Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

[Mark One]

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20172019

 

[_]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

For the transition period from ____________ to ____________

  

Commission File Number 0-32637

 

AMES NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

IOWA

42-1039071

(State or Other Jurisdiction of

Incorporation)

(I. R. S. Employer

Incorporation or Organization)

Identification Number)

                                                                                                                 

405 FIFTH STREET

AMES, IOWA 50010

(Address of Principal Executive Offices)

 

Registrant's Telephone Number, Including Area Code: (515) 232-6251

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes __X_      No ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer,, a smaller reporting company or an emerging growth company. See definition of “accelerated“large accelerated filer”, “large accelerated“accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer filer____ Accelerated filer  X (Do not check if a smaller reporting company)filer__X__ Non-accelerated filer filer____ Smaller reporting company company_X__ Emerging growth company company____

 

If an emerging growth company, indicate by check mark if the registrant has elected notnot to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(1)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 Exchange Act). Yes ____ No  X  ___X_

 

Indicate the number of shares outstanding of eachSecurities registered pursuant to Section 12(b) of the issuer's classes of common stock, as of the latest practicable date.Act:

 

COMMON STOCK, $2.00 PAR VALUETitle of each class

9,310,913

Trading Symbol

Name of each exchange on which registered

(Class)Common stock

(Shares Outstanding at October 27, 2017)

ATLO

NASDAQ

 

 

 

AMES NATIONAL CORPORATION

 

INDEX

 

  

Page

   

Part I.

Financial Information

 

  

Item 1.

Consolidated Financial Statements (Unaudited)

3

   

Consolidated Balance Sheets at SeptemberJune 30, 20172019 and December 31, 20162018

3

   

Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018

4

  
 

Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018

5

   
 

Consolidated Statements of Stockholders’Stockholders’ Equity for the nine three and six months ended SeptemberJune 30, 20172019 and 20162018

6

   

Consolidated Statements of Cash Flows for the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018

7

   
 

Notes to Consolidated Financial Statements

9

   

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

30

31

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

51

   

Item 4.

Controls and Procedures

49

51

   

Part II.

Other Information

51
   

Item 1.

Legal Proceedings

50

51

   

Item 1.A.

Risk Factors

50

51

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

51

   

Item 3.

Defaults Upon Senior Securities

50

52

   

Item 4.

Mine Safety Disclosures

50

52

   

Item 5.

Other Information

51

52

   

Item 6.

Exhibits

51

52

   

Signatures

52

53

 

2
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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

CONSOLIDATED BALANCE SHEETS

(unaudited)

  

June 30,

  

December 31,

 

 

 

2019

  

2018

 
ASSETS        
         

Cash and due from banks

 $22,615,322  $30,384,066 

Interest bearing deposits in financial institutions

  67,435,442   26,057,513 

Securities available-for-sale

  458,763,315   458,971,162 

Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost

  2,655,700   3,191,200 

Loans receivable, net

  873,639,020   890,461,479 

Loans held for sale

  766,945   401,287 

Bank premises and equipment, net

  15,733,212   15,813,196 

Accrued income receivable

  8,998,009   9,415,570 

Other real estate owned

  217,856   829,603 

Bank-owned life insurance

  2,806,029   2,773,729 

Deferred income taxes, net

  1,213,746   3,848,713 

Intangible assets, net

  2,374,906   2,677,884 

Goodwill

  9,744,472   9,744,472 

Other assets

  1,631,159   1,117,477 
         

Total assets

 $1,468,595,133  $1,455,687,351 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

LIABILITIES

        

Deposits

        

Demand, noninterest bearing

 $220,241,881  $230,113,170 

NOW accounts

  386,894,248   366,178,715 

Savings and money market

  413,412,483   418,384,284 

Time, $250,000 and over

  50,144,650   40,014,550 

Other time

  173,763,838   166,393,120 

Total deposits

  1,244,457,100   1,221,083,839 
         

Securities sold under agreements to repurchase

  31,693,100   40,674,486 

Federal Home Loan Bank (FHLB) advances

  2,000,000   14,600,000 

Dividends payable

  2,215,709   2,137,460 

Accrued expenses and other liabilities

  4,977,688   4,326,502 

Total liabilities

  1,285,343,597   1,282,822,287 
         

STOCKHOLDERS' EQUITY

        

Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,232,122 and 9,293,305 shares as of June 30, 2019 and December 31, 2018, respectively

  18,464,244   18,586,610 

Additional paid-in capital

  19,019,767   20,461,724 

Retained earnings

  142,312,863   137,891,821 

Accumulated other comprehensive income (loss) - net unrealized income (loss) on securities available-for-sale

  3,454,662   (4,075,091)

Total stockholders' equity

  183,251,536   172,865,064 
         

Total liabilities and stockholders' equity

 $1,468,595,133  $1,455,687,351 

 

  

September 30,

  

December 31,

 

ASSETS

 

2017

  

2016

 
         

Cash and due from banks

 $23,087,890  $29,478,068 

Interest bearing deposits in financial institutions

  35,486,284   31,737,259 

Securities available-for-sale

  506,610,435   516,079,506 

Loans receivable, net

  764,228,850   752,181,730 

Loans held for sale

  279,800   242,618 

Bank premises and equipment, net

  15,595,418   16,049,379 

Accrued income receivable

  8,423,038   7,768,689 

Other real estate owned

  385,509   545,757 

Deferred income taxes

  1,817,543   3,485,689 

Intangible assets, net

  1,133,736   1,352,812 

Goodwill

  6,732,216   6,732,216 

Other assets

  1,159,533   799,306 
         

Total assets

 $1,364,940,252  $1,366,453,029 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

LIABILITIES

        

Deposits

        

Demand, noninterest bearing

 $202,368,921  $212,074,792 

NOW accounts

  337,062,117   310,427,812 

Savings and money market

  380,454,650   381,852,433 

Time, $250,000 and over

  36,776,010   39,031,663 

Other time

  157,876,361   166,022,165 

Total deposits

  1,114,538,059   1,109,408,865 
         

Securities sold under agreements to repurchase

  39,001,050   58,337,367 

Federal Home Loan Bank (FHLB) advances

  19,000,000   14,500,000 

Other borrowings

  13,000,000   13,000,000 

Dividends payable

  2,048,401   1,955,292 

Accrued expenses and other liabilities

  4,023,858   4,146,262 

Total liabilities

  1,191,611,368   1,201,347,786 
         

STOCKHOLDERS' EQUITY

        

Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,310,913 shares as of September 30, 2017 and December 31, 2016

  18,621,826   18,621,826 

Additional paid-in capital

  20,878,728   20,878,728 

Retained earnings

  131,047,038   126,181,376 

Accumulated other comprehensive income (loss) - net unrealized gain (loss) on securities available-for-sale

  2,781,292   (576,687)

Total stockholders' equity

  173,328,884   165,105,243 
         

Total liabilities and stockholders' equity

 $1,364,940,252  $1,366,453,029 

See Notes to Consolidated Financial Statements.

 

3
Table of Contents

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
                 

Interest income:

                

Loans, including fees

 $10,808,142  $8,996,222  $21,509,571  $17,885,077 

Securities:

                

Taxable

  1,554,713   1,563,840   3,043,565   3,092,962 

Tax-exempt

  1,067,955   1,179,607   2,168,529   2,365,953 

Interest bearing deposits and federal funds sold

  290,465   256,024   528,033   449,059 

Total interest income

  13,721,275   11,995,693   27,249,698   23,793,051 
                 

Interest expense:

                

Deposits

  2,606,384   1,633,395   4,965,216   2,995,876 

Other borrowed funds

  184,634   151,463   383,848   399,853 

Total interest expense

  2,791,018   1,784,858   5,349,064   3,395,729 
                 

Net interest income

  10,930,257   10,210,835   21,900,634   20,397,322 
                 

Provision for loan losses

  68,320   63,978   166,414   92,978 
                 

Net interest income after provision for loan losses

  10,861,937   10,146,857   21,734,220   20,304,344 
                 

Noninterest income:

                

Wealth management income

  1,019,143   906,364   1,803,757   1,657,364 

Service fees

  387,133   334,606   757,429   672,848 

Securities gains, net

  1,890   -   1,890   - 

Gain on sale of loans held for sale

  224,031   191,385   396,757   368,585 

Merchant and card fees

  386,384   366,863   747,525   676,522 

Other noninterest income

  194,358   191,654   431,289   379,555 

Total noninterest income

  2,212,939   1,990,872   4,138,647   3,754,874 
                 

Noninterest expense:

                

Salaries and employee benefits

  4,797,497   4,316,823   9,513,325   8,884,868 

Data processing

  872,064   887,358   1,763,445   1,668,390 

Occupancy expenses, net

  518,559   459,445   1,117,564   954,391 

FDIC insurance assessments

  91,666   102,073   191,895   208,068 

Professional fees

  382,983   354,998   771,829   700,405 

Business development

  248,178   238,811   516,775   493,359 

Intangible asset amortization

  139,314   83,919   302,978   171,454 

Other operating expenses, net

  167,717   269,636   496,923   497,265 

Total noninterest expense

  7,217,978   6,713,063   14,674,734   13,578,200 
                 

Income before income taxes

  5,856,898   5,424,666   11,198,133   10,481,018 
                 

Provision for income taxes

  1,239,305   1,107,400   2,343,105   2,127,000 
                 

Net income

 $4,617,593  $4,317,266  $8,855,028  $8,354,018 
                 

Basic and diluted earnings per share

 $0.50  $0.46  $0.96  $0.90 
                 

Dividends declared per share

 $0.24  $0.23  $0.48  $0.71 

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2017

  

2016

  

2017

  

2016

 
                 

Interest income:

                

Loans, including fees

 $8,729,702  $8,236,401  $25,345,116  $24,124,973 

Securities:

                

Taxable

  1,557,872   1,425,366   4,637,498   4,392,602 

Tax-exempt

  1,210,510   1,329,071   3,819,380   4,117,893 

Interest bearing deposits and federal funds sold

  114,820   86,869   365,346   296,925 

Total interest income

  11,612,904   11,077,707   34,167,340   32,932,393 
                 

Interest expense:

                

Deposits

  1,169,296   753,642   3,204,115   2,259,140 

Other borrowed funds

  292,054   274,297   862,798   796,006 

Total interest expense

  1,461,350   1,027,939   4,066,913   3,055,146 
                 

Net interest income

  10,151,554   10,049,768   30,100,427   29,877,247 
                 

Provision for loan losses

  57,277   234,703   1,221,620   440,787 
                 

Net interest income after provision for loan losses

  10,094,277   9,815,065   28,878,807   29,436,460 
                 

Noninterest income:

                

Wealth management income

  747,634   684,908   2,180,941   2,210,229 

Service fees

  401,237   426,711   1,126,122   1,228,416 

Securities gains, net

  37,881   64,917   498,560   296,110 

Gain on sale of loans held for sale

  179,553   339,501   544,095   773,512 

Merchant and card fees

  348,847   350,488   1,017,362   1,051,378 

Other noninterest income

  144,953   137,153   598,791   469,138 

Total noninterest income

  1,860,105   2,003,678   5,965,871   6,028,783 
                 

Noninterest expense:

                

Salaries and employee benefits

  4,026,932   3,977,495   12,058,903   11,883,696 

Data processing

  807,419   824,429   2,481,331   2,366,293 

Occupancy expenses, net

  527,071   449,775   1,546,657   1,461,201 

FDIC insurance assessments

  111,987   109,289   326,958   434,808 

Professional fees

  307,484   296,720   919,157   889,721 

Business development

  262,408   239,917   722,869   696,033 

Other real estate owned (income), net

  (3,200)  (91,173)  (2,396)  (87,564)

Intangible asset amortization

  89,861   86,492   280,837   273,206 

Other operating expenses, net

  166,026   219,283   837,810   750,244 

Total noninterest expense

  6,295,988   6,112,227   19,172,126   18,667,638 
                 

Income before income taxes

  5,658,394   5,706,516   15,672,552   16,797,605 
                 

Provision for income taxes

  1,729,987   1,902,636   4,661,687   5,087,253 
                 

Net income

 $3,928,407  $3,803,880  $11,010,865  $11,710,352 
                 

Basic and diluted earnings per share

 $0.42  $0.41  $1.18  $1.26 
                 

Dividends declared per share

 $0.22  $0.21  $0.66  $0.63 

See Notes to Consolidated Financial Statements.

 

4
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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
                 
                 

Net income

 $4,617,593  $4,317,266  $8,855,028  $8,354,018 

Other comprehensive income (loss), before tax:

                

Unrealized gains (losses) on securities before tax:

                

Unrealized holding gains (losses) arising during the period

  4,469,777   (1,041,258)  10,041,561   (6,074,301)

Less: reclassification adjustment for gains realized in net income

  1,890   -   1,890   - 

Other comprehensive income (loss), before tax

  4,467,887   (1,041,258)  10,039,671   (6,074,301)

Tax effect related to other comprehensive income (loss)

  (1,116,972)  260,314   (2,509,918)  1,518,919 

Other comprehensive income (loss), net of tax

  3,350,915   (780,944)  7,529,753   (4,555,382)

Comprehensive income

 $7,968,508  $3,536,322  $16,384,781  $3,798,636 

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2017

  

2016

  

2017

  

2016

 
                 
                 

Net income

 $3,928,407  $3,803,880  $11,010,865  $11,710,352 

Other comprehensive income (loss), before tax:

                

Unrealized gains (losses) on securities before tax:

                

Unrealized holding gains (losses) arising during the period

  (270,853)  (1,838,831)  5,828,684   6,077,365 

Less: reclassification adjustment for gains realized in net income

  37,881   64,917   498,560   296,110 

Other comprehensive income (loss), before tax

  (308,734)  (1,903,748)  5,330,124   5,781,255 

Tax effect related to other comprehensive income (loss)

  114,233   704,387   (1,972,145)  (2,139,064)

Other comprehensive income (loss), net of tax

  (194,501)  (1,199,361)  3,357,979   3,642,191 

Comprehensive income

 $3,733,906  $2,604,519  $14,368,844  $15,352,543 

See Notes to Consolidated Financial Statements.

 

5
Table of Contents

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

Three and Six Months Ended June 30, 2019 and 2018

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

Nine Months Ended September 30, 2017 and 2016

  

Common Stock

  

Additional Paid-

in Capital

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income (Loss),

Net of Taxes

  

Total

Stockholders'

Equity

 
                     

Balance, March 31, 2018

 $18,621,826  $20,878,728  $131,335,175  $(4,289,511) $166,546,218 

Net income

  -   -   4,317,266   -   4,317,266 

Other comprehensive (loss)

  -   -   -   (780,944)  (780,944)

Cash dividends declared, $0.23 per share

  -   -   (2,141,510)  -   (2,141,510)

Balance, June 30, 2018

 $18,621,826  $20,878,728  $133,510,931  $(5,070,455) $167,941,030 
                     

Balance, March 31, 2019

 $18,485,644  $19,276,388  $139,910,979  $103,747  $177,776,758 

Net income

  -   -   4,617,593   -   4,617,593 

Other comprehensive income

  -   -   -   3,350,915   3,350,915 

Retirement of 10,700 shares of stock

  (21,400)  (256,621)  -   -   (278,021)

Cash dividends declared, $0.24 per share

  -   -   (2,215,709)  -   (2,215,709)

Balance, June 30, 2019

 $18,464,244  $19,019,767  $142,312,863  $3,454,662  $183,251,536 

 

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive Income (Loss), Net of Taxes

  

Total Stockholders' Equity

 
                     

Balance, December 31, 2015

 $18,621,826  $20,878,728  $118,267,767  $3,481,736  $161,250,057 

Net income

  -   -   11,710,352   -   11,710,352 

Other comprehensive income

  -   -   -   3,642,191   3,642,191 

Cash dividends declared, $0.63 per share

  -   -   (5,865,875)  -   (5,865,875)

Balance, September 30, 2016

 $18,621,826  $20,878,728  $124,112,244  $7,123,927  $170,736,725 
                     

Balance, December 31, 2016

 $18,621,826  $20,878,728  $126,181,376  $(576,687) $165,105,243 

Net income

  -   -   11,010,865   -   11,010,865 

Other comprehensive income

  -   -   -   3,357,979   3,357,979 

Cash dividends declared, $0.66 per share

  -   -   (6,145,203)  -   (6,145,203)

Balance, September 30, 2017

 $18,621,826  $20,878,728  $131,047,038  $2,781,292  $173,328,884 
  

Common Stock

  

Additional Paid-

in Capital

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income (Loss),

Net of Taxes

  

Total

Stockholders'

Equity

 
                     

Balance, December 31, 2017

 $18,621,826  $20,878,728  $131,684,961  $(432,373) $170,753,142 

Net income

  -   -   8,354,018   -   8,354,018 

Other comprehensive (loss)

  -   -   -   (4,555,382)  (4,555,382)

The cumulative effect from change in accounting policy (1)

  -   -   82,700   (82,700)  - 

Cash dividends declared, $0.71 per share

  -   -   (6,610,748)  -   (6,610,748)

Balance, June 30, 2018

 $18,621,826  $20,878,728  $133,510,931  $(5,070,455) $167,941,030 
                     

Balance, December 31, 2018

 $18,586,610  $20,461,724  $137,891,821  $(4,075,091) $172,865,064 

Net income

  -   -   8,855,028   -   8,855,028 

Other comprehensive income

  -   -   -   7,529,753   7,529,753 

Retirement of 61,183 shares of stock

  (122,366)  (1,441,957)  -   -   (1,564,323)

Cash dividends declared, $0.48 per share

  -   -   (4,433,986)  -   (4,433,986)

Balance, June 30, 2019

 $18,464,244  $19,019,767  $142,312,863  $3,454,662  $183,251,536 

 

(1) The cumulative effect for the six months ended June 30, 2018, reflects adoption in first quarter 2018 of ASU 2018-02.

See Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Six Months Ended June 30, 2019 and 2018

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Nine Months Ended September 30, 2017 and 2016

 

2017

  

2016

  

2019

  

2018

 
                

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net income

 $11,010,865  $11,710,352  $8,855,028  $8,354,018 

Adjustments to reconcile net income to net cash provided by operating activities:

                

Provision for loan losses

  1,221,620   440,787   166,414   92,978 

Provision for off-balance sheet commitments

  4,000   12,000   -   12,000 

Amortization, net

  2,129,648   2,327,654   739,633   1,088,865 

Amortization of intangible asset

  280,837   273,206   302,978   171,454 

Depreciation

  861,700   885,202   576,757   548,173 

Deferred income taxes

  (303,999)  176,658   125,049   (74,100)

Securities gains, net

  (498,560)  (296,110)  (1,890)  - 

(Gain) on sales of loans held for sale

  (544,095)  (773,511)  (396,757)  (368,586)

Proceeds from loans held for sale

  22,668,307   34,782,288   17,485,451   14,853,787 

Originations of loans held for sale

  (22,161,394)  (34,657,822)  (17,454,352)  (15,965,849)

Loss on sale of premises and equipment, net

  56,168   2,769   500   5,563 

Impairment of other real estate owned

  -   28,039 

(Gain) on sale of other real estate owned, net

  (14,648)  (131,127)  (43,414)  - 

Change in assets and liabilities:

                

(Increase) in accrued income receivable

  (654,349)  (805,127)

(Increase) decrease in other assets

  (377,095)  286,238 

Increase (decrease) in accrued expenses and other liabilities

  (126,404)  323,605 

Decrease in accrued income receivable

  417,561   627,214 

(Increase) in other assets

  (523,361)  (282,739)

Increase in accrued expenses and other liabilities

  651,186   94,674 

Net cash provided by operating activities

  13,552,601   14,585,101   10,900,783   9,157,452 
                

CASH FLOWS FROM INVESTING ACTIVITIES

                

Purchase of securities available-for-sale

  (51,271,943)  (49,668,267)  (35,113,621)  (21,743,179)

Proceeds from sale of securities available-for-sale

  11,756,963   18,738,154   5,973,154   - 

Proceeds from maturities and calls of securities available-for-sale

  52,588,102   54,611,331   38,381,532   30,931,429 

Purchase of FHLB stock

  (3,912,500)  (874,400)

Proceeds from the redemption of FHLB stock

  4,448,000   1,334,400 

Net (increase) decrease in interest bearing deposits in financial institutions

  (3,749,025)  994,573   (41,377,929)  1,190,930 

Net (increase) in loans

  (13,190,423)  (39,394,414)

Net (increase) decrease in loans

  16,896,403   (8,566,196)

Net proceeds from the sale of other real estate owned

  191,564   755,906   655,161   - 

Purchase of bank premises and equipment, net

  (447,039)  (218,081)  (492,149)  (347,878)

Other

  (61,761)  -   (28,300)  (14,960)

Net cash (used in) investing activities

  (4,183,562)  (14,180,798)

Net cash provided by (used in) investing activities

  (14,570,249)  1,910,146 
                

CASH FLOWS FROM FINANCING ACTIVITIES

                

Increase (decrease) in deposits

  5,129,194   (12,358,477)

Increase in deposits

  23,402,168   17,424,482 

(Decrease) in securities sold under agreements to repurchase

  (19,336,317)  (4,431,520)  (8,981,386)  (3,317,089)

Payments on FHLB borrowings and other borrowings

  (1,000,000)  (1,542,203)  (12,600,000)  (24,500,000)

Proceeds from short-term FHLB borrowings, net

  5,500,000   21,000,000 

Dividends paid

  (6,052,094)  (5,772,766)  (4,355,737)  (6,517,639)

Stock repurchases

  (1,564,323)  - 

Net cash (used in) financing activities

  (15,759,217)  (3,104,966)  (4,099,278)  (16,910,246)
                

Net (decrease) in cash and due from banks

  (6,390,178)  (2,700,663)  (7,768,744)  (5,842,648)
                

CASH AND DUE FROM BANKS

                

Beginning

  29,478,068   24,005,801   30,384,066   26,397,550 

Ending

 $23,087,890  $21,305,138  $22,615,322  $20,554,902 

 

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Six Months Ended June 30, 2019 and 2018

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Nine Months Ended September 30, 2017 and 2016

  

2019

  

2018

 
         

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

        

Cash payments for:

        

Interest

 $5,148,519  $3,318,116 

Income taxes

  2,248,474   2,346,406 

 

  

2017

  

2016

 
         

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

        

Cash payments for:

        

Interest

 $4,027,782  $3,145,519 

Income taxes

  5,050,220   4,223,653 
         

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES

        

Transfer of loans receivable to other real estate owned

 $16,668  $56,587 

See Notes to Consolidated Financial Statements.

 

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements (unaudited)

 

1.     Significant Accounting Policies

 

The consolidated financial statements for the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018 months are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 20162018 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.

 

Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The second step, if necessary, measures the amount of impairment, if any.

 

Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. At SeptemberJune 30, 2017,2019, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.

 

New and Pending Accounting Pronouncements: In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update includes requiring changes in fair value of equity securities with readily determinable fair value to be recognized in net income and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entities' other deferred tax assets. Among other items the ASC requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017, and is to be applied on a modified retrospective basis. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months.  Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.  Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet.  In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, which amends ASC 842, Leases. This update provides for an adoption option that does not require earlier periods to be restated at the adoption date.  For public companies, this update will bewas effective for interim and annual periods beginning after December 15, 2018.  Early application iswas permitted.  The adoption of this guidance isdid not expected to have a material impact on the Company’sCompany’s consolidated financial statements.

 

9

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. FASB has issued a proposed change to this ASU that would delay the implementation date until January 1, 2023 for the Company. The Company is currently planning for the implementation of this accounting standard. It is too earlystandard and has chosen a vendor for a software solution. The Company continues to assessrefine the impact that the guidance will have on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40) . The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topicsimplementation of the Codification. For public companies, this update will be effectivesoftware and its approach for interim and annual periods beginning after December 15, 2017.determining the expected credit losses under the new guidance. The guidance does not applyCompany’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to revenues associated withimpact the Company’s financial instruments, including loans and securities that are accounted for under U.S. GAAP. Based upon management’s revenue recognition analysis,statements. The Company is continuing to evaluate the Company does not expectextent of the guidance to have a material impact on the Company's consolidated financial statements.potential impact.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates the Step 2 from the goodwill impairment test. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment test with a measurement date after January 1, 2017. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

 

2.      DividendsIn August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption will not have a material effect on the Company’s consolidated financial statements.

Reclassifications: Certain amounts in prior year financial statements have been reclassified, with no effect on net income, comprehensive income or stockholder’s equity, to conform to current period presentation.

10

2.      Bank Acquisition

 

On August 9, 2017,September 14, 2018, First National Bank (FNB) completed the purchase and merger of Clarke County State Bank (CCSB) located in Osceola and Murray, Iowa (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. The acquired assets and liabilities are recorded at fair value at the date of acquisition and were reflected in the September 30, 2018 financial statements as such. 100% of the stock of CCSB was purchased for cash consideration of $14.8 million. As a result of this acquisition, the Company recorded a core deposit intangible asset of $2.0 million and goodwill of $3.0 million. The results of operations for this acquisition have been included since the transaction date of September 14, 2018. The fair value of purchased credit deteriorated loans related to the Acquisition was $386,000. These purchased loans are included in the impaired loan category in the financial statements.

The following table summarizes the fair value of the total consideration transferred as a part of the Acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.

Cash consideration transferred

 $14,806,981 
     

Recognized amounts of identifiable assets acquired and liabilities assumed:

    
     

Cash and due from banks

 $1,363,762 

Federal funds sold

  1,154,000 

Interest bearing deposits in financial institutions

  1,475,000 

Securities available-for-sale

  17,196,715 

Federal Home Loan Bank stock

  129,600 

Loans receivable

  76,041,470 

Accrued interest receivable

  862,895 

Bank premises and equipment

  924,400 

Other real estate owned

  120,000 

Deferred income taxes

  49,150 

Bank owned life insurance

  2,754,798 

Core deposit intangible asset

  2,002,000 

Other assets

  13,996 

Deposits

  (83,169,311)

Federal funds purchased

  (9,000,000)

Accrued interest payable and other liabilities

  (123,749)
     

Total identifiable net assets

  11,794,726 
     

Goodwill

 $3,012,255 

On September 14, 2018, the contractual balance of loans receivable acquired was $77.2 million and the contractual balance of deposits assumed was $83.1 million. Loans receivable acquired include commercial real estate, 1-4 family real estate agricultural real estate, commercial operating, agricultural operating and consumer loans.

11

The acquired loans at contractual values as of September 14, 2018 were determined to be risk rated as follows:

Pass

 $63,220,130 

Watch

  9,430,540 

Special Mention

  2,733,940 

Substandard

  1,426,137 

Deteriorated credit

  385,884 
     

Total loans acquired at book value

 $77,196,631 

Loans acquired as deteriorated credit loans will be included with impaired loans.

The core deposit intangible asset is amortized to expense on a declining basis over a period of ten years. The loan market valuation is accreted to income on the effective yield method over a ten year period. The time deposits market valuation is amortized to expense on a declining basis over a two year period.

3.      Dividends

On May 8, 2019, the Company declared a cash dividend on its common stock, payable on NovemberAugust 15, 20172019 to stockholders of record as of NovemberAugust 1, 2017,2019, equal to $0.22$0.24 per share.share

 

3.4.   Earnings Per Share

 

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three and nine months ended SeptemberJune 30, 20172019 and 20162018 was 9,239,969 and 9,310,913, respectively. The weighted average outstanding shares for the six months ended June 30, 2019 and 2018 were 9,310,913.9,246,576 and 9,310,913, respectively. The Company had no potentially dilutive securities outstanding during the periods presented.

 

4.5.     Off-Balance Sheet Arrangements

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2016.2018.

 

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5.6.     Fair Value Measurements

 

AssetsAssets and liabilities carried at fair value are required to be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.

 

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

 

Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.

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Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

The following table presents the balances of assets measured at fair value on a recurring basis by level as of SeptemberJune 30, 20172019 and December 31, 2016.2018. (in thousands)

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2017

                
                 

U.S. government treasuries

 $4,449  $4,449  $-  $- 

U.S. government agencies

  112,657   -   112,657   - 

U.S. government mortgage-backed securities

  81,956   -   81,956   - 

State and political subdivisions

  243,438   -   243,438   - 

Corporate bonds

  60,834   -   60,834   - 

Equity securities, other

  3,276   34   3,242   - 
                 
  $506,610  $4,483  $502,127  $- 
                 

2016

                
                 

U.S. government treasuries

 $4,368  $4,368  $-  $- 

U.S. government agencies

  110,209   -   110,209   - 

U.S. government mortgage-backed securities

  82,858   -   82,858   - 

State and political subdivisions

  264,448   -   264,448   - 

Corporate bonds

  51,184   -   51,184   - 

Equity securities, other

  3,013   -   3,013   - 
                 
  $516,080  $4,368  $511,712  $- 

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Table of Contents

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2019

                
                 

U.S. government treasuries

 $7,509  $7,509  $-  $- 

U.S. government agencies

  123,007   -   123,007   - 

U.S. government mortgage-backed securities

  62,960   -   62,960   - 

State and political subdivisions

  197,027   -   197,027   - 

Corporate bonds

  68,260   -   68,260   - 
                 
  $458,763  $7,509  $451,254  $- 
                 

2018

                
                 

U.S. government treasuries

 $7,800  $7,800  $-  $- 

U.S. government agencies

  110,268   -   110,268   - 

U.S. government mortgage-backed securities

  70,382   -   70,382   - 

State and political subdivisions

  215,955   -   215,955   - 

Corporate bonds

  54,566   -   54,566   - 
                 
  $458,971  $7,800  $451,171  $- 

 

Level 1 securities include U.S. Treasury securities and other equity securities that are traded by dealers or brokers in active over-the-counter markets.  U.S government agencies, mortgage-backed securities, state and political subdivisions, and most corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

 

The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three or ninesix months ended SeptemberJune 30, 2017.2019.

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Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of SeptemberJune 30, 20172019 and December 31, 2016.2018. (in thousands)

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

  

Total

  

Level 1

  

Level 2

  

Level 3

 
                                

2017

                

2019

                
                                

Loans receivable

 $2,439  $-  $-  $2,439  $2,247  $-  $-  $2,247 

Other real estate owned

  386   -   -   386   218   -   -   218 
                                

Total

 $2,825  $-  $-  $2,825  $2,465  $-  $-  $2,465 
                                

2016

                

2018

                
                                

Loans receivable

 $683  $-  $-  $683  $2,030  $-  $-  $2,030 

Other real estate owned

  546   -   -   546   830   -   -   830 
                                

Total

 $1,229  $-  $-  $1,229  $2,860  $-  $-  $2,860 

 

Loans Receivable: Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans. Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation allowance is a component of the allowance for loan losses. The Company considers these fair value measurements as level 3.

 

Other Real Estate Owned: Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The valuation allowance was $287,000 as of September 30, 2017 and $331,000 as of December 31, 2016. The Company considers these fair value measurements as level 3.

 

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TheThe significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of SeptemberJune 30, 20172019 and December 31, 20162018 are as follows: (in thousands)

 

 

2019

 
 

2017

  

Estimated

 

Valuation

 

 

Range

 
 

Estimated

Fair Value

 

Valuation

Techniques

Unobservable Inputs 

Range

(Average)

  

Fair Value

 

Techniques

Unobservable Inputs  

(Average)

 
                       

Impaired Loans

 $2,439 

Evaluation of collateral

Estimation of value

 NM*     $2,247 

Evaluation of collateral

Estimation of value

   NM*  
                       

Other real estate owned

 $386 

Appraisal

Appraisal adjustment

 6%-8%(7%)  $218 

Appraisal

Appraisal adjustment

  6%-8%(7%)
            

 

 

2018

 
 

2016

  

Estimated

 

Valuation

  

Range

 
 

Estimated

Fair Value

 

Valuation

Techniques

Unobservable Inputs 

Range

(Average)

  

Fair Value

 

Techniques

Unobservable Inputs  

(Average)

 
                      

Impaired Loans

 $683 

Evaluation of collateral

Estimation of value

 NM*     $2,030 

Evaluation of collateral

Estimation of value

  NM*  
                      

Other real estate owned

 $546 

Appraisal

Appraisal adjustment

 6%-10%(8%)  $830 

Appraisal

Appraisal adjustment

 6%-8%(7%)

 

* Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

 

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis.  The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above.  The methodologies for other financial assets and financial liabilities are discussed below.

 

Fair value of financial instruments: 

 

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

 

The following disclosures represent financial instruments in which the ending balances at SeptemberJune 30, 20172019 and December 31, 20162018 are not carried at fair value in their entirety on the consolidated balance sheets.

Cash and due from banks and interest bearing deposits in financial institutions: The recorded amount of these assets approximates fair value.

13
Table of Contents

 

Securities available-for-sale: Fair value measurement for Level 1 securities is based upon quoted prices. Fair value measurement for Level 2 securities are based upon quoted prices, if available. If quoted prices are not available, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. Level 1 securities include U.S. Treasury and other equity securities that are traded by dealers or brokers in active over-the-counter markets.  U.S government mortgage-backed securities, state and political subdivisions, and some corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs.

 

Loans receivable: The fair value

15
Table of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. The effect of nonperforming loans is considered in assessing the credit risk inherent in the fair value estimate.

Contents

 

Loans held for sale: The fair value of loans held for sale is based on prevailing market prices.

Deposits: Fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, are equal to the amount payable on demand as of the respective balance sheet date. Fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Securities sold under agreements to repurchase: The carrying amounts of securities sold under agreements to repurchase approximate fair value because of the generally short-term nature of the instruments.

FHLB advances and other borrowings: Fair values of FHLB advances and other borrowings are estimated using discounted cash flow analysis based on interest rates currently being offered with similar terms.

Accrued income receivable and accrued interest payable: The carrying amounts of accrued income receivable and accrued interest payable approximate fair value.

Commitments to extend credit and standby letters of credit: The fair values of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and credit worthiness of the counterparties. The carrying value and fair value of the commitments to extend credit and standby letters of credit are not considered significant.

 

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

14
Table of Contents

 

The estimated fair values of the Company’sCompany’s financial instruments as described above as of SeptemberJune 30, 20172019 and December 31, 20162018 are as follows: (in thousands)

 

  

2017

  

2016

   

2019

  

2018

 

Fair Value

     

Estimated

      

Estimated

 

Fair Value

     

Estimated

      

Estimated

 

Hierarchy

 

Carrying

  

Fair

  

Carrying

  

Fair

 

Hierarchy

 

Carrying

  

Fair

  

Carrying

  

Fair

 

Level

 

Amount

  

Value

  

Amount

  

Value

 

Level

 

Amount

  

Value

  

Amount

  

Value

 
                                  

Financial assets:

                                  

Cash and due from banks

Level 1

 $23,088  $23,088  $29,478  $29,478 

Level 1

 $22,615  $22,615  $30,384  $30,384 

Interest bearing deposits

Level 1

  35,486   35,486   31,737   31,737 

Level 1

  67,435   67,435   26,058   26,058 

Securities available-for-sale

See previous table

  506,610   506,610   516,080   516,080 

See previous table

  458,763   458,763   458,971   458,971 

FHLB and FRB stock

Level 2

  2,656   2,656   3,191   3,191 

Loans receivable, net

Level 2

  764,229   753,977   752,182   746,580 

Level 2

  873,639   856,694   890,461   864,417 

Loans held for sale

Level 2

  280   280   243   243 

Level 2

  767   767   401   401 

Accrued income receivable

Level 1

  8,423   8,423   7,769   7,769 

Level 1

  8,998   8,998   9,416   9,416 

Financial liabilities:

                                  

Deposits

Level 2

 $1,114,538  $1,115,076  $1,109,409  $1,110,211 

Level 2

 $1,244,457  $1,244,235  $1,221,084  $1,219,643 

Securities sold under agreements to repurchase

Level 1

  39,001   39,001   58,337   58,337 

Level 1

  31,693   31,693   40,674   40,674 

FHLB advances

Level 2

  19,000   19,046   14,500   14,681 

Level 2

  2,000   1,990   14,600   14,559 

Other borrowings

Level 2

  13,000   13,159   13,000   13,386 

Accrued interest payable

Level 1

  447   447   408   408 

Level 1

  878   878   649   649 

 

The methodologiesmethodologies used to determine fair value as of SeptemberJune 30, 20172019 did not change from the methodologies described in the December 31, 20162018 Annual Financial Statements.

15
Table of Contents

6.     Debt and Equity Securities

The amortized cost of securities available-for-sale and their fair values as of September 30, 2017 and December 31, 2016 are summarized below: (in thousands)

2017:

     

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 
                 

U.S. government treasuries

 $4,412  $37  $-  $4,449 

U.S. government agencies

  112,011   807   (161)  112,657 

U.S. government mortgage-backed securities

  80,948   1,091   (83)  81,956 

State and political subdivisions

  241,150   2,684   (396)  243,438 

Corporate bonds

  60,417   560   (143)  60,834 

Equity securities, other

  3,257   19   -   3,276 
  $502,195  $5,198  $(783) $506,610 

2016:

     

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 
                 

U.S. government treasuries

 $4,396  $18  $(46) $4,368 

U.S. government agencies

  110,372   540   (703)  110,209 

U.S. government mortgage-backed securities

  82,279   1,018   (439)  82,858 

State and political subdivisions

  265,204   1,660   (2,416)  264,448 

Corporate bonds

  51,731   147   (694)  51,184 

Equity securities, other

  3,013   -   -   3,013 
  $516,995  $3,383  $(4,298) $516,080 

The proceeds, gains and losses from securities available-for-sale are summarized as follows: (in thousands)

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2017

  

2016

  

2017

  

2016

 

Proceeds from sales of securities available-for-sale

 $933  $5,852  $11,757  $18,738 

Gross realized gains on securities available-for-sale

  38   66   501   303 

Gross realized losses on securities available-for-sale

  -   (1)  (2)  (7)

Tax provision applicable to net realized gains on securities available-for-sale

  14   29   175   110 

 

16
Table of Contents

7.     Debt and Equity Securities

The amortized cost of securities available-for-sale and their fair values as of June 30, 2019 and December 31, 2018 are summarized below: (in thousands)

2019:

     

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 
                 

U.S. government treasuries

 $7,445  $65  $(1) $7,509 

U.S. government agencies

  121,328   1,749   (70)  123,007 

U.S. government mortgage-backed securities

  62,364   650   (54)  62,960 

State and political subdivisions

  195,739   1,575   (287)  197,027 

Corporate bonds

  67,280   1,023   (43)  68,260 
  $454,156  $5,062  $(455) $458,763 

2018:

     

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 
                 

U.S. government treasuries

 $7,925  $-  $(125) $7,800 

U.S. government agencies

  111,759   73   (1,564)  110,268 

U.S. government mortgage-backed securities

  71,596   88   (1,302)  70,382 

State and political subdivisions

  217,247   465   (1,757)  215,955 

Corporate bonds

  55,877   2   (1,313)  54,566 
  $464,404  $628  $(6,061) $458,971 

The amortized cost and fair value of debt securities available-for-sale as of June 30, 2019, are shown below by expected maturity. Expected maturity will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. (in thousands)

  

Amortized

  

Estimated

 
  

Cost

  

Fair Value

 
         

Due in one year or less

 $82,832  $82,832 

Due after one year through five years

  230,550   232,741 

Due after five years through ten years

  122,856   124,975 

Due after ten years

  17,918   18,215 

Total

 $454,156  $458,763 

Securities with a carrying value of $136.0 million and $145.7 million at June 30, 2019 and December 31, 2018, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

17

The proceeds, gains and losses for securities available-for-sale for the three and six months ended June 30, 2019 and 2018 are summarized below (in thousands):

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2019

  

2018

  

2019

  

2018

 

Proceeds from sales of securities available-for-sale

 $5,973  $-  $5,973  $- 

Gross realized gains on securities available-for-sale

  21   -   21   - 

Gross realized losses on securities available-for-sale

  (19)  -   (19)  - 

Tax provision applicable to net realized gains on securities available-for-sale

  -   -   -   - 

 

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of SeptemberJune 30, 20172019 and December 31, 20162018 are as follows: (in thousands)

 

 

Less than 12 Months

  

12 Months or More

  

Total

  

Less than 12 Months

  

12 Months or More

  

Total

 

2017:

 

Estimated Fair Value

  

Unrealized Losses

  

Estimated Fair Value

  

Unrealized Losses

  

Estimated Fair Value

  

Unrealized Losses

 

2019:

 

Estimated

Fair Value

  

Unrealized

Losses

  

Estimated

Fair Value

  

Unrealized

Losses

  

Estimated

Fair Value

  

Unrealized

Losses

 
                                                

Securities available-for-sale:

                                                

U.S. government treasuries

 $-  $-  $1,492  $(1) $1,492  $(1)

U.S. government agencies

 $28,424  $(125) $3,773  $(36) $32,197  $(161)  -   -   34,346   (70)  34,346   (70)

U.S. government mortgage-backed securities

  10,639   (71)  1,997   (12)  12,636   (83)  2,234   (10)  7,575   (44)  9,809   (54)

State and political subdivisions

  22,029   (81)  21,739   (315)  43,768   (396)  896   -   28,346   (287)  29,242   (287)

Corporate bonds

  5,619   (11)  7,310   (132)  12,929   (143)  1,008   (3)  11,809   (40)  12,817   (43)
 $66,711  $(288) $34,819  $(495) $101,530  $(783) $4,138  $(13) $83,568  $(442) $87,706  $(455)

 

 

Less than 12 Months

  

12 Months or More

  

Total

  

Less than 12 Months

  

12 Months or More

  

Total

 

2016:

 

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

 

2018:

 

Fair Value

  

Unrealized

Losses

  

Fair Value

  

Unrealized

Losses

  

Fair Value

  

Unrealized

Losses

 
                                                

Securities available-for-sale:

                                                

U.S. government treasuries

 $2,893  $(46) $-  $-  $2,893  $(46) $2,962  $(11) $4,838  $(114) $7,800  $(125)

U.S. government agencies

  48,225   (703)  -   -   48,225   (703)  26,099   (218)  73,192   (1,346)  99,291   (1,564)

U.S. government mortgage-backed securities

  33,753   (439)  -   -   33,753   (439)  25,037   (277)  37,632   (1,025)  62,669   (1,302)

State and political subdivisions

  125,558   (2,226)  6,512   (190)  132,070   (2,416)  60,600   (302)  83,494   (1,455)  144,094   (1,757)

Corporate bonds

  35,703   (694)  -   -   35,703   (694)  19,239   (256)  34,254   (1,057)  53,493   (1,313)
 $246,132  $(4,108) $6,512  $(190) $252,644  $(4,298) $133,937  $(1,064) $233,410  $(4,997) $367,347  $(6,061)

 

Gross unrealized losses on debt securities totaled $783,000$455,000 as of SeptemberJune 30, 2017.2019. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

 

1718

8.

Loans Receivable and Credit Disclosures

 

7.     Loans ReceivableThe composition of loans receivable as of June 30, 2019 and Credit DisclosuresDecember 31, 2018 is as follows (inthousands):

  

2019

  

2018

 
         

Real estate - construction

 $50,031  $51,364 

Real estate - 1 to 4 family residential

  165,487   169,722 

Real estate - commercial

  386,558   389,532 

Real estate - agricultural

  107,985   103,652 

Commercial

  81,578   86,194 

Agricultural

  78,250   85,202 

Consumer and other

  15,691   16,566 
   885,580   902,232 

Less:

        

Allowance for loan losses

  (11,869)  (11,684)

Deferred loan fees

  (72)  (87)

Loans receivable, net

 $873,639  $890,461 

19

 

Activity in the allowance for loan losses, on a disaggregated basis, for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 is as follows: (in thousands)

 

 

Three Months Ended September 30, 2017

  

Three Months Ended June 30, 2019

 
     

1-4 Family

                              

1-4 Family

                         
 

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

      

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
 

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, June 30, 2017

 $780  $1,713  $4,437  $907  $2,071  $1,154  $126  $11,188 

Balance, March 31, 2019

 $736  $1,850  $4,770  $1,258  $1,610  $1,392  $196  $11,812 

Provision (credit) for loan losses

  (74)  15   155   36   (80)  (34)  39   57   (15)  (1)  136   43   (21)  (61)  (13)  68 

Recoveries of loans charged-off

  -   4   -   -   2   -   4   10   -   1   -   -   1   1   4   7 

Loans charged-off

  -   -   -   -   (109)  -   (6)  (115)  -   (3)  -   -   -   -   (15)  (18)

Balance, September 30, 2017

 $706  $1,732  $4,592  $943  $1,884  $1,120  $163  $11,140 

Balance, June 30, 2019

 $721  $1,847  $4,906  $1,301  $1,590  $1,332  $172  $11,869 

 

 

Nine Months Ended September 30, 2017

  

Six Months Ended June 30, 2019

 
     

1-4 Family

                              

1-4 Family

                         
 

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

      

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
 

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, December 31, 2016

 $908  $1,711  $3,960  $861  $1,728  $1,216  $123  $10,507 

Balance, December 31, 2018

 $699  $1,820  $4,615  $1,198  $1,777  $1,384  $191  $11,684 

Provision (credit) for loan losses

  (202)  12   632   82   735   (96)  59   1,222   11   27   291   103   (211)  (53)  (2)  166 

Recoveries of loans charged-off

  -   9   -   -   30   -   8   47   11   3   -   -   29   1   4   48 

Loans charged-off

  -   -   -   -   (609)  -   (27)  (636)  -   (3)  -   -   (5)  -   (21)  (29)

Balance, September 30, 2017

 $706  $1,732  $4,592  $943  $1,884  $1,120  $163  $11,140 

Balance, June 30, 2019

 $721  $1,847  $4,906  $1,301  $1,590  $1,332  $172  $11,869 

  

Three Months Ended June 30, 2018

 
      

1-4 Family

                         
  

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, March 31, 2018

 $804  $1,744  $4,763  $977  $1,750  $1,168  $117  $11,323 

Provision (credit) for loan losses

  42   (13)  79   -   (53)  10   (1)  64 

Recoveries of loans charged-off

  -   1   -   -   3   -   6   10 

Loans charged-off

  -   -   -   -   (12)  -   (2)  (14)

Balance, June 30, 2018

 $846  $1,732  $4,842  $977  $1,688  $1,178  $120  $11,383 

 

  

Three Months Ended September 30, 2016

 
      

1-4 Family

                         
  

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, June 30, 2016

 $758  $1,742  $3,890  $834  $1,439  $1,219  $253  $10,135 

Provision (credit) for loan losses

  121   32   (89)  -   169   12   (10)  235 

Recoveries of loans charged-off

  15   1   -   -   75   -   2   93 

Loans charged-off

  -   -   -   -   (1)  -   (11)  (12)

Balance, September 30, 2016

 $894  $1,775  $3,801  $834  $1,682  $1,231  $234  $10,451 

 

Nine Months Ended September 30, 2016

  

Six Months Ended June 30, 2018

 
     

1-4 Family

                              

1-4 Family

                         
 

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

      

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
 

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, December 31, 2015

 $999  $1,806  $3,557  $760  $1,371  $1,256  $239  $9,988 

Balance, December 31, 2017

 $796  $1,716  $4,734  $997  $1,739  $1,171  $168  $11,321 

Provision (credit) for loan losses

  (135)  (34)  244   74   308   (25)  9   441   50   13   108   (20)  (59)  7   (6)  93 

Recoveries of loans charged-off

  30   3   -   -   81   -   7   121   -   3   -   -   21   -   14   38 

Loans charged-off

  -   -   -   -   (78)  -   (21)  (99)  -   -   -   -   (13)  -   (56)  (69)

Balance, September 30, 2016

 $894  $1,775  $3,801  $834  $1,682  $1,231  $234  $10,451 

Balance, June 30, 2018

 $846  $1,732  $4,842  $977  $1,688  $1,178  $120  $11,383 

 

1820

 

Allowance for loan losses disaggregated on the basis of impairment analysis method as of SeptemberJune 30, 20172019 and December 31, 20162018 is as follows: (in thousands)

 

2017

     

1-4 Family

                         

2019

     

1-4 Family

                         
 

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

      

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
 

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Individually evaluated for impairment

 $-  $28  $-  $-  $747  $-  $48  $823  $-  $36  $-  $-  $320  $-  $-  $356 

Collectively evaluated for impairment

  706   1,704   4,592   943   1,137   1,120   115   10,317   721   1,811   4,906   1,301   1,270   1,332   172   11,513 

Balance September 30, 2017

 $706  $1,732  $4,592  $943  $1,884  $1,120  $163  $11,140 

Balance June 30, 2019

 $721  $1,847  $4,906  $1,301  $1,590  $1,332  $172  $11,869 

 

2016

     

1-4 Family

                         

2018

     

1-4 Family

                         
 

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

      

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
 

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Individually evaluated for impairment

 $-  $76  $-  $-  $644  $-  $-  $720  $-  $53  $-  $-  $430  $-  $18  $501 

Collectively evaluated for impairment

  908   1,635   3,960   861   1,084   1,216   123   9,787   699   1,767   4,615   1,198   1,347   1,384   173   11,183 

Balance December 31, 2016

 $908  $1,711  $3,960  $861  $1,728  $1,216  $123  $10,507 

Balance December 31, 2018

 $699  $1,820  $4,615  $1,198  $1,777  $1,384  $191  $11,684 

 

Loans receivable disaggregated on the basis of impairment analysis method as of SeptemberJune 30, 20172019 and December 31, 20162018 is as follows (in thousands):

 

2017

     

1-4 Family

                         

2019

     

1-4 Family

                         
 

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

      

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
 

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Individually evaluated for impairment

 $-  $692  $703  $-  $3,250  $-  $85  $4,730  $-  $246  $137  $84  $2,766  $1,886  $-  $5,119 

Collectively evaluated for impairment

  44,041   148,148   350,508   79,181   70,916   67,711   10,201   770,706   50,031   165,241   386,421   107,901   78,812   76,364   15,691   880,461 
                                                                

Balance September 30, 2017

 $44,041  $148,840  $351,211  $79,181  $74,166  $67,711  $10,286  $775,436 

Balance June 30, 2019

 $50,031  $165,487  $386,558  $107,985  $81,578  $78,250  $15,691  $885,580 

 

2016

     

1-4 Family

                         

2018

     

1-4 Family

                         
 

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

      

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
 

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Individually evaluated for impairment

 $-  $660  $399  $-  $3,942  $-  $76  $5,077  $-  $365  $128  $74  $2,648  $-  $19  $3,234 

Collectively evaluated for impairment

  61,042   148,847   315,303   73,032   70,436   76,994   12,054   757,708   51,364   169,357   389,404   103,578   83,546   85,202   16,547   898,998 
                                                                

Balance December 31, 2016

 $61,042  $149,507  $315,702  $73,032  $74,378  $76,994  $12,130  $762,785 

Balance December 31, 2018

 $51,364  $169,722  $389,532  $103,652  $86,194  $85,202  $16,566  $902,232 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company will apply its normal loan review procedures to identify loans that should be evaluated for impairment.

 

1921

 

The following is a recap of impairedImpaired loans,, on a disaggregated basis, as of SeptemberJune 30, 20172019 and December 31, 2016:2018: (in thousands)

 

 

2017

  

2016

  

2019

  

2018

 
     

Unpaid

          

Unpaid

          

Unpaid

          

Unpaid

     
 

Recorded

  

Principal

  

Related

  

Recorded

  

Principal

  

Related

  

Recorded

  

Principal

  

Related

  

Recorded

  

Principal

  

Related

 
 

Investment

  

Balance

  

Allowance

  

Investment

  

Balance

  

Allowance

  

Investment

  

Balance

  

Allowance

  

Investment

  

Balance

  

Allowance

 

With no specific reserve recorded:

                                                

Real estate - construction

 $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 

Real estate - 1 to 4 family residential

  610   750   -   452   473   -   177   185   -   252   277   - 

Real estate - commercial

  703   1,369   -   399   1,025   -   137   569   -   128   601   - 

Real estate - agricultural

  -   -   -   -   -   -   84   96   -   74   88   - 

Commercial

  127   150   -   2,747   2,672   -   232   249   -   248   258   - 

Agricultural

  -   -   -   -   -   -   1,886   1,886   -   -   -   - 

Consumer and other

  28   30   -   76   81   -   -   -   -   1   2   - 

Total loans with no specific reserve:

  1,468   2,299   -   3,674   4,251   -   2,516   2,985   -   703   1,226   - 
                                                

With an allowance recorded:

                                                

Real estate - construction

  -   -   -   -   -   -   -   -   -   -   -   - 

Real estate - 1 to 4 family residential

  82   104   28   208   360   76   69   97   36   113   139   53 

Real estate - commercial

  -   -   -   -   -   -   -   -   -   -   -   - 

Real estate - agricultural

  -   -   -   -   -   -   -   -   -   -   -   - 

Commercial

  3,123   3,392   747   1,195   1,286   644   2,534   2,537   320   2,400   2,506   430 

Agricultural

  -   -   -   -   -   -   -   -   -   -   -   - 

Consumer and other

  57   60   48   -   -   -   -   -   -   18   22   18 

Total loans with specific reserve:

  3,262   3,556   823   1,403   1,646   720   2,603   2,634   356   2,531   2,667   501 
                                                

Total

                                                

Real estate - construction

  -   -   -   -   -   -   -   -   -   -   -   - 

Real estate - 1 to 4 family residential

  692   854   28   660   833   76   246   282   36   365   416   53 

Real estate - commercial

  703   1,369   -   399   1,025   -   137   569   -   128   601   - 

Real estate - agricultural

  -   -   -   -   -   -   84   96   -   74   88   - 

Commercial

  3,250   3,542   747   3,942   3,958   644   2,766   2,786   320   2,648   2,764   430 

Agricultural

  -   -   -   -   -   -   1,886   1,886   -   -   -   - 

Consumer and other

  85   90   48   76   81   -   -   -   -   19   24   18 
                                                
 $4,730  $5,855  $823  $5,077  $5,897  $720  $5,119  $5,619  $356  $3,234  $3,893  $501 

 

2022

 

The following is a recap of the averageAverage recorded investment and interest income recognized on impaired loans for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018: (in thousands)

 

 

Three Months Ended September 30,

  

Three Months Ended June 30,

 
 

2017

  

2016

  

2019

  

2018

 
 

Average

  

Interest

  

Average

  

Interest

  

Average

  

Interest

  

Average

  

Interest

 
 

Recorded

  

Income

  

Recorded

  

Income

  

Recorded

  

Income

  

Recorded

  

Income

 
 

Investment

  

Recognized

  

Investment

  

Recognized

  

Investment

  

Recognized

  

Investment

  

Recognized

 

With no specific reserve recorded:

                                

Real estate - construction

 $-  $-  $-  $-  $-  $-  $-  $- 

Real estate - 1 to 4 family residential

  631   18   481   -   209   6   474   22 

Real estate - commercial

  716   -   450   -   135   29   135   - 

Real estate - agricultural

  -   -   -   -   78   -   -   - 

Commercial

  139   2   67   -   235   -   64   5 

Agricultural

  -   -   11   -   943   -   -   - 

Consumer and other

  46   -   88   6   -   -   -   - 

Total loans with no specific reserve:

  1,532   20   1,097   6   1,600   35   673   27 
                                

With an allowance recorded:

                                

Real estate - construction

  -   -   -   -   -   -   -   - 

Real estate - 1 to 4 family residential

  128   -   626   -   89   -   229   - 

Real estate - commercial

  -   -   -   -   -   -   177   - 

Real estate - agricultural

  -   -   -   -   -   -   -   - 

Commercial

  3,263   -   1,003   2   2,535   -   2,903   - 

Agricultural

  -   -   -   -   -   -   29   - 

Consumer and other

  29   -   1   -   7   -   32   - 

Total loans with specific reserve:

  3,420   -   1,630   2   2,631   -   3,370   - 
                                

Total

                                

Real estate - construction

  -   -   -   -   -   -   -   - 

Real estate - 1 to 4 family residential

  759   18   1,107   -   298   6   703   22 

Real estate - commercial

  716   -   450   -   135   29   312   - 

Real estate - agricultural

  -   -   -   -   78   -   -   - 

Commercial

  3,402   2   1,070   2   2,770   -   2,967   5 

Agricultural

  -   -   11   -   943   -   29   - 

Consumer and other

  75   -   89   6   7   -   32   - 
                                
 $4,952  $20  $2,727  $8  $4,231  $35  $4,043  $27 

 

2123

 

 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 
 

2017

  

2016

  

2019

  

2018

 
 

Average

  

Interest

  

Average

  

Interest

  

Average

  

Interest

  

Average

  

Interest

 
 

Recorded

  

Income

  

Recorded

  

Income

  

Recorded

  

Income

  

Recorded

  

Income

 
 

Investment

  

Recognized

  

Investment

  

Recognized

  

Investment

  

Recognized

  

Investment

  

Recognized

 

With no specific reserve recorded:

                                

Real estate - construction

 $-  $-  $-  $31  $-  $-  $-  $- 

Real estate - 1 to 4 family residential

  535   27   438   1   223   26   506   45 

Real estate - commercial

  648   -   465   22   133   60   314   258 

Real estate - agricultural

  -   -   -   -   76   -   -   - 

Commercial

  1,457   3   39   -   239   -   84   5 

Agricultural

  -   -   11   -   629   -   -   - 

Consumer and other

  60   -   66   6   -   -   8   - 

Total loans with no specific reserve:

  2,700   30   1,019   60   1,300   86   912   308 
                                

With an allowance recorded:

                                

Real estate - construction

  16   2   -   -   -   -   -   - 

Real estate - 1 to 4 family residential

  162   -   663   5   97   -   192   - 

Real estate - commercial

  -   -   26   -   -   -   194   - 

Real estate - agricultural

  -   -   -   -   -   -   -   - 

Commercial

  2,193   -   732   2   2,490   -   2,940   - 

Agricultural

  -   -   -   -   -   -   19   - 

Consumer and other

  15   1   1   -   10   1   39   1 

Total loans with specific reserve:

  2,386   3   1,422   7   2,597   1   3,384   1 
                                

Total

                                

Real estate - construction

  16   2   -   31   -   -   -   - 

Real estate - 1 to 4 family residential

  697   27   1,101   6   320   26   698   45 

Real estate - commercial

  648   -   491   22   133   60   508   258 

Real estate - agricultural

  -   -   -   -   76   -   -   - 

Commercial

  3,650   3   771   2   2,729   -   3,024   5 

Agricultural

  -   -   11   -   629   -   19   - 

Consumer and other

  75   1   67   6   10   1   47   1 
                                
 $5,086  $33  $2,441  $67  $3,897  $87  $4,296  $309 

 

The interest foregone on nonaccrual loans for the three months ended SeptemberJune 30, 20172019 and 20162018 was approximately $88,000$59,000 and $46,000,$120,000, respectively. The interest foregone on nonaccrual loans for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 was approximately $289,000$117,000 and $124,000,$203,000, respectively.

 

TheNonaccrual loans at June 30, 2019 and December 31, 2018 were $5,119,000 and $3,234,000 respectively.

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $3,098,000$2,645,000 as of SeptemberJune 30, 2017,2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000$2,350,000 as of December 31, 2016,2018, all of which were included in impaired and nonaccrual loans.

22

The following table sets forth information on the Company’s TDRs, on a disaggregated basis, occurring in the three and nine months ended September 30, 2017 and 2016: (dollarsin thousands)

  

Three Months Ended September 30,

 
  

2017

  

2016

 
      

Pre-Modification

  

Post-Modification

      

Pre-Modification

  

Post-Modification

 
      

Outstanding

  

Outstanding

      

Outstanding

  

Outstanding

 
  

Number of

  

Recorded

  

Recorded

  

Number of

  

Recorded

  

Recorded

 
  

Contracts

  

Investment

  

Investment

  

Contracts

  

Investment

  

Investment

 
                         

Real estate - construction

  -  $-  $-   -  $-  $- 

Real estate - 1 to 4 family residential

  -   -   -   -   -   - 

Real estate - commercial

  -   -   -   -   -   - 

Real estate - agricultural

  -   -   -   -   -   - 

Commercial

  -   -   -   -   -   - 

Agricultural

  -   -   -   -   -   - 

Consumer and other

  -   -   -   -   -   - 
                         
   -  $-  $-   -  $-  $- 

  

Nine Months Ended September 30,

 
  

2017

  

2016

 
      

Pre-Modification

  

Post-Modification

      

Pre-Modification

  

Post-Modification

 
      

Outstanding

  

Outstanding

      

Outstanding

  

Outstanding

 
  

Number of

  

Recorded

  

Recorded

  

Number of

  

Recorded

  

Recorded

 
  

Contracts

  

Investment

  

Investment

  

Contracts

  

Investment

  

Investment

 
                         

Real estate - construction

  -  $-  $-   -  $-  $- 

Real estate - 1 to 4 family residential

  -   -   -   -   -   - 

Real estate - commercial

  -   -   -   -   -   - 

Real estate - agricultural

  -   -   -   -   -   - 

Commercial

  2   93   99   3   702   705 

Agricultural

  -   -   -   -   -   - 

Consumer and other

  -   -   -   3   70   70 
                         
   2  $93  $99   6  $772  $775 

 

During the three and ninesix months ended SeptemberJune 30, 2017,2019, the Company did not grant concessions to any borrowers. During the three and six months ended June 30, 2018, the Company granted concessions to two borrowers that were experiencingone borrower with three commercial operating contracts facing financial difficulties. The loans wereloan was extended beyond theirits normal terms and on one loan the interest was capitalized.

 

During the three months ended September 30, 2016, the Company did not grant any concessions to any borrowers facing financial difficulties. During the nine months ended September 30, 2016, the Company granted concessions to two borrowers experiencing financial difficulties with six loans. The three consumer loans were extended beyond normal terms at an interest rate below a market interest rate. The three commercial operating loans were extended beyond normal terms.

 

The Company considers TDR loans to have payment default when it is past due 60 days or more.

 

NoOne TDR modified during the twelve months ended September 30, 2017 and 2016March 31, 2018 had a payment defaults.

A $530,000 specific reserve was established in the nine months ended September 30, 2017 on two TDR loans.default. There were $257,000 of netno charge-offs related to TDRsTDR’s for the nine monthsthree and six month ended SeptemberJune 30, 2017. There were no2018 and a $12,000 charge-offs related to TDRs for the three and ninesix months ended SeptemberJune 30, 2016.2018. A specific reserve was increased $25,000 for the three months ended June 30, 2019. An $80,000 specific reserve was established in the three months ended June 30, 2018.

 

2324

 

AnAn aging analysis of the recorded investments in loans, on a disaggregated basis, as of SeptemberJune 30, 20172019 and December 31, 2016,2018, is as follows: (in thousands)

 

2017

     

90 Days

              

90 Days

 

2019

     

90 Days

              

90 Days

 
 30-89  

or Greater

  

Total

          

or Greater

  30-89  

or Greater

  

Total

          

or Greater

 
 

Past Due

  

Past Due

  

Past Due

  

Current

  

Total

  

Accruing

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total

  

Accruing

 
                                                

Real estate - construction

 $205  $-  $205  $43,836  $44,041  $-  $1,339  $-  $1,339  $48,692  $50,031  $- 

Real estate - 1 to 4 family residential

  1,065   476   1,541   147,299   148,840   81   1,377   251   1,628   163,859   165,487   109 

Real estate - commercial

  312   398   710   350,501   351,211   -   1,231   -   1,231   385,327   386,558   - 

Real estate - agricultural

  377   -   377   78,804   79,181   -   1,112   144   1,256   106,729   107,985   111 

Commercial

  129   429   558   73,608   74,166   -   217   11   228   81,350   81,578   - 

Agricultural

  207   -   207   67,504   67,711   -   418   2,783   3,201   75,049   78,250   897 

Consumer and other

  43   32   75   10,211   10,286   -   110   1   111   15,580   15,691   1 
                                                
 $2,338  $1,335  $3,673  $771,763  $775,436  $81  $5,804  $3,190  $8,994  $876,586  $885,580  $1,118 

 

2016

     

90 Days

              

90 Days

 

2018

     

90 Days

              

90 Days

 
 30-89  

or Greater

  

Total

          

or Greater

  30-89  

or Greater

  

Total

          

or Greater

 
 

Past Due

  

Past Due

  

Past Due

  

Current

  

Total

  

Accruing

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total

  

Accruing

 
                                                

Real estate - construction

 $-  $-  $-  $61,042  $61,042  $-  $376  $-  $376  $50,988  $51,364  $- 

Real estate - 1 to 4 family residential

  1,577   35   1,612   147,895   149,507   19   1,032   302   1,334   168,388   169,722   150 

Real estate - commercial

  1,420   -   1,420   314,282   315,702   -   -   -   -   389,532   389,532   - 

Real estate - agricultural

  -   -   -   73,032   73,032   -   -   -   -   103,652   103,652   - 

Commercial

  84   747   831   73,547   74,378   -   595   248   843   85,351   86,194   - 

Agricultural

  -   -   -   76,994   76,994   -   89   -   89   85,113   85,202   - 

Consumer and other

  36   3   39   12,091   12,130   3   76   -   76   16,490   16,566   - 
                                                
 $3,117  $785  $3,902  $758,883  $762,785  $22  $2,168  $550  $2,718  $899,514  $902,232  $150 

The increase in the 90 days or greater loans still accruing from December 31, 2018 is primarily due to agricultural loans that are well secured and in the process of collection as of June 30, 2019.

 

2425

 

The credit risk profile by internally assigned grade, on a disaggregated basis, asas of SeptemberJune 30, 20172019 and December 31, 20162018 is as follows: (in thousands)

 

2017

 

Construction

  

Commercial

  

Agricultural

             

2019

 

Construction

  

Commercial

  

Agricultural

             
 

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

Total

 
                                                

Pass

 $41,032  $329,263  $57,569  $59,420  $42,695  $529,979  $42,342  $336,514  $75,931  $58,380  $52,951  $566,118 

Watch

  3,009   17,927   18,984   10,020   23,828   73,768   7,689   30,744   26,531   17,063   22,577   104,604 

Special Mention

  -   189   1,234   -   -   1,423   -   4,679   -   -   -   4,679 

Substandard

  -   3,129   1,394   1,478   1,188   7,189   -   14,484   5,439   3,369   836   24,128 

Substandard-Impaired

  -   703   -   3,248   -   3,951   -   137   84   2,766   1,886   4,873 
                                                
 $44,041  $351,211  $79,181  $74,166  $67,711  $616,310  $50,031  $386,558  $107,985  $81,578  $78,250  $704,402 

 

2016

 

Construction

  

Commercial

  

Agricultural

             

2018

 

Construction

  

Commercial

  

Agricultural

             
 

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

Total

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

Total

 
                                                

Pass

 $57,420  $288,107  $51,720  $59,506  $57,415  $514,168  $45,991  $345,262  $72,562  $64,850  $58,818  $587,483 

Watch

  3,245   22,833   15,251   9,512   18,938   69,779   5,373   26,177   22,758   13,998   22,628   90,934 

Special Mention

  -   204   4,228   96   75   4,603   -   4,775   1,675   264   747   7,461 

Substandard

  377   4,159   1,833   1,322   566   8,257   -   13,221   6,583   4,434   3,009   27,247 

Substandard-Impaired

  -   399   -   3,942   -   4,341   -   97   74   2,648   -   2,819 
                                                
 $61,042  $315,702  $73,032  $74,378  $76,994  $601,148  $51,364  $389,532  $103,652  $86,194  $85,202  $715,944 

 

The credit risk profile based on payment activity, on a disaggregated basis, asas of SeptemberJune 30, 20172019 and December 31, 20162018 is as follows:

 

2017

 

1-4 Family

         

2019

 

1-4 Family

         
 

Residential

  

Consumer

      

Residential

  

Consumer

     
 

Real Estate

  

and Other

  

Total

  

Real Estate

  

and Other

  

Total

 
                        

Performing

 $148,069  $10,202  $158,271  $165,133  $15,690  $180,823 

Non-performing

  771   84   855   354   1   355 
                        
 $148,840  $10,286  $159,126  $165,487  $15,691  $181,178 

 

2016

 

1-4 Family

         

2018

 

1-4 Family

         
 

Residential

  

Consumer

      

Residential

  

Consumer

     
 

Real Estate

  

and Other

  

Total

  

Real Estate

  

and Other

  

Total

 
                        

Performing

 $148,828  $12,051  $160,879  $169,206  $16,547  $185,753 

Non-performing

  679   79   758   516   19   535 
                        
 $149,507  $12,130  $161,637  $169,722  $16,566  $186,288 

9.

Goodwill

 

8.      As of September 14, 2018, as a result of the acquisition of CCSB, FNB recognized $3.0 million of goodwill. Goodwill

Goodwill recognized in the Acquisition was primarily attributable to an expanded market share and economies of scale expected from combining the operations of CCSB branches with FNB. Goodwill is not amortized but is evaluated for impairment at least annually. For income tax purposes, goodwill associated with CCSB is not amortized and goodwill associated with previous acquisition is amortized over fifteen years.

 

2526

10.

Intangible assets

 

9.     Intangible assets

In conjunction with the acquisition of CCSB in 2018, the Company recorded $2.0 million in core deposit intangible assets. The following sets forth the carrying amounts and accumulated amortization of the intangible assets at SeptemberJune 30, 20172019 and December 31, 2016:2018: (in thousands)

 

 

2017

  

2016

  

2019

  

2018

 
 

Gross

  

Accumulated

  

Gross

  

Accumulated

  

Gross

  

Accumulated

  

Gross

  

Accumulated

 
 

Amount

  

Amortization

  

Amount

  

Amortization

  

Amount

  

Amortization

  

Amount

  

Amortization

 
                                

Core deposit intangible asset

 $2,518  $1,793  $2,518  $1,563  $4,520  $2,477  $4,520  $2,212 

Customer list

  474   65   412   14   535   203   535   165 
                                

Total

 $2,992  $1,858  $2,930  $1,577  $5,055  $2,680  $5,055  $2,377 

 

The weighted average life of the intangible assets is 33.4 years as of SeptemberJune 30, 20172019 and 3.5 years as of December 31, 2016.2018.

 

The following sets forth the activity related to the intangible assets for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018: (in thousands)

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 30,

  

September 30,

  

June 30,

  

June 30,

 
 

2017

  

2016

  

2017

  

2016

  

2019

  

2018

  

2019

  

2018

 
                                

Beginning intangible asset, net

 $1,212  $1,122  $1,353  $1,309  $2,514  $1,019  $2,678  $1,091 

Adjustment to intangible asset

  12   -   62   -   -   -   -   15 

Amortization

  (90)  (86)  (281)  (273)  (139)  (84)  (303)  (171)
                                

Ending intangible asset, net

 $1,134  $1,036  $1,134  $1,036  $2,375  $935  $2,375  $935 

27

 

EstimatedEstimated remaining amortization expense on core deposit intangible for the years ending December 31st is as follows: (in thousands)

 

2017

 $85 

2018

  319 

2019

  196 

2020

  139 

2021

  139 

2022

  133 

2023

  123 
     
  $1,134 

26
Table of Contents

2019

 $237 

2020

  440 

2021

  402 

2022

  368 

2023

  315 

2024

  166 

After

  447 
     

Intangible asset, net

 $2,375 

 

11.

10.    Pledged Collateral Related to Securities Sold Under Repurchase Agreements

 

The repurchase agreements mature daily and the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements and term repurchase agreements as of SeptemberJune 30, 20172019 and December 31, 2016:2018: (in thousands)

 

 

2017

  

2016

  

2019

  

2018

 
 

Remaining Contractual Maturity of the Agreements

  

Remaining Contractual Maturity of the Agreements

 
 

Overnight

  

Greater than

  

Total

  

Overnight

  

Greater than

  

Total

  

Overnight

  

Greater than

  

Total

  

Overnight

  

Greater than

  

Total

 
     

90 days

          

90 days

          

90 days

          

90 days

     
                                                

Securities sold under agreements to repurchase:

                        

Securities sold under agreements to repurchase:

                     

U.S. government treasuries

 $1,485  $-  $1,485  $1,476  $-  $1,476  $4,520  $-  $4,520  $4,406  $-  $4,406 

U.S. government agencies

  48,363   -   48,363   46,557   -   46,557   39,484   -   39,484   41,375   -   41,375 

U.S. government mortgage-backed securities

  24,514   -   24,514   30,376   -   30,376   15,107   -   15,107   19,893   -   19,893 
                                                

Total

 $74,362  $-  $74,362  $78,409  $-  $78,409 
                        

Term repurchase agreements (Other borrowings):

                        

U.S. government agencies

 $-  $15,174  $15,174  $-  $15,068  $15,068 

U.S. government mortgage-backed securities

  -   -   -   -   354   354 
                        

Total

 $-  $15,174  $15,174  $-  $15,422  $15,422 
                        

Total pledged collateral

 $74,362  $15,174  $89,536  $78,409  $15,422  $93,831  $59,111  $-  $59,111  $65,674  $-  $65,674 

 

In the event the repurchase agreements exceed the estimated fair value of the pledged securities available-for-sale, the Company has unpledged securities available-for-sale that may be pledged on the repurchase agreements.

 

 

12.

11.    Regulatory Matters

 

The Company and the Banks capital amounts and ratios are as follows: (dollars in thousands)

                  

To Be Well

 
                  

Capitalized Under

 
          

For Capital

  

Prompt Corrective

 
  

Actual

  

Adequacy Purposes *

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
                         

As of September 30, 2017:

                        

Total capital (to risk- weighted assets):

                        

Consolidated

 $175,203   17.7% $91,324   9.25%  N/A   N/A 

Boone Bank & Trust

  15,325   16.7   8,486   9.25  $9,174   10.0%

First National Bank

  81,177   15.4   48,867   9.25   52,829   10.0 

Reliance State Bank

  26,957   15.9   15,661   9.25   16,931   10.0 

State Bank & Trust

  20,217   16.5   11,337   9.25   12,256   10.0 

United Bank & Trust

  14,903   20.4   6,741   9.25   7,288   10.0 
                         

Tier 1 capital (to risk- weighted assets):

                        

Consolidated

 $163,536   16.6% $71,578   7.25%  N/A   N/A 

Boone Bank & Trust

  14,419   15.7   6,651   7.25  $7,339   8.0%

First National Bank

  75,221   14.2   38,301   7.25   42,263   8.0 

Reliance State Bank

  24,947   14.7   12,275   7.25   13,545   8.0 

State Bank & Trust

  18,680   15.2   8,886   7.25   9,805   8.0 

United Bank & Trust

  14,084   19.3   5,284   7.25   5,830   8.0 
                         

Tier 1 capital (to average- weighted assets):

                        

Consolidated

 $163,536   12.1% $53,995   4.00%  N/A   N/A 

Boone Bank & Trust

  14,419   10.5   5,484   4.00  $6,855   5.0%

First National Bank

  75,221   10.0   29,942   4.00   37,428   5.0 

Reliance State Bank

  24,947   12.2   8,147   4.00   10,184   5.0 

State Bank & Trust

  18,680   11.9   6,297   4.00   7,871   5.0 

United Bank & Trust

  14,084   12.9   4,372   4.00   5,465   5.0 
                         

Common equity tier 1 capital (to risk-weighted assets):

                        

Consolidated

 $163,536   16.6% $56,769   5.75%  N/A   N/A 

Boone Bank & Trust

  14,419   15.7   5,275   5.75  $5,963   6.5%

First National Bank

  75,221   14.2   30,377   5.75   34,339   6.5 

Reliance State Bank

  24,947   14.7   9,735   5.75   11,005   6.5 

State Bank & Trust

  18,680   15.2   7,047   5.75   7,967   6.5 

United Bank & Trust

  14,084   19.3   4,190   5.75   4,737   6.5 

* These ratios for September 30, 2017 include a capital conservation buffer of 1.25%, except for the Tier 1 capital to average weighted assets ratios.

 

                  

To Be Well

 
                  

Capitalized Under

 
          

For Capital

  

Prompt Corrective

 
  

Actual

  

Adequacy Purposes *

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
                         

As of June 30, 2019:

                        

Total capital (to risk-weighted assets):

                        

Consolidated

 $180,052   16.5% $114,867   10.50%  N/A   N/A 

Boone Bank & Trust

  15,646   16.0   10,252   10.50  $9,764   10.0%

First National Bank

  84,450   13.8   64,158   10.50   61,103   10.0 

Reliance State Bank

  28,124   16.0   18,500   10.50   17,620   10.0 

State Bank & Trust

  20,396   15.9   13,480   10.50   12,838   10.0 

United Bank & Trust

  14,798   18.8   8,256   10.50   7,863   10.0 
                         

Tier 1 capital (to risk-weighted assets):

                        

Consolidated

 $167,643   15.3% $92,988   8.50%  N/A   N/A 

Boone Bank & Trust

  14,707   15.1   8,299   8.50  $7,811   8.0%

First National Bank

  77,871   12.7   51,938   8.50   48,882   8.0 

Reliance State Bank

  25,921   14.7   14,977   8.50   14,096   8.0 

State Bank & Trust

  18,789   14.6   10,912   8.50   10,271   8.0 

United Bank & Trust

  13,979   17.8   6,683   8.50   6,293   8.0 
                         

Tier 1 capital (to average-weighted assets):

                        

Consolidated

 $167,643   11.7% $57,537   4.00%  N/A   N/A 

Boone Bank & Trust

  14,707   11.1   5,289   4.00  $6,611   5.0%

First National Bank

  77,871   9.4   33,418   4.00   41,462   5.0 

Reliance State Bank

  25,921   12.1   8,790   4.00   10,987   5.0 

State Bank & Trust

  18,789   11.5   6,543   4.00   8,179   5.0 

United Bank & Trust

  13,979   12.8   4,359   4.00   5,448   5.0 
                         

Common equity tier 1 capital (to risk-weighted assets):

                        

Consolidated

 $167,643   15.3% $76,578   7.00%  N/A   N/A 

Boone Bank & Trust

  14,707   15.1   6,835   7.00  $6,347   6.5%

First National Bank

  77,871   12.7   42,772   7.00   39,717   6.5 

Reliance State Bank

  25,921   14.7   12,334   7.00   11,453   6.5 

State Bank & Trust

  18,789   14.6   8,987   7.00   8,345   6.5 

United Bank & Trust

  13,979   17.8   5,504   7.00   5,111   6.5 

* These ratios for June 30, 2019 include a capital conservation buffer of 2.5%, except for the Tier 1 capital to average weighted assets ratios.

 

                 

To Be Well

                  

To Be Well

 
                 

Capitalized Under

           ��      

Capitalized Under

 
         

For Capital

  

Prompt Corrective

          

For Capital

  

Prompt Corrective

 
 

Actual

  

Adequacy Purposes

  

Action Provisions

  

Actual

  

Adequacy Purposes *

  

Action Provisions

 
 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
                                                

As of December 31, 2016:

                        

Total capital (to risk- weighted assets):

                        

As of December 31, 2018:

                        

Total capital (to risk-weighted assets):

                        

Consolidated

 $170,358   17.2% $85,241   8.625%  N/A   N/A  $177,405   16.1% $109,082   9.875%  N/A   N/A 

Boone Bank & Trust

  15,044   17.2   7,534   8.625  $8,735   10.0%  15,632   17.0   9,092   9.875  $9,207   10.0%

First National Bank

  78,322   15.3   44,279   8.625   51,338   10.0   81,419   13.1   61,312   9.875   62,088   10.0 

Reliance State Bank

  26,095   14.1   15,927   8.625   18,466   10.0   27,880   14.8   18,576   9.875   18,811   10.0 

State Bank & Trust

  20,170   16.4   10,590   8.625   12,278   10.0   20,358   16.2   12,427   9.875   12,585   10.0 

United Bank & Trust

  14,897   19.2   6,684   8.625   7,749   10.0   14,790   19.5   7,489   9.875   7,583   10.0 
                                                

Tier 1 capital (to risk- weighted assets):

                        

Tier 1 capital (to risk-weighted assets):

                        

Consolidated

 $159,325   16.1% $65,475   6.625%  N/A   N/A  $165,181   15.0% $86,989   7.875%  N/A   N/A 

Boone Bank & Trust

  14,132   16.2   5,787   6.625  $6,988   8.0%  14,722   16.0   7,251   7.875  $7,366   8.0%

First National Bank

  72,750   14.2   34,011   6.625   41,070   8.0   74,995   12.1   48,894   7.875   49,671   8.0 

Reliance State Bank

  24,139   13.1   12,234   6.625   14,773   8.0   25,622   13.6   14,813   7.875   15,049   8.0 

State Bank & Trust

  18,633   15.2   8,134   6.625   9,822   8.0   18,783   14.9   9,910   7.875   10,068   8.0 

United Bank & Trust

  14,078   18.2   5,134   6.625   6,199   8.0   13,974   18.4   5,972   7.875   6,067   8.0 
                                                

Tier 1 capital (to average- weighted assets):

                        

Tier 1 capital (to average-weighted assets):

                        

Consolidated

 $159,325   12.0% $53,316   4.000%  N/A   N/A  $165,181   11.3% $58,635   4.000%  N/A   N/A 

Boone Bank & Trust

  14,132   10.2   5,529   4.000  $6,911   5.0%  14,722   11.2   5,277   4.000  $6,596   5.0%

First National Bank

  72,750   10.0   29,077   4.000   36,347   5.0   74,995   9.1   33,034   4.000   41,292   5.0 

Reliance State Bank

  24,139   11.5   8,374   4.000   10,467   5.0   25,622   11.7   8,730   4.000   10,913   5.0 

State Bank & Trust

  18,633   11.6   6,449   4.000   8,061   5.0   18,783   11.8   6,384   4.000   7,980   5.0 

United Bank & Trust

  14,078   12.5   4,523   4.000   5,654   5.0   13,974   12.7   4,402   4.000   5,503   5.0 
                                                

Common equity tier 1 capital (to risk-weighted assets):

                                                

Consolidated

 $159,325   16.1% $50,650   5.125%  N/A   N/A  $165,181   15.0% $70,420   6.375%  N/A �� N/A 

Boone Bank & Trust

  14,132   16.2   4,477   5.125  $5,678   6.5%  14,722   16.0   5,870   6.375  $5,985   6.5%

First National Bank

  72,750   14.2   26,311   5.125   33,370   6.5   74,995   12.1   39,581   6.375   40,357   6.5 

Reliance State Bank

  24,139   13.1   9,464   5.125   12,003   6.5   25,622   13.6   11,992   6.375   12,227   6.5 

State Bank & Trust

  18,633   15.2   6,292   5.125   7,981   6.5   18,783   14.9   8,023   6.375   8,180   6.5 

United Bank & Trust

  14,078   18.2   3,972   5.125   5,037   6.5   13,974   18.4   4,834   6.375   4,929   6.5 

* These ratios for December 31, 2018 include a capital conservation buffer of 1.875%, except for the Tier 1 capital to average weighted assets ratios.

 

* These ratios for December 31, 2016 include a capital conservation buffer of 0.625%, except for the Tier 1 capital to average weighted assets ratios.

TheThe Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes in July 2013. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, addadded a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirements and implementimplemented a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income.income (loss). The Company and the Banks have made the election to retain the existingprior treatment for accumulated other comprehensive income.income (loss). The final rules took effect for the Company and the Banks on January 1, 2015, subject to a transition period for certain parts of the rules.

 

 

Beginning in 2016, an additional capital conservation buffer waswas added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will bewas fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) will beis subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At the present time, the ratios for the Company and the Banks are sufficient to meet the fully phased-in conservation buffer.

 

12.13.     Subsequent Events

 

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after September 30, 2017, but priorOn July 29, 2019, Ames National Corporation (the “Company”) entered into a Stock Purchase Agreement (the “Agreement”) with Iowa Community Bancorp, Inc. (“Iowa Community”) and Iowa State Savings Bank (the “Bank”), an Iowa state chartered bank and 100% owned subsidiary of Iowa Community, and the majority shareholder of Iowa Community. The Agreement provides for the purchase by the Company from Iowa Community of 100% of the outstanding stock of the Bank. At closing, the Company will pay Iowa Community cash of approximately $22.0 million, subject to November 8, 2017, that provided additional evidence about conditions that existed at September 30, 2017.certain adjustments based on the financial condition of the Bank (including total equity capital and loan loss reserve) on the closing date. Closing of the transaction is expected to occur during the fourth quarter of 2019, subject to regulatory approval and other customary closing conditions. There were no other significant events or transactions that provided evidence about conditions that did not exist at SeptemberJune 30, 2017.2019.

 

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Ames National Corporation (the(the “Company”) is a bank holding company established in 1975 that owns and operates five bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), and United Bank & Trust NA (United Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.

 

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. The Banks also offerWealth management services includes financial planning and managing trust, agencies, estates and investment services through a third-party broker-dealer.brokerage accounts. The Company employs fourteenfifteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training, real estate valuation services and the coordination of management activities, in addition to 205233 full-time equivalent individuals employed by the Banks.Banks, including employees from the Acquisition.

 

The Company’sCompany’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.

31

 

The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks and (v) Merchantmerchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.

 

30
CCSB for approximately $14.8 million. First National operates all three bank offices previously owned by Clarke County as branches of First National.

 

The Company had net income of $3,928,000,$4,618,000, or $0.42$0.50 per share, for the three months ended SeptemberJune 30, 2017,2019, compared to net income of $3,804,000,$4,317,000, or $0.41$0.46 per share, for the three months ended SeptemberJune 30, 2016.2018.

 

The increase in quarterly earnings can be primarily attributed to improved loan interest income, offset in part by elevated deposit interest expense and higher salary and employee benefits.

Net loan charge-offs totaled $11,000 and $4,000 for the three months ended June 30, 2019 and 2018, respectively. The provision for loan losses totaled $68,000 and $64,000 for the three months ended June 30, 2019 and 2018, respectively.

The Company had net income of $8,855,000, or $0.96 per share, for the six months ended June 30, 2019, compared to net income of $8,354,000, or $0.90 per share, for the six months ended June 30, 2018.

The increase in six month earnings can be primarily attributed to an increase in loan interest income, and a lower provision for loan losses, offset in part by increaseshigher deposit interest expense and an increase in interest expense.salaries and benefits.

 

NetNet loan charge-offs (recoveries)recoveries totaled $105,000$19,000 and $(81,000)net loan charge offs of $31,000 for the threesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The provision for loan losses totaled $57,000$166,000 and $235,000$93,000 for the threesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

The Company had net income of $11,011,000, or $1.18 per share, for the nine months ended September 30, 2017, compared to net income of $11,710,000, or $1.26 per share, for the nine months ended September 30, 2016. The decrease in nine month earnings can be primarily attributed to a higher provision for loan losses and increases in interest expense, offset in part by an increase in loan interest income.

Net loan charge-offs (recoveries) totaled $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The provision for loan losses totaled $1,222,000 and $441,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

The following management discussion and analysis will provide a review of important items relating to:

 

●     Challenges

●     Key Performance Indicators and Industry Results

●     Critical Accounting Policies

●     Income Statement Review

●     Balance Sheet Review

●     Asset Quality Review and Credit Risk Management

●     Liquidity and Capital Resources

●     Forward-Looking Statements and Business Risks

●     Non-GAAP Financial Measures

Challenges

●

Key Performance Indicators and Industry Results

●

Critical Accounting Policies

●

Income Statement Review

●

Balance Sheet Review

●

Asset Quality Review and Credit Risk Management

●

Liquidity and Capital Resources

●

Forward-Looking Statements and Business Risks

 

Challenges

 

Management has identified certain events or circumstances that may negatively impact the Company’sCompany’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 13, 2017.12, 2019.

 

3132

 

Key Performance Indicators and Industry Results

 

Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 5,7875,406 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.

 

Selected Indicators for the Company and the Industry 

 

 

3 Months

  

9 Months

                          

3 Months

  

6 Months

                         
 

Ended

  

Ended

  

3 Months Ended

  

Years Ended December 31,

  

Ended

  

Ended

  

3 Months Ended

  

Years Ended December 31,

 
 

September 30, 2017

  

June 30, 2017

  

2016

  

2015

  

June 30, 2019

  

March 31, 2019

  

2018

  

2017

 
 

Company

  

Company

  

Industry*

  

Company

  

Industry

  

Company

  

Industry

  

Company

      

Company

  

Industry*

  

Company

  

Industry*

  

Company

  

Industry*

 
                                                                

Return on assets

  1.15%  1.07%  1.01%  1.14%  1.18%  1.04%  1.13%  1.04%  1.27%  1.22%  1.17%  1.35%  1.23%  1.35%  1.00%  0.97%
                                                                

Return on equity

  9.08%  8.64%  8.17%  10.11%  9.38%  9.32%  9.44%  9.31%  10.32%  10.03%  9.73%  11.93%  10.09%  11.98%  8.02%  8.64%
                                                                

Net interest margin

  3.29%  3.25%  3.25%  3.22%  3.36%  3.13%  3.33%  3.07%  3.20%  3.22%  3.23%  3.42%  3.23%  3.40%  3.25%  3.25%
                                                                

Efficiency ratio

  52.42%  53.16%  52.93%  56.32%  51.95%  58.28%  53.59%  59.91%  54.92%  56.36%  57.82%  55.85%  55.90%  56.27%  52.70%  57.94%
                                                                

Capital ratio

  12.70%  12.41%  12.37%  9.69%  12.60%  9.48%  12.00%  9.59%  12.30%  12.17%  12.05%  9.76%  12.18%  9.70%  12.48%  9.62%

 

*Latest available data

 

Key performances indicators include:

 

●

●     Return on Assets

 

This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on averageaverage assets was 1.15%1.27% and 1.26% for the three months ended SeptemberJune 30, 20172019 and 2016.2018, respectively. This ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in average assets.

 

●

●     Return on Equity

 

This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 9.08%10.32% and 8.91%10.35% for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. TheThis ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in this ratio in 2017 from the previous period is primarily due to an increase in net income.average equity.

 

●

●     Net Interest Margin

 

The net interest margin for the three months ended SeptemberJune 30, 20172019 and 20162018 was 3.29%3.20% and 3.38%3.16%, respectively. The ratio is calculated by dividing net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. The decrease in this ratio in 2017 is primarily the result of an increase in the interest rates on deposits.

 

32

●

●     Efficiency Ratio

 

This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 52.42%54.92% and 50.71%55.02% for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The efficiency ratio remained consistent with prior periods.the 2018 efficiency ratio.

 

●

●     Capital Ratio

 

The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 12.70%12.30% as of SeptemberJune 30, 20172019 is significantly higher than the industry average of 9.69%9.70% as of June 30, 2017.December 31, 2018.

 

Industry ResultsResults:

 

The FDIC Quarterly Banking Profile reported the following results for the secondfirst quarter of 2017:2019:

 

Higher Net Interest Income Lifts Industry EarningsIncreases 8.7% From First Quarter 2018 to $60.7 Billion

 

HigherThe aggregate net interest income and restrained growth in operating expenses helped lift banking industry profits in second quarter 2017. The 5,787for the 5,362 FDIC-insured commercial banks and savings institutions insured by the FDIC reported net income of $48.3totaled $60.7 billion for thein first quarter 2019, an increase of $4.7$4.9 billion (10.7%(8.7%) compared with the second quarter of 2016.from a year ago. The improvement in net income was led by higher net interest income, which reflected a modest growth in interest-earning assets and wider net interest margins (NIM). Almost two out of every three banks 63.4%(62.3%) reported year-over-year earnings improvement, while only 4.1% were unprofitable, down from 4.6% a year earlier.increases in net income, and less than 4% of banks reported net losses for the quarter. The average return on assets (ROA) rose to 1.14%1.35%, an improvement from 1.06% the 1.28% a year before. This is the highest quarterly ROA for the industry since second quarter 2007.earlier.

 

Net Interest Margins ImproveIncome Expands 6% From a Year Ago

 

Net operating revenue—the sum of net interest income and total noninterest income—of $139.3 billion rose by $7.9 billion (6%) from 12 months ago, as more than three out of every four banks (79.2%) reported year-over-year increases. NIM for the banking industry increased by 10 basis points from a year ago to $190.53.42%, as average asset yields (up 49 basis points) increased by more than average funding costs (up 39 basis points). The largest institutions (banks with assets greater than $250 billion) reported the largest annual increase in NIM (up 11 basis points), almost twice the rate of all other institution size groups.

Loan-Loss Provisions Rise Almost 12% From First Quarter 2018

Banks allocated $13.9 billion in loan-loss provisions in the secondfirst quarter, an $11increase of $1.5 billion (6.1%) increase from second quarter 2016. Most of the improvement consisted of higher net interest income, which was $10.3 billion (9.1%) higher than a year earlier. The increase in net interest income helped lift the industry’s net interest margin (NIM) to 3.22%, from 3.08% in second quarter 2016. This is the highest quarterly NIM since fourth quarter 2013. While 57.7% of all banks reported higher NIMs, the improvement was greatest at larger institutions. More of their assets reprice or mature in the short term, and they are better-positioned to benefit from rising short-term interest rates. Noninterest income totaled $66.8 billion, up $654 million (1%(11.8%) from a year earlier. Income from asset servicing was $1 billion (93.9%) higher, while gains on asset sales were $1.6 billion (31.7%) lower. Trading income fell $313 million (4.5%).

Noninterest Expense Growth Is Moderate

Banks set aside $12 billion in loan-loss provisions during the second quarter, up $273 million (2.3%) from the previous year. Slightly more than one-third of all banks—36.5%—increased theirbanks (35.2%) reported annual increases in loan loss provisions versus second quarter 2016, while 32.2% reported lower provisions. Noninterest expenses totaled $108.6 billion, an increase of $3.5 billion (3.3%). Expenses for salaries and employee benefits were $2.1 billion (4.3%) higher than a year earlier, as the total number of employees rose by 48,019 (2.3%).

33

Noncurrent Loan Balances Decline Further

The amount of loans and leases that were noncurrent—90 days or more past due or in nonaccrual status—fell for the 28th time in the last 29 quarters, declining by $8.4 billion (6.7%) in the three months ended June 30. Noncurrent balances declined in all major loan categories during the quarter. Noncurrent residential mortgage loans fell by $4.8 billion (7.9%), while noncurrent C&I loans declined by $2.2 billion (9.5%). The average noncurrent loan rate fell from 1.34% to 1.23% during the quarter, the lowest since third quarter 2007.

Banks Shift Their Reserve Allocations

Total loan-loss reserves posted a modest ($197 million, 0.2%) decline during the second quarter. The industry’s coverage ratio of reserves to noncurrent loans and leases rose from 97.5% to 104.3%, the highest level since third quarter 2007. Banks with assets greater than $1 billion, which account for 90%A large portion of the industry’s loss reserves, increased their reserves for credit card losses by $1.4 billion (4.3%), while reducing their reserves for commercial loan losses by $1.1 billion (3.3%) and their reserves for residential real estate loan losses by $922 million (5.5%).

Retained Earnings Drive Capital Growth

Equity capital increased by $38.7 billion (2%) duringannual increase was concentrated among the quarter. Retained earnings contributed $20 billion to the growth in capital, $322 million (1.6%) less than in second quarter 2016. Banks declared $28.3 billion in dividends in the quarter, up $5 billion (21.4%) from the year-earlier quarter. Lower long-term interest rates contributed to an $8 billion improvement in accumulated other comprehensive income, which was reflected in the equity capital increase. At the end of the quarter, 99.4% of all FDIC-insured institutions, representing 99.96% of total industry assets, met or exceeded the requirements for well-capitalized banks, as defined for Prompt Corrective Action purposes.

Banks Reduce Their Federal Reserve Bank Balances

Industry assets surpassed $17 trillion for the first time at the end of the second quarter, rising by $100.8 billion (0.6%) during the three months ended June 30. Banks reduced their balances at Federal Reserve banks by $102.4 billion (8%). They also reduced their investment securities by $15 billion (0.4%), as U.S. Treasury securities fell by $49.9 billion (9.7%), and mortgage-backed securities rose by $38 billion (1.9%). Securities held in available-for-sale accounts declined by $59 billion (9.7%), while securities in held-to-maturity accounts increased by $44 billion (4.7%). Assets in trading accounts increased by $18.7 billion (3.2%) during the quarter. The percentage of industry assets maturing or repricing in more than three years remained unchanged from the first quarter, at 35.4%. The all-time high level for this percentage—35.5%—occurred at the end of fourth quarter 2016.

The Annual Loan Growth Rate Slows for a Third Consecutive Quarter

Total loans and leases increased by $161.2 billion (1.7%) during the second quarter. All major loan categories posted increases, led by residential mortgage loans (up $35.1 billion, 1.8%), credit card balances (up $23.6 billion, 3.1%), and C&I loans (up $22.1 billion, 1.1%). Unused loan commitments increased by $25.9 billion (0.4%). For the 12 months ended June 30, total loans and leases increased by $337.6 billion (3.7%), while unused loan commitments rose by $274.8 billion (3.9%). The 12-month growth rate for total loans and leases has slowed in each of the last three quarters. A year ago, the 12-month loan growth rate was 6.7%. The 12-month growth rate in unused loan commitments has slowed for six consecutive quarters. In 2015, unused commitments increased 6.6%.largest banks.

 

34

 

Noninterest Income Declines 2.9% From a Year Ago

Noninterest income declined by $2 billion (2.9%) from a year ago, due to lower servicing fees, which fell by $2.1 billion (58.3%), and all other noninterest income, which declined by $1.1 billion (3.6%). Despite the overall decline in noninterest income, trading revenue rose by $2.5 billion (32.8%). Slightly more than half of all banks (52.6%) reported annual declines in noninterest income.

Noninterest Expense Declines From First Quarter 2018

Noninterest expense fell by $427.1 million (0.4%) from a year earlier. The Numberincrease in salary and employee benefits (up $1.1 billion, or 2%) was offset by a decline in all other noninterest expense (down $1.4 billion, or 3%). The average assets per employee increased from $8.4 million in first quarter 2018 to $8.8 million.

Net Charge-Offs Increase 5.5% From 12 Months Ago

During the first quarter, banks charged off $12.7 billion in uncollectable loans, an increase of Banking Employees Rises$667.9 million (5.5%) from first quarter 2018. Credit card balances reported the largest year-over-year dollar increase in net charge-offs, increasing by $543.4 million (6.6%). The average net charge-off rate remained unchanged from a year ago (0.50%). For eight out of the past ten quarters, the net charge-off rate for credit cards increased, reaching 3.97% for the current quarter.

Noncurrent Loan Rate Remains Below 1%

Noncurrent loan balances (90 days or more past due or in nonaccrual status) increased by $461.6 million (0.5%) from the previous quarter. Less than half of all banks (41.2%) reported increases in noncurrent loan balances. The quarterly increase was in commercial and industrial loan balances, which rose by $3.3 billion (22.8%), the largest quarterly dollar increase since first quarter 2016. The banking industry continued to reduce noncurrent loans for residential mortgages, which declined by $2.2 billion (5%) from the previous quarter. The average noncurrent rate remained unchanged from the previous quarter at 0.99%.

Loan-Loss Reserves Increase From the Previous Quarter

At the end of first quarter, loan-loss reserves increased by $432.3 billion (0.3%) from the previous quarter. Almost two-thirds of all banks (64.9%) reported increases in loan-loss reserves during the quarter. At banks that itemize their loan-loss reserves, which represent 91% of total industry loan-loss reserves, the quarterly growth was attributable to commercial loans (up $761.4 million, or 2.4%) and other consumer (up $308.3 million, or 3.1%), which excludes credit cards. For the past 11 consecutive quarters, growth in total itemized loan-loss reserves was attributable to credit cards; however, credit card losses remained stable during the first quarter, increasing by only $54.2 million (0.1%).

Equity Capital Increases From the Fourth Quarter

During the three months ended March 31, 2019 equity capital of $2.1 trillion rose by $36.9 billion (1.8%). Retained earnings in first quarter 2019 totaled $22.1 billion and dividends paid rose to $38.6 billion, an increase of $7.9 billion (25.9%). Accumulated other comprehensive income increased by $20.6 billion, as the fair value of securities improved. At the end of first quarter, 99.6% of all insured institutions, which account for 99.87% of total industry assets, met or exceeded the requirements for the well-capitalized category, as defined for Prompt Corrective Action.

35

Total Assets Increase From the Previous Quarter

Total assets increased by $147 billion (0.8%) during the first quarter. Assets in trading accounts increased by $94.2 billion (16.5%), the largest quarterly dollar increase since first quarter 2008. Securities holdings among the banking industry remained stable (up $1.3 billion, or .003%) from the previous quarter. Mortgage-backed securities rose by $30.6 billion (1.4%), but were offset in part by lower U.S. Treasury securities (down $11.4 billion, or 2.1%) and state and municipal securities (down $7.6 billion, or 2.3%).

Loan Balances Drop Slightly From the Previous Quarter but Increase 4.1% From a Year Ago

Total loan and lease balances fell by $4.8 billion (0.05%) compared with the previous quarter. More than half of all banks (57.5%) reported quarterly increases in loan and lease balances. Commercial and industrial loans increased by $37.7 billion (1.7%), while consumer loans, including credit card balances, fell by $37 billion (2.1%). Over the Past Yearpast 12 months, total loan and lease balances increased by $395 billion (4.1%), a slight decline from the 4.4% annual growth rate reported last quarter. All major loan categories reported year-over-year increases, led by commercial and industrial loans (up $155.6 billion, or 7.6%) and consumer loans, which includes credit card balances (up $71.3 billion, or 4.4%).

Noninterest-Bearing Deposits Decline 3.2% From the Previous Quarter

Total deposits rose by $59.5 billion (0.4%) from the previous quarter, as interest-bearing deposits increased by $172.4 billion (1.8%). Noninterest-bearing deposits declined by $100.4 billion (3.2%), the largest quarterly dollar decline since reporting the Quarterly Banking Profile, and deposits in foreign offices fell by $12.5 billion (1%). Nondeposit liabilities rose by $50.6 billion (2.5%) from the previous quarter, with the increase led by other secured borrowings (up $35.8 billion, or 18.7%) and other liabilities (up $28 billion, or 7.3%). Federal Home Loan Bank advances fell by $50.3 billion (8.8%) from the previous quarter, the largest quarterly dollar decline since first quarter 2010.

 

The numberNumber of FDIC-insured commercialBanks on the FDIC’s “Problem Bank List” Declines to 59

The FDIC’s “Problem Bank List” declined from 60 at year end to 59 at the end of first quarter, the lowest since first quarter 2007. Total assets of problem banks and savings institutions reporting financial results felldeclined from $48.5 billion to 5,787 in the second quarter, from 5,856 in$46.7 billion. During the first quarter. During the second quarter, three insured institutions failed, while 62one new bank was chartered, 43 institutions were absorbed by mergers. No new reporters were added during the quarter. The number of institutions on the FDIC’s Problem Bank List declined for a 25th consecutive quarter, from 112 to 105. This is the smallest number of problemmergers, and no banks since March 31, 2008, and is almost 90% below the peak of 888 at the end of March 2011. The number of full-time equivalent employees rose by 11,663 (0.6%) to 2,093,278 during the quarter, which was 48,019 higher than second quarter 2016 (2.3%). This is still 5.9% below the peak of 2,223,383 employees in first quarter 2007.failed.

 

Critical Accounting Policies

 

The discussion contained in this Item 2 and other disclosures included within this report are based,, in part, on the Company’s audited December 31, 20162018 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

 

The Company’sCompany’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.

36

 

Allowance for Loan Losses

 

The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’sCompany’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

 

For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of thethe Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.

35

 

Fair Value and Other-Than-Temporary Impairment of Investment Securities

 

The Company’sCompany’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

 

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, it is at least reasonably possible that changes in management’smanagement’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

 

Goodwill

 

Goodwill arose in connection with twothree acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment.  For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions.   Impairment would arise if the fair value of a reporting unit is less than its carrying value. At SeptemberJune 30, 2017,2019, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation.

 

3637

Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP. (dollars in thousands)

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2019

  

2018

  

2019

  

2018

 

Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:

         

Net interest income (GAAP)

 $10,930  $10,211  $21,901  $20,397 

Tax-equivalent adjustment (1)

  284   313   576   629 

Net interest income on an FTE basis (non-GAAP)

  11,214   10,524   22,477   21,026 

Average interest-earning assets

 $1,400,685  $1,330,909  $1,397,269  $1,324,875 

Net interest margin on an FTE basis (non-GAAP)

  3.20%  3.16%  3.22%  3.17%

(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent for the three and six months ended June 30, 2019 and 2018, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.

38

 

Income Statement Review for the Three Months ended SeptemberJune 3030, 20179 and 20168

 

The following highlights a comparative discussion of the major components of net income and their impact for the three monthsmonths ended SeptemberJune 30, 20172019 and 2016:2018:

 

AVERAGE BALANCES AND INTEREST RATES

 

The following two tables are used to calculate the Company’sCompany’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                
 

Three Months Ended September 30,

  

Three Months Ended June 30,

 
                                                
 

2017

  

2016

  

2019

  

2018

 
                                                
 

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

 
 

balance

  

expense

  

rate

  

balance

  

expense

  

rate

  

balance

  

expense

  

rate

  

balance

  

expense

  

rate

 

ASSETS

                                                

(dollars in thousands)

                                                

Interest-earning assets

                                                

Loans 1

                                                

Commercial

 $77,788  $920   4.73% $88,265  $1,014   4.59% $82,133  $1,119   5.45% $72,939  $927   5.08%

Agricultural

  67,951   922   5.43%  73,879   900   4.87%  81,803   1,304   6.37%  68,992   945   5.48%

Real estate

  623,214   6,756   4.34%  555,002   6,131   4.42%  712,534   8,174   4.59%  637,835   7,008   4.40%

Consumer and other

  10,514   132   5.03%  21,513   191   3.56%  16,694   211   5.06%  8,240   116   5.62%
                                                

Total loans (including fees)

  779,467   8,730   4.48%  738,659   8,236   4.46%  893,164   10,808   4.84%  788,005   8,996   4.57%
                                                

Investment securities

                                                

Taxable

  275,498   1,558   2.26%  259,212   1,425   2.20%  255,671   1,555   2.43%  271,835   1,564   2.30%

Tax-exempt 2

  230,249   1,862   3.23%  249,400   2,045   3.28%  202,232   1,352   2.67%  223,979   1,493   2.67%

Total investment securities

  505,747   3,420   2.70%  508,612   3,470   2.73%  457,903   2,907   2.54%  495,814   3,057   2.47%
                                                

Interest bearing deposits with banks and federal funds sold

  27,183   115   1.69%  25,533   87   1.36%  49,618   290   2.34%  47,089   256   2.17%
                                                

Total interest-earning assets

  1,312,397  $12,265   3.74%  1,272,804  $11,793   3.71%  1,400,685  $14,005   4.00%  1,330,909  $12,309   3.70%
                                                

Noninterest-earning assets

  49,366           55,732           53,992           38,895         
                                                

TOTAL ASSETS

 $1,361,763          $1,328,536          $1,454,677          $1,369,804         

 

1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%

1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 21%.

 

3739

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                
 

Three Months Ended September 30,

  

Three Months Ended June 30,

 
                                                
 

2017

  

2016

  

2019

  

2018

 
                                                
 

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

 
 

balance

  

expense

  

rate

  

balance

  

expense

  

rate

  

balance

  

expense

  

rate

  

balance

  

expense

  

rate

 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                

(dollars in thousands)

                                                

Interest-bearing liabilities

                                                

Deposits

                                                

NOW, savings accounts and money markets

 $712,550  $685   0.38% $658,522  $325   0.20% $790,872  $1,616   0.82% $744,936  $1,070   0.57%

Time deposits > $100,000

  83,793   240   1.15%  84,034   196   0.93%

Time deposits < $100,000

  113,112   244   0.86%  123,648   233   0.75%

Time deposits

  222,740   990   1.78%  193,897   564   1.16%

Total deposits

  909,455   1,169   0.51%  866,204   754   0.35%  1,013,612   2,606   1.03%  938,833   1,634   0.70%

Other borrowed funds

  71,266   292   1.64%  94,504   274   1.16%  40,930   185   1.80%  44,124   151   1.37%
                                                

Total Interest-bearing liabilities

  980,721   1,461   0.60%  960,708   1,028   0.43%  1,054,542   2,791   1.06%  982,957   1,785   0.73%
                                                

Noninterest-bearing liabilities

                                                

Demand deposits

  200,934           188,419           212,929           211,586         

Other liabilities

  7,132           8,710           8,315           8,487         
                                                

Stockholders' equity

  172,976           170,699           178,890           166,774         
                                                

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $1,361,763          $1,328,536          $1,454,676          $1,369,804         
                                                
                                                

Net interest income

     $10,804   3.29%     $10,765   3.38%     $11,214   3.20%     $10,524   3.16%
                                                

Spread Analysis

                                                

Interest income/average assets

 $12,265   3.60%     $11,793   3.55%     $14,005   3.85%     $12,309   3.59%    

Interest expense/average assets

 $1,461   0.43%     $1,028   0.31%     $2,791   0.77%     $1,785   0.52%    

Net interest income/average assets

 $10,804   3.17%     $10,765   3.24%     $11,214   3.08%     $10,524   3.07%    

 

Net Interest Income

 

For the three months ended SeptemberJune 30, 20172019 and 2016,2018, the Company's net interest margin adjusted for tax exempt income was 3.29%3.20% and 3.38%3.16%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended SeptemberJune 30, 20172019 totaled $10,152,000$10,930,000 compared to $10,050,000$10,211,000 for the three months ended SeptemberJune 30, 2016.2018.

 

For the three months ended SeptemberJune 30, 2017,2019, interest income increased $535,000,$1,726,000, or 5%14%, when compared to the same period in 2016.2018. The increase from 20162019 was primarily attributable to higher average balance of loans.increased loan volume and to a lesser extent improved interest rates. The higher average balances of loans wereincrease in loan volume was primarily due primarily to favorable economic conditionsthe Acquisition. Loan interest rates increased in ourconjunction with general market areas.interest rates, as the Federal Reserve Bank increased short term interest rate targets by 1.00% in 2018.

 

Interest expense increased $433,000,$1,006,000, or 42%56%, for the three months ended SeptemberJune 30, 20172019 when compared to the same period in 2016.2018. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to market interest rates and competitive pressures.

 

3840

 

Provision for Loan Losses

 

The Company’sCompany’s provision for loan losses was $57,000$68,000 and $235,000$64,000 for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The decrease in the provision for loan losses was due primarily to an increase in specific reserves for one loan in 2016. Net loan charge-offs (recoveries) were $105,000$11,000 and $(81,000)$4,000 for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase net charge-offs related primarily to one commercial operating customer relationship. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy remains challenged as the result of the low grain prices throughout much of 2018 and 2019 and tariff concerns on Iowa exports. Corn prices rebounded in the second quarter of 2019 as a result of delayed planting caused by excessive rain in much of the current low grain prices; however, initial crop yield reports have been favorable inMidwest. An early frost could be problematic for the Company’s market area as ofag loan customers that were impacted by the end of the quarter.delayed planting season.

 

Noninterest Income and Expense

 

NoninterestNoninterest income decreased $144,000increased $222,000 for the three months ended SeptemberJune 30, 20172019 compared to the same period in 2016.2018. The decreaseincrease in noninterest income is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower gains on the sale of loans, offset in part by a 9% increase inAcquisition and higher wealth management income. The increase in wealth management income iswas primarily due to an revenue increases associated with an acquisition and higher revenues related to increasesgrowth in the assets under management, offset in partfueled by lower one time estate fees. Exclusive of realized securities gains, noninterest income was 6% lower ina growing equity market and new account relationships.

Noninterest expense increased $505,000 or 8% for the third quarter of 2017three months ended June 30, 2019 compared to the same period in 2016.

Noninterest expense increased $184,000 or 3% for the three months ended September 30, 2017 compared to the same period in 20162018 primarily as a result of lower other real estate owned incomethe Acquisition. Salaries and higher occupancy costs. The decreasebenefits was the largest component of the increase in other real estate incomenoninterest expense, this increase was due primarily to the continuing lower levels of other real estate owned. The higher occupancy costs were primarily related to an increase in property tax expense.Acquisition and normal salary and employee benefit increases. The efficiency ratio was 52.42%54.9% for the thirdsecond quarter of 20172019 as compared to 50.71%55.0% in 2016.2018.

 

Income Taxes

 

The provision for income taxes expense for the three months ended SeptemberJune 30, 20172019 and 20162018 was $1,730,000$1,239,000 and $1,903,000,$1,107,000, respectively, representing an effective tax rate of 31%21% and 33%20%, respectively. The lower than expected effective tax rate than the expected tax rate of 35% for both periods is primarily due to tax-exempt interest income. The initial recording of a valuation allowance on a deferred tax asset resulted in a higher effective tax rate in 2016.

 

3941

 

Income Statement Review for the NineSix Months ended Months ended SeptemberJune 30, 2019 30and 201, 2017 and 20168

 

The following highlights a comparative discussion of the major components of net income and their impact for the ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:

 

AVERAGE BALANCES AND INTEREST RATES

 

The following two tables are used to calculate the Company’sCompany’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                
 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 
                                                
 

2017

  

2016

  

2019

  

2018

 
                                                
 

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

 
 

balance

  

expense

  

rate

  

balance

  

expense

  

rate

  

balance

  

expense

  

rate

  

balance

  

expense

  

rate

 

ASSETS

                                                

(dollars in thousands)

                                                

Interest-earning assets

                                                

Loans 1

                                                

Commercial

 $77,471  $2,613   4.50% $94,121  $3,192   4.52% $83,164  $2,239   5.38% $73,180  $1,795   4.90%

Agricultural

  69,093   2,703   5.22%  75,211   2,754   4.88%  81,511   2,587   6.35%  68,776   1,913   5.56%

Real estate

  612,845   19,620   4.27%  528,179   17,595   4.44%  713,274   16,267   4.56%  634,953   13,949   4.39%

Consumer and other

  11,121   411   4.92%  21,897   584   3.56%  16,678   416   4.99%  8,532   228   5.34%
                                                

Total loans (including fees)

  770,530   25,347   4.39%  719,408   24,125   4.47%  894,627   21,509   4.81%  785,440   17,884   4.55%
                                                

Investment securities

                                                

Taxable

  271,913   4,637   2.27%  262,604   4,393   2.23%  253,421   3,044   2.40%  271,924   3,093   2.27%

Tax-exempt 2

  241,160   5,875   3.25%  253,688   6,335   3.33%  205,633   2,745   2.67%  225,197   2,995   2.66%

Total investment securities

  513,073   10,512   2.73%  516,292   10,728   2.77%  459,054   5,789   2.52%  497,122   6,088   2.45%
                                                

Interest bearing deposits with banks and federal funds sold

  36,633   365   1.33%  34,930   297   1.13%  43,588   528   2.42%  42,313   449   2.12%
                                                

Total interest-earning assets

  1,320,236  $36,224   3.66%  1,270,630  $35,150   3.69%  1,397,269  $27,826   3.98%  1,324,875  $24,421   3.69%
                                                

Noninterest-earning assets

  49,268           54,989           53,300           40,125         
                                                

TOTAL ASSETS

 $1,369,504          $1,325,619          $1,450,569          $1,365,000         

 

1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%

1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 21%.

 

4042

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                
 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 
                                                
 

2017

  

2016

  

2019

  

2018

 
                                                
 

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

  

Average

  

Revenue/

  

Yield/

 
 

balance

  

expense

  

rate

  

balance

  

expense

  

rate

  

balance

  

expense

  

rate

  

balance

  

expense

  

rate

 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                

(dollars in thousands)

                                                

Interest-bearing liabilities

                                                

Deposits

                                                

NOW, savings accounts and money markets

 $717,946  $1,819   0.34% $663,891  $965   0.19% $788,786  $3,133   0.79% $733,157  $1,901   0.52%

Time deposits > $100,000

  82,956   671   1.08%  86,632   590   0.91%

Time deposits < $100,000

  115,646   714   0.82%  125,745   704   0.75%

Time deposits

  218,380   1,832   1.68%  194,481   1,095   1.13%

Total deposits

  916,548   3,204   0.47%  876,268   2,259   0.34%  1,007,166   4,965   0.99%  927,638   2,996   0.65%

Other borrowed funds

  75,662   863   1.52%  84,261   796   1.26%  42,188   384   1.82%  51,832   400   1.54%
                                                

Total Interest-bearing liabilities

  992,210   4,067   0.55%  960,529   3,055   0.42%  1,049,354   5,349   1.02%  979,471   3,396   0.69%
                                                

Noninterest-bearing liabilities

                                                

Demand deposits

  200,020           190,176           216,522           209,169         

Other liabilities

  7,319           7,606           8,090           8,456         
                                                

Stockholders' equity

  169,955           167,308           176,603           167,905         
                                                

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $1,369,504          $1,325,619          $1,450,569          $1,365,000         
                                                
                                                

Net interest income

     $32,157   3.25%     $32,095   3.37%     $22,477   3.22%     $21,025   3.17%
                                                

Spread Analysis

                                                

Interest income/average assets

 $36,224   3.53%     $35,150   3.54%     $27,826   3.84%     $24,421   3.58%    

Interest expense/average assets

 $4,067   0.40%     $3,055   0.31%     $5,349   0.74%     $3,396   0.50%    

Net interest income/average assets

 $32,157   3.13%     $32,095   3.23%     $22,477   3.10%     $21,025   3.08%    

 

Net Interest Income

 

For the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, the Company's net interest margin adjusted for tax exempt income was 3.25%3.22% and 3.37%3.17%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the ninesix months ended SeptemberJune 30, 20172019 totaled $30,100,000$21,901,000 compared to $29,877,000$20,397,000 for the ninesix months ended SeptemberJune 30, 2016.2018.

 

For the ninesix months ended SeptemberJune 30, 2017,2019, interest income increased $1,235,000,$3,457,000, or 4%15%, when compared to the same period in 2016.2018. The increase from 20162019 was primarily attributable to higher average balance of loans, offsetincreased loan volume and to a lesser extent rates. The increase in part by lower yields on loans. The higher average balances of loans wereloan volume was due primarily to the Acquisition and a favorable economic conditionslending environment in ourthe Company’s market areas. The lower yields on loans were due primarily to competitive pressures.Loan interest rates increased in conjunction with general market interest rates, as the Federal Reserve Bank increased short term interest rate targets by 1.00% in 2018.

41

 

Interest expense increased $1,012,000,$1,953,000, or 33%58%, for the ninesix months ended SeptemberJune 30, 20172019 when compared to the same period in 2016.2018. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to market interest rates and competitive pressures.

43

 

Provision for Loan Losses

 

The Company’sCompany’s provision for loan losses was $1,222,000$166,000 and $441,000$93,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase in the provision for loan losses was due primarily to the increase in the specific reserve for one commercial credit and growth in the loan portfolio. Net loan recoveries were $19,000 and net charge-offs (recoveries) were $589,000 and $(22,000)$31,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase in the net loan charge-offs were related primarily to commercial operating loans with construction contractors. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy remains challenged as the result of the low grain prices throughout much of 2018 and 2019 and tariff concerns on Iowa exports. Corn prices rebounded in the second quarter of 2019 as a result of the current low grain prices; however, initial crop yield reports have been favorabledelayed planting caused by excessive rain in the Company’s market area asmuch of the end ofMidwest. An early frost could be problematic for our ag loan customers that were impacted by the quarter.delayed planting season.

 

Noninterest Income and Expense

 

Noninterest income decreased $63,000increased $384,000 for the ninesix months ended SeptemberJune 30, 20172019 compared to the same period in 2016.2018. The decreaseincrease in noninterest income is primarily due to decreases in gain on sale of loansthe Acquisition and service fees, offset in part by an increase in security gains and other noninteresthigher wealth management income. The decrease in the gain on the sale of loans is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower revenue. The increase in other noninterest income is primarily due to the collection of $73,000 on a court judgement previously deemed uncollectible by First Bank prior to the Company’s acquisition in 2014. Exclusive of realized securities gains, noninterestwealth management income was 5% lowerprimarily related to growth in the assets under management, fueled by a growing equity market and new account relationships.

Noninterest expense increased $1,097,000 or 8% for the ninesix months ended SeptemberJune 30, 20172019 compared to the same period in 2016.

Noninterest expense increased $504,000 or 3% for the nine months ended September 30, 2017 compared to the same period in 20162018 primarily as a result of the Acquisition. Salaries and benefits was the largest component of the increase in noninterest expense, this increase was due primarily to the Acquisition and normal salary and employee benefit increases, and higher data processing costs. Data processing increases were dueoffset in part by a one-time $1,000 bonus paid to increasing technology costs.full-time employees in 2018. The efficiency ratio was 53.16%56.4 % for the ninesix months ended SeptemberJune 30, 20172019 as compared to 51.99%56.2% in same period in 2016.2018.

 

Income Taxes

 

The provision for income taxes expense for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 was $4,662,000$2,343,000 and $5,087,000,$2,127,000, respectively, representing an effective tax rate of 30%21% and 30%20%, respectively. The lower than expected effective tax rate than the expected income tax rate of 35% for both periods is primarily due to tax-exempt interest income.

 

Balance Sheet Review

 

As of SeptemberJune 30, 2017,2019, total assets were $1,364,940,000,$1,468,595,000, a $1,513,000 decrease$12,908,000 increase compared to December 31, 2016.2018. The decreaseincrease in assets, primarily interest bearing deposits, was duefunded primarily to a decrease in cash and due from banks and securities available for sale, offset by an increase in loans.deposits.

 

Investment Portfolio

 

The investmentinvestment portfolio totaled $506,610,000$458,763,000 as of SeptemberJune 30, 2017,2019, a decrease of $9,469,000$208,000 from the December 31, 20162018 balance of $516,080,000.$458,971,000. The decrease in securities available-for-sale is primarily due to maturities in the municipal investment portfolio, offset in part by increases in the unrealized gain on the investment portfolio was primarily due to sales, calls and maturitiesas market interest rates caused an increase in the fair value of state and political subdivision bonds.the investment portfolio.

42

 

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of SeptemberJune 30, 2017,2019, gross unrealized losses of $783,000,$455,000, are considered to be temporary in nature due to the interest rate environment of 20172019 and other general economic factors. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.

44

 

At SeptemberJune 30, 2017,2019, the Company’s investment securities portfolio included securities issued by 266227 government municipalities and agencies located within 2417 states with a fair value of $243.4$197.0 million. At December 31, 2016,2018, the Company’s investment securities portfolio included securities issued by 286263 government municipalities and agencies located within 2516 states with a fair value of $264.4$216.0 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of SeptemberJune 30, 20172019 was $4.4$3.9 million (approximately 2.0% of the fair value of the governmental municipalities and agencies) represented by the Dubuque,West Des Moines, Iowa Community School District to be repaid by sales tax revenues and property taxes.

 

The Company’sCompany’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.

43

 

The following table summarizes the total general obligation and revenue bonds in the Company’sCompany’s investment securities portfolios as of SeptemberJune 30, 20172019 and December 31, 20162018 identifying the state in which the issuing government municipality or agency operates. (Dollars in thousands)

 

 

2017

  

2016

  

2019

  

2018

 
     

Estimated

      

Estimated

      

Estimated

      

Estimated

 
 

Amortized

  

Fair

  

Amortized

  

Fair

  

Amortized

  

Fair

  

Amortized

  

Fair

 
 

Cost

  

Value

  

Cost

  

Value

  

Cost

  

Value

  

Cost

  

Value

 
                                

Obligations of states and political subdivisions:

                                

General Obligation bonds:

                                

Iowa

 $60,493  $60,732  $75,142  $74,408  $51,258  $51,728  $59,935  $59,481 

Texas

  12,188   12,359   11,091   11,065   10,761   10,898   11,822   11,803 

Pennsylvania

  8,720   8,795   8,728   8,654   8,790   8,883   9,167   9,144 

Washington

  6,640   6,609   7,221   6,957   6,850   6,896   6,905   6,762 

Other (2017: 16 states; 2016: 17 states)

  24,150   24,601   28,064   28,258 

Other (2019: 12 states; 2018: 12 states)

  17,504   17,738   17,138   17,198 
                                

Total general obligation bonds

 $112,191  $113,096  $130,246  $129,342  $95,163  $96,143  $104,967  $104,388 
                                

Revenue bonds:

                                

Iowa

 $118,886  $120,175  $126,750  $126,964  $93,314  $93,525  $104,589  $103,925 

Other (2017: 9 states; 2016: 10 states)

  10,073   10,167   8,208   8,142 

Other (2019: 6 states; 2018: 7 states)

  7,262   7,359   7,691   7,642 
                                

Total revenue bonds

 $128,959  $130,342  $134,958  $135,106  $100,576  $100,884  $112,280  $111,567 
                                

Total obligations of states and political subdivisions

 $241,150  $243,438  $265,204  $264,448  $195,739  $197,027  $217,247  $215,955 

45

 

As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 5 revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table. (in thousands)

 

 

2017

  

2016

  

2019

  

2018

 
     

Estimated

      

Estimated

      

Estimated

      

Estimated

 
 

Amortized

  

Fair

  

Amortized

  

Fair

  

Amortized

  

Fair

  

Amortized

  

Fair

 
 

Cost

  

Value

  

Cost

  

Value

  

Cost

  

Value

  

Cost

  

Value

 
                                

Revenue bonds by revenue source

                                

Sales tax

 $72,894  $73,917  $77,586  $78,085  $57,326  $57,591  $60,422  $60,322 

Water

  14,139   14,218   11,283   11,296   13,445   13,458   13,863   13,644 

College and universities, primarily dormitory revenues

  10,457   10,538   14,105   13,907   5,645   5,658   8,183   8,139 

Leases

  9,062   9,098   9,106   8,960   7,193   7,221   8,958   8,861 

Electric

  8,428   8,545   8,446   8,459 

Electric power & light revenues

  5,053   5,080   5,223   5,185 

Other

  13,979   14,026   14,432   14,399   11,914   11,876   15,631   15,416 
                                

Total revenue bonds by revenue source

 $128,959  $130,342  $134,958  $135,106  $100,576  $100,884  $112,280  $111,567 

 

Loan Portfolio

 

The loanloan portfolio, net of the allowance for loan losses, totaled $764,229,000, $768,208,000$873,639,000, $890,461,000 and $752,182,000$780,260,000 as of September 30, 2017, June 30, 2017 and2019, December 31, 2016,2018 and June 30, 2018, respectively. Loan demand has moderated since year end. The increase in the loan portfolio since December 31, 2016June 30, 2018 is primarily due to steady loan demand, in the Ames and Des Moines markets.   Loan demand has softened in the third quarter of 2017.Acquisition.

44

 

Deposits

 

Deposits totaled $1,114,538,000, $1,126,771,000$1,244,457,000, $1,221,084,000 and $1,109,409,000$1,151,815,000 as of September 30, 2017, June 30, 2017 and2019, December 31, 2016,2018 and June 30, 2018, respectively. The increase in deposits since December 31, 20162018 was primarily due to increasespublic fund balances in public funds NOW account balances.accounts. The decreaseincrease in deposits since June 30, 2017 was2018 is primarily due to decreases in retail NOW and public funds money market account balances.the Acquisition.   

 

SecuritiesSecurities Sold Under Agreements to Repurchase

 

SecuritiesSecurities sold under agreements to repurchase totaled $39,001,000$31,693,000 as of SeptemberJune 30, 2017,2019, a decrease of $19,336,000,$8,981,000, or 33%22%, from the December 31, 20162018 balance of $58,337,000.$40,674,000. The decrease was due primarily to a decrease in primarily due to withdrawals from three commercial accounts.the balances of one existing customer.

 

Off-Balance Sheet Arrangements

 

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2016.2018.

 

Asset Quality Review and Credit Risk Management

 

The Company’sCompany’s credit risk is historically centered in the loan portfolio, which on SeptemberJune 30, 20172019 totaled $764,229,000$873,639,000 compared to $752,182,000$890,461,000 as of December 31, 2016.2018. Net loans comprise 56%59% of total assets as of SeptemberJune 30, 2017.2019. The object in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of a transactionan agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 0.62%0.70% at SeptemberJune 30, 2017,2019, as compared to 0.67%0.38% at December 31, 20162018 and 0.40%0.49% at SeptemberJune 30, 2016.2018. The increase in the level of problem loans is due primarily to two agricultural loan relationships.    The Company’s level of problem loans as a percentage of total loans at SeptemberJune 30, 20172019 of 0.62%0.70% is lower thancomparable to the Company’sIowa State Average peer group (339 bank holding companies with assets of $1 billion to $3 billion) of 0.72%FDIC insured institutions as of June 30, 2017.March 31, 2019, of 0.67%.

 

46

Impaired

Impaired loans, net of specific reserves, totaled $3,907,000$4,763,000 as of SeptemberJune 30, 20172019 and have decreased $450,000increased $2,030,000 as compared to the impaired loans of $4,357,000$2,733,000 as of December 31, 2016.2018.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.

 

The Company had TDRs of $3,098,000$2,645,000 as of SeptemberJune 30, 2017,2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000$2,350,000 as of December 31, 2016,2018, all of which were included in impaired and nonaccrual loans.

 

TDRsTDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.

45

 

For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. A $530,000specific reserve was increased $25,000 in the three and six months ended June 30, 2019. An $80,000 specific reserve was established in the ninethree and six months ended SeptemberJune 30, 20172018 on a TDR loan.loan, respectively. The Company did not have any charge-offs for TDR’s for the three and six months ended June 30, 2019. The Company had $257,000$12,000 of net charge-offs related to TDRs for the ninethree and six months ended SeptemberJune 30, 2017 and none for the same period in 2016.2018.

 

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there iscontinues to be a strong reason that the credit should not be placed on non-accrual. As of SeptemberJune 30, 2017,2019, non-accrual loans totaled $4,726,000$5,119,000 and there was one loan in the amountwere $1,118,000 of $81,000loans past due 90 days and still accruing. This compares to non-accrual loans of $5,077,000$3,234,000 and loans past due 90 days and still accruing totaled $22,000$150,000 as of December 31, 2016. Other real2018. The increases are due primarily to two agricultural loan relationships. Real estate owned totaled $385,000$218,000 and $830,000 as of SeptemberJune 30, 20172019 and $546,000 as of December 31, 2016.2018, respectively.

 

The agricultural real estate and agricultural operating loan portfolio classifications remain inelevated as a weakened position.result of lower grain prices. The watch and special mention loans in these categories totaled $44,046,000$49,108,000 as of SeptemberJune 30, 20172019 as compared to $38,492,000$47,808,000 as of December 31, 2016.2018. The substandard loans in these categories totaled $2,582,000$8,245,000 as of SeptemberJune 30, 20172019 as compared to $2,399,000$9,666,000 as of December 31, 2016.2018. The increase in these categories is primarily due toIowa agricultural economy remains challenged as the impact on agricultural loansresult of the delayed planting, current low grain prices mitigated by indicationsand tariff concerns on Iowa exports.

47

The watch and special mention loans classified as commercial real estate totaled $35,423,000 as of June 30, 2019 as compared to $30,952,000 as of December 31, 2018. The substandard loans in 2017.this category totaled $14,621,000 as of June 30, 2019 as compared to $13,318,000 as of December 31, 2018.

 

The allowance for loan losses as a percentage of outstanding loans as of SeptemberJune 30, 20172019 was 1.44%1.34%, as compared to 1.38%1.30% at December 31, 2016.2018. The allowance for loan losses totaled $11,140,000$11,869,000 and $10,507,000$11,684,000 as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. Net charge-offs (recoveries)recoveries of loans totaled $589,000$19,000 and $(22,000)net charge-offs of loans totaled $31,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

 

The allowance for loan losses is management’smanagement’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans.

 

Liquidity and Capital Resources

 

Liquidity management is the process by which the Company, through its Banks’Banks’ Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.

 

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of securities available-for-sale; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, FHLB advances and other capital market sources.

46

 

As of SeptemberJune 30, 2017,2019, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.

 

The liquidity and capital resources discussiondiscussion will cover the following topics:

    

●

●

Review of the Company’s Current Liquidity Sources

●

●

Review of Statements of Cash Flows

●

●

Company Only Cash Flows

●

Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

●

Capital Resources

 

Review of the Company’sCompany’s Current Liquidity Sources

 

Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of SeptemberJune 30, 20172019 and December 31, 20162018 totaled $58,574,000$90,051,000 and $61,215,000,$56,442,000, respectively, and provide an adequate level of liquidity given current economic conditions.

 

Other sources of liquidity available to the Banks as of SeptemberJune 30, 20172019 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $183,824,000,$190,583,000, with $19,000,000$2,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,571,000,$93,269,000, with no outstanding federal fund purchase balances as of SeptemberJune 30, 2017.2019. The Company had securities sold under agreements to repurchase totaling $39,001,000 and term repurchase agreements of $13,000,000$31,693,000 as of SeptemberJune 30, 2017.2019.

48

 

Total investments as of SeptemberJune 30, 20172019 were $506,610,000$458,763,000 compared to $516,080,000$458,971,000 as of December 31, 2016.2018. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of SeptemberJune 30, 2017.2019.

 

The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’sportfolio’s scheduled maturities and payments represent a significant source of liquidity.

 

Review of Statements of Cash Flows

 

Net cashcash provided by operating activities for the ninesix months ended SeptemberJune 30, 20172019 totaled $13,553,000$10,901,000 compared to $14,585,000$9,157,000 for the ninesix months ended SeptemberJune 30, 2016.2018. The decreasecash flow from operations in 2019 is comparable to the same period in 2018.

Net cash provided by operating activities was primarily due to lower net income.

Net cash used in(used in) investing activities for the ninesix months ended SeptemberJune 30, 20172019 was $4,184,000$(14,570,000) compared to $14,181,000$1,910,000 for the ninesix months ended SeptemberJune 30, 2016.2018. The decreaseincrease of $9,997,000$16,480,000 in cash used in investing activities was primarily due to an increase in interest bearing deposits and a net decrease in the change in the loan portfoliohigher level of $26,204,000,purchases of investments, offset in part by lower levelsgreater maturities and calls of investments; an increase in the proceeds from the sale of securities of $6,981,000investments; and a net increasedecrease in the change in the interest bearing deposits.loan balances.

47

 

Net cash used in financing activities for the ninesix months ended SeptemberJune 30, 20172019 totaled $15,759,000$4,099,000 compared to $3,105,000$16,910,000 for the ninesix months ended SeptemberJune 30, 2016.2018. The change of $12,654,000decrease in net cash used in financing activities was $12,811,000. The decrease was primarily due to a greater amount of repayments of FHLB advances and other borrowings in 2018 as compared to 2019 and an increase in deposits, offset in part by a decrease in the securities sold under agreements to repurchase in 2017 of $19,336,000 as compared to a decrease of $4,432,000 in 2016 and a decrease in proceeds from short-term FHLB borrowings of $15,500,000, offset in part by an increase in deposits in 2017 of $5,129,000 as compared to a decrease of $12,358,000 in 2016.repurchase. As of SeptemberJune 30, 2017,2019, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

 

Company Only Cash Flows

 

The Company’sCompany’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7,655,000$6,368,000 and $6,825,000$5,690,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.22$0.24 per share in 20172019 from $0.21$0.23 per share in 2016.   2018.

 

The Company,, on an unconsolidated basis, has interest bearing deposits totaling $13,287,000$15,298,000 as of SeptemberJune 30, 20172019 that are presently available to provide additional liquidity to the Banks.

49

 

Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

 

No other material capital expenditures or material changes in the capital resource mix are anticipated at this time.time, with the exception of the expected need to finance approximately $22 million of the purchase price for the Company’s recently-announced stock acquisition of Iowa State Savings Bank.  The purchase will be funded by current cash at the Company as well as dividends from affiliate banks to the Company.  The banks will remain well-capitalized after these dividends are accrued. This transaction is expected to close during the fourth quarter of 2019, subject to receipt of regulatory approval and other customary closing conditions.  The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities.  Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances.  There are no known trends in liquidity and cash flow needs as of SeptemberJune 30, 20172019 that are of concern to management.

 

Capital Resources

 

The Company’sCompany’s total stockholders’ equity as of SeptemberJune 30, 20172019 totaled $173,329,000$183,252,000 and was $8,224,000$10,386,000 higher than the $165,105,000$172,865,000 recorded as of December 31, 2016.2018. The increase in stockholders’ equity was primarily due to net income and an increase in accumulated other comprehensive income, reducedoffset in part by dividends declared. The increase in other comprehensive income is created by lower market interest rates on the longer end of the interest yield curve compared to December 31, 2016,2018, which resulted in higher fair values in the securities available-for-sale portfolio. At SeptemberJune 30, 20172019 and December 31, 2016,2018, stockholders’ equity as a percentage of total assets was 12.70%12.5% and 12.08%11.9%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of SeptemberJune 30, 2017.2019.

48

 

Forward-Looking Statements and Business Risks

 

The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: economic conditions, particularly in the concentrated geographic area in which the Company and its affiliate banks operate; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements and Business Risks” in the Company’s Annual Report. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

50

 

Item 3.          Quantitative and Qualitative Disclosures About Market Risk

 

The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 20172019 changed significantly when compared to 2016.2018.

 

Item 4.          Controls and Procedures

 

As of the end of the period covered by this report, anan evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

49

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable

 

PART II.OTHER INFORMATION
Item 1.A.

1.

Legal Proceedings

Not applicable
Item 1.A.Risk Factors

None.

None.
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

     

In November, 2016,2018, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of SeptemberJune 30, 2017,2019, there were 100,00021,209 shares remaining to be purchased under the plan.

51

 

The following table provides information with respect to purchase made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended SeptemberJune 30, 2017.2019.

          

Total

     
          

Number

  

Maximum

 
          

of Shares

  

Number of

 
          

Purchased as

  

Shares that

 
  

Total

      

Part of

  

May Yet Be

 
  

Number

  

Average

  

Publicly

  

Purchased

 
  

of Shares

  

Price Paid

  

Announced

  

Under

 

Period

 

Purchased

  

Per Share

  

Plans

  

The Plan

 
                 

April 1, 2019 to April 30, 2019

  906  $25.93   906   31,003 
                 

May 1, 2019 to May 31, 2019

  -  $-   -   31,003 
                 

June 1, 2019 to June 30, 2019

  9,794  $25.99   9,794   21,209 
                 

Total

  10,700       10,700     

 

 Item 3.Defaults Upon Senior Securities

Total

   
  Not applicable

Item 4.Mine Safety Disclosures
  

Number

Maximum

 
  Not applicable
   
Item 5.Other information
  

of Shares

Number of

 
  

Purchased as

Shares that

Total

Part of

May Yet Be

Number

Average

Publicly

Purchased

of Shares

Price Paid

Announced

Under

Period

Purchased

Per Share

Plans

The Plan

Not applicable
   
 Item 6.Exhibits
   

July 1, 2017 to July 31, 20172.1

-$--100,000

Stock purchase agreement, dated July 29, 2019, between Ames National Corporation and Iowa Community Bancorp, Inc. and Iowa State Savings Bank.

 

August 1, 2017 to August 31, 2017

-$--100,000

September 1, 2017 to September 30, 2017

-$--100,000

Total

--

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

Mine Safety Disclosures

Not applicable

50

Item 5.

Other information

Not applicable

Item 6.

Exhibits

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.

32.2

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

101.INS

101.INS  

XBRL Instance Document (1)

101.SCH

101.SCH

XBRL Taxonomy Extension Schema Document (1)

101.CAL

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.LAB

101.LAB 

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

101.DEF

101.DEF 

XBRL Taxonomy Extension Definition Linkbase Document (1)

 

(1)     These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

5152

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 AMES NATIONAL CORPORATION

DATE:     November 8, 2017

August 7, 2019 		By:

/s/ Thomas H. Pohlman

Thomas H. Pohlman, Chief Executive Officer and President
By:

/s/ John P. Nelson

  
 John P. Nelson, Chief FinancialExecutive Officer and Executive Vice President

52

EXHIBIT INDEX

The following exhibits are filed herewith:

Exhibit No.

Description

-----------

-------------------------------------------------------------------------------------------

By: /s/ John L. Pierschbacher

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002

31.2

Certification of PrincipalJohn L. Pierschbacher. Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350

101.INS

XBRL Instance Document (1)

101.SCH

XBRL Taxonomy Extension Schema Document (1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

 

(1)     These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

53