | the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible loan losses, our analysis of our capital position and other estimates; |
| · | changes in the scope and cost of FDIC insurance, the state of Indiana'sIndiana’s Public Deposit Insurance Fund and other coverages; |
| · | the effects of the Tax Cuts and Jobs Act, including any effects on the housing market, and on the demand for home equity loans and other loan products that we offer; |
| · | changes in accounting policies, rules and practices; |
| · | the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; and |
| · | Thethe risks noted in the Risk Factors discussed under Item 1A of Part 1 of this Annual Report on Form 10-K, as well as other risks and uncertainties set forth from time to time in the Company'sCompany’s other filings with the SEC.Securities and Exchange Commission (the “SEC”). |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Internet Website
The Company maintains an internet site at www.lakecitybank.com. The Company makes available free of charge in the Investor Relations section on this site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other statements and reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the "SEC").SEC. All such documents filed with the SEC are also available for free on the SEC'sSEC’s website (www.sec.gov). The Company'sCompany’s Articles of Incorporation, Bylaws, Code of Conduct and the charters of its various committees of the BoardCompany’s board of Directorsdirectors are also available on the website.
SUPERVISION AND REGULATION
General
FDIC-insured institutions, like the Bank, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the Company'sour growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Indiana Department of Financial Institutions (the "DFI"“DFI”), the Board of Governors of the Federal Reserve System (the "Federal Reserve"“Federal Reserve”), the FDIC and the Consumer Financial Protection Bureau (the "CFPB"“CFPB”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board, securities laws administered by the Securities and Exchange Commission (the "SEC"(“SEC”) and state securities authorities, and anti-money laundering laws enforced by the U.S. Department of the Treasury ("Treasury"(“Treasury”) have an impact on the Company'sour business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the Company'sour operations and results.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of the Company'sCompany’s business, the kinds and amounts of investments the Company and the Bankwe may make, reserve requirements, required capital levels relative to the Company’s assets, the nature and amount of collateral for loans, the establishment of branches, the Company'sCompany’s ability to merge, consolidate and acquire, dealings with the Company's and the Bank'sCompany’s insiders and affiliates and the Company'sCompany’s payment of dividends. In the last several years, the Company has experienced heightened regulatory requirements and scrutiny followingreaction to the global financial crisis and as a resultparticularly following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"“Dodd-Frank Act”). , we experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and the reforms have caused the Company'sCompany’s compliance and risk management processes, and the costs thereof, to increase. While it is anticipated thatAfter the Trump administration will not increase2016 federal elections, momentum to decrease the regulatory burden on community banks gathered strength. In May 2018, the Economic Growth, Regulatory Relief and may reduce someConsumer Protection Act (the “Regulatory Relief Act”) was enacted to modify or remove certain financial reform rules and regulations. While the Regulatory Relief Act maintains most of the burdens associated with implementation ofregulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, like us, and for large banks with assets of more than $50 billion. Many of these changes are intended to result in meaningful regulatory relief for community banks and their holding companies, including new rules that may make our capital requirements less complex. For a discussion of capital requirements, see
“—The Role of Capital.” It also eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving us of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. We believe these reforms are favorable to our operations, but the true impact of the new administration is impossibleremains difficult to predict with any certainty.until rulemaking is complete and the reforms are fully implemented.
ThisThe supervisory and regulatory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also
capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, beginning with a discussion of the continuing regulatory emphasis on the Company'sCompany’s capital levels. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
Regulatory Emphasis onThe Role of Capital
Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects the Company'sCompany’s earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish strengthened capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously.
Minimum Required Capital Levels.Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of capital divided by total assets. As discussed below, bank capital measures have become more sophisticated over the years and have focused more on the quality of capital and the risk of assets. Bank holding companies have historically had to comply with less stringent capital standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, are beingwere excluded from capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions. Because the Company has assets of less than $15 billion, the Company is able to maintain itsthe Company’s trust preferred proceeds as capital but the Company has to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.
The Basel International Capital Accords.The risk-based capital guidelines for U.S. banks since 1989 were based upon the 1988 capital accord known as "Basel I"“Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accord recognized that bank assets for the purpose of the capital ratio calculations needed to be assigned risk weightedweights (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations. Basel I had a very simple formula for assigning risk weights to bank assets from 0% to 100% based on four categories. In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as "Basel“Basel II,"” for large or "core"“core” international banks (generally defined for U.S. purposes as having total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more) known as "advanced approaches"“advanced approaches” banks. The primary focus of Basel II was on the calculation of risk weights based on complex models developed by each advanced approaches bank. Because most banks were not subject to Basel II, the U.S. bank regulators worked to improve the risk sensitivity of Basel I standards without imposing the complexities of Basel II. This "standardized approach"“standardized approach” increased the number of risk-weightrisk weight categories and recognized risks well above the original 100% risk weighting. The standardized approachweight. It is institutionalized by the Dodd-Frank Act for all banking organizations, even for the advanced approaches banks, as a floor.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.
The Basel III Rule. Rule.In July of 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the "Basel“Basel III Rule"Rule”). In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of enforceable regulations by each of the regulatory agencies. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to
bank and savings and loan holding companies, other than "small“small bank holding companies"companies” (generally holding companies with consolidated assets of less than $1 billion that do not have securities registered with$3 billion). Banking organizations (except for large, internationally active banking organizations) became subject to the SEC).
6
it were fully phased-in as of January 1, 2019.The Basel III Rule required higher capital levels, increased the required quantity and quality of capital, and required more detailed categories of risk weighting of riskier, more opaque assets. Forfor nearly every class of assets, the Basel III Ruleit requires a more complex, detailed and calibrated assessment of credit risk and calculation of risk weightings.
weight amounts.
Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). A number of instruments that qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications changed. For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital under Basel I, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking institution'sinstitution’s Common Equity Tier 1 Capital.
The Basel III Rule required minimum capital ratios as of January 1, 2015, as follows:
| · | A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets; |
| · | An increase in the minimum required amount of Tier 1 Capital from 4% to 6% of risk-weighted assets; |
| · | A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and |
| · | A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances. |
In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer being phased in over three years beginning in 2016 (which,(fully phased-in as of January 1, 2017, was phased in half-way to 1.25%)2019). The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the fully phased-in conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital,Capital; 8.5% for Tier 1 CapitalCapital; and 10.5% for Total Capital.
Banking organizations (except for large, internationally active banking organizations) became subject to the new rules on January 1, 2015. However, there are separate phase-in/phase-out periods for: (i) the capital conservation buffer; (ii) regulatory capital adjustments and deductions; (iii) nonqualifying capital instruments; and (iv) changes to the prompt corrective action rules discussed below. The phase-in periods commenced on January 1, 2016 and extend until 2019.
Well-Capitalized Requirements.Requirements. The ratios described above are minimum standards in order for banking organizations to be considered "adequately“adequately capitalized."” Bank regulatory agencies uniformly encourage banks to hold more capital and be "well-capitalized"“well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve'sReserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.
Under the capital regulations of the FDIC and Federal Reserve, in order to be well‑capitalized, a banking organization must maintain:
| · | A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more; |
| · | A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more (6% under Basel I); |
| · | A ratio of Total Capital to total risk-weighted assets of 10% or more (the same as Basel I); and |
| · | A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater. |
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.
As of December 31, 2016:2018: (i) the Bank was not subject to a directive from the DFPR or the Federal ReserveFDIC to increase its capital and (ii) the Bank was well-capitalized, as defined by Federal Reserve regulations. As of December 31, 2016,2018, the Company had regulatory capital in excess of the Federal Reserve'sReserve’s requirements and met the Basel III Rule requirements to be well-capitalized.
Prompt Corrective Action. ActionAn FDIC-insured institution's capital plays. The concept of an important role in connection withinstitution being “well-capitalized” is part of a regulatory enforcement as well. Federal lawregime that provides the federal banking regulators with broad power to take prompt“prompt corrective actionaction” to resolve the problems of undercapitalized institutions.institutions based on the capital level of each particular institution. The extent of the regulators'regulators’ powers depends on whether the institution in question is "adequately“adequately capitalized," "undercapitalized," "significantly undercapitalized"” “undercapitalized,” “significantly undercapitalized” or "critically“critically undercapitalized," ”
in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators'regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution'sinstitution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
The Potential for Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided a potential Basel III “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single "Community Bank Leverage Ratio" (“CBLR”) of between 8 and 10%. On November 21, 2018, the agencies proposed setting the CBLR at 9% of tangible equity to total assets for a qualifying bank to be well-capitalized. Under the proposal, a community banking organization would be eligible to elect the new framework if it has less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The electing institution would not be required to calculate the existing risk-based and leverage capital requirements of the Basel III Rule and would not need to risk-weight its assets for purposes of capital calculations.
We are in the process of considering the Federal Reserve’s CBLR proposal and will await the final regulation to determine whether we will elect the framework.
Regulation and Supervision of the Company
General.The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company iswe are registered with, and subject to regulation supervision and enforcement by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the "BHCA"(“BHCA”). The Company isWe are legally obligated to act as a source of financial and managerial strength to the Bank and to commit resources to support the Bank in circumstances where the Companywe might not otherwise do so. Under the BHCA, the Company iswe are subject to periodic examination by the Federal Reserve and isare required to file with the Federal Reserve periodic reports of the Company'sCompany’s operations and such additional information regarding the Companyus and the Bank as the Federal Reserve may require.
Acquisitions Activities and Change in Control.Activities. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and examiners must rate them well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see "—Regulatory Emphasis on Capital"“—The Role of Capital” above.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be "so“so closely related to banking ... as to be a proper incident thereto."” This authority would permit the Companypermits us to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. The Company elected to, and continues to operate as, a financial holding company. MaintainingIn order to maintain status as a financial holding company, status requiresboth the bank holding company and its subsidiary bank must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act (“CRA”) rating. If the Federal Reserve determines that we are not well-capitalized or well-managed, we will have a period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any limitations on us it believes to be appropriate. Furthermore, if the Federal Reserve determines that the Bank remain "well-capitalized" and "well-managed" as defined by regulation and maintain at leasthas not received a "satisfactory" rating under the Communitysatisfactory CRA
Reinvestment Act. In addition, under the Dodd-Frank Act, the Company must also remain well-capitalized and well-managedrating, we will not be able to maintain itscommence any new financial holding company status. If the Companyactivities or the Bank fails to continue to meet these requirements, the Company could be subject to restrictions on new activities and acquisitions and/or be required to cease and possibly divest of operations that conduct existing activities that are not permissible foracquire a bank holding company that is not a financial holding company.engages in such activities.
Change in Control. Federal law also prohibits any person or company from acquiring "control"“control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. "Control"“Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.
Capital Requirements.Bank As a bank holding companiescompany, we are required to maintain capital in accordance with Federal Reserve capital adequacy requirements. For a discussion of capital requirements, see "—Regulatory Emphasis on Capital"“—The Role of Capital” above.
Dividend Payments.The Company's ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. companies. As an Indiana corporation, the Company is subject to the limitations of Indiana General Business Corporations Law, which prohibit the Company from paying dividends if the Company is, or by payment of the dividend would become, insolvent, or if the payment of dividends would render the Company unable to pay its debts as they become due in the usual course of business. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer to be phased in over three years beginning in 2016.
buffer.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company'scompany’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company'scompany’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-banknonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer to be phased in over three years beginning in 2016. See "—Regulatory Emphasis on Capital" above.
Incentive Compensation. There have been a number of developments in recent years focused on incentive compensation plans sponsored by bank holding companies and banks, reflecting recognition by the bank regulatory agencies and Congress that flawed incentive compensation practices in the financial industry were one of many factors contributing to the global financial crisis. Layered on top of that are the abuses in the headlines dealing with product cross-selling incentive plans. The result is interagency guidance on sound incentive compensation practices and proposed rulemaking by the agencies required under Section 956 of the Dodd-Frank Act.
The interagency guidance recognized three core principles: effective incentive plans should: (i) provide employees incentives that appropriately balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. Much of the guidance addresses large banking organizations and, because of the size and complexity of their operations, the regulators expect those organizations to maintain systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation arrangements for all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards. Smaller banking organizations like the Company that use incentive compensation arrangements are expected to be less extensive, formalized, and detailed than those of the larger banks.
Section 956 of the Dodd-Frank Act required the banking agencies, the National Credit Union Administration, the SEC and the Federal Housing Finance Agency to jointly prescribe regulations that prohibit types of incentive-based compensation that encourage inappropriate risk taking and to disclose certain information regarding such plans. On June 10, 2016, the agencies released an updated proposed rule for comment. Section 956 will only apply to banking organizations with assets of greater than $1 billion. The Company has consolidated assets greater than $1 billion and less than $50 billion and the Company is considered a Level 3 banking organization under the proposed rules. The proposed rules contain mostly general principles and reporting requirements for Level 3 institutions so there are no specific prescriptions or limits, deferral requirements or claw-back mandates. Risk management and controls are required, as is board or committee level approval and oversight. Management expects to review its incentive plans in light of the proposed rulemaking and guidance and implement policies and procedures that mitigate unreasonable risk.
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve
requirements against bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.
Federal Securities Regulation.The Company'sCompany’s common stock is registered with the SEC under the Securities Exchange Act of 1934,1933, as amended, (the "Exchange Act").and the Exchange Act. Consequently, the Company iswe are subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Corporate Governance. Governance.The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. ItThe Dodd-Frank Act increased stockholdershareholder influence over boards of directors by requiring companies to give stockholders a non-bindingnonbinding vote on executive compensation and so-called "golden parachute"“golden parachute” payments, and authorizing the SEC to promulgate rules that would allow stockholdersshareholders to nominate and solicit voters for their own candidates using a company'scompany’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.
Regulation and Supervision of the Bank
General.The Bank is an Indiana-chartered bank. The deposit accounts of the Bank are insured by the FDIC's Deposit Insurance Fund ("DIF") to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category. The Bank is also a member of the Federal Reserve System (a "member bank"“member bank”). As an Indiana-chartered FDIC-insured member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFI, the chartering authority for Indiana banks, the Federal Reserve, as the primary federal regulator of member banks, and the FDIC, as administrator of the DIF.
Deposit Insurance Fund.
Deposit Insurance. Insurance.As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from three1.5 basis points to 30 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution'sinstitution’s deposit insurance premiums paid to the DIF arehave been calculated issince effectiveness of the Dodd-Frank Act based on its average consolidated total assets less its average tangible equity. This method shiftsshifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sourcesthe resources other than U.S. deposits.
The reserve ratio is the DIFFDIC insurance fund balance divided by estimated insured deposits. The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits,
and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds. The reserve ratio reached 1.15% on June1.36% as of September 30, 2016, when revised factors were put in place for calculating2018 (most recent available), exceeding the assessment. If thestatutory required minimum reserve ratio does not reachof 1.35% by December 31, 2018 (provided it is at least 1.15%), the FDIC will impose a shortfall assessment on March 31, 2019 on insured depository institutions with total consolidated assets of $10 billion or more.. The FDIC will provide assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contribute to growth in the reserve ratio between 1.15% and 1.35%. The FDIC will apply the credits each quarter that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with credits.
FICO Assessments. Assessments.In addition to paying basic deposit insurance assessments, FDIC-insured institutions must pay Financing Corporation ("FICO")(FICO) assessments. FICO is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued 30-year noncallable bonds of approximately $8.1 billion that mature in 2017 through 2019. FICO'sFICO’s authority to issue bonds ended on December 12, 1991. Since 1996, federal legislation has required that all FDIC-insured institutions pay assessments to cover interest payments on FICO'sFICO’s outstanding obligations. The FICO assessment rate is adjusted quarterly and for the fourth quarter of 20162018 was 0.5600.320 basis points (56(32 cents per $100 dollars of assessable deposits).
Supervisory Assessments. Assessments. All Indiana banks are required to pay supervisory assessments to the DFI to fund the operations of that agency. The amount of the assessment is calculated on the basis of the Bank'sBank’s total assets. During the year ended December 31, 2016,2018, the Bank paid supervisory assessments to the DFI totaling approximately $228,000.$265,000.
Capital Requirements.Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see "—Regulatory Emphasis on Capital"“—The Role of Capital” above.
Liquidity Requirements.Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global
financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the Liquidity Coverage Ratio, ("LCR"), is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the Net Stable Funding Ratio, ("NSFR"), is designed to promote more medium-andmedium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in 2014 While these rules do not, and have proposed the NSFR. While the LCR only applieswill not, apply to the largest banking organizations in the country, as will the NSFR, certain elements are expected to filter down to all FDIC-insured institutions. The Company continuesBank, we continue to review the Company'sour liquidity risk management policies in light of the LCR and NSFR.
developments.
Stress Testing. A stress test is an analysis or simulation designed to determine the ability of a given FDIC-insured institution to deal with an economic crisis. In October 2012, U.S. bank regulators unveiled new rules mandated by the Dodd-Frank Act that require the largest U.S. banks to undergo stress tests twice per year, once internally and once conducted by the regulators. Stress tests are not required for banks with less than $10 billion in assets; however, the FDIC now recommends stress testing as means to identify and quantify loan portfolio risk and the Bank is engaged in the process.
Dividend Payments.The primary source of funds for the Company is dividends from the Bank. Indiana law prohibits the Bank from paying dividends in an amount greater than its undivided profits. The Bank is required to obtain the approval of the DFI for the payment of any dividend if the total of all dividends declared by the Bank during the calendar year, including the proposed dividend, would exceed the sum of the Bank's net income for the year-to-date combined with its retained net income for the previous two years. Indiana law defines "retained net income" to mean the net income of a specified period, calculated under the consolidated report of income instructions, less the total amount of all dividends declared for the specified period. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state member banks, such as the Bank. Without Federal Reserve approval, a state member bank may not pay dividends in any calendar year that, in the aggregate, exceed thethat bank's calendar year-to-date net income plus the bank's retained net income for the two preceding calendar years. Moreover, the payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and aan FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2016.2018. Notwithstanding the availability of funds for dividends, however, the Federal Reserve and the DFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer to be phased in over three years beginning in 2016.buffer. See "—Regulatory Emphasis on Capital"“-The Role of Capital” above.
State Bank Investments and Activities.The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Indiana law. However, under federal law, FDIC-insured institutions are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount that are not permissible for a national bank. Federal law also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.
Insider Transactions.The Bank is subject to certain restrictions imposed by federal law on "covered transactions"“covered transactions” between the Bank and its "affiliates."“affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and
the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of "covered transactions"“covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.
Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to "related interests"“related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a principal shareholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards/Risk Management.The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The guidelines set forth
standards forapply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelinesstandards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. IfWhile regulatory standards do not have the force of law, if an institution fails to comply with any of the standards set forthoperates in the guidelines,an unsafe and unsound manner, the FDIC-insured institution'sinstitution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator'sregulator’s order is cured, the regulator may restrict the FDIC-insured institution'sinstitution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, incentive compensation, third-party risk and cybersecurity are critical sources of operational risk that FDIC-insured institutions are expected tomust address in the current environment. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.
Branching Authority. Authority.Indiana banks, such as the Bank, have the authority under Indiana law to establish branches anywhere in the State of Indiana, subject to receipt of all required regulatory approvals. Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches has historically been permitted only in those states the laws of which expressly authorize such expansion. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or acquirethe acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments.
Transaction Account Reserves.Federal Reserve regulations require FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2017:2019, the first $15.5$16.3 million of otherwise reservable balances are exempt from reserves and have a zero percent reserve requirement; for transaction accounts aggregating more than $15.5between $16.3 million to $115.1$124.2 million, the reserve requirement is 3% of totalthose transaction accounts;account balances; and for net transaction accounts in excess of $115.1$124.2 million, the reserve requirement is 3% up to $115.1 million plus 10% of the aggregate amount of total transaction accountsaccount balances in excess of $115.1$124.2 million. These reserve requirements are subject to annual adjustment by the Federal Reserve.
Community Reinvestment Act Requirements.The Community Reinvestment Act CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank'sBank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank'sBank’s effectiveness in meeting its Community Reinvestment ActCRA requirements.
Anti-Money Laundering.The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "Patriot Act"(“USA PATRIOT Act”) is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money. The PatriotUSA PATRIOT Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and
(vi) cooperation between FDIC-insured institutions and law enforcement authorities.
Concentrations in Commercial Real Estate.Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance ("(“CRE Guidance"Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks'banks’ levels of commercial real estate lending
activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk.
Based on the Bank'sBank’s loan portfolio as of December 31, 2016,2018, it did not exceed the 300% guidelineguidance for commercial real estate loans or the 100% guideline for construction and land development loans.
Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit "unfair,“unfair, deceptive or abusive"abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.
Because abuses in connection with residential mortgages were a significant factor contributing to the global financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressaddressed mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd-FrankDodd‑Frank Act imposed new standards for mortgage loan originations on all lenders, including all FDIC-insured institutions,banks and savings associations, in an effort to strongly encourage lenders to verify a borrower's "abilityborrower’s ability to repay," while also establishing a presumption of compliance for certain "qualified“qualified mortgages." In addition,” The Regulatory Relief Act provided relief in connection with mortgages for banks with assets of less than $10 billion, and, as a result, mortgages the Dodd-Frank Act generally required lenders or securitizersBank makes are now considered to retain an economic interestbe qualified mortgages if they are held in portfolio for the credit risk relating to loans thatlife of the lender sells, and other asset-backed securities that the securitizer issues, if the loans have not complied with the ability-to-repay standards. [The Company doesloan.
We do not currently expect the CFPB'sCFPB’s rules to have a significant impact on the Bank'sCompany’s operations, except for higher compliance costs.]
In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:
A downturn in the general economic or business conditions, nationally or in markets where our business is concentrated, could have an adverse effect on our business, results of operations and financial condition.
Our success depends upon the business activity, population, employment rates, income levels, deposits and real estate activity in our markets in northern and central Indiana. Although our customers'customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, diminish the ability of our customers to repay their loans to us, decrease the value of any collateral securing our loans and generally adversely affect our financial condition and results of operations. While economic conditions in our markets have generally improved since the nationwide recession in 2008 and 2009, there can be no guarantee that they will continue to do so, or that they will be as strong as national economic conditions. Moreover, because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
If we do not effectively manage our credit risk, we may experience increased levels of nonperforming loans, charge - offs and delinquencies, which could require further increaseincreases in our provision for loan losses.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries, a centralized credit administration department and periodic independent reviews of outstanding loans by our loan review department. However, we cannot make assurances that such approval and monitoring procedures will reduce these credit risks. If the overall economic climate in the United States, generally, and our market areas, specifically, does not continue to improve, or even if it does, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the provision for loan losses, which would cause our net income and return on equity to decrease.
If our allowance for loan losses is not sufficient to absorb losses that may occur in our loan portfolio, our financial condition and liquidity could suffer.
We establish our allowance for loan losses and maintain it at a level considered adequate by management to absorb probable incurred loan losses that are inherent in the portfolio. The allowance contains provisions for probable incurred losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas. The actual amount of loan losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.
At December 31, 2016,2018, our allowance for loan losses as a percentage of total loans was 1.26%1.24% and as a percentage of total nonperforming loans was 653%667%. Because of the nature of our loan portfolio and our concentration in commercial and industrial loans, which tend to be larger loans, the movement of a small number of loans to nonperforming status can have a significant impact on these ratios. Although management believes that the allowance for loan losses is adequate to absorb probable losses on any existing loans, we cannot predict loan losses with certainty and we cannot assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the future. Loan losses in excess of our reserves may adversely affect our business, results of operations and financial condition.
Commercial and industrial and agri-business loans make up a significant portion of our loan portfolio.
Commercial and industrial and agri-business loans were $1.663$1.405 billion, or approximately 47.9%35.9% of our total loan portfolio, as of December 31, 2016.2018. Commercial and industrial loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation of the borrower involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the general economy. For example, increased input costs as a result of escalating tariffs could adversely affect commercial and industrial loans. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, machinery or real estate. Whenever practical, we require a personal guarantee on commercial and industrial loans. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could adversely affect our business, results of operations and growth prospects.
In addition to the risks described above, our agri-business loans, which totaled $394.8 million, or approximately11.4% of our total loan portfolio as of December 31, 2016, are subject to risks specific to the agricultural industry, including recent decreases in livestock and crop prices, increases in labor and seed prices, increase in stockpiles of agricultural commodities, the strength of the U.S. dollar and the nature of weather conditions. To the extent these or other factors affect the performance or financial condition of our agri-business borrowers, our results of operations and financial performance could suffer.
Our loan portfolio includes commercial real estate loans, which involve risks specific to real estate value.
Commercial real estate loans were $1.301$1.570 billion, or approximately 37.5%40.1% of our total loan portfolio as of December 31, 2016.2018. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Although a significant portion of such loans are secured by real estate as a secondary form of collateral, adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
If the loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
14Our loan portfolio has a notable concentration in agri-business, which has a higher level of uncontrolled risk.
TableOur agri-business loans, which totaled $370.5 million, or approximately 9.5% of Contentsour total loan portfolio as of December 31, 2018, are subject to risks outside of our or the borrower’s control. These risk, specific to the agricultural industry, include decreases in livestock and crop prices, increases in labor and seed prices, increase in stockpiles of agricultural commodities, the strength of the U.S. dollar, the potential impact of tariffs on commodities and the nature of weather conditions. To the extent these or other factors affect the performance or financial condition of our agri-business borrowers, our results of operations and financial performance could suffer.
Our consumer loans generally have a higher degree of risk of default than our other loans.
At December 31, 2016,2018, consumer loans totaled $61.3$86.1 million, or 1.8%2.2% of our total loan and lease portfolio. Consumer loans typically have shorter terms and lower balances with higher yields as compared to commercial loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower'sborrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans.
We may need to raise additional capital in the future to achieve our growth plans, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Accordingly, we may need to raise additional capital to support our future growth plans. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our financial condition and our ability to further expand our operations through internal growth or acquisitions could be materially impaired.
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we pay on our liabilities may rise more quickly than the rate of interest that we receive on our interest-bearing assets, which may cause our profits to decrease. The impact on earnings is more adverse when the slope of the yield curve flattens, i.e. when short-term interest rates increase more than corresponding changes in long-term interest rates or when long-term interest rates decrease more than corresponding changes in short-term interest rates.
Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on the loans underlying our participation interests as borrowers refinance their mortgages at lower rates.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.
IfAlthough the Federal Reserve Bank has raised the target fed funds rate range to 2.25%-2.50%, short-term interest rates remainhave remained at their historically low levels for a prolonged period, and assumingperiod. If long-term interest rates fall further,do not rise as quickly as short-term rates, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest bearing liability rates could fail to decline in tandem.compression. This would have a material adverse effect on our net interest income and our results of operations.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition and could result in further losses in the future.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or other real estate owned, which adversely affects our net income and returns on assets and equity, increases our loan administration costs and adversely affects our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its thencurrent fair market value at the time of transfer, which may result in a loss. These nonperforming loans and other real estate owned also increase our risk profile and our regulatory capital requirements may increase in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income and provision expense may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.
Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial, negative effect on our liquidity. Our primary sources of funds consist of deposits, cash from
operations and investment maturities and sales. Additional liquidity is provided by brokered deposits, Certificate of Deposit Account Registry Service ("CDARS"(“CDARS”) deposits, repurchase agreements as well as our ability to borrow from the Federal Reserve and the Federal Home Loan Bank (the "FHLB"“FHLB”). Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. In addition, increased competition with the largest banks for retail deposits due to the higher liquidity requirements these banks are now subject to may impact our ability to raise funds through deposits and could have a negative effect on our liquidity.
During the recent recession, the financial services industry and the credit markets generally were materially and adversely affected by significant declines in asset values and historically depressed levels of liquidity. The liquidity issues were also particularly acute for regional and community banks, as many of the larger financial institutions curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks. In addition, many of the larger correspondent lenders reduced or even eliminated federal funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than national and super-regional banks because of their smaller size and limited analyst coverage. Although availability has improved since the beginning of the recession, anyAny decline in available funding similar to the decline experienced during the recession, could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
Any action or steps to change coverages or eliminate Indiana'sIndiana’s Public Deposit Insurance Fund could require us to find alternative, higher-cost funding sources to replace public fund deposits or to provide for collateralization of these deposits.
Approximately 33%30% of our deposits are concentrated in public funds from a small number of municipalities and government agencies. A shift in funding away from public fund deposits would likely increase our cost of funds, as the alternate funding sources, such as brokered certificates of deposit, are higher-cost, less favorable deposits. The inability to maintain these public funds on deposit could result in a material adverse effect on the Bank'sBank’s liquidity and could materially impact our ability to grow and remain profitable.
Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.
We maintain an investment portfolio that includes, but is not limited to, mortgage-backed securities and municipal securities. The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a monthlyquarterly basis, we evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if our investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on our results of operations in the periods in which the write-offs occur.
We may experience difficulties in managing our growth, and our growth strategy involves risks that may negatively impact our net income.
In addition to our continuing expansion in Indianapolis and larger cities in Northern Indiana, we may expand into additional communities or attempt to strengthen our position in our current markets through opportunistic acquisitions of all or part of other financial institutions, or by opening new branches in or contiguous to our geographic footprint. To the extent that we undertake acquisitions or new branch openings, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management'smanagement’s time and attention and general disruption to our business.
To the extent that we grow through acquisitions and branch openings, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses will involve similar risks to those commonly associated with branching but may also involve additional risks, including:
| · | potential exposure to unknown or contingent liabilities of banks and businesses we acquire; |
| · | exposure to potential asset quality issues of the acquired bank or related business; |
| · | difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; and |
| · | the possible loss of key employees and customers of the banks and businesses we acquire. |
We face intense competition in all phases of our business from other banks and financial institutions.
The banking and financial services business in our market is highly competitive. Our competitors include large national and regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions, farm credit services and other nonbank financial service providers. Many of these competitors are not subject to the same regulatory restrictions as we are and are able to provide customers with a feasible alternative to traditional banking services.
Increased competition in our market may also result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to relax our underwriting standards, we could be exposed to higher losses from lending activities. Moreover, we rely on deposits to be a low cost source of funding, and a loss in our deposit base could cause us to incur higher funding costs. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, possess larger lending limits and offer a broader range of financial services than we can offer.
Attractive acquisition opportunities may not be available to us in the future.
We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other financial institutions if we pursue such acquisitions. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and stockholders'stockholders’ equity per share of our common stock.
Our accounting policies and methods are the basis for how we prepare our consolidated financial statements and how we report our financial condition and results of operations, and they require management to make estimates about matters that are inherently uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure they comply with GAAP and reflect management'smanagement’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances. The application of that chosen accounting policy or method might result in the Company reporting different amounts than would have been reported under a different alternative. If management'smanagement’s estimates or assumptions are incorrect, the Company may experience material losses.
Management has identified two accounting policies as being "critical"“critical” to the presentation of the Company'sCompany’s financial condition and results of operations because they require management to make particularly subjective and complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These critical accounting policies relate to: (1) the allowance for loan losses and (2) determining the fair value and possible other than temporary impairment of investment securities available for sale. Because of the inherent uncertainty of these estimates, no assurance can be given that the application of alternative policies or methods might not result in the reporting of different amounts of the fair value of securities available for sale, or the allowance for loan losses and, accordingly, net income.
From time to time, the Financial Accounting Standards Board (FASB) and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial condition and results of operations. Changes in these standards are continuously occurring, and given the current economic environment, more drastic changes may occur. The implementation of such changes could have a material adverse effect on our financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities,
adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
We are required to maintain capital to meet regulatory requirements, and, if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
The Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. We face significant capital and other regulatory requirements as a financial institution, which were heightened with the implementation of the Basel III rule on January 1, 2015 and the phase-in of capital conservation buffer requirement through January 1, 2019. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
We may be materially and adversely affected by the highly regulated environment in which we operate.
We are subject to extensive federal and state regulation, supervision and examination. A more detailed description of the primary federal and state banking laws and regulations that affect us is contained in the section of this Form 10-K captioned "Supervision“Supervision and Regulation."” Banking regulations are primarily intended to protect depositors'depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than our shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.
As a bank holding company, we are subject to extensive regulation and supervision and undergo periodic examinations by our regulators, who have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties and/or damage to our reputation, which could have a material adverse effect on us. Although we have policies and procedures designed to mitigate the risk of any such violations, there can be no assurance that such violations will not occur.
The laws, regulations, rules, standards, policies and interpretations governing us are constantly evolving and may change significantly over time. For example, on July 21, 2010, the Dodd-Frank Act was signed into law, which significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act, together with the regulations to be developed thereunder, includes provisions affecting large and small financial institutions alike, including several provisions that affect how community banks, thrifts and small bank and thrift holding companies will be regulated. In addition, the Federal Reserve, in recent years, has adopted numerous new regulations addressing banks'banks’ overdraft and mortgage lending practices. Further, the CFPB was recently established, with broad powers to supervise and enforce consumer protection laws, and additional consumer protection legislation and regulatory activity is anticipated in the near future.
In addition, in July 2013, the U.S. federal banking authorities approved the implementation of the Basel III Rules. The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than "small“small bank holding companies"companies” (generally bank holding companies with consolidated assets of less than $1 billion).
The Basel III Rules became effective on January 1, 2015, with a phase in period through 2019 for many of the changes. The Basel III Rules not only increase most of the required minimum regulatory capital ratios, they introduce a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expand the current definition of capital by establishing additional criteria that capital instruments must meet to be considered Additional Tier 1 Capital (i.e., Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of instruments that formerly qualified as Tier 1 Capital will not qualify or their qualifications will change when the Basel III Rules are fully implemented. However, the Basel III Rules permit banking organizations with less than $15 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III Rules have maintained the general structure of the current prompt corrective action thresholds while incorporating the increased requirements, including the Common Equity Tier 1 Capital ratio. In order to be a "well-capitalized"“well-capitalized” depository institution under the new regime, an institution must maintain a Common
Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of Common Equity Tier 1 Capital.
These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of our business activities and may change certain of our business practices, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. Although we are currently compliant with the Basel III Rules, these changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply and could therefore also materially and adversely affect our business, financial condition and results of operations.
Our ability to attract and retain management and key personnel and any damage to our reputation may affect future growth and earnings.
Much of our success and growth has been influenced strongly by our ability to attract and retain management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain the executive officers, management teams, branch managers and loan officers at the Bank will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community‑based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, results of operations and financial condition.
In addition, our business depends on earning and maintaining the trust of our customers and communities. Harm to our reputation could arise from numerous sources, including employee misconduct, compliance failures, litigation or our failure to deliver appropriate levels of service. If any events or circumstances occur which could undermine our reputation, there can be no assurance that the additional costs and expenses we may incur as a result would not have an adverse impact on our business.
We have a continuing need forto adapt to technological change and we may not have the resources to effectively implement new technology.
The financial services industry is constantly undergoing rapid technological changes with frequent introductions of new technology‑driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market areas. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide assurances that we will be able to effectively implement new technology‑driven products and services or be successful in marketing such products and services to our customers.
The Company'sCompany’s information systems may experience an interruption or breach in security and cyber-attacks, all of which could have a material adverse effect on the Company'sCompany’s business.
The Company relies heavily on internal and outsourced technologies, communications, and information systems to conduct its business. Additionally, in the normal course of business, the Company collects, processes and retains sensitive and confidential information regarding our customers. As the Company'sCompany’s reliance on technology has increased, so have the potential risks of a technology-related operation interruption (such as disruptions in the Company'sCompany’s customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of a cyber-attacks (such as unauthorized access to the Company'sCompany’s systems). These risks have increased for all financial institutions as new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others.others have increased. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, thatwhich are designed to disrupt key business services, such as customer-facing web sites. The Company is not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. In addition, it is possible that we may not be able to detect security breaches on a timely basis, or at all, which could increase the costs and risks associated with any such breach.
The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding the Company'sCompany’s customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and its processors. Some of these
parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks relating to them. In addition, the Company offers its customers protection against fraud and certain losses for unauthorized use of debit cards in order to stay competitive with other financial institutions. Offering such protection exposes the Company to losses that could adversely affect its business, financial condition and results of operations. Further cyber-attacks or other breaches in the future, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in reduced use of payment cards and increased costs, all of which could have a material adverse effect on the Company'sCompany’s business. To the extent we are involved in any future cyber-attacks or other breaches, the Company'sCompany’s reputation could be affected, which could also have a material adverse effect on the Company'sCompany’s business, financial condition or results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding their own unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence, among others.
We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors, cyber-attacks, and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, results of operations and financial condition.
We may be adversely affected by changes in U.S. tax laws and regulations.
The Tax Cuts and Jobs Act was enacted in December 2017. While the Company benefited from the decrease in the federal corporate income tax rate from 35% to 21%, several changes could adversely affect our customers, including a cap on the deductibility of state and local income taxes, lower limits on the deductibility of mortgage interest and the elimination of deductions for new home equity loans. These changes could make it more difficult for borrowers to make their loan payments, reduce the demand for certain of our loan products, and could also negatively impact the housing market, which could adversely affect our financial condition and results of operations.
We may be subject to a higher consolidated effective tax rate if there is a change in tax laws relating to LCB Investments II, Inc. or if LCB Funding, Inc. fails to qualify as a real estate investment trust.
The Bank holds certain investment securities in its wholly-owned subsidiary LCB Investments II, Inc., which is incorporated in Nevada. Pursuant to the State of Indiana'sIndiana’s current tax laws and regulations, we are not subject to Indiana income tax for income earned through that subsidiary. If there are changes in Indiana'sIndiana’s tax laws or interpretations thereof requiring us to pay state taxes for income generated by LCB Investments II, Inc., the resulting tax consequences could increase our effective tax rate or cause us to have a tax liability for prior years.
The Bank also holds certain commercial real estate loans, residential real estate loans and other loans in a real estate investment trust through LCB Investments II, Inc. Qualification as a real estate investment trust involves application of specific provisions of the Internal Revenue Code relating to various asset tests. If LCB Funding, Inc. fails to meet any of the required provisions for real estate investment trusts, it could no longer qualify as a real estate investment trust and the resulting tax consequences would increase our effective tax rate or cause us to have a tax liability for prior years.
We may be adversely impacted by the discontinuance of LIBOR as a short-term interest rate utilized for loans and other financing agreements.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved SEC staff comments.
The Company is headquartered in the main office building of the Bank at 202 E. Center Street, Warsaw, Indiana. The Company operates in 5556 locations, 49 of which are owned by the Bank and sixseven of which are leased from third parties. In addition, the Company leases the real estate for five of its freestanding ATMs.
None of the Company'sCompany’s assets are the subject of any material encumbrances.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary routine litigation incidental to the business to which the Company and the Bank are a party or of which any of their property is subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The quarterly high and low closing prices for the Company'sCompany’s common stock and the cash dividends declared and paid on that common stock are set forth in the table below.
| | | 2016 | | | 2015 | | 2018 | | 2017 |
| | | | | | | | | Cash | | | | | | | | | Cash | | | Cash | | | Cash |
| | | High* ** | | | Low* ** | | | Dividend ** | | | High* ** | | | Low* ** | | | Dividend ** | | High* | Low* | Dividend | | High* | Low* | Dividend |
| Fourth quarter | | $ | 48.88 | | | $ | 33.98 | | | $ | 0.190 | | | $ | 32.99 | | | $ | 28.92 | | | $ | 0.163 | | $47.41 | $37.79 | $0.260 | | $52.43 | $45.26 | $0.220 |
| Third quarter | | $ | 37.74 | | | $ | 30.21 | | | $ | 0.187 | | | $ | 30.27 | | | $ | 26.01 | | | $ | 0.163 | | $51.25 | $46.35 | $0.260 | | $49.22 | $41.30 | $0.220 |
| Second quarter | | $ | 33.27 | | | $ | 28.94 | | | $ | 0.187 | | | $ | 29.51 | | | $ | 25.81 | | | $ | 0.163 | | $51.15 | $45.15 | $0.260 | | $48.70 | $41.38 | $0.220 |
| First quarter | | $ | 31.03 | | | $ | 26.53 | | | $ | 0.163 | | | $ | 29.22 | | | $ | 24.95 | | | $ | 0.140 | | $51.76 | $45.01 | $0.220 | | $48.32 | $39.68 | $0.190 |
* The trading ranges are the high and low prices as obtained from The Nasdaq Stock Market.
** Share and per share data has been adjusted for a 3-for-2 stock split on July 25, 2016 paid in the form of a stock dividend on August 5, 2016.
The common stock of the Company was first quoted on The Nasdaq Stock Market under the symbol "LKFN" in“LKFN” on August 14, 1997. Currently, the Company'sCompany’s common stock is listed for trading on the Nasdaq Global Select Market under the symbol "LKFN"“LKFN”. On February 21, 2017,19, 2019, the Company had approximately 367349 stockholders of record.
The Company paid dividends on its common stock as set forth in the table above. The Company'sCompany’s ability to pay dividends to stockholders is largely dependent upon the dividends it receives from the Bank, and the Bank is subject to regulatory limitations on the amount of cash dividends it may pay. See "Supervision“Supervision and Regulation – Dividend Payments"Payments” for additional information.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 20162018 for (i) all compensation plans previously approved by the Company'sCompany’s stockholders and (ii) all compensation plans not previously approved by the Company'sCompany’s stockholders:
| | (a) | | the number of securities to be issued upon the exercise of outstanding options, warrants and rights; |
| | | | |
| | (b) | | the weighted-average exercise price of such outstanding options, warrants and rights; and |
| | | | |
| | (c) | | other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the |
| | | | number of securities remaining available for future issuance under the plans. |
EQUITY COMPENSATION PLAN INFORMATION
| | | | | | | | | Number of securities | |
| | | | | | | | | remaining available | |
| | | Number of securities to be | | | Weighted-average | | | for future issuance | |
| | | issued upon exercise of | | | exercise price of | | | under equity | |
| Plan category | | outstanding options | | | outstanding options | | | compensation plans | |
| Equity compensation plans | | | | | | | | | |
| approved by security | | | | | | | | | |
holders(1)(2)(3) | | | 9,000 | | | $ | 16.03 | | | | 100,121 | |
| | | | | | | | | | | | | |
| Equity compensation plans | | | | | | | | | | | | |
| not approved by security | | | | | | | | | | | | |
| holders | | | 0 | | | | 0.00 | | | | 0 | |
| Total | | | 9,000 | | | $ | 16.03 | | | | 100,121 | |
(1) Lakeland Financial Corporation 1997 Share Incentive Plan adopted on April 14, 1998 by the Board of Directors.
| | | | Number of securities |
| | | | remaining available |
| | Number of securities to be | Weighted-average | for future issuance |
| | issued upon exercise of | exercise price of | under equity |
| Plan category | outstanding options | outstanding options | compensation plans |
| Equity compensation plans | | | |
| approved by security | | | |
holders(1) | 0 | $0.00 | 839,459 |
| | | | |
| Equity compensation plans | | | |
| not approved by security | | | |
| holders | 0 | 0.00 | 0 |
| Total | 0 | $0.00 | 839,459 |
(2) Lakeland Financial Corporation 2008 Equity Incentive Plan adopted on May 14, 2008 by the Board of Directors.
(3)(1) Lakeland Financial Corporation 20132017 Equity Incentive Plan adopted on April 9, 201312, 2017 by the Board of Directors.Board.
STOCK PRICE PERFORMANCE GRAPH
The graph below compares the cumulative total return of the Company, the Nasdaq Market Index, and the NASDAQSNL U.S. Bank Nasdaq Index.
| Lakeland Financial Corporation |
| INDEX | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | |
| Lakeland Financial Corporation | | $ | 100.00 | | | $ | 103.17 | | | $ | 158.69 | | | $ | 180.80 | | | $ | 198.26 | | | $ | 309.22 | |
| NASDAQ Composite | | | 100.00 | | | | 117.45 | | | | 164.57 | | | | 188.84 | | | | 201.98 | | | | 219.89 | |
| NASDAQ Bank Index | | | 100.00 | | | | 118.69 | | | | 168.21 | | | | 176.48 | | | | 192.08 | | | | 265.02 | |
| SNL U.S. Bank NASDAQ | | | 100.00 | | | | 119.19 | | | | 171.31 | | | | 177.42 | | | | 191.53 | | | | 265.56 | |
| | | | | | | | |
| | INDEX | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 |
| | Lakeland Financial Corporation | $100.00 | $113.93 | $124.93 | $194.86 | $203.26 | $172.01 |
| | Nasdaq Composite Index | 100.00 | 114.75 | 122.74 | 133.62 | 173.22 | 168.30 |
| | SNL U.S. Bank Nasdaq Index | 100.00 | 103.57 | 111.80 | 155.02 | 163.20 | 137.56 |
The above returns assume that $100 invested on December 31, 20112013 and that all dividends were reinvested.
ISSUER PURCHASES OF EQUITY SECURITIES
On January 8, 2019, the Company's board of directors approved a share repurchase program, under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company's common stock with an aggregate purchase price of up to $30 million. Repurchases may be made in the open market, through block trades or otherwise, and in privately negotiated transactions. The repurchase program expires on December 31, 2019. The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, suspended or discontinued at any time. None of the purchases reflected in the table below were purchases under the share repurchase program.
The following table provides information about purchases by the Company and its affiliates during the quarter ended December 31, 20162018 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | Maximum Number (or | |
| | | | | | | | | Total Number of | | | Appropriate Dollar | |
| | | | | | | | | Shares Purchased as | | | Value) of Shares that | |
| | | | | | | | | Part of Publicly | | | May Yet Be Purchased | |
| | | Total Number of | | | Average Price | | | Announced Plans or | | | Under the Plans or | |
| Period | | Shares Purchased | | | Paid per Share | | | Programs | | | Programs | |
| | | | | | | | | | | | | |
| 10/01/16-10/31/16 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 0.00 | |
| 11/01/16-11/30/16 | | | 829 | | | | 36.30 | | | | 0 | | | | 0.00 | |
| 12/01/16-12/31/16 | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 829 | | | $ | 36.30 | | | | 0 | | | $ | 0.00 | |
| | | | | | | | | Maximum Number (or |
| | | | | | | Total Number of | | Appropriate Dollar |
| | | | | | | Shares Purchased as | | Value) of Shares that |
| | | | | | | Part of Publicly | | May Yet Be Purchased |
| | | Total Number of | | Average Price | | Announced Plans or | | Under the Plans or |
| Period | | Shares Purchased | | Paid per Share | | Programs | | Programs(1) |
| | | | | | | | | |
| 10/01/18-10/31/18 | | 0 | | $0.00 | | 0 | | $0.00 |
| 11/01/18-11/30/18 | | 1,023 | | 43.68 | | 0 | | 0.00 |
| 12/01/18-12/31/18 | | 0 | | 0.00 | | 0 | | 0.00 |
| | | | | | | | | |
| Total | | 1,023 | | $43.68 | | 0 | | $0.00 |
| (1) | Does not reflect $30 million shares that were authorized for purchase after the periods reflected in this table. |
The shares purchased during the quarter were credited to the deferred share accounts of nine nonemployee directors under the Company's directors'Company’s directors’ deferred compensation plan.
ITEM 6. SELECTED FINANCIAL DATA (in thousands except share and per share data) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Ending period balances | | | | | | | | | | | | | | | |
| Assets | | $ | 4,290,025 | | | $ | 3,766,286 | | | $ | 3,443,284 | | | $ | 3,175,764 | | | $ | 3,064,144 | |
| Deposits | | | 3,577,912 | | | | 3,183,421 | | | | 2,873,120 | | | | 2,546,068 | | | | 2,581,756 | |
| Loans | | | 3,470,927 | | | | 3,080,929 | | | | 2,762,320 | | | | 2,535,098 | | | | 2,257,520 | |
| Allowance for loan losses | | | 43,718 | | | | 43,610 | | | | 46,262 | | | | 48,797 | | | | 51,445 | |
| Total equity | | | 427,067 | | | | 392,901 | | | | 361,385 | | | | 321,964 | | | | 297,828 | |
| Average balances | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 4,039,719 | | | $ | 3,597,190 | | | $ | 3,318,271 | | | $ | 3,009,738 | | | $ | 2,976,239 | |
| Earning assets | | | 3,799,963 | | | | 3,384,178 | | | | 3,141,290 | | | | 2,838,457 | | | | 2,729,319 | |
| Investments | | | 493,656 | | | | 476,153 | | | | 475,068 | | | | 474,711 | | | | 477,010 | |
| Loans | | | 3,225,635 | | | | 2,885,568 | | | | 2,650,678 | | | | 2,343,422 | | | | 2,216,131 | |
| Total deposits | | | 3,477,816 | | | | 3,088,598 | | | | 2,797,929 | | | | 2,505,341 | | | | 2,505,195 | |
| Interest bearing deposits | | | 2,753,466 | | | | 2,478,674 | | | | 2,299,578 | | | | 2,087,870 | | | | 2,151,094 | |
| Interest bearing liabilities | | | 2,872,691 | | | | 2,589,915 | | | | 2,461,352 | | | | 2,265,303 | | | | 2,316,375 | |
| Total equity | | | 416,034 | | | | 378,106 | | | | 343,135 | | | | 310,627 | | | | 287,866 | |
| Income statement data | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 118,481 | | | $ | 105,927 | | | $ | 102,303 | | | $ | 90,439 | | | $ | 87,671 | |
| Net interest income-fully tax equivalent | | | 120,477 | | | | 107,902 | | | | 104,232 | | | | 92,235 | | | | 89,277 | |
| Provision for loan loss | | | 1,150 | | | | 0 | | | | 0 | | | | 0 | | | | 2,549 | |
| Non-interest income | | | 32,864 | | | | 31,479 | | | | 30,053 | | | | 30,737 | | | | 25,196 | |
| Non-interest expense | | | 72,978 | | | | 68,206 | | | | 66,166 | | | | 62,778 | | | | 57,742 | |
| Net income | | | 52,084 | | | | 46,367 | | | | 43,805 | | | | 38,839 | | | | 35,394 | |
| Per share data * | | | | | | | | | | | | | | | | | | | | |
| Basic net income per common share | | $ | 2.08 | | | $ | 1.86 | | | $ | 1.77 | | | $ | 1.57 | | | $ | 1.45 | |
| Diluted net income per common share | | | 2.05 | | | | 1.84 | | | | 1.74 | | | | 1.55 | | | | 1.43 | |
| Cash dividends declared per common share | | | 0.73 | | | | 0.63 | | | | 0.55 | | | | 0.38 | | | | 0.56 | |
| Dividend payout | | | 35.61 | % | | | 34.36 | % | | | 31.42 | % | | | 24.46 | % | | | 38.84 | % |
| Book value per common share | | | 17.01 | | | | 15.74 | | | | 14.55 | | | | 13.03 | | | | 12.12 | |
| Basic weighted average common shares outstanding | | | 25,056,095 | | | | 24,926,354 | | | | 24,803,295 | | | | 24,654,197 | | | | 24,485,805 | |
| Diluted weighted average common shares outstanding | | | 25,460,727 | | | | 25,245,569 | | | | 25,172,183 | | | | 24,951,507 | | | | 24,724,406 | |
| Key ratios | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | 1.29 | % | | | 1.29 | % | | | 1.32 | % | | | 1.29 | % | | | 1.19 | % |
| Return on average total equity | | | 12.52 | % | | | 12.26 | % | | | 12.77 | % | | | 12.50 | % | | | 12.30 | % |
| Equity to average assets | | | 10.30 | % | | | 10.51 | % | | | 10.34 | % | | | 10.32 | % | | | 9.67 | % |
| Net interest margin | | | 3.18 | % | | | 3.19 | % | | | 3.32 | % | | | 3.25 | % | | | 3.27 | % |
| Efficiency | | | 48.22 | % | | | 49.64 | % | | | 49.99 | % | | | 51.81 | % | | | 51.16 | % |
| Asset Quality | | | | | | | | | | | | | | | | | | | | |
| Net charge offs to average loans | | | 0.03 | % | | | 0.09 | % | | | 0.10 | % | | | 0.11 | % | | | 0.20 | % |
| Loan loss reserve to total loans | | | 1.26 | % | | | 1.42 | % | | | 1.67 | % | | | 1.92 | % | | | 2.28 | % |
| Loan loss reserve to nonperforming loans | | | 653.31 | % | | | 334.04 | % | | | 337.51 | % | | | 203.79 | % | | | 166.60 | % |
| Nonperforming assets to total loans | | | 0.20 | % | | | 0.43 | % | | | 0.51 | % | | | 0.96 | % | | | 1.40 | % |
| Other Data | | | | | | | | | | | | | | | | | | | | |
| Full-time equivalent employees | | | 524 | | | | 518 | | | | 496 | | | | 497 | | | | 493 | |
| Offices | | | 48 | | | | 47 | | | | 46 | | | | 45 | | | | 45 | |
The following selected financial data as of the year-end for each of the five years in the period ended December 31, 2018, has been derived from the Company’s Consolidated Financial Statements and the results of operations for each period. This financial data should be read in conjunction with the Consolidated Financial Statements included in this Annual report of Form 10-K.
| (in thousands except share and per share data) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Ending period balances | | | | | | | | | |
| Assets | $4,875,254 | | $4,682,976 | | $4,290,025 | | $3,766,286 | | $3,443,284 |
| Deposits | 4,044,065 | | 4,008,655 | | 3,577,912 | | 3,183,421 | | 2,873,120 |
| Loans, net of deferred fees | 3,914,745 | | 3,818,459 | | 3,470,927 | | 3,080,929 | | 2,762,320 |
| Allowance for loan losses | 48,453 | | 47,121 | | 43,718 | | 43,610 | | 46,262 |
| Total equity | 521,704 | | 468,667 | | 427,067 | | 392,901 | | 361,385 |
| Average balances | | | | | | | | | |
| Total assets | $4,758,392 | | $4,443,106 | | $4,039,719 | | $3,597,190 | | $3,318,271 |
| Earning assets | 4,461,366 | | 4,183,112 | | 3,799,963 | | 3,384,178 | | 3,141,290 |
| Investments | 562,385 | | 530,275 | | 493,656 | | 476,153 | | 475,068 |
| Loans, net of deferred fees | 3,843,912 | | 3,610,908 | | 3,225,635 | | 2,885,568 | | 2,650,678 |
| Total deposits | 4,093,894 | | 3,757,209 | | 3,477,816 | | 3,088,598 | | 2,797,929 |
| Interest bearing deposits | 3,235,867 | | 2,967,902 | | 2,753,466 | | 2,478,674 | | 2,299,578 |
| Interest bearing liabilities | 3,382,507 | | 3,178,439 | | 2,872,691 | | 2,589,915 | | 2,461,352 |
| Total equity | 487,062 | | 450,796 | | 416,034 | | 378,106 | | 343,135 |
| Income statement data | | | | | | | | | |
| Net interest income | $151,271 | | $135,892 | | $118,481 | | $105,927 | | $102,303 |
| Net interest income-fully tax equivalent | 153,088 | | 139,015 | | 120,719 | | 107,902 | | 104,232 |
| Provision for loan loss | 6,400 | | 3,000 | | 1,150 | | 0 | | 0 |
| Non-interest income | 40,110 | | 36,009 | | 32,864 | | 31,479 | | 30,053 |
| Non-interest expense | 86,037 | | 79,267 | | 72,978 | | 68,206 | | 66,166 |
| Net income | 80,411 | | 57,330 | | 52,084 | | 46,367 | | 43,805 |
| Per share data * | | | | | | | | | |
| Basic net income per common share | $3.18 | | $2.28 | | $2.08 | | $1.86 | | $1.77 |
| Diluted net income per common share | 3.13 | | 2.23 | | 2.05 | | 1.84 | | 1.74 |
| Cash dividends declared per common share | 1.00 | | 0.85 | | 0.73 | | 0.63 | | 0.55 |
| Dividend payout | 31.95% | | 38.12% | | 35.61% | | 34.36% | | 31.42% |
| Book value per common share | 20.62 | | 18.60 | | 17.01 | | 15.74 | | 14.55 |
| Basic weighted average common shares outstanding | 25,288,533 | | 25,181,208 | | 25,056,095 | | 24,926,354 | | 24,803,295 |
| Diluted weighted average common shares outstanding | 25,727,831 | | 25,663,381 | | 25,460,727 | | 25,245,569 | | 25,172,183 |
| Key ratios | | | | | | | | | |
| Return on average assets | 1.69% | | 1.29% | | 1.29% | | 1.29% | | 1.32% |
| Return on average total equity | 16.51% | | 12.72% | | 12.52% | | 12.26% | | 12.77% |
| Equity to average assets | 10.24% | | 10.15% | | 10.30% | | 10.51% | | 10.34% |
| Net interest margin | 3.43% | | 3.33% | | 3.18% | | 3.19% | | 3.32% |
| Efficiency | 44.96% | | 46.11% | | 48.22% | | 49.64% | | 49.99% |
| Asset Quality | | | | | | | | | |
| Net charge offs to average loans | 0.13% | | -0.01% | | 0.03% | | 0.09% | | 0.10% |
| Loan loss reserve to total loans | 1.24% | | 1.23% | | 1.26% | | 1.42% | | 1.67% |
| Loan loss reserve to nonperforming loans | 667.40% | | 500.91% | | 653.31% | | 334.04% | | 337.51% |
| Nonperforming assets to total loans | 0.19% | | 0.25% | | 0.20% | | 0.43% | | 0.51% |
| Other Data | | | | | | | | | |
| Full-time equivalent employees | 553 | | 539 | | 524 | | 518 | | 496 |
| Offices | 49 | | 49 | | 48 | | 47 | | 46 |
* Share and per share data has been adjusted for a 3-for-2 stock split on July 25, 2016 in the form of a stock dividend on August 5, 2016.
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income in 20162018 was $52.1$80.4 million, up 12.3%40.3% from $46.4$57.3 million in 20152017 and up from $43.8$52.1 million in 2014.2016. Diluted net income per common share was $3.13 in 2018, $2.23 in 2017 and $2.05 in 2016, $1.84 in 2015 and $1.74 in 2014.2016. Return on average total assets was 1.69% in 2018 versus 1.29% in 2016 compared to 1.29% in 20152017 and 1.32% in 2014.2016. Return on average common shareholders'shareholders’ equity was 16.51% in 2018 versus 12.72% in 2017 and 12.52% in 2016 versus 12.26% in 2015 and 12.77% in 2014.2016. The dividend payout ratio with respect to diluted earnings per share was 31.95% in 2018, 38.12% in 2017 and 35.61% in 2016, 34.36% in 2015 and 31.42% in 2014.2016. The equity to average assets ratio was 10.24% in 2018 compared to 10.15% in 2017 and 10.30% in 2016 compared to 10.51% in 2015 and 10.34% in 2014.2016.
Net income in 20162018 was positively impacted by a $12.6$15.4 million increase in net interest income and a $1.4$4.1 million increase in noninterest income. In addition, income tax expense decreased $13.8 million from 2017. The decrease was largely due to the Tax Cuts and Jobs Act which lowered the Company’s federal tax rate to 21% from 35%. Offsetting these positive impacts was a $6.8 million increase in noninterest expense and a $3.4 million increase in the provision for loan losses.
Net income in 2017 was positively impacted by a $17.4 million increase in net interest income and a $3.1 million increase in noninterest income. Offsetting this positive impact was a $4.8$6.3 million increase in noninterest expense and a $1.2$1.9 million increase in the provision for loan losses. NetIn addition, income tax expense increased $7.2 million from 2016. As a result of the Tax Cuts and Jobs Act that was enacted into law on December 22, 2017, the Company revalued its net deferred tax asset position to reflect the reduction in 2015 was positively impacted byits federal corporate income tax rate from 35% to 21%. This revaluation resulted in a $3.6non-cash, non-operating and non-recurring income tax expense adjustment of approximately $4.1 million, increase in net interest income and a $1.4 million increase in noninterest income. Offsetting this positive impact was a $2.0 million increase in noninterest expense.or $0.16 per diluted share, for the year ending December 31, 2017.
Total assets were $4.290$4.875 billion as of December 31, 20162018 versus $3.766$4.683 billion as of December 31, 2015,2017, an increase of $523.7$192.3 million or 13.9%4.1%. This increase was primarily due to a $390.0$96.3 million increase in total loans.loans, and a $47.1 million increase in investment securities. Total average assets increased $315.3 million primarily due to average loans increasing $233.0 million in 2018, and a $32.1 million increase in investment securities.
CRITICAL ACCOUNTING POLICIES
Certain of the Company'sCompany’s accounting policies are important to the portrayal of the Company'sCompany’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation and other-than-temporary impairment of investment securities.
Allowance for Loan Losses
The Company maintains an allowance for loan losses to provide for probable incurred credit losses. Loan losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management'smanagement’s judgment, should be charged against the allowance. A provision for loan losses is taken based on management'smanagement’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the loan loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company'sCompany’s control.
The level of loan loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the allocation for specific watch list credits in determining the appropriate level of the loan loss provision. Furthermore, management'smanagement’s overall view on credit quality is a factor in the determination of the provision.
The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for loan losses that generally includes consideration of the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers'borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. With respect to specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows and the current valuation of collateral as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, allocations are assigned based upon historical experience unless the rate of loss is expected to be greater than historical losses as noted
below. A detailed analysis is performed on loans that are classified but determined not to be impaired which incorporates probabilitydifferent scenarios where the risk that the borrower will be unable or unwilling to repay its debt in full or on time is combined with an estimate of default with a loss given default scenarioin the event the borrower cannot pay to develop non-specific allocations for thesuch loan pool.pools. These allocations may be adjusted based on the other factors cited above. An appropriate level of general allowance for pooled loans is determined after considering the following: application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentration, new industry lending activity and general economic conditions. It is also possible that the following could affect the overall process: social, political, economic and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover probable losses inherent in the loan portfolio.
Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a consensus is reached by credit administration and the loan review officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate the loan is impaired. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) does the customer'scustomer’s cash flow or net worth appear insufficient to repay the loan; (b) is there adequate collateral to repay the loan; (c) has the loan been criticized in a regulatory examination; (d) is the loan impaired; (e) are there other reasons where the ultimate collectability of the loan is in question; or (f) are there unique loan characteristics that require special monitoring.
Allocations are also applied to categories of loans considered not to be individually impaired, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. In addition, general allocations are made for other pools of loans, including non-classified loans. These general pooled loan allocations are performed for portfolio segments of commercial and industrial, commercial real estate and multi-family, agri-business and agricultural, other commercial, consumer 1-4 family mortgage and other consumer loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a three-year historical average for loan losses for these portfolios, and are subjectively adjusted for economic factors and portfolio trends.
Due to the imprecise nature of estimating the allowance for loan losses, the Company'sCompany’s allowance for loan losses includes an unallocated component. The unallocated component of the allowance for loan losses incorporates the Company'sCompany’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as the level of classified credits, economic uncertainties, industry trends impacting specific portfolio segments, broad portfolio quality trends and trends in the composition of the Company'sCompany’s large commercial loan portfolio and related large dollar exposures to individual borrowers.
Valuation and Other-Than-Temporary Impairment of Investment Securities
The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models, which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities'securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. The fair value of certain securities is determined using unobservable inputs, primarily observable inputs of similar securities.
At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with current accounting guidance. Impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received.
Significant judgments are required in determining impairment, which includes making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.
We consider the following factors when determining other-than-temporary impairment for a security or investment:
| · | the length of time and the extent to which the market value has been less than amortized cost; |
| · | the financial condition and near-term prospects of the issuer; |
| · | the underlying fundamentals of the relevant market and the outlook for such market for the near future; and |
| · | our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in market value. |
The assessment of whether a decline exists that is other-than-temporary, involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. If, in management'smanagement’s judgment, other-than-temporary
impairment exists, the cost basis of the security will be written down to the computed net present value, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings (as if the loss had been realized in the period of other-than-temporary impairment).
RESULTS OF OPERATIONS
Overview
In 2016,2018 and 2017, the Company continued to grow loans and deposits organically, in its geographic footprint of northern Indiana and in Indianapolis. In late 2015, the Company opened its fourth branch in Indianapolis and in early 2016, its fifth branchcentral Indiana in the Fort WayneIndianapolis market. The Company has continued to increase market sharehad 49 branches as of December 31, 2018 and opened its 50th branch located in its geographic footprint and is planning for continued growthdowntown Indianapolis in loans and deposits in its most recent expansion into Indianapolis.January of 2019. The Company'sCompany’s profitability has been positively impacted by growth in loans and deposits. In addition, asset quality has remained strong.stable. The core banking contributions to noninterest income of deposit, loan and wealth management fee income continued to growincreased in 2016.2018. Overall, expense growth has reflected theour continued investment in people, technology and our branch infrastructure. The outlook for 20172019 includes plans for continued organic loan and deposit growth, a disciplined credit philosophy and continued investment in the Company.Company in the form of staff additions, expansion in the Indianapolis marketplace and investments in technology.
Selected income statement information for the years ended December 31, 2016, 20152018, 2017 and 20142016 is presented in the following table.
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | 2018 | | 2017 | | 2016 |
| Income Statement Summary: | | | | | | | | | | | | | | |
| Net interest income | | $ | 118,481 | | | $ | 105,927 | | | $ | 102,303 | | $151,271 | | $135,892 | | $118,481 |
| Provision for loan losses | | | 1,150 | | | | 0 | | | | 0 | | 6,400 | | 3,000 | | 1,150 |
| Noninterest income | | | 32,864 | | | | 31,479 | | | | 30,053 | | 40,110 | | 36,009 | | 32,864 |
| Noninterest expense | | | 72,978 | | | | 68,206 | | | | 66,166 | | 86,037 | | 79,267 | | 72,978 |
| Other Data: | | | | | | | | | | | | | | | | | |
| Efficiency ratio (1) | | | 48.22 | % | | | 49.64 | % | | | 49.99 | % | 44.96% | | 46.11% | | 48.22% |
Dilutive EPS (2) | | $ | 2.05 | | | $ | 1.84 | | | $ | 1.74 | | $3.13 | | $2.23 | | $2.05 |
Tangible capital ratio | | | 9.89 | % | | | 10.36 | % | | | 10.41 | % | 10.63% | | 9.93% | | 9.89% |
| Net charge-offs to average loans | | | 0.03 | % | | | 0.09 | % | | | 0.10 | % | 0.13% | | -0.01% | | 0.03% |
| Net interest margin | | | 3.18 | % | | | 3.19 | % | | | 3.32 | % | 3.43% | | 3.33% | | 3.18% |
| Noninterest income to total revenue | | | 21.71 | % | | | 22.91 | % | | | 22.71 | % | 20.96% | | 20.95% | | 21.71% |
| (1) | Noninterest expense/Net interest income plus Noninterest income |
| (2) | Per share data has been adjusted for a 3-for-2 stock split on July 25, 2016 paid inTangible common equity, tangible assets, and the formtangible capital ratio are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of a stock dividend on August 5, 2016.goodwill and other intangible assets from the calculation of stockholders' equity, net of deferred tax. Tangible assets are calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets, net of deferred tax. The tangible capital ratio is calculated by dividing tangible common equity by tangible assets. |
Net Income
Net income was $52.1$80.4 million in 2016,2018, an increase of $5.7$23.1 million, or 12.3%40.3%, versus net income of $46.4$57.3 million in 2015. Net interest2017. The increase in net income increased $12.6 million, or 11.9%,from 2017 to $118.5 million versus $105.9 million in 2015. Net interest income increased2018 was primarily due to a 12.3%the increase in average earning assets, driven by an increase of 12.1%net interest income in the commercial loan portfolio, which reflects our continuing strategic focus on commercial lending. The net interest marginamount of $15.4 million, or 11.3%, to $151.3 million versus $135.9 million in 2017. In addition, income tax expense decreased by $13.8 million to 3.18%$18.5 million and noninterest income increased $4.1 million to $40.1 million, offset by increases in 2016 versus 3.19% in 2015, due to an increase in interest bearing liabilities, which more than offset an increase in earning asset yields during 2016.noninterest expense and provision expense of $6.8 million and $3.4 million, respectively.
Net income was $46.4$57.3 million in 2015,2017, an increase of $2.6$5.2 million, or 5.9%10.1%, versus net income of $43.8$52.1 million in 2014. Net interest2016. The increase in net income increased $3.6 million, or 3.5%,from 2016 to $105.9 million versus $102.3 million in 2014. Net interest income increased2017 was primarily due to a 7.7%the increase in average earning assets, driven by an increase of 8.9%net interest income in the commercial loan portfolio, which reflects our continuing strategic focusamount of $17.4 million, or 14.7%, to $135.9 million versus $118.5 million in 2016. In addition, noninterest income increased $3.1 million to $36.0 million offset by increases in noninterest expenses, provision expense, and income tax expense of $6.3 million, $1.9 million, and $7.2 million, respectively. In 2017, the Company recorded a non-cash, non-operating and non-recurring income tax provision of $4.1 million for federal income taxes associated with the Company’s net deferred tax asset revaluation as a result of the Tax Cuts and Jobs Act that was enacted into law on commercial lending. The net interest margin decreased to 3.19% in 2015 versus 3.32% in 2014. The lower margin resulted from the continued low interest rate environment as well as competitive factors in the Company's markets including more aggressive pricing of new loan opportunities and renewed loans.
December 22, 2017.
Net Interest Income
The following table presents a three-year average balance sheet and, for each major asset and liability category, its related interest income and yield or its expense and rate for the years ended December 31.
THREE YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
| | | 2016 | | | 2015 | | | 2014 | | 2018 | | | 2017 | | | 2016 | |
| | | Average | | | Interest | | | Yield (1)/ | | | Average | | | Interest | | | Yield (1)/ | | | Average | | | Interest | | | Yield (1)/ | | Average | | Interest | | Yield (1)/ | | | Average | | Interest | | Yield (1)/ | | | Average | | Interest | | Yield (1)/ | |
(fully tax equivalent basis, dollars in thousands) | | Balance | | | Income | | | Rate | | | Balance | | | Income | | | Rate | | | Balance | | | Income | | | Rate | | Balance | | Income | | Rate | | | Balance | | Income | | Rate | | | Balance | | Income | | Rate | |
| Earning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable (2)(3) | | $ | 3,213,188 | | | $ | 124,830 | | | | 3.88 | % | | $ | 2,872,937 | | | $ | 110,097 | | | | 3.83 | % | | $ | 2,638,507 | | | $ | 105,317 | | | | 3.99 | % | $3,821,182 | | $181,451 | | 4.75 | % | | $3,589,734 | | $150,295 | | 4.19 | % | | $3,213,188 | | $124,830 | | 3.88 | % |
| Tax exempt (1) | | | 12,447 | | | | 687 | | | | 5.52 | | | | 12,631 | | | | 692 | | | | 5.48 | | | | 12,171 | | | | 705 | | | | 5.79 | | 22,730 | | 1,016 | | 4.47 | | | 21,174 | | 1,103 | | 5.21 | | | 12,447 | | 687 | | 5.52 | |
| Investments: (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available for sale | | | 493,656 | | | | 15,319 | | | | 3.10 | | | | 476,153 | | | | 13,666 | | | | 2.87 | | | | 475,068 | | | | 13,151 | | | | 2.77 | | 562,385 | | 17,411 | | 3.10 | | | 530,275 | | 17,069 | | 3.23 | | | 493,656 | | 15,319 | | 3.10 | |
| Short-term investments | | | 6,007 | | | | 14 | | | | 0.23 | | | | 5,229 | | | | 4 | | | | 0.08 | | | | 5,253 | | | | 4 | | | | 0.08 | | 3,868 | | 49 | | 1.27 | | | 5,565 | | 27 | | 0.49 | | | 6,007 | | 14 | | 0.23 | |
| Interest bearing deposits | | | 74,665 | | | | 339 | | | | 0.45 | | | | 17,229 | | | | 55 | | | | 0.32 | | | | 10,291 | | | | 40 | | | | 0.39 | | 51,201 | | 860 | | 1.68 | | | 36,364 | | 327 | | 0.90 | | | 74,665 | | 339 | | 0.45 | |
| Total earning assets | | $ | 3,799,963 | | | $ | 141,189 | | | | 3.72 | % | | $ | 3,384,179 | | | $ | 124,514 | | | | 3.68 | % | | $ | 3,141,290 | | | $ | 119,217 | | | | 3.80 | % | $4,461,366 | | $200,787 | | 4.50 | % | | $4,183,112 | | $168,821 | | 4.04 | % | | $3,799,963 | | $141,189 | | 3.72 | % |
| Less: Allowance for loan losses | | | (43,274 | ) | | | | | | | | | | | (45,256 | ) | | | | | | | | | | | (46,831 | ) | | | | | | | | | (47,722) | | | | | | | (44,849) | | | | | | | (43,274) | | | | | |
| Nonearning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 110,104 | | | | | | | | | | | | 99,902 | | | | | | | | | | | | 70,950 | | | | | | | | | | 144,727 | | | | | | | 114,967 | | | | | | | 110,104 | | | | | |
| Premises and equipment | | | 49,782 | | | | | | | | | | | | 43,510 | | | | | | | | | | | | 40,241 | | | | | | | | | | 56,842 | | | | | | | 55,141 | | | | | | | 49,782 | | | | | |
| Other nonearning assets | | | 123,144 | | | | | | | | | | | | 114,855 | | | | | | | | | | | | 112,621 | | | | | | | | | | 143,179 | | | | | | | 134,735 | | | | | | | 123,144 | | | | | |
| Total assets | | $ | 4,039,719 | | | | | | | | | | | $ | 3,597,190 | | | | | | | | | | | $ | 3,318,271 | | | | | | | | | | $4,758,392 | | | | | | | $4,443,106 | | | | | | | $4,039,719 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings deposits | | $ | 264,669 | | | $ | 441 | | | | 0.17 | % | | $ | 233,361 | | | $ | 457 | | | | 0.20 | % | | $ | 233,657 | | | $ | 507 | | | | 0.22 | % | $257,959 | | $331 | | 0.13 | % | | $272,811 | | $401 | | 0.15 | % | | $264,669 | | $441 | | 0.17 | % |
| Interest bearing checking accounts | | | 1,282,257 | | | | 5,654 | | | | 0.44 | | | | 1,232,101 | | | | 4,769 | | | | 0.39 | | | | 1,169,338 | | | | 4,660 | | | | 0.40 | | 1,475,776 | | 17,940 | | 1.22 | | | 1,401,216 | | 9,999 | | 0.71 | | | 1,282,257 | | 5,654 | | 0.44 | |
| Time deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In denominations under $100,000 | | | 246,971 | | | | 2,832 | | | | 1.15 | | | | 279,604 | | | | 3,321 | | | | 1.19 | | | | 280,819 | | | | 3,205 | | | | 1.14 | | 265,604 | | 4,017 | | 1.51 | | | 241,170 | | 2,927 | | 1.21 | | | 246,971 | | 2,832 | | 1.15 | |
| In denominations over $100,000 | | | 959,569 | | | | 10,017 | | | | 1.04 | | | | 733,608 | | | | 6,868 | | | | 0.94 | | | | 615,764 | | | | 5,196 | | | | 0.84 | | 1,236,528 | | 22,625 | | 1.83 | | | 1,052,705 | | 13,699 | | 1.30 | | | 959,569 | | 10,017 | | 1.04 | |
| Miscellaneous short-term borrowings | | | 88,265 | | | | 352 | | | | 0.40 | | | | 80,279 | | | | 188 | | | | 0.23 | | | | 130,811 | | | | 388 | | | | 0.30 | | 115,711 | | 1,143 | | 0.99 | | | 179,579 | | 1,446 | | 0.81 | | | 88,265 | | 352 | | 0.40 | |
| Long-term borrowings and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
subordinated debentures (4) | | | 30,960 | | | | 1,174 | | | | 3.79 | | | | 30,962 | | | | 1,009 | | | | 3.26 | | | | 30,963 | | | | 1,029 | | | | 3.32 | | 30,929 | | 1,643 | | 5.31 | | | 30,958 | | 1,334 | | 4.31 | | | 30,960 | | 1,174 | | 3.79 | |
| Total interest bearing liabilities | | $ | 2,872,691 | | | $ | 20,470 | | | | 0.71 | % | | $ | 2,589,915 | | | $ | 16,612 | | | | 0.64 | % | | $ | 2,461,352 | | | $ | 14,985 | | | | 0.61 | % | $3,382,507 | | $47,699 | | 1.41 | % | | $3,178,439 | | $29,806 | | 0.94 | % | | $2,872,691 | | $20,470 | | 0.71 | % |
| Noninterest Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 724,350 | | | | | | | | | | | | 609,924 | | | | | | | | | | | | 498,351 | | | | | | | | | | 858,027 | | | | | | | 789,307 | | | | | | | 724,350 | | | | | |
| Other liabilities | | | 26,644 | | | | | | | | | | | | 19,245 | | | | | | | | | | | | 15,433 | | | | | | | | | | 30,796 | | | | | | | 24,564 | | | | | | | 26,644 | | | | | |
| Stockholders' Equity | | | 416,034 | | | | | | | | | | | | 378,106 | | | | | | | | | | | | 343,135 | | | | | | | | | | 487,062 | | | | | | | 450,796 | | | | | | | 416,034 | | | | | |
| Total liabilities and stockholders' equity | | $ | 4,039,719 | | | | | | | | | | | $ | 3,597,190 | | | | | | | | | | | $ | 3,318,271 | | | | | | | | | | $4,758,392 | | | | | | | $4,443,106 | | | | | | | $4,039,719 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Margin Recap | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income/average earning assets | | | | | | | 141,189 | | | | 3.72 | | | | | | | | 124,514 | | | | 3.68 | | | | | | | | 119,217 | | | | 3.80 | | | | 200,787 | | 4.50 | | | | | 168,821 | | 4.04 | | | | | 141,189 | | 3.72 | |
| Interest expense/average earning assets | | | | | | | 20,470 | | | | 0.54 | | | | | | | | 16,612 | | | | 0.49 | | | | | | | | 14,985 | | | | 0.48 | | | | 47,699 | | 1.07 | | | | | 29,806 | | 0.71 | | | | | 20,470 | | 0.54 | |
| Net interest income and margin | | | | | | $ | 120,719 | | | | 3.18 | % | | | | | | $ | 107,902 | | | | 3.19 | % | | | | | | $ | 104,232 | | | | 3.32 | % | | | $153,088 | | 3.43 | % | | | | $139,015 | | 3.33 | % | | | | $120,719 | | 3.18 | % |
| (1) | Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate for 2018 and 35 percent tax rate for 2016, 20152017 and 2014.2016. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"(“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $2.2$1.8 million, $2.0$3.1 million and $1.9$2.2 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively. |
| (2) | Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, are included as taxable loan interest income. |
| (3) | Nonaccrual loans are included in the average balance of taxable loans. |
(4) | Long-term borrowings and subordinated debentures interest expense was reduced by interest capitalized on construction in process for 2015 and 2014. |
The following table shows fluctuations in net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31.
NET INTEREST INCOME – RATE/VOLUME ANALYSIS (fully tax equivalent basis, dollars in thousands)
| | | 2016 Over (Under) 2015 (1) | | | 2015 Over (Under) 2014 (1) | | 2018 Over (Under) 2017 (1) | | 2017 Over (Under) 2016 (1)
|
| | | Attributable to | | | Total | | | Attributable to | | | Total | | Attributable to | | Total | | Attributable to | | Total |
| | | Volume | | | Rate | | | Change | | | Volume | | | Rate | | | Change | | Volume | | Rate | | Change | | Volume | | Rate | | Change |
| Interest Income (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | $ | 13,200 | | | $ | 1,533 | | | $ | 14,733 | | | $ | 9,100 | | | $ | (4,320 | ) | | $ | 4,780 | | $10,112 | | $21,044 | | $31,156 | | $15,312 | | $10,153 | | $25,465 |
| Tax exempt | | | (10 | ) | | | 5 | | | | (5 | ) | | | 26 | | | | (39 | ) | | | (13 | ) | 77 | | (164) | | (87) | | 457 | | (41) | | 416 |
| Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available for sale | | | 515 | | | | 1,138 | | | | 1,653 | | | | 30 | | | | 485 | | | | 515 | | 1,009 | | (667) | | 342 | | 1,165 | | 585 | | 1,750 |
| Short-term investments | | | 1 | | | | 9 | | | | 10 | | | | 0 | | | | 0 | | | | 0 | | (10) | | 32 | | 22 | | (1) | | 14 | | 13 |
| Interest bearing deposits | | | 252 | | | | 32 | | | | 284 | | | | 23 | | | | (8 | ) | | | 15 | | 170 | | 363 | | 533 | | (232) | | 220 | | (12) |
| Total interest income | | | 13,958 | | | | 2,717 | | | | 16,675 | | | | 9,179 | | | | (3,882 | ) | | | 5,297 | | 11,358 | | 20,608 | | 31,966 | | 16,701 | | 10,931 | | 27,632 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings deposits | | | 57 | | | | (73 | ) | | | (16 | ) | | | (1 | ) | | | (49 | ) | | | (50 | ) | (21) | | (49) | | (70) | | 13 | | (53) | | (40) |
| Interest bearing checking accounts | | | 200 | | | | 685 | | | | 885 | | | | 245 | | | | (136 | ) | | | 109 | | 558 | | 7,383 | | 7,941 | | 567 | | 3,778 | | 4,345 |
| Time deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In denominations under $100,000 | | | (377 | ) | | | (112 | ) | | | (489 | ) | | | (14 | ) | | | 130 | | | | 116 | | 318 | | 772 | | 1,090 | | (68) | | 163 | | 95 |
| In denominations over $100,000 | | | 2,293 | | | | 856 | | | | 3,149 | | | | 1,064 | | | | 608 | | | | 1,672 | | 2,684 | | 6,242 | | 8,926 | | 1,040 | | 2,642 | | 3,682 |
| Miscellaneous short-term borrowings | | | 20 | | | | 144 | | | | 164 | | | | (129 | ) | | | (71 | ) | | | (200 | ) | (585) | | 282 | | (303) | | 551 | | 543 | | 1,094 |
| Long-term borrowings and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| subordinated debentures | | | 0 | | | | 165 | | | | 165 | | | | 0 | | | | (20 | ) | | | (20 | ) | (1) | | 310 | | 309 | | 0 | | 160 | | 160 |
| Total interest expense | | | 2,193 | | | | 1,665 | | | | 3,858 | | | | 1,165 | | | | 462 | | | | 1,627 | | 2,953 | | 14,940 | | 17,893 | | 2,103 | | 7,233 | | 9,336 |
| Net Interest Income (tax equivalent) | | $ | 11,765 | | | $ | 1,052 | | | $ | 12,817 | | | $ | 8,014 | | | $ | (4,344 | ) | | $ | 3,670 | | $8,405 | | $5,668 | | $14,073 | | $14,598 | | $3,698 | | $18,296 |
| (1) | The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 2016, 20152018, 2017 and 2014.2016. The changes in net interest income are created by changes in interest rates and changes in the volumes of loans, investments, deposits and borrowings. In the table above, changes attributable to volume are computed using the change in volume from the prior year multiplied by the previous year'syear’s rate, and changes attributable to rate are computed using the change in rate from the prior year multiplied by the previous year'syear’s volume. The change in interest or expense due to both rate and volume has been allocated between factors in proportion to the relationship of the absolute dollar amounts of the change in each. |
| (2) | Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate for 2018 and 35 percent tax rate for 2016, 20152017 and 2014.2016. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the TEFRA adjustment applicable to nondeductible interest expense. |
Net interest income increased by $15.4 million to $151.3 million in 2018 compared to 2017, primarily due to a 46 basis point increase in the yield on earning assets to 4.50% from 4.04%. In addition, average earning assets increased $278.3 million, or 6.7% in 2018, driven by an increase of 6.2% in the average commercial loan portfolio, which reflects our continuing strategic focus on commercial lending. The net interest margin increased to 3.43% in 2018 versus 3.33% in 2017, due to higher yields on average earning assets, which more than offset an increase in the cost of interest bearing liabilities during 2018. Net interest income increased by $17.4 million to $135.9 million in 2017 compared to 2016, primarily due to a 10.1% increase in average earning assets in 2017, driven by an increase of 12.5% in the average commercial loan portfolio. The net interest margin increased to 3.33% in 2017 versus 3.18% in 2016, due to higher yields on average earning assets, which more than offset an increase in the cost of interest bearing liabilities during 2017.
Growth in the commercial loan portfolio accounted for most of the growth in loans, as well as total earning assets, during both 20162018 and 20152017, and positively impacted total interest income. Management believes that the growth in the loan portfolio will likely continue in a measured, but prudent, fashion as a result of our continued strategic focus on commercial and industrial lending, as well as commercial real estate lending. In addition, management believes its organic growth strategy of continued expansion in its current geographic footprint and in Indianapolis will provide continued loan growth opportunities. GrowthDuring 2018, growth in average loans of $340.1$233.0 million and growth in investment securities of $32.1 million was funded through an increase in interest bearing deposits. InterestAverage interest bearing deposit accounts represented primarily by public funds increased $274.8 million. In addition,$268.0 million and average demand deposits increased $114.4$68.7 million in 2016.2018.
The increase in the Company'sCompany’s yields on average earning assets during 20162018 and 2017 resulted from increases in market rates overall, including increases in loan portfolio yields during 2016.both years. Market rates were impacted by twofour Federal Reserve Bank increases of 25 basis points each in the Federal Funds rate, which occurred in March 2018, June 2018, September 2018, and December of 2016 and 2015.2018. Yields on commercial loans increased in 2016,2018, as a result of higher market interest rates.rates and due to the variable nature of the commercial loan portfolio. During 20162018 management continued to focus on growing the commercial portfolio in a prudent and
responsible manner. The cost of funds was also impacted by the rising rate environment during 2016,2018, with the largest impact occurring in public fund interest bearing checking and time deposit accounts.
Provision for Loan Losses
Due to the increase in the loan portfolio theThe Company recorded a provision for loan loss expense of $6.4 million primarily due to a charge off of $5.1 million from a single commercial loan relationship in addition to growth in the loan portfolio. The 2018 provision expense compares to $3.0 million of provision expense recorded in 2017 and $1.2 million of provision expense recorded in 2016, compared to no provision in either 2015 or 2014.2016. The allowance for loan losses at December 31, 20162018 was $43.7$48.5 million, which represented 1.26%1.24% of the loan portfolio, versus an allowance for loan losses of $43.6$47.1 million at the end of 2015,2017, which represented 1.42%1.23% of the loan portfolio. The allowance for loan losses was $46.3$43.7 million at the end of 2014,2016, which represented 1.67%1.26% of the loan portfolio. The provision in 2017 and 2016 was attributable to the increasing size of the loan portfolio with consideration to the decline in
nonperforming loans and net charge-offs. The lackcharge-offs (recoveries). Net charge-offs (recoveries) of a provision$5.1 million, or 0.13% of average loans, and net recoveries of ($403,000), or (0.01)% of average loans were recorded in 20152018 and 20142017, respectively. Provision expense for 2018, 2017, and 2016 was attributable to a number of factors but was primarily a result of improvement indetermined based on key loan quality metrics, including a decrease inthe level of net charge-offs, strong reserve coverage of nonperforming loans, a decrease in historical loss percentages, stabilization in economic conditions in the Company'sCompany’s markets and general signs of improvement in borrower performance and future prospects. In addition, management gave consideration to changes in the allocation for specific watch list credits in determining the appropriate level of the loan loss provision. Management'sManagement’s overall view on current credit quality was also a factor in the determination of the provision for loan losses. The Company'sCompany’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans.
Noninterest Income
The following table presents changes in the components of noninterest income for the years ended December 31.
| | | | | | | | | | | | % Change From | | | | | | | | % Change From |
| | | | | | | | | | | | Prior Year | | | | | | | | Prior Year |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| Wealth advisory fees | | $ | 4,805 | | | $ | 4,531 | | | $ | 4,072 | | | | 6.0 | % | | | 11.3 | % | $6,344 | | $5,481 | | $4,805 | | 15.7% | | 14.1% |
| Investment brokerage fees | | | 1,010 | | | | 1,507 | | | | 3,370 | | | | -33.0 | % | | | -55.3 | % | 1,458 | | 1,273 | | 1,010 | | 14.5% | | 26.0% |
| Service charges on deposit accounts | | | 12,013 | | | | 10,608 | | | | 9,495 | | | | 13.2 | % | | | 11.7 | % | 15,831 | | 13,696 | | 12,013 | | 15.6% | | 14.0% |
| Loan, insurance and service fees | | | 7,681 | | | | 7,460 | | | | 6,799 | | | | 3.0 | % | | | 9.7 | % | |
| Loan and service fees | | 9,291 | | 7,900 | | 7,681 | | 17.6% | | 2.9% |
| Merchant card fee income | | | 2,098 | | | | 1,843 | | | | 1,549 | | | | 13.8 | % | | | 19.0 | % | 2,461 | | 2,279 | | 2,098 | | 8.0% | | 8.6% |
| Bank owned life insurance | | | 1,392 | | | | 1,338 | | | | 1,393 | | | | 4.0 | % | | | -3.9 | % | 1,244 | | 1,768 | | 1,392 | | -29.6% | | 27.0% |
| Other income | | | 2,213 | | | | 2,974 | | | | 2,978 | | | | -25.6 | % | | | -0.1 | % | 2,381 | | 2,598 | | 2,213 | | -8.4% | | 17.4% |
| Mortgage banking income | | | 1,586 | | | | 1,176 | | | | 621 | | | | 34.9 | % | | | 89.4 | % | 1,150 | | 982 | | 1,586 | | 17.1% | | -38.1% |
| Net securities gains (losses) | | | 66 | | | | 42 | | | | (224 | ) | | | 57.1 | % | | | 118.8 | % | (50) | | 32 | | 66 | | -256.3% | | -51.5% |
| Total noninterest income | | $ | 32,864 | | | $ | 31,479 | | | $ | 30,053 | | | | 4.4 | % | | | 4.7 | % | $40,110 | | $36,009 | | $32,864 | | 11.4% | | 9.6% |
| Noninterest income to total revenue | | | 21.7 | % | | | 22.9 | % | | | 22.7 | % | | | | | | | | | 21.0 | % | 21.0 | % | 21.7 | % | | | |
Noninterest income was $32.9$40.1 million in 20162018 versus $31.5$36.0 million in 2015,2017, an increase of $1.4$4.1 million, or 4.4%11.4%. The increase was primarily driven by a $1.4$2.1 million increase in service charges on deposit accounts driven by growth in fees from business accounts. In addition, mortgage banking incomewealth advisory fees increased $863,000, due to higher volumes of loans soldnew business development as well as growth in assets managed for existing clients. Noninterest income was also positively impacted by growth in the secondary market resulting from the continued low interest rate environment.amount of $1.4 million in loan and service fees. Noninterest income was negatively impacted by decreasesa decrease in otherbank owned life insurance income which declined by $524,000, or 29.6%, primarily due to lower rents on operating leases as well as a write-down to a property formerly used as a Lake City Bank branchvariable bank owned life insurance product that was subsequently sold. In addition, investment brokerage fees declined due to lower production volumes as well as changes to the product mix designed to provide a more consistent revenue stream.contains equity based investments.
Noninterest income was $31.5$36.0 million in 20152017 versus $30.1$32.9 million in 2014,2016, an increase of $1.4$3.1 million, or 4.7%9.6%. The increase was primarily driven by a $1.1$1.7 million increase in service charges on deposit accounts driven by higher service charges ongrowth in fees from business accounts. In addition, loan, insurance and servicewealth advisory fees increased $676,000, due to increased fees resulting from higher loan volumes. Mortgage banking income increased due to higher volumes driven by the continued low interest rate environment.new business development as well as growth in assets managed for existing clients. Noninterest income was negatively impacted by a $1.9 million decreasedecreases in investment brokerage feesmortgage banking income due to lower production volumes as well as changes to the product mix designed to provide a more consistent revenue stream.
mortgage originations.
Noninterest Expense
The following table presents changes in the components of noninterest expense for the years ended December 31.
| | | | | | | | | | | | % Change From | | | | | | | | % Change From |
| | | | | | | | | | | | Prior Year | | | | | | | | Prior Year |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| Salaries and employee benefits | | $ | 41,934 | | | $ | 38,923 | | | $ | 38,648 | | | | 7.7 | % | | | 0.7 | % | $48,353 | | $45,306 | | $41,656 | | 6.7% | | 8.8% |
| Net occupancy expense | | | 4,266 | | | | 3,820 | | | | 3,776 | | | | 11.7 | % | | | 1.2 | % | 5,149 | | 4,595 | | 4,266 | | 12.1% | | 7.7% |
| Equipment costs | | | 3,850 | | | | 3,598 | | | | 3,231 | | | | 7.0 | % | | | 11.4 | % | 5,243 | | 4,629 | | 3,850 | | 13.3% | | 20.2% |
| Data processing fees and supplies | | | 8,148 | | | | 7,592 | | | | 6,171 | | | | 7.3 | % | | | 23.0 | % | 9,685 | | 8,233 | | 8,148 | | 17.6% | | 1.0% |
| Corporate and business development | | | 3,328 | | | | 3,173 | | | | 3,073 | | | | 4.9 | % | | | 3.3 | % | 5,066 | | 4,744 | | 3,328 | | 6.8% | | 42.5% |
| FDIC insurance and other regulatory fees | | | 2,001 | | | | 2,044 | | | | 1,936 | | | | -2.1 | % | | | 5.6 | % | 1,701 | | 1,798 | | 2,001 | | -5.4% | | -10.1% |
| Professional fees | | | 3,208 | | | | 2,794 | | | | 2,990 | | | | 14.8 | % | | | -6.6 | % | 3,798 | | 3,574 | | 3,208 | | 6.3% | | 11.4% |
| Other expense | | | 6,243 | | | | 6,262 | | | | 6,341 | | | | -0.3 | % | | | -1.2 | % | 7,042 | | 6,388 | | 6,521 | | 10.2% | | -2.0% |
| Total noninterest expense | | $ | 72,978 | | | $ | 68,206 | | | $ | 66,166 | | | | 7.0 | % | | | 3.1 | % | $86,037 | | $79,267 | | $72,978 | | 8.5% | | 8.6% |
Noninterest expense was $73.0$86.0 million in 20162018 versus $68.2$79.3 million in 2015,2017, an increase of $4.8$6.8 million, or 7.0%8.5%. Salaries and employee benefits increased by $3.0 million primarily due to an increase to the Company’s minimum hiring wage, normal merit increases and increased health insurance cost. Data processing fees also increased during 2018 by $1.5 million primarily due to the Company’s continued investment in technology-based solutions and ongoing transition to cloud-based technology. Occupancy and equipment costs increased during 2018 due to continued branch expansion and remodeling of existing branches and other offices. In addition, corporate and business development expense increased due to higher community support and donation expense.
Noninterest expense was $79.3 million in 2017 versus $73.0 million in 2016, an increase of $6.3 million, or 8.6%. Salaries and employee benefits increased by $3.6 million primarily due to higher performance incentive-based compensation costs, normal merit increases and staff additions. Data processing feesadditions related to the Company’s continued growth and expansion. Corporate and business development expense increased primarily due to increased technologyhigher community support and software related expenditures with the Company's core processor which are volume and product driven and represent digital solutions and forward technology for clients. Net occupancydonation expense, increased due to higher depreciation expense related to branch upgrades and expansion. Professional fees increased primarily due to fees related to the issuance of chip-enabled debit cards, fees paid to a third-party investment manager to manage the Company's investment portfolio as well as fees paid for deposit and asset/liability modeling consulting.
Noninterest expense was $68.2 million in 2015 versus $66.2 million in 2014, an increase of $2.0 million, or 3.1%. Data processing fees increased by $1.4 million, primarily due to increased technology and software related expenditures with the Company's core processor which are volume and product driven and represent digital solutions and forward technology for clients.higher advertising expense. Equipment costs increased due to higher depreciation expense related todriven by the Company’s branch upgradesexpansion and expansion. Salariesremodeling of existing branches and employee benefits increased primarily due to staff additions, higher health insurance costs and higher pension plan costs.other offices.
Income Taxes
The Company recognized income tax expense in 20162018 of $25.1$18.5 million, compared to $22.8$32.3 million in 2015,2017, and $22.4$25.1 million in 2014.2016. The effective tax rate in 20162018 was 32.5%18.7% compared to 33.0%36.0% in 2015,2017, and 33.8%32.5% in 2014.2016. The effective tax rate was lower in 20162018 compared to 20152017 and 20142016 due to increases in incomethe effects of the Tax Cuts and Jobs Act, which reduced the Company’s federal tax rate to 21% from tax-advantaged sources as well as lower statutory state35% effective January 1, 2018. Results for 2017 included a non-cash, non-operating and non-recurring income tax rates.provision of $4.1 million or $0.16 per diluted share. For a detailed analysis of the Company'sCompany’s income taxes see Note 13 of the Notes to Consolidated Financial Statements.– Income Taxes.
FINANCIAL CONDITION
Overview
Total assets of the Company were $4.290$4.875 billion as of December 31, 2016,2018, an increase of $523.7$192.3 million, or 13.9%4.1%, when compared to $3.766$4.683 billion as of December 31, 2015.2017. Total loans increased by $390.0$96.8 million, or 12.7%2.5%, to $3.471$3.916 billion at December 31, 20162018 from $3.081$3.820 billion at December 31, 2015.2017. Cash and cash equivalents increased by $74.9$40.7 million and investmentsavailable-for-sale securities increased by $26.1$47.1 million. Funding for the loan and investment growth came from a $394.5$94.9 million increase in total borrowings as well as a $35.4 million increase in total deposits in 2016 as well as a $90.4 million2018. Most of the increase in short-term borrowings.borrowings resulted from short-term advances from the Federal Home Loan Bank of Indianapolis. The Company used wholesale funding, including brokered deposits and Federal Home Loan Bank advances, to fund part of its loan growth and to help maintain its desired interest rate risk position.
Uses of Funds
Investment Portfolio
The amortized cost and the fair value of securities as of December 31, 2016, 20152018, 2017 and 20142016 were as follows:
| | | 2016 | | | 2015 | | | 2014 | | 2018 | | 2017 | | 2016 |
| | | Amortized | | | Fair | | | Amortized | | | Fair | | | Amortized | | | Fair | | Amortized | | Fair | | Amortized | | Fair | | Amortized | | Fair |
(fully tax equivalent basis dollars in thousands) | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | | Cost | | Value | | Cost | | Value | | Cost | | Value |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | $ | 990 | | | $ | 1,003 | | | $ | 988 | | | $ | 1,003 | | | $ | 986 | | | $ | 1,004 | | $994 | | $987 | | $992 | | $997 | | $990 | | $1,003 |
| U.S. government sponsored agencies | | | 6,312 | | | | 6,241 | | | | 7,178 | | | | 7,120 | | | | 0 | | | | 0 | | 4,435 | | 4,350 | | 5,191 | | 5,122 | | 6,312 | | 6,241 |
| Agency residential mortgage-backed securities | | | 351,108 | | | | 351,568 | | | | 357,984 | | | | 360,672 | | | | 366,596 | | | | 372,095 | | |
| Mortgage-backed securities: residential | | 329,516 | | 325,412 | | 314,650 | | 313,774 | | 304,172 | | 304,495 |
| Mortgage-backed securities: commercial | | 38,712 | | 38,141 | | 44,208 | | 44,211 | | 46,936 | | 47,073 |
| State and municipal securities | | | 146,917 | | | | 145,379 | | | | 105,753 | | | | 109,276 | | | | 99,399 | | | | 102,812 | | 217,964 | | 216,659 | | 172,375 | | 174,389 | | 146,917 | | 145,379 |
| Total debt securities available for sale | | $ | 505,327 | | | $ | 504,191 | | | $ | 471,903 | | | $ | 478,071 | | | $ | 466,981 | | | $ | 475,911 | | $591,621 | | $585,549 | | $537,416 | | $538,493 | | $505,327 | | $504,191 |
At year-end 2016, 20152018, 2017 and 2014,2016, there were no holdings of securities of any one issuer, other than the U.S. government, government agencies and government sponsored agencies, in an amount greater than 10% of stockholders'stockholders’ equity. See Note 2 – Securities for more information on these investments.
Purchases of securities available for sale totaled $117.7$126.6 million in 2016, $91.82018, $139.3 million in 20152017 and $73.4$116.2 million in 2014.2016. The growth of the investment portfolio during the past three years serves to enhance liquidity for the Company and manage the level of interest rate risk in relation to the loan portfolio. Securities sales totaled $15.3 million in 2018, $40.9 million in 2017 and $12.1 million in 2016, $7.8 million in 2015 and $13.8 million in 2014.2016. Paydowns from prepayments and scheduled payments of $56.4$42.8 million, $61.6$50.0 million and $55.9$56.4 million were received in 2016, 20152018, 2017 and 2014,2016, and the amortization of premiums, net of the accretion of discounts, was $2.9$3.2 million, $4.5$3.1 million and $5.4$2.9 million, respectively. Maturities and calls of securities totaled $11.0 million, $11.7 million and $12.9 million $13.1 millionin 2018, 2017 and $2.1 million in 2016, 2015 and 2014, respectively. No other-than-temporary impairment was recognized in 2016, 20152018, 2017 or 2014.2016. The investment portfolio is managed to provide for an appropriate balance between liquidity, credit risk, investment return and to limit the Company'sCompany’s exposure to risk to an acceptable level.
The weighted average yields and maturity distribution for the securities portfolio at December 31, 2016,2018, were as follows:
| | | Within | | | After One | | | After Five Years | | | Over Ten | |
| | | One Year | | | Within Five Years | | | Within Ten years | | | Years | |
| | | Fair | | | | | | Fair | | | | | | Fair | | | | | | Fair | | | | |
| | | Value | | | Yield | | | Value | | | Yield | | | Value | | | Yield | | | Value | | | Yield | |
(fully tax equivalent basis, dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | $ | 0 | | | | 0.00 | % | | $ | 1,003 | | | | 2.24 | % | | $ | 0 | | | | 0.00 | % | | $ | 0 | | | | 0.00 | % |
| U.S. government sponsor agency | | | 0 | | | | 0.00 | % | | | 0 | | | | 0.00 | % | | | 2,951 | | | | 2.36 | % | | | 3,290 | | | | 2.21 | % |
| Agency residential mortgage-backed securities | | | 0 | | | | 0.00 | % | | | 63,368 | | | | 2.60 | % | | | 83,290 | | | | 2.72 | % | | | 204,910 | | | | 2.87 | % |
| State and municipal securities | | | 3,403 | | | | 5.67 | % | | | 21,402 | | | | 4.43 | % | | | 44,930 | | | | 4.78 | % | | | 75,644 | | | | 4.56 | % |
| Total Securities | | $ | 3,403 | | | | 5.67 | % | | $ | 85,773 | | | | 3.05 | % | | $ | 131,171 | | | | 3.42 | % | | $ | 283,844 | | | | 3.31 | % |
| | Within | | After One | | After Five Years | | Over Ten | |
| | One Year | | Within Five Years | | Within Ten years | | Years | |
| | Fair | | | | Fair | | | | Fair | | | | Fair | | | |
| | Value | | Yield | | Value | | Yield | | Value | | Yield | | Value | | Yield | |
| (fully tax equivalent basis, dollars in thousands) | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | $0 | | 0.00 | % | $987 | | 3.50 | % | $0 | | 0.00 | % | $0 | | 0.00 | % |
| U.S. government sponsor agency | 0 | | 0.00 | % | 1,995 | | 0.41 | % | 0 | | 0.00 | % | 2,355 | | 3.00 | % |
| Mortgage-backed securities: residential | 111 | | 3.03 | % | 38,386 | | 3.93 | % | 43,959 | | 3.34 | % | 242,956 | | 3.53 | % |
| Mortgage-backed securities: commercial | 0 | | 0.00 | % | 34,101 | | 4.25 | % | 4,040 | | 5.50 | % | 0 | | 0.00 | % |
| State and municipal securities | 2,541 | | 3.43 | % | 19,540 | | 3.80 | % | 32,656 | | 3.45 | % | 161,922 | | 3.82 | % |
| Total Securities | $2,652 | | 3.41 | % | $95,009 | | 3.94 | % | $80,655 | | 3.49 | % | $407,233 | | 3.64 | % |
The company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds in the Volcker Rule.
Real Estate Mortgage Loans HFSHeld For Sale
Real estate mortgages held for sale increaseddecreased by $2.6$1.0 million to $5.9$2.3 million at December 31, 20162018 from $3.3 million at December 31, 2015.2017. This asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells almost all of the mortgage loans it originates on the secondary market. Proceeds from sales totaled $69.4$51.7 million in 2016, $68.62018, $57.6 million in 20152017 and $56.1$68.7 million in 2014.
2016.
Loan Portfolio
The loan portfolio by class as of December 31, 2018, 2017, 2016, 2015 2014, 2013 and 20122014 was as follows:
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 624,404 | | | $ | 581,025 | | | $ | 544,043 | | | $ | 457,690 | | | $ | 439,638 | | $690,620 | | $743,609 | | $624,404 | | $581,025 | | $544,043 |
| Non-working capital loans | | | 644,086 | | | | 598,487 | | | | 491,330 | | | | 443,877 | | | | 407,184 | | 714,759 | | 675,072 | | 644,086 | | 598,487 | | 491,330 |
| Total commercial and industrial loans | | | 1,268,490 | | | | 1,179,512 | | | | 1,035,373 | | | | 901,567 | | | | 846,822 | | 1,405,379 | | 1,418,681 | | 1,268,490 | | 1,179,512 | | 1,035,373 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 245,182 | | | | 230,719 | | | | 156,636 | | | | 157,630 | | | | 82,494 | | 266,805 | | 224,474 | | 245,182 | | 230,719 | | 156,636 |
| Owner occupied loans | | | 469,705 | | | | 412,026 | | | | 403,154 | | | | 370,386 | | | | 358,617 | | 586,325 | | 538,603 | | 469,705 | | 412,026 | | 403,154 |
| Nonowner occupied loans | | | 458,404 | | | | 407,883 | | | | 394,458 | | | | 394,748 | | | | 314,889 | | 520,901 | | 508,121 | | 458,404 | | 407,883 | | 394,458 |
| Multi-family loans | | | 127,632 | | | | 79,425 | | | | 71,811 | | | | 63,443 | | | | 45,011 | | 195,604 | | 173,715 | | 127,632 | | 79,425 | | 71,811 |
| Total commercial real estate and multi-family residential loans | | | 1,300,923 | | | | 1,130,053 | | | | 1,026,059 | | | | 986,207 | | | | 801,011 | | 1,569,635 | | 1,444,913 | | 1,300,923 | | 1,130,053 | | 1,026,059 |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 172,633 | | | | 164,375 | | | | 137,407 | | | | 133,458 | | | | 109,147 | | 177,503 | | 186,437 | | 172,633 | | 164,375 | | 137,407 |
| Loans for agricultural production | | | 222,210 | | | | 141,719 | | | | 136,380 | | | | 120,571 | | | | 115,572 | | 193,010 | | 196,404 | | 222,210 | | 141,719 | | 136,380 |
| Total agri-business and agricultural loans | | | 394,843 | | | | 306,094 | | | | 273,787 | | | | 254,029 | | | | 224,719 | | 370,513 | | 382,841 | | 394,843 | | 306,094 | | 273,787 |
| Other commercial loans | | | 98,270 | | | | 85,075 | | | | 75,715 | | | | 70,770 | | | | 56,807 | | 95,657 | | 124,076 | | 98,270 | | 85,075 | | 75,715 |
| Total commercial loans | | | 3,062,526 | | | | 2,700,734 | | | | 2,410,934 | | | | 2,212,573 | | | | 1,929,359 | | 3,441,184 | | 3,370,511 | | 3,062,526 | | 2,700,734 | | 2,410,934 |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 163,155 | | | | 158,062 | | | | 145,167 | | | | 125,444 | | | | 109,823 | | 185,822 | | 179,302 | | 163,155 | | 158,062 | | 145,167 |
| Open end and junior lien loans | | | 169,664 | | | | 163,700 | | | | 150,220 | | | | 146,946 | | | | 161,366 | | 187,030 | | 181,865 | | 169,664 | | 163,700 | | 150,220 |
| Residential construction and land development loans | | | 15,015 | | | | 9,341 | | | | 6,742 | | | | 4,640 | | | | 11,541 | | 16,226 | | 13,478 | | 15,015 | | 9,341 | | 6,742 |
| Total consumer 1-4 family mortgage loans | | | 347,834 | | | | 331,103 | | | | 302,129 | | | | 277,030 | | | | 282,730 | | 389,078 | | 374,645 | | 347,834 | | 331,103 | | 302,129 |
| Other consumer loans | | | 61,308 | | | | 49,113 | | | | 49,541 | | | | 46,125 | | | | 45,755 | | 86,064 | | 74,369 | | 61,308 | | 49,113 | | 49,541 |
| Total consumer loans | | | 409,142 | | | | 380,216 | | | | 351,670 | | | | 323,155 | | | | 328,485 | | 475,142 | | 449,014 | | 409,142 | | 380,216 | | 351,670 |
| Subtotal | | | 3,471,668 | | | | 3,080,950 | | | | 2,762,604 | | | | 2,535,728 | | | | 2,257,844 | | 3,916,326 | | 3,819,525 | | 3,471,668 | | 3,080,950 | | 2,762,604 |
| Less: Allowance for loan losses | | | (43,718 | ) | | | (43,610 | ) | | | (46,262 | ) | | | (48,797 | ) | | | (51,445 | ) | (48,453) | | (47,121) | | (43,718) | | (43,610) | | (46,262) |
| Net deferred loan fees | | | (741 | ) | | | (21 | ) | | | (284 | ) | | | (630 | ) | | | (324 | ) | (1,581) | | (1,066) | | (741) | | (21) | | (284) |
| Loans, net | | $ | 3,427,209 | | | $ | 3,037,319 | | | $ | 2,716,058 | | | $ | 2,486,301 | | | $ | 2,206,075 | | $3,866,292 | | $3,771,338 | | $3,427,209 | | $3,037,319 | | $2,716,058 |
The ratio of loans to total loans by portfolio segment as of December 31, 2018, 2017, 2016, 2015 2014, 2013 and 20122014 was as follows:
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | | | | | | | | | |
| Commercial and industrial loans | 36.54% | | 38.28% | | 37.48% | | 35.55% | | 37.50% |
| Commercial real estate and multi-family residential loans | 37.47% | | 36.68% | | 37.14% | | 38.89% | | 35.48% |
| Agri-business and agricultural loans | 11.36% | | 9.93% | | 9.91% | | 10.02% | | 9.95% |
| Other commercial loans | 2.83% | | 2.76% | | 2.74% | | 2.79% | | 2.52% |
| Consumer 1-4 family mortgage loans | 10.02% | | 10.75% | | 10.94% | | 10.93% | | 12.52% |
| Other consumer loans | 1.78% | | 1.60% | | 1.79% | | 1.82% | | 2.03% |
| Total Loans | 100.00% | | 100.00% | | 100.00% | | 100.00% | | 100.00% |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| Commercial and industrial loans | 35.89% | | 37.14% | | 36.54% | | 38.28% | | 37.48% |
| Commercial real estate and multi-family residential loans | 40.08% | | 37.83% | | 37.47% | | 36.68% | | 37.14% |
| Agri-business and agricultural loans | 9.46% | | 10.02% | | 11.36% | | 9.93% | | 9.91% |
| Other commercial loans | 2.44% | | 3.25% | | 2.83% | | 2.76% | | 2.74% |
| Consumer 1-4 family mortgage loans | 9.93% | | 9.81% | | 10.02% | | 10.75% | | 10.94% |
| Other consumer loans | 2.20% | | 1.95% | | 1.78% | | 1.60% | | 1.79% |
| Total Loans | 100.00% | | 100.00% | | 100.00% | | 100.00% | | 100.00% |
In 2018, net loan balances increased by $95.0 million to $3.866 billion, which is net of approximately $49.8 million in loans originated and sold and $316,000 transferred to other real estate in 2018. In 2017, net loan balances increased by $344.1 million to $3.771 billion, which is net of approximately $54.2 million in loans originated and sold and $88,000 transferred to other real estate in 2017. In 2016, loan balances increased by $391.1$389.9 million to $3.427 billion, which is net of approximately $70.7$70.0 million in loans originated and sold and $105,000 transferred to other real estate in 2016. In 2015, loan balances increased by $322.1 million, which is net of approximately $69.3 million in loans originated and sold and $853,000 transferred to other real estate in 2015. In 2014 loan balances increased by $235.2 million, which is net of approximately $55.1 million in loans originated and sold and $1.1 million transferred to other real estate in 2014.
The mix of loan types within the Company'sCompany’s portfolio continued a trend toward a higher percentage of the total loan portfolio being in commercial loans. In particular, agriculture loans increased by $88.7 million in 2016, which resulted in 11%This higher percentage of the total loan portfolio. This increase in commercial loans to the total portfolio was a result of the Company'sCompany’s long standing strategic plan that is focused on organic expansion and growth in the commercial business. The owner-occupied commercial real estate loans tend to represent the real estate holding of our commercial and industrial loan customers. Another significant loan segment are loans to the agri-business sector, which has resulted in the Company becoming one of the largest agricultural lenders in the State of Indiana.
The residential construction and land development loans class included construction loans totaling $12.5 million, $10.0 million, $11.4 million, $7.3 million $5.3 million, $3.8 million and $10.7$5.3 million as of December 31, 2018, 2017, 2016, 2015 2014, 2013 and 2012.2014. The Bank generally sells conforming mortgage loans which it originates on the secondary market. These loans generally represent mortgage loans that are made to clients with long-term or substantial relationships with the Bank on terms consistent with secondary market requirements. The loan classifications are based on the nature of the loans as of the loan origination date. There were no foreign loans included in the loan portfolio for the periods presented.
Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in the related loan agreements or upon maturity of each principal payment. The following table indicates the scheduled maturities of the loan portfolio as of December 31, 2016:2018:
| | | | | Commercial | | | | | | | | | | | | | |
| | | | | | Residential | | | | | | | | | | | | | | | | Real Estate | | | | | | | | | | | | | |
| | | | | | Real | | | | | | | | | | | | | | | | and | | Agri-business | | | | Consumer | | | | | | | |
| | | | | | Estate | | | | | | Line of | | | | | | | | Commercial and | | Multi-family | | and | | Other | | 1-4 Family | | Other | | | | | |
(dollars in thousands) | | Commercial | | | Mortgage | | | Installment | | | Credit | | | Total | | | Percent | | Industrial | | Residential | | Agricultural | | Commercial | | Mortgage | | Consumer | | Total | | Percent | |
| Within one year | | $ | 1,693,161 | | | $ | 17,273 | | | $ | 11,885 | | | $ | 33,115 | | | $ | 1,755,434 | | | | 50.57 | % | $699,601 | | $286,261 | | $155,117 | | $31,461 | | $17,662 | | $13,149 | | $1,203,251 | | 30.72 | % |
| After one year, within five years | | | 1,166,493 | | | | 55,535 | | | | 23,259 | | | | 86,082 | | | | 1,331,369 | | | | 38.35 | | 581,655 | | 840,277 | | 136,908 | | 25,773 | | 81,591 | | 42,198 | | 1,708,402 | | 43.62 | |
| Over five years | | | 266,398 | | | | 51,809 | | | | 3,168 | | | | 56,851 | | | | 378,226 | | | | 10.89 | | 120,305 | | 440,828 | | 78,205 | | 38,423 | | 288,935 | | 30,717 | | 997,413 | | 25.47 | |
| Nonaccrual loans | | | 6,363 | | | | 80 | | | | 0 | | | | 195 | | | | 6,639 | | | | 0.19 | | 3,818 | | 2,269 | | 283 | | 0 | | 890 | | 0 | | 7,260 | | 0.19 | |
| Total loans | | $ | 3,132,415 | | | $ | 124,698 | | | $ | 38,312 | | | $ | 176,243 | | | $ | 3,471,668 | | | | 100.00 | % | $1,405,379 | | $1,569,635 | | $370,513 | | $95,657 | | $389,078 | | $86,064 | | $3,916,326 | | 100.00 | % |
At maturity, credits are reviewed and, if renewed, are renewed at rates and conditions that prevail at the time of maturity.
Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 20162018 amounted to $594.7$878.0 million and $1.115$1.156 billion, respectively.
Bank Owned Life Insurance
Bank owned life insurance increased by $4.3$1.2 million to $77.1 million at December 31, 2018 and by $1.9 million to $75.9 million at December 31, 2017 from $74.0 million at December 31, 2016 and by $3.1 million to $69.7 million at December 31, 2015 from $66.6 million at December 31, 2014. These2016. The increases during 20162018 and 20152017 were primarily due to additional purchases ofinvestment returns on the life insurance to help offset employee benefit plan expenses, which have continued to increase since 2002 due to the increased numberpolicies of officers at the Bank.pre-existing life insurance policies. Bank owned life insurance provides investment income from the securities the life insurance is invested in and offsets benefit plan expenses.
Sources of Funds
The average daily deposits and borrowings together with the average rates paid on those deposits and borrowings for the years ended December 31, 2016, 20152018, 2017 and 20142016 are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | % Balance Change | | | | | | | | | | | | | | % Balance Change | |
| | | 2016 | | | 2015 | | | 2014 | | | From Prior Year | | 2018 | | 2017 | | 2016 | | From Prior Year | |
(dollars in thousands) | | Balance | | | Rate | | | Balance | | | Rate | | | Balance | | | Rate | | | 2016 | | | 2015 | | Balance | | Rate | | Balance | | Rate | | Balance | | Rate | | 2018 | | 2017 | |
| Noninterest bearing demand deposits | | $ | 724,350 | | | | 0.00 | % | | $ | 609,924 | | | | 0.00 | % | | $ | 498,351 | | | | 0.00 | % | | | 19 | % | | | 22 | % | $858,027 | | 0.00 | % | $789,307 | | 0.00 | % | $724,350 | | 0.00 | % | 9 | % | 9 | % |
| Savings and transaction accounts: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings deposits | | | 264,669 | | | | 0.17 | | | | 233,361 | | | | 0.20 | | | | 233,657 | | | | 0.22 | | | | 13 | | | | (0 | ) | 257,959 | | 0.13 | | 272,811 | | 0.15 | | 264,669 | | 0.17 | | (5) | | 3 | |
| Interest bearing demand deposits | | | 1,282,257 | | | | 0.44 | | | | 1,232,101 | | | | 0.39 | | | | 1,169,338 | | | | 0.40 | | | | 4 | | | | 5 | | 1,475,776 | | 1.22 | | 1,401,216 | | 0.71 | | 1,282,257 | | 0.44 | | 5 | | 9 | |
| Time deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits of $100,000 or more | | | 959,569 | | | | 1.04 | | | | 733,608 | | | | 0.94 | | | | 615,764 | | | | 0.84 | | | | 31 | | | | 19 | | 1,236,528 | | 1.83 | | 1,052,705 | | 1.30 | | 959,569 | | 1.04 | | 17 | | 10 | |
| Other time deposits | | | 246,971 | | | | 1.15 | | | | 279,604 | | | | 1.19 | | | | 280,819 | | | | 1.14 | | | | (12 | ) | | | (0 | ) | 265,604 | | 1.51 | | 241,170 | | 1.21 | | 246,971 | | 1.15 | | 10 | | (2) | |
| Total deposits | | $ | 3,477,816 | | | | 0.54 | % | | $ | 3,088,598 | | | | 0.49 | % | | $ | 2,797,929 | | | | 0.48 | % | | | 13 | | | | 10 | | $4,093,894 | | 1.10 | % | $3,757,209 | | 0.72 | % | $3,477,816 | | 0.54 | % | 9 | % | 8 | % |
| FHLB advances and other borrowings | | | 119,225 | | | | 1.28 | | | | 111,241 | | | | 1.08 | | | | 161,774 | | | | 0.88 | | | | 7 | | | | (31 | ) | 146,640 | | 1.90 | | 210,537 | | 1.32 | | 119,225 | | 1.28 | | (30) | | 77 | |
| Total funding sources | | $ | 3,597,041 | | | | 0.71 | % | | $ | 3,199,839 | | | | 0.64 | % | | $ | 2,959,703 | | | | 0.61 | % | | | 12 | | | | 8 | | $4,240,534 | | 1.12 | % | $3,967,746 | | 0.75 | % | $3,597,041 | | 0.57 | % | 7 | % | 10 | % |
Time deposits as of December 31, 20162018 will mature as follows:
| | | $100,000 | | | % of | | | | | | % of | | $100,000 | | | | | | % of | |
(dollars in thousands) | | or more | | | Total | | | Other | | | Total | | or more | | Other | | Total | | Total | |
| Within three months | | $ | 237,210 | | | | 25.65 | % | | $ | 40,151 | | | | 16.80 | % | $395,750 | | $41,423 | | $437,173 | | 30.79 | % |
| Over three months, within six months | | | 152,787 | | | | 16.52 | | | | 28,498 | | | | 11.92 | | 203,838 | | 41,840 | | 245,678 | | 17.31 | |
| Over six months, within twelve months | | | 296,141 | | | | 32.02 | | | | 58,137 | | | | 24.33 | | 205,874 | | 44,598 | | 250,472 | | 17.64 | |
| Over twelve months | | | 238,687 | | | | 25.81 | | | | 112,207 | | | | 46.95 | | 340,759 | | 145,672 | | 486,431 | | 34.26 | |
| Total time certificates of deposit | | $ | 924,825 | | | | 100.00 | % | | $ | 238,993 | | | | 100.00 | % | $1,146,221 | | $273,533 | | $1,419,754 | | 100.00 | % |
Deposits
AverageTotal deposits increased $389.2by $35.4 million to $4.044 billion, comparing December 31, 20162018 to December 31, 2015.2017. The growth in deposits consisted of $420.5$135.5 million in core deposit growth offset by a decrease of $31.3$100.1 million in brokered deposits. Average public funds
time$112.4 million in commercial deposits. In addition, retail deposits increased by $293.6$57.9 million and average commercial demandwhile public funds deposits increased $94.8decreased by $34.7 million. The growth in deposits in 20162018 resulted from increased deposit balances from new and existing customers, as well as a decreased utilization of brokered deposits. Core deposit growth in new customers. Theenabled the Company believes that the prolonged low rate environment has caused depositors to shift their deposits to short-term liquid products in anticipation of higher future market deposit rates.reduce reliance on wholesale funding during 2018.
AverageTotal deposits increased $290.7by $430.7 million to $4.009 billion, comparing December 31, 20152017 to December 31, 2014.2016. The growth in deposits consisted of $301.1$263.9 million in core deposit growth offsetwith $166.8 million of the growth coming in the form of brokered deposits. Total deposit growth was led by a decreasean increase of $10.4$78.9 million in brokeredcommercial deposits. Average commercial demandIn addition, retail deposits increased $97.2 million, average interest bearingand public funds transaction accounts increased by $67.4 million, average public funds time deposits increased by $61.6$141.7 million and average time$43.3 million, respectively. The growth in deposits in 2017 resulted from increased deposit balances from new and existing customers, as well as an increased utilization of $100,000 or more increased by $37.9 million.brokered deposits. The Company used brokered deposits to fund part of its loan growth, reduce short-term borrowings, and to help maintain its desired interest rate risk position.
As previously noted, 30% of the Company has 33% funding fromCompany’s deposit base is attributable to public fund entities which primarily represent customers in the Company'sCompany’s geographic footprint. A shift in funding away from public fund deposits could require the Company to execute alternate funding plans under the Contingency Funding Plan discussed in further detail under "Liquidity Risk"“Liquidity Risk” below. The following table presents total deposits by portfolio segment as of December 31, 2018, 2017 and 2016:
| (dollars in thousands) | | 2018 | | 2017 | | 2016 |
| Retail | | $1,588,225 | 39.3% | | $1,530,368 | 38.2% | | $1,388,637 | 38.8% |
| Commercial | | 1,075,419 | 26.6% | | 963,064 | 24.0% | | 884,178 | 24.7% |
| Public funds | | 1,215,533 | 30.0% | | 1,250,243 | 31.2% | | 1,206,920 | 33.8% |
| Core deposits | | 3,879,177 | 95.9% | | 3,743,675 | 93.4% | | 3,479,735 | 97.3% |
| Brokered deposits | | 164,888 | 4.1% | | 264,980 | 6.6% | | 98,177 | 2.7% |
| Total deposits | | $4,044,065 | 100.0% | | $4,008,655 | 100.0% | | $3,577,912 | 100.0% |
Borrowings
During 2016, average total short-term borrowings increased $8.0 million primarily due to an increase in advances with the Federal Home Loan Bank of Indianapolis. Ending balances of total short-term borrowings increased $90.4 million during 2016 due to increases in Federal Home Loan Bank of Indianapolis advances offset by decreases in securities sold under agreements to repurchase.
During 2015,2018, average total short-term borrowings decreased $50.5by $63.9 million to $115.7 million, primarily due to a $27.8 million decrease in advances with the Federal Home Loan Bank of Indianapolis (“FHLBI”). Ending balances of total short-term borrowings increased $94.9 million during 2018 to $245.6 million, due to increases in FHLBI advances that typically increase at the end of the year. Short-term borrowings are used to fund short-term balance sheet growth due to the flexible nature of the financial instrument and allows the Company to prudently lend to commercial or retail borrowers when opportunities are presented.
During 2017, average long termtotal short-term borrowings decreasedincreased by $1.0 million.$91.3 million to $ 179.6 million, primarily due to an increase in advances with the FHLBI. Ending balances of total short-term borrowings decreased $20.8$79.4 million during 20152017 to $150.7 million, due to decreases in Federal Home Loan Bank of IndianapolisFHLBI advances offset by increases in securities sold under agreements to repurchase. During 2015,repurchase and brokered certificates of deposit. Short-term borrowings are used to fund short-term balance sheet growth due to the flexible nature of the financial instrument and allows the Company reduced its reliance on borrowings due to strong growthprudently lend to commercial or retail borrowers when opportunities are presented. In September of 2017, the Company raised $150.0 million in deposits.brokered deposits and repaid all outstanding short-term borrowings.
Capital
The Company believes that a strong, appropriately managed capital position is critical to long-term earnings and continuing growth in loans. The Company had a total risk-based capital ratio of 13.2%14.2%, a Tier I risk-based capital ratio of 12.1%13.1% and a common Tier 1 risk-based capital ratio of 11.3%12.4% as of December 31, 2016.2018. These ratios met or exceeded the Federal Reserve's "well-capitalized"Reserve’s “well-capitalized” minimums of 10.0%, 8.0% and 6.5%, respectively. The Company also had a Tier 1 leverage ratio of 10.9%11.4% and a tangible equity ratio of 9.9%10.6%. See Note 16 – Capital Requirements for more information.
The ability to maintain these ratios is a function of the balance between net income and a prudent dividend policy. Total stockholders'stockholders’ equity increased by 8.7%11.3% to $427.0$521.6 million as of December 31, 20162018 from $392.8$468.6 million as of December 31, 2015.2017. The Company earned $52.1$80.4 million in 20162018 and $46.4$57.3 million in 2015.2017. The Company declared cash dividends of $0.73$1.00 per share in 2016,2018, which decreased equity by $18.2$25.3 million. The Company declared cash dividends of $0.63$0.85 per share in 2015,2017, which decreased equity by $15.7$21.4 million. The change in accumulated other comprehensive income, largely due to changes in the fair values of available-for-sale securities, decreased equity by $4.5$5.3 million in 2016, and decreased equity by2018 compared to an increase of $1.7 million in 2015.2017. The impact to equity due to other comprehensive income is not included in regulatory capital. StockAmortization of stock based compensation expense increased equity by $4.2$5.6 million in 20162018 and $2.5$5.7 million in 2015.2017.
On January 8, 2019, the Board of Directors authorized the purchase of up to $30,000,000 shares of the Company’s common stock, representing approximately 3.0% of the company’s issued and outstanding shares of common stock as of December 31, 2018. The Board authorized this stock repurchase plan based on the strength of the company’s balance sheet and capital position. The Board believes that a stock repurchase plan is an important tool that can be utilized to enhance long term shareholder value. Share repurchases may be made periodically as permitted by securities laws and other legal and regulatory requirements and will be subject to market conditions as well as other factors. The timing, price and quantity of purchases will be at the discretion of the corporation and the program may be discontinued or suspended at any time. Repurchases may be made in the open market, through block trades or otherwise, and in privately negotiated transactions. If any share purchases are made, they will be made on or prior to December 31, 2019.
RISK MANAGEMENT
Overview
The Company, with the oversight of the Corporate Risk Committee of the Board, of Directors, has developed a company-wide risk management program intended to help manage and mitigate the various business risks the Company is exposed to. Following is a discussion addressing the risks identified as most significant to the Company – Credit, Liquidity and Interest Rate or Market Risk. Item 7A. includes additional market risk discussion.
Credit Risk
Credit risk represents the risk of loss arising from an obligor'sobligor’s inability or failure to meet contractual payment or performance terms. Our primary credit risks result from lending and investment activities.
Investment Portfolio
The Company'sCompany’s investment portfolio consists of Treasury securities, government agencies, and municipal tax exempt bonds. During 2016,2018, purchases in the securities portfolio consisted of primarily mortgage-backed securities and municipal bonds. As of December 31, 2016,2018, the Company'sCompany’s investment in mortgage-backed securities represented approximately 70%62% of total securities consisting of Collateralized Mortgage Obligations ("CMOs"(“CMOs”), Commercial Mortgage-Backed Securities ("CMBSs"(“CMBSs”) and mortgage
pools issued by Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie Mae, Fannie Mae and Freddie Mac securities are each guaranteed by their respective agencies as to principal and interest. All mortgage securities purchased by the Company in 20162018 were within risk tolerances for price, prepayment, extension and original life risk characteristics contained in the Company'sCompany’s investment policy. The Company uses analytics provided by its third party portfolio advisor to evaluate and monitor all investments on a quarterly basis. Based upon these analytics as of December 31, 2016,2018, the securities in the available for sale portfolio had approximately a 4.1 year effective duration with approximately a negative 13.17%13.96% change in market value in the event of a 300 basis point upward, instantaneous rate shock and an approximate positive 3.65%3.35% change in market value in the event of a 100 basis point downward, instantaneous rate shock. As of December 31, 2016,2018, all mortgage-backed securities were performing in a manner consistent with management'smanagement’s ALCO modeled expectations at time of purchase.
Loan Portfolio
The Company has a relatively high percentage of commercial and commercial real estate loans, most of which are extended to small or medium-sized businesses from a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area.
There were no loan concentrations within industries, which exceeded ten percent of total loans, except commercial real estate, manufacturing and manufacturing.agri-business. Commercial real estate was $1.102$1.570 billion, or 32.2%40.1% of total loans, manufacturing was $472.2 million, or 12.1% of total loans, and manufacturingagri-business was $477.3$370.5 million, or 13.9%9.5% of total loans, at December 31, 2016.2018. Nearly all of the Bank'sBank’s commercial, industrial, agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its geographic market areas and to diverse industries.
The following is a summary of nonperforming loans as of December 31, 2018, 2017, 2016, 2015 2014, 2013 and 2012.2014.
| (dollars in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Commercial and industrial loans | | | | | | | | | |
| Past due accruing loans (90 days or more) | $0 | | $0 | | $0 | | $0 | | $101 |
| Nonaccrual loans(1) | 3,818 | | 4,922 | | 2,224 | | 5,109 | | 4,230 |
| Subtotal nonperforming loans | 3,818 | | 4,922 | | 2,224 | | 5,109 | | 4,331 |
| Commercial real estate and multi-family residential loans | | | | | | | | | |
| Past due accruing loans (90 days or more) | 0 | | 0 | | 0 | | 0 | | 0 |
| Nonaccrual loans(1) | 2,269 | | 3,621 | | 3,723 | | 7,174 | | 7,204 |
| Subtotal nonperforming loans | 2,269 | | 3,621 | | 3,723 | | 7,174 | | 7,204 |
| Agri-business and agricultural loans | | | | | | | | | |
| Past due accruing loans (90 days or more) | 0 | | 0 | | 0 | | 0 | | 0 |
| Nonaccrual loans(1) | 283 | | 282 | | 283 | | 471 | | 486 |
| Subtotal nonperforming loans | 283 | | 282 | | 283 | | 471 | | 486 |
| Other commercial loans | | | | | | | | | |
| Past due accruing loans (90 days or more) | 0 | | 0 | | 0 | | 0 | | 0 |
| Nonaccrual loans(1) | 0 | | 0 | | 0 | | 0 | | 30 |
| Subtotal nonperforming loans | 0 | | 0 | | 0 | | 0 | | 30 |
| Consumer 1-4 family mortgage loans | | | | | | | | | |
| Past due accruing loans (90 days or more) | 0 | | 6 | | 53 | | 0 | | 29 |
| Nonaccrual loans(1) | 890 | | 341 | | 409 | | 301 | | 1,576 |
| Subtotal nonperforming loans | 890 | | 347 | | 462 | | 301 | | 1,605 |
| Other consumer loans | | | | | | | | | |
| Past due accruing loans (90 days or more) | 0 | | 0 | | 0 | | 0 | | 0 |
| Nonaccrual loans(1) | 0 | | 235 | | 0 | | 0 | | 51 |
| Subtotal nonperforming loans | 0 | | 235 | | 0 | | 0 | | 51 |
| Total nonperforming loans | $7,260 | | $9,407 | | $6,692 | | $13,055 | | $13,707 |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Commercial and industrial loans | | | | | | | | | | | | | | | |
| Past due accruing loans (90 days or more) | | $ | 0 | | | $ | 0 | | | $ | 101 | | | $ | 0 | | | $ | 50 | |
| Nonaccrual loans(1) | | | 2,224 | | | | 5,109 | | | | 4,230 | | | | 5,616 | | | | 6,713 | |
| Subtotal nonperforming loans | | | 2,224 | | | | 5,109 | | | | 4,331 | | | | 5,616 | | | | 6,763 | |
| Commercial real estate and multi-family residential loans | | | | | | | | | | | | | | | | | | | | |
| Past due accruing loans (90 days or more) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Nonaccrual loans(1) | | | 3,723 | | | | 7,174 | | | | 7,204 | | | | 15,459 | | | | 22,346 | |
| Subtotal nonperforming loans | | | 3,723 | | | | 7,174 | | | | 7,204 | | | | 15,459 | | | | 22,346 | |
| Agri-business and agricultural loans | | | | | | | | | | | | | | | | | | | | |
| Past due accruing loans (90 days or more) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Nonaccrual loans(1) | | | 283 | | | | 471 | | | | 486 | | | | 1,114 | | | | 798 | |
| Subtotal nonperforming loans | | | 283 | | | | 471 | | | | 486 | | | | 1,114 | | | | 798 | |
| Other commercial loans | | | | | | | | | | | | | | | | | | | | |
| Past due accruing loans (90 days or more) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Nonaccrual loans(1) | | | 0 | | | | 0 | | | | 30 | | | | 0 | | | | 0 | |
| Subtotal nonperforming loans | | | 0 | | | | 0 | | | | 30 | | | | 0 | | | | 0 | |
| Consumer 1-4 family mortgage loans | | | | | | | | | | | | | | | | | | | | |
| Past due accruing loans (90 days or more) | | | 53 | | | | 0 | | | | 29 | | | | 46 | | | | 0 | |
| Nonaccrual loans(1) | | | 409 | | | | 301 | | | | 1,576 | | | | 1,605 | | | | 895 | |
| Subtotal nonperforming loans | | | 462 | | | | 301 | | | | 1,605 | | | | 1,651 | | | | 895 | |
| Other consumer loans | | | | | | | | | | | | | | | | | | | | |
| Past due accruing loans (90 days or more) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Nonaccrual loans(1) | | | 0 | | | | 0 | | | | 51 | | | | 105 | | | | 77 | |
| Subtotal nonperforming loans | | | 0 | | | | 0 | | | | 51 | | | | 105 | | | | 77 | |
| Total nonperforming loans | | $ | 6,692 | | | $ | 13,055 | | | $ | 13,707 | | | $ | 23,945 | | | $ | 30,879 | |
(1) Includes nonaccrual troubled debt restructured loans.
Nonperforming assets of the Company include nonperforming loans (as indicated above), nonaccrual investments and other real estate owned and repossessions, the total of which amounted to $6.9$7.6 million and $13.3$9.5 million at December 31, 20162018 and 2015.2017, respectively. As of December 31, 2016,2018, management believed that there were no significant foreseeable losses relating to nonperforming assets, except as discussed below.
All loansLoans for which the borrower appears to be unable or unwilling to repay its debt in full or on time and the collateral is insufficient to cover all principal and accrued interest, will be reclassified as nonperforming loans to the extent they are unsecured, on or before the date when the loan becomes 90 days delinquent, with the exception of small dollar other consumer loans which are not placed on nonaccrual status since these loans are charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued, all unpaid accrued interest is reversed and interest income is subsequently recorded only to the extent cash payments are received. Accrual status is resumed when all contractually due payments are brought current and future payments are reasonably assured. Interest not recorded on nonaccrual loans is referenced in Note 4 in Item 8 below.
Nonaccrual loans were 0.19% of total loans, at year end 20162018 versus 0.42%0.25% of total loans, at year end 2015.2017. There were 46 relationships44 loans totaling $20.7$26.7 million classified as impaired as of December 31, 20162018 versus 47 relationships33 loans totaling $20.6$13.9 million at the end of 2015.2017. The decreaseincrease in nonaccrualimpaired loans during 20162018 resulted primarily from the payoff of a $2.0 million nonaccrual commercial credit. In addition, a $2.9 million commercial credit was returnedloan relationships categorized as substandard which had further downward migration in 2018 to accruing status due to improved performance.impaired status. Total nonperforming loans were $6.7$7.3 million, or 0.19% of total loans, at year end 20162018 versus $13.1$9.4 million, or 0.42%0.25% of total loans, at the end of 2015.2017.
A loan is impaired when full payment under the original loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature not in nonaccrual or troubled debt restructured status such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flow or at the fair value of collateral if repayment is expected solely from the collateral.
As of December 31, 20162018 and 2015,2017, all non-homogenous loans on nonaccrual status were also on impaired status. There were $20.7$26.7 million and $20.6$13.9 million of loans classified as impaired as of December 31, 20162018 and 2015.2017.
Loans renegotiated as troubled debt restructurings are those loans for which either the contractual interest rate has been reduced below market rates and/or other concessions are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan.
As of December 31, 2016,2018, there were 36 borrowers with40 loans totaling $16.0$12.4 million renegotiated as troubled debt restructurings and $2.6of which $7.2 million were modified in 2016.2018. Of these loans, $5.6$4.4 million were included in nonaccrual loans in the previous table and the remaining $10.4$8.0 million were performing under their modified terms. As of December 31, 2015,2017, there were 33 borrowers with42 loans totaling $17.2$10.6 million renegotiated as troubled debt restructurings and $2.3of which $3.9 million were modified in 2015.2017. Of these loans, $10.9$7.7 million were included in nonaccrual loans in the previous table and the remaining $6.3$2.9 million of troubled debt restructured loans were performing under their modified terms at December 31, 2015.terms. The Company has no commitments to lend additional funds to any of the borrowers.
The following is a summary of the loan loss experience for the years ended December 31, 2018, 2017, 2016, 2015 2014, 2013 and 2012.2014.
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | |
| Amount of loans outstanding, December 31, | | $ | 3,470,927 | | | $ | 3,080,929 | | | $ | 2,762,320 | | | $ | 2,535,098 | | | $ | 2,257,520 | | |
| Amount of loans outstanding, net of deferred fees, December 31, | | $3,914,745 | | $3,818,459 | | $3,470,927 | | $3,080,929 | | $2,762,320 | |
| Average daily loans outstanding during the year ended December 31, | | $ | 3,225,635 | | | $ | 2,885,568 | | | $ | 2,650,678 | | | $ | 2,343,422 | | | $ | 2,216,131 | | $3,843,912 | | $3,610,908 | | $3,225,635 | | $2,885,568 | | $2,650,678 | |
| Allowance for loan losses, January 1, | | $ | 43,610 | | | $ | 46,262 | | | $ | 48,797 | | | $ | 51,445 | | | $ | 53,400 | | $47,121 | | $43,718 | | $43,610 | | $46,262 | | $48,797 | |
| Loans charged-off: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans | | | 801 | | | | 1,320 | | | | 1,441 | | | | 1,062 | | | | 3,069 | | 5,215 | | 842 | | 801 | | 1,320 | | 1,441 | |
| Commercial real estate and multi-family residential loans | | | 566 | | | | 1,114 | | | | 2,560 | | | | 2,069 | | | | 1,108 | | 491 | | 406 | | 566 | | 1,114 | | 2,560 | |
| Agri-business and agricultural loans | | | 0 | | | | 0 | | | | 0 | | | | 200 | | | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Other commercial loans | | | 0 | | | | 122 | | | | 0 | | | | 0 | | | | 0 | | 0 | | 0 | | 0 | | 122 | | 0 | |
| Consumer 1-4 family mortgage loans | | | 478 | | | | 362 | | | | 439 | | | | 382 | | | | 1,340 | | 48 | | 53 | | 478 | | 362 | | 439 | |
| Other consumer loans | | | 210 | | | | 255 | | | | 245 | | | | 339 | | | | 405 | | 357 | | 259 | | 210 | | 255 | | 245 | |
| Total loans charged-off | | | 2,055 | | | | 3,173 | | | | 4,685 | | | | 4,052 | | | | 5,922 | | 6,111 | | 1,560 | | 2,055 | | 3,173 | | 4,685 | |
| Recoveries of loans previously charged-off: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans | | | 461 | | | | 216 | | | | 914 | | | | 513 | | | | 767 | | 752 | | 1,053 | | 461 | | 216 | | 914 | |
| Commercial real estate and multi-family residential loans | | | 336 | | | | 107 | | | | 928 | | | | 377 | | | | 203 | | 30 | | 671 | | 336 | | 107 | | 928 | |
| Agri-business and agricultural loans | | | 19 | | | | 20 | | | | 20 | | | | 212 | | | | 186 | | 42 | | 23 | | 19 | | 20 | | 20 | |
| Other commercial loans | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Consumer 1-4 family mortgage loans | | | 107 | | | | 52 | | | | 153 | | | | 126 | | | | 148 | | 108 | | 99 | | 107 | | 52 | | 153 | |
| Other consumer loans | | | 90 | | | | 126 | | | | 135 | | | | 176 | | | | 111 | | 111 | | 117 | | 90 | | 126 | | 135 | |
| Total recoveries | | | 1,013 | | | | 521 | | | | 2,150 | | | | 1,404 | | | | 1,415 | | 1,043 | | 1,963 | | 1,013 | | 521 | | 2,150 | |
| Net loans charged-off | | | 1,042 | | | | 2,652 | | | | 2,535 | | | | 2,648 | | | | 4,504 | | 5,068 | | (403) | | 1,042 | | 2,652 | | 2,535 | |
| Provision for loan loss charged to expense | | | 1,150 | | | | 0 | | | | 0 | | | | 0 | | | | 2,549 | | 6,400 | | 3,000 | | 1,150 | | 0 | | 0 | |
| Balance, December 31, | | $ | 43,718 | | | $ | 43,610 | | | $ | 46,262 | | | $ | 48,797 | | | $ | 51,445 | | $48,453 | | $47,121 | | $43,718 | | $43,610 | | $46,262 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ratio of net charge-offs during the period to average daily loans outstanding: | Ratio of net charge-offs during the period to average daily loans outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans | | | 0.01 | % | | | 0.04 | % | | | 0.02 | % | | | 0.02 | % | | | 0.11 | % | 0.11 | % | 0.00 | % | 0.01 | % | 0.04 | % | 0.02 | % |
| Commercial real estate and multi-family residential loans | | | 0.01 | | | | 0.03 | | | | 0.06 | | | | 0.07 | | | | 0.04 | | 0.01 | | (0.01) | | 0.01 | | 0.03 | | 0.06 | |
| Agri-business and agricultural loans | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | (0.01 | ) | 0.00 | | 0.00 | | 0.00 | | 0.00 | | 0.00 | |
| Other commercial loans | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | | 0.00 | | 0.00 | | 0.00 | | 0.00 | | 0.00 | |
| Consumer 1-4 family mortgage loans | | | 0.01 | | | | 0.01 | | | | 0.01 | | | | 0.01 | | | | 0.05 | | (0.00) | | 0.00 | | 0.01 | | 0.01 | | 0.01 | |
| Other consumer loans | | | 0.00 | | | | 0.01 | | | | 0.01 | | | | 0.01 | | | | 0.01 | | 0.01 | | 0.00 | | 0.00 | | 0.01 | | 0.01 | |
| Total ratio of net charge-offs | | | 0.03 | % | | | 0.09 | % | | | 0.10 | % | | | 0.11 | % | | | 0.20 | % | 0.13 | % | (0.01) | % | 0.03 | % | 0.09 | % | 0.10 | % |
| Ratio of allowance for loan losses to nonperforming loans | | | 653.29 | % | | | 334.05 | % | | | 337.51 | % | | | 203.79 | % | | | 166.60 | % | 667.40 | % | 500.91 | % | 653.29 | % | 334.05 | % | 337.51 | % |
The following is a summary of the allocation for loan losses as of December 31, 2018, 2017, 2016, 2015 2014, 2013 and 2012.2014.
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Allocated allowance for loan losses: | | | | | | | | | | | | | | | |
| Commercial and industrial loans | | $ | 20,272 | | | $ | 21,564 | | | $ | 22,785 | | | $ | 21,005 | | | $ | 22,342 | |
| Commercial real estate and multi-family residential loans | | | 13,452 | | | | 12,473 | | | | 14,153 | | | | 18,556 | | | | 20,812 | |
| Agri-business and agricultural loans | | | 3,532 | | | | 2,445 | | | | 1,790 | | | | 1,682 | | | | 1,403 | |
| Other commercial loans | | | 461 | | | | 574 | | | | 276 | | | | 391 | | | | 240 | |
| Consumer 1-4 family mortgage loans | | | 2,827 | | | | 3,395 | | | | 3,459 | | | | 3,046 | | | | 2,682 | |
| Other consumer loans | | | 387 | | | | 319 | | | | 483 | | | | 608 | | | | 609 | |
| Total allocated allowance for loan losses | | | 40,931 | | | | 40,770 | | | | 42,946 | | | | 45,288 | | | | 48,088 | |
| Unallocated allowance for loan losses | | | 2,787 | | | | 2,840 | | | | 3,316 | | | | 3,509 | | | | 3,357 | |
| Total allowance for loan losses | | $ | 43,718 | | | $ | 43,610 | | | $ | 46,262 | | | $ | 48,797 | | | $ | 51,445 | |
| | | | | | | | | | |
| (dollars in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Allocated allowance for loan losses: | | | | | | | | | |
| Commercial and industrial loans | $22,518 | | $21,097 | | $20,272 | | $21,564 | | $22,785 |
| Commercial real estate and multi-family residential loans | 15,393 | | 14,714 | | 13,452 | | 12,473 | | 14,153 |
| Agri-business and agricultural loans | 4,305 | | 4,920 | | 3,532 | | 2,445 | | 1,790 |
| Other commercial loans | 368 | | 577 | | 461 | | 574 | | 276 |
| Consumer 1-4 family mortgage loans | 2,292 | | 2,768 | | 2,827 | | 3,395 | | 3,459 |
| Other consumer loans | 283 | | 379 | | 387 | | 319 | | 483 |
| Total allocated allowance for loan losses | 45,159 | | 44,455 | | 40,931 | | 40,770 | | 42,946 |
| Unallocated allowance for loan losses | 3,294 | | 2,666 | | 2,787 | | 2,840 | | 3,316 |
| Total allowance for loan losses | $48,453 | | $47,121 | | $43,718 | | $43,610 | | $46,262 |
At December 31, 2016,2018, the allowance for loan losses was 1.26%1.24% of total loans outstanding, versus 1.42%1.23% of total loans outstanding at December 31, 2015.2017. Management believes the allowance for loan losses is at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions do not remain stabilized, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the provision for loan losses. The process of identifying probable incurred credit losses is a subjective process. Therefore, the Company maintains a general allowance to cover probable incurred credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the loan loss reserve includes the considerations below.
Loans are charged against the allowance for loan losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other probable incurred losses inherent in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower'sborrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. An appropriate level of general allowance is determined after considering the following factors:
application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management'smanagement’s close attention. The Company'sCompany’s policy is to establish a specific allowance for loan losses for any assets where management has identified conditions or circumstances that indicate an asset is impaired. If an asset or portion thereof is classified as loss, the Company'sCompany’s policy is to either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.
At December 31, 2016,2018, on the basis of management'smanagement’s review of the loan portfolio, the Company had 8491 credits totaling $147.3$186.6 million on the classified loan list versus 8495 credits totaling $141.2$171.7 million on December 31, 2015.2017. As of December 31, 2016,2018, the Company had $74.2$101.4 million of assets classified as Special Mention, $72.4$85.2 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $105.4$93.2 million, $35.3$78.5 million, $0 and $0, respectively at December 31, 2015.2017.
Included in the classified loan amounts for December 31, 2016 above were the following troubled debt restructured loans: 15 mortgage loans totaling $1.1 million with total allocations of $240,000, and 30 commercial loans totaling $14.9 million with total allocations of $2.7 million. Included in the classified loan amounts for December 31, 20152018 above were the following troubled debt restructured loans: 17 mortgage loans totaling $1.4$1.2 million with total allocations of $272,000,$194,000, and 23 commercial loans totaling $13.9$11.2 million with total allocations of $3.5 million. Included in the classified loan amounts for December 31, 2017 above were the following troubled debt restructured loans: 17 mortgage loans totaling $1.2 million with total allocations of $210,000, and 25 commercial loans totaling $9.5 million with total allocations of $2.1 million.
Allowance estimates are developed by management taking into account actual loss experience, adjusted for current economic conditions. Allowance estimates are considered a prudent measurement of the risk in the Company'sCompany’s loan portfolio and are applied to individual loans based on loan type. In accordance with current accounting guidance, the allowance is provided for losses that have been incurred as of the balance sheet date and is based on past events and current economic conditions and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. For a more thorough discussion of the allowance for loan losses methodology see the Critical Accounting Policies section of this Item 7.
The allowance for loan losses increased 0.2%2.8%, or $108,000,$1.3 million, from $43.6$47.1 million at December 31, 20152017 to $43.7$48.5 million at December 31, 2016.2018. Pooled loan allocations decreased $347,000$6.1 million from $40.0$41.2 million at December 31, 20152017 to $39.6$35.1 million at December 31, 2016,2018, which was due to management's viewa migration of current credit quality andcommercial loans from substandard to impaired in the current economic environment. Impairedloan portfolio. This migration resulted in impaired loan allocations increased $455,000increasing $6.8 million from $3.7$3.2 million at December 31, 20152017 to $4.1$10.0 million at December 31, 2016.2018. This increase in specific allocations on impaired loans was primarily due to slightly higher levels of classifiedimpaired loans as well as higher allocationswith similar reserve levels at 20-25% of impaired loans, which is determined based on specific classified loans.collateral shortfalls of each individual loan. The unallocated component of the allowance for loan losses was $2.8$3.3 million at both December 31, 20162018, which was similar to $2.7 million reported at December 31, 2017, and 2015, unchangedincreased primarily due to stabilizationgrowth in the current economic conditions and the general improvement in our borrowers' performance and future prospects.loan portfolio. While general trends in credit quality were stable or favorable, the Company believes that the unallocated component is appropriate given the uncertainty that exists regarding near term economic conditions, including the risk of an economic downturn.
The Company has experienced growth in total loans over the last threeseveral years with growth of $935.8$96.3 million, or 36.9%.2.5%, from December 31, 2017 to December 31, 2018 and $347.5 million, or 10.0%, from December 31, 2016 to December 31, 2017. The concentration of this loan growth was in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining loan loss allocations. Management believes that it is prudent to continue to provide for loan losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions.
Economic conditions in the Company'sCompany’s markets have generally improved and stabilized, and management is cautiously optimistic that the recovery is positively impacting its borrowers. While the recovery is not robust, commercialare stable. Commercial real estate activity and manufacturing growth is occurring.continuing to occur in the Company’s market area. The Company'sCompany’s continued growth strategy promotes diversification among industries, as well as continued focus on enforcement of a strong credit environment and an aggressive position in loan work-out situations. The Company believes that historical industry-specific issues in the Company's markets have improved and continue to be somewhat mitigated by its overall expansion strategy, the economic environment impacting its entire geographic footprint will continue to present challenges.
Liquidity Risk
Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. Liquidity is monitored and closely managed by the ALCO Committee.
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. The liquidity structure is expressly detailed in the Company'sCompany’s Contingency Funding Plan, which is discussed below. The Company relies on a number of different sources in order to meet these potential liquidity demands. The primary sources are increases in deposit accounts and cash flows from loan payments and the securities
portfolio. The cash flow from the securities portfolio is expected to provide approximately $55$62.8 million of potential contingent funding in 2017.2019.
The Company has approval of $1.680$1.863 billion in secondary funding sources available as of December 31, 2016,2018, of which $270.6$334.9 million was utilized. The Company had $305.0$325.0 million of availability in federal funds lines with eleventwelve correspondent banks, none of which was drawn on as of December 31, 2016.2018. The Company has Board of Directors approval to borrow up to $800.0 million at the FHLB, but, given the Company'sCompany’s current collateral structure and outstanding borrowings as of December 31, 2016,2018, the Company could have only borrowed up to $45.2$85.6 million under this authority based on utilization of $180.0$170.0 million at December 31, 2016.2018. The Company also has additional collateral that could be pledged to the FHLB of $190.4$204.1 million as of December 31, 20162018 to generate additional liquidity. Further, the Company had available capacity at the Federal Reserve Bank of Chicago of up to $305.6$286.5 million given its current collateral structure at the Federal Reserve Bank discount window program and the terms of these facilities at December 31, 2016.2018. The Company also has established relationships in the brokered time deposit and brokered money market sectors, as well as the CDARS One-Way Buy program, to access these funds when desired with settlement of funds in one to two weeks'weeks’ time. Additionally, during 2018 the Bank become a member of the American Financial Exchange (AFX) where overnight fed funds purchased can be obtained from other banks on the Exchange that have approved the Bank for an unsecured, overnight line. These funds are only available if the approving banks have an ‘offer’ out to sell that day. As of December 31, 2018, the total amount approved for Lake City Bank via AFX banks was $119.0 million and none was outstanding at year end.
The Company had all of its securities in the available for sale portfolio at December 31, 2016,2018, allowing the Company maximum flexibility to sell securities to meet funding demands. Management believes the majority of the securities in the available for sale portfolio are of high quality and marketable. Approximately 71%63% of this portfolio is comprised of U.S. government agency securities or mortgage-backed securities directly or indirectly backed by the U.S. government. In addition, the Company has historically sold the majority of its originated mortgage loans on the secondary market to reduce interest rate risk and to create an additional source of funding.
The Company has a formalized Contingency Funding Plan ("CFP"(“CFP”). The Board of Directors and management recognize the importance of liquidity during times of normal operations and in times of stress. The CFP was developed to ensure that the multiple liquidity sources available to the Company are readily available. The CFP specifically considers liquidity at the Bank and the Company level. The CFP identifies the potential funding sources at the Bank level, which includes the FHLB, the Federal Reserve Bank, brokered deposits,
certificates of deposit available from CDARS, repurchase agreements and Fed Funds. The CFP also addresses the Bank'sBank’s ability to liquidate its securities portfolio. The CFP at the Holding Company level establishes a minimum cash coverage limit of 2 times annual operating expenses; it also gives consideration to the possibility of establishing a holding company committed line of credit as well as the ability to transfer securities from the investment subsidiary of the Bank to the Company.
Further, the CFP identifies CFP team members and expressly details their respective roles. Potential risk scenarios are identified and the plan includes multiple scenarios, including short-term and long-term funding crisis situations. Under the long-term funding crisis, two additional scenarios are identified: a moderate risk scenario and a highly stressed scenario. The CFP details the responsibilities and the actions to be taken by the CFP team under each scenario. Quarterly reports to management and the Board of Directors under the CFP include an early warning indicator matrix and pro forma cash flows for the various scenarios.
The following table discloses information on the maturity of the Company'sCompany’s contractual long-term obligations. Certificates of deposit listed are those with original maturities of 1 year or moreobligations as of December 31, 2016.2018.
| | | Payments Due by Period | | Payments Due by Period |
| | | | | | One year | | | | | | | | | After 5 | | | | One year | | | | | | After 5 |
(dollars in thousands) | | Total | | | or less | | | 1-3 years | | | 3-5 years | | | years | | Total | | or less | | 1-3 years | | 3-5 years | | years |
| Certificates of deposit | | $ | 429,351 | | | $ | 102,188 | | | $ | 248,812 | | | $ | 78,330 | | | $ | 21 | | |
| Long-term debt | | | 32 | | | | 0 | | | | 32 | | | | 0 | | | | 0 | | |
| Operating leases | | | 4,735 | | | | 363 | | | | 697 | | | | 704 | | | | 2,971 | | $5,604 | | $553 | | $1,153 | | $1,106 | | $2,792 |
| Pension and SERP plans | | | 3,066 | | | | 330 | | | | 676 | | | | 666 | | | | 1,394 | | 2,797 | | 356 | | 626 | | 594 | | 1,221 |
| Subordinated debentures | | | 30,928 | | | | 0 | | | | 0 | | | | 0 | | | | 30,928 | | 30,928 | | 0 | | 0 | | 0 | | 30,928 |
| Total contractual long-term cash obligations | | $ | 468,112 | | | $ | 102,881 | | | $ | 250,217 | | | $ | 79,700 | | | $ | 35,314 | | $39,329 | | $909 | | $1,779 | | $1,700 | | $34,941 |
During the normal course of business, the Company becomes a party to financial instruments with off‑balance sheet risk in order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open‑ended revolving lines of credit. The Company follows the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as is followed for those loans that are recorded in its financial statements.
The Company'sCompany’s exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments. Off-balance sheet transactions are more fully discussed in Note 18 in the consolidated financial statements.– Commitments, Off-Balance Sheet Risks and Contingencies.
The following table discloses information on the maturity of the Company'sCompany’s commitments.
| | | Amount of Commitment Expiration Per Period | | Amount of Commitment Expiration Per Period |
| | | Total | | | | | | | | Total | | | | |
| | | Amount | | | One year | | | Over one | | Amount | | One year | | Over one |
(dollars in thousands) | | Committed | | | or less | | | year | | Committed | | or less | | year |
| Unused loan commitments | | $ | 1,419,794 | | | $ | 888,657 | | | $ | 531,137 | | $1,656,388 | | $1,012,238 | | $644,150 |
| Commercial letters of credit | | | 93 | | | | 93 | | | | 0 | | 3,245 | | 3,245 | | 0 |
| Standby letters of credit | | | 54,749 | | | | 31,483 | | | | 23,266 | | 81,512 | | 77,267 | | 4,245 |
| Total commitments and letters of credit | | $ | 1,474,636 | | | $ | 920,233 | | | $ | 554,403 | | $1,741,145 | | $1,092,750 | | $648,395 |
Interest Rate Risk
Interest rate risk is the risk that the estimated fair value of the Company'sCompany’s assets, liabilities and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that net income will be significantly reduced by interest rate changes.
Interest rate risk represents the Company'sCompany’s primary market risk exposure. The Company does not have material exposure to foreign currency exchange risk and does not maintain a trading portfolio. The Corporate Risk Committee of the Board of Directors annually reviews and approves the ALCO policy and the Derivatives and Hedging policy used to manage interest rate risk. These policies set guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income, but it does not necessarily indicate the effect on future net interest income. Given the Company'sCompany’s mix of interest bearing liabilities and interest earning assets on December 31, 20162018 and using changes in the interest rate environment over a one-year period, the net interest margin could be expected to decline in a falling interest rate environment and increase in a rising interest rate environment. Earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve Board. For the majority of 2016,
During 2018 the Federal Reserve Board'sBoard’s Federal Open Market Committee ("FOMC"(“FOMC”) keptraised interest rates by 25 basis points on four different occasions: March, June, September and December. The December increase ended the year with the target federal funds rate at a range of .25%2.25% to .50%. At their2.50% and marked the ninth rate increase overall since liftoff in December 2016 meeting, the2015. The FOMC raised interest rates for the first time sinceindicated in December 2015 when they unanimously votedthat “the labor market has continued to set the new target federal funds ratestrengthen and economic activity has been rising at a rangestrong rate”, while further stating that “household spending has continued to grow strongly, while growth of .50% to .75% (a 25 basis point increase). The FOMC cited 'realized and expected labor market conditions and inflation'business fixed investment has moderated from its rapid pace earlier in increasing its benchmark rate a quarter percentage point.the year”. The updated economic projections also released at thisthe December meeting now project threetwo rate hikes in 2017, as opposed to just two rate hikes projected with2019 and one final hike in 2020. Additionally, the September 2016 projections. There was no change in the inflationlonger run Fed median forecast for 2017 or 2018. The FOMC also announced it is maintaining its policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities, and of rolling over maturing Treasury securities at auction, anticipating it will do so until normalization of the federal funds rate is well underway.was decreased by 2 basis points to 2.80%. The Company'sCompany’s yield on earning assets increased 446 basis points during 2016.2018. Contributing to this increase was the full-year impact of the December 2015four 25 basis point FOMC rate increase,increases during the year as well as investment prepayment penalty income received in the first quarterasset sensitive balance sheet for the Company. The commercial loan portfolio represents 88% of 2016.the total loan portfolio. Approximately 65% of the commercial loan portfolio are variable rate loans which are primarily indexed to prime, 30 day LIBOR and FHLBI indices. The rate paid on deposit accounts and purchased funds increased 536 basis pointpoints for 20162018 mainly due to increased rates paid on public fund accounts, including transactional accounts and time deposit accounts, as these accounts are typically higher priced and more sensitive to interest rates, as well as Libor basedLIBOR-based funding in the form of subordinated debentures. debentures and increases to the rates paid on jumbo time deposits (non-public) due mainly to product pricing decisions driven by liquidity needs and competitive pricing pressure.
The combined result of the increase in the yield on earning assets and the increase in rates paid on deposits and purchased funds led to a decreasean increase in the net interest margin from 3.19%3.33% for 20152017 to 3.18%3.43% for 2016.2018. Future changes in the net interest margin will be dependent upon multiple factors including further actions by the FOMC during 20172019 in response to economic conditions, the results of the Trumpcurrent administration changes to economic policy and laws, competitive pressures in the various markets served, and changes in the structure of the balance sheet as a result of changes in customer demands for products and services. In general, we expect loans to reprice quicker than deposits in a rising rate environment as quantified in the sensitivity to market rates table in Item 7A..
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index ("CPI"(“CPI”) coincides with changes in interest rates. The price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by the Company. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the reverse situation may occur.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company'sCompany’s primary market risk exposure is interest rate risk. The Company does not have a material exposure to foreign currency exchange rate risk and does not maintain a trading portfolio.
The following table provides information regarding the Company'sCompany’s financial instruments that are sensitive to changes in interest rates. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities, as well as the Company'sCompany’s assumptions relative to the impact of interest-rate fluctuations on the prepayment of certain commercial, residential and home equity loans and mortgage-backed securities. Core deposits such as noninterest bearing deposits, interest-bearing checking, savings, and money market deposits and securities sold under agreements to repurchase that have no contractual maturity, are shown based on management'smanagement’s judgment and historical experience that indicates some portion of the balances are retained over time. Weighted-average variable rates are based upon rates existing at the reporting date.
| | | 2016 | | 2018 |
| | | Principal/Notional Amount Maturing in: | | Principal/Notional Amount Maturing in: |
| | | | | | | | | | | | | | | | | | | | | | | | Fair | | | | | | | | | | | | | | | | Fair |
| | | | | | | | | | | | | | | | | | | | | | | | Value | | | | | | | | | | | | | | | | Value |
(dollars in thousands) | | Year 1 | | | Year 2 | | | Year 3 | | | Year 4 | | | Year 5 | | | Thereafter | | | Total | | | 12/31/2016 | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter | | Total | | 12/31/2018 |
| Rate sensitive assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed interest rate loans | | $ | 516,657 | | | $ | 291,441 | | | $ | 147,290 | | | $ | 72,626 | | | $ | 33,206 | | | $ | 40,494 | | | $ | 1,101,714 | | | $ | 1,099,773 | | $540,165 | | $374,350 | | $231,403 | | $127,303 | | $59,435 | | $69,240 | | $1,401,896 | | $1,362,854 |
| Average interest rate | | | 4.36 | % | | | 4.36 | % | | | 4.24 | % | | | 4.22 | % | | | 4.18 | % | | | 4.27 | % | | | | | | | | | 4.47% | | 4.54% | | 4.53% | | 4.63% | | 4.69% | | 4.60% | | | | |
| Variable interest rate loans | | $ | 1,244,882 | | | $ | 342,797 | | | $ | 206,493 | | | $ | 142,791 | | | $ | 94,768 | | | $ | 337,482 | | | $ | 2,369,213 | | | $ | 2,355,066 | | $1,344,600 | | $339,961 | | $190,918 | | $132,997 | | $160,863 | | $343,510 | | $2,512,849 | | $2,480,842 |
| Average interest rate | | | 3.55 | % | | | 3.45 | % | | | 3.55 | % | | | 3.44 | % | | | 3.75 | % | | | 3.91 | % | | | | | | | | | 5.16% | | 5.11% | | 5.00% | | 5.08% | | 5.17% | | 5.30% | | | | |
| Total loans | | $ | 1,761,539 | | | $ | 634,238 | | | $ | 353,783 | | | $ | 215,417 | | | $ | 127,974 | | | $ | 377,976 | | | $ | 3,470,927 | | | $ | 3,454,839 | | $1,884,765 | | $714,311 | | $422,321 | | $260,300 | | $220,298 | | $412,750 | | $3,914,745 | | $3,843,696 |
| Average interest rate | | | 3.79 | % | | | 3.87 | % | | | 3.83 | % | | | 3.70 | % | | | 3.86 | % | | | 3.95 | % | | | | | | | | | 4.96% | | 4.81% | | 4.74% | | 4.86% | | 5.04% | | 5.18% | | | | |
| Fixed interest rate securities | | $ | 90,530 | | | $ | 64,846 | | | $ | 59,249 | | | $ | 50,968 | | | $ | 50,854 | | | $ | 186,021 | | | $ | 502,468 | | | $ | 501,267 | | $86,832 | | $68,118 | | $69,231 | | $59,361 | | $45,675 | | $261,009 | | $590,226 | | $584,142 |
| Average interest rate | | | 2.95 | % | | | 2.69 | % | | | 2.61 | % | | | 2.48 | % | | | 2.45 | % | | | 2.72 | % | | | | | | | | | 3.04% | | 2.72% | | 2.47% | | 2.68% | | 2.80% | | 3.06% | | | | |
| Variable interest rate securities | | $ | 590 | | | $ | 506 | | | $ | 396 | | | $ | 309 | | | $ | 242 | | | $ | 816 | | | $ | 2,859 | | | $ | 2,924 | | $369 | | $263 | | $197 | | $148 | | $110 | | $308 | | $1,395 | | $1,407 |
| Average interest rate | | | 1.58 | % | | | 1.57 | % | | | 1.57 | % | | | 1.57 | % | | | 1.57 | % | | | 1.57 | % | | | | | | | | | 5.53% | | 5.74% | | 5.74% | | 5.74% | | 5.74% | | 5.74% | | | | |
| Other interest-bearing assets | | $ | 29,637 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 29,637 | | | $ | 29,637 | | $24,632 | | $0 | | $0 | | $0 | | $0 | | $0 | | $24,632 | | $24,632 |
| Average interest rate | | | 0.38 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | | | | | | | 2.10% | | 0.00% | | 0.00% | | 0.00% | | 0.00% | | 0.00% | | | | |
| Total earning assets | | $ | 1,882,296 | | | $ | 699,590 | | | $ | 413,428 | | | $ | 266,694 | | | $ | 179,070 | | | $ | 564,813 | | | $ | 4,005,891 | | | $ | 3,988,667 | | $1,996,598 | | $782,692 | | $491,749 | | $319,809 | | $266,083 | | $674,067 | | $4,530,998 | | $4,453,877 |
| Average interest rate | | | 3.70 | % | | | 3.76 | % | | | 3.66 | % | | | 3.46 | % | | | 3.46 | % | | | 3.54 | % | | | | | | | | | 4.84% | | 4.63% | | 4.42% | | 4.46% | | 4.66% | | 4.36% | | | | |
| Rate sensitive liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest bearing checking | | $ | 26,468 | | | $ | 3,731 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 789,604 | | | $ | 819,803 | | | $ | 819,803 | | $14,901 | | $0 | | $0 | | $2,330 | | $0 | | $929,607 | | $946,838 | | $946,838 |
| Average interest rate | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | | | | | | | 0.00% | | 0.00% | | 0.00% | | 0.00% | | 0.00% | | 0.00% | | | | |
| Savings & interest bearing checking | | $ | 123,544 | | | $ | 47,778 | | | $ | 34,374 | | | $ | 294,810 | | | $ | 28,006 | | | $ | 1,065,779 | | | $ | 1,594,291 | | | $ | 1,594,291 | | $125,104 | | $69,974 | | $51,119 | | $311,093 | | $35,568 | | $1,084,615 | | $1,677,473 | | $1,677,473 |
| Average interest rate | | | 0.45 | % | | | 0.29 | % | | | 0.30 | % | | | 0.82 | % | | | 0.28 | % | | | 0.40 | % | | | | | | | | | 0.97% | | 0.56% | | 0.58% | | 2.25% | | 0.61% | | 1.21% | | | | |
| Time deposits | | $ | 812,924 | | | $ | 197,626 | | | $ | 64,068 | | | $ | 40,420 | | | $ | 48,299 | | | $ | 481 | | | $ | 1,163,818 | | | $ | 1,169,905 | | $933,323 | | $383,254 | | $58,944 | | $27,978 | | $15,950 | | $305 | | $1,419,754 | | $1,424,553 |
| Average interest rate | | | 0.98 | % | | | 1.28 | % | | | 1.64 | % | | | 1.76 | % | | | 1.96 | % | | | 1.10 | % | | | | | | | | | 2.10% | | 2.05% | | 1.95% | | 2.14% | | 2.81% | | 1.36% | | | | |
| Total deposits | | $ | 962,936 | | | $ | 249,135 | | | $ | 98,442 | | | $ | 335,230 | | | $ | 76,305 | | | $ | 1,855,864 | | | $ | 3,577,912 | | | $ | 3,583,999 | | $1,073,328 | | $453,228 | | $110,063 | | $341,401 | | $51,518 | | $2,014,527 | | $4,044,065 | | $4,048,864 |
| Average interest rate | | | 0.89 | % | | | 1.06 | % | | | 1.16 | % | | | 0.93 | % | | | 1.33 | % | | | 0.23 | % | | | | | | | | | 1.94% | | 1.82% | | 1.31% | | 2.22% | | 1.28% | | 0.65% | | | | |
| Fixed interest rate borrowings | | $ | 0 | | | $ | 32 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 32 | | | $ | 34 | | $170,000 | | $0 | | $0 | | $0 | | $0 | | $0 | | $170,000 | | $169,996 |
| Average interest rate | | | 0.00 | % | | | 6.23 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | | | | | | | 2.52% | | 0.00% | | 0.00% | | 0.00% | | 0.00% | | 0.00% | | | | |
| Variable interest rate borrowings | | $ | 180,000 | | | $ | 7,292 | | | $ | 3,278 | | | $ | 39,475 | | | $ | 0 | | | $ | 30,928 | | | $ | 260,973 | | | $ | 261,244 | | $5,379 | | $10,646 | | $6,679 | | $52,851 | | $0 | | $30,928 | | $106,483 | | $106,750 |
| Average interest rate | | | 0.91 | % | | | 0.33 | % | | | 0.33 | % | | | 0.33 | % | | | 0.00 | % | | | 4.08 | % | | | | | | | | | 0.80% | | 0.80% | | 0.80% | | 0.80% | | 0.00% | | 5.86% | | | | |
| Total funds | | $ | 1,142,936 | | | $ | 256,459 | | | $ | 101,720 | | | $ | 374,705 | | | $ | 76,305 | | | $ | 1,886,792 | | | $ | 3,838,917 | | | $ | 3,845,277 | | $1,248,707 | | $463,874 | | $116,742 | | $394,252 | | $51,518 | | $2,045,455 | | $4,320,548 | | $4,325,610 |
| Average interest rate | | | 0.89 | % | | | 1.04 | % | | | 1.13 | % | | | 0.86 | % | | | 1.33 | % | | | 0.29 | % | | | | | | | | | 1.67% | | 1.80% | | 1.28% | | 2.03% | | 1.28% | | 0.73% | | | | |
| Cumulative rate sensitivity gap | | $747,891 | | $318,818 | | $375,007 | | $(74,443) | | $214,565 | | $(1,371,388) | | | | |
| Cumulative rate sensitivity gap ratio | | $747,891 | | $1,066,709 | | $1,441,716 | | $1,367,273 | | $1,581,838 | | $210,450 | | | | |
| at December 31, 2018 | | 159.9% | | 168.7% | | 421.2% | | 81.1% | | 516.5% | | 33.0% | | | | |
| at December 31, 2017 | | 157.9% | | 189.8% | | 353.9% | | 73.0% | | 379.3% | | 32.5% | | | | |
The Company utilizes computer modeling software to stress test the balance sheet under a wide variety of interest rate scenarios. The model quantifies the income impact of changes in customer preference for products, basis risk between the assets and the liabilities that support them and the risk inherent in different yield curves as well as other factors. The ALCO committee reviews these possible outcomes and makes loan, investment and deposit decisions that maintain reasonable balance sheet structure in light of potential interest rate movements. It is the objective of the Company to monitor and manage risk exposure to net interest income caused by changes in interest rates. It is the goal of the Company'sCompany’s asset/liability function to provide optimum and stable net interest income. To accomplish this, management uses two asset liability tools: GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation Modeling, which are constructed, presented and monitored quarterly. Management believes that the Company'sCompany’s liquidity and interest sensitivity position at December 31, 2016,2018, remained adequate to meet the Company'sCompany’s primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The Company places a greater level of credence in net interest income simulation modeling. The GAP/Interest Rate Sensitivity Report is believed by the Company'sCompany’s management to have two major shortfalls. The GAP/Interest Rate Sensitivity Report fails to precisely gauge how often an interest rate sensitive product reprices, nor is it able to measure the magnitude of potential future rate movements. Although management does not consider GAP ratios in
planning, the information can be used in a general fashion to look at asset and liability mismatches. The Company'sCompany’s cumulative repricing GAP ratio as of December 31, 20162018 for the next 12 months using a scenario in which interest rates remained unchanged was a positive 0.79%negative 3.04% of earning assets.
Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements. The Company'sCompany’s asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling. Estimated net interest income for each scenario is calculated over a twelve-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management'smanagement’s view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Company.
The base scenario is highly dependent on numerous assumptions embedded in the model. While the base sensitivity analysis incorporates management'smanagement’s best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity core deposit products, such as savings, money market, NOW and demand deposits reflect management'smanagement’s best estimate of expected future behavior.
Results for the base, falling 100 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, rising 200 basis points, and rising 300 basis points interest rate scenarios are listed below based upon the Company'sCompany’s rate sensitive assets and liabilities at December 31, 2016.2018. The net interest income shown represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.
| | | | | | Falling | | | Rising | | | Rising | | | Rising | | | Rising | | | Rising | | | | Falling | | Rising | | Rising | | Rising | | Rising | | Rising | |
| | | Base | | | (100 Basis Points) | | | (25 Basis Points) | | | (50 Basis Points) | | | (100 Basis Points) | | | (200 Basis Points) | | | (300 Basis Points) | | Base | | (100 Basis Points) | | (25 Basis Points) | | (50 Basis Points) | | (100 Basis Points) | | (200 Basis Points) | | (300 Basis Points) | |
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 128,914 | | | $ | 122,747 | | | $ | 131,197 | | | $ | 133,588 | | | $ | 138,356 | | | $ | 147,821 | | | $ | 157,116 | | $160,865 | | $149,428 | | $163,155 | | $165,406 | | $169,894 | | $178,776 | | $187,542 | |
| Variance from Base | | | | | | $ | (6,167 | ) | | $ | 2,283 | | | $ | 4,674 | | | $ | 9,442 | | | $ | 18,907 | | | $ | 28,202 | | | | $(11,437) | | $2,290 | | $4,541 | | $9,029 | | $17,911 | | $26,677 | |
| Percent of change from Base | Percent of change from Base | | | | (4.78 | )% | | | 1.77 | % | | | 3.63 | % | | | 7.32 | % | | | 14.67 | % | | | 21.88 | % | Percent of change from Base | | (7.11) | % | 1.42 | % | 2.82 | % | 5.61 | % | 11.13 | % | 16.58 | % |
For more information on the Company'sCompany’s interest rate sensitivity see the Interest Rate Risk discussion in Item 7. above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Lakeland Financial Corporation
Warsaw, Indiana
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Lakeland Financial Corporation (the "Company") as of December 31, 20162018 and 2015, and2017, the related consolidated statements of income, comprehensive income, changes in stockholders'stockholders’ equity, and cash flows for each of the three years in the three-year period ended December 31, 2016.2018, and the related notes (collectively referred to as the "financial statements"). We also have audited Lakeland Financial Corporation'sthe Company’s internal control over financial reporting as of December 31, 2016,2018, based on criteria“criteria established in the 2013 Internal Control—Control – Integrated FrameworkFramework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Lakeland Financial Corporation's”
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on “criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.”
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control over Financial Reporting.Reporting. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements and an opinion on the effectiveness of the company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion,
/s/ Crowe LLP
We have served as the Company's auditor since 1983.
South Bend, Indiana
February 28, 2019
| CONSOLIDATED BALANCE SHEETS (in thousands except share data) | | | |
| December 31 | 2018 | | 2017 |
| ASSETS | | | |
| Cash and due from banks | $192,290 | | $140,402 |
| Short-term investments | 24,632 | | 35,778 |
| Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 216,922 | | 176,180 |
| | | | |
| Securities available for sale (carried at fair value) | 585,549 | | 538,493 |
| Real estate mortgage loans held for sale | 2,293 | | 3,346 |
| | | | |
| Loans, net of allowance for loan losses of $48,453 and $47,121 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 3,866,292 | | 3,771,338 |
| | | | |
| Land, premises and equipment, net | 58,097 | | 56,466 |
| Bank owned life insurance | 77,106 | | 75,879 |
| Federal Reserve and Federal Home Loan Bank Stock | 13,772 | | 13,772 |
| Accrued interest receivable | 15,518 | | 14,093 |
| Goodwill | 4,970 | | 4,970 |
| Other assets | 34,735 | | 28,439 |
| Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $4,875,254 | | $4,682,976 |
| | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| | | | |
| LIABILITIES | | | |
| Noninterest bearing deposits | $946,838 | | $885,622 |
| Interest bearing deposits | 3,097,227 | | 3,123,033 |
| Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 4,044,065 | | 4,008,655 |
| | | | |
| Borrowings | | | |
| Securities sold under agreements to repurchase | 75,555 | | 70,652 |
| Federal Home Loan Bank advances | 170,000 | | 80,030 |
| Subordinated debentures | 30,928 | | 30,928 |
| Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 276,483 | | 181,610 |
| | | | |
| Accrued interest payable | 10,404 | | 6,311 |
| Other liabilities | 22,598 | | 17,733 |
| Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 4,353,550 | | 4,214,309 |
| | | | |
| Commitments, off-balance sheet risks and contingencies (Notes 1 and 18) | | | |
| | | | |
| STOCKHOLDERS' EQUITY | | | |
| Common stock: 90,000,000 shares authorized, no par value | | | |
| 25,301,732 shares issued and 25,128,773 outstanding as of December 31, 2018 | | | |
| 25,194,903 shares issued and 25,025,933 outstanding as of December 31, 2017 | 112,383 | | 108,862 |
| Retained earnings | 419,179 | | 363,794 |
| Accumulated other comprehensive income (loss) | (6,191) | | (670) |
| Treasury stock, at cost (2018 - 172,959 shares, 2017 - 168,970 shares) | (3,756) | | (3,408) |
| Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 521,615 | | 468,578 |
| Noncontrolling interest | 89 | | 89 |
| Total equity | 521,704 | | 468,667 |
| Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $4,875,254 | | $4,682,976 |
The accompanying notes are an integral part of these consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lakeland Financial Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Lakeland Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.statements.
Crowe Horwath LLP
Indianapolis, Indiana
February 28, 2017
| CONSOLIDATED STATEMENTS OF INCOME (in thousands except share and per share data) | | | | |
| Years Ended December 31 | 2018 | | 2017 | | 2016 |
| NET INTEREST INCOME | | | | | |
| Interest and fees on loans | | | | | |
| Taxable | $181,451 | | $150,295 | | $124,830 |
| Tax exempt | 814 | | 729 | | 462 |
| Interest and dividends on securities | | | | | |
| Taxable | 9,717 | | 9,218 | | 9,421 |
| Tax exempt | 6,079 | | 5,102 | | 3,885 |
| Interest on short-term investments | 909 | | 354 | | 353 |
| Total interest income | 198,970 | | 165,698 | | 138,951 |
| | | | | | |
| Interest on deposits | 44,913 | | 27,026 | | 18,944 |
| Interest on borrowings | | | | | |
| Short-term | 1,143 | | 1,446 | | 352 |
| Long-term | 1,643 | | 1,334 | | 1,174 |
| Total interest expense | 47,699 | | 29,806 | | 20,470 |
| | | | | | |
| NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 151,271 | | 135,892 | | 118,481 |
| | | | | | |
| Provision for loan losses | 6,400 | | 3,000 | | 1,150 |
| | | | | | |
| NET INTEREST INCOME AFTER PROVISION FOR | | | | | |
| LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 144,871 | | 132,892 | | 117,331 |
| | | | | | |
| NONINTEREST INCOME | | | | | |
| Wealth advisory fees | 6,344 | | 5,481 | | 4,805 |
| Investment brokerage fees | 1,458 | | 1,273 | | 1,010 |
| Service charges on deposit accounts | 15,831 | | 13,696 | | 12,013 |
| Loan and service fees | 9,291 | | 7,900 | | 7,681 |
| Merchant and interchange fee income | 2,461 | | 2,279 | | 2,098 |
| Bank owned life insurance income | 1,244 | | 1,768 | | 1,392 |
| Other income | 2,381 | | 2,598 | | 2,213 |
| Mortgage banking income | 1,150 | | 982 | | 1,586 |
| Net securities gains (losses) | (50) | | 32 | | 66 |
| Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 40,110 | | 36,009 | | 32,864 |
| | | | | | |
| NONINTEREST EXPENSE | | | | | |
| Salaries and employee benefits | 48,353 | | 45,306 | | 41,656 |
| Net occupancy expense | 5,149 | | 4,595 | | 4,266 |
| Equipment costs | 5,243 | | 4,629 | | 3,850 |
| Data processing fees and supplies | 9,685 | | 8,233 | | 8,148 |
| Corporate and business development | 5,066 | | 4,744 | | 3,328 |
| FDIC insurance and other regulatory fees | 1,701 | | 1,798 | | 2,001 |
| Professional fees | 3,798 | | 3,574 | | 3,208 |
| Other expense | 7,042 | | 6,388 | | 6,521 |
| Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 86,037 | | 79,267 | | 72,978 |
| | | | | | |
| INCOME BEFORE INCOME TAX EXPENSE | 98,944 | | 89,634 | | 77,217 |
| Income tax expense | 18,533 | | 32,304 | | 25,133 |
| NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $80,411 | | $57,330 | | $52,084 |
| | | | | | |
| BASIC WEIGHTED AVERAGE COMMON SHARES | 25,288,533 | | 25,181,208 | | 25,056,095 |
| | | | | | |
| BASIC EARNINGS PER COMMON SHARE | $3.18 | | $2.28 | | $2.08 |
| | | | | | |
| DILUTED WEIGHTED AVERAGE COMMON SHARES | 25,727,831 | | 25,663,381 | | 25,460,727 |
| | | | | | |
| DILUTED EARNINGS PER COMMON SHARE | $3.13 | | $2.23 | | $2.05 |
The accompanying notes are an integral part of these consolidated financial statements.
| CONSOLIDATED BALANCE SHEETS (in thousands except share data) | | | | | | |
| December 31 | | 2016 | | | 2015 | |
| ASSETS | | | | | | |
| Cash and due from banks | | $ | 142,408 | | | $ | 67,484 | |
| Short-term investments | | | 24,872 | | | | 13,190 | |
| Total cash and cash equivalents | | | 167,280 | | | | 80,674 | |
| | | | | | | | | |
| Securities available for sale (carried at fair value) | | | 504,191 | | | | 478,071 | |
| Real estate mortgage loans held for sale | | | 5,915 | | | | 3,294 | |
| | | | | | | | | |
| Loans, net of allowance for loan losses of $43,718 and $43,610 | | | 3,427,209 | | | | 3,037,319 | |
| | | | | | | | | |
| Land, premises and equipment, net | | | 52,092 | | | | 46,684 | |
| Bank owned life insurance | | | 74,006 | | | | 69,698 | |
| Federal Reserve and Federal Home Loan Bank Stock | | | 11,522 | | | | 7,668 | |
| Accrued interest receivable | | | 11,687 | | | | 9,462 | |
| Goodwill | | | 4,970 | | | | 4,970 | |
| Other assets | | | 31,153 | | | | 28,446 | |
| Total assets | | $ | 4,290,025 | | | $ | 3,766,286 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| LIABILITIES | | | | | | | | |
| Noninterest bearing deposits | | $ | 819,803 | | | $ | 715,093 | |
| Interest bearing deposits | | | 2,758,109 | | | | 2,468,328 | |
| Total deposits | | | 3,577,912 | | | | 3,183,421 | |
| | | | | | | | | |
| Short-term borrowings | | | | | | | | |
| Securities sold under agreements to repurchase | | | 50,045 | | | | 69,622 | |
| Other short-term borrowings | | | 180,000 | | | | 70,000 | |
| Total short-term borrowings | | | 230,045 | | | | 139,622 | |
| | | | | | | | | |
| Long-term borrowings | | | 32 | | | | 34 | |
| Subordinated debentures | | | 30,928 | | | | 30,928 | |
| Accrued interest payable | | | 5,676 | | | | 3,773 | |
| Other liabilities | | | 18,365 | | | | 15,607 | |
| Total liabilities | | | 3,862,958 | | | | 3,373,385 | |
| | | | | | | | | |
| Commitments, off-balance sheet risks and contingencies (Notes 1 and 18) | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | | | |
| Common stock: 90,000,000 shares authorized, no par value | | | | | | | | |
| 25,096,087 shares issued and 24,937,865 outstanding as of December 31, 2016 | | | | | | | | |
| 24,962,477 shares issued and 24,819,066 outstanding as of December 31, 2015 | | | 104,405 | | | | 99,123 | |
| Retained earnings | | | 327,873 | | | | 294,002 | |
| Accumulated other comprehensive income (loss) | | | (2,387 | ) | | | 2,142 | |
| Treasury stock, at cost (2016 - 158,222 shares, 2015 - 143,411 shares) | | | (2,913 | ) | | | (2,455 | ) |
| Total stockholders' equity | | | 426,978 | | | | 392,812 | |
| Noncontrolling interest | | | 89 | | | | 89 | |
| Total equity | | | 427,067 | | | | 392,901 | |
| Total liabilities and stockholders' equity | | $ | 4,290,025 | | | $ | 3,766,286 | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) | | | | | |
| | | | | | | | |
| Years Ended December 31 | 2018 | | 2017 | | 2016 |
| Net income | $80,411 | | $57,330 | | $52,084 |
| Other comprehensive income (loss) | | | | | |
| | Change in securities available for sale: | | | | | |
| | | Unrealized holding gain (loss) on securities available for sale | | | | | |
| | | arising during the period | (7,339) | | 2,245 | | (7,238) |
| | | Reclassification adjustment for (gains)/losses included in net income | 50 | | (32) | | (66) |
| | | Net securities gain (loss) activity during the period | (7,289) | | 2,213 | | (7,304) |
| | | Tax effect | 1,637 | | (707) | | 2,746 |
| | | Net of tax amount | (5,652) | | 1,506 | | (4,558) |
| | Defined benefit pension plans: | | | | | |
| | | Net gain(loss) on defined benefit pension plans | 269 | | 97 | | (151) |
| | | Amortization of net actuarial loss | 266 | | 265 | | 215 |
| | | Net gain on activity during the period | 535 | | 362 | | 64 |
| | | Tax effect | (163) | | (151) | | (35) |
| | | Net of tax amount | 372 | | 211 | | 29 |
| | | Total other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | (5,280) | | 1,717 | | (4,529) |
| Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $75,131 | | $59,047 | | $47,555 |
The accompanying notes are an integral part of these consolidated financial statements.
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands except share and per share data) | | |
| | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | |
| | | | | | | | Other | | | | Total |
| | Common Stock | | Retained | | Comprehensive | | Treasury | | Stockholders' |
| | Shares | | Amount | | Earnings | | Income (Loss) | | Stock | | Equity |
| | | | | | | | | | | | |
| Balance at January 1, 2016 | 24,819,066 | | $99,123 | | $294,002 | | $2,142 | | $(2,455) | | $392,812 |
| | | | | | | | | | | | |
| Net income | | | | | 52,084 | | | | | | 52,084 |
| Other comprehensive income (loss), net of tax | | | | | | | (4,529) | | | | (4,529) |
| Comprehensive income (loss) | | | | | | | | | | | 47,555 |
| Cash dividends declared, $0.73 per share | | | | | (18,213) | | | | | | (18,213) |
| Treasury shares purchased under deferred | | | | | | | | | | | |
| directors' plan | (14,811) | | 458 | | | | | | (458) | | 0 |
| Stock activity under equity incentive plans | 133,646 | | 614 | | | | | | | | 614 |
| Stock based compensation expense | | | 4,210 | | | | | | | | 4,210 |
| Fractional shares retired due to 3-for-2 stock split | (36) | | | | | | | | | | |
| Balance at December 31, 2016 | 24,937,865 | | $104,405 | | $327,873 | | $(2,387) | | $(2,913) | | $426,978 |
| Net income | | | | | 57,330 | | | | | | 57,330 |
| Other comprehensive income (loss), net of tax | | | | | | | 1,717 | | | | 1,717 |
| Comprehensive income (loss) | | | | | | | | | | | 59,047 |
| Cash dividends declared, $0.85 per share | | | | | (21,409) | | | | | | (21,409) |
| Treasury shares purchased under deferred | | | | | | | | | | | |
| directors' plan | (10,748) | | 495 | | | | | | (495) | | 0 |
| Stock activity under equity incentive plans | 98,816 | | (1,736) | | | | | | | | (1,736) |
| Stock based compensation expense | | | 5,698 | | | | | | | | 5,698 |
| Balance at December 31, 2017 | 25,025,933 | | $108,862 | | $363,794 | | $(670) | | $(3,408) | | $468,578 |
| Adoption of ASU 2018-02 (See Note 1) | | | | | 173 | | (173) | | | | 0 |
| Adoption of ASU 2014-09 (See Note 1) | | | | | 24 | | | | | | 24 |
| Adoption of ASU 2016-01 (See Note 1) | | | | | 68 | | (68) | | | | 0 |
| Net income | | | | | 80,411 | | | | | | 80,411 |
| Other comprehensive income (loss), net of tax | | | | | | | (5,280) | | | | (5,280) |
| Comprehensive income (loss) | | | | | | | | | | | 75,131 |
| Cash dividends declared, $1.00 per share | | | | | (25,291) | | | | | | (25,291) |
| Treasury shares purchased under deferred | | | | | | | | | | | |
| directors' plan | (9,625) | | 463 | | | | | | (463) | | 0 |
| Treasury shares sold and distributed under deferred | | | | | | | | | | | |
| directors' plan | 5,636 | | (115) | | | | | | 115 | | 0 |
| Stock activity under equity incentive plans | 106,829 | | (2,435) | | | | | | | | (2,435) |
| Stock based compensation expense | | | 5,608 | | | | | | | | 5,608 |
| Balance at December 31, 2018 | 25,128,773 | | $112,383 | | $419,179 | | $(6,191) | | $(3,756) | | $521,615 |
The accompanying notes are an integral part of these consolidated financial statements.
| CONSOLIDATED STATEMENTS OF INCOME (in thousands except share and per share data) | | | | | | | |
| Years Ended December 31 | | 2016 | | | 2015 | | | 2014 | |
| NET INTEREST INCOME | | | | | | | | | |
| Interest and fees on loans | | | | | | | | | |
| Taxable | | $ | 124,830 | | | $ | 110,097 | | | $ | 105,317 | |
| Tax exempt | | | 462 | | | | 464 | | | | 470 | |
| Interest and dividends on securities | | | | | | | | | | | | |
| Taxable | | | 9,421 | | | | 8,564 | | | | 8,176 | |
| Tax exempt | | | 3,885 | | | | 3,355 | | | | 3,281 | |
| Interest on short-term investments | | | 353 | | | | 59 | | | | 44 | |
| Total interest income | | | 138,951 | | | | 122,539 | | | | 117,288 | |
| | | | | | | | | | | | | |
| Interest on deposits | | | 18,944 | | | | 15,415 | | | | 13,568 | |
| Interest on borrowings | | | | | | | | | | | | |
| Short-term | | | 352 | | | | 188 | | | | 388 | |
| Long-term | | | 1,174 | | | | 1,009 | | | | 1,029 | |
| Total interest expense | | | 20,470 | | | | 16,612 | | | | 14,985 | |
| | | | | | | | | | | | | |
| NET INTEREST INCOME | | | 118,481 | | | | 105,927 | | | | 102,303 | |
| | | | | | | | | | | | | |
| Provision for loan losses | | | 1,150 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | |
| NET INTEREST INCOME AFTER PROVISION FOR | | | | | | | | | | | | |
| LOAN LOSSES | | | 117,331 | | | | 105,927 | | | | 102,303 | |
| | | | | | | | | | | | | |
| NONINTEREST INCOME | | | | | | | | | | | | |
| Wealth advisory fees | | | 4,805 | | | | 4,531 | | | | 4,072 | |
| Investment brokerage fees | | | 1,010 | | | | 1,507 | | | | 3,370 | |
| Service charges on deposit accounts | | | 12,013 | | | | 10,608 | | | | 9,495 | |
| Loan, insurance and service fees | | | 7,681 | | | | 7,460 | | | | 6,799 | |
| Merchant card fee income | | | 2,098 | | | | 1,843 | | | | 1,549 | |
| Bank owned life insurance income | | | 1,392 | | | | 1,338 | | | | 1,393 | |
| Other income | | | 2,213 | | | | 2,974 | | | | 2,978 | |
| Mortgage banking income | | | 1,586 | | | | 1,176 | | | | 621 | |
| Net securities gains (losses) | | | 66 | | | | 42 | | | | (224 | ) |
| Total noninterest income | | | 32,864 | | | | 31,479 | | | | 30,053 | |
| | | | | | | | | | | | | |
| NONINTEREST EXPENSE | | | | | | | | | | | | |
| Salaries and employee benefits | | | 41,934 | | | | 38,923 | | | | 38,648 | |
| Net occupancy expense | | | 4,266 | | | | 3,820 | | | | 3,776 | |
| Equipment costs | | | 3,850 | | | | 3,598 | | | | 3,231 | |
| Data processing fees and supplies | | | 8,148 | | | | 7,592 | | | | 6,171 | |
| Corporate and business development | | | 3,328 | | | | 3,173 | | | | 3,073 | |
| FDIC insurance and other regulatory fees | | | 2,001 | | | | 2,044 | | | | 1,936 | |
| Professional fees | | | 3,208 | | | | 2,794 | | | | 2,990 | |
| Other expense | | | 6,243 | | | | 6,262 | | | | 6,341 | |
| Total noninterest expense | | | 72,978 | | | | 68,206 | | | | 66,166 | |
| | | | | | | | | | | | | |
| INCOME BEFORE INCOME TAX EXPENSE | | | 77,217 | | | | 69,200 | | | | 66,190 | |
| Income tax expense | | | 25,133 | | | | 22,833 | | | | 22,385 | |
| NET INCOME | | $ | 52,084 | | | $ | 46,367 | | | $ | 43,805 | |
| | | | | | | | | | | | | |
| BASIC WEIGHTED AVERAGE COMMON SHARES | | | 25,056,095 | | | | 24,926,354 | | | | 24,803,295 | |
| | | | | | | | | | | | | |
| BASIC EARNINGS PER COMMON SHARE | | $ | 2.08 | | | $ | 1.86 | | | $ | 1.77 | |
| | | | | | | | | | | | | |
| DILUTED WEIGHTED AVERAGE COMMON SHARES | | | 25,460,727 | | | | 25,245,569 | | | | 25,172,183 | |
| | | | | | | | | | | | | |
| DILUTED EARNINGS PER COMMON SHARE | | $ | 2.05 | | | $ | 1.84 | | | $ | 1.74 | |
The accompanying notes are an integral part of these consolidated financial statements.
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) | | | | | | | | | |
| | | | | | | | | | |
| Years Ended December 31 | | 2016 | | | 2015 | | | 2014 | |
| Net income | | $ | 52,084 | | | $ | 46,367 | | | $ | 43,805 | |
| Other comprehensive income (loss) | | | | | | | | | | | | |
| Change in securities available for sale: | | | | | | | | | | | | |
| Unrealized holding gain (loss) on securities available for sale | | | | | | | | | | | | |
| arising during the period | | | (7,238 | ) | | | (2,720 | ) | | | 10,739 | |
| Reclassification adjustment for (gains)/losses included in net income | | | (66 | ) | | | (42 | ) | | | 224 | |
| Net securities gain (loss) activity during the period | | | (7,304 | ) | | | (2,762 | ) | | | 10,963 | |
| Tax effect | | | 2,746 | | | | 1,131 | | | | (4,358 | ) |
| Net of tax amount | | | (4,558 | ) | | | (1,631 | ) | | | 6,605 | |
| Defined benefit pension plans: | | | | | | | | | | | | |
| Net loss on defined benefit pension plans | | | (151 | ) | | | (325 | ) | | | (654 | ) |
| Amortization of net actuarial loss | | | 215 | | | | 244 | | | | 197 | |
| Net gain (loss) activity during the period | | | 64 | | | | (81 | ) | | | (457 | ) |
| Tax effect | | | (35 | ) | | | 24 | | | | 176 | |
| Net of tax amount | | | 29 | | | | (57 | ) | | | (281 | ) |
| Total other comprehensive income (loss), net of tax | | | (4,529 | ) | | | (1,688 | ) | | | 6,324 | |
| Comprehensive income | | $ | 47,555 | | | $ | 44,679 | | | $ | 50,129 | |
The accompanying notes are an integral part of these consolidated financial statements.
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands except share and per share data) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | | | Other | | | | | | Total | |
| | | Common Stock | | | Retained | | | Comprehensive | | | Treasury | | | Stockholders' | |
| | | Shares | | | Amount | | | Earnings | | | Income (Loss) | | | Stock | | | Equity | |
| | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2014 | | | 24,566,173 | | | $ | 93,249 | | | $ | 233,108 | | | $ | (2,494 | ) | | $ | (1,988 | ) | | $ | 321,875 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 43,805 | | | | | | | | | | | | 43,805 | |
| Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | 6,324 | | | | | | | | 6,324 | |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | 50,129 | |
| Cash dividends declared, $0.55 per share | | | | | | | | | | | (13,568 | ) | | | | | | | | | | | (13,568 | ) |
| Treasury shares purchased under deferred | | | | | | | | | | | | | | | | | | | | | | | | |
| directors' plan | | | (17,201 | ) | | | 444 | | | | | | | | | | | | (444 | ) | | | 0 | |
| Treasury stock sold and distributed under | | | | | | | | | | | | | | | | | | | | | | | | |
| deferred directors' plan | | | 37,547 | | | | (432 | ) | | | | | | | | | | | 432 | | | | 0 | |
| Stock activity under equity incentive plans | | | 111,912 | | | | 57 | | | | | | | | | | | | | | | | 57 | |
| Stock based compensation expense | | | | | | | 2,803 | | | | | | | | | | | | | | | | 2,803 | |
| Balance at December 31, 2014 | | | 24,698,431 | | | $ | 96,121 | | | $ | 263,345 | | | $ | 3,830 | | | $ | (2,000 | ) | | | 361,296 | |
| Net income | | | | | | | | | | | 46,367 | | | | | | | | | | | | 46,367 | |
| Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | (1,688 | ) | | | | | | | (1,688 | ) |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | 44,679 | |
| Cash dividends declared, $0.63 per share | | | | | | | | | | | (15,710 | ) | | | | | | | | | | | (15,710 | ) |
| Treasury shares purchased under deferred | | | | | | | | | | | | | | | | | | | | | | | | |
| directors' plan | | | (16,356 | ) | | | 455 | | | | | | | | | | | | (455 | ) | | | 0 | |
| Stock activity under equity incentive plans | | | 136,991 | | | | 12 | | | | | | | | | | | | | | | | 12 | |
| Stock based compensation expense | | | | | | | 2,535 | | | | | | | | | | | | | | | | 2,535 | |
| Balance at December 31, 2015 | | | 24,819,066 | | | $ | 99,123 | | | $ | 294,002 | | | $ | 2,142 | | | $ | (2,455 | ) | | $ | 392,812 | |
| Net income | | | | | | | | | | | 52,084 | | | | | | | | | | | | 52,084 | |
| Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | (4,529 | ) | | | | | | | (4,529 | ) |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | 47,555 | |
| Cash dividends declared, $0.73 per share | | | | | | | | | | | (18,213 | ) | | | | | | | | | | | (18,213 | ) |
| Treasury shares purchased under deferred | | | | | | | | | | | | | | | | | | | | | | | | |
| directors' plan | | | (14,811 | ) | | | 458 | | | | | | | | | | | | (458 | ) | | | 0 | |
| Stock activity under equity incentive plans | | | 133,646 | | | | 614 | | | | | | | | | | | | | | | | 614 | |
| Stock based compensation expense | | | | | | | 4,210 | | | | | | | | | | | | | | | | 4,210 | |
| Fractional shares retired due to 3-for-2 stock split | | | (36 | ) | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2016 | | | 24,937,865 | | | $ | 104,405 | | | $ | 327,873 | | | $ | (2,387 | ) | | $ | (2,913 | ) | | $ | 426,978 | |
The accompanying notes are an integral part of these consolidated financial statements.
| CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) | | | | | | | | | | | | | | |
| Years Ended December 31 | | 2016 | | | 2015 | | | 2014 | | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | | | | | | | | | | |
| Net income | | $ | 52,084 | | | $ | 46,367 | | | $ | 43,805 | | $80,411 | | $57,330 | | $52,084 |
| Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | | | | | | | | | | |
| Depreciation | | | 4,229 | | | | 3,758 | | | | 3,412 | | 5,654 | | 5,119 | | 4,229 |
| Provision for loan losses | | | 1,150 | | | | 0 | | | | 0 | | 6,400 | | 3,000 | | 1,150 |
| (Gain) Loss on sale and write down of other real estate owned | | | 17 | | | | (48 | ) | | | (159 | ) | |
| Net loss on sale and write down of other real estate owned | | 16 | | 12 | | 17 |
| Amortization of loan servicing rights | | | 598 | | | | 553 | | | | 526 | | 503 | | 599 | | 598 |
| Loans originated for sale | | | (70,724 | ) | | | (69,302 | ) | | | (55,107 | ) | (49,816) | | (54,188) | | (69,998) |
| Net gain on sales of loans | | | (2,047 | ) | | | (1,650 | ) | | | (1,202 | ) | (1,713) | | (1,749) | | (2,047) |
| Proceeds from sale of loans | | | 69,418 | | | | 68,557 | | | | 56,065 | | 51,715 | | 57,621 | | 68,692 |
| Net loss on sale of premises and equipment | | | 160 | | | | 7 | | | | 24 | | 1 | | 79 | | 160 |
| Net (gain) loss on sales and calls of securities available for sale | | | (66 | ) | | | (42 | ) | | | 224 | | 50 | | (32) | | (66) |
| Net securities amortization | | | 2,860 | | | | 4,464 | | | | 5,420 | | 3,177 | | 3,114 | | 2,860 |
| Stock based compensation expense | | | 4,210 | | | | 2,535 | | | | 2,803 | | 5,608 | | 5,698 | | 4,210 |
| Earnings on life insurance | | | (1,392 | ) | | | (1,338 | ) | | | (1,393 | ) | (1,244) | | (1,768) | | (1,392) |
| Tax benefit of stock option exercises | | | (669 | ) | | | (148 | ) | | | (50 | ) | |
| Gain on life insurance | | (206) | | 0 | | 0 |
| Tax benefit of stock award issuances | | (761) | | (964) | | (669) |
| Net change: | | | | | | | | | | | | | | | | | |
| Interest receivable and other assets | | | (1,386 | ) | | | (398 | ) | | | (2,687 | ) | (3,301) | | 787 | | (1,386) |
| Interest payable and other liabilities | | | 3,757 | | | | 2,466 | | | | 2,700 | | 8,481 | | 2,584 | | 3,757 |
| Total adjustments | | | 10,115 | | | | 9,414 | | | | 10,576 | | 24,564 | | 19,912 | | 10,115 |
| Net cash from operating activities | | | 62,199 | | | | 55,781 | | | | 54,381 | | |
| Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | 104,975 | | 77,242 | | 62,199 |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | |
| Proceeds from sale of securities available for sale | | | 12,095 | | | | 7,787 | | | | 13,766 | | 15,302 | | 40,877 | | 12,095 |
| Proceeds from maturities, calls and principal paydowns of | | | | | | | | | | | | | | | | | |
| securities available for sale | | | 69,343 | | | | 74,679 | | | | 57,970 | | 53,817 | | 61,745 | | 69,343 |
| Purchases of securities available for sale | | | (116,196 | ) | | | (91,810 | ) | | | (73,361 | ) | (126,551) | | (139,252) | | (116,196) |
| Purchase of life insurance | | | (3,390 | ) | | | (2,629 | ) | | | (3,181 | ) | (423) | | (580) | | (3,390) |
| Proceeds from loans sold to others | | | 0 | | | | 0 | | | | 4,307 | | |
| Net increase in total loans | | | (391,145 | ) | | | (322,114 | ) | | | (235,165 | ) | (101,670) | | (347,217) | | (391,145) |
| Proceeds from sales of land, premises and equipment | | | 28 | | | | 701 | | | | 232 | | 461 | | 10 | | 28 |
| Purchases of land, premises and equipment | | | (9,825 | ) | | | (9,167 | ) | | | (6,565 | ) | (7,968) | | (9,582) | | (9,825) |
| Proceeds from redemption of Federal Home Loan Bank Stock | | | 0 | | | | 1,745 | | | | 1,319 | | |
| Purchase of Federal Home Loan Bank Stock | | | (3,854 | ) | | | 0 | | | | 0 | | 0 | | (2,250) | | (3,854) |
| Proceeds from sales of other real estate owned | | | 136 | | | | 963 | | | | 1,426 | | 21 | | 199 | | 136 |
| Proceeds from life insurance | | | 360 | | | | 738 | | | | 778 | | 569 | | 0 | | 360 |
| Net cash from investing activities | | | (442,448 | ) | | | (339,107 | ) | | | (238,474 | ) | |
| Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | (166,442) | | (396,050) | | (442,448) |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | |
| Net increase/(decrease) in total deposits | | | 394,491 | | | | 310,301 | | | | 327,052 | | |
| Net increase in total deposits | | 35,410 | | 430,743 | | 394,491 |
| Net increase/(decrease) in short-term borrowings | | | 90,423 | | | | (20,785 | ) | | | (101,469 | ) | 174,903 | | 100,607 | | (19,577) |
| Proceeds on long-term borrowings | | 0 | | 95,000 | | 180,000 |
| Payments on long-term borrowings | | | (2 | ) | | | (1 | ) | | | (2 | ) | (80,030) | | (275,002) | | (70,002) |
| Common dividends paid | | | (18,200 | ) | | | (15,697 | ) | | | (13,555 | ) | (25,278) | | (21,396) | | (18,200) |
| Preferred dividends paid | | | (13 | ) | | | (13 | ) | | | (13 | ) | (13) | | (13) | | (13) |
| Proceeds related to equity incentive plans | | | 614 | | | | 12 | | | | 57 | | |
| Proceeds (Payments) related to equity incentive plans | | (2,435) | | (1,736) | | 614 |
| Purchase of treasury stock | | | (458 | ) | | | (455 | ) | | | (444 | ) | (463) | | (495) | | (458) |
| Net cash from financing activities | | | 466,855 | | | | 273,362 | | | | 211,626 | | |
| Sales of treasury stock | | 115 | | 0 | | 0 |
| Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | 102,209 | | 327,708 | | 466,855 |
| Net change in cash and cash equivalents | | | 86,606 | | | | (9,964 | ) | | | 27,533 | | 40,742 | | 8,900 | | 86,606 |
| Cash and cash equivalents at beginning of the year | | | 80,674 | | | | 90,638 | | | | 63,105 | | 176,180 | | 167,280 | | 80,674 |
| Cash and cash equivalents at end of the year | | $ | 167,280 | | | $ | 80,674 | | | $ | 90,638 | | |
| Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | $216,922 | | $176,180 | | $167,280 |
| Cash paid during the year for: | | | | | | | | | | | | | | | | | |
| Interest | | $ | 18,567 | | | $ | 15,786 | | | $ | 14,957 | | $43,606 | | $29,171 | | $18,567 |
| Income taxes | | | 21,613 | | | | 21,566 | | | | 21,185 | | 19,033 | | 29,120 | | 21,613 |
| Supplemental non-cash disclosures: | | | | | | | | | | | | | | | | | |
| Loans transferred to other real estate owned | | | 105 | | | | 853 | | | | 1,101 | | 316 | | 88 | | 105 |
| Security purchased not settled | | | 1,459 | | | | 0 | | | | 0 | | 0 | | 0 | | 1,459 |
| Property transferred to held for sale | | | 0 | | | | 0 | | | | 249 | | 221 | | 0 | | 0 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation:
The consolidated financial statements include Lakeland Financial Corporation (the "Holding Company"“Holding Company”) and its wholly-owned subsidiaries, Lake City Bank (the "Bank"“Bank”) and LCB Risk Management, Inc., together referred to as (the "Company"“Company”). On December 18, 2006, LCB Investments II, Inc. was formed as a wholly owned subsidiary of the Bank incorporated in Nevada to manage a portion of the Bank'sBank’s investment portfolio beginning in 2007. On December 21, 2006, LCB Funding, Inc., a real estate investment trust incorporated in Maryland, was formed as a wholly owned subsidiary of LCB Investments II, Inc. On December 28, 2012, LCB Risk Management, Inc., a captive insurance company incorporated in Nevada, was formed as a wholly owned subsidiary of the Holding Company. All intercompany transactions and balances are eliminated in consolidation.
The Company provides financial services through the Bank, a full-service commercial bank with 49 branch offices in fifteen counties in Northern and Central Indiana.Indiana with its 50th branch that opened in downtown Indianapolis in January 2019. The Company provides commercial, retail, trust and investment services to its customers. Commercial products include commercial loans and technology-driven solutions to meet commercial customers'customers’ treasury management needs such as internet business banking and on-line treasury management services. Retail banking clients are provided a wide array of traditional retail banking services, including lending, deposit and investment services. Retail lending programs are focused on mortgage loans, home equity lines of credit and traditional retail installment loans. The Company provides credit card services to retail and commercial customers through its retail card program and merchant processing activity. The Company provides wealth advisory and trust clients with traditional personal and corporate trust services. The Company also provides retail brokerage services, including an array of financial and investment products such as annuities and life insurance. Other financial instruments, which represent potential concentrations of credit risk, include deposit accounts in other financial institutions.
Use of Estimates:
To prepare financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"(“GAAP”), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and future results could differ.
Cash Flows:
Cash and cash equivalents include cash, demand deposits in other financial institutions and short-term investments and certificates of deposit with maturities of 90 days or less. Cash flows are reported net for customer loan and deposit transactions, and short-term borrowings.
Securities:
Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax. Trading securities are bought for sale in the near term and are carried at fair value, with changes in unrealized holding gains and losses included in income. Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
Purchase premiums or discounts are recognized in interest income using the interest method over the terms of the securities or overestimated lives for mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities which are included in other assets, the entire amount of impairment is recognized through earnings.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real Estate Mortgage Loans Held for Sale:
Loans held for sale are reported at the lower of cost or fair value on an aggregate basis. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Loan sales occur on the delivery date agreed to in the relevant commitment agreement. The Company retains servicing on the majority of loans sold. The carrying value of loans sold is reduced by the amount allocated to the servicing right. The gain or loss on the sale of loans is the difference between the carrying value of the loans sold and the funds received from the sale.
Loans:
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. All classes of commercial and industrial, commercial real estate and multi-family residential, agri-business and agricultural, other commercial and consumer 1-4 family mortgage loans for which collateral is insufficient to cover all principal and accrued interest are reclassified as nonaccrual loans, on or before the date when the loan becomes 90 days delinquent. When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued, all unpaid accrued interest is reversed and interest income is subsequently recorded on the cash-basis or cost-recovery method. Accrual status is resumed when all contractually due payments are brought current and future payments are reasonably assured. Other consumer loans are not placed on a nonaccrual status since these loans are charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The recorded investment in loans is the loan balance plusnet of unamortized net deferred loan fees and costs less unamortized net deferred loan fees. The total amount of accrued interest on loans as of December 31, 20162018 and 20152017 was $8.9$11.8 million and $7.0$11.0 million.
Allowance for Loan Losses:
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the inability to fully collect a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company has an established process to determine the adequacy of the allowance for loan losses that generally includes consideration of the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers'borrowers’ ability to repay. Consideration is not limited to these factors, although they represent the most commonly cited factors. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management'smanagement’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. A detailed analysis is performed on loans that are classified but determined not to be impaired which incorporates probabilitydifferent scenarios where the risk that the borrower will be unable or unwilling to repay its debt in full or on time is combined with an estimate of default with a loss given default scenarioin the event the borrower cannot pay to develop non-specific allocations for such loan pools. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years. This actual loss experience is supplemented with other environmental factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of, and trends in, delinquencies and impaired loans; levels of, and trends in, charge-offs and recoveries over the historical three and five year periods; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: commercial and industrial, commercial real estate and multi-family residential, agri-business and agricultural, other commercial, consumer 1-4 family mortgage and other consumer. The risk characteristics of each of the identified portfolio segments are as follows:
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commercial and Industrial – Borrowers may be subject to industry conditions including decreases in product demand; increases in material or other production costs that cannot be immediately recaptured in the sales or distribution cycle; interest rate increases that could have an adverse impact on profitability; non-payment of credit that has been extended under normal vendor terms for goods sold or services; and interruption related to the importing or exporting of production materials or sold products.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commercial Real Estate and Multi-Family Residential – Borrowers may be subject to potential adverse market conditions that cause a decrease in market value or lease rates; the potential for environmental impairment from events occurring on subject or neighboring properties; and obsolescence in location or function. Multi-Family Residential is also subject to adverse market conditions associated with a change in governmental or personal funding sources for tenants; over supply of units in a specific region; a shift in population; and reputational risks. Construction and Land Development risks include slower absorption than anticipated on speculative projects; deterioration in market conditions that may impact a project'sproject’s value; unforeseen costs not considered in the original construction budget; or any other factors that may impact the completion or success of the project.
Agri-business and Agricultural – Borrowers may be subject to adverse market or weather conditions including changes in local or foreign demand; lower yields than anticipated; political or other impact on storage, distribution or use; and exposure to increasing commodity prices which result in higher production, distribution or exporting costs.
Other Commercial – Borrowers may be subject to the uninterrupted flow of funds to states and other political subdivisions for the purpose of debt repayments on loans held by the Bank.
Consumer 1-4 Family Mortgage – Borrowers may be subject to adverse employment conditions in the local economy leading to increased default rates; decreased market values from oversupply in a geographic area; and impact to borrowers'borrowers’ ability to maintain payments in the event of incremental rate increases on adjustable rate mortgages.
Other Consumer – Borrowers may be subject to adverse employment conditions in the local economy which may lead to higher default rates; and decreases in the value of underlying collateral.
A loan is 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. Loans, for which the terms have been modified and a concession has been granted for borrowers experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired and may be either accruing or non-accruing. Nonaccrual troubled debt restructurings follow the same policy as described above for other loans. Impairment for troubled debt restructurings is measured at the present value of estimated future cash flows using the loan'sloan’s effective rate at inception or at discounted collateral value for collateral dependent loans. Impairment is evaluated individually or in total for smaller-balance loans of similar nature such as all classes of consumer 1-4 family and other consumer loans, and individually for all classes of commercial and industrial, commercial real estate and multi-family, agri-business and agricultural and other commercial loans. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $150,000.$250,000. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower'sborrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan'sloan’s existing rate or at the fair value of collateral less anticipated costs to sell if repayment is expected solely from the collateral. All classes of commercial and industrial, commercial real estate and multifamily residential, agri-business and agricultural, other commercial and consumer 1-4 family mortgage loans that become delinquent beyond 90 days are analyzed and a charge-off is taken when it is determined that the underlying collateral, if any, is not sufficient to offset the indebtedness.
Troubled debt restructured loans are considered for removal from troubled debt restructuring status in the year following modification or at time of subsequent restructuring for loans with cumulative principal forgiveness if the interest rate is considered a market rate at the time of modification and it has been performing according to the terms of the modification for a reasonable period of time long enough to observe an ability to repay under the modified terms. If removed from troubled debt restructuring status, the loan continues to be evaluated for impairment with either the present value of estimated future cash flows using the loan'sloan’s effective rate at inception or at discounted collateral value for collateral dependent loans. In addition, troubled debt restructured loans with subsequent modifications that do not have cumulative principal forgiveness are considered for removal from troubled debt restructuring status at the time of the subsequent modification if the following circumstances exist: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties; (2) under the terms of the subsequent restructuring agreement no concession has been granted to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
favorable than those that would be offered for comparable new debt. Upon meeting these criteria, the loan is no longer individually evaluated for impairment and is no longer disclosed as a troubled debt restructuring.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments in Limited Partnerships:
The Company enters into and invests in limited partnerships in order to invest in affordable housing projects for the primary purpose of obtaining available tax benefits. The Company is a limited partner in these investments and, as such, the Company is not involved in the management or operation of such investments. These investments are accounted for using the equity method of accounting. Under the equity method of accounting, the Company records its share of the partnership'spartnership’s earnings or losses in its income statement and adjusts the carrying amount of the investments on the consolidated balance sheet. These investments are evaluated for impairment when events indicate the carrying amount may not be recoverable. The investments recorded at December 31, 20162018 and 20152017 were $5.1$7.0 million and $3.4$5.3 million, respectively and are included with other assets in the consolidated balance sheet. The Company also has a commitment to fund an additional $1.3$2.1 million at December 31, 2018 in onetwo of the limited partnerships compared to $1.0 million at December 31, 2017, which is included with other liabilities in the consolidated balance sheet.
Foreclosed Assets:
Assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines, a valuation allowance is recorded through expense. Costs incurred after acquisition are expensed. At December 31, 20162018 and 2015,2017, the balance of other real estate owned was $153,000$316,000 and $210,000$40,000 and are included with other assets on the consolidated balance sheet.
Land, Premises and Equipment:
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the useful lives of the assets. Premises assets have useful lives between 5 and 40 years. Equipment assets have useful lives between 3 and 7 years.
Loan Servicing Rights:
Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in mortgage banking income. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as loan type, term and interest rate. Any impairment of a grouping is reported as a valuation allowance, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in the valuation allowance are reported with mortgage banking income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
The carrying value of mortgage servicing rights, which is included with other assets in the consolidated balance sheet, was $2.7$3.3 million and $2.6$3.0 million as of December 31, 20162018 and 2015.2017.
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $341.0$343.5 million and $335.8$344.4 million at December 31, 20162018 and 2015.2017. Custodial escrow balances maintained in connection with serviced loans were $1.5$1.6 million and $1.4$1.5 million at year end 20162018 and 2015, respectively.2017.
Servicing fee income/(loss), which is included in loan insurance and service fees on the income statement, is recorded for fees earned for servicing loans. Fees earned for servicing loans are based on a contractual percentage of the outstanding principal amount of the loan and are recorded as income when earned. The amortization of servicing rights is netted against mortgage banking income. Servicing fees totaled $987,000, $957,000$1.1 million, $1.0 million and $930,000$987,000 for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively. Late fees and ancillary fees related to loan servicing are not material.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Transfers of Financial Assets:
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(free (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Mortgage Banking Derivatives:
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in fair values of these derivatives are included in mortgage banking income.
Interest Rate Swap Derivatives:
The Company offers a derivative product to certain creditworthy commercial banking customers. This product allows the commercial banking customers to enter into an agreement with the Company to swap a variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the borrower's interest rate exposure. The extension of credit incurred in connection with these derivative products is subject to the same approval and underwriting standards as traditional credit products. The Company limits its risk exposure by simultaneously entering into a similar, offsetting swap agreement with a separate, well-capitalized and highly rated counterparty previously approved by the Company'sCompany’s Asset Liability Committee. By using these interest rate swap arrangements, the Company is also better insulated from the interest rate risk associated with underwriting fixed-rate loans and is better able to meet customer demand for fixed rate loans. These derivative contracts are not designated against specific assets or liabilities and, therefore, do not qualify for hedge accounting. The derivatives are recorded as assets and liabilities on the balance sheet at fair value with changes in fair value recorded in othernon-interest income for both the commercial banking customer swaps and the related offsetting swaps. The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820), resulting in some potential volatility in earnings each period.
The notional amount of the combined interest rate swaps with customers and counterparties at December 31, 20162018 and 20152017 was $231.1$258.0 million and $162.5$229.6 million. The fair value of the interest rate swap asset was $2.6$3.9 million and $1.7$2.4 million and the fair value of the interest rate swap liability was $2.7$4.0 million and $1.7$2.6 million, respectively at December 31, 20162018 and 2015.2017.
Bank Owned Life Insurance:
At December 31, 20162018 and 2015,2017, the Company owned $71.7$73.9 million and $67.6$73.0 million of life insurance policies on certain officers to provide a life insurance benefit for these officers. At December 31, 20162018 and 2015,2017, the Company also owned $2.3$3.2 million and $2.1$2.9 million, respectively, of variable life insurance on certain officers related to a deferred compensation plan. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, i.e., the cash surrender value adjusted for other changes or other amounts due that are probable at settlement.
Goodwill and Other Intangible Assets:
All goodwill on the Company'sCompany’s consolidated balance sheet resulted from business combinations prior to January 1, 2009 and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is not amortized, but assessed at least annually for impairment and any such impairment will be recognized in the period identified.
FHLB and Federal Reserve Bank Stock:
FHLB and Federal Reserve Bank stock are carried at cost in other assets, classified as a restricted security and are periodically evaluated for impairment based on ultimate recoverability of par value. Both cash and stock dividends are reported as income.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Repurchase Agreements:
Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-term Assets:
Premises and equipment, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Benefit Plans:
The Company has a noncontributory defined benefit pension plan, which covered substantially all employees until the plan was frozen effective April 1, 2000. Funding of the plan equals or exceeds the minimum funding requirement determined by the actuary. Pension expense is the net of interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Benefits are based on years of service and compensation levels.
The Company maintains a 401(k) profit sharing plan for all employees meeting certain age and service requirements. The Company contributions are based upon the percentage of budgeted net income earned during the year.
An employee deferred compensation plan is available to certain employees with returns based on investments in mutual funds.
The Company maintains a directors'directors’ deferred compensation plan. Effective January 1, 2003, the directors'directors’ deferred compensation plan was amended to restrict the deferral to be in stock only and deferred directors'directors’ fees are included in equity. The Company acquires shares on the open market and records such shares as treasury stock.
Stock Compensation:
Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company'sCompany’s common stock at the date of grant adjusted for the present value of expected dividends is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. Certain of the restricted stock awards are performance based, as more fully discussed in Note 15.
Income Taxes:
Annual consolidated federal and state income tax returns are filed by the Company. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Income tax expense is recorded based on the amount of taxes due on its tax return plus net deferred taxes computed based upon the expected future tax consequences of temporary differences between carrying amounts and tax basis of assets and liabilities, using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is "more“more likely than not"not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more likely of being realized on examination than not. For tax positions not meeting the "more“more likely than not"not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Off-Balance Sheet Financial Instruments:
Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. The fair value of standby letters of credit is recorded as a liability during the commitment period.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Common Share:
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, stock awards and warrants. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements. The common shares included in treasury stock for 20162018 and 20152017 include 158,222172,959 and 143,411168,970 shares, respectively, of Company common stock that has been purchased under the directors'directors’ deferred compensation plan described above. Because these shares are held in trust for the participants, they are treated as outstanding when computing the weighted-average common shares outstanding for the calculation of both basic and diluted earnings per share.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and changes in the funded status of the pension plan, which are also recognized as separate components of equity.
Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there currently are such matters that will have a material effect on the financial statements.
Restrictions on Cash:
The Company was required to have $11.2$6.4 million and $2.3$10.5 million of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at year-end 20162018 and 2015.2017, respectively. The Company met this requirement both years.
Dividend Restriction:
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to its stockholders. These restrictions currently pose no practical limit on the ability of the Bank or Company to pay dividends at historical levels.
Fair Value of Financial Instruments:
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 5. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Operating Segments:
The Company'sCompany’s chief decision-makers monitor and evaluate financial performance on a Company-wide basis. All of the Company'sCompany’s financial service operations are similar and considered by management to be aggregated into one reportable operating segment. While the Company has assigned certain management responsibilities by region and business-line, the Company's chief decision-makers monitor and evaluate financial performance on a Company-wide basis. The majority of the Company's revenue is from the business of banking and the Company's assigned regions have similar economic characteristics, products, services and customers. Accordingly, all of the Company'sCompany’s operations are considered by management to be aggregated in one reportable operating segment.
Adoption of New Accounting Standards:
No new accounting standards were adopted during the year ended December 31, 2016.
Newly Issued But Not Yet Effective Accounting Standards:
In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The largest revenue stream the Company has is from financial instruments, which is scoped out of this accounting standard. Management has evaluated our other revenue streams, to which this standard does apply and has identified one revenue stream, wealth advisory revenue, which requires further review of the individual trust contracts to determine what, if any impact this new accounting standard will have on the timing of that revenue and on our financial statements.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Adoption of New Accounting Standards:
The Company accounts for revenue in accordance with ASU No. 2014-09, “Revenue from Contracts with Customers” and all the subsequent amendments to the ASU (collectively “ASC 606”), which the Company adopted on January 1, 2018, using the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a net increase to opening retained earnings of $24,000 as of January 1, 2018 due to the cumulative impact of adopting ASC 606. Revenue is split between net interest income and noninterest income at a ratio of approximately 80% to 20%, respectively. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. The Company’s services that fall within ASC 606 are presented in noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. The majority of the Company's revenue is from the business of banking and the Company's assigned regions have similar economic characteristics, products, services and customers. Accordingly, all of the Company's operations are considered by management to be aggregated in one reportable operating segment.
The income statement impact of adopting ASC 606 for the year ended December 31, 2018 is outlined below:
| | For the year ended December 31, 2018 |
| | As reported | | Under legacy GAAP | | Impact of ASC 606 |
| Noninterest income | | | | | |
| Loan and service fees | $9,291 | | $8,520 | | $771 |
| Other income | 2,381 | | 2,625 | | (244) |
| Total | $11,672 | | $11,145 | | $527 |
| | | | | | |
| Noninterest expense | | | | | |
| Data processing fees and supplies | 9,685 | | 9,158 | | 527 |
| Total | $9,685 | | $9,158 | | $527 |
| | | | | | |
| Net Impact | $1,987 | | $1,987 | | $0 |
| | | | | | |
| Net income | $80,411 | | $80,411 | | $0 |
| Comprehensive income | 75,131 | | 75,131 | | 0 |
| | | | | | |
| Basic earnings per share | $3.18 | | $3.18 | | $0 |
| Diluted earnings per share | 3.13 | | 3.13 | | 0 |
In January 2016, the FASBFinancial Accounting Standards Board (the “FASB”) issued ASU No. 2016-01, “Financial Instruments”, which amended existing accounting guidance related to the recognition and measurement of financial assets and financial liabilities. These amendments make targeted improvements to U.S. GAAP as follows: (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. (3) Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. (4) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. (5) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. (6) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. (7) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivable)receivables) on the balance sheet or the accompanying notes to the financial statements. (8) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. This guidance will bewas effective for the Company beginning January 1, 20182018. Adopting this standard resulted in a credit to retained earnings for the reclassification in the amount of $68,000.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In August 2016, the FASB issued guidance related to the classification of certain cash receipts and cash payments in the statement of cash flow. This standard provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied as a cumulative-effect adjustment to the balance sheet aswhen cash receipts and cash payments have aspects of themore than one class of cash flows. This guidance was effective beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption.January 1, 2018. Adopting this standard isdid not expected to have a significant impact on the Company's financial condition or results of operations.
In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately from the line item that includes the service cost. The guidance was effective beginning January 1, 2018. As a result of the applicable plans being frozen April 1, 2000, there was no service cost recognized for the years ended December 31, 2018 and 2017. All other components of cost were recorded in other expense under noninterest expenses on the Consolidated Statements of Income for all periods presented. Adopting this standard did not have a significant impact on the Company's financial condition or results of operations.
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.” The ASU required a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate as a result of the Tax Cuts and Jobs Act of 2017. The amount reclassified was the difference between the historical corporate income tax rate and the new 21% federal corporate income tax rate. The new guidance is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company elected to early adopt the guidance during the first quarter of 2018, and recorded a credit to retained earnings for the reclassification in the amount of $173,000 during the first quarter.
Newly Issued But Not Yet Effective Accounting Standards:
In February 2016, the FASB issued new accounting guidance related to leases. This update, effective for the Company beginning January 1, 2019, will replace existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company currently has approximately $4.7$5.5 million of lease obligations that would come on balance sheet as both assets and liabilities upon adoption of this accounting standard.
In March 2016, the FASB issued new guidance related to employee share-based payment accounting. This standard requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The effect of adopting this new accounting standard in 2017 of approximately $1.0 million in income tax benefits offsetting income tax expense and current tax liability is due to restricted stock and performance stock units that are expected to vest using expected market price.
In June 2016, the FASB issued guidance related to credit losses on financial instruments. This update will change the accounting for credit losses on loans and debt securities. 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. For loans, this measurement will take place at the proposal will require an expected credit loss model rather than the current incurred loss model to determine the allowance for credit losses. The expected credit loss model would estimate losses for the estimated life oftime the financial asset.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. In addition, the guidance will modify the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which will allow for reversal of credit impairments in future periods. This guidance is effective for public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years. AThe Company has formed a cross-functional committee that has been formedevaluated existing technology and other solutions for calculating losses under this new standard, selected a vendor to assessvalidate data currently loaded in the requirementstechnology solution selected, and reviewed the validation assessment report. The committee is continuing to evaluate the various methods available for calculating the credit losses, including but not limited to discounted cash flows, migration, probability of this accounting standard as it relates to the Companydefault/loss given default and develop a plan for implementing them.vintage. Management expects to recognize credit losses earlier upon adoption of this accounting standard and the expected credit loss model than it has historically done under the current incurred credit loss model and is evaluatingmodel. Management will be calculating credit losses for internal purposes in accordance with the new standard during 2019, in order to evaluate the impact of adopting this new accounting standard on our financial statements.
In August 2016,January 2017, the FASB issued guidance relatedASU No. 2017-04 "Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment." These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the classification of certain cash receipts and cash payments ingoodwill impairment test. An entity still has the statement of cash flow. This standard provides cash flow statement classification guidanceoption to perform the qualitative assessment for certain transactions including howa reporting unit to determine if the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows.quantitative impairment test is necessary. The guidance is effective for public business entities forannual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively.2019. Early adoption is permitted including adoption in anfor interim period.or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. Management does not expect the adoption of this new accounting standard to have a material impact on our financial statements.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In March 2017, the FASB issued ASU No. 2017-08, ��Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities.” This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. Concerns were raised that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. There is diversity in practice (1) in the amortization period for premiums of callable debt securities and (2) in how the potential for exercise of a call is factored into current impairment assessments. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company adopted this new accounting standard on January 1, 2019. The effect of adoption was a reduction in retained earnings of approximately $1.3 million, net of tax, to reflect the acceleration of amortization of premiums on debt securities.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company's financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. Adopting this standard did not have an impact on the Company’s financial condition or results of operations.
Reclassifications:
Certain amounts appearing in the financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders'stockholders’ equity as previously reported.
NOTE 2 – SECURITIES
Information related to the fair value and amortized cost of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at December 31 is provided in the tables below.
| | | | | | Gross | | | Gross | | | | | | | Gross | | Gross | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair |
(dollars in thousands) | | Cost | | | Gain | | | Losses | | | Value | | Cost | | Gain | | Losses | | Value |
| 2016 | | | | | | | | | | | | | |
| 2018 | | | | | | | | |
| U.S. Treasury securities | | $ | 990 | | | $ | 13 | | | $ | 0 | | | $ | 1,003 | | $994 | | $0 | | $(7) | | $987 |
| U.S. government sponsored agencies | | | 6,312 | | | | 10 | | | | (81 | ) | | | 6,241 | | 4,435 | | 0 | | (85) | | 4,350 |
| Agency residential mortgage-backed securities | | | 351,108 | | | | 3,604 | | | | (3,144 | ) | | | 351,568 | | |
| Mortgage-backed securities: residential | | 329,516 | | 1,392 | | (5,496) | | 325,412 |
| Mortgage-backed securities: commercial | | 38,712 | | 0 | | (571) | | 38,141 |
| State and municipal securities | | | 146,917 | | | | 1,784 | | | | (3,322 | ) | | | 145,379 | | 217,964 | | 1,403 | | (2,708) | | 216,659 |
| Total | | $ | 505,327 | | | $ | 5,411 | | | $ | (6,547 | ) | | $ | 504,191 | | $591,621 | | $2,795 | | $(8,867) | | $585,549 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | | | | | | | | | | | | | | | | |
| 2017 | | | | | | | | |
| U.S. Treasury securities | | $ | 988 | | | $ | 15 | | | $ | 0 | | | $ | 1,003 | | $992 | | $5 | | $0 | | $997 |
| U.S. government sponsored agencies | | | 7,178 | | | | 19 | | | | (77 | ) | | | 7,120 | | 5,191 | | 0 | | (69) | | 5,122 |
| Agency residential mortgage-backed securities | | | 357,984 | | | | 5,087 | | | | (2,399 | ) | | | 360,672 | | |
| Mortgage-backed securities: residential | | 314,650 | | 2,099 | | (2,975) | | 313,774 |
| Mortgage-backed securities: commercial | | 44,208 | | 75 | | (72) | | 44,211 |
| State and municipal securities | | | 105,753 | | | | 3,773 | | | | (250 | ) | | | 109,276 | | 172,375 | | 2,990 | | (976) | | 174,389 |
| Total | | $ | 471,903 | | | $ | 8,894 | | | $ | (2,726 | ) | | $ | 478,071 | | $537,416 | | $5,169 | | $(4,092) | | $538,493 |
NOTE 2 – SECURITIES (continued)
Information regarding the fair value and amortized cost of available for sale debt securities by maturity as of December 31, 20162018 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without prepayment penalty.
| | | Amortized | | | Fair | | Amortized | | Fair |
(dollars in thousands) | | Cost | | | Value | | Cost | | Value |
| Due in one year or less | | $ | 3,370 | | | $ | 3,403 | | $2,540 | | $2,541 |
| Due after one year through five years | | | 22,002 | | | | 22,404 | | 22,363 | | 22,522 |
| Due after five years through ten years | | | 47,028 | | | | 47,882 | | 32,702 | | 32,656 |
| Due after ten years | | | 81,819 | | | | 78,934 | | 165,788 | | 164,277 |
| | | | 154,219 | | | | 152,623 | | 223,393 | | 221,996 |
| Mortgage-backed securities | | | 351,108 | | | | 351,568 | | 368,228 | | 363,553 |
| Total debt securities | | $ | 505,327 | | | $ | 504,191 | | |
| Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | $591,621 | | $585,549 |
Security proceeds, gross gains and gross losses for 2016, 20152018, 2017 and 20142016 were as follows:
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
| Sales of securities available for sale | | | | | | | | | |
| Proceeds | | $ | 12,095 | | | $ | 7,787 | | | $ | 13,766 | |
| Gross gains | | | 83 | | | | 42 | | | | 3 | |
| Gross losses | | | 17 | | | | 0 | | | | 231 | |
The Company sold fifteen securities with a total book value of $12.0 million and a total fair value of $12.1 million during 2016. The Company sold two securities with a total book value of $7.7 million and a total fair value of $7.8 million during 2015. The Company sold four securities with a total book value of $14.0 million and a total fair value of $13.8 million during 2014. The remaining gains during 2014 were from calls.
NOTE 2 – SECURITIES (continued)
| (dollars in thousands) | 2018 | | 2017 | | 2016 |
| Sales of securities available for sale | | | | | |
| Proceeds | $15,302 | | $40,877 | | $12,095 |
| Gross gains | 21 | | 267 | | 83 |
| Gross losses | (71) | | (235) | | (17) |
| Number of securities | 29 | | 50 | | 15 |
Securities with carrying values of $168.3$164.7 million and $122.7$171.1 million were pledged as of December 31, 20162018 and 2015,2017, as collateral for securities sold under agreements to repurchase, borrowings from the FHLB and for other purposes as permitted or required by law.
Information regarding securities with unrealized losses as of December 31, 20162018 and 20152017 is presented below. The tables distribute the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.
| | | Less than 12 months | | | 12 months or more | | | Total | | Less than 12 months | | 12 months or more | | Total |
| | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(dollars in thousands) | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | Value | | Losses | | Value | | Losses | | Value | | Losses |
| 2016 | | | | | | | | | | | | | | | | | | | |
| 2018 | | | | | | | | | | | | |
| U.S. Treasury securities | | $0 | | $0 | | $987 | | $7 | | $987 | | $7 |
| U.S. government sponsored agencies | | $ | 3,290 | | | $ | 81 | | | $ | 0 | | | $ | 0 | | | $ | 3,290 | | | $ | 81 | | 0 | | 0 | | 4,350 | | 85 | | 4,350 | | 85 |
| Agency residential mortgage-backed | | | | | | | | | | | | | | | | | | | | | | |
| securities | | | 181,699 | | | | 2,882 | | | | 7,080 | | | | 262 | | | | 188,779 | | | | 3,144 | | |
| Mortgage-backed securities: residential | | 11,619 | | 12 | | 217,182 | | 5,484 | | 228,801 | | 5,496 |
| Mortgage-backed securities: commercial | | 0 | | 0 | | 38,141 | | 571 | | 38,141 | | 571 |
| State and municipal securities | | | 77,434 | | | | 3,180 | | | | 2,361 | | | | 142 | | | | 79,795 | | | | 3,322 | | 26,229 | | 124 | | 85,982 | | 2,584 | | 112,211 | | 2,708 |
| Total temporarily impaired | | $ | 262,423 | | | $ | 6,143 | | | $ | 9,441 | | | $ | 404 | | | $ | 271,864 | | | $ | 6,547 | | $37,848 | | $136 | | $346,642 | | $8,731 | | $384,490 | | $8,867 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | | | | | | | | | | | |
| U.S. government sponsored agencies | | $ | 0 | | | $ | 0 | | | $ | 3,895 | | | $ | 77 | | | $ | 3,895 | | | $ | 77 | | $2,353 | | $6 | | $2,769 | | $63 | | $5,122 | | $69 |
| Agency residential mortgage-backed | | | | | | | | | | | | | | | | | | | | | | |
| securities | | | 151,792 | | | | 1,521 | | | | 30,116 | | | | 878 | | | | 181,908 | | | | 2,399 | | |
| Mortgage-backed securities: residential | | 142,834 | | 1,412 | | 59,024 | | 1,563 | | 201,858 | | 2,975 |
| Mortgage-backed securities: commercial | | 23,505 | | 72 | | 0 | | 0 | | 23,505 | | 72 |
| State and municipal securities | | | 11,364 | | | | 78 | | | | 8,326 | | | | 172 | | | | 19,690 | | | | 250 | | 8,585 | | 47 | | 49,552 | | 929 | | 58,137 | | 976 |
| Total temporarily impaired | | $ | 163,156 | | | $ | 1,599 | | | $ | 42,337 | | | $ | 1,127 | | | $ | 205,493 | | | $ | 2,726 | | $177,277 | | $1,537 | | $111,345 | | $2,555 | | $288,622 | | $4,092 |
NOTE 2 – SECURITIES (continued)
The number of securities with unrealized losses as of December 31, 20162018 and 20152017 is presented below.
| | Less than | | 12 months | | | Less than | | 12 months | | |
| | 12 months | | or more | | Total | 12 months | | or more | | Total |
| 2016 | | | | | | |
| 2018 | | | | | | |
| U.S. Treasury securities | | 0 | | 1 | | 1 |
| U.S. government sponsored agencies | 1 | | 0 | | 1 | 0 | | 2 | | 2 |
| Agency residential mortgage-backed securities | 59 | | 2 | | 61 | |
| Mortgage-backed securities: residential | | 5 | | 84 | | 89 |
| Mortgage-backed securities: commercial | | 0 | | 9 | | 9 |
| State and municipal securities | 121 | | 4 | | 125 | 35 | | 111 | | 146 |
| Total temporarily impaired | 181 | | 6 | | 187 | 40 | | 207 | | 247 |
| | | | | | | | | | | |
| 2015 | | | | | | |
| 2017 | | | | | | |
| U.S. government sponsored agencies | 0 | | 1 | | 1 | 1 | | 1 | | 2 |
| Agency residential mortgage-backed securities | 46 | | 9 | | 55 | |
| Mortgage-backed securities: residential | | 46 | | 21 | | 67 |
| Mortgage-backed securities: commercial | | 5 | | 0 | | 5 |
| State and municipal securities | 21 | | 12 | | 33 | 17 | | 62 | | 79 |
| Total temporarily impaired | 67 | | 22 | | 89 | 69 | | 84 | | 153 |
There were no debt securities with credit losses recognized in income during 2016, 20152018, 2017 or 2014.2016.
Ninety-nine percent of the securities are backed by the U.S. government, government agencies, government sponsored agencies or are A-rated or better,rated above investment grade, except for certain non-local or local municipal securities, which are not rated. For the government, government-sponsored agency and municipal securities, management did not have concerns of credit losses and there was nothing to indicate that full principal will not be received. Management considered the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell and it is more likely than not that it will not be required to sell these securities before the recovery of their amortized cost basis.
The Company does not have a history of actively trading securities, but keeps the securities available for sale should liquidity or other needs develop that would warrant the sale of securities. While these securities are held in the available for sale portfolio, it is management'smanagement’s current intent and ability to hold them until a recovery in fair value or maturity.
NOTE 3 – LOANS
Total loans outstanding as of the years ended December 31, 20162018 and 20152017 consisted of the following:
(dollars in thousands) | | 2016 | | | 2015 | | 2018 | | 2017 |
| Commercial and industrial loans: | | | | | | | | | |
| Working capital lines of credit loans | | $ | 624,404 | | | $ | 581,025 | | $690,620 | | $743,609 |
| Non-working capital loans | | | 644,086 | | | | 598,487 | | 714,759 | | 675,072 |
| Total commercial and industrial loans | | | 1,268,490 | | | | 1,179,512 | | 1,405,379 | | 1,418,681 |
| | | | | | | | | | | | |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | |
| Construction and land development loans | | | 245,182 | | | | 230,719 | | 266,805 | | 224,474 |
| Owner occupied loans | | | 469,705 | | | | 412,026 | | 586,325 | | 538,603 |
| Nonowner occupied loans | | | 458,404 | | | | 407,883 | | 520,901 | | 508,121 |
| Multi-family loans | | | 127,632 | | | | 79,425 | | 195,604 | | 173,715 |
| Total commercial real estate and multi-family residential loans | | | 1,300,923 | | | | 1,130,053 | | 1,569,635 | | 1,444,913 |
| | | | | | | | | | | | |
| Agri-business and agricultural loans: | | | | | | | | | | | |
| Loans secured by farmland | | | 172,633 | | | | 164,375 | | 177,503 | | 186,437 |
| Loans for agricultural production | | | 222,210 | | | | 141,719 | | 193,010 | | 196,404 |
| Total agri-business and agricultural loans | | | 394,843 | | | | 306,094 | | 370,513 | | 382,841 |
| | | | | | | | | | | | |
| Other commercial loans | | | 98,270 | | | | 85,075 | | 95,657 | | 124,076 |
| Total commercial loans | | | 3,062,526 | | | | 2,700,734 | | 3,441,184 | | 3,370,511 |
| | | | | | | | | | | | |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | |
| Closed end first mortgage loans | | | 163,155 | | | | 158,062 | | 185,822 | | 179,302 |
| Open end and junior lien loans | | | 169,664 | | | | 163,700 | | 187,030 | | 181,865 |
| Residential construction and land development loans | | | 15,015 | | | | 9,341 | | 16,226 | | 13,478 |
| Total consumer 1-4 family mortgage loans | | | 347,834 | | | | 331,103 | | 389,078 | | 374,645 |
| | | | | | | | | | | | |
| Other consumer loans | | | 61,308 | | | | 49,113 | | 86,064 | | 74,369 |
| Total consumer loans | | | 409,142 | | | | 380,216 | | 475,142 | | 449,014 |
| Subtotal | | | 3,471,668 | | | | 3,080,950 | | |
| Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | 3,916,326 | | 3,819,525 |
| Less: Allowance for loan losses | | | (43,718 | ) | | | (43,610 | ) | (48,453) | | (47,121) |
| Net deferred loan fees | | | (741 | ) | | | (21 | ) | (1,581) | | (1,066) |
| Loans, net | | $ | 3,427,209 | | | $ | 3,037,319 | | |
| Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | $3,866,292 | | $3,771,338 |
The recorded investment in loans does not include accrued interest.
The Company had $241,000$586,000 and $47,000 in residential real estate loans in process of foreclosure as of December 31, 2016.2018 and 2017, respectively.
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY
The following tables present the activity and balance in the allowance for loan losses by portfolio segment for the year ended December 31, 2016, 20152018, 2017 and 2014:2016:
| | | | | Commercial | | | | | | | | | | | | |
| | | | | Real Estate | | | | | | | | | | | | |
| | | Commercial | | and | | Agri-business | | | | Consumer | | | | | | |
| | | and | | Multi-family | | and | | Other | | 1-4 Family | | Other | | | | |
| (dollars in thousands) | | Industrial | | Residential | | Agricultural | | Commercial | | Mortgage | | Consumer | | Unallocated | | Total |
| December 31, 2018 | | |
| Beginning balance | | $21,097 | | $14,714 | | $4,920 | | $577 | | $2,768 | | $379 | | $2,666 | | $47,121 |
| Provision for loan losses | | 5,884 | | 1,140 | | (657) | | (209) | | (536) | | 150 | | 628 | | 6,400 |
| Loans charged-off | | (5,215) | | (491) | | 0 | | 0 | | (48) | | (357) | | 0 | | (6,111) |
Recoveries | | 752 | | 30 | | 42 | | 0 | | 108 | | 111 | | 0 | | 1,043 |
| Net loans charged-off/(recovered) | | (4,463) | | (461) | | 42 | | 0 | | 60 | | (246) | | 0 | | (5,068) |
| Ending balance | | $22,518 | | $15,393 | | $4,305 | | $368 | | $2,292 | | $283 | | $3,294 | | $48,453 |
| | | | | | | | | | | | | | | | | |
| | | | | Commercial | | | | | | | | | | | | |
| | | | | Real Estate | | | | | | | | | | | | |
| | | Commercial | | and | | Agri-business | | | | Consumer | | | | | | |
| | | and | | Multi-family | | and | | Other | | 1-4 Family | | Other | | | | |
| (dollars in thousands) | | Industrial | | Residential | | Agricultural | | Commercial | | Mortgage | | Consumer | | Unallocated | | Total |
| December 31, 2017 | | |
| Beginning balance | | $20,272 | | $13,452 | | $3,532 | | $461 | | $2,827 | | $387 | | $2,787 | | $43,718 |
| Provision for loan losses | | 614 | | 997 | | 1,365 | | 116 | | (105) | | 134 | | (121) | | 3,000 |
| Loans charged-off | | (842) | | (406) | | 0 | | 0 | | (53) | | (259) | | 0 | | (1,560) |
| Recoveries | | 1,053 | | 671 | | 23 | | 0 | | 99 | | 117 | | 0 | | 1,963 |
| Net loans charged-off/(recovered) | | 211 | | 265 | | 23 | | 0 | | 46 | | (142) | | 0 | | 403 |
| Ending balance | | $21,097 | | $14,714 | | $4,920 | | $577 | | $2,768 | | $379 | | $2,666 | | $47,121 |
| | | | | | | | | | | | | | | | | |
| | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | Commercial | | | | | | | | | | | | |
| | | | | | Real Estate | | | | | | | | | | | | | | | | | | | | | | Real Estate | | | | | | | | | | | | |
| | | Commercial | | | and | | | Agri-business | | | | | | Consumer | | | | | | | | | | | Commercial | | and | | Agri-business | | | | Consumer | | | | | | |
| | | and | | | Multi-family | | | and | | | Other | | | 1-4 Family | | | Other | | | | | | | | and | | Multi-family | | and | | Other | | 1-4 Family | | Other | | | | |
(dollars in thousands) | | Industrial | | | Residential | | | Agricultural | | | Commercial | | | Mortgage | | | Consumer | | | Unallocated | | | Total | | Industrial | | Residential | | Agricultural | | Commercial | | Mortgage | | Consumer | | Unallocated | | Total |
| December 31, 2016 | | | | |
| Beginning balance | | $ | 21,564 | | | $ | 12,473 | | | $ | 2,445 | | | $ | 574 | | | $ | 3,395 | | | $ | 319 | | | $ | 2,840 | | | $ | 43,610 | | $21,564 | | $12,473 | | $2,445 | | $574 | | $3,395 | | $319 | | $2,840 | | $43,610 |
| Provision for loan losses | | | (952 | ) | | | 1,209 | | | | 1,068 | | | | (113 | ) | | | (197 | ) | | | 188 | | | | (53 | ) | | | 1,150 | | (952) | | 1,209 | | 1,068 | | (113) | | (197) | | 188 | | (53) | | 1,150 |
| Loans charged-off | | | (801 | ) | | | (566 | ) | | | 0 | | | | 0 | | | | (478 | ) | | | (210 | ) | | | 0 | | | | (2,055 | ) | (801) | | (566) | | 0 | | 0 | | (478) | | (210) | | 0 | | (2,055) |
Recoveries | | | 461 | | | | 336 | | | | 19 | | | | 0 | | | | 107 | | | | 90 | | | | 0 | | | | 1,013 | | 461 | | 336 | | 19 | | 0 | | 107 | | 90 | | 0 | | 1,013 |
| Net loans charged-off | | | (340 | ) | | | (230 | ) | | | 19 | | | | 0 | | | | (371 | ) | | | (120 | ) | | | 0 | | | | (1,042 | ) | |
| Net loans charged-off/(recovered) | | (340) | | (230) | | 19 | | 0 | | (371) | | (120) | | 0 | | (1,042) |
| Ending balance | | $ | 20,272 | | | $ | 13,452 | | | $ | 3,532 | | | $ | 461 | | | $ | 2,827 | | | $ | 387 | | | $ | 2,787 | | | $ | 43,718 | | $20,272 | | $13,452 | | $3,532 | | $461 | | $2,827 | | $387 | | $2,787 | | $43,718 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Commercial | | | and | | | Agri-business | | | | | | | Consumer | | | | | | | | | | | | | | |
| | | and | | �� | Multi-family | | | and | | | Other | | | 1-4 Family | | | Other | | | | | | | | | | |
(dollars in thousands) | | Industrial | | | Residential | | | Agricultural | | | Commercial | | | Mortgage | | | Consumer | | | Unallocated | | | Total | | |
| December 31, 2015 | | | | |
| Beginning balance | | $ | 22,785 | | | $ | 14,153 | | | $ | 1,790 | | | $ | 276 | | | $ | 3,459 | | | $ | 483 | | | $ | 3,316 | | | $ | 46,262 | | |
| Provision for loan losses | | | (117 | ) | | | (673 | ) | | | 635 | | | | 420 | | | | 246 | | | | (35 | ) | | | (476 | ) | | | 0 | | |
| Loans charged-off | | | (1,320 | ) | | | (1,114 | ) | | | 0 | | | | (122 | ) | | | (362 | ) | | | (255 | ) | | | 0 | | | | (3,173 | ) | |
| Recoveries | | | 216 | | | | 107 | | | | 20 | | | | 0 | | | | 52 | | | | 126 | | | | 0 | | | | 521 | | |
| Net loans charged-off | | | (1,104 | ) | | | (1,007 | ) | | | 20 | | | | (122 | ) | | | (310 | ) | | | (129 | ) | | | 0 | | | | (2,652 | ) | |
| Ending balance | | $ | 21,564 | | | $ | 12,473 | | | $ | 2,445 | | | $ | 574 | | | $ | 3,395 | | | $ | 319 | | | $ | 2,840 | | | $ | 43,610 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Commercial | | | and | | | Agri-business | | | | | | | Consumer | | | | | | | | | | | | | | |
| | | and | | | Multi-family | | | and | | | Other | | | 1-4 Family | | | Other | | | | | | | | | | |
(dollars in thousands) | | Industrial | | | Residential | | | Agricultural | | | Commercial | | | Mortgage | | | Consumer | | | Unallocated | | | Total | | |
| December 31, 2014 | | | | |
| Beginning balance | | $ | 21,005 | | | $ | 18,556 | | | $ | 1,682 | | | $ | 391 | | | $ | 3,046 | | | $ | 608 | | | $ | 3,509 | | | $ | 48,797 | | |
| Provision for loan losses | | | 2,307 | | | | (2,771 | ) | | | 88 | | | | (115 | ) | | | 699 | | | | (15 | ) | | | (193 | ) | | | 0 | | |
| Loans charged-off | | | (1,441 | ) | | | (2,560 | ) | | | 0 | | | | 0 | | | | (439 | ) | | | (245 | ) | | | 0 | | | | (4,685 | ) | |
| Recoveries | | | 914 | | | | 928 | | | | 20 | | | | 0 | | | | 153 | | | | 135 | | | | 0 | | | | 2,150 | | |
| Net loans charged-off | | | (527 | ) | | | (1,632 | ) | | | 20 | | | | 0 | | | | (286 | ) | | | (110 | ) | | | 0 | | | | (2,535 | ) | |
| Ending balance | | $ | 22,785 | | | $ | 14,153 | | | $ | 1,790 | | | $ | 276 | | | $ | 3,459 | | | $ | 483 | | | $ | 3,316 | | | $ | 46,262 | | |
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
The following tables present balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 20162018 and 2015:2017:
| | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | Commercial | | | | | | | | | | | | |
| | | | | | Real Estate | | | | | | | | | | | | | | | | | | | | | | Real Estate | | | | | | | | | | | | |
| | | Commercial | | | and | | | Agri-business | | | | | | Consumer | | | | | | | | | | | Commercial | | and | | Agri-business | | | | Consumer | | | | | | |
| | | and | | | Multi-family | | | and | | | Other | | | 1-4 Family | | | Other | | | | | | | | and | | Multi-family | | and | | Other | | 1-4 Family | | Other | | | | |
(dollars in thousands) | | Industrial | | | Residential | | | Agricultural | | | Commercial | | | Mortgage | | | Consumer | | | Unallocated | | | Total | | Industrial | | Residential | | Agricultural | | Commercial | | Mortgage | | Consumer | | Unallocated | | Total |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending allowance balance attributable to loans: | Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | | | Ending allowance balance attributable to loans: | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 3,191 | | | $ | 576 | | | $ | 0 | | | $ | 0 | | | $ | 296 | | | $ | 51 | | | $ | 0 | | | $ | 4,114 | | $8,552 | | $921 | | $73 | | $0 | | $457 | | $26 | | $0 | | $10,029 |
| Collectively evaluated for impairment | | | 17,081 | | | | 12,876 | | | | 3,532 | | | | 461 | | | | 2,531 | | | | 336 | | | | 2,787 | | | | 39,604 | | 13,966 | | 14,472 | | 4,232 | | 368 | | 1,835 | | 257 | | 3,294 | | 38,424 |
| Total ending allowance balance | | $ | 20,272 | | | $ | 13,452 | | | $ | 3,532 | | | $ | 461 | | | $ | 2,827 | | | $ | 387 | | | $ | 2,787 | | | $ | 43,718 | | $22,518 | | $15,393 | | $4,305 | | $368 | | $2,292 | | $283 | | $3,294 | | $48,453 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | $ | 9,776 | | | $ | 9,151 | | | $ | 283 | | | $ | 0 | | | $ | 1,427 | | | $ | 55 | | | $ | 0 | | | $ | 20,692 | | $19,734 | | $4,266 | | $433 | | $0 | | $2,240 | | $44 | | $0 | | $26,717 |
| Loans collectively evaluated for impairment | | | 1,258,682 | | | | 1,290,131 | | | | 394,621 | | | | 98,265 | | | | 347,408 | | | | 61,128 | | | | 0 | | | | 3,450,235 | | 1,385,604 | | 1,562,899 | | 370,174 | | 95,520 | | 388,053 | | 85,778 | | 0 | | 3,888,028 |
| Total ending loans balance | | $ | 1,268,458 | | | $ | 1,299,282 | | | $ | 394,904 | | | $ | 98,265 | | | $ | 348,835 | | | $ | 61,183 | | | $ | 0 | | | $ | 3,470,927 | | $1,405,338 | | $1,567,165 | | $370,607 | | $95,520 | | $390,293 | | $85,822 | | $0 | | $3,914,745 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | | | | | | | | | | | |
| | | | | | | Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real Estate | | | | | | | | | | | | |
| | | Commercial | | | and | | | Agri-business | | | | | | | Consumer | | | | | | | | | | | | | | Commercial | | and | | Agri-business | | | | Consumer | | | | | | |
| | | and | | | Multi-family | | | and | | | Other | | | 1-4 Family | | | Other | | | | | | | | | | and | | Multi-family | | and | | Other | | 1-4 Family | | Other | | | | |
(dollars in thousands) | | Industrial | | | Residential | | | Agricultural | | | Commercial | | | Mortgage | | | Consumer | | | Unallocated | | | Total | | Industrial | | Residential | | Agricultural | | Commercial | | Mortgage | | Consumer | | Unallocated | | Total |
| December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending allowance balance attributable to loans: | Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending allowance balance attributable to loans: | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 2,781 | | | $ | 465 | | | $ | 0 | | | $ | 5 | | | $ | 358 | | | $ | 50 | | | $ | 0 | | | $ | 3,659 | | $2,067 | | $795 | | $0 | | $0 | | $310 | | $44 | | $0 | | $3,216 |
| Collectively evaluated for impairment | | | 18,783 | | | | 12,008 | | | | 2,445 | | | | 569 | | | | 3,037 | | | | 269 | | | | 2,840 | | | | 39,951 | | 19,030 | | 13,919 | | 4,920 | | 577 | | 2,458 | | 335 | | 2,666 | | 43,905 |
| Total ending allowance balance | | $ | 21,564 | | | $ | 12,473 | | | $ | 2,445 | | | $ | 574 | | | $ | 3,395 | | | $ | 319 | | | $ | 2,840 | | | $ | 43,610 | | $21,097 | | $14,714 | | $4,920 | | $577 | | $2,768 | | $379 | | $2,666 | | $47,121 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | $ | 8,286 | | | $ | 9,823 | | | $ | 471 | | | $ | 12 | | | $ | 1,927 | | | $ | 60 | | | $ | 0 | | | $ | 20,579 | | $6,979 | | $4,802 | | $283 | | $0 | | $1,756 | | $50 | | $0 | | $13,870 |
| Loans collectively evaluated for impairment | | | 1,171,407 | | | | 1,119,150 | | | | 305,707 | | | | 85,059 | | | | 330,072 | | | | 48,955 | | | | 0 | | | | 3,060,350 | | 1,411,648 | | 1,438,219 | | 382,643 | | 123,922 | | 374,013 | | 74,144 | | 0 | | 3,804,589 |
| Total ending loans balance | | $ | 1,179,693 | | | $ | 1,128,973 | | | $ | 306,178 | | | $ | 85,071 | | | $ | 331,999 | | | $ | 49,015 | | | $ | 0 | | | $ | 3,080,929 | | $1,418,627 | | $1,443,021 | | $382,926 | | $123,922 | | $375,769 | | $74,194 | | $0 | | $3,818,459 |
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016:2018:
| | | Unpaid | | | | | | Allowance for | | Unpaid | | | | Allowance for |
| | | Principal | | | Recorded | | | Loan Losses | | Principal | | Recorded | | Loan Losses |
(dollars in thousands) | | Balance | | | Investment | | | Allocated | | Balance | | Investment | | Allocated |
| With no related allowance recorded: | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 951 | | | $ | 494 | | | $ | 0 | | |
| Non-working capital loans | | | 3,007 | | | | 1,358 | | | | 0 | | $3,284 | | $1,889 | | $0 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 126 | | | | 126 | | | | 0 | | |
| Owner occupied loans | | | 2,868 | | | | 2,620 | | | | 0 | | 1,773 | | 1,527 | | 0 |
| Nonowner occupied loans | | | 4,632 | | | | 4,633 | | | | 0 | | |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 603 | | | | 283 | | | | 0 | | 603 | | 283 | | 0 |
| Consumer 1-4 family loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 161 | | | | 147 | | | | 0 | | 583 | | 502 | | 0 |
| Open end and junior lien loans | | | 408 | | | | 195 | | | | 0 | | 220 | | 220 | | 0 |
| With an allowance recorded: | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | | 1,100 | | | | 1,099 | | | | 465 | | 9,691 | | 6,694 | | 2,602 |
| Non-working capital loans | | | 6,827 | | | | 6,825 | | | | 2,726 | | 11,099 | | 11,151 | | 5,950 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | 291 | | 291 | | 142 |
| Owner occupied loans | | | 1,773 | | | | 1,772 | | | | 576 | | 2,938 | | 2,448 | | 779 |
| Agri-business and agricultural loans: | | | | | | |
| Loans secured by farmland | | 150 | | 150 | | 73 |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 1,152 | | | | 1,085 | | | | 296 | | 1,517 | | 1,518 | | 457 |
| Other consumer loans | | | 55 | | | | 55 | | | | 51 | | 45 | | 44 | | 26 |
| Total | | $ | 23,663 | | | $ | 20,692 | | | $ | 4,114 | | $32,194 | | $26,717 | | $10,029 |
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2015:2017:
| | | Unpaid | | | | | | Allowance for | | Unpaid | | | | Allowance for |
| | | Principal | | | Recorded | | | Loan Losses | | Principal | | Recorded | | Loan Losses |
(dollars in thousands) | | Balance | | | Investment | | | Allocated | | Balance | | Investment | | Allocated |
| With no related allowance recorded: | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 20 | | | $ | 20 | | | $ | 0 | | $491 | | $491 | | $0 |
| Non-working capital loans | | | 2,390 | | | | 623 | | | | 0 | | 2,973 | | 1,579 | | 0 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | 88 | | 88 | | 0 |
| Owner occupied loans | | | 3,762 | | | | 3,223 | | | | 0 | | 2,558 | | 2,310 | | 0 |
| Nonowner occupied loans | | | 4,894 | | | | 4,898 | | | | 0 | | |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 969 | | | | 471 | | | | 0 | | 603 | | 283 | | 0 |
| Consumer 1-4 family loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 45 | | | | 45 | | | | 0 | | 636 | | 570 | | 0 |
| With an allowance recorded: | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | | 1,318 | | | | 1,318 | | | | 535 | | 1,617 | | 1,617 | | 667 |
| Non-working capital loans | | | 8,617 | | | | 6,325 | | | | 2,246 | | 3,292 | | 3,292 | | 1,400 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 364 | | | | 364 | | | | 71 | | 827 | | 827 | | 350 |
| Owner occupied loans | | | 949 | | | | 949 | | | | 232 | | 1,577 | | 1,577 | | 445 |
| Multifamily loans | | | 389 | | | | 389 | | | | 162 | | |
| Other commercial loans | | | 12 | | | | 12 | | | | 5 | | |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 1,695 | | | | 1,629 | | | | 331 | | 950 | | 950 | | 269 |
| Open end and junior lien loans | | | 253 | | | | 253 | | | | 27 | | 235 | | 236 | | 41 |
| Other consumer loans | | | 60 | | | | 60 | | | | 50 | | 50 | | 50 | | 44 |
| Total | | $ | 25,737 | | | $ | 20,579 | | | $ | 3,659 | | $15,897 | | $13,870 | | $3,216 |
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
The following table presents loans individually evaluated for impairment by class of loans as offor the year ended December 31, 2016:2018:
| | | | | | | | | Cash Basis | | | | | | Cash Basis |
| | | Average | | | Interest | | | Interest | | Average | | Interest | | Interest |
| | | Recorded | | | Income | | | Income | | Recorded | | Income | | Income |
(dollars in thousands) | | Investment | | | Recognized | | | Recognized | | Investment | | Recognized | | Recognized |
| With no related allowance recorded: | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 331 | | | $ | 15 | | | $ | 14 | | $785 | | $26 | | $23 |
| Non-working capital loans | | | 996 | | | | 16 | | | | 13 | | 1,862 | | 74 | | 68 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 114 | | | | 10 | | | | 10 | | 58 | | 5 | | 4 |
| Owner occupied loans | | | 2,555 | | | | 3 | | | | 3 | | 2,291 | | 36 | | 37 |
| Nonowner occupied loans | | | 4,732 | | | | 292 | | | | 286 | | |
| Multifamily loans | | | 8 | | | | 0 | | | | 0 | | |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 393 | | | | 0 | | | | 0 | | 283 | | 0 | | 0 |
| Loans for ag production | | | 677 | | | | 5 | | | | 4 | | |
| Other commercial loans | | | 1 | | | | 0 | | | | 0 | | |
| Consumer 1-4 family loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 91 | | | | 2 | | | | 2 | | 521 | | 13 | | 12 |
| Open end and junior lien loans | | | 58 | | | | 0 | | | | 0 | | 205 | | 0 | | 0 |
| With an allowance recorded: | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | | 1,199 | | | | 33 | | | | 30 | | 3,307 | | 74 | | 12 |
| Non-working capital loans | | | 4,685 | | | | 151 | | | | 151 | | 5,328 | | 138 | | 81 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 186 | | | | 0 | | | | 0 | | 453 | | 26 | | 29 |
| Owner occupied loans | | | 1,143 | | | | 3 | | | | 3 | | 1,631 | | 9 | | 1 |
| Nonowner occupied loans | | | 19 | | | | 0 | | | | 0 | | |
| Multifamily loans | | | 256 | | | | 12 | | | | 11 | | |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | |
| Other commercial loans | | | 8 | | | | 0 | | | | 1 | | |
| Loans secured by farmland | | 12 | | 1 | | 0 |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 1,392 | | | | 36 | | | | 34 | | 1,214 | | 37 | | 36 |
| Open end and junior lien loans | | | 166 | | | | 0 | | | | 0 | | 38 | | 0 | | 0 |
| Other consumer loans | | | 57 | | | | 4 | | | | 4 | | 47 | | 3 | | 3 |
| Total | | $ | 19,067 | | | $ | 582 | | | $ | 566 | | $18,035 | | $442 | | $306 |
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
The following table presents loans individually evaluated for impairment by class of loans as offor the year ended December 31, 2015:2017:
| | | | | | | | | Cash Basis | | | | | | Cash Basis |
| | | Average | | | Interest | | | Interest | | Average | | Interest | | Interest |
| | | Recorded | | | Income | | | Income | | Recorded | | Income | | Income |
(dollars in thousands) | | Investment | | | Recognized | | | Recognized | | Investment | | Recognized | | Recognized |
| With no related allowance recorded: | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 21 | | | $ | 0 | | | $ | 0 | | $407 | | $46 | | $39 |
| Non-working capital loans | | | 619 | | | | 2 | | | | 2 | | 1,341 | | 57 | | 51 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 132 | | | | 0 | | | | 0 | | 110 | | 5 | | 5 |
| Owner occupied loans | | | 2,336 | | | | 8 | | | | 9 | | 2,349 | | 17 | | 15 |
| Nonowner occupied loans | | | 4,635 | | | | 105 | | | | 108 | | 3,009 | | 294 | | 284 |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 426 | | | | 0 | | | | 0 | | 287 | | 0 | | 0 |
| Consumer 1-4 family loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 261 | | | | 0 | | | | 0 | | 293 | | 9 | | 8 |
| Open end and junior lien loans | | | 189 | | | | 0 | | | | 0 | | 103 | | 0 | | 0 |
| Residential construction loans | | | 11 | | | | 0 | | | | 0 | | |
| Other consumer loans | | | 3 | | | | 0 | | | | 0 | | |
| With an allowance recorded: | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | | 1,133 | | | | 24 | | | | 23 | | 2,083 | | 17 | | 17 |
| Non-working capital loans | | | 8,705 | | | | 326 | | | | 333 | | 5,715 | | 103 | | 103 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 382 | | | | 16 | | | | 17 | | 69 | | 5 | | 0 |
| Owner occupied loans | | | 3,050 | | | | 13 | | | | 13 | | 1,664 | | 3 | | 2 |
| Nonowner occupied loans | | | 817 | | | | 0 | | | | 0 | | |
| Multifamily loans | | | 32 | | | | 0 | | | | 0 | | |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 50 | | | | 0 | | | | 0 | | 2 | | 0 | | 0 |
| Other commercial loans | | | 3 | | | | 0 | | | | 0 | | |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 2,357 | | | | 60 | | | | 60 | | 1,006 | | 25 | | 22 |
| Open end and junior lien loans | | | 82 | | | | 0 | | | | 0 | | 80 | | 0 | | 0 |
| Other consumer loans | | | 100 | | | | 4 | | | | 4 | | 52 | | 3 | | 3 |
| Total | | $ | 25,344 | | | $ | 558 | | | $ | 569 | | $18,570 | | $584 | | $549 |
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
The following table presents loans individually evaluated for impairment by class of loans as offor the year ended December 31, 2014:2016:
| | | | | | | | | Cash Basis | | | | | | Cash Basis |
| | | Average | | | Interest | | | Interest | | Average | | Interest | | Interest |
| | | Recorded | | | Income | | | Income | | Recorded | | Income | | Income |
(dollars in thousands) | | Investment | | | Recognized | | | Recognized | | Investment | | Recognized | | Recognized |
| With no related allowance recorded: | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 154 | | | $ | 1 | | | $ | 1 | | $331 | | $15 | | $14 |
| Non-working capital loans | | | 174 | | | | 1 | | | | 1 | | 996 | | 16 | | 13 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 265 | | | | 0 | | | | 0 | | 114 | | 10 | | 10 |
| Owner occupied loans | | | 218 | | | | 0 | | | | 0 | | 2,555 | | 3 | | 3 |
| Nonowner occupied loans | | | 1,019 | | | | 139 | | | | 139 | | 4,732 | | 292 | | 286 |
| Multifamily loans | | 8 | | 0 | | 0 |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 240 | | | | 0 | | | | 0 | | 393 | | 0 | | 0 |
| Loans for ag production | | 677 | | 5 | | 4 |
| Other commercial loans | | 1 | | 0 | | 0 |
| Consumer 1-4 family loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 697 | | | | 0 | | | | 0 | | 91 | | 2 | | 2 |
| Open end and junior lien loans | | | 210 | | | | 0 | | | | 0 | | 58 | | 0 | | 0 |
| Residential construction loans | | | 139 | | | | 0 | | | | 0 | | |
| Other consumer loans | | | 1 | | | | 0 | | | | 0 | | |
| With an allowance recorded: | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | | 1,845 | | | | 66 | | | | 57 | | 1,199 | | 33 | | 30 |
| Non-working capital loans | | | 13,806 | | | | 513 | | | | 513 | | 4,685 | | 151 | | 151 |
| Commercial real estate and multi-family residential loans: | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 1,977 | | | | 45 | | | | 46 | | 186 | | 0 | | 0 |
| Owner occupied loans | | | 3,416 | | | | 72 | | | | 70 | | 1,143 | | 3 | | 3 |
| Nonowner occupied loans | | | 7,220 | | | | 0 | | | | 0 | | 19 | | 0 | | 0 |
| Multifamily loans | | 256 | | 12 | | 11 |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 381 | | | | 0 | | | | 0 | | |
| Other commercial loans | | | 5 | | | | 0 | | | | 0 | | 8 | | 0 | | 1 |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 2,680 | | | | 74 | | | | 77 | | 1,392 | | 36 | | 34 |
| Open end and junior lien loans | | | 63 | | | | 0 | | | | 0 | | 166 | | 0 | | 0 |
| Other consumer loans | | | 98 | | | | 2 | | | | 2 | | 57 | | 4 | | 4 |
| Total | | $ | 34,608 | | | $ | 913 | | | $ | 906 | | $19,067 | | $582 | | $566 |
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following table presents the aging of the recorded investment in past due loans as of December 31, 20162018 by class of loans:
| | | | | | | Greater than | | | | | | |
| | | | | | 30-89 | | | Greater than | | | | | | | | | | | | | 30-89 | | 90 Days Past | | | | Total Past | | |
| | | Loans Not | | | Days | | | 90 Days | | | | | | Total | | | | | Loans Not | | Days | | Due and Still | | | | Due and | | |
(dollars in thousands) | | Past Due | | | Past Due | | | Past Due | | | Nonaccrual | | | Past Due | | | Total | | Past Due | | Past Due | | Accruing | | Nonaccrual | | Nonaccrual | | Total |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 624,213 | | | $ | 9 | | | $ | 0 | | | $ | 140 | | | $ | 149 | | | $ | 624,362 | | $684,191 | | $4,328 | | $0 | | $2,245 | | $6,573 | | $690,764 |
| Non-working capital loans | | | 642,014 | | | | 0 | | | | 0 | | | | 2,082 | | | | 2,082 | | | | 644,096 | | 709,629 | | 3,368 | | 0 | | 1,577 | | 4,945 | | 714,574 |
| Commercial real estate and multi-family | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| residential loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 244,411 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 244,411 | | 265,544 | | 0 | | 0 | | 0 | | 0 | | 265,544 |
| Owner occupied loans | | | 465,789 | | | | 0 | | | | 0 | | | | 3,598 | | | | 3,598 | | | | 469,387 | | 583,214 | | 486 | | 0 | | 2,269 | | 2,755 | | 585,969 |
| Nonowner occupied loans | | | 457,880 | | | | 0 | | | | 0 | | | | 122 | | | | 122 | | | | 458,002 | | 520,431 | | 57 | | 0 | | 0 | | 57 | | 520,488 |
| Multi-family loans | | | 127,482 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 127,482 | | 195,164 | | 0 | | 0 | | 0 | | 0 | | 195,164 |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 172,349 | | | | 0 | | | | 0 | | | | 283 | | | | 283 | | | | 172,632 | | 177,080 | | 150 | | 0 | | 283 | | 433 | | 177,513 |
| Loans for agricultural production | | | 222,272 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 222,272 | | 193,094 | | 0 | | 0 | | 0 | | 0 | | 193,094 |
| Other commercial loans | | | 98,265 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 98,265 | | 95,520 | | 0 | | 0 | | 0 | | 0 | | 95,520 |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 161,499 | | | | 1,072 | | | | 53 | | | | 213 | | | | 1,338 | | | | 162,837 | | 183,420 | | 1,370 | | 0 | | 671 | | 2,041 | | 185,461 |
| Open end and junior lien loans | | | 170,372 | | | | 448 | | | | 0 | | | | 195 | | | | 643 | | | | 171,015 | | 188,320 | | 98 | | 0 | | 220 | | 318 | | 188,638 |
| Residential construction loans | | | 14,983 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 14,983 | | 16,194 | | 0 | | 0 | | 0 | | 0 | | 16,194 |
| Other consumer loans | | | 61,119 | | | | 64 | | | | 0 | | | | 0 | | | | 64 | | | | 61,183 | | 85,654 | | 168 | | 0 | | 0 | | 168 | | 85,822 |
| Total | | $ | 3,462,648 | | | $ | 1,593 | | | $ | 53 | | | $ | 6,633 | | | $ | 8,279 | | | $ | 3,470,927 | | $3,897,455 | | $10,025 | | $0 | | $7,265 | | $17,290 | | $3,914,745 |
The following table presents the aging of the recorded investment in past due loans as of December 31, 20152017 by class of loans:
| | | | | | | Greater than | | | | | | |
| | | | | | 30-89 | | | Greater than | | | | | | | | | | | | | 30-89 | | 90 Days Past | | | | Total Past | | |
| | | Loans Not | | | Days | | | 90 Days | | | | | | Total | | | | | Loans Not | | Days | | Due and Still | | | | Due and | | |
(dollars in thousands) | | Past Due | | | Past Due | | | Past Due | | | Nonaccrual | | | Past Due | | | Total | | Past Due | | Past Due | | Accruing | | Nonaccrual | | Nonaccrual | | Total |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 579,081 | | | $ | 350 | | | $ | 0 | | | $ | 913 | | | $ | 1,263 | | | $ | 580,344 | | $742,205 | | $11 | | $0 | | $1,459 | | $1,470 | | $743,675 |
| Non-working capital loans | | | 595,154 | | | | 0 | | | | 0 | | | | 4,195 | | | | 4,195 | | | | 599,349 | | 671,490 | | 0 | | 0 | | 3,462 | | 3,462 | | 674,952 |
| Commercial real estate and multi-family | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| residential loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 230,336 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 230,336 | | 215,713 | | 8,000 | | 0 | | 0 | | 8,000 | | 223,713 |
| Owner occupied loans | | | 407,229 | | | | 310 | | | | 0 | | | | 4,172 | | | | 4,482 | | | | 411,711 | | 534,648 | | 0 | | 0 | | 3,620 | | 3,620 | | 538,268 |
| Nonowner occupied loans | | | 404,146 | | | | 423 | | | | 0 | | | | 3,000 | | | | 3,423 | | | | 407,569 | | 507,696 | | 0 | | 0 | | 0 | | 0 | | 507,696 |
| Multi-family loans | | | 79,357 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 79,357 | | 173,100 | | 244 | | 0 | | 0 | | 244 | | 173,344 |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 163,911 | | | | 0 | | | | 0 | | | | 471 | | | | 471 | | | | 164,382 | | 186,160 | | 0 | | 0 | | 283 | | 283 | | 186,443 |
| Loans for agricultural production | | | 141,706 | | | | 90 | | | | 0 | | | | 0 | | | | 90 | | | | 141,796 | | 196,483 | | 0 | | 0 | | 0 | | 0 | | 196,483 |
| Other commercial loans | | | 85,071 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 85,071 | | 123,922 | | 0 | | 0 | | 0 | | 0 | | 123,922 |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 156,525 | | | | 1,187 | | | | 0 | | | | 49 | | | | 1,236 | | | | 157,761 | | 177,410 | | 1,183 | | 6 | | 342 | | 1,531 | | 178,941 |
| Open end and junior lien loans | | | 164,582 | | | | 83 | | | | 0 | | | | 253 | | | | 336 | | | | 164,918 | | 183,056 | | 89 | | 0 | | 236 | | 325 | | 183,381 |
| Residential construction loans | | | 9,320 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 9,320 | | 13,447 | | 0 | | 0 | | 0 | | 0 | | 13,447 |
| Other consumer loans | | | 48,687 | | | | 328 | | | | 0 | | | | 0 | | | | 328 | | | | 49,015 | | 74,102 | | 92 | | 0 | | 0 | | 92 | | 74,194 |
| Total | | $ | 3,065,105 | | | $ | 2,771 | | | $ | 0 | | | $ | 13,053 | | | $ | 15,824 | | | $ | 3,080,929 | | $3,799,432 | | $9,619 | | $6 | | $9,402 | | $19,027 | | $3,818,459 |
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
Troubled Debt Restructurings:
Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.7$3.7 million and $2.3 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 20162018 and 2015.2017. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.
(dollars in thousands) | | 2016 | | | 2015 | | 2018 | | 2017 |
| Accruing troubled debt restructured loans | | $ | 10,351 | | | $ | 6,260 | | $8,016 | | $2,893 |
| Nonaccrual troubled debt restructured loans | | | 5,633 | | | | 10,914 | | 4,384 | | 7,750 |
| Total troubled debt restructured loans | | $ | 15,984 | | | $ | 17,174 | | $12,400 | | $10,643 |
During the year ending December 31, 2018, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.
Additional concessions were granted to borrowers during 2018 with previously identified troubled debt restructured loans. There were three commercial real estate loans with recorded investments totaling $1.3 million and three commercial and industrial loans with recorded investments totaling $1.4 million where the collateral value and/or cash flows do not support those loans. The other three loans are to borrowers for investments in land for residential development which have not had sales activity to support loans with a recorded investments totaling $593,000. These troubled debt restructured loans with additional concessions increased the allowance by $189,000 and resulted in no charge-offs for year ending December 31, 2018. These concessions are not included in the table below.
The following table presents loans by class modified as new troubled debt restructurings that occurred during the year ending December 31, 2018:
| | | | Modified Repayment Terms |
| | | | Pre-Modification | | Post-Modification | | | | Extension |
| | | | Outstanding | | Outstanding | | | | Period or |
| | Number of | | Recorded | | Recorded | | Number of | | Range |
| (dollars in thousands) | Loans | | Investment | | Investment | | Loans | | (in months) |
| Troubled Debt Restructurings | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | |
| Working capital lines of credit loans | 1 | | $600 | | $600 | | 1 | | 0 |
| Non-working capital loans | 7 | | 4,628 | | 4,628 | | 7 | | 0-6 |
| Commercial real estate and multi- | | | | | | | | | |
| family residential loans: | | | | | | | | | |
| Construction and land | | | | | | | | | |
| development loans | 1 | | 824 | | 824 | | 1 | | 12 |
| Owner occupied loans | 2 | | 933 | | 933 | | 2 | | 12 |
| Consumer 1-4 family loans: | | | | | | | | | |
| Closed end first mortgage loans | 1 | | 198 | | 197 | | 1 | | 239 |
| Total | 12 | | $7,183 | | $7,182 | | 12 | | 0-239 |
For the period ending December 31, 2018, the commercial real estate and multi-family residential troubled debt restructurings described above decreased the allowance for loan losses by $207,000, and resulted in no charge-offs. The commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $1.6 million, and resulted in $1.6 million of charge-offs for the year ending December 31, 2018. All other troubled debt restructurings described above had no impact to the allowance and no charge-offs were recorded for the year ending December 31, 2018.
During the year ending December 31, 2017, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
Additional concessions were granted to borrowers during 2017 with previously identified troubled debt restructured loans. There were four loans for commercial real estate buildings where the collateral value and cash flows from the companies occupying the buildings do not support the loans with recorded investments of $1.9 million. There were five loans for commercial and industrial non-working capital loans with recorded investments of $2.5 million. These concessions are not included in table below.
The following table presents loans by class modified as new troubled debt restructurings that occurred during the year ending December 31, 2017:
| | | | Pre-Modification | | Post-Modification | | | | Extension |
| | | | Outstanding | | Outstanding | | | | Period or |
| | Number of | | Recorded | | Recorded | | Number of | | Range |
| (dollars in thousands) | Loans | | Investment | | Investment | | Loans | | (in months) |
| Troubled Debt Restructurings | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | |
| Working capital lines of credit loans | 1 | | $1,324 | | $1,324 | | 1 | | 9 |
| Non-working capital loans | 4 | | 1,922 | | 1,922 | | 4 | | 0-6 |
| Commercial real estate and multi- | | | | | | | | | |
| family residential loans: | | | | | | | | | |
| Owner occupied loans | 1 | | 486 | | 486 | | 1 | | 6 |
| Consumer 1-4 family loans: | | | | | | | | | |
| Closed end first mortgage loans | 2 | | 120 | | 122 | | 2 | | 198-350 |
| Total | 8 | | $3,852 | | $3,854 | | 8 | | 0-350 |
For the period ending December 31, 2017, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $513,000 and the commercial real estate and multi-family residential loan troubled debt restructurings increased the allowance for loan losses by $27,000.
No charge-offs resulted from any troubled debt restructurings described above during the year ended December 31, 2017.
During the year ending December 31, 2016, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for at least one year; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.
One new commercial and industrial non-working capital loan to assist with cash flow was offered to a borrower under financial duress which did not require additional compensation or consideration, and the terms offered would not have been readily available in the marketplace for loans bearing similar risk profiles.profiles for the year ending December 31, 2016. In this instance, it was determined that a concession had been granted. It is difficult to quantify the concessions granted due to an absence of readily available market terms to be used for comparison. The recorded investment was $60,000.$60,000 and was included in the table below reporting loans modified as new troubled debt restructurings for the year ending December 31, 2016.
Additional concessions were granted to borrowers during 2016 with previously identified troubled debt restructured loans. Seven loans were for commercial real estate building with a recorded investment of $3.0 million. Another was to a borrower engaged in land development, where the aggregate recorded investment totaled $126,000. One loan was secured by farmland with a recorded investment of $283,000. Three loans were for commercial and industrial non-working capital with a recorded investment of $491,000. Also, an additional concession was granted to a borrower for a commercial and industrial working capital loan with a recorded investment of $475,000. These concessions are not included in table below.
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
The following table presents loans by class modified as new troubled debt restructurings that occurred during the year ending December 31, 2016 not already noted above:2016:
| | | | | | Modified Repayment Terms | | |
| | | | | | Pre-Modification | | | Post-Modification | | | | | | Extension | | | | Pre-Modification | | Post-Modification | | | | Extension |
| | | | | | Outstanding | | | Outstanding | | | | | | Period or | | | | Outstanding | | Outstanding | | | | Period or |
| | | Number of | | | Recorded | | | Recorded | | | Number of | | | Range | | Number of | | Recorded | | Recorded | | Number of | | Range |
(dollars in thousands) | | Loans | | | Investment | | | Investment | | | Loans | | | (in months) | | Loans | | Investment | | Investment | | Loans | | (in months) |
| Troubled Debt Restructurings | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-working capital loans | | | 6 | | | $ | 1,841 | | | $ | 1,902 | | | | 5 | | | | 9-356 | | 6 | | $1,841 | | $1,902 | | 5 | | 9-356 |
| Commercial real estate and multi- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| family residential loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owner occupied loans | | | 3 | | | | 718 | | | | 717 | | | | 3 | | | | 13-24 | | 3 | | 718 | | 717 | | 3 | | 13-24 |
| Total | | | 9 | | | $ | 2,559 | | | $ | 2,619 | | | | 8 | | | | 9-356 | | 9 | | $2,559 | | $2,619 | | 8 | | 9-356 |
For the period ending December 31, 2016, the commercial and industrial troubled debt restructurings described above decreased the allowance for loan losses by $99,000 and the commercial real estate and multi-family residential loan troubled debt restructurings increased the allowance for loan losses by $108,000.
Charge-offs of $66,000 resulted from the commercial real estate and multi-family residential loan troubled debt restructurings described above during the period ending December 31, 2016.
During the year ending December 31, 2015, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for at least one year; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
Renewal terms were offered to three borrowers under financial duress which did not require additional compensation or consideration, and the terms offered would not have been readily available in the marketplace for loans bearing similar risk profiles. In these instances, it was determined that a concession had been granted. It is difficult to quantify the concessions granted due to an absence of readily available market terms to be used for comparison. Two were to commercial and industrial working capital loans with recorded investments of $379,000 and $185,000 and the other was to a borrower for a commercial real estate building where the collateral value and cash flows from the company occupying the building did not support the loan with a recorded investment of $788,000.
Additional concessions were granted to borrowers during 2015 with previously identified troubled debt restructured loans. One loan was for a commercial real estate building where the collateral value and cash flows from the company occupying the building did not support the loan with a recorded investment of $131,000. Another was to a borrower engaged in land development, where the aggregate recorded investment totaled $238,000. Also, an additional concession was granted to a borrower for a commercial and industrial working capital loan with a recorded investment of $2.5 million. These concessions are not included in table below.
The following table presents loans by class modified as new troubled debt restructurings that occurred during the year ending December 31, 2015 not already noted above:
| | | | | | Modified Repayment Terms | |
| | | | | | Pre-Modification | | | Post-Modification | | | | | | Extension | |
| | | | | | Outstanding | | | Outstanding | | | | | | Period or | |
| | | Number of | | | Recorded | | | Recorded | | | Number of | | | Range | |
(dollars in thousands) | | Loans | | | Investment | | | Investment | | | Loans | | | (in months) | |
| Troubled Debt Restructurings | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | | 2 | | | $ | 564 | | | $ | 564 | | | | | | | |
| Non-working capital loans | | | 1 | | | | 783 | | | | 783 | | | | 1 | | | | 12 | |
| Commercial real estate and multi- | | | | | | | | | | | | | | | | | | | | |
| family residential loans: | | | | | | | | | | | | | | | | | | | | |
| Owner occupied loans | | | 2 | | | | 855 | | | | 855 | | | | 1 | | | | 6 | |
| Consumer 1-4 family loans: | | | | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 1 | | | | 65 | | | | 65 | | | | 1 | | | | 208 | |
| Total | | | 6 | | | $ | 2,267 | | | $ | 2,267 | | | | 3 | | | | 6-208 | |
For the period ending December 31, 2015, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $74,000, the commercial real estate and multi-family residential loan troubled debt restructurings decreased the allowance for loan losses by $18,000 and the consumer 1-4 family loan troubled debt restructuring described above increased the allowance by $9,000.
No charge-offs resulted from any troubled debt restructurings described above during the period ending December 31, 2015.
During the year ending December 31, 2014 certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.
There were renewal terms offered to one borrower under financial duress which did not require additional compensation or consideration, and the terms offered would not have been readily available in the marketplace forno loans bearing similar risk profiles. In this instance, it was determined that a concession had been granted. It is difficult to quantify the concession granted due to an absence of readily available market terms to be used for comparison. The borrower engaged in retail sales, where the collateral and cash flow did not support the loan with a recorded investment of $159,000.
Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during 2014. One loan with a balance of $173,000 was rewritten under terms that are not readily available in the marketplace. Terms in the current loan agreement include an amortization period that exceeds those of similar type loans for a borrower enduring financial hardship. This concession was granted without additional compensation. Another concession included further forgiveness of principal if the terms of the restructured loan are met during the life of the loan. This borrower had a recorded investment of $2.7 million at the time of the modification. These concessions are not included in table below.
Renegotiated interest rates include loans with a reduction in rate for the remaining life of the loan. There were modifications to borrowers at rates that were not readily available in the marketplace that were considered concessions.
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
The following table presents loans by class modified as new troubled debt restructurings that occurred during the year ending December 31, 2014:
| | | All Modifications | | | Interest Rate Reductions | | | Modified Repayment Terms | |
| | | | | | Pre-Modification | | | Post-Modification | | | | | | | | | | | | | | | Extension | |
| | | | | | Outstanding | | | Outstanding | | | | | | Interest at | | | Interest at | | | | | | Period or | |
| | | Number of | | | Recorded | | | Recorded | | | Number of | | | Pre-Modification | | | Post-Modification | | | Number of | | | Range | |
(dollars in thousands) | | Loans | | | Investment | | | Investment | | | Loans | | | Rate | | | Rate | | | Loans | | | (in months) | |
| Troubled Debt Restructurings | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-working capital loans | | | 2 | | | $ | 433 | | | $ | 433 | | | | 0 | | | $ | 0 | | | $ | 0 | | | | 2 | | | | 12-15 | |
| Commercial real estate and multi- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| family residential loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owner occupied loans | | | 3 | | | | 2,639 | | | | 2,710 | | | | 1 | | | | 89 | | | | 95 | | | | 2 | | | | 12-24 | |
| Total | | | 5 | | | $ | 3,072 | | | $ | 3,143 | | | | 1 | | | $ | 89 | | | $ | 95 | | | | 4 | | | | 12-24 | |
For period ending December 31, 2014, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $205,000 and the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $171,000.
No charge-offs resulted from any troubled debt restructurings described above during the period ending December 31, 2014.
The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period ending December 31:
| | | 2016 | | | 2015 | | | 2014 | |
| | | Number of | | | Recorded | | | Number of | | | Recorded | | | Number of | | | Recorded | |
(dollars in thousands) | | Loans | | | Investment | | | Loans | | | Investment | | | Loans | | | Investment | |
| Troubled Debt Restructurings that Subsequently Defaulted | | | | | | | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | | |
| Non-working capital loans | | | 0 | | | $ | 0 | | | | 1 | | | $ | 755 | | | | 0 | | | $ | 0 | |
| Total | | | 0 | | | $ | 0 | | | | 1 | | | $ | 755 | | | | 0 | | | $ | 0 | |
31, 2018, 2017, and 2016. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.
The non-working capital troubled debt restructurings that subsequently defaulted, as described above, increased the allowance for loan losses by $76,000 and did not result in any charge-offs during the period ending December 31, 2015.
During the first quarter of 2014 the Company sold, to an independent party, three loans totaling $6.7 million, representing a single commercial relationship. The three loans were accounted for as troubled debt restructurings. The Company received proceeds of $4.3 million and recognized charge-offs of $2.4 million as a result of the sale. The amount charged-off had previously been reserved for by the Company.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $150,000.$250,000.
The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as Special Mention have a potential weakness that deserves management'smanagement’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution'sinstitution’s credit position at some future date.
Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized as the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY (continued)
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial gradeconsumer loans and consumer nonaccrual loans which are evaluated individually and listed with Not Rated loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status. As of December 31, 2016,2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
| | | | | | Special | | | | | | | | | Not | | | | | | | Special | | | | | | Not | | |
(dollars in thousands) | | Pass | | | Mention | | | Substandard | | | Doubtful | | | Rated | | | Total | | Pass | | Mention | | Substandard | | Doubtful | | Rated | | Total |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 577,208 | | | $ | 17,636 | | | $ | 29,396 | | | $ | 0 | | | $ | 122 | | | $ | 624,362 | | $618,612 | | $43,240 | | $28,563 | | $0 | | $349 | | $690,764 |
| Non-working capital loans | | | 583,135 | | | | 32,587 | | | | 24,405 | | | | 0 | | | | 3,969 | | | | 644,096 | | 664,787 | | 15,992 | | 27,548 | | 0 | | 6,247 | | 714,574 |
| Commercial real estate and multi- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| family residential loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction and land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| development loans | | | 242,964 | | | | 1,447 | | | | 0 | | | | 0 | | | | 0 | | | | 244,411 | | 264,900 | | 353 | | 291 | | 0 | | 0 | | 265,544 |
| Owner occupied loans | | | 444,143 | | | | 10,285 | | | | 14,959 | | | | 0 | | | | 0 | | | | 469,387 | | 541,734 | | 21,864 | | 22,371 | | 0 | | 0 | | 585,969 |
| Nonowner occupied loans | | | 451,390 | | | | 4,550 | | | | 2,062 | | | | 0 | | | | 0 | | | | 458,002 | | 517,356 | | 2,491 | | 641 | | 0 | | 0 | | 520,488 |
| Multi-family loans | | | 127,219 | | | | 263 | | | | 0 | | | | 0 | | | | 0 | | | | 127,482 | | 194,948 | | 216 | | 0 | | 0 | | 0 | | 195,164 |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 168,660 | | | | 3,689 | | | | 283 | | | | 0 | | | | 0 | | | | 172,632 | | 166,623 | | 9,107 | | 1,783 | | 0 | | 0 | | 177,513 |
| Loans for agricultural production | | | 218,581 | | | | 3,691 | | | | 0 | | | | 0 | | | | 0 | | | | 222,272 | | 183,189 | | 8,155 | | 1,750 | | 0 | | 0 | | 193,094 |
| Other commercial loans | | | 98,261 | | | | 0 | | | | 0 | | | | 0 | | | | 4 | | | | 98,265 | | 95,516 | | 0 | | 0 | | 0 | | 4 | | 95,520 |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 44,687 | | | | 126 | | | | 1,232 | | | | 0 | | | | 116,792 | | | | 162,837 | | 54,879 | | 0 | | 2,021 | | 0 | | 128,561 | | 185,461 |
| Open end and junior lien loans | | | 7,028 | | | | 0 | | | | 0 | | | | 0 | | | | 163,987 | | | | 171,015 | | 8,810 | | 0 | | 220 | | 0 | | 179,608 | | 188,638 |
| Residential construction loans | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 14,983 | | | | 14,983 | | 0 | | 0 | | 0 | | 0 | | 16,194 | | 16,194 |
| Other consumer loans | | | 17,717 | | | | 0 | | | | 55 | | | | 0 | | | | 43,411 | | | | 61,183 | | 12,700 | | 0 | | 44 | | 0 | | 73,078 | | 85,822 |
| Total | | $ | 2,980,993 | | | $ | 74,274 | | | $ | 72,392 | | | $ | 0 | | | $ | 343,268 | | | $ | 3,470,927 | | $3,324,054 | | $101,418 | | $85,232 | | $0 | | $404,041 | | $3,914,745 |
As of December 31, 2015,2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
| | | | | | Special | | | | | | | | | Not | | | | | | | Special | | | | | | Not | | |
(dollars in thousands) | | Pass | | | Mention | | | Substandard | | | Doubtful | | | Rated | | | Total | | Pass | | Mention | | Substandard | | Doubtful | | Rated | | Total |
| Commercial and industrial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 538,899 | | | $ | 32,601 | | | $ | 8,844 | | | $ | 0 | | | $ | 0 | | | $ | 580,344 | | $688,748 | | $33,337 | | $21,350 | | $0 | | $240 | | $743,675 |
| Non-working capital loans | | | 549,771 | | | | 35,910 | | | | 10,566 | | | | 0 | | | | 3,102 | | | | 599,349 | | 624,275 | | 20,171 | | 25,834 | | 0 | | 4,672 | | 674,952 |
| Commercial real estate and multi- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| family residential loans: | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction and land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| development loans | | | 227,996 | | | | 2,340 | | | | 0 | | | | 0 | | | | 0 | | | | 230,336 | | 222,445 | | 441 | | 827 | | 0 | | 0 | | 223,713 |
| Owner occupied loans | | | 378,847 | | | | 23,522 | | | | 9,342 | | | | 0 | | | | 0 | | | | 411,711 | | 496,231 | | 19,361 | | 22,676 | | 0 | | 0 | | 538,268 |
| Nonowner occupied loans | | | 394,387 | | | | 10,953 | | | | 2,229 | | | | 0 | | | | 0 | | | | 407,569 | | 505,033 | | 1,970 | | 693 | | 0 | | 0 | | 507,696 |
| Multi-family loans | | | 78,968 | | | | 0 | | | | 389 | | | | 0 | | | | 0 | | | | 79,357 | | 173,100 | | 244 | | 0 | | 0 | | 0 | | 173,344 |
| Agri-business and agricultural loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans secured by farmland | | | 163,911 | | | | 0 | | | | 471 | | | | 0 | | | | 0 | | | | 164,382 | | 174,118 | | 7,988 | | 4,337 | | 0 | | 0 | | 186,443 |
| Loans for agricultural production | | | 141,796 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 141,796 | | 185,772 | | 9,716 | | 995 | | 0 | | 0 | | 196,483 |
| Other commercial loans | | | 85,056 | | | | 0 | | | | 12 | | | | 0 | | | | 3 | | | | 85,071 | | 123,917 | | 0 | | 0 | | 0 | | 5 | | 123,922 |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | Consumer 1-4 family mortgage loans: | | | | | | | | | | |
| Closed end first mortgage loans | | | 43,231 | | | | 126 | | | | 1,769 | | | | 0 | | | | 112,635 | | | | 157,761 | | 52,301 | | 0 | | 1,520 | | 0 | | 125,120 | | 178,941 |
| Open end and junior lien loans | | | 8,373 | | | | 0 | | | | 1,616 | | | | 0 | | | | 154,929 | | | | 164,918 | | 8,259 | | 0 | | 236 | | 0 | | 174,886 | | 183,381 |
| Residential construction loans | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 9,320 | | | | 9,320 | | 0 | | 0 | | 0 | | 0 | | 13,447 | | 13,447 |
| Other consumer loans | | | 13,940 | | | | 0 | | | | 60 | | | | 0 | | | | 35,015 | | | | 49,015 | | 18,642 | | 0 | | 50 | | 0 | | 55,502 | | 74,194 |
| Total | | $ | 2,625,175 | | | $ | 105,452 | | | $ | 35,298 | | | $ | 0 | | | $ | 315,004 | | | $ | 3,080,929 | | $3,272,841 | | $93,228 | | $78,518 | | $0 | | $373,872 | | $3,818,459 |
NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTSVALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
| Level 1 | | Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
| Level 2 | | Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| Level 3 | | Significant unobservable inputs that reflect a company'scompany’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities: Securities available for sale are valued primarily by a third party pricing service. The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities'securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).
The Company's ControllingCompany’s Finance Department, which is responsible for all accounting and SEC compliance, and the Company'sCompany’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company'sCompany’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board of Directors are made aware of such assets at their next scheduled meeting.
Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/- 5%, government mbs/cmo +/- 3% and U.S. treasuries +/-1%. If any securities fall outside the tolerance threshold and have a variance of $100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material differences are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service.
Mortgage banking derivative: The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2).
Interest rate swap derivatives: Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2).
NOTE 5 – FAIR VALUE (continued)
Impaired loans: Impaired loans with specific allocations of the allowance for loan losses are generally based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the
NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Company'sCompany’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of impaired loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 0-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company'sCompany’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 35-65%, depending on the marketability of the goods (b) finished goods are generally discounted by 30-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good (c) work in process inventory is typically discounted by 50-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30-70% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.
Mortgage servicing rights: As of December 31, 2016,2018, the fair value of the Company'sCompany’s Level 3 servicing assets for residential mortgage loans ("MSRs"(“MSRs”) was $3.6$4.4 million, none of which are currently impaired and therefore are carried at amortized cost. These residential mortgage loans have a weighted average interest rate of 3.82%3.91%, a weighted average maturity of 1920 years and are secured by homes generally within the Company'sCompany’s market area of Northern Indiana.Indiana and Indianapolis. A valuation model is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At December 31, 2016,2018, the constant prepayment speed ("PSA"(“PSA”) used was 16281 and discount rate used was 9.3%9.4%. At December 31, 2015,2017, the PSA used was 181123 and the discount rate used was 9.4%.
At December 31, 2016,2018, the sensitivity of the current fair value of MSRs to an immediate 10% and 20% adverse change in the PSA and discount rate was ($129,000)94,000) and ($253,000)183,000), respectively for the PSA, and was ($116,000)186,000) and ($225,000)358,000), respectively for the discount rate. These sensitivities are hypothetical and should not be relied upon. As the figures indicate, changes in value based on a 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also, in this example, the effect of a variation in a particular assumption on the value of the MSR is calculated without changing any other assumption; however, in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which might magnify or counteract the sensitivities.
Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company'sCompany’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company'sCompany’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Real estate mortgage loans held for sale: Real estate mortgage loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification.
NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTSVALUE (continued)
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis:
| | | December 31, 2016 | |
| | | Fair Value Measurements Using | | | Assets | |
(dollars in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | at Fair Value | |
| Assets | | | | | | | | | |
| U.S. Treasury securities | | $ | 1,003 | | | $ | 0 | | | $ | 0 | | | $ | 1,003 | |
| U.S. government sponsored agency securities | | | 0 | | | | 6,241 | | | | 0 | | | | 6,241 | |
| Mortgage-backed securities | | | 0 | | | | 351,568 | | | | 0 | | | | 351,568 | |
| State and municipal securities | | | 0 | | | | 144,709 | | | | 670 | | | | 145,379 | |
| Total Securities | | | 1,003 | | | | 502,518 | | | | 670 | | | | 504,191 | |
| Mortgage banking derivative | | | 0 | | | | 314 | | | | 0 | | | | 314 | |
| Interest rate swap derivative | | | 0 | | | | 2,645 | | | | 0 | | | | 2,645 | |
| Total assets | | $ | 1,003 | | | $ | 505,477 | | | $ | 670 | | | $ | 507,150 | |
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| Mortgage banking derivative | | | 0 | | | | 14 | | | | 0 | | | | 14 | |
| Interest rate swap derivative | | | 0 | | | | 2,735 | | | | 0 | | | | 2,735 | |
| Total liabilities | | $ | 0 | | | $ | 2,749 | | | $ | 0 | | | $ | 2,749 | |
| | | December 31, 2015 | | December 31, 2018 |
| | | Fair Value Measurements Using | | | Assets | | Fair Value Measurements Using | | Assets |
(dollars in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | at Fair Value | | Level 1 | | Level 2 | | Level 3 | | at Fair Value |
| Assets | | | | | | | | | | | | | | |
| U.S. Treasury securities | | $ | 1,003 | | | $ | 0 | | | $ | 0 | | | $ | 1,003 | | $987 | | $0 | | $0 | | $987 |
| U.S. government sponsored agency securities | | | 0 | | | | 7,120 | | | | 0 | | | | 7,120 | | 0 | | 4,350 | | 0 | | 4,350 |
| Mortgage-backed securities | | | 0 | | | | 360,672 | | | | 0 | | | | 360,672 | | |
| Mortgage-backed securities: residential | | 0 | | 325,412 | | 0 | | 325,412 |
| Mortgage-backed securities: commercial | | 0 | | 38,141 | | 0 | | 38,141 |
| State and municipal securities | | | 0 | | | | 108,725 | | | | 551 | | | | 109,276 | | 0 | | 216,509 | | 150 | | 216,659 |
| Total Securities | | | 1,003 | | | | 476,517 | | | | 551 | | | | 478,071 | | 987 | | 584,412 | | 150 | | 585,549 |
| Mortgage banking derivative | | | 0 | | | | 165 | | | | 0 | | | | 165 | | 0 | | 95 | | 0 | | 95 |
| Interest rate swap derivative | | | 0 | | | | 1,732 | | | | 0 | | | | 1,732 | | 0 | | 3,869 | | 0 | | 3,869 |
| Total assets | | $ | 1,003 | | | $ | 478,414 | | | $ | 551 | | | $ | 479,968 | | $987 | | $588,376 | | $150 | | $589,513 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage banking derivative | | | 0 | | | | 1 | | | | 0 | | | | 1 | | 0 | | 23 | | 0 | | 23 |
| Interest rate swap derivative | | | 0 | | | | 1,748 | | | | 0 | | | | 1,748 | | 0 | | 4,025 | | 0 | | 4,025 |
| Total liabilities | | $ | 0 | | | $ | 1,749 | | | $ | 0 | | | $ | 1,749 | | $0 | | $4,048 | | $0 | | $4,048 |
| | December 31, 2017 |
| | Fair Value Measurements Using | | Assets |
| (dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | at Fair Value |
| Assets | | | | | |
| U.S. Treasury securities | $997 | | $0 | | $0 | | $997 |
| U.S. government sponsored agency securities | 0 | | 5,122 | | 0 | | 5,122 |
| Mortgage-backed securities: residential | 0 | | 313,774 | | 0 | | 313,774 |
| Mortgage-backed securities: commercial | 0 | | 44,211 | | 0 | | 44,211 |
| State and municipal securities | 0 | | 173,509 | | 880 | | 174,389 |
| Total Securities | 997 | | 536,616 | | 880 | | 538,493 |
| Mortgage banking derivative | 0 | | 136 | | 0 | | 136 |
| Interest rate swap derivative | 0 | | 2,441 | | 0 | | 2,441 |
| Total assets | $997 | | $539,193 | | $880 | | $541,070 |
| | | | | | | | |
| Liabilities | | | | | | | |
| Mortgage banking derivative | 0 | | 3 | | 0 | | 3 |
| Interest rate swap derivative | 0 | | 2,562 | | 0 | | 2,562 |
| Total liabilities | $0 | | $2,565 | | $0 | | $2,565 |
There were no transfers between Level 1 and Level 2 during 20162018 and 2015.2017.
NOTE 5 – FAIR VALUE (continued)
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 20162018 and 2015:2017:
| | | State and Municipal Securities | |
(dollars in thousands) | | 2016 | | | 2015 | |
| Balance of recurring Level 3 assets at January 1 | | $ | 551 | | | $ | 850 | |
| Transfers into Level 3 | | | 339 | | | | 0 | |
| Changes in fair value of securities | | | | | | | | |
| included in other comprehensive income | | | (10 | ) | | | (4 | ) |
| Principal payments | | | (210 | ) | | | (295 | ) |
| Sales | | | 0 | | | | 0 | |
| Balance of recurring Level 3 assets at December 31 | | $ | 670 | | | $ | 551 | |
NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
| | | | State and Municipal Securities |
| (dollars in thousands) | | | | | 2018 | | 2017 |
| Balance of recurring Level 3 assets at January 1 | | | | | $880 | | $670 |
| Transfers into Level 3 | | | | | 0 | | 325 |
| Changes in fair value of securities | | | | | | | |
| included in other comprehensive income | | | | | (10) | | (10) |
| Principal payments | | | | | (720) | | (105) |
| Sales | | | | | 0 | | 0 |
| Balance of recurring Level 3 assets at December 31 | | | | | $150 | | $880 |
The state and municipal securities measured at fair value included below are nonrated Indiana municipal revenue bonds and are not actively traded.
| Quantitative Information about Level 3 Fair Value Measurements | |
| | | | | | | | Range of | |
| | | Fair Value at | | | | | Inputs | |
(dollars in thousands) | | 12/31/2016 | | Valuation Technique | Unobservable Input | | (Average) | |
| | | | | | | | | |
| State and municipal securities | | $ | 670 | | Price to type, par, call | Discount to benchmark index | | | 0-5 | % |
| | | | | | | | | | (2.98 | %) |
| Quantitative Information about Level 3 Fair Value Measurements |
| | | | | | | Range of |
| Fair Value at | | | | | | Inputs |
| (dollars in thousands) | 12/31/2018 | | Valuation Technique | | Unobservable Input | | (Average) |
| | | | | | | |
| State and municipal securities | $150 | | Price to type, par, call | | Discount to benchmark index | | 0-1% |
| | | | | | | (0.17%) |
| Quantitative Information about Level 3 Fair Value Measurements | |
| | | | | | | | Range of | |
| | | Fair Value at | | | | | Inputs | |
(dollars in thousands) | | 12/31/2015 | | Valuation Technique | Unobservable Input | | (Average) | |
| | | | | | | | | |
| State and municipal securities | | $ | 551 | | Price to type, par, call | Discount to benchmark index | | | 0-5 | % |
| | | | | | | | | | (2.82 | %) |
| Quantitative Information about Level 3 Fair Value Measurements |
| | | | | | | Range of |
| Fair Value at | | | | | | Inputs |
| (dollars in thousands) | 12/31/2017 | | Valuation Technique | | Unobservable Input | | (Average) |
| | | | | | | |
| State and municipal securities | $880 | | Price to type, par, call | | Discount to benchmark index | | 0-5% |
| | | | | | | (2.03%) |
The primary methodology used in the fair value measurement of the Company'sCompany’s state and municipal securities classified as Level 3 is a discount to the AAA municipal benchmark index. Significant increases or (decreases) in this index as well as the degree to which the security differs in ratings, coupon, call and duration will result in a higher or (lower) fair value measurement for those securities that are not callable. For those securities that are continuously callable, a slight premium to par is used.
NOTE 5 – FAIR VALUE (continued)
The table below presents the balancesamount of assets measured at fair value on a nonrecurring basis:
| | | December 31, 2016 | |
| | | Fair Value Measurements Using | | | Assets | |
(dollars in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | at Fair Value | |
| Assets | | | | | | | | | |
| Impaired loans: | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 0 | | | $ | 0 | | | $ | 621 | | | $ | 621 | |
| Non-working capital loans | | | 0 | | | | 0 | | | | 3,889 | | | | 3,889 | |
| Commercial real estate and multi-family | | | | | | | | | | | | | | | | |
| residential loans: | | | | | | | | | | | | | | | | |
| Owner occupied loans | | | 0 | | | | 0 | | | | 1,195 | | | | 1,195 | |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 0 | | | | 0 | | | | 62 | | | | 62 | |
| Total impaired loans | | $ | 0 | | | $ | 0 | | | $ | 5,767 | | | $ | 5,767 | |
| Other real estate owned | | | 0 | | | | 0 | | | | 75 | | | | 75 | |
| Total assets | | $ | 0 | | | $ | 0 | | | $ | 5,842 | | | $ | 5,842 | |
NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
| | December 31, 2018 |
| | Fair Value Measurements Using | | Assets |
| (dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | at Fair Value |
| Assets | | | | | |
| Impaired loans: | | | | | | | |
| Commercial and industrial loans: | | | | | | | |
| Working capital lines of credit loans | $0 | | $0 | | $4,092 | | $4,092 |
| Non-working capital loans | 0 | | 0 | | 4,967 | | 4,967 |
| Commercial real estate and multi-family | | | | | | | |
| residential loans: | | | | | | | |
| Construction and land development loans | 0 | | 0 | | 148 | | 148 |
| Owner occupied loans | 0 | | 0 | | 1,669 | | 1,669 |
| Agri-business and agricultural loans: | | | | | | | |
| Loans secured by farmland | 0 | | 0 | | 77 | | 77 |
| Consumer 1-4 family mortgage loans: | | | | | | | |
| Closed end first mortgage loans | 0 | | 0 | | 553 | | 553 |
| Total impaired loans | $0 | | $0 | | $11,506 | | $11,506 |
| Other real estate owned | 0 | | 0 | | 316 | | 316 |
| Total assets | $0 | | $0 | | $11,822 | | $11,822 |
The table below presents the balancesamount of assets measured at fair value on a nonrecurring basis:
| | | December 31, 2015 | |
| | | Fair Value Measurements Using | | | Assets | |
(dollars in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | at Fair Value | |
| Assets | | | | | | | | | |
| Impaired loans: | | | | | | | | | | | | |
| Commercial and industrial loans: | | | | | | | | | | | | |
| Working capital lines of credit loans | | $ | 0 | | | $ | 0 | | | $ | 753 | | | $ | 753 | |
| Non-working capital loans | | | 0 | | | | 0 | | | | 2,083 | | | | 2,083 | |
| Commercial real estate and multi-family | | | | | | | | | | | | | | | | |
| residential loans: | | | | | | | | | | | | | | | | |
| Construction and land development loans | | | 0 | | | | 0 | | | | 293 | | | | 293 | |
| Owner occupied loans | | | 0 | | | | 0 | | | | 717 | | | | 717 | |
| Multifamily loans | | | 0 | | | | 0 | | | | 227 | | | | 227 | |
| Other commercial loans | | | 0 | | | | 0 | | | | 7 | | | | 7 | |
| Consumer 1-4 family mortgage loans: | | | | | | | | | | | | | | | | |
| Closed end first mortgage loans | | | 0 | | | | 0 | | | | 245 | | | | 245 | |
| Open end and junior lien loans | | | 0 | | | | 0 | | | | 226 | | | | 226 | |
| Total impaired loans | | $ | 0 | | | $ | 0 | | | $ | 4,551 | | | $ | 4,551 | |
| Other real estate owned | | | 0 | | | | 0 | | | | 75 | | | | 75 | |
| Total assets | | $ | 0 | | | $ | 0 | | | $ | 4,626 | | | $ | 4,626 | |
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2016:
(dollars in thousands) | | Fair Value | | Valuation Methodology | Unobservable Inputs | | Average | | | Range of Inputs | |
| Impaired loans: | | | | | | | | | | | |
| Commercial and industrial | | $ | 4,510 | | Collateral based | Discount to reflect | | | 44 | % | | | (22% - 100 | %) |
| | | | | | measurements | current market conditions | | | | | | | | |
| | | | | | | and ultimate collectability | | | | | | | | |
| Impaired loans: | | | | | | | | | | | | | | |
| Commercial real estate | | | 1,195 | | Collateral based | Discount to reflect | | | 30 | % | | | (6% - 59 | %) |
| | | | | | measurements | current market conditions | | | | | | | | |
| | | | | | | and ultimate collectability | | | | | | | | |
| Impaired loans: | | | | | | | | | | | | | | |
| Consumer 1-4 family mortgage | | | 62 | | Collateral based | Discount to reflect | | | 15 | % | | | | |
| | | | | | measurements | current market conditions | | | | | | | | |
| | | | | | | and ultimate collectability | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other real estate owned | | | 75 | | Appraisals | Discount to reflect | | | 49 | % | | | | |
| | | | | | | current market conditions | | | | | | | | |
NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTSVALUE (continued)
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2015:2018:
(dollars in thousands) | | Fair Value | | Valuation Methodology | Unobservable Inputs | | Average | | | Range of Inputs | | | Fair Value | | Valuation Methodology | | Unobservable Inputs | | Average | | Range of Inputs |
| Impaired loans: | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | $ | 2,836 | | Collateral based | Discount to reflect | | | 46 | % | | | (5% - 100 | %) | | $9,059 | | Collateral based | | Discount to reflect | | 48% | | 4%-100% |
| | | | | | measurements | current market conditions | | | | | | | | | | | | measurements | | current market conditions | | | |
| | | | | | | and ultimate collectability | | | | | | | | | | | | | | and ultimate collectability | | | |
| Impaired loans: | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | 1,237 | | Collateral based | Discount to reflect | | | 31 | % | | | (19% - 53 | %) | | 1,817 | | Collateral based | | Discount to reflect | | 34% | | 6%-53% |
| | | | | | measurements | current market conditions | | | | | | | | | | | | measurements | | current market conditions | | | |
| | | | | | | and ultimate collectability | | | | | | | | | | | | | | and ultimate collectability | | | |
| | | | | | | | | | | | |
| Impaired loans: | | | | | | | | | | | | | | | | | | | | | | | |
| Other commercial | | | 7 | | Collateral based | Discount to reflect | | | 43 | % | | | | | |
| | | | | | measurements | current market conditions | | | | | | | | | |
| Agribusiness and agricultural | | | 77 | | Collateral based | | Discount to reflect | | 49% | | |
| | | | | | | and ultimate collectability | | | | | | | | | | | | measurements | | current market conditions | | | |
| | | | | | | | | | | | | | | | | | | | and ultimate collectability | | | |
| Impaired loans: | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer 1-4 family mortgage | | | 471 | | Collateral based | Discount to reflect | | | 26 | % | | | (11% - 42 | %) | | 553 | | Collateral based | | Discount to reflect | | 23% | | 0%-64% |
| | | | | | measurements | current market conditions | | | | | | | | | | | | measurements | | current market conditions | | | |
| | | | | | | and ultimate collectability | | | | | | | | | | | | | | and ultimate collectability | | | |
| | | | | | | | | | | | | | | | | | | | | | | | �� |
| Other real estate owned | | | 75 | | Appraisals | Discount to reflect | | | 49 | % | | | | | | 316 | | Collateral based | | Discount to reflect | | 0% | | |
| | | | | | | current market conditions | | | | | | | | | | | | measurements | | current market conditions | | | |
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2017:
| (dollars in thousands) | | Fair Value | | Valuation Methodology | | Unobservable Inputs | | Average | | Range of Inputs |
| Impaired loans: | | | | | | | | | | |
| Commercial and industrial | | $2,627 | | Collateral based | | Discount to reflect | | 37% | | 23% - 100% |
| | | | | measurements | | current market conditions | | | | |
| | | | | | | and ultimate collectability | | | | |
| Impaired loans: | | | | | | | | | | |
| Commercial real estate | | 1,610 | | Collateral based | | Discount to reflect | | 33% | | 2% - 58% |
| | | | | measurements | | current market conditions | | | | |
| | | | | | | and ultimate collectability | | | | |
| Impaired loans: | | | | | | | | | | |
| Consumer 1-4 family mortgage | | 195 | | Collateral based | | Discount to reflect | | 17% | | |
| | | | | measurements | | current market conditions | | | | |
| | | | | | | and ultimate collectability | | | | |
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $8.9$21.0 million, with a valuation allowance of $3.1$9.5 million at December 31, 2016,2018, resulting in an additionalincrease in provision for loan losses of $7.1 million for the year ended December 31, 2018. At December 31, 2017, impaired loans had a gross carrying amount of $6.8 million, with a valuation allowance of $2.4 million, resulting in a reduction in provision for loan losses of $700,000 for the year ended December 31, 2016. 2017.
At December 31, 2015, impaired loans2018, other real estate owned had a grossnet carrying amount of $6.9 million, with a valuation allowance of $2.4 million, resulting in a net reduction in provision for loans losses of $1.1 million for the year ending December 31, 2015.
Other$316,000. We had no other real estate owned properties measured at fair value less costs to sell, at December 31, 2016 and 2015 had a net carrying amount of $75,000, which is made up of the outstanding balance of $147,000, net of a valuation allowance of $72,000, which was all written down during 2012.2017.
The following table contains the estimated fair values and the related carrying values of the Company's financial instruments at December 31, 2016. Items which are not financial instruments are not included.
| | | December 31, 2016 | |
| | | Carrying | | | Estimated Fair Value | |
(dollars in thousands) | | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Financial Assets: | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 167,280 | | | $ | 165,385 | | | $ | 1,899 | | | $ | 0 | | | $ | 167,284 | |
| Securities available for sale | | | 504,191 | | | | 1,003 | | | | 502,518 | | | | 670 | | | | 504,191 | |
| Real estate mortgages held for sale | | | 5,915 | | | | 0 | | | | 5,994 | | | | 0 | | | | 5,994 | |
| Loans, net | | | 3,427,209 | | | | 0 | | | | 0 | | | | 3,411,121 | | | | 3,411,121 | |
| Federal Home Loan Bank stock | | | 8,102 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Federal Reserve Bank stock | | | 3,420 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Accrued interest receivable | | | 11,687 | | | | 3 | | | | 2,688 | | | | 8,996 | | | | 11,687 | |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit | | | (1,163,818 | ) | | | 0 | | | | (1,169,905 | ) | | | 0 | | | | (1,169,905 | ) |
| All other deposits | | | (2,414,094 | ) | | | (2,414,094 | ) | | | 0 | | | | 0 | | | | (2,414,094 | ) |
| Securities sold under agreements | | | | | | | | | | | | | | | | | | | | |
| to repurchase | | | (50,045 | ) | | | 0 | | | | (50,045 | ) | | | 0 | | | | (50,045 | ) |
| Other short-term borrowings | | | (180,000 | ) | | | 0 | | | | (180,005 | ) | | | 0 | | | | (180,005 | ) |
| Long-term borrowings | | | (32 | ) | | | 0 | | | | (34 | ) | | | 0 | | | | (34 | ) |
| Subordinated debentures | | | (30,928 | ) | | | 0 | | | | 0 | | | | (31,194 | ) | | | (31,194 | ) |
| Standby letters of credit | | | (323 | ) | | | 0 | | | | 0 | | | | (323 | ) | | | (323 | ) |
| Accrued interest payable | | | (5,676 | ) | | | (93 | ) | | | (5,580 | ) | | | (3 | ) | | | (5,676 | ) |
NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTSVALUE (continued)
The following table contains the estimated fair values and the related carrying values of the Company'sCompany’s financial instruments at December 31, 2015.2018. Items which are not financial instruments are not included. Due to the adoption of ASU 2016-01 as of January 1, 2018, the fair value as presented below is measured using the exit price notion in the periods after adoption and may not be comparable with prior periods presented as a result of the change in methodology.
| | December 31, 2018 |
| | Carrying | | Estimated Fair Value |
| (dollars in thousands) | Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Financial Assets: | | | | | | | | | |
| Cash and cash equivalents | $216,922 | | $214,452 | | $2,470 | | $0 | | $216,922 |
| Securities available for sale | 585,549 | | 987 | | 584,412 | | 150 | | 585,549 |
| Real estate mortgages held for sale | 2,293 | | 0 | | 2,314 | | 0 | | 2,314 |
| Loans, net | 3,866,292 | | 0 | | 0 | | 3,786,175 | | 3,786,175 |
| Federal Reserve and Federal Home Loan Bank stock | 13,772 | | N/A | | N/A | | N/A | | N/A |
| Accrued interest receivable | 15,518 | | 3 | | 3,569 | | 11,946 | | 15,518 |
| Financial Liabilities: | | | | | | | | | |
| Certificates of deposit | (1,419,754) | | 0 | | (1,424,553) | | 0 | | (1,424,553) |
| All other deposits | (2,624,311) | | (2,624,311) | | 0 | | 0 | | (2,624,311) |
| Securities sold under agreements | | | | | | | | | |
| to repurchase | (75,555) | | 0 | | (75,555) | | 0 | | (75,555) |
| Other short-term borrowings | (170,000) | | 0 | | (169,996) | | 0 | | (169,996) |
| Subordinated debentures | (30,928) | | 0 | | 0 | | (31,195) | | (31,195) |
| Standby letters of credit | (978) | | 0 | | 0 | | (978) | | (978) |
| Accrued interest payable | (10,404) | | (110) | | (10,289) | | (5) | | (10,404) |
The following table contains the estimated fair values and the related carrying values of the Company’s financial instruments at December 31, 2017. Items which are not financial instruments are not included.
| | | December 31, 2015 | | |
| | | Carrying | | | Estimated Fair Value | | Carrying | | Estimated Fair Value |
(dollars in thousands) | | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Financial Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 80,674 | | | $ | 79,074 | | | $ | 1,602 | | | $ | 0 | | | $ | 80,676 | | $176,180 | | $174,045 | | $2,127 | | $0 | | $176,172 |
| Securities available for sale | | | 478,071 | | | | 1,003 | | | | 476,517 | | | | 551 | | | | 478,071 | | 538,493 | | 997 | | 536,616 | | 880 | | 538,493 |
| Real estate mortgages held for sale | | | 3,294 | | | | 0 | | | | 3,340 | | | | 0 | | | | 3,340 | | 3,346 | | 0 | | 3,390 | | 0 | | 3,390 |
| Loans, net | | | 3,037,319 | | | | 0 | | | | 0 | | | | 3,029,533 | | | | 3,029,533 | | 3,771,338 | | 0 | | 0 | | 3,744,842 | | 3,744,842 |
| Federal Home Loan Bank stock | | | 4,248 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | |
| Federal Reserve Bank stock | | | 3,420 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | |
| Federal Reserve and Federal Home Loan Bank stock | | 13,772 | | N/A | | N/A | | N/A | | N/A |
| Accrued interest receivable | | | 9,462 | | | | 3 | | | | 2,301 | | | | 7,158 | | | | 9,462 | | 14,093 | | 3 | | 2,925 | | 11,165 | | 14,093 |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit | | | (997,514 | ) | | | 0 | | | | (1,002,452 | ) | | | 0 | | | | (1,002,452 | ) | (1,412,583) | | 0 | | (1,417,075) | | 0 | | (1,417,075) |
| All other deposits | | | (2,185,907 | ) | | | (2,185,907 | ) | | | 0 | | | | 0 | | | | (2,185,907 | ) | (2,596,072) | | (2,596,072) | | 0 | | 0 | | (2,596,072) |
| Securities sold under agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| to repurchase | | | (69,622 | ) | | | 0 | | | | (69,622 | ) | | | 0 | | | | (69,622 | ) | (70,652) | | 0 | | (70,652) | | 0 | | (70,652) |
| Other short-term borrowings | | | (70,000 | ) | | | 0 | | | | (70,003 | ) | | | 0 | | | | (70,003 | ) | |
| Long-term borrowings | | | (34 | ) | | | 0 | | | | (37 | ) | | | 0 | | | | (37 | ) | (80,030) | | 0 | | (80,035) | | 0 | | (80,035) |
| Subordinated debentures | | | (30,928 | ) | | | 0 | | | | 0 | | | | (31,211 | ) | | | (31,211 | ) | (30,928) | | 0 | | 0 | | (31,194) | | (31,194) |
| Standby letters of credit | | | (381 | ) | | | 0 | | | | 0 | | | | (381 | ) | | | (381 | ) | (758) | | 0 | | 0 | | (758) | | (758) |
| Accrued interest payable | | | (3,773 | ) | | | (86 | ) | | | (3,684 | ) | | | (3 | ) | | | (3,773 | ) | (6,311) | | (149) | | (6,158) | | (4) | | (6,311) |
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
Cash and cash equivalents – The carrying amount of cash and cash equivalents approximate fair value and are classified as Level 1, with the exception of certificates of deposits, which are estimated using discounted cash flow analysis using current market rates applied to the estimated life resulting in a Level 2 classification.
Loans, net – Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analysis, using current market rates applied to the estimated life resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
FHLB and Federal Reserve Bank stock – It is not practical to determine the fair value of FHLB stock and Federal Reserve Bank stock due to restrictions placed on its transferability.
Certificates of deposit – Fair values of certificates of deposit are estimated using discounted cash flow analysis using current market rates applied to the estimated life resulting in a Level 2 classification.
All other deposits – The fair values for all other deposits other than certificates of deposit are equal to the amount payable on demand (the carrying value) resulting in a Level 1 classification.
Securities sold under agreements to repurchase – The carrying amount of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification.
Federal funds purchased – The carrying amount of federal funds purchased approximate fair value resulting in a Level 2 classification.
Other short-term borrowings – The fair value of other short-term borrowings is estimated using discounted cash flow analysis based on current borrowing rates resulting in a Level 2 classification.
Long-term borrowings – The fair value of long-term borrowings is estimated using discounted cash flow analyses based on current borrowing rates resulting in a Level 2 classification.
Subordinated debentures – The fair value of subordinated debentures is based on the rates currently available to the Company with similar terms and remaining maturity and credit spread resulting in a Level 3 classification.
NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Standby letters of credit – The fair value of off-balance sheet items is based on the current fees and costs that would be charged to enter into or terminate such arrangements resulting in a Level 3 classification.
Accrued interest receivable/payable – The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification depending on its associated asset/liability.
NOTE 6 – LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation were as follows at December 31, 20162018 and 2015:2017:
(dollars in thousands) | | 2016 | | | 2015 | | 2018 | | 2017 |
| Land | | $ | 14,799 | | | $ | 14,583 | | $16,649 | | $16,172 |
| Premises | | | 39,722 | | | | 35,760 | | 44,717 | | 41,694 |
| Equipment | | | 29,274 | | | | 24,997 | | 36,111 | | 34,349 |
| Total cost | | | 83,795 | | | | 75,340 | | |
| Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | 97,477 | | 92,215 |
| Less accumulated depreciation | | | 31,703 | | | | 28,656 | | 39,380 | | 35,749 |
| Land, premises and equipment, net | | $ | 52,092 | | | $ | 46,684 | | $58,097 | | $56,466 |
The Company had land, premises and equipment of $249,000$100,000 and $0 held for sale and included in other assets as of December 31, 2015.2018 and 2017, respectively.
We rent certain premises and equipment under operating leases, which expire at various dates. Many of these leases require the payment of property taxes, insurance premiums, maintenance, and other costs. In some cases, rentals are subject to increase in relation to a cost-of-living index. The leases have original terms ranging from less than one year to 14 years.
Rent expense was $479,000 in 2018, $412,000 in 2017, and $377,000 in 2016. The following is a summary of future minimum lease commitments as of December 31, 2018:
| (dollars in thousands) | 2018 |
| 2019 | $553 |
| 2020 | 571 |
| 2021 | 582 |
| 2022 | 595 |
| 2023 | 511 |
| Thereafter | 2,792 |
| Total | $5,604 |
NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
There have been no changes in the $5.0 million carrying amount of goodwill since 2002.
Impairment exists when a reporting unit'sunit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 of the impairment test includes the determination of the carrying value of our single reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. The Company determined the fair value of our reporting unit and compared it to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the Company is required to perform a second step to the impairment test. Our annual impairment analysis as of May 31, 2016,2018, indicated that the Step 2 analysis was not necessary. Circumstances did not substantially change during the second half of the year such that the Company did not believe it was necessary to do an additional impairment analysis.
NOTE 8 – DEPOSITS
The following table details certain types oftotal deposits as of December 31, 20162018 and 2015:2017:
(dollars in thousands) | | 2016 | | | 2015 | |
| Time deposits of $100,000 to $250,000 | | $ | 212,232 | | | $ | 248,711 | |
| Time deposits of $250,000 or more | | | 712,593 | | | | 489,543 | |
| Public fund deposits | | | 1,183,166 | | | | 891,065 | |
| Brokered deposits | | | 98,177 | | | | 148,040 | |
| (dollars in thousands) | 2018 | | 2017 |
| Non-interest bearing demand deposits | $946,838 | | $885,622 |
| Savings and transaction accounts: | | | |
| Savings deposits | 247,903 | | 263,570 |
| Interest bearing demand deposits | 1,429,570 | | 1,446,880 |
| Time deposits: | | | |
| Other time deposits | 273,533 | | 251,218 |
| Deposits of $100,000 to $250,000 | 268,058 | | 236,354 |
| Deposits of $250,000 or more | 878,163 | | 925,011 |
| Total deposits | $4,044,065 | | $4,008,655 |
At December 31, 2016,2018, the scheduled maturities of time deposits were as follows:
(dollars in thousands) | | Amount | |
| Maturing in 2017 | | $ | 812,924 | |
| Maturing in 2018 | | | 197,626 | |
| Maturing in 2019 | | | 64,068 | |
| Maturing in 2020 | | | 40,420 | |
| Maturing in 2021 | | | 48,299 | |
| Thereafter | | | 481 | |
| Total time deposits | | $ | 1,163,818 | |
There were no modifications of stock option awards during the years ended December 31, 2016, 20152018, 2017 and 2014.2016.
As of December 31, 2016,2018, there was no unrecognized compensation cost related to nonvested stock options granted under the plan.
Restricted Stock Awards and Units
The fair value of restricted stock awards and units is the closing price of the Company'sCompany’s common stock on the date of grant adjusted for the present value of expected dividends. The restricted stock awards fully vest on either the first or third anniversary of the grant date, with the exception of 21,55114,800 shares included as vested below, which vested on the grant date.
A summary of the changes in the Company'sCompany’s nonvested shares for the year follows:
| | | | | | Weighted-Average | |
| | | | | | Grant-Date | |
| Nonvested Shares | | Shares | | | Fair Value | |
| Nonvested at January 1, 2016 | | | 5,250 | | | $ | 24.29 | |
| Granted | | | 21,551 | | | | 30.80 | |
| Vested | | | (22,301 | ) | | | 30.73 | |
| Forfeited | | | 0 | | | | 0.00 | |
| Nonvested at December 31, 2016 | | | 4,500 | | | $ | 23.57 | |
| | | | Weighted-Average |
| | | | Grant-Date |
| Nonvested Shares | Shares | | Fair Value |
| Nonvested at January 1, 2018 | 500 | | $41.22 |
| Granted | 15,300 | | 49.09 |
| Vested | (14,800) | | 48.89 |
| Forfeited | 0 | | 0.00 |
| Nonvested at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 1,000 | | $48.14 |
NOTE 15 – STOCK BASED COMPENSATION (continued)
As of December 31, 2016,2018, there was $10,000$24,000 of total unrecognized compensation cost related to nonvested shares granted under the plan. The cost is expected to be recognized over a weighted period of .290.48 years. The total fair value of shares vested during the years ended December 31, 2018, 2017 and 2016 2015was $726,000, $1.2 million and 2014 was $1.1 million, $944,000 and $598,000.
NOTE 15 – STOCK BASED COMPENSATION (continued)million.
Performance Stock Units
The fair value of stock awards is the closing price of the Company'sCompany’s common stock on the date of grant adjusted for the present value of expected dividends. The expected dividend rate is assumed to be the most recent dividend rate declared by the Board of Directors on the grant date. The grant date fair value of stock awards is assumed at the target payout rate. The stock awards fully vest on the third anniversary of the grant date. The 2016-2018, 2015-20172018-2020, 2017-2019 and 2014-20162016-2018 Long-Term Incentive Plans must be paid in stock and have performance conditions which include revenue growth, diluted earnings per share growth and average return on beginning equity growth.equity. Shares granted below include the number of shares assumed granted based on meeting the performance criteria of the 2016-2018, 2015-20172018-2020, 2017-2019 and 2014-20162016-2018 Long-Term Incentive Plans at December 31, 2016.2018.
| | | | | | Weighted-Average | | | | Weighted-Average |
| | | | | | Grant-Date | | | | Grant-Date |
| Nonvested Shares | | Shares | | | Fair Value | | Shares | | Fair Value |
| Nonvested at January 1, 2016 | | | 288,855 | | | $ | 22.53 | | |
| Nonvested at January 1, 2018 | | 387,693 | | $33.39 |
| Granted | | | 154,265 | | | | 23.20 | | 118,282 | | 46.07 |
| Vested | | | (95,600 | ) | | | 16.23 | | (137,472) | | 27.05 |
| Forfeited | | | 0 | | | | 0.00 | | 0 | | 0.00 |
| Nonvested at December 31, 2016 | | | 347,520 | | | $ | 16.90 | | |
| Nonvested at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | 368,503 | | $39.83 |
As of December 31, 2016 and 2015,2018, there was $3.4 million and $2.5$5.5 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted period of 1.51 years and 1.47 years, respectively.1.66 years. The total fair value of shares vested during the year ended December 31, 2018, 2017 and 2016 was $6.6 million, $5.1 million and $4.1 million.million, respectively. At December 31, 2018, 2017 and 2016, 2015137,472, 112,055 and 2014, 95,600 94,968 and 83,301 shares vested, respectively.
NOTE 16 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Company became a financial holding company effective May 30, 2012 and is now required to be well capitalized under the applicable regulatory guidelines. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet certain heightened minimum capital requirements can initiate certain mandatory, and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
The capital adequacy requirements were heightened by the Basel III Rules, which went into effect on January 1, 2015 with a phase-in period for certain aspects of the rule through 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.000% for 2015 to 2.50% by 2019. The capital conservation buffer for 20162018 and 2017 is 0.625%.1.875% and 1.25%, respectively. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. The quantitative measures established by regulation to ensure capital adequacy that were in effect on December 31, 20162018 and 2015,2017, require the Company and the Bank to maintain minimum capital amounts and ratios (set forth in the following table) of Total, Tier I and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulation), and of Tier I capital (as defined in the regulation) to average assets (as defined). Management believes, as of the years ended December 31, 20162018 and 2015,2017, that the Company and the Bank met all capital adequacy requirements to which they are subject.
NOTE 16 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (continued)
As of December 31, 2016,2018, the most recent notification from the federal regulators categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum Total risk-based capital ratios, Tier I risk-based capital ratios and Tier I leverage capital ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Company and the Bank'sBank’s category.
| | | | | | | | | | | | | | | | | | | | | Minimum Required to | | | | | | | | | | | | | | Minimum Required to |
| | | | | | | | | Minimum Required | | | For Capital Adequacy | | | Be Well Capitalized | | | | | | Minimum Required | | For Capital Adequacy | | Be Well Capitalized |
| | | | | | | | | For Capital | | | Purposes Plus Capital | | | Under Prompt Corrective | | | | | | For Capital | | Purposes Plus Capital | | Under Prompt Corrective |
| | | Actual | | | Adequacy Purposes | | | Conservation Buffer | | | Action Regulations | | Actual
| | Adequacy Purposes | | Conservation Buffer | | Action Regulations |
(dollars in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| As of December 31, 2016: | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2018: | | | | | | | | | | | | | | | | |
| Total Capital (to Risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 498,189 | | | | 13.23 | % | | $ | 301,243 | | | | 8.00 | % | | $ | 324,777 | | | | 8.625 | % | | $ | 376,554 | | | | 10.00 | % | $601,379 | | 14.20% | | $338,690 | | 8.00% | | $418,070 | | N/A | | N/A | | N/A |
| Bank | | $ | 482,600 | | | | 12.84 | % | | $ | 300,784 | | | | 8.00 | % | | $ | 324,283 | | | | 8.625 | % | | $ | 375,980 | | | | 10.00 | % | $583,206 | | 13.80% | | $338,098 | | 8.00% | | $417,340 | | 9.875% | | $422,623 | | 10.00% |
| Tier I Capital (to Risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 454,382 | | | | 12.07 | % | | $ | 225,932 | | | | 6.00 | % | | $ | 249,467 | | | | 6.625 | % | | $ | 301,243 | | | | 8.00 | % | $552,836 | | 13.06% | | $254,017 | | 6.00% | | $333,398 | | N/A | | N/A | | N/A |
| Bank | | $ | 438,793 | | | | 11.67 | % | | $ | 225,588 | | | | 6.00 | % | | $ | 249,087 | | | | 6.625 | % | | $ | 300,784 | | | | 8.00 | % | $534,664 | | 12.65% | | $253,574 | | 6.00% | | $332,815 | | 7.875% | | $338,098 | | 8.00% |
| Common Equity Tier 1 (CET1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 424,382 | | | | 11.27 | % | | $ | 169,449 | | | | 4.50 | % | | $ | 192,984 | | | | 5.125 | % | | $ | 244,760 | | | | 6.50 | % | $522,836 | | 12.35% | | $190,513 | | 4.50% | | $269,893 | | N/A | | N/A | | N/A |
| Bank | | $ | 438,793 | | | | 11.67 | % | | $ | 169,191 | | | | 4.50 | % | | $ | 192,690 | | | | 5.125 | % | | $ | 244,387 | | | | 6.50 | % | $534,664 | | 12.65% | | $190,180 | | 4.50% | | $269,422 | | 6.375% | | $274,705 | | 6.50% |
| Tier I Capital (to Average Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 454,382 | | | | 10.86 | % | | $ | 167,310 | | | | 4.00 | % | | $ | 167,310 | | | | 4.00 | % | | $ | 209,138 | | | | 5.00 | % | $552,836 | | 11.44% | | $193,305 | | 4.00% | | $193,305 | | N/A | | N/A | | N/A |
| Bank | | $ | 438,793 | | | | 10.54 | % | | $ | 166,522 | | | | 4.00 | % | | $ | 166,522 | | | | 4.00 | % | | $ | 208,153 | | | | 5.00 | % | $534,664 | | 11.06% | | $193,312 | | 4.00% | | $193,312 | | 4.00% | | $241,639 | | 5.00% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2017: | | | | | | | | | | | | | | | | |
| Total Capital (to Risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 457,456 | | | | 13.73 | % | | $ | 266,524 | | | | 8.00 | % | | | N/A | | | | N/A | | | $ | 333,155 | | | | 10.00 | % | $541,475 | | 13.26% | | $326,782 | | 8.00% | | $377,842 | | N/A | | N/A | | N/A |
| Bank | | $ | 446,463 | | | | 13.42 | % | | $ | 266,106 | | | | 8.00 | % | | | N/A | | | | N/A | | | $ | 332,633 | | | | 10.00 | % | $525,482 | | 12.89% | | $326,140 | | 8.00% | | $377,099 | | 9.250% | | $407,675 | | 10.00% |
| Tier I Capital (to Risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 415,700 | | | | 12.48 | % | | $ | 199,893 | | | | 6.00 | % | | | N/A | | | | N/A | | | $ | 266,524 | | | | 8.00 | % | $494,265 | | 12.10% | | $245,087 | | 6.00% | | $296,147 | | N/A | | N/A | | N/A |
| Bank | | $ | 404,771 | | | | 12.17 | % | | $ | 199,580 | | | | 6.00 | % | | | N/A | | | | N/A | | | $ | 266,106 | | | | 8.00 | % | $478,272 | | 11.73% | | $244,605 | | 6.00% | | $295,564 | | 7.250% | | $326,140 | | 8.00% |
| Common Equity Tier 1 (CET1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 385,700 | | | | 11.58 | % | | $ | 149,920 | | | | 4.50 | % | | | N/A | | | | N/A | | | $ | 216,551 | | | | 6.50 | % | $464,265 | | 11.37% | | $183,815 | | 4.50% | | $234,875 | | N/A | | N/A | | N/A |
| Bank | | $ | 404,771 | | | | 12.17 | % | | $ | 149,685 | | | | 4.50 | % | | | N/A | | | | N/A | | | $ | 216,211 | | | | 6.50 | % | $478,272 | | 11.73% | | $183,454 | | 4.50% | | $234,413 | | 5.750% | | $264,988 | | 6.50% |
| Tier I Capital (to Average Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 415,700 | | | | 11.10 | % | | $ | 149,841 | | | | 4.00 | % | | | N/A | | | | N/A | | | $ | 187,301 | | | | 5.00 | % | $494,265 | | 10.76% | | $183,793 | | 4.00% | | $183,793 | | N/A | | N/A | | N/A |
| Bank | | $ | 404,771 | | | | 10.86 | % | | $ | 149,051 | | | | 4.00 | % | | | N/A | | | | N/A | | | $ | 186,313 | | | | 5.00 | % | $478,272 | | 10.44% | | $183,187 | | 4.00% | | $183,187 | | 4.00% | | $228,984 | | 5.00% |
The Bank is required to obtain the approval of the Indiana Department of Financial Institutions for the payment of any dividend if the total amount of all dividends declared by the Bank during the calendar year, including the proposed dividend, would exceed the sum of the retained net income for the year-to-date combined with the retained net income for the previous two years. Indiana law defines "retained“retained net income"income” to mean the net income of a specified period, calculated under the consolidated report of income instructions, less the total amount of all dividends declared for the specified period. As of December 31, 2016,2018, approximately $71.7$96.1 million was available to be paid as dividends to the Company by the Bank.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2016.2018. Notwithstanding the availability of funds for dividends however, the FDIC may prohibit the payment of any dividends by the Bank if the FDIC determines such payment would constitute an unsafe or unsound practice.
NOTE 17 – OFFSETTING ASSETS AND LIABILITIES
The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at December 31, 20162018 and 2015.2017.
| | | December 31, 2016 | |
| | | | | | Gross | | | Net Amounts | | | | | | | | | | |
| | | Gross | | | Amounts | | | of Assets | | | Gross Amounts Not | | | | |
| | | Amounts of | | | Offset in the | | | presented in | | | Offset in the Statement | | | | |
| | | Recognized | | | Statement of | | | the Statement | | | of Financial Position | | | | |
| | | Assets/ | | | Financial | | | of Financial | | | Financial | | | Cash Collateral | | | | |
(dollars in thousands) | | Liabilities | | | Position | | | Position | | | Instruments | | | Received | | | Net Amount | |
| Assets | | | | | | | | | | | | | | | | | | |
| Interest Rate Swap Derivatives | | $ | 2,645 | | | $ | 0 | | | $ | 2,645 | | | $ | 0 | | | $ | 0 | | | $ | 2,645 | |
| Total Assets | | $ | 2,645 | | | $ | 0 | | | $ | 2,645 | | | $ | 0 | | | $ | 0 | | | $ | 2,645 | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Swap Derivatives | | $ | 2,735 | | | $ | 0 | | | $ | 2,735 | | | $ | 0 | | | $ | (1,330 | ) | | $ | 1,405 | |
| Repurchase Agreements | | | 50,045 | | | | 0 | | | | 50,045 | | | | (50,045 | ) | | | 0 | | | | 0 | |
| Total Liabilities | | $ | 52,780 | | | $ | 0 | | | $ | 52,780 | | | $ | (50,045 | ) | | $ | (1,330 | ) | | $ | 1,405 | |
| | | December 31, 2015 | | December 31, 2018 |
| | | | | | Gross | | | Net Amounts | | | | | | | | | | | | | Gross | | | | | | | | |
| | | Gross | | | Amounts | | | of Assets | | | Gross Amounts Not | | | | | Gross | | Amounts | | Net Amounts | | Gross Amounts Not | | |
| | | Amounts of | | | Offset in the | | | presented in | | | Offset in the Statement | | | | | Amounts of | | Offset in the | | presented in | | Offset in the Statement | | |
| | | Recognized | | | Statement of | | | the Statement | | | of Financial Position | | | | | Recognized | | Statement of | | the Statement | | of Financial Position | | |
| | | Assets/ | | | Financial | | | of Financial | | | Financial | | | Cash Collateral | | | | | Assets/ | | Financial | | of Financial | | Financial | | Cash Collateral | | |
(dollars in thousands) | | Liabilities | | | Position | | | Position | | | Instruments | | | Received | | | Net Amount | | Liabilities | | Position | | Position | | Instruments | | Received | | Net Amount |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Swap Derivatives | | $ | 1,732 | | | $ | 0 | | | $ | 1,732 | | | $ | 0 | | | $ | 0 | | | $ | 1,732 | | $3,869 | | $0 | | $3,869 | | $0 | | $(760) | | $3,109 |
| Total Assets | | $ | 1,732 | | | $ | 0 | | | $ | 1,732 | | | $ | 0 | | | $ | 0 | | | $ | 1,732 | | $3,869 | | $0 | | $3,869 | | $0 | | $(760) | | $3,109 |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Swap Derivatives | | $ | 1,748 | | | $ | 0 | | | $ | 1,748 | | | $ | 0 | | | $ | (1,660 | ) | | $ | 88 | | $4,025 | | $0 | | $4,025 | | $0 | | $(560) | | $3,465 |
| Repurchase Agreements | | | 69,622 | | | | 0 | | | | 69,622 | | | | (69,622 | ) | | | 0 | | | | 0 | | 75,555 | | 0 | | 75,555 | | (75,555) | | 0 | | 0 |
| Total Liabilities | | $ | 71,370 | | | $ | 0 | | | $ | 71,370 | | | $ | (69,622 | ) | | $ | (1,660 | ) | | $ | 88 | | $79,580 | | $0 | | $79,580 | | $(75,555) | | $(560) | | $3,465 |
| | December 31, 2017 |
| | | | Gross | | | | | | | | |
| | Gross | | Amounts | | Net Amounts | | Gross Amounts Not | | |
| | Amounts of | | Offset in the | | presented in | | Offset in the Statement | | |
| | Recognized | | Statement of | | the Statement | | of Financial Position | | |
| | Assets/ | | Financial | | of Financial | | Financial | | Cash Collateral | | |
| (dollars in thousands) | Liabilities | | Position | | Position | | Instruments | | Received | | Net Amount |
| Assets | | | | | | | | | | | |
| Interest Rate Swap Derivatives | $2,441 | | $0 | | $2,441 | | $0 | | $0 | | $2,441 |
| Total Assets | $2,441 | | $0 | | $2,441 | | $0 | | $0 | | $2,441 |
| Liabilities | | | | | | | | | | | |
| Interest Rate Swap Derivatives | $2,562 | | $0 | | $2,562 | | $0 | | $(750) | | $1,812 |
| Repurchase Agreements | 70,652 | | 0 | | 70,652 | | (70,652) | | 0 | | 0 |
| Total Liabilities | $73,214 | | $0 | | $73,214 | | $(70,652) | | $(750) | | $1,812 |
If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.
NOTE 18 – COMMITMENTS, OFF‑BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk in order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open-ended revolving lines of credit. Amounts as of the years ended December 31, 20162018 and 2015,2017, were as follows:
| | | 2016 | | | 2015 | | 2018
| | 2017
|
| | | Fixed | | | Variable | | | Fixed | | | Variable | | Fixed | | Variable | | Fixed | | Variable |
(dollars in thousands) | | Rate | | | Rate | | | Rate | | | Rate | | Rate | | Rate | | Rate | | Rate |
| Commercial loan lines of credit | | $ | 46,940 | | | $ | 1,164,660 | | | $ | 50,713 | | | $ | 1,125,720 | | $63,625 | | $1,337,437 | | $53,998 | | $1,155,096 |
| Commercial letters of credit | | | 0 | | | | 93 | | | | 0 | | | | 0 | | 0 | | 3,245 | | 0 | | 50 |
| Standby letters of credit | | | 0 | | | | 54,749 | | | | 0 | | | | 51,515 | | 0 | | 81,512 | | 0 | | 71,046 |
| Real estate mortgage loans | | | 6,116 | | | | 3,103 | | | | 4,917 | | | | 3,185 | | 2,811 | | 2,881 | | 4,973 | | 5,722 |
| Real estate construction mortgage loans | | | 0 | | | | 6,063 | | | | 648 | | | | 1,220 | | 400 | | 2,189 | | 2,365 | | 6,042 |
| Home equity mortgage open-ended revolving lines | | | 0 | | | | 183,472 | | | | 0 | | | | 165,549 | | 0 | | 232,362 | | 0 | | 212,776 |
| Consumer loan open-ended revolving lines | | | 240 | | | | 9,200 | | | | 0 | | | | 7,558 | | 215 | | 14,468 | | 249 | | 11,892 |
| Total | | $ | 53,296 | | | $ | 1,421,340 | | | $ | 56,278 | | | $ | 1,354,747 | | |
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | $67,051 | | $1,674,094 | | $61,585 | | $1,462,624 |
The index on variable rate commercial loan commitments is principally the national prime rate. Interest rate ranges on commitments and open-ended revolving lines of credit for years ended December 31, 20162018 and 2015,2017, were as follows:
| | 2016 | | 2015 | |
| | Fixed | | Variable | | Fixed | | Variable | |
| | Rate | | Rate | | Rate | | Rate | |
| Commercial loan | 2.71-12.50 | % | 1.96-8.75 | % | 2.44-7.50 | % | 1.59-8.50 | % |
| Real estate mortgage loan | 3.13-4.50 | % | 3.25-5.75 | % | 3.13-4.63 | % | 3.00-5.75 | % |
| Consumer loan open-ended revolving line | 15.00 | % | 3.00-15.00 | % | N/A | | 2.25-15.00 | % |
| | 2018 | | 2017 | |
| | Fixed | | Variable | | Fixed | | Variable | |
| | Rate | | Rate | | Rate | | Rate | |
| Commercial loan | 0.75-14.50 | % | 2.65-10.00 | % | 2.00-14.50 | % | 2.48-9.50 | % |
| Real estate mortgage loan | 3.75-6.13 | % | 3.75-11.00 | % | 3.25-4.50 | % | 3.50-5.75 | % |
| Consumer loan open-ended revolving line | 15.00 | % | 3.88-15.00 | % | 15.00 | % | 4.00-15.00 | % |
Commitments, excluding open-ended revolving lines, generally have fixed expiration dates of one year or less. Open-ended revolving lines are monitored for proper performance and compliance on a monthly basis. Since many commitments expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company follows the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as it follows for those loans that are recorded in its financial statements.
The Company'sCompany’s exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments.
NOTE 19 – PARENT COMPANY STATEMENTS
The Company operates primarily in the banking industry, which accounts for substantially all of its revenues, operating income and assets. Presented below are parent only financial statements:
CONDENSED BALANCE SHEETS
| | | December 31, | | December 31,
|
(dollars in thousands) | | 2016 | | | 2015 | | 2018 | | 2017 |
| ASSETS | | | | | | | | | |
| Deposits with Lake City Bank | | $ | 3,467 | | | $ | 712 | | $1,283 | | $850 |
| Deposits with other depository institutions | | | 4,636 | | | | 3,623 | | 7,613 | | 4,969 |
| Cash | | | 8,103 | | | | 4,335 | | 8,896 | | 5,819 |
| Investments in banking subsidiary | | | 441,389 | | | | 411,883 | | 533,442 | | 482,585 |
| Investments in other subsidiaries | | | 3,471 | | | | 3,429 | | 3,992 | | 3,552 |
| Other assets | | | 5,206 | | | | 4,329 | | 6,468 | | 7,789 |
| Total assets | | $ | 458,169 | | | $ | 423,976 | | |
| Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | $552,798 | | $499,745 |
| LIABILITIES | | | | | | | | | | | |
| Dividends payable and other liabilities | | $ | 263 | | | $ | 236 | | $255 | | $239 |
| Subordinated debt | | | 30,928 | | | | 30,928 | | 30,928 | | 30,928 |
| STOCKHOLDERS' EQUITY | | | 426,978 | | | | 392,812 | | 521,615 | | 468,578 |
| Total liabilities and stockholders' equity | | $ | 458,169 | | | $ | 423,976 | | |
| Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | $552,798 | | $499,745 |
CONDENSED STATEMENTS OF INCOME
| | | Years Ended December 31, | |
Years Ended December 31,
|
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | 2018 | | 2017 | | 2016 |
| Dividends from Lake City Bank | | $ | 20,622 | | | $ | 10,257 | | | $ | 18,331 | | $27,933 | | $21,822 | | $20,622 |
| Dividends from non-bank subsidiaries | | | 1,035 | | | | 1,031 | | | | 31 | | 1,010 | | 1,030 | | 1,035 |
| Other income | | | 50 | | | | 98 | | | | 182 | | 171 | | 57 | | 50 |
| Interest expense on subordinated debt | | | (1,190 | ) | | | (1,063 | ) | | | (1,048 | ) | (1,643) | | (1,349) | | (1,190) |
| Miscellaneous expense | | | (5,006 | ) | | | (3,231 | ) | | | (3,462 | ) | (6,422) | | (6,491) | | (5,006) |
| INCOME BEFORE INCOME TAXES AND EQUITY IN | | | | | | | | | | | | | | | | | |
| UNDISTRIBUTED INCOME OF SUBSIDIARIES | | | 15,511 | | | | 7,092 | | | | 14,034 | | 21,049 | | 15,069 | | 15,511 |
| Income tax benefit | | | 2,483 | | | | 1,655 | | | | 1,691 | | 2,795 | | 2,688 | | 2,483 |
| INCOME BEFORE EQUITY IN UNDISTRIBUTED | | | | | | | | | | | | | | | | | |
| INCOME OF SUBSIDIARIES | | | 17,994 | | | | 8,747 | | | | 15,725 | | 23,844 | | 17,757 | | 17,994 |
| Equity in undistributed income of subsidiaries | | | 34,090 | | | | 37,620 | | | | 28,080 | | 56,567 | | 39,573 | | 34,090 |
| NET INCOME | | $ | 52,084 | | | $ | 46,367 | | | $ | 43,805 | | |
| NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | $80,411 | | $57,330 | | $52,084 |
| COMPREHENSIVE INCOME | | $ | 47,555 | | | $ | 44,679 | | | $ | 50,129 | | $75,131 | | $59,047 | | $47,555 |
CONDENSED STATEMENTS OF CASH FLOWS
| | | Years Ended December 31, | |
Years Ended December 31,
|
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | | | | | | | | | | |
| Net income | | $ | 52,084 | | | $ | 46,367 | | | $ | 43,805 | | $80,411 | | $57,330 | | $52,084 |
| Adjustments to net cash from operating activities: | | | | | | | | | | | | | | | | | |
| Equity in undistributed income of subsidiaries | | | (34,090 | ) | | | (37,620 | ) | | | (28,080 | ) | (56,567) | | (39,573) | | (34,090) |
| Other changes | | | 3,818 | | | | 3,647 | | | | 5,348 | | 7,294 | | 3,586 | | 3,818 |
| �� Net cash from operating activities | | | 21,812 | | | | 12,394 | | | | 21,073 | | |
| Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | 31,138 | | 21,343 | | 21,812 |
| Cash flows from financing activities | | | | | | | | | | | | | | | | | |
| Proceeds from issuance of common stock | | | 614 | | | | 12 | | | | 57 | | |
| Repurchase of common stock | | | (458 | ) | | | (455 | ) | | | (444 | ) | |
| Proceeds (Payments) related to equity incentive plans | | (2,435) | | (1,736) | | 614 |
| Purchase of treasury stock | | (463) | | (495) | | (458) |
| Sales of treasury stock | | 115 | | 0 | | 0 |
| Dividends paid | | | (18,200 | ) | | | (15,697 | ) | | | (13,555 | ) | (25,278) | | (21,396) | | (18,200) |
| Cash flows from financing activities | | | (18,044 | ) | | | (16,140 | ) | | | (13,942 | ) | (28,061) | | (23,627) | | (18,044) |
| Net increase in cash and cash equivalents | | | 3,768 | | | | (3,746 | ) | | | 7,131 | | |
| Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | 3,077 | | (2,284) | | 3,768 |
| Cash and cash equivalents at beginning of the year | | | 4,335 | | | | 8,081 | | | | 950 | | 5,819 | | 8,103 | | 4,335 |
| Cash and cash equivalents at end of the year | | $ | 8,103 | | | $ | 4,335 | | | $ | 8,081 | | |
| Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | | $8,896 | | $5,819 | | $8,103 |
NOTE 20 – EARNINGS PER SHARE
Following are the factors used in the earnings per share computations:
(dollars in thousand except share and per share data) | | 2016 | | | 2015 | | | 2014 | | 2018 | | 2017 | | 2016 |
| Basic earnings per common share: | | | | | | | | | | | | | | |
| Net income | | $ | 52,084 | | | $ | 46,367 | | | $ | 43,805 | | $80,411 | | $57,330 | | $52,084 |
| Weighted-average common shares outstanding | | | 25,056,095 | | | | 24,926,354 | | | | 24,803,295 | | 25,288,533 | | 25,181,208 | | 25,056,095 |
| Basic earnings per common share | | $ | 2.08 | | | $ | 1.86 | | | $ | 1.77 | | $3.18 | | $2.28 | | $2.08 |
| Diluted earnings per common share: | | | | | | | | | | | | | | | | | |
| Net income | | $ | 52,084 | | | $ | 46,367 | | | $ | 43,805 | | $80,411 | | $57,330 | | $52,084 |
| Weighted-average common shares outstanding for | | | | | | | | | | | | | | | | | |
| basic earnings per common share | | | 25,056,095 | | | | 24,926,354 | | | | 24,803,295 | | 25,288,533 | | 25,181,208 | | 25,056,095 |
| Add: Dilutive effect of assumed exercise of warrant | | | 184,205 | | | | 156,563 | | | | 138,821 | | 225,831 | | 219,273 | | 184,205 |
| Add: Dilutive effect of assumed exercises of stock options | | | | | | | | | | | | | | | | | |
| and awards | | | 220,427 | | | | 162,652 | | | | 230,067 | | 213,467 | | 262,900 | | 220,427 |
| Average shares and dilutive potential common shares | | | 25,460,727 | | | | 25,245,568 | | | | 25,172,183 | | 25,727,831 | | 25,663,381 | | 25,460,727 |
| Diluted earnings per common share | | $ | 2.05 | | | $ | 1.84 | | | $ | 1.74 | | $3.13 | | $2.23 | | $2.05 |
There were no antidilutive stock options for 2016, 20152018, 2017 and 2014.
Share and per share data has been adjusted for a 3-for-2 stock split July 25, 2016 in the form of a stock dividend on August 5, 2016.
NOTE 21 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for December 31, 20162018 and 20152017 all shown net of tax:
| | | Unrealized | | | | | | | |
| | | Gains and | | | | | | | |
| | | Losses on | | | Defined | | | | |
| | | Available- | | | Benefit | | | | |
| | | for-Sales | | | Pension | | | | |
(dollars in thousands) | | Securities | | | Items | | | Total | |
| Balance at December 31, 2015 | | $ | 3,836 | | | $ | (1,694 | ) | | $ | 2,142 | |
| Other comprehensive income before reclassification | | | (4,518 | ) | | | (101 | ) | | | (4,619 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | (40 | ) | | | 130 | | | | 90 | |
| Net current period other comprehensive income | | | (4,558 | ) | | | 29 | | | | (4,529 | ) |
| Balance at December 31, 2016 | | $ | (722 | ) | | $ | (1,665 | ) | | $ | (2,387 | ) |
| | | Unrealized | | | | | | | | Unrealized | | | | |
| | | Gains and | | | | | | | | Gains and | | | | |
| | | Losses on | | | Defined | | | | | Losses on | | Defined | | |
| | | Available- | | | Benefit | | | | | Available- | | Benefit | | |
| | | for-Sales | | | Pension | | | | | for-Sales | | Pension | | |
(dollars in thousands) | | Securities | | | Items | | | Total | | Securities | | Items | | Total |
| Balance at December 31, 2014 | | $ | 5,467 | | | $ | (1,637 | ) | | $ | 3,830 | | |
| Balance at December 31, 2017 | | $784 | | $(1,454) | | $(670) |
| Other comprehensive income before reclassification | | | (1,606 | ) | | | (204 | ) | | | (1,810 | ) | (5,691) | | 175 | | (5,516) |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | (25 | ) | | | 147 | | | | 122 | | 39 | | 197 | | 236 |
| Net current period other comprehensive income | | | (1,631 | ) | | | (57 | ) | | | (1,688 | ) | (5,652) | | 372 | | (5,280) |
| Balance at December 31, 2015 | | $ | 3,836 | | | $ | (1,694 | ) | | $ | 2,142 | | |
| Adoption of ASU 2018-02 | | 140 | | (313) | | (173) |
| Adoption of ASU 2016-01 | | (68) | | 0 | | (68) |
| Balance at December 31, 2018 | | $(4,796) | | $(1,395) | | $(6,191) |
| | Unrealized | | | | |
| | Gains and | | | | |
| | Losses on | | Defined | | |
| | Available- | | Benefit | | |
| | for-Sales | | Pension | | |
| (dollars in thousands) | Securities | | Items | | Total |
| Balance at December 31, 2016 | $(722) | | $(1,665) | | $(2,387) |
| Other comprehensive income before reclassification | 1,525 | | 50 | | 1,575 |
| Amounts reclassified from accumulated other comprehensive income (loss) | (19) | | 161 | | 142 |
| Net current period other comprehensive income | 1,506 | | 211 | | 1,717 |
| Balance at December 31, 2017 | $784 | | $(1,454) | | $(670) |
NOTE 21 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (continued)
Reclassifications out of accumulated comprehensive income for the years ended December 31, 20162018, 2017 and 20152016 are as follows:
| Details about | | Amount | | Affected Line Item |
| Accumulated Other | | Reclassified From | | in the Statement |
| Comprehensive | | Accumulated Other | | Where Net |
| Income Components | | Comprehensive Income | | Income is Presented |
| 2016 | | | | |
(dollars in thousands) | | | | |
| Unrealized gains and losses on available-for-sale securities | | $ | 66 | | Net securities gains (losses) |
| Tax effect | | | (26 | ) | Income tax expense |
| | | | 40 | | Net of tax |
Amortization of defined benefit pension items(1) | | | (215 | ) | Salaries and employee benefits |
| Tax effect | | | 85 | | Income tax expense |
| | | | (130 | ) | Net of tax |
| Total reclassifications for the period | | $ | (90 | ) | Net income |
| | | | | | |
| | | | | | |
| 2015 | | | | | |
(dollars in thousands) | | | | | |
| Unrealized gains and losses on available-for-sale securities | | $ | 42 | | Net securities gains (losses) |
| Tax effect | | | (17 | ) | Income tax expense |
| | | | 25 | | Net of tax |
Amortization of defined benefit pension items(1) | | | (244 | ) | Salaries and employee benefits |
| Tax effect | | | 97 | | Income tax expense |
| | | | (147 | ) | Net of tax |
| Total reclassifications for the period | | $ | (122 | ) | Net income |
| | | | | | |
| | | | | | |
| 2014 | | | | | |
(dollars in thousands) | | | | | |
| Unrealized gains and losses on available-for-sale securities | | $ | (224 | ) | Net securities gains (losses) |
| Tax effect | | | 90 | | Income tax expense |
| | | | (134 | ) | Net of tax |
Amortization of defined benefit pension items(1) | | | (197 | ) | Salaries and employee benefits |
| Tax effect | | | 79 | | Income tax expense |
| | | | (118 | ) | Net of tax |
| Total reclassifications for the period | | $ | (252 | ) | Net income |
| Details about | | Amount | | Affected Line Item |
| Accumulated Other | | Reclassified From | | in the Statement |
| Comprehensive | | Accumulated Other | | Where Net |
| Income Components | | Comprehensive Income | | Income is Presented |
| 2018 | | | | |
| (dollars in thousands) | | | | |
| Unrealized gains and losses on available-for-sale securities | | $(50) | | Net securities gains (losses) |
| Tax effect | | 11 | | Income tax expense |
| | (39) | | Net of tax |
Amortization of defined benefit pension items(1) | | (266) | | Salaries and employee benefits |
| Tax effect | | 69 | | Income tax expense |
| | (197) | | Net of tax |
| Total reclassifications for the period | | $(236) | | Net income |
| | | | |
| | | | |
| 2017 | | | | |
| (dollars in thousands) | | | | |
| Unrealized gains and losses on available-for-sale securities | | $32 | | Net securities gains (losses) |
| Tax effect | | (13) | | Income tax expense |
| | 19 | | Net of tax |
Amortization of defined benefit pension items(1) | | (265) | | Salaries and employee benefits |
| Tax effect | | 104 | | Income tax expense |
| | (161) | | Net of tax |
| Total reclassifications for the period | | $(142) | | Net income |
| | | | |
| | | | |
| 2016 | | | | |
| (dollars in thousands) | | | | |
| Unrealized gains and losses on available-for-sale securities | | $66 | | Net securities gains (losses) |
| Tax effect | | (26) | | Income tax expense |
| | 40 | | Net of tax |
Amortization of defined benefit pension items(1) | | (215) | | Salaries and employee benefits |
| Tax effect | | 85 | | Income tax expense |
| | (130) | | Net of tax |
| Total reclassifications for the period | | $(90) | | Net income |
(1) Included in the computation of net pension plan expense as more fully discussed in Note 11.
NOTE 22 – SELECTED QUARTERLY DATA (UNAUDITED) (in thousands except per share data)
| 2016 | | 4th | | | 3rd | | | 2nd | | | 1st | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| Interest income | | $ | 36,307 | | | $ | 35,079 | | | $ | 34,355 | | | $ | 33,210 | |
| Interest expense | | | 5,400 | | | | 5,360 | | | | 5,082 | | | | 4,628 | |
| Net interest income | | | 30,907 | | | | 29,719 | | | | 29,273 | | | | 28,582 | |
| Provision for loan losses | | | 1,150 | | | | 0 | | | | 0 | | | | 0 | |
| Net interest income after provision | | | 29,757 | | | | 29,719 | | | | 29,273 | | | | 28,582 | |
| Noninterest income | | | 8,736 | | | | 9,018 | | | | 8,067 | | | | 7,043 | |
| Noninterest expense | | | 18,389 | | | | 18,759 | | | | 18,446 | | | | 17,384 | |
| Income tax expense | | | 6,582 | | | | 6,498 | | | | 6,091 | | | | 5,962 | |
| Net income | | $ | 13,522 | | | $ | 13,480 | | | $ | 12,803 | | | $ | 12,279 | |
| | | | | | | | | | | | | | | | | |
| Basic earnings per common share | | $ | 0.54 | | | $ | 0.54 | | | $ | 0.51 | | | $ | 0.49 | |
| Diluted earnings per common share | | $ | 0.53 | | | $ | 0.53 | | | $ | 0.50 | | | $ | 0.48 | |
| | | | | | | | | | | | | | | | | |
| 2015 | | 4th | | | 3rd | | | 2nd | | | 1st | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| Interest income | | $ | 31,619 | | | $ | 30,966 | | | $ | 30,290 | | | $ | 29,664 | |
| Interest expense | | | 4,167 | | | | 4,255 | | | | 4,226 | | | | 3,964 | |
| Net interest income | | | 27,452 | | | | 26,711 | | | | 26,064 | | | | 25,700 | |
| Provision for loan losses | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Net interest income after provision | | | 27,452 | | | | 26,711 | | | | 26,064 | | | | 25,700 | |
| Noninterest income | | | 8,069 | | | | 7,902 | | | | 7,713 | | | | 7,795 | |
| Noninterest expense | | | 17,357 | | | | 17,207 | | | | 16,741 | | | | 16,901 | |
| Income tax expense | | | 5,878 | | | | 5,841 | | | | 5,656 | | | | 5,458 | |
| Net income | | $ | 12,286 | | | $ | 11,565 | | | $ | 11,380 | | | $ | 11,136 | |
| | | | | | | | | | | | | | | | | |
| Basic earnings per common share | | $ | 0.49 | | | $ | 0.46 | | | $ | 0.46 | | | $ | 0.45 | |
| Diluted earnings per common share | | $ | 0.49 | | | $ | 0.46 | | | $ | 0.45 | | | $ | 0.44 | |
| | | | | | | | |
| 2018 | 4th | | 3rd | | 2nd | | 1st |
| | Quarter | | Quarter | | Quarter | | Quarter |
| Interest income | $53,728 | | $50,379 | | $48,795 | | $46,068 |
| Interest expense | 14,138 | | 12,454 | | 11,262 | | 9,845 |
| Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 39,590 | | 37,925 | | 37,533 | | 36,223 |
| Provision for loan losses | 300 | | 1,100 | | 1,700 | | 3,300 |
| Net interest income after provision | 39,290 | | 36,825 | | 35,833 | | 32,923 |
| Noninterest income | 10,105 | | 10,433 | | 9,693 | | 9,879 |
| Noninterest expense | 22,552 | | 22,009 | | 20,274 | | 21,202 |
| Income tax expense | 5,480 | | 4,679 | | 5,110 | | 3,264 |
| Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $21,363 | | $20,570 | | $20,142 | | $18,336 |
| | | | | | | | |
| Basic earnings per common share | $0.84 | | $0.81 | | $0.80 | | $0.73 |
| Diluted earnings per common share | $0.83 | | $0.80 | | $0.78 | | $0.71 |
| | | | | | | | |
| 2017 | 4th | | 3rd | | 2nd | | 1st |
| | Quarter | | Quarter | | Quarter | | Quarter |
| Interest income | $44,161 | | $42,589 | | $40,821 | | $38,127 |
| Interest expense | 8,769 | | 7,969 | | 7,002 | | 6,066 |
| Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 35,392 | | 34,620 | | 33,819 | | 32,061 |
| Provision for loan losses | 1,850 | | 450 | | 500 | | 200 |
| Net interest income after provision | 33,542 | | 34,170 | | 33,319 | | 31,861 |
| Noninterest income | 9,462 | | 9,497 | | 8,791 | | 8,259 |
| Noninterest expense | 19,598 | | 20,269 | | 19,352 | | 20,048 |
| Income tax expense | 11,779 | | 7,573 | | 7,394 | | 5,558 |
| Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $11,627 | | $15,825 | | $15,364 | | $14,514 |
| | | | | | | | |
| Basic earnings per common share | $0.46 | | $0.63 | | $0.61 | | $0.58 |
| Diluted earnings per common share | $0.45 | | $0.62 | | $0.60 | | $0.57 |
NOTE 23 – WARRANT
On February 27, 2009, the Company entered into a Letter Agreement with the Treasury, pursuant to which the Company issued (i) 56,044 shares of the Company'sCompany’s Series A Preferred Stock and (ii) the Warrant to purchase 396,538 shares of the Company'sCompany’s common stock, no par value, for an aggregate purchase price of $56,044,000 in cash. This transaction was conducted in accordance with the CPP.
The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $21.20 per share of the common stock (trailing 20-day Lakeland average closing price as of December 17, 2008, which was the last trading day prior to date of receipt of Treasury'sTreasury’s preliminary approval for our participation in the CPP). The Warrant was valued using the Black-Scholes model with the following assumptions: market price of $17.45; exercise price of $21.20; risk-free interest rate of 3.02%; expected life of 10 years; expected dividend rate on common stock of 4.5759% and volatility of common stock price of 41.8046%. This resulted in a value of $4.4433 per share of common stock underlying the Warrant.
On December 3, 2009, the Company was notified by Treasury that, as a result of the Company's completion of our November 18, 2009 Qualified Equity Offering, the amount of the Warrant was reduced by 50% to 198,269 shares. In accordance with the terms of the Warrant, the number of shares issuable upon exercise and the exercise price are adjusted each time the Company pays a dividend to its stockholders in excess of the dividend paid at the time the warrant was issued. In 2017 and 2016, the Company paid four dividends each year in excess of dividend paid at the time the Warrant was issued. In 2016, the number of shares issuable upon exercise and the exercise price were also adjusted for a 3-for-2 stock split on July 25, 2016 paid in the form of a dividend on August 5, 2016. In 2015, the Company paid three dividends in excess of the dividend paid at the time the Warrant was issued. Based on the formula set forth in the warrant, at December 31, 2015,2018, the amount of shares issuable upon exercise of the Warrant was 203,323314,846 and the exercise price was $20.6730.$13.3503. Based on the formula set forth in the Warrant, at December 31, 2016,2017, the amount of shares issuable upon exercise of the Warrant was 308,014310,968 and the exercise price was $13.6465.$13.5168.
On June 9, 2010, the Company redeemed the Series A Preferred Stock and accreted the remaining unamortized discount on these shares. The Company did not repurchase the Warrant, and the Warrant was sold by Treasury to an independent, third party. The Warrant hashad not been exercised as of December 31, 2016.
NOTE 24 – REVENUE RECOGNITION
All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following table presents the Company's sources of noninterest income for the years ended 2018, 2017, and 2016. Items outside of scope of ASC 606 are noted as such.
| | 2018 | | 2017 (2) | | 2016 (2) |
| NONINTEREST INCOME | | | | | |
| Wealth advisory fees | $6,344 | | $5,481 | | $4,805 |
| Investment brokerage fees | 1,458 | | 1,273 | | 1,010 |
| Service charges on deposit accounts | | | | | |
| Service charges on commercial deposit acounts | 10,234 | | 8,230 | | 6,224 |
| Service charges on retail deposit acounts | 879 | | 905 | | 989 |
| Overdrafts, net | 3,581 | | 3,452 | | 3,700 |
| Other | 1,137 | | 1,109 | | 1,100 |
| Loan and service fees | | | | | |
| Debit card interchange fees | 5,883 | | 4,663 | | 4,332 |
| Loan fees (1) | 2,423 | | 2,231 | | 2,421 |
| Other | 985 | | 1,006 | | 928 |
| Merchant card fee income | 2,461 | | 2,279 | | 2,098 |
| Bank owned life insurance income (1) | 1,244 | | 1,768 | | 1,392 |
| Other income | 2,381 | | 2,598 | | 2,213 |
| Mortgage banking income (1) | 1,150 | | 982 | | 1,586 |
| Net securities gains/(losses) (1) | (50) | | 32 | | 66 |
| Total noninterest income | $40,110 | | $36,009 | | $32,864 |
(1) | Not within scope of ASC 606 |
(2) | The Company elected the modified retrospective approach of adoption; therefore, prior period balances are presented under legacy GAAP and may not be comparable to current year presentation. As a result of this new standard, the only revenue streams with changes in reporting in the current periods compared to the prior year comparable periods are loan and service fees and other income. |
NOTE 24 – REVENUE RECOGNITION (continued)
The following is a description of Contentsprincipal activities from which we generate revenue. Revenues are recognized as the Company satisfies its obligations with our customers, in an amount that reflects the consideration that we expect to receive in exchange for those services.
Wealth advisory fees
The Company provides wealth advisory services to its customers and earns fees from its contracts with trust customers to manage assets for investment and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted monthly, quarterly, or annual services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed. Other related services, such as escrow accounts that are based on a fixed schedule, are recognized when the services are rendered.
Investment brokerage services
The Company provides investment brokerage services through a full service brokerage and investment and advisory firm, Cetera Investment Services LLC (“Cetera”). The Company receives commissions from Cetera on a monthly basis based upon customer activity for the month. The fees are recognized monthly and a receivable is recorded until commissions are generally paid by the 5th business day of the following month. Because the Company (i) acts as an agent in arranging the relationship between the customer and the Cetera and (ii) does not control the services to the customers, investment brokerage service fees are presented net of Cetera’s related costs.
Service charges on deposit accounts
The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s balance.
Interchange income
The Company provides the ability to transact on certain deposit accounts through the use of debit cards by outsourcing the services through third party service providers. Performance obligations are met on a transactional basis and income is recognized monthly based on transaction type and volume. Under the accounting standards in effect in the prior period, revenue was previously recognized net of the third party’s costs. Under ASC 606, fees from interchange income related to its customers use of debit cards will be reported gross in loan and service fees under noninterest income. The cost of using third party providers for these interchange services will be reported in data processing fees and supplies under noninterest expense, which has no effect on net income for the period.
Gain on sale of other real estate (OREO) owned financed by seller
On occasion, the Company underwrites a loan to purchase property owned by the Company. Under the accounting standards in effect in the prior period, the gain on the sale of the Company owned property was deferred and recognized over the life of the loan. Under ASC 606, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. As a result of the adoption of ASC 606, the Company reported a net increase of $24,000 to opening retained earnings as of January 1, 2018.
Debit card incentive rebates
The Company receives incentive rebates based on debit card transaction volume. Performance obligations are met on a transactional basis and income is recognized monthly based on transaction volume. Under the accounting standards in effect in the prior period, revenue was previously recognized in other income under noninterest income. Under ASC 606, these rebates related to debit card transaction volume will be reported as a contra expense in data processing fees and supplies under noninterest expense, which has no effect on net income for the period.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Within the prior two years of the date of the most recent financial statement, there have been no changes in or disagreements with the Company'sCompany’s accountants.
ITEM 9A. CONTROLS AND PROCEDURES
a) An evaluation was performed under the supervision and with the participation of the Company'sCompany’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a -15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2016.2018. Based on that evaluation, the Company'sCompany’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company'sCompany’s disclosure controls and procedures were effective.
b) MANAGEMENT'SMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. The Company'sCompany’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles ("GAAP"(“GAAP”).
The Company'sCompany’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company'sCompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management assessed the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 2016.2018. In making this assessment, management used the 2013 criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2016.2018.
The Company'sCompany’s independent registered public accounting firm has issued their report on the Company'sCompany’s internal control over financial reporting. That report appears under the heading, Report of Independent Registered Public Accounting Firm.
c) There have been no changes in the Company'sCompany’s internal controls during the previous fiscal quarter, ended December 31, 2016,2018, that have materially affected, or are reasonably likely to materially affect the Company'sCompany’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in response to this item will be contained under the captions "Election“Election of Directors," "Corporate” “Corporate Governance and the Board of Directors"Directors” and "Section“Section 16(a) Beneficial Ownership Reporting Compliance" Compliance” in the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 11, 2017,9, 2019, as filed with the SEC on March 1, 2017,February 28, 2019, on Form DEF 14A, and such sections are incorporated herein by reference in response to this Item.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be contained under the captions "Director“Director Compensation," "Executive” “Executive Compensation,"” "Compensation Committee Interlocks and Insider Participation," and "Compensation“Compensation Committee Report"Report” in the definitive Proxy Statement, for the Annual Meeting of Stockholders to be held on April 11, 2017,9, 2019, as filed with the SEC on March 1, 2017,February 28, 2019, on Form DEF 14A, is incorporated herein by reference in response to this Item. The information included under the heading "Compensation“Compensation Committee Report"Report” in the Proxy Statement shall not be deemed "soliciting"“soliciting” materials or to be "filed"“filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHARELHOLDER MATTERS
The information appearing under the caption "“Security Ownership of Certain Beneficial Owners and Management"Management” in the definitive Proxy Statement, for the Annual Meeting of Stockholders to be held on April 11, 2017,9, 2019, as filed with the SEC on March 1, 2017,February 28, 2019, on Form DEF 14A, is incorporated herein by reference in response to this Item.
See Item 5 above for equity compensation plan information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information appearing under the caption "Certain“Certain Relationships and Related Transactions"Transactions” in the definitive Proxy Statement, for the Annual Meeting of Stockholders to be held on April 11, 2017,9, 2019, as filed March 1, 2017,February 28, 2019, on Form DEF 14A, is incorporated herein by reference in response to this Item. Certain additional information on related party transactions is also included in Note 14 to the Company'sCompany’s financial statements contained in Item 8.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing under the caption "Accountant Fees"“Accountant Fees” in the definitive Proxy Statement, for the Annual Meeting of Stockholders to be held on April 11, 2017,9, 2019, as filed March 1, 2017,February 28, 2019, on Form DEF 14A, is incorporated herein by reference in response to this Item.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The documents listed below are filed as a part of this report:
(a) Exhibits
| Exhibit No. | Document | Incorporated by reference to |
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| Amended and | |
| Bylaws of | filed on December 5, 2011 |
| Financial Corporation | |
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10.2 | Lakeland Financial Corporation 401(k) | Exhibit 10.1 to the Company's Form |
| Plan | S-8 filed on October 23, 2000 |
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10.3 | Amended and Restated Lakeland | Exhibit 10.4 to the Company's |
| Financial Corporation Director's Fee | Form 10-K for the fiscal year ended |
| Deferral Plan | December 31, 2008 |
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10.4 | Form of Change in Control Agreement entered into with | Exhibit 10.1 of the Company's Form |
| Michael L. Kubacki, Kevin L. Deardorff, Eric H. | 8-K filed on March 2, 2016 |
| Ottinger, Michael E. Gavin, Lisa M. O'Neill and | |
| Kristin L. Pruitt | |
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10.5 | Employee Deferred Compensation Plan | Exhibit 10.7 to the Company's |
| and Form of Agreement | Form 10-K for the fiscal year ended |
| | December 31, 2008 |
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10.6 | Form of Option Grant Agreement | Exhibit 10.10 to the Company's Form |
| | 10-K for the fiscal year ended |
| | December 31, 2004 |
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10.7 | Executive Incentive Bonus Plan | Exhibit 10.11 to the Company's Form |
| | 10-K for the fiscal year ended |
| | December 31, 2004 |
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10.8 | Amended and Restated Long Term | Exhibit 10.1 to the Company's Form |
| Incentive Plan | 10-Q for the quarter ended |
| | September 30, 2009 |
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10.9 | Lakeland Financial Corporation 2013 | Appendix A to the Definitive |
| Equity Incentive Plan | Proxy Statement on Form DEF-14A |
| | filed on March 4, 2013 |
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10.10 | Form of Restricted Stock Award | Exhibit 4.3 to the Company's |
| Agreement | Form S-8 filed on July 9, 2013 |
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10.11 | Form of Nonqualified Stock Option | Exhibit 4.4 to the Company's |
| Award Agreement | Form S-8 filed on July 9, 2013 |
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10.12 | Form of Restricted Stock Unit Award | Exhibit 4.5 to the Company's |
| Agreement | Form S-8 filed on July 9, 2013 |
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10.13 | Transitional Employment Agreement, dated | Exhibit 10.1 to the Company's |
| September 4, 2013, by and among the | Form 8-K filed on September |
| Company, the Bank and Michael L. | 4, 2013 |
| Kubacki | |
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21 | Subsidiaries | Attached hereto |
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23.1 | Consent of Independent Registered | Attached hereto |
| Public Accounting Firm | |
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31.1 | Certification of Chief Executive Officer | Attached hereto |
| Pursuant to Rule 13a-15(e)/15d-15(e) and | |
| 13(a)-15(f)/15d-15(f) | |
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31.2 | Certification of Chief Financial Officer | Attached hereto |
| | Pursuant to Rule 13a-15(e)/15d-15(e) and | |
| 13(a)-15(f)/15d-15(f) | |
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32.1 | Certification of Chief Executive Officer | Attached hereto |
| Pursuant to 18 U.S.C. Section 1350, as | |
| adopted Pursuant to Section 906 of the | |
| Sarbanes-Oxley Act of 2002 | |
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ITEM 16. FORM 10-K SUMMARY
Not applicable.None.
Pursuant to the requirements of Section 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | LAKELAND FINANCIAL CORPORATION |
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Date: March 1, 2017February 28, 2019 | By /s/ David M. Findlay |
| | David M. Findlay, Chief Executive Officer |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Name | Title | Date |
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| /s/ David M. Findlay | President, Chief Executive Officer and Director | |
| David M. Findlay | Principal Executive Officer and Director(principal executive officer) | March 1, 2017February 28, 2019 |
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/s/ Lisa M. O'NeillO’Neill | Executive Vice President, Chief Financial Officer | |
Lisa M. O'NeillO’Neill | Principal Financial Officer(principal financial officer and principal accounting officer) | March 1, 2017 |
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/s/ Teresa A. Bartman | | |
Teresa A. Bartman | Principal Accounting Officer | March 1, 2017February 28, 2019 |
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| /s/ Blake W. Augsburger | | |
| Blake W. Augsburger | Director | March 1, 2017February 28, 2019 |
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| /s/ Robert E. Bartels, Jr. | | |
| Robert E. Bartels, Jr. | Director | March 1, 2017February 28, 2019 |
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| /s/Darrianne P. Christian | | |
| Darrianne P. Christian | Director | February 28, 2019 |
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| /s/ Daniel F. Evans, Jr. | | |
| Daniel F. Evans, Jr. | Director | March 1, 2017February 28, 2019 |
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| /s/ Thomas A. Hiatt | | |
| Thomas A. Hiatt | Director | March 1, 2017February 28, 2019 |
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| /s/ Michael L. Kubacki | | |
| Michael L. Kubacki | Chairman and Director | March 1, 2017 |
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/s/ Charles E. Niemier | | |
Charles E. Niemier | Director | March 1, 2017February 28, 2019 |
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| /s/ Emily E. Pichon | | |
| Emily E. Pichon | Director | March 1, 2017February 28, 2019 |
| /s/ Steven D. Ross | | |
| Steven D. Ross | Director | March 1, 2017February 28, 2019 |
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| /s/ Brian J. Smith | | |
| Brian J. Smith | Director | March 1, 2017February 28, 2019 |
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| /s/ Bradley J. Toothaker | | |
| Bradley J. Toothaker | Director | March 1, 2017February 28, 2019 |
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| /s/ Ronald D. Truex | | |
| Ronald D. Truex | Director | March 1, 2017February 28, 2019 |
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| /s/ M. Scott Welch | | |
| M. Scott Welch | Director | March 1, 2017February 28, 2019 |
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