What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-03-05 compared with 2020-03-06 · 288 added, 109 removed, 623 unchanged (39% of the section changed)

23 unchanged sentences

• Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

The economic impact of natural disasters, terrorist attacks and military actions.

• The economic impact of natural disasters, diseases and/or pandemics, such as the COVID-19 pandemic, terrorist attacks and military actions.

• Business combinations and the integration of acquired businesses and assets which may be more difficult or expensive than expected.

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Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

What the Company knows and what steps we have taken.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) has and will continue to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company.

The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

The spread of the outbreak has caused significant disruptions in the U.S.

economy and is highly likely to disrupt banking and other financial activity in the areas in which the Company operates and could also potentially create widespread business continuity issues for the Company.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.

If the global response to contain COVID-19 escalates or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.

With the health of our employees and customers being our top concern, as of March 17, 2020, the Bank temporarily suspended branch lobby hours to the public for walk-in transactions while allowing limited scheduled appointments.

The Bank reopened branch lobbies in the third quarter of 2020, but in November 2020 again temporarily suspended branch lobby hours to the public for walk-in transactions.

In late January 2021, the Bank has since started the process of reopening branch lobbies.

The Bank implemented the following changes in response to the pandemic:

• Plexiglass windows on our teller stations and reception areas

• A limit on the number of people who can be in the lobbies at one time

• Transaction areas and reusable items will be frequently cleaned

• Hand sanitizing stations located at each entrance

• Floor stickers to guide social distancing while waiting in line

• Require both customers and employees to wear protective face coverings, among other social distancing requirements for both customers and employees.

Drive-thru services remain available as well as all ATM’s to complete needed transactions.

Customers are also able to directly contact our bankers through calling the customer contact center, engaging with a digital banker via the HERE by Hills Bank app, or through Hills Bank Online which is available 24/7.

The Bank continues to promote social distancing by encouraging employees who can work remotely to do so and in other cases, departments have been dispersed to keep the team separated.

We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19.

No material operational or internal control challenges or risks have been identified to date.

With the Federal Reserve rate drops of 150 basis points in March (100 basis points of which was directly related to the effects of the virus on the economy), a surge in home loan activity has occurred, a significant portion of which is refinance related.

The Bank sells most of its home loans into the secondary market and has seen a significant increase in the net gain on the sale of these loans.

The Bank is working with customers who request forbearance agreements and has also provided short-term modifications for customers primarily through deferrals of principal only payments for three to six months.

Throughout 2020, COVID-19 related payment deferrals provided for customers totaled approximately 14.82% of total loans.

As of December 31, 2020, COVID-19 related payment deferrals were approximately 1.20% of total loans.

The Bank continues to assist customers through this difficult time in the best manner possible by providing $127.10 million of Paycheck Protection Program (PPP) loans through December 31, 2020.

The PPP loans have a two or five year term and earn interest at 1%.

Loans funded through the PPP program are fully guaranteed by the U.S.

government if certain criteria are met.

The Bank believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

As of December 31, 2020, the Bank has outstanding PPP loan balances of $86.5 million and has received forgiveness payments totaling $40.4 million from the SBA.

With the passage of the Coronavirus Response and Relief Supplemental Appropriations Act 2021 in late December 2020 , the Bank is planning to provide additional PPP loans beginning in late January 2021 to further assist our customers.

Financial - Exposures

As discussed above, throughout 2020 the Company provided a significant number of PPP loans to customers as well as short-term loan modifications deferring principal and interest or principal only for three to six months.

During late summer and fall, a significant number of the COVID-19 related short-term loan modifications expired with the majority of customers able to return to scheduled payments.

A small percentage of customers have requested additional pandemic-related modifications described above.

Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic.

In March 2020, various regulatory agencies, including the FRB and the FDIC, issued an interagency statement, effective immediately, on loan modifications and reporting for financial institutions working with customers affected by COVID-19.

The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs.

This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

As of December 31, 2020, the total amount of the eligible loans in deferral (deferral of principal and/or interest) that met the requirements set forth under the interagency statement and therefore were not considered TDRs was 13 loans, totaling $9.4 million.

The Bank anticipates that the current and future economic conditions will continue to have an impact on the initial modifications that were made that qualified under such criteria.

The COVID-19 pandemic represents an unprecedented challenge to the global economy in general and the financial services sector in particular.

However, there is still significant uncertainty regarding the overall length of the pandemic and the aggregate impact that it will have on global and regional economies, including uncertainties regarding the potential positive effects of governmental actions taken in response to the pandemic during 2020.

With so much uncertainty, it is impossible for the Bank to accurately predict the impact that the pandemic will have on the Bank’s primary markets and the overall extent to which it will affect the Bank’s financial condition and results of operations into 2021.

Nonetheless, management believes that the Bank’s current regulatory capital position is adequate to face the coming challenges.

To account for potential exposures resulting from the pandemic, the Bank has increased its allowance for loan losses for the year ended December 31, 2020 by approximately $3.3 million since December 31, 2019.

The Bank is fully prepared to make additional provisions as warranted by the COVID-19 situation.

The Bank anticipates that a significant portion of the Bank’s borrowers in the hospitality industry, which represents approximately 0.2% of our loan portfolio, will endure significant economic distress which will adversely affect their ability to repay existing indebtedness.

These developments, together with economic conditions generally, are also expected to impact the value of certain collateral securing our loans.

Our credit administration is closely monitoring and analyzing the higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the board of directors.

Based on the Company’s capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, we currently expect to be able to manage the economic risks and uncertainties associated with the pandemic and remain adequately capitalized.

The Company continued to maintain the payment of its annual dividend consistent with its past practices.

Government Response

Congress, the FRB and the other U.S.

state and federal financial regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from the COVID-19 pandemic.

The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed measures to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.

The descriptions below summarize additional significant government actions taken in response to the COVID-19 pandemic.

The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions or government programs summarized.

The CARES Act

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020.

Among other provisions, the CARES Act includes funding for the SBA to expand lending, relief from certain U.S.

GAAP requirements to allow COVID-19-related loan modifications to not be categorized as troubled debt restructurings and a range of incentives to encourage deferment, forbearance or modification of consumer credit and mortgage contracts.

One of the key CARES Act programs is the Paycheck Protection Program, which temporarily expanded the SBA’s business loan guarantee program to include forgivable loans used for permissible purposes, which were issued under the program through August 8, 2020.

Paycheck Protection Program loans are available to a broader range of entities than ordinary SBA loans, and the loan may be forgiven in an amount equal to payroll costs and certain other expenses during either an eight-week or twenty-four week “covered period.” The Bank is participating in this program as described above.

The CARES Act contains additional protections for homeowners and renters of properties with federally-backed mortgages, including a 60-day moratorium on the initiation of foreclosure proceedings beginning on March 18, 2020 and a 120-day moratorium on initiating eviction proceedings effective March 27, 2020.

These foreclosure and eviction moratoriums have been extended through year-end by the Federal Housing Administration.

Borrowers of federally-backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the coronavirus-related public health emergency.

Also pursuant to the CARES Act, the U.S.

Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19.

Some of these funds have been used to support several FRB programs and facilities described below or additional programs or facilities that are established by its authority under Section 13(3) of the Federal Reserve Act and meeting certain criteria.

Coronavirus Response and Relief Supplemental Appropriations Act 2021

On December 21, 2020, the House and Senate passed legislation to supply the latest round of COVID-19 relief, authorizing more than $900 billion in economic aid to small businesses and consumers—the second largest stimulus in history, behind only the CARES (Coronavirus Aid Relief and Economic Security) Act that Congress enacted in March.

The bill also includes appropriations provisions to keep the government funded through September 30, 2021, as well as a host of miscellaneous items.

The summary below focuses on key banking provisions while omitting significant provisions on many other important topics, including an extension of enhanced unemployment insurance and funding for vaccine distribution, school reopening, and the airline industry.

In particular, the banking aspects of the package include the following:

An additional $284.6 billion in Paycheck Protection Program (PPP) funding for loans to small businesses, including for borrowers who have previously received a PPP loan.

A one-page simplified forgiveness process for PPP loans under $150,000.

Clarification to various CARES Act provisions, the tax treatment of PPP expenses, lender responsibilities for agent fees, and lender “hold harmless” protections under the PPP and other laws.

A further delay in Troubled Debt Restructuring (TDR) accounting until 60 days after the termination of the national emergency, or January 1, 2022.

A further optional delay in Current Expected Credit Loss (CECL) accounting until January 1, 2022.

A new round of Economic Impact Payments (EIPs) for consumers, with aggressive distribution timelines and new exemptions from garnishments.

Significant added support for Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs).

Funding for agricultural support programs and for renter assistance programs.

Termination of existing Federal Reserve emergency lending authority under the CARES Act, while preserving the Fed’s general 13(3) emergency authority existing prior to that Act.

The FRB has taken a range of actions to support the flow of credit to households and businesses.

For example, on March 15, 2020, the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S.

Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities.

The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days.

Reserve requirements have been reduced to zero as of March 26, 2020.

In addition, the FRB has established, or has taken steps to establish, a range of facilities and programs to support the U.S.

economy and U.S.

marketplace participants in response to economic disruptions associated with COVID-19.

Through these facilities and programs, the FRB, relying on its authority under Section 13(3) of the Federal Reserve Act, has taken steps to directly or indirectly purchase assets from, or make loans to, U.S.

companies, financial institutions, municipalities and other market participants.

Non-GAAP Financial Measures

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The Company’s net income for 2020 was $38.65 million compared to $45.32 million in 2019 and $36.77 million in 2018.

Before the effect of the Tax Act, the Company's net income for 2017 would have been $32.77 million.

Diluted earnings per share were $4.12, $4.85, and $3.92 for the years ended December 31, 2020, 2019 and 2018, respectively.

Before the effect of the Tax Act, diluted earnings per share would have been $3.51 in 2017.

(1) Without the effect of the Tax Act, management estimates the Company's net income for 2018 would have been $30.96 million.

The Tax Act resulted in an approximately $4.7 million charge against net income primarily due to the write down of its deferred tax assets as a result of the Tax Act’s reduction in the base corporate tax rate from 35% to 21%.

While the Tax Act negatively impacted earnings for the Company's fiscal year ended December 31, 2017, the lower corporate rate is expected to be a significant ongoing benefit to the Company.

The Bank’s net interest income is the largest component of the Bank’s revenue, and is a function of the average earning assets and the net interest margin percentage.

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Highlights with respect to items on the Company’s balance sheet as of December 31, 2020 included the following:

• Total assets were $3.781 billion, an increase of $479.72 million since December 31, 2019.

• Cash and cash equivalents were $574.31 million, an increase of $332.35 million since December 31, 2019.

A substantial portion of the increase can be attributed to increased savings with the current negative economic environment due to the pandemic and equity investors fleeing volatile capital markets in an effort to preserve principal.

• Loans, net of allowance for loan losses and unamortized fees and costs, totaling $2.718 billion.

• Net loan growth in 2020 of $67.74 million.

The increase was primarily due to PPP loans provided to customers totaling $127.10 million.

Loans held for sale increased $35.55 million since December 31, 2019 due to the significant reduction in interest rates during 2020, resulting in a significant amount of mortgage loan refinance activity.

• Deposit growth of $531.20 million in 2020.

Deposits increased to $3.193 billion and included $74.08 million of brokered deposits.

A substantial portion of the increase can be attributed to the current negative economic environment.

• FHLB borrowings decreased $80.00 million.

The decrease was largely due to prepaying $55 million of FHLB borrowings.

• Stockholders’ equity increased $40.87 million to $416.08 million in 2020, with dividends having been paid in 2020 of $8.33 million.

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(Amounts In Thousands)

Total assets $ 3,780,611 $ 3,300,887 $ 3,042,464 $ 2,963,360 $ 2,655,770

Investment securities 416,544 366,368 331,098 300,160 279,950

Loans held for sale 43,947 8,400 1,984 5,162 9,806

Loans, net 2,674,012 2,606,277 2,591,085 2,431,165 2,251,445

Deposits 3,192,568 2,661,364 2,421,124 2,288,565 2,036,312

Federal Home Loan Bank borrowings 105,000 185,000 215,000 295,000 235,000

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Asset growth from 2018 to 2019 was $258.42 million and represented a 8.49% increase.

The largest growth in assets in 2019 occurred in Cash and Cash Equivalents, which increased $198.66 million as of December 31, 2019 compared to December 31, 2018 and decreased $111.05 million as of December 31, 2018 compared to December 31, 2017.

The largest growth in assets in 2020 occurred in Cash and Cash Equivalents, which increased $332.35 million as of December 31, 2020 compared to December 31, 2019 and increased $198.66 million as of December 31, 2019 compared to December 31, 2018.

Net Loans increased $67.74 million and $15.19 million for the years ended December 31, 2020 and 2019, respectively.

Loans held for sale to the secondary market increased $6.42 million and decreased $3.18 for the years ended December 31, 2019 and 2018 , respectively.

Loans held for sale to the secondary market increased $35.55 million and increased $6.42 for the years ended December 31, 2020 and 2019, respectively.

Loans held for investment represent the largest component of the Bank’s earning assets.

Loans held for investment were $2.711 billion and $2.640 billion at December 31, 2020 and 2019, respectively.

The local economy that generated consistent demand for loans was a significant factor in the trend of increasing net loans in each of the last five years.

The local economy that generated consistent demand for loans was a significant factor in the trend of increasing net loans in past years.

The trend of increasing Net Loans did slow in 2020 and may not continue, and as a result, may not be indicative of future performance.

Loans secured by real estate represent the largest increase in loan growth.

These loans increased $21.29 million in 2019 and increased $154.56 million in 2018 .

Loans secured by real estate include loans for 1 to 4 family residential properties, multi-family properties, agricultural real estate, commercial real estate and construction and development.

The primary reason for the increase in 2020 was PPP loans provided to customers in response to the COVID-19 pandemic as discussed previously.

Commercial and financial loans represent the largest increase in loan growth.

These loans increased $64.92 million in 2020 and decreased $8.18 million in 2019.

Commercial and financial loans increased due to PPP loans provided to customers, which had an outstanding balance of $86.5 million as of December 31, 2020.

On a net basis, the Company originated $72.14 million and $13.02 million in loans to customers for the years ended December 31, 2020 and 2019, respectively.

Net loan originations decreased 92.27% in 2019 compared to 2018 .

The decrease in net loan originations in 2019 as compared to 2018 is reflective of a decrease in loan demand in the local commercial lending environment.

Net loan originations increased 453.89% in 2020 compared to 2019.

The increase in net loan originations in 2020 as compared to 2019 is reflective of loan demand primarily for PPP loans provided in response to the COVID-19 pandemic.

The Company does not engage in significant participation activity and does not purchase participations from outside its established trade area.

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Residential real estate loans, including first and junior liens, were $1,019.92 million, $1,059.97 million and $1,064.68 million as of December 31, 2020, 2019 and 2018, respectively.

The dollar total of residential real estate loans decreased 0.44% in 2019 and increased 9.11% in 2018 .

The dollar total of residential real estate loans decreased 3.78% in 2020 and decreased 0.44% in 2019.

Residential real estate loans were 37.63% of the loan portfolio at December 31, 2020, 40.16% at December 31, 2019 and 40.51% at December 31, 2018.

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The table does not include loans held for sale to the secondary market.

2020 2019 2018 2017 2016

Agricultural $ 94,842 $ 91,317 $ 92,673 $ 88,580 $ 92,871

Commercial and financial 286,242 221,323 229,501 218,632 192,995

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Obligations of state and political subdivisions 56,488 49,896 52,725 57,626 54,462

$ 2,710,144 $ 2,639,104 $ 2,627,943 $ 2,459,671 $ 2,277,148

Net unamortized fees and costs 938 933 952 894 827

$ 2,711,082 $ 2,640,037 $ 2,628,895 $ 2,460,565 $ 2,277,975

Less allowance for loan losses 37,070 33,760 37,810 29,400 26,530

$ 2,674,012 $ 2,606,277 $ 2,591,085 $ 2,431,165 $ 2,251,445

There were no foreign loans outstanding for any of the years presented.

The following table shows the principal payments due on loans as of December 31, 2020:

Amounts Due in One Year

Amounts Due in One To

Amounts Due in Over Five

Of Loans Amounts Due in One Year

Or Less (1) Amounts Due in One To

Five Years Amounts Due in Over Five

(Amounts In Thousands)

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Real Estate (2) 1,019,269 139,031 696,294 183,944

Other 88,513 5,700 27,968 54,845

Totals $ 2,710,144 $ 530,536 $ 1,877,731 $ 301,877

The types of interest rates applicable to these principal payments are shown below:

Fixed rate $ 1,699,403 $ 357,894 $ 1,175,466 $ 166,043

Variable rate 1,010,741 172,642 702,265 135,834

$ 2,710,144 $ 530,536 $ 1,877,731 $ 301,877

(1) A significant portion of the commercial loans are due in one year or less.

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The following table shows unemployment as of December 31, 2020, 2019 and 2018 and median income information as of December 31, 2019, 2018 and 2017, as December 31, 2020 information is not available as of the date of this report:

Unemployment Rate %

Median Income

Unemployment Rate % Median Income

2020 2019 2018 2019 2018 2017

United States 6.7 % 3.5 % 3.9 % $ 62,843 $ 60,293 $ 60,336

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Johnson County 2.8 % 2.2 % 1.7 % 62,542 61,640 59,965

Linn County 3.8 % 3.1 % 2.7 % 64,903 64,862 62,702

Washington County 2.7 % 2.5 % 2.2 % 62,556 61,769 59,157

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The following tables show the amounts of the Company's average deposits and average rates paid on such deposits for the years ended December 31, 2020, 2019 and 2018 and the composition of the certificates of deposit issued in denominations in excess of $100,000 as of December 31, 2020, 2019 and 2018:

2020 Rate 2019 Rate 2018 Rate

(Amounts In Thousands)

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Average time deposits 695,468 2.07 661,548 2.19 537,575 1.72

$ 2,906,818 $ 2,596,581 $ 2,379,975

Time certificates issued in amounts of $100,000 or more with maturity in:

2020 Rate 2019 Rate 2018 Rate

(Amounts In Thousands)

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Over 12 months 171,391 2.20 150,760 3.67 131,435 2.29

$ 327,861 $ 292,982 $ 228,551

Investment securities increased $50.18 million in 2020.

In 2019, investment securities increased by $35.27 million.

The investment portfolio consists of $355.30 million of securities that are stated at fair value, with any unrealized gain or loss, net of income taxes,

reported as a separate component of stockholders’ equity.

The investment portfolio consists of $408.37 million of securities that are stated at fair value, with any unrealized gain or loss, net of

income taxes, reported as a separate component of stockholders’ equity.

The securities portfolio is used for liquidity and pledging purposes and to provide a rate of return that is acceptable to management.

The following tables show the carrying value of the investment securities held by the Bank, including stock of the Federal Home Loan Bank, as of December 31, 2020, 2019 and 2018 and the maturities and weighted average yields of the investment securities, computed on a tax-equivalent basis using a federal tax rate of 21%, as of December 31, 2020:

2020 2019 2018

(Amounts In Thousands)

Carrying value:

Treasury $ 148,646 $ 128,585 $ 83,155

Other securities (FHLB, FHLMC and FNMA) 35,160 15,229 34,871

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Obligations of state and political subdivisions 224,566 211,489 200,900

$ 416,544 $ 366,368 $ 331,098

December 31, 2020

Value Weighted

(Amounts In Thousands)

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Over 10 years 26,920 1.90

Total $ 416,544

As of December 31, 2020, the Company held no investment securities exceeding 10% of stockholders’ equity, other than securities of the U.S.

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The following table presents the return on average assets, return on average stockholders' equity, the dividend payout ratio and average stockholders’ equity to average assets ratio for the years ended December 31, 2020, 2019 and 2018:

2020 2019 2018

Return on average assets 1.09 % 1.40 % 1.23 %

Return on average assets before Tax Act (1)

Return on average stockholders' equity 8.72 11.23 9.92

Return on average equity before Tax Act (1)

Dividend payout ratio 21.54 16.90 19.05

Average stockholders' equity to average assets ratio 12.47 12.45 12.35

Non-GAAP financial measurement.

For further information, refer to the Non-GAAP Financial Measures section of this report in Item 7.

Net Income Overview

Net income and diluted earnings per share for the last five years are as presented below:

% (Decrease) Increase

Year Net Income % (Decrease) Increase Earnings Per

Share - Diluted

(In Thousands)

2020 $ 38,647 (14.72) % $ 4.12

2019 45,318 23.26 4.85

2018 36,767 31.03 3.92

2017 28,061 (11.07) 3.01

2017 (1) 32,770 3.85 3.51

2016 31,555 11.04 3.40

(1) Non-GAAP financial measurement.

For further information, refer to the Non-GAAP Financial Measurement section of this report.

Net income for 2019 increased by $8.55 million or 23.26% and diluted earnings per share increased by 23.72% .

Net income for 2020 decreased by $(6.67) million or (14.72)% and diluted earnings per share decreased by (15.05)%.

In 2020, net interest income increased $10.57 million due to growth of $309.59 million in the Bank's average earning assets and decreased $6.43 million due to interest rate changes.

Noninterest income increased by $0.97 million, the provision for loan losses decreased by $11.38 million and total noninterest expenses increased by $5.14 million .

Annual fluctuations in the Company's net income continue to be driven primarily by three generally recurring important factors.

Noninterest income increased by $3.54 million, the provision for loan losses increased by $7.24 million and total noninterest expenses increased by $8.37 million.

Annual fluctuations in the Company's net income are driven primarily by four important factors.

The first important factor is net interest margin.

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Net interest margin in 2018 was 3.25%.

Based on the current interest rate environment, the Company expects continued net interest compression to impact earnings for the foreseeable future.

The Company believes net interest margin in dollars will be contingent on the growth of the Company’s earnings assets and maintaining yield on loans.

Net interest income was also impacted by the increase in interest expense of $8.55 million compared to 2018, primarily driven by interest rate increases which accounted for $6.28 million of the change.

Net interest income for the Company increased primarily as a result of growth in the volume of earning assets (offsetting reductions in interest income caused by declines in interest rates) and the continued low interest rates on interest bearing deposits resulting in decreased interest expense.

The Company expects net interest compression to impact earnings for the foreseeable future due to competition for loans and deposits combined with the interest rate decreases by the Federal Reserve Board.

The Company believes growth in net interest income will be contingent on the growth of the Company’s earnings assets and maintaining yield on loans.

Net interest income was also impacted by the decrease in interest expense of $7.92 million compared to 2019, primarily driven by interest rate decreases which accounted for $8.54 million of the change.

A significant portion of the increase in the loan portfolio is attributable to PPP loans.

The Company anticipates most PPP loans will be forgiven in accordance with the SBA's requirements.

The second significant factor affecting the Company's net income is the provision for loan losses.

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The Company’s allowance for loan losses was $37.07 million at December 31, 2020.

The allowance in 2019 decreased in comparison to 2018 due to a decreased provision for loan losses of $11.38 million resulting from a combination of the composition of loan growth, historical loss rates, changes in the composition of loans among the credit risk ratings in 2019 including decrease in specific reserve on impaired loans and management's evaluation of qualitative factors given the current and expected national and local economic conditions.

The loan loss provision, which is the amount necessary to adjust the allowance to the level considered appropriate by management, totaled a reduction of expense of $ 2.88 million for 2019 , an expense of $8.5 million for 2018 and an expense of $1.69 million for 2017 .

Provision expense is expected to be dependent on the Company’s loan growth, local economic conditions, asset quality and the adoption of ASU 2016-13, or CECL, through the end of 2020.

The allowance in 2020 increased in comparison to 2019 due to a increased provision for loan losses of $7.24 million resulting from a combination of the composition of loan growth, historical loss rates, changes in the composition of loans among the credit risk ratings in 2020 and management's evaluation of qualitative factors given the current and expected national and local economic conditions primarily given the impact of the COVID-19 pandemic.

The loan loss provision, which is the amount necessary to adjust the allowance to the level considered appropriate by management, totaled an expense of $4.36 million for 2020, a reduction of expense of $2.88 million for 2019 and an expense of $8.50 million for 2018.

Provision expense is expected to be dependent on the Company’s loan growth, local economic conditions, including, but not limited to, conditions associated with the COVID-19 pandemic and the attendant risks and uncertainties related thereto, asset quality and the adoption of ASU 2016-13, or CECL, through the end of 2021.

See Note 3 to the Company's Consolidated Financial Statements.

A detailed discussion is included in the Provision for Loan Losses section below.

The third significant factor affecting the Company’s net income is income tax expense.

Federal and state income tax expenses were $12.55 million, $8.91 million and $19.54 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Income taxes as a percentage of income before taxes were 21.69% in 2019, 19.50% in 2018 and 41.05% in 2017.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”).

The Tax Act established new tax laws that reduced the U.S.

federal corporate income tax rate from 35% to 21% in 2018.

Without the effect of the Tax Act, management estimates the Company's net income for 2018 would have been $30.96 million.

The third significant factor affecting the Company’s net income is net gain on the sale of loans.

The net gain on the sale of loans was $6.68 million and $3.54 million for the years ended December 31, 2020 and 2019, respectively, an increase of 88.70% for the year ended December 31, 2020 compared to the same period in 2019.

Loans originated for sale in 2020 totaled $475.19 million compared to $299.22 million in the same period in 2019, an increase of 58.81%.

The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly.

The volume of activity in these types of loans is directly related to the level of interest rates and has been significantly impacted by the Federal Reserve Board's reduction of the federal funds rate to 0.25%, resulting in a significant amount of mortgage loan refinance activity.

The fourth significant factor affecting the Company's net income is noninterest expenses.

Noninterest expenses were $75.63 million and 67.26 million for the years ended December 31, 2020 and 2019, respectively.

Salaries and employee benefits increased $3.91 million in 2020.

The increase is primarily the result of annual salary adjustments, hiring of additional employees to staff growth, increased variable compensation due to the increase in loans originated for sale described above and increased overtime due to the increase in loans originated for sale and processing of PPP loans.

Other noninterest expenses increased $3.07 million in 2020 primarily due to $2.53 million in fees incurred from the prepayment of FHLB borrowings and $2.68 million paid for the early termination of the interest rate swap.

Net income for 2019 was $45.32 million, or diluted earnings per share of $4.85.

4 unchanged sentences

Noninterest expense increased from $62.12 million in 2018 to $67.26 million in 2019, or 8.28%.

Without the effect of the Tax Act, net income for 2017 would have increased by $1.22 million or 3.85%.

In addition, diluted earnings per share would have increased 3.25%.(1)

Net Interest Income

3 unchanged sentences

The net interest margin was 3.00% in 2020, 3.18% in 2019, 3.25% in 2018, 3.43% in 2017, and 3.43% in 2016.

The measure is shown on a tax-equivalent basis using a rate of 21% for 2019 and 2018 and 35% for 2017 to make the interest earned on taxable and nontaxable assets more comparable.

The measure is shown on a tax-equivalent basis using a rate of 21% for 2020, 2019 and 2018 to make the interest earned on taxable and nontaxable assets more comparable.

Interest income and expense for 2020, 2019 and 2018 are indicated on the following table:

Years Ended December 31,

2020 2019 2018

(Amounts In Thousands)

Loans (1) $ 120,814 $ 121,862 $ 111,172

Taxable securities 3,512 3,239 2,759

5 unchanged sentences

Time deposits 14,454 14,483 9,267

Other borrowings

FHLB borrowings 5,399 6,333 6,792

Interest-bearing other liabilities

Total interest expense $ 26,952 $ 34,873 $ 26,323

Net interest income $ 103,520 $ 99,376 $ 94,264

(1) Presented on a tax equivalent basis using a rate of 21% for 2019 and 2018 and 35% for 2017.

(1) Presented on a tax equivalent basis using a rate of 21% for 2020, 2019 and 2018.

Net interest income on a tax-equivalent basis changed in 2020 as follows:

Increase (Decrease)

Change In Change In Increase (Decrease)

Balance Average

(Amounts In Thousands)

Interest income:

Loans, net $ 93,443 (0.21) % $ 6,531 $ (7,579) $ (1,048)

Taxable securities 37,196 (0.32) 847 (574) 273

2 unchanged sentences

Federal funds sold 112 (2.78) 3 (5) (2)

$ 309,596 $ 11,185 $ (14,962) $ (3,777)

Interest expense:

5 unchanged sentences

Interest-bearing other liabilities — — — — —

$ 184,881 $ (614) $ 8,535 $ 7,921

Change in net interest income $ 10,571 $ (6,427) $ 4,144

3 unchanged sentences

Net interest income on a tax equivalent basis changed in 2019 as follows:

Change In Average Balance

Change In Average Rate

Increase (Decrease)

Change In Average Balance Change In Average Rate Increase (Decrease)

(Amounts In Thousands)

Interest income:

Loans, net $ 123,810 0.20 % $ 5,716 $ 4,974 $ 10,690

Taxable securities 11,060 0.15 325 155 480

2 unchanged sentences

Federal funds sold 33 1.13 — — —

$ 228,326 $ 7,824 $ 5,838 $ 13,662

Interest expense:

5 unchanged sentences

Interest-bearing other liabilities — — — — —

$ 200,241 $ (2,275) $ (6,275) $ (8,550)

Change in net interest income $ 5,549 $ (437) $ 5,112

1 unchanged sentence

Years Ended December 31,

2020 2019 2018

Average yields:

Loans (1) 4.44 % 4.64 % 4.45 %

Loans (tax equivalent basis) (1) 4.46 4.67 4.47

15 unchanged sentences

(1) Non-accruing loans have been included in the average loan balances for purposes of this computation.

Net interest spread is the difference between the yield on average interest-earning assets and the yield on average interest-paying liabilities stated on a tax equivalent basis using a federal rate of 21% for 2019 and 2018 and 35% for 2017.

(2) Net interest spread is the difference between the yield on average interest-earning assets and the yield on average interest-paying liabilities stated on a tax equivalent basis using a federal rate of 21% for 2020, 2019 and 2018.

The net interest spread decreased 10 basis points in 2020 compared to 2019 and the net interest spread decreased 13 basis points compared to 2018.

2 unchanged sentences

The net interest margin decreased 7 basis points in 2019 compared to 2018.

In October 2019, the Federal Open Market Committee decreased the target rate to 1.75%.

In March 2020, the Federal Open Market Committee decreased the target rate to 0.25%.

Interest rates on loans are generally affected by the target rate since interest rates for the U.S.

12 unchanged sentences

The allowance for loan losses totaled $37.07 million at December 31, 2020 compared to $33.76 million at December 31, 2019.

The decrease in 2019 is the result of the decrease in specific reserve loans, historical loss rates improving and management's evaluation of qualitative factors.

Specifically for 2019 , there was a decrease of $2.76 million due to changes in average balances and composition of loans outstanding.

The increase in 2020 is the result of an increase of $3.39 million due to changes in average balances, composition of loans outstanding and significant uncertainties with respect to qualitative factors considered by management due to the COVID-19 pandemic's economic impact.

There was a decrease of $0.08 million in the amount allocated to the allowance due to improvements in credit quality.

The percentage of the allowance to outstanding loans was 1.37% and 1.28% at December 31, 2020 and 2019, respectively.

The provision for loan losses totaled a reduction of expense of $2.88 million in 2019 , an expense of $8.50 million in 2018 and an expense of $1.69 million for 2017 .

The provision for loan losses totaled an expense of $4.36 million in 2020, a reduction of expense of $2.88 million in 2019 and an expense of $8.50 million for 2018.

Loan charge-offs net of recoveries were $1.05 million in 2019.

33 unchanged sentences

The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge-offs.

When an updated appraisal value has been obtained, the Company

has used the appraisal amount in determining the appropriate charge-off or required reserve.

When an updated appraisal value has been obtained, the Company has used the appraisal amount in determining the appropriate charge-off or required reserve.

The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company’s loss experience with the type of property in question.

11 unchanged sentences

Impaired loans also include loans that, based on management’s evaluation of current information and events, the Bank expects to be unable to collect in full according to the contractual terms of the original loan agreement.

The decrease in impaired loans is primarily due to a decrease in specific reserve loans of $8.07 million from December 31, 2018 to December 31, 2019 .

The decrease in impaired loans is primarily due to a decrease in nonaccrual loans of $1.92 million and offset by an increase of accruing loans past due 90 days or more of $0.45 million, an increase of $0.43 million in specific reserve loans and an increase in TDR loans of $0.94 million from December 31, 2019 to December 31, 2020.

Special mention loan balances were $78.05 million at December 31, 2020 and $66.81 million at December 31, 2019.

These asset quality changes decreased the provision by $0.14 million based upon the relative mix of special mention loans by category.

These asset quality changes increased the provision by $0.13 million based upon the relative mix of special mention loans by category.

The $11.24 million increase in special mention loans is related to management’s evaluation of its loan portfolio.

The total increase of $13.21 million is comprised of approximately $2.46 million in agricultural operating loans, $0.72 million in construction 1 to 4 family residential, $1.98 million in real estate farmland, $0.73 million in 1 to 4 family residential mortgages, $0.34 million in 1 to 4 family junior mortgages, $11.49 million for multi-family real estate mortgages, $1.57 million for commercial real estate mortgages, and $0.40 million for obligations of state and political subdivisions.

The increase is offset by a decrease in the special mention classification of $6.25 million in commercial loans, $0.19 million in construction land development and commercial, and $0.04 million in individual loans.

The total increase of $11.24 million is comprised of approximately $2.03 million in agricultural operating loans, $3.10 million in commercial loans, $3.04 million in real estate farmland, $1.72 million in 1 to 4 family residential mortgages and $14.94 million for commercial real estate mortgages.

The increase is offset by a decrease in the special mention classification of $0.63 million in construction 1 to 4 family residential, $0.29 million in construction land development and commercial, $0.16 million in 1 to 4 family junior mortgages, $12.18 million for multi-family real estate mortgages, $0.09 million in individual loans and $0.24 million for obligations of state and political subdivisions.

Substandard loan balances were $51.03 million at December 31, 2020 and $43.34 million at December 31, 2019.

These asset quality changes decreased the provision by $0.11 million at December 31, 2019 due to the mix of the reserve required for certain substandard loans.

The decrease of $11.06 million in substandard loans at December 31, 2019 includes an increase of $0.08 million in 1 to 4 family junior mortgages.

The increase is offset by a decrease in the substandard classification of $1.54 million in agricultural operating loans, $2.34 million in commercial loans, $0.40 million in construction 1 to 4 family residential, $0.70 million in construction land development, $1.16 million in real estate farmland, $0.79 million of 1 to 4 family residential mortgages, $0.21 million in multi-family real estate mortgages, $3.96 million in commercial real estate mortgages, and $0.04 million in loans to individuals.

These asset quality changes increased the provision by $0.21 million at December 31, 2020 due to the mix of the reserve required for certain substandard loans.

The increase of $7.69 million in substandard loans at December 31, 2020 includes an increase of $2.01 million in commercial loans, $0.32 million in construction 1 to 4 family residential, $1.11 million in construction land development, $0.02 million in 1 to 4 family junior mortgages, $12.31 million in multi-family real estate mortgages, $1.02 million in commercial real estate mortgages and $0.03 million in loans to individuals.

The increase is offset by a decrease in the substandard classification of $1.90 million in agricultural operating loans, $5.09 million in real estate farmland and $2.14 million of 1 to 4 family residential mortgages.

A description of the Bank's credit quality indicators are discussed in Note 3 to the Company's Consolidated Financial Statements.

2 unchanged sentences

The following table summarizes the Company's impaired loans and non-performing assets as of December 31 for each of the years presented:

2020 2019 2018 2017 2016

(Amounts In Thousands)

18 unchanged sentences

The ratio of allowance for loan losses to impaired loans increased to 178.83% as of December 31, 2020 compared to 161.34% as of December 31, 2019.

The increase in 2019 is the result of a decrease in impaired loans with specific reserves.

The increase in 2020 is the result of an increase in the allowance for loan losses primarily due to management's evaluation of qualitative factors in response to the COVID-19 pandemic and related uncertainties.

The ratio of impaired loans to total gross loans was 0.76% and 0.79% at December 31, 2020 and 2019, respectively.

The decrease in the 2019 ratio is primarily due to the decrease in specific reserve loans.

The decrease in the 2020 ratio is primarily due to the decrease in nonaccrual loans.

Other factors that are considered in determining the credit quality of the Company’s loan portfolio are the vacancy rates for both residential and commercial space, current equity the borrower has in the property and overall financial strength of the customer including cash flow to continue to fund loan payments.

17 unchanged sentences

The following table summarizes the Bank's loan loss experience for the years ended December 31 for each of the years presented:

Commercial and Financial

Agricultural Commercial and Financial Real Estate:

development Real Estate:

farmland Real Estate:

Mortgage, 1 to

4 family Real Estate:

Mortgage, multi-family and

commercial Other Total

(Amounts In Thousands)

1 unchanged sentence

Beginning balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760

Charge-offs (43) (1,425) (43) (1) (738) (291) (381) (2,922)

Recoveries 63 670 118 10 784 49 180 1,874

Provision 88 652 (355) 214 1,684 1,798 277 4,358

Ending balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070

Commercial and Financial

Agricultural Commercial and Financial Real Estate:

development Real Estate:

farmland Real Estate:

Mortgage, 1 to

4 family Real Estate:

Mortgage, multi-family and

commercial Other Total

(Amounts In Thousands)

1 unchanged sentence

Beginning balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810

Charge-offs (266) (981) (45) (6) (896) (341) (434) (2,969)

Recoveries 95 646 8 5 700 180 165 1,799

Provision (218) (503) (656) (21) (1,682) (145) 345 (2,880)

Ending balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760

Commercial and Financial

Agricultural Commercial and Financial Real Estate:

development Real Estate:

farmland Real Estate:

Mortgage, 1 to

4 family Real Estate:

Mortgage, multi-family and

commercial Other Total

(Amounts In Thousands)

1 unchanged sentence

Beginning balance $ 2,294 $ 4,837 $ 2,989 $ 3,669 $ 8,668 $ 5,700 $ 1,243 $ 29,400

Charge-offs (95) (585) — — (830) (251) (561) (2,322)

Recoveries 119 1,057 148 30 612 107 162 2,235

Provision 471 517 155 273 4,066 2,609 406 8,497

Ending balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810

Commercial and Financial

Agricultural Commercial and Financial Real Estate:

development Real Estate:

farmland Real Estate:

Mortgage, 1 to

4 family Real Estate:

Mortgage, multi-family and

commercial Other Total

(Amounts In Thousands)

1 unchanged sentence

Beginning balance $ 2,947 $ 4,531 $ 2,890 $ 3,417 $ 7,677 $ 4,045 $ 1,023 $ 26,530

Charge-offs (167) (583) (114) (3) (553) (130) (554) (2,104)

Recoveries 146 1,183 662 — 661 376 258 3,286

Provision (632) (294) (449) 255 883 1,409 516 1,688

Ending balance $ 2,294 $ 4,837 $ 2,989 $ 3,669 $ 8,668 $ 5,700 $ 1,243 $ 29,400

Commercial and Financial

Agricultural Commercial and Financial Real Estate:

development Real Estate:

farmland Real Estate:

Mortgage, 1 to

4 family Real Estate:

Mortgage, multi-family and

commercial Other Total

(Amounts In Thousands)

1 unchanged sentence

Beginning balance $ 3,082 $ 4,517 $ 2,280 $ 3,342 $ 8,172 $ 4,223 $ 894 $ 26,510

Charge-offs (226) (315) (34) (116) (1,181) (66) (693) (2,631)

Recoveries 181 1,169 849 — 1,043 385 187 3,814

Provision (90) (840) (205) 191 (357) (497) 635 (1,163)

Ending balance $ 2,947 $ 4,531 $ 2,890 $ 3,417 $ 7,677 $ 4,045 $ 1,023 $ 26,530

2 unchanged sentences

The following table presents the allowance for loan losses by type of loans, the percentage of the allocation for each category to the total allowance and the percentage of all loans in each category to total loans as of December 31, 2020, 2019, 2018, 2017 and 2016:

% of Total Allowance

to Total Loans

% of Total Allowance

Amount % of Total Allowance % of Loans

to Total Loans Amount % of Total Allowance % of Loans

to Total Loans

(In Thousands)

(In Thousands) (In Thousands)

Agricultural $ 2,508 6.77 % 3.50 % $ 2,400 7.11 % 3.46 %

Commercial and financial 4,885 13.18 % 10.56 4,988 14.77 % 8.39

8 unchanged sentences

Obligations of state and political subdivisions 650 1.74 % 2.08 473 1.41 1.89

$ 37,070 100.00 % 100.00 % $ 33,760 100.00 % 100.00 %

Agricultural $ 2,789 7.38 % 3.53 % $ 2,294 7.80 % 3.60 %

Commercial and financial 5,826 15.41 % 8.73 4,837 16.45 % 8.89

8 unchanged sentences

Obligations of state and political subdivisions 527 1.38 2.01 461 1.57 2.34

% of Total Allowance

$ 37,810 100.00 % 100.00 % $ 29,400 100.00 % 100.00 %

Amount % of Total Allowance % of Loans

to Total Loans

(In Thousands)

Agricultural $ 2,947 11.11 % 4.08 %

Commercial and financial 4,531 17.08 8.48

8 unchanged sentences

Obligations of state and political subdivisions 381 1.44 2.39

$ 26,530 100.00 % 100.00 %

The Company believes that the allowance for loan losses is at a level commensurate with the overall risk exposure of the loan portfolio.

2 unchanged sentences

Noninterest Income

The following table sets forth the various categories of noninterest income for the year ended December 31, 2019 , 2018 and 2017 .

Year Ended December 31,

The following table sets forth the various categories of noninterest income for the years ended December 31, 2020, 2019 and 2018.

Year Ended December 31, $ Change % Change

2020 2019 2018 2020/2019 2019/2018 2020/2019 2019/2018

(Amounts in thousands)

Net gain on sale of loans $ 6,678 $ 3,539 $ 1,517 $ 3,139 $ 2,022 88.70 % 133.29 %

Trust fees 10,275 9,579 10,007 696 (428) 7.27 (4.28)

Service charges and fees 10,186 10,276 9,614 (90) 662 (0.88) 6.89

Other noninterest income 1,187 1,426 2,680 (239) (1,254) (16.76) (46.79)

Loss on sale of investment securities

Gain (loss) on sale of investment securities $ 10 $ (28) $ — 38 (28) (135.71) —

$ 28,336 $ 24,792 $ 23,818 $ 3,544 $ 974 14.29 % 4.09 %

The noninterest income of the Company was $28.34 million in 2020 compared to $24.79 million in 2019.

1 unchanged sentence

In 2019, the total noninterest income increased $0.97 million from 2018.

Net gain on sale of loans increased 2.02 million in 2019 primarily due to the decreasing interest rate environment.

The amount of the gain on sale of secondary market mortgage loans in each year can vary significantly.

The volume of activity in these types of loans is directly related to the level of interest rates.

Loans originated for sale in 2020, which consist primarily of fixed rate residential mortgage loans, totaled $475.19 million compared to $299.22 million in 2019, an increase of 58.81%.

In the year ended December 31, 2020 and 2019, the net gain on sale of loans was $6.68 million and $3.54 million, respectively.

The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly.

The volume of activity in these types of loans is directly related to the level

of interest rates and has been significantly impacted by the Federal Reserve Board's reduction of the federal funds rate to 0.25% in 2020, resulting in a significant amount of mortgage loan refinance activity.

The servicing of the loans sold into the secondary market is not retained by the Company so these loans do not provide an ongoing stream of income.

Trust fees decreased $0.43 million to $9.58 million in 2019 .

Trust fees increased $1.96 million in 2018 .

Trust fees increased $0.70 million to $10.28 million in 2020.

Trust fees decreased $(0.43) million in 2019.

As of December 31, 2020, the Bank’s Trust Department had $2.176 billion in assets under management compared to $1.919 billion and $1.618 billion at December 31, 2019 and 2018, respectively.

The trust assets that are the most volatile are those that are held in common stocks, which amount to approximately 68.00% of assets under management.

In 2020, the Dow Jones Industrial Average increased 7.25%.

The market value of the Dow Jones Industrial Average decreased 5.63% in 2018 and increased 25.08% in 2017 .

Service charges and fees increased $0.66 million in 2018 from increased debit and credit card interchange income.

Service charges and fees increased $0.76 million in 2018.

The market value of the Dow Jones Industrial Average increased 22.34% in 2019 and decreased 5.63% in 2018.

Other noninterest income decreased $1.25 million in 2019 primarily due to the sale of the insurance department in August 2018 for a gain of $885,000.

1 unchanged sentence

The following table sets forth the various categories of noninterest expenses for the year ended December 31, 2020, 2019 and 2018.

Year Ended December 31,

Year Ended December 31, $ Change % Change

2020 2019 2018 2020/2019 2019/2018 2020/2019 2019/2018

(Amounts in thousands)

Salaries and employee benefits $ 40,621 $ 36,709 $ 34,981 $ 3,912 $ 1,728 10.66 % 4.94 %

Occupancy 4,343 4,336 4,374 7 (38) 0.16 (0.87)

Furniture and equipment 7,357 6,795 5,741 562 1,054 8.27 18.36

4 unchanged sentences

Other noninterest expense 7,504 4,434 1,804 3,070 2,630 69.24 145.79

$ 75,631 $ 67,264 $ 62,123 $ 8,367 $ 5,141 12.44 % 8.28 %

Total noninterest expenses were $75.63 and $67.26 million for the years ended December 31, 2020 and 2019, respectively.

1 unchanged sentence

Salaries and employee benefits increased $3.91 million in 2020.

The increase is the result of annual salary increases and hiring additional employees.

Furniture and equipment increased $1.05 million in 2019 primarily due to increases in software maintenance contract costs.

Other noninterest expenses increased $2.63 million in 2019 primarily due to $2.09 million in fees incurred from the prepayment of FHLB borrowings.

Furniture and equipment increased $0.56 million in 2020 primarily due to planned increases in software maintenance contract costs.

Advertising and business development decreased $0.51 million in 2020 due to lower spending in response to the pandemic.

FDIC insurance assessment increased $0.66 million in 2020 primarily due to the use of the credit carryover in 2019.

Total noninterest expenses were $62.12 million for the year ended December 31, 2018.

The increase in expenses in 2019 was $5.14 million.

This included an increase of $1.78 million in salaries and benefits, which was the direct result of salary adjustments and restricted stock awards increases due to the increase in the appraised value of the Company stock.

This included an increase of $1.73 million in salaries and benefits, which was the direct result of salary adjustments and hiring additional employees.

Furniture and equipment increased $1.05 million in 2019 primarily due to

increases in software maintenance contract costs.

Other noninterest expenses increased $2.63 million in 2019 primarily due to $2.09 million in fees incurred from the prepayment of FHLB borrowings.

Income tax expense was $11.28, $12.55 and $8.91 million for the years ended December 31, 2020, 2019 and 2018, respectively.

1 unchanged sentence

The amount of tax credits were $0.05, $0.53 and $1.29 million for 2020, 2019, and 2018, respectively.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”).

The Tax Act makes broad and complex changes to the U.S.

tax code that affected 2017, including, but not limited to, accelerated depreciation that allowed for full expensing of qualified property.

The Tax Act also established new tax laws that affected 2018 and thereafter, including a reduction in the U.S.

federal corporate income tax rate from 35% to 21%.

As a result of the reduction of the federal corporate income tax rate, we revalued our net deferred tax asset, excluding after tax credits, as of December 22, 2017.

Based on this revaluation, we recorded a net tax expense of $4.71 million to reduce our net deferred tax asset balance, which was recorded as additional income tax expense for the year ended December 31, 2017.

Our effective tax rate increased by 30.99% to 41.05% primarily as a result of the revaluation of our net deferred tax asset.

While the Tax Act negatively impacted earnings for the Company's fiscal year ended December 31, 2017, the lower corporate rate has been a significant ongoing benefit to the Company.

For the year ended December 31, 2018, net income was $5.81 million higher than it would have been under the tax laws in effect before the Tax Act.

Effects of Inflation

43 unchanged sentences

The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of federal funds purchased and securities sold under agreements to repurchase during 2020, 2019 and 2018:

2020 2019 2018

(Amounts In Thousands)

5 unchanged sentences

The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of Federal Home Loan Bank borrowings during 2020, 2019 and 2018:

2020 2019 2018

(Amounts In Thousands)

11 unchanged sentences

(Amounts In Thousands)

Total Less Than

One Year One -

Three Years Three -

Five Years More Than

Contractual obligations:

2 unchanged sentences

Total contractual obligations:

$ 106,093 $ 375 $ 635 $ 45,083 $ 60,000

Other commitments:

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis