atlo20180630_10q.htm
 

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 June 30, 2018

 

[_]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
  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 or Organization)

(I. R. S. Employer

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 filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(1) 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   

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

COMMON STOCK, $2.00 PAR VALUE 9,310,913
(Class) (Shares Outstanding at July 31, 2018)

 

 

 

 

 

AMES NATIONAL CORPORATION

 

INDEX

 Page

 

Part I. Financial Information  
     
Item 1. Consolidated Financial Statements (Unaudited) 3
     
  Consolidated Balance Sheets at June 30, 2018 and December 31, 2017  3
     
  Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017 4
     
  Consolidated Statements of Comprehensive Income for the three and Six months ended June 30, 2018 and 2017 5
     
  Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2018 and 2017  6
     
  Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 7
     
  Notes to Consolidated Financial Statements 9
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
     
Item 4. Controls and Procedures 50
     
Part II.     Other Information  
     
Item 1. Legal Proceedings 50
     
Item 1.A.   Risk Factors 50
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 51
     
Item 3. Defaults Upon Senior Securities 51
     
Item 4.  Mine Safety Disclosures   51
     
Item 5. Other Information 51
     
Item 6.   Exhibits 52
     
  Signatures 53

 

2

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   

June 30,

   

December 31,

 

 

 

2018

   

2017

 
ASSETS            
                 

Cash and due from banks

  $ 20,554,902     $ 26,397,550  

Interest bearing deposits in financial institutions

    41,831,023       43,021,953  

Securities available-for-sale

    478,733,417       495,321,664  

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

    2,561,200       3,021,200  

Loans receivable, net

    780,259,704       771,549,655  

Loans held for sale

    1,480,648       -  

Bank premises and equipment, net

    15,203,655       15,399,146  

Accrued income receivable

    7,755,177       8,382,391  

Other real estate owned

    385,509       385,509  

Deferred income taxes, net

    4,135,552       2,542,533  

Intangible assets, net

    934,968       1,091,462  

Goodwill

    6,732,216       6,732,216  

Other assets

    1,486,743       1,214,371  
                 

Total assets

  $ 1,362,054,714     $ 1,375,059,650  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

LIABILITIES

               

Deposits

               

Demand, noninterest bearing

  $ 218,222,877     $ 227,332,347  

NOW accounts

    338,858,159       322,392,945  

Savings and money market

    400,566,104       389,630,180  

Time, $250,000 and over

    39,727,075       38,838,782  

Other time

    154,440,954       156,196,433  

Total deposits

    1,151,815,169       1,134,390,687  
                 

Securities sold under agreements to repurchase

    34,107,530       37,424,619  

Federal Home Loan Bank (FHLB) advances

    2,000,000       13,500,000  

Other borrowings

    -       13,000,000  

Dividends payable

    2,141,510       2,048,401  

Accrued expenses and other liabilities

    4,049,475       3,942,801  

Total liabilities

    1,194,113,684       1,204,306,508  
                 

STOCKHOLDERS' EQUITY

               

Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,310,913 shares as of June 30, 2018 and December 31, 2017

    18,621,826       18,621,826  

Additional paid-in capital

    20,878,728       20,878,728  

Retained earnings

    133,510,931       131,684,961  

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

    (5,070,455 )     (432,373 )

Total stockholders' equity

    167,941,030       170,753,142  
                 

Total liabilities and stockholders' equity

  $ 1,362,054,714     $ 1,375,059,650  

 

See Notes to Consolidated Financial Statements.

 

3

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Interest income:

                               

Loans, including fees

  $ 8,996,222     $ 8,499,729     $ 17,885,077     $ 16,615,414  

Securities:

                               

Taxable

    1,590,138       1,566,707       3,146,976       3,079,626  

Tax-exempt

    1,179,607       1,290,808       2,365,953       2,608,870  

Interest bearing deposits and federal funds sold

    229,726       113,353       395,045       250,526  

Total interest income

    11,995,693       11,470,597       23,793,051       22,554,436  
                                 

Interest expense:

                               

Deposits

    1,633,395       1,113,389       2,995,876       2,034,819  

Other borrowed funds

    151,463       291,343       399,853       570,744  

Total interest expense

    1,784,858       1,404,732       3,395,729       2,605,563  
                                 

Net interest income

    10,210,835       10,065,865       20,397,322       19,948,873  
                                 

Provision for loan losses

    63,978       766,769       92,978       1,164,343  
                                 

Net interest income after provision for loan losses

    10,146,857       9,299,096       20,304,344       18,784,530  
                                 

Noninterest income:

                               

Wealth management income

    906,364       734,375       1,657,364       1,433,307  

Service fees

    334,606       365,753       672,848       724,885  

Securities gains, net

    -       95,644       -       460,679  

Gain on sale of loans held for sale

    191,385       226,530       368,585       364,542  

Merchant and card fees

    366,863       353,479       676,522       668,515  

Other noninterest income

    191,654       249,367       379,555       453,838  

Total noninterest income

    1,990,872       2,025,148       3,754,874       4,105,766  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    4,316,823       3,986,327       8,884,868       8,031,971  

Data processing

    887,358       850,133       1,668,390       1,673,912  

Occupancy expenses, net

    459,445       475,556       954,391       1,019,586  

FDIC insurance assessments

    102,073       111,140       208,068       214,971  

Professional fees

    354,998       313,528       700,405       611,673  

Business development

    238,811       222,720       493,359       460,461  

Intangible asset amortization

    83,919       92,174       171,454       190,976  

Other operating expenses, net

    269,636       347,836       497,265       672,588  

Total noninterest expense

    6,713,063       6,399,414       13,578,200       12,876,138  
                                 

Income before income taxes

    5,424,666       4,924,830       10,481,018       10,014,158  
                                 

Provision for income taxes

    1,107,400       1,452,500       2,127,000       2,931,700  
                                 

Net income

  $ 4,317,266     $ 3,472,330     $ 8,354,018     $ 7,082,458  
                                 

Basic and diluted earnings per share

  $ 0.46     $ 0.37     $ 0.90     $ 0.76  
                                 

Dividends declared per share

  $ 0.23     $ 0.22     $ 0.71     $ 0.44  

 

See Notes to Consolidated Financial Statements.

 

4

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 
                                 

Net income

  $ 4,317,266     $ 3,472,330     $ 8,354,018     $ 7,082,458  

Other comprehensive income (loss), before tax:

                               

Unrealized gains (losses) on securities before tax:

                               

Unrealized holding gains (losses) arising during the period

    (1,041,258 )     3,417,455       (6,074,301 )     6,099,537  

Less: reclassification adjustment for gains realized in net income

    -       95,644       -       460,679  

Other comprehensive income (loss), before tax

    (1,041,258 )     3,321,811       (6,074,301 )     5,638,858  

Tax effect related to other comprehensive income (loss)

    260,314       (1,229,071 )     1,518,919       (2,086,378 )

Other comprehensive income (loss), net of tax

    (780,944 )     2,092,740       (4,555,382 )     3,552,480  

Comprehensive income

  $ 3,536,322     $ 5,565,070     $ 3,798,636     $ 10,634,938  

 

See Notes to Consolidated Financial Statements.

 

5

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

Six Months Ended June 30, 2018 and 2017

 

   

Common Stock

   

Additional Paid-

in Capital

   

Retained

Earnings

   

Accumulated

Other Comprehensive

Income (Loss),

Net of Taxes

   

Total

Stockholders'

Equity

 
                                         

Balance, December 31, 2016

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

Net income

    -       -       7,082,458       -       7,082,458  

Other comprehensive income

    -       -       -       3,552,480       3,552,480  

Cash dividends declared, $0.44 per share

    -       -       (4,096,802 )     -       (4,096,802 )

Balance, June 30, 2017

  $ 18,621,826     $ 20,878,728     $ 129,167,032     $ 2,975,793     $ 171,643,379  
                                         

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  

 

(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.

 

6

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Six Months Ended June 30, 2018 and 2017

 

   

2018

   

2017

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 8,354,018     $ 7,082,458  

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

               

Provision for loan losses

    92,978       1,164,343  

Provision for off-balance sheet commitments

    12,000       10,000  

Amortization, net

    1,088,865       1,423,539  

Amortization of intangible asset

    171,454       190,976  

Depreciation

    548,173       567,889  

Deferred income taxes

    (74,100 )     (314,501 )

Securities gains, net

    -       (460,679 )

(Gain) on sales of loans held for sale

    (368,586 )     (364,542 )

Proceeds from loans held for sale

    14,853,787       14,927,797  

Originations of loans held for sale

    (15,965,849 )     (14,864,320 )

Loss on sale of premises and equipment, net

    5,563       31,557  

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

    -       (11,573 )

Change in assets and liabilities:

               

Decrease in accrued income receivable

    627,214       355,296  

(Increase) decrease in other assets

    (282,739 )     (127,899 )

Increase (decrease) in accrued expenses and other liabilities

    94,674       (176,469 )

Net cash provided by operating activities

    9,157,452       9,433,872  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchase of securities available-for-sale

    (21,743,179 )     (43,240,669 )

Proceeds from sale of securities available-for-sale

    -       10,823,579  

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

    30,931,429       34,222,958  

Purchase of FHLB stock

    (874,400 )     (1,773,600 )

Proceeds from the redemption of FHLB stock

    1,334,400       1,744,000  

Net decrease in interest bearing deposits in financial institutions

    1,190,930       3,610,960  

Net (increase) in loans

    (8,566,196 )     (17,142,504 )

Net proceeds from the sale of other real estate owned

    -       148,639  

Purchase of bank premises and equipment, net

    (347,878 )     (384,819 )

Other

    (14,960 )     (50,634 )

Net cash provided by (used in) investing activities

    1,910,146       (12,042,090 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Increase in deposits

    17,424,482       17,361,911  

(Decrease) in securities sold under agreements to repurchase

    (3,317,089 )     (19,654,099 )

Payments on FHLB borrowings and other borrowings

    (24,500,000 )     (1,000,000 )

Dividends paid

    (6,517,639 )     (4,003,693 )

Net cash (used in) financing activities

    (16,910,246 )     (7,295,881 )
                 

Net (decrease) in cash and due from banks

    (5,842,648 )     (9,904,099 )
                 

CASH AND DUE FROM BANKS

               

Beginning

    26,397,550       29,478,068  

Ending

  $ 20,554,902     $ 19,573,969  

 

See Notes to Consolidated Financial Statements.

 

7

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Six Months Ended June 30, 2018 and 2017

 

   

2018

   

2017

 
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

               

Cash payments for:

               

Interest

  $ 3,318,116     $ 2,595,215  

Income taxes

    2,346,406       3,468,613  
                 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES

               

Transfer of loans receivable to other real estate owned

  $ -     $ 16,668  

 

See Notes to Consolidated Financial Statements.

 

8

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements (unaudited)

 

 

1.     Significant Accounting Policies

 

The consolidated financial statements for the three and six months ended June 30, 2018 and 2017 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, 2017 (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 June 30, 2018, 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. The Company adopted this guidance effective January 1, 2018 and is to be applied on a modified retrospective basis. The fair value of the Company's loan portfolio is presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial instruments measured at amortized cost on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material impact on the Company's consolidated financial statements.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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. The Company is currently planning for the implementation of this accounting standard. It is too early to assess 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 topics of the Codification. The Company adopted this guidance effective January 1, 2018. The guidance does not apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. The requirements of this update did not have a material impact on the Company's consolidated financial statements.

 

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.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.   The amendments in this ASU would require a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. The amendments in this update will be effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted. The Company adopted this ASU in the first quarter of 2018. The Company made an election to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated comprehensive income to retained earnings. This update did not have a material impact on the Company’s 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 with current period presentation.

 

 

 

2.      Dividends

 

On May 9, 2018, the Company declared a cash dividend on its common stock, payable on August 15, 2018 to stockholders of record as of August 1, 2018, equal to $0.23 per share

 

 

3.      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 six months ended June 30, 2018 and 2017 were 9,310,913. The Company had no potentially dilutive securities outstanding during the periods presented.

 

 

4.     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, 2017.

 

 

5.     Fair Value Measurements

 

Assets 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.

 

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 June 30, 2018 and December 31, 2017. (in thousands)

 

Description

 

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

2018

                               
                                 

U.S. government treasuries

  $ 6,762     $ 6,762     $ -     $ -  

U.S. government agencies

    118,970       -       118,970       -  

U.S. government mortgage-backed securities

    75,604       -       75,604       -  

State and political subdivisions

    223,227       -       223,227       -  

Corporate bonds

    54,170       -       54,170       -  
                                 
    $ 478,733     $ 6,762     $ 471,971     $ -  
                                 

2017

                               
                                 

U.S. government treasuries

  $ 6,367     $ 6,367     $ -     $ -  

U.S. government agencies

    111,263       -       111,263       -  

U.S. government mortgage-backed securities

    81,780       -       81,780       -  

State and political subdivisions

    237,413       -       237,413       -  

Corporate bonds

    58,464       -       58,464       -  

Equity securities, other

    35       35       -       -  
                                 
    $ 495,322     $ 6,402     $ 488,920     $ -  

 

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 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 months ended June 30, 2018.

 

 

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 June 30, 2018 and December 31, 2017. (in thousands)

 

Description

 

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

2018

                               
                                 

Loans receivable

  $ 2,447     $ -     $ -     $ 2,447  

Other real estate owned

    386       -       -       386  
                                 

Total

  $ 2,833     $ -     $ -     $ 2,833  
                                 

2017

                               
                                 

Loans receivable

  $ 2,606     $ -     $ -     $ 2,606  

Other real estate owned

    386       -       -       386  
                                 

Total

  $ 2,992     $ -     $ -     $ 2,992  

 

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 June 30, 2018 and December 31, 2017. The Company considers these fair value measurements as level 3.

 

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of June 30, 2018 and December 31, 2017 are as follows: (in thousands)

 

   

2018

   

Estimated

 

Valuation

 

 

 

Range

   

Fair Value

 

Techniques

   Unobservable Inputs  

(Average)

                           

Impaired Loans

  $ 2,447  

Evaluation of collateral

 

Estimation of value

      NM*    
                           

Other real estate owned

  $ 386  

Appraisal

 

Appraisal adjustment

    6% - 8% (7%)

 

   

2017

   

Estimated

 

Valuation

 

 

 

Range

   

Fair Value

 

Techniques

   Unobservable Inputs  

(Average)

                           

Impaired Loans

  $ 2,606  

Evaluation of collateral

 

Estimation of value

      NM*    
                           

Other real estate owned

  $ 386  

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 June 30, 2018 and December 31, 2017 are not carried at fair value in their entirety on the consolidated balance sheets.

 

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 are reported at fair value utilizing Level 2 inputs.

 

14

 

 

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

 

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.

 

The estimated fair values of the Company’s financial instruments as described above as of June 30, 2018 and December 31, 2017 are as follows: (in thousands)

 

       

2018

   

2017

 
   

Fair Value

         

Estimated

           

Estimated

 
   

Hierarchy

 

Carrying

   

Fair

   

Carrying

   

Fair

 
   

Level

 

Amount

   

Value

   

Amount

   

Value

 
                                     

Financial assets:

                                   

Cash and due from banks

 

Level 1

  $ 20,555     $ 20,555     $ 26,398     $ 26,398  

Interest bearing deposits

 

Level 1

    41,831       41,831       43,022       43,022  

Securities available-for-sale

 

See previous table

    478,733       478,733       495,322       495,322  

FHLB and FRB stock

 

Level 2

    2,561       2,561       3,021       3,021  

Loans receivable, net

 

Level 2

    780,260       756,494       771,550       768,444  

Loans held for sale

 

Level 2

    1,481       1,481       -       -  

Accrued income receivable

 

Level 1

    7,755       7,755       8,382       8,382  

Financial liabilities:

                                   

Deposits

 

Level 2

  $ 1,151,815     $ 1,150,690     $ 1,134,391     $ 1,134,468  

Securities sold under agreements to repurchase

 

Level 1

    34,108       34,108       37,425       37,425  

FHLB advances

 

Level 2

    2,000       1,945       13,500       13,482  

Other borrowings

 

Level 2

    -       -       13,000       13,079  

Accrued interest payable

 

Level 1

    486       486       477       477  

 

The methodologies used to determine fair value as of June 30, 2018 did not change from the methodologies described in the December 31, 2017 Annual Financial Statements, except for loans receivables which are now presented using an exit price method.

 

 

 

6.     Debt and Equity Securities

 

The amortized cost of securities available-for-sale and their fair values as of June 30, 2018 and December 31, 2017 are summarized below: (in thousands)

 

2018:

         

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 
   

Cost

   

Gains

   

Losses

   

Fair Value

 
                                 

U.S. government treasuries

  $ 6,924     $ -     $ (162 )   $ 6,762  

U.S. government agencies

    121,229       23       (2,282 )     118,970  

U.S. government mortgage-backed securities

    76,945       122       (1,463 )     75,604  

State and political subdivisions

    224,760       604       (2,137 )     223,227  

Corporate bonds

    55,636       3       (1,469 )     54,170  
    $ 485,494     $ 752     $ (7,513 )   $ 478,733  

 

2017:

         

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 
   

Cost

   

Gains

   

Losses

   

Fair Value

 
                                 

U.S. government treasuries

  $ 6,413     $ 2     $ (48 )   $ 6,367  

U.S. government agencies

    111,900       136       (773 )     111,263  

U.S. government mortgage-backed securities

    81,685       422       (327 )     81,780  

State and political subdivisions

    237,349       1,233       (1,169 )     237,413  

Corporate bonds

    58,647       206       (389 )     58,464  

Equity securities, other

    15       20       -       35  
    $ 496,009     $ 2,019     $ (2,706 )   $ 495,322  

 

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

 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Proceeds from sales of securities available-for-sale

  $ -     $ 183     $ -     $ 10,824  

Gross realized gains on securities available-for-sale

    -       96       -       463  

Gross realized losses on securities available-for-sale

    -       -       -       (2 )

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

    -       33       -       161  

 

 

 

 

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 June 30, 2018 and December 31, 2017 are as follows: (in thousands)

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

2018:

 

Estimated

Fair Value

   

Unrealized

Losses

   

Estimated

Fair Value

   

Unrealized

Losses

   

Estimated

Fair Value

   

Unrealized

Losses

 
                                                 

Securities available-for-sale:

                                               

U.S. government treasuries

  $ 6,762     $ (162 )   $ -     $ -     $ 6,762     $ (162 )

U.S. government agencies

    101,386       (1,876 )     9,591       (406 )     110,977       (2,282 )

U.S. government mortgage-backed securities

    60,872       (1,286 )     5,797       (177 )     66,669       (1,463 )

State and political subdivisions

    103,605       (1,419 )     18,221       (718 )     121,826       (2,137 )

Corporate bonds

    45,413       (1,067 )     6,471       (402 )     51,884       (1,469 )
    $ 318,038     $ (5,810 )   $ 40,080     $ (1,703 )   $ 358,118     $ (7,513 )

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

2017:

 

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 
                                                 

Securities available-for-sale:

                                               

U.S. government treasuries

  $ 4,894     $ (48 )   $ -     $ -     $ 4,894     $ (48 )

U.S. government agencies

    73,953       (549 )     10,168       (224 )     84,121       (773 )

U.S. government mortgage-backed securities

    39,565       (245 )     5,344       (82 )     44,909       (327 )

State and political subdivisions

    89,904       (703 )     16,631       (466 )     106,535       (1,169 )

Corporate bonds

    29,808       (198 )     6,709       (191 )     36,517       (389 )
    $ 238,124     $ (1,743 )   $ 38,852     $ (963 )   $ 276,976     $ (2,706 )

 

Gross unrealized losses on debt securities totaled $7,513,000 as of June 30, 2018. 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.

 

 

 

7.      Loans Receivable and Credit Disclosures

 

Activity in the allowance for loan losses, on a disaggregated basis, for the three and six months ended June 30, 2018 and 2017 is as follows: (in thousands)  

 

   

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  

 

   

Six 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, December 31, 2017

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

Provision (credit) for loan losses

    50       13       108       (20 )     (59 )     7       (6 )     93  

Recoveries of loans charged-off

    -       3       -       -       21       -       14       38  

Loans charged-off

    -       -       -       -       (13 )     -       (56 )     (69 )

Balance, June 30, 2018

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

 

   

Three Months Ended June 30, 2017

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, March 31, 2017

  $ 932     $ 1,719     $ 4,276     $ 898     $ 1,803     $ 1,142     $ 132     $ 10,902  

Provision (credit) for loan losses

    (152 )     (9 )     161       9       741       12       5       767  

Recoveries of loans charged-off

    -       3       -       -       27       -       1       31  

Loans charged-off

    -       -       -       -       (500 )     -       (12 )     (512 )

Balance, June 30, 2017

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

 

   

Six Months Ended June 30, 2017

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

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  

Provision (credit) for loan losses

    (128 )     (3 )     477       46       815       (62 )     19       1,164  

Recoveries of loans charged-off

    -       5       -       -       28       -       4       37  

Loans charged-off

    -       -       -       -       (500 )     -       (20 )     (520 )

Balance, June 30, 2017

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

 

 

 

Allowance for loan losses disaggregated on the basis of impairment analysis method as of June 30, 2018 and December 31, 2017 is as follows: (in thousands)

 

2018

         

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Individually evaluated for impairment

  $ -     $ 54     $ 115     $ -     $ 535     $ 57     $ 28     $ 789  

Collectively evaluated for impairment

    846       1,678       4,727       977       1,153       1,121       92       10,594  

Balance June 30, 2018

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

 

2017

         

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Individually evaluated for impairment

  $ -     $ 42     $ 115     $ -     $ 607     $ -     $ 47     $ 811  

Collectively evaluated for impairment

    796       1,674       4,619       997       1,132       1,171       121       10,510  

Balance December 31, 2017

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

 

Loans receivable disaggregated on the basis of impairment analysis method as of June 30, 2018 and December 31, 2017 is as follows (in thousands):

 

2018

         

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Individually evaluated for impairment

  $ -     $ 503     $ 257     $ -     $ 2,955     $ 58     $ 30     $ 3,803  

Collectively evaluated for impairment

    53,500       147,717       358,870       81,671       67,731       69,368       9,082       787,939  
                                                                 

Balance June 30, 2018

  $ 53,500     $ 148,220     $ 359,127     $ 81,671     $ 70,686     $ 69,426     $ 9,112     $ 791,742  

 

2017

         

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Individually evaluated for impairment

  $ -     $ 689     $ 901     $ -     $ 3,140     $ -     $ 80     $ 4,810  

Collectively evaluated for impairment

    50,309       145,569       349,725       81,790       70,676       69,806       10,265       778,140  
                                                                 

Balance December 31, 2017

  $ 50,309     $ 146,258     $ 350,626     $ 81,790     $ 73,816     $ 69,806     $ 10,345     $ 782,950  

 

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.

 

 

Impaired loans, on a disaggregated basis, as of June 30, 2018 and December 31, 2017: (in thousands)

 

           

Unpaid

                   

Unpaid

         
   

Recorded

   

Principal

   

Related

   

Recorded

   

Principal

   

Related

 
   

Investment

   

Balance

   

Allowance

   

Investment

   

Balance

   

Allowance

 

With no specific reserve recorded:

                                               

Real estate - construction

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

Real estate - 1 to 4 family residential

    380       518       -       572       677       -  

Real estate - commercial

    123       594       -       671       1,353       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    64       68       -       125       148       -  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    -       -       -       25       44       -  

Total loans with no specific reserve:

    567       1,180       -       1,393       2,222       -  
                                                 

With an allowance recorded:

                                               

Real estate - construction

    -       -       -       -       -       -  

Real estate - 1 to 4 family residential

    123       149       54       117       180       42  

Real estate - commercial

    134       134       115       230       230       115  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    2,891       3,547       535       3,015       3,336       607  

Agricultural

    58       57       57       -       -       -  

Consumer and other

    30       34       28       55       43       47  

Total loans with specific reserve:

    3,236       3,921       789       3,417       3,789       811  
                                                 

Total

                                               

Real estate - construction

    -       -       -       -       -       -  

Real estate - 1 to 4 family residential

    503       667       54       689       857       42  

Real estate - commercial

    257       728       115       901       1,583       115  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    2,955       3,615       535       3,140       3,484       607  

Agricultural

    58       57       57       -       -       -  

Consumer and other

    30       34       28       80       87       47  
                                                 
    $ 3,803     $ 5,101     $ 789     $ 4,810     $ 6,011     $ 811  

 

 

Average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2018 and 2017: (in thousands) 

 

   

Three Months Ended June 30,

 
   

2018

   

2017

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 
   

Investment

   

Recognized

   

Investment

   

Recognized

 

With no specific reserve recorded:

                               

Real estate - construction

  $ -     $ -     $ -     $ -  

Real estate - 1 to 4 family residential

    474       22       538       6  

Real estate - commercial

    135       -       744       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    64       5       1,476       1  

Agricultural

    -       -       -       -  

Consumer and other

    -       -       69       -  

Total loans with no specific reserve:

    673       27       2,827       7  
                                 

With an allowance recorded:

                               

Real estate - construction

    -       -       32       2  

Real estate - 1 to 4 family residential

    229       -       178       -  

Real estate - commercial

    177       -       -       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    2,903       -       2,227       -  

Agricultural

    29       -       -       -  

Consumer and other

    32       -       2       1  

Total loans with specific reserve:

    3,370       -       2,439       3  
                                 

Total

                               

Real estate - construction

    -       -       32       2  

Real estate - 1 to 4 family residential

    703       22       716       6  

Real estate - commercial

    312       -       744       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    2,967       5       3,703       1  

Agricultural

    29       -       -       -  

Consumer and other

    32       -       71       1  
                                 
    $ 4,043     $ 27     $ 5,266     $ 10  

 

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 
   

Investment

   

Recognized

   

Investment

   

Recognized

 

With no specific reserve recorded:

                               

Real estate - construction

  $ -     $ -     $ -     $ -  

Real estate - 1 to 4 family residential

    506       45       509       9  

Real estate - commercial

    314       258       629       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    84       5       1,900       1  

Agricultural

    -       -       -       -  

Consumer and other

    8       -       71       -  

Total loans with no specific reserve:

    912       308       3,109       10  
                                 

With an allowance recorded:

                               

Real estate - construction

    -       -       21       2  

Real estate - 1 to 4 family residential

    192       -       188       -  

Real estate - commercial

    194       -       -       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    2,940       -       1,883       -  

Agricultural

    19       -       -       -  

Consumer and other

    39       1       1       1  

Total loans with specific reserve:

    3,384       1       2,093       3  
                                 

Total

                               

Real estate - construction

    -       -       21       2  

Real estate - 1 to 4 family residential

    698       45       697       9  

Real estate - commercial

    508       258       629       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    3,024       5       3,783       1  

Agricultural

    19       -       -       -  

Consumer and other

    47       1       72       1  
                                 
    $ 4,296     $ 309     $ 5,202     $ 13  

 

The interest foregone on nonaccrual loans for the three months ended June 30, 2018 and 2017 was approximately $120,000 and $103,000, respectively. The interest foregone on nonaccrual loans for the six months ended June 30, 2018 and 2017 was approximately $203,000 and $201,000, respectively.

 

Nonaccrual loans at June 30, 2018 and December 31, 2017 were $3,803,000 and $4,810,000 respectively.

 

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $2,828,000 as of June 30, 2018, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $2,984,000 as of December 31, 2017, all of which were included in impaired and nonaccrual loans.

 

 

The following table sets forth information on the Company’s TDRs, on a disaggregated basis, occurring in the three and six months ended June 30, 2018 and 2017: (dollars in thousands)

 

   

Three Months Ended June 30,

 
   

2018

   

2017

 
           

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

    3       80       80       2       93       99  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    -       -       -       -       -       -  
                                                 
      3     $ 80     $ 80       2     $ 93     $ 99  

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 
           

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

    3       80       80       2       93       99  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    -       -       -       -       -       -  
                                                 
      3     $ 80     $ 80       2     $ 93     $ 99  

 

During the three and six months ended June 30, 2018, the Company granted concessions to one borrower facing financial difficulties. During the three and six months ended June 30, 2017, the Company granted concessions to two borrowers that were experiencing financial difficulties. The loans were extended beyond their normal terms and on one loan the interest was capitalized.

 

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

 

No TDR modified during the twelve months ended June 30, 2018 and 2017 had payment defaults. There were no charge-offs related to TDRs for the three and six months ended June 30, 2018. An $80,000 specific reserve was established in the three months ended June 30, 2018. A $500,000 specific reserve was established in the three months ended June 30, 2017 on a TDR loan. There was $12,000 and $257,000 of net charge-offs related to TDRs for the three and six months ended June 30, 2018 and 2017, respectively.

 

 

 

 

An aging analysis of the recorded investments in loans, on a disaggregated basis, as of June 30, 2018 and December 31, 2017, is as follows: (in thousands)

 

2018

         

90 Days

                           

90 Days

 
      30-89    

or Greater

   

Total

                   

or Greater

 
   

Past Due

   

Past Due

   

Past Due

   

Current

   

Total

   

Accruing

 
                                                 

Real estate - construction

  $ 196     $ -     $ 196     $ 53,304     $ 53,500     $ -  

Real estate - 1 to 4 family residential

    1,503       356       1,859       146,361       148,220       96  

Real estate - commercial

    -       134       134       358,993       359,127       -  

Real estate - agricultural

    -       -       -       81,671       81,671       -  

Commercial

    549       333       882       69,804       70,686       -  

Agricultural

    3       57       60       69,366       69,426       -  

Consumer and other

    47       -       47       9,065       9,112       -  
                                                 
    $ 2,298     $ 880     $ 3,178     $ 788,564     $ 791,742     $ 96  

 

2017

         

90 Days

                           

90 Days

 
      30-89    

or Greater

   

Total

                   

or Greater

 
   

Past Due

   

Past Due

   

Past Due

   

Current

   

Total

   

Accruing

 
                                                 

Real estate - construction

  $ 159     $ -     $ 159     $ 50,150     $ 50,309     $ -  

Real estate - 1 to 4 family residential

    940       414       1,354       144,904       146,258       18  

Real estate - commercial

    363       629       992       349,634       350,626       -  

Real estate - agricultural

    655       -       655       81,135       81,790       -  

Commercial

    275       418       693       73,123       73,816       -  

Agricultural

    77       -       77       69,729       69,806       -  

Consumer and other

    77       38       115       10,230       10,345       -  
                                                 
    $ 2,546     $ 1,499     $ 4,045     $ 778,905     $ 782,950     $ 18  

 

 

 

The credit risk profile by internally assigned grade, on a disaggregated basis, as of June 30, 2018 and December 31, 2017 is as follows: (in thousands)

 

2018

 

Construction

   

Commercial

   

Agricultural

                         
   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

Total

 
                                                 

Pass

  $ 50,125     $ 325,421     $ 58,933     $ 49,904     $ 45,734     $ 530,117  

Watch

    3,375       20,835       16,162       13,673       20,919       74,964  

Special Mention

    -       10,852       23       2,000       -       12,875  

Substandard

    -       1,762       6,553       2,153       2,716       13,184  

Substandard-Impaired

    -       257       -       2,956       57       3,270  
                                                 
    $ 53,500     $ 359,127     $ 81,671     $ 70,686     $ 69,426     $ 634,410  

 

2017

 

Construction

   

Commercial

   

Agricultural

                         
   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

Total

 
                                                 

Pass

  $ 47,726     $ 319,178     $ 60,301     $ 59,535     $ 45,816     $ 532,556  

Watch

    2,583       27,528       20,114       9,628       22,640       82,493  

Special Mention

    -       184       -       -       -       184  

Substandard

    -       2,835       1,375       1,513       1,350       7,073  

Substandard-Impaired

    -       901       -       3,140       -       4,041  
                                                 
    $ 50,309     $ 350,626     $ 81,790     $ 73,816     $ 69,806     $ 626,347  

 

The credit risk profile based on payment activity, on a disaggregated basis, as of June 30, 2018 and December 31, 2017 is as follows:

 

2018

 

1-4 Family

                 
   

Residential

   

Consumer

         
   

Real Estate

   

and Other

   

Total

 
                         

Performing

  $ 147,622     $ 9,083     $ 156,705  

Non-performing

    598       29       627  
                         
    $ 148,220     $ 9,112     $ 157,332  

 

2017

 

1-4 Family

                 
   

Residential

   

Consumer

         
   

Real Estate

   

and Other

   

Total

 
                         

Performing

  $ 145,551     $ 10,264     $ 155,815  

Non-performing

    707       81       788  
                         
    $ 146,258     $ 10,345     $ 156,603  

 

 

8.     Goodwill

 

Goodwill is not amortized but is evaluated for impairment at least annually. For income tax purposes, goodwill is amortized over fifteen years.

 

 

 

9.     Intangible assets

 

The following sets forth the carrying amounts and accumulated amortization of the intangible assets at June 30, 2018 and December 31, 2017: (in thousands)

 

   

2018

   

2017

 
   

Gross

   

Accumulated

   

Gross

   

Accumulated

 
   

Amount

   

Amortization

   

Amount

   

Amortization

 
                                 

Core deposit intangible asset

  $ 2,518     $ 1,994     $ 2,518     $ 1,861  

Customer list

    535       124       520       86  
                                 

Total

  $ 3,053     $ 2,118     $ 3,038     $ 1,947  

 

The weighted average life of the intangible assets is 2.8 years as of June 30, 2018 and 2.5 years as of December 31, 2017.

 

The following sets forth the activity related to the intangible assets for the three and six months ended June 30, 2018 and 2017: (in thousands)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Beginning intangible asset, net

  $ 1,019     $ 1,238     $ 1,091     $ 1,353  

Adjustment to intangible asset

    -       66       15       50  

Amortization

    (84 )     (92 )     (171 )     (191 )
                                 

Ending intangible asset, net

  $ 935     $ 1,212     $ 935     $ 1,212  

 

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

 

 

2018

  $ 158  

2019

    206  

2020

    149  

2021

    149  

2022

    144  

2023

    129  
         

Intangible asset, net

  $ 935  

 

 

 

10.     Pledged Collateral Related to Securities Sold Under Repurchase Agreements

 

The following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements and term repurchase agreements as of June 30, 2018 and December 31, 2017: (in thousands)

 

   

2018

   

2017

 
   

Remaining Contractual Maturity of the Agreements

 
   

Overnight

   

Greater than

   

Total

   

Overnight

   

Greater than

   

Total

 
           

90 days

                   

90 days

         
                                                 
Securities sold under agreements to repurchase:                                                

U.S. government treasuries

  $ 3,407     $ -     $ 3,407     $ 1,474     $ -     $ 1,474  

U.S. government agencies

    46,772       -       46,772       47,323       -       47,323  

U.S. government mortgage-backed securities

    19,963       -       19,963       22,824       -       22,824  
                                                 
                                                 

Total

  $ 70,142     $ -     $ 70,142     $ 71,621     $ -     $ 71,621  
                                                 
Term repurchase agreements (Other borrowings):                                                

U.S. government agencies

  $ -     $ -     $ -     $ -     $ 14,986     $ 14,986  
                                                 

Total pledged collateral

  $ 70,142     $ -     $ 70,142     $ 71,621     $ 14,986     $ 86,607  

 

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.

 

 

 

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 June 30, 2018:

                                               

Total capital (to risk- weighted assets):

                                               

Consolidated

  $ 177,657       17.8 %   $ 98,379       9.875 %     N/A       N/A  

Boone Bank & Trust

    15,501       17.1       8,930       9.875     $ 9,043       10.0 %

First National Bank

    83,450       15.9       51,989       9.875       52,647       10.0  

Reliance State Bank

    27,475       15.7       17,118       9.875       17,535       10.0  

State Bank & Trust

    20,345       16.3       12,309       9.875       12,465       10.0  

United Bank & Trust

    14,895       19.7       7,461       9.875       7,556       10.0  
                                                 

Tier 1 capital (to risk- weighted assets):

                                               

Consolidated

  $ 165,743       16.6 %   $ 78,455       7.875 %     N/A       N/A  

Boone Bank & Trust

    14,588       16.1       7,122       7.875     $ 7,235       8.0 %

First National Bank

    77,369       14.7       41,459       7.875       42,118       8.0  

Reliance State Bank

    25,282       14.4       13,809       7.875       14,028       8.0  

State Bank & Trust

    18,784       15.1       9,816       7.875       9,972       8.0  

United Bank & Trust

    14,082       18.6       5,950       7.875       6,045       8.0  
                                                 

Tier 1 capital (to average- weighted assets):

                                               

Consolidated

  $ 165,743       12.2 %   $ 54,501       4.000 %     N/A       N/A  

Boone Bank & Trust

    14,588       10.9       5,272       4.000     $ 6,590       5.0 %

First National Bank

    77,369       10.3       30,100       4.000       37,625       5.0  

Reliance State Bank

    25,282       11.5       8,773       4.000       10,966       5.0  

State Bank & Trust

    18,784       11.4       6,613       4.000       8,266       5.0  

United Bank & Trust

    14,082       12.7       4,419       4.000       5,524       5.0  
                                                 

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

                                               

Consolidated

  $ 165,743       16.6 %   $ 63,511       6.375 %     N/A       N/A  

Boone Bank & Trust

    14,588       16.1       5,765       6.375     $ 5,878       6.5 %

First National Bank

    77,369       14.7       33,562       6.375       34,220       6.5  

Reliance State Bank

    25,282       14.4       11,179       6.375       11,398       6.5  

State Bank & Trust

    18,784       15.1       7,946       6.375       8,102       6.5  

United Bank & Trust

    14,082       18.6       4,817       6.375       4,911       6.5  

 

*  These ratios for June 30, 2018 include a capital conservation buffer of 1.875%, 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 December 31, 2017:

                                               

Total capital (to risk- weighted assets):

                                               

Consolidated

  $ 176,306       17.6 %   $ 92,500       9.25 %     N/A       N/A  

Boone Bank & Trust

    15,344       16.5       8,613       9.25     $ 9,312       10.0 %

First National Bank

    81,390       15.5       48,466       9.25       52,396       10.0  

Reliance State Bank

    26,982       15.3       16,324       9.25       17,648       10.0  

State Bank & Trust

    20,064       15.8       11,738       9.25       12,690       10.0  

United Bank & Trust

    14,833       19.9       6,878       9.25       7,436       10.0  
                                                 

Tier 1 capital (to risk- weighted assets):

                                               

Consolidated

  $ 164,467       16.4 %   $ 72,500       7.25 %     N/A       N/A  

Boone Bank & Trust

    14,453       15.5       6,751       7.25     $ 7,449       8.0 %

First National Bank

    75,404       14.4       37,987       7.25       41,917       8.0  

Reliance State Bank

    24,775       14.0       12,795       7.25       14,118       8.0  

State Bank & Trust

    18,475       14.6       9,200       7.25       10,152       8.0  

United Bank & Trust

    14,012       18.8       5,391       7.25       5,649       8.0  
                                                 

Tier 1 capital (to average- weighted assets):

                                               

Consolidated

  $ 164,467       12.1 %   $ 54,264       4.00 %     N/A       N/A  

Boone Bank & Trust

    14,453       10.4       5,568       4.00     $ 6,960       5.0 %

First National Bank

    75,404       10.1       29,910       4.00       37,387       5.0  

Reliance State Bank

    24,775       11.6       8,553       4.00       10,691       5.0  

State Bank & Trust

    18,475       11.8       6,284       4.00       7,856       5.0  

United Bank & Trust

    14,012       12.8       4,362       4.00       5,453       5.0  
                                                 

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

                                               

Consolidated

  $ 164,467       16.4 %   $ 57,500       5.75 %     N/A       N/A  

Boone Bank & Trust

    14,453       15.5       5,354       5.75     $ 6,053       6.5 %

First National Bank

    75,404       14.4       30,128       5.75       34,058       6.5  

Reliance State Bank

    24,775       14.0       10,147       5.75       11,471       6.5  

State Bank & Trust

    18,475       14.6       7,297       5.75       8,248       6.5  

United Bank & Trust

    14,012       18.8       4,276       5.75       4,833       6.5  

 

* These ratios for December 31, 2017 include a capital conservation buffer of 1.25%, except for the Tier 1 capital to average weighted assets ratios.

 

The 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, add a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirements and implement 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 (loss). The Company and the Banks have made the election to retain the existing treatment for accumulated other comprehensive 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 was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be 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 be 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.     Subsequent Events

 

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after June 30, 2018, but prior to August 7, 2018, that provided additional evidence about conditions that existed at June 30, 2018. There were no other significant events or transactions that provided evidence about conditions that did not exist at June 30, 2018.

 

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

 

Overview

 

Ames National Corporation (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 offer investment services through a third-party broker-dealer. The Company employs fourteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training and the coordination of management activities, in addition to 213 full-time equivalent individuals employed by the Banks.

 

The Company’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.

 

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) Merchant 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

 

The Company had net income of $4,317,000, or $0.46 per share, for the three months ended June 30, 2018, compared to net income of $3,472,000, or $0.37 per share, for the three months ended June 30, 2017.

 

The increase in quarterly earnings can be primarily attributed to an increase in loan interest income, a reduction in the provision for loan losses and lower federal income tax expense, offset in part by higher deposit interest expense and an increase in salaries and benefits.

 

Net loan charge-offs totaled $4,000 and $481,000 for the three months ended June 30, 2018 and 2017, respectively. The provision for loan losses totaled $64,000 and $767,000 for the three months ended June 30, 2018 and 2017, respectively.

 

The Company had net income of $8,354,000, or $0.90 per share, for the six months ended June 30, 2018, compared to net income of $7,082,000, or $0.76 per share, for the six months ended June 30, 2017.

 

The increase in six month earnings can be primarily attributed to an increase in loan interest income, a reduction in the provision for loan losses and lower federal income tax expense, offset in part by higher deposit interest expense, an increase in salaries and benefits and a decrease in securities gains

 

Net loan charge-offs totaled $31,000 and $483,000 for the six months ended June 30, 2018 and 2017, respectively. The provision for loan losses totaled $93,000 and $1,164,000 for the six months ended June 30, 2018 and 2017, 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

 

Management has identified certain events or circumstances that may negatively impact the Company’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 12, 2018.

 

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 5,606 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.

 

31

 

Selected Indicators for the Company and the Industry 

 

   

3 Months

   

6 Months

                                                 
   

Ended

   

Ended

   

3 Months Ended

   

Years Ended December 31,

 
   

June 30, 2018

   

March 31, 2018

   

2017

   

2016

         
   

Company

           

Company

   

Industry*

   

Company

   

Industry*

   

Company

   

Industry

 
                                                                 

Return on assets

    1.26 %     1.22 %     1.19 %     1.28 %     1.00 %     0.97 %     1.18 %     1.04 %
                                                                 

Return on equity

    10.35 %     9.95 %     9.55 %     11.44 %     8.02 %     8.64 %     9.38 %     9.32 %
                                                                 

Net interest margin

    3.16 %     3.17 %     3.19 %     3.32 %     3.25 %     3.25 %     3.36 %     3.13 %
                                                                 

Efficiency ratio

    55.02 %     56.22 %     57.45 %     57.53 %     52.70 %     57.94 %     51.95 %     58.28 %
                                                                 

Capital ratio

    12.18 %     12.30 %     12.43 %     9.66 %     12.48 %     9.62 %     12.60 %     9.48 %

 

*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 average assets was 1.26% and 1.01% for the three months ended June 30, 2018 and 2017, respectively. The increase in this ratio in 2018 from the previous period is primarily due to a decrease in income tax expense and the provision for loan losses.

 

●     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 10.35% and 8.17% for the three months ended June 30, 2018 and 2017, respectively. The increase in this ratio in 2018 from the previous period is primarily due to a decrease in income tax expense and the provision for loan losses.

 

●     Net Interest Margin

 

The net interest margin for the three months ended June 30, 2018 and 2017 was 3.16% and 3.25%, 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.

 

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 55.02% and 52.93% for the three months ended June 30, 2018 and 2017, respectively. The efficiency ratio increase for the three months ended June 30, 2018 primarily an increase in salaries and benefits.

 

●     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 12.18% as of June 30, 2018 is significantly higher than the industry average of 9.62% as of December 31, 2017.

 

Industry Results

 

The FDIC Quarterly Banking Profile reported the following results for the first quarter of 2018:

 

Net Income Increases 27.5% From a Year Earlier Due to Higher Net Operating Revenue and a Lower Effective Tax Rate

 

Aggregate net income for the 5,606 FDIC-insured commercial banks and savings institutions reporting first quarter performance totaled $56 billion in first quarter 2018, an increase of $12.1 billion (27.5%) from a year earlier. Improvement in net income was attributable to higher net operating revenue (the sum of net interest income and noninterest income) and a lower effective tax rate, but was offset in part by higher loan-loss provisions and noninterest expense. Using the effective tax rate before the new tax law, estimated net income would have been $49.4 billion, an increase of $5.5 billion (12.6%) from first quarter 2017. The average return on assets rose by 24 basis points from first quarter 2017 to 1.28%. Less than 4% of institutions were unprofitable during the quarter, the lowest level since first quarter 1996.

 

Net Interest Income Rises 8.5% From the Year Before

 

Net interest income rose by $10.3 billion (8.5%), as more than four out of five banks (85.9%) reported an increase from 12 months ago. For the past seven consecutive quarters, the annual growth rate for net interest income has exceeded 7.4%. The net interest margin (NIM) increased from 3.19% in first quarter 2017 to 3.32%, due to growth in interest income as interest-bearing assets rose by 3.6%. The improvement in NIM was widespread, as more than two out of three banks (69.4%) reported increases from a year earlier.

 

Noninterest Income Increases 7.9% From a Year Earlier

 

Over the past 12 months, noninterest income grew by $4.9 billion (7.9%) to $67.4 billion. This increase is the highest 12-month growth rate since third quarter 2014. The annual increase in noninterest income was led by higher trading revenue (up $1.1 billion, or 14.9%) and other noninterest income (up $2.4 billion, or 8.8%). More than half (55.1%) of all banks reported increases in noninterest income compared with first quarter 2017.

 

Noninterest Expense Increases 5.8% From a Year Earlier

 

Noninterest expenses were $6.3 billion (5.8%) higher than first quarter 2017, as almost three out of four banks (74%) reported increases. Other noninterest expense rose by $3.7 billion (8.6%), and salary and employee benefits grew by $2.3 billion (4.3%). Average assets per employee increased from $8.2 million in first quarter 2017 to $8.4 million.

 

33

 

Provisions Increase Modestly From First Quarter 2017

 

In the first quarter, banks allocated $12.4 billion in loan-loss provisions, an increase of $356.6 million (3%) from a year earlier. Almost 37% of institutions reported higher loan-loss provisions than in first quarter 2017. The increase is due to higher net charge-offs, and a growing loan portfolio. Loan-loss provisions as a percent of net operating revenue totaled 6.2% for the first quarter, down from 6.6% a year ago.

 

Net Charge-Off Rate Remains Stable

 

Banks charged off $12.1 billion in uncollectable loans during the quarter, an increase of $540.6 million (4.7%) from a year earlier. The annual increase in net charge-offs was led by credit card balances (up $1.1 billion, or 16.3%). However, less than half (42.9%) of all banks reported a year-over-year increase, and net charge-offs were lower for most major loan categories. The average net-charge off rate remained stable (0.50%) from a year earlier.

 

Noncurrent Loan Rate Declines Modestly

 

Noncurrent loan balances (90 days or more past due or in nonaccrual status) were $3.9 billion (3.4%) lower compared with the previous quarter. Slightly more than half (50.8%) of all banks reported declines in their noncurrent loan balances during the quarter. The decline in noncurrent loan balances was led by residential mortgages (down $2.8 billion, or 4.9%), commercial and industrial loans (down $617.2 million, or 3.4%), and credit cards (down $436.4 million, or 3.7%). The average noncurrent rate declined by 5 basis points from the previous quarter to 1.15%.

 

Coverage Ratio Rises to 110%

 

Banks reduced their loan-loss reserves by $15 million from the previous quarter, with less than one-third (23.8%) of all banks reporting a quarterly decline. Banks with assets greater than $1 billion, which itemize their reserves, reported the largest quarterly increase in reserves for credit card losses (up $850.2 million, or 2.3%). Reserves declined for residential real estate losses (down $654.3 million, or 4.5%) and commercial loan losses (down $368.5 million, or 1.1%). With noncurrent loan balances declining at a faster quarterly rate than loan-loss reserves, the coverage ratio (loan-loss reserves to noncurrent loan balances) increased from 106.3% in fourth quarter 2017 to 110%. This marks the fourth consecutive quarter that the coverage ratio was above 100%.

 

Equity Capital Rises Modestly

 

Bank equity capital rose by $11.2 billion (0.6%) from the previous quarter. Retained earnings contributed $25.3 billion to equity growth, but were offset in part by the decline in the market value of available-for-sale securities, which reduced accumulated other comprehensive income by $25.8 billion. Declared dividends in the first quarter totaled $30.7 billion, an increase of $3.3 billion (12.2%) from the year-earlier quarter. At the end of the quarter, 99.5% of all insured institutions, which account for 99.98% of total industry assets, met or exceeded the requirements for the highest regulatory capital category as defined for Prompt Corrective Action purposes.

 

34

 

Loan Balances Rise 4.9% Over 12 Months

 

Total loan and lease balances rose by $31.3 billion (0.3%) from fourth quarter 2017. Commercial and industrial loans increased by $38.6 billion (1.9%), nonfarm nonresidential loans grew by $11.5 billion (0.8%), and residential mortgage loans rose by $8.8 billion (0.4%). Credit card balances posted a seasonal decline of $44.6 billion (5.2%). Over the past 12 months, total loan and lease balances rose by $455.2 billion (4.9%), exceeding last quarter’s annual growth rate of 4.5%. Commercial and industrial loans increased by $91.8 billion (4.7%), residential mortgage loans grew by $87.8 billion (4.4%), credit card balances rose by $64.3 billion (8.5%), and nonfarm nonresidential loans increased by $56.1 billion (4.2%). Home equity lines of credit declined by $31.6 billion (7.3%) over the past 12 months. Unused loan commitments increased by 5.5% from a year earlier, the highest annual growth rate since first quarter 2016.

 

Deposits Increase From the Previous Quarter

 

Total deposits grew by $129.7 billion (1%) in the first quarter. Domestic interest-bearing deposits increased by $176.1 billion (2%), while noninterest-bearing deposits fell by $655.9 million (0.02%). Nondeposit liabilities declined by $24.1 billion (1.2%), led by other liabilities (down $30.7 billion, or 1.9%) and borrowings from Federal Home Loan Banks (down $28.6 billion, or 4.9%). Domestic deposits in accounts less than $250,000 rose by $169.7 billion (2.9%) from fourth quarter 2017.

 

Three New Charters Added in First Quarter 2018

 

There were 5,607 FDIC-insured commercial banks and savings institutions at the end of first quarter 2018, a decline from 5,670 the year before. The number of institutions on the FDIC’s “Problem Bank List” fell from 95 to 92. During the quarter, 65 institutions were absorbed by merger transactions, three new charters were added, and there were no failures.

 

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, 2017 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’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.

 

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’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.

 

35

 

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

 

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

 

The Company’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’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 two 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 June 30, 2018, 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.

 

36

 

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,

 
   

2018

   

2017

   

2018

   

2017

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

Net interest income (GAAP)

  $ 10,211     $ 10,066     $ 20,397     $ 19,949  

Tax-equivalent adjustment (1)

    313       695       629       1,405  

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

    10,524       10,761       21,026       21,354  

Average interest-earning assets

  $ 1,330,909     $ 1,325,985     $ 1,324,875     $ 1,324,522  

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

    3.16 %     3.25 %     3.17 %     3.22 %

 

(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, 2018 and 35 percent for the three and six months ended June 30, 2017, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.

 

 

37

 

Income Statement Review for the Three Months ended June 30, 2018 and 2017

 

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended June 30, 2018 and 2017:

 

AVERAGE BALANCES AND INTEREST RATES

 

The following two tables are used to calculate the Company’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

 
                                                 
   

Three Months Ended June 30,

 
                                                 
   

2018

   

2017

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

ASSETS

                                               

(dollars in thousands)

                                               

Interest-earning assets

                                               

Loans 1

                                               

Commercial

  $ 72,939     $ 927       5.08 %   $ 79,493     $ 879       4.42 %

Agricultural

    68,992       945       5.48 %     71,939       946       5.26 %

Real estate

    637,835       7,008       4.40 %     613,289       6,537       4.26 %

Consumer and other

    8,240       116       5.62 %     11,241       138       4.91 %
                                                 

Total loans (including fees)

    788,006       8,996       4.57 %     775,962       8,500       4.38 %
                                                 

Investment securities

                                               

Taxable

    271,835       1,590       2.34 %     272,735       1,567       2.30 %

Tax-exempt 2

    223,979       1,493       2.67 %     244,088       1,986       3.25 %

Total investment securities

    495,814       3,083       2.49 %     516,823       3,553       2.75 %
                                                 

Interest bearing deposits with banks and federal funds sold

    47,089       230       1.95 %     33,200       113       1.37 %
                                                 

Total interest-earning assets

    1,330,909     $ 12,309       3.70 %     1,325,985     $ 12,166       3.67 %
                                                 

Noninterest-earning assets

    38,895                       48,727                  
                                                 

TOTAL ASSETS

  $ 1,369,804                     $ 1,374,712                  

 

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 for the three months ended June 30, 2018 and 2017 of 21% and 35%, respectively.

 

 

38

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                 
   

Three Months Ended June 30,

 
                                                 
   

2018

   

2017

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

(dollars in thousands)

                                               

Interest-bearing liabilities

                                               

Deposits

                                               

NOW, savings accounts and money markets

  $ 744,936     $ 1,070       0.57 %   $ 728,850     $ 656       0.36 %

Time deposits

    193,897       564       1.16 %     197,492       458       0.93 %

Total deposits

    938,833       1,634       0.70 %     926,342       1,114       0.48 %

Other borrowed funds

    44,124       151       1.37 %     76,769       291       1.52 %
                                                 

Total Interest-bearing liabilities

    982,957       1,785       0.73 %     1,003,111       1,405       0.56 %
                                                 

Noninterest-bearing liabilities

                                               

Demand deposits

    211,586                       194,505                  

Other liabilities

    8,487                       7,064                  
                                                 

Stockholders' equity

    166,774                       170,032                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,369,804                     $ 1,374,712                  
                                                 
                                                 

Net interest income

          $ 10,524       3.16 %           $ 10,761       3.25 %
                                                 

Spread Analysis

                                               

Interest income/average assets

  $ 12,309       3.59 %           $ 12,166       3.54 %        

Interest expense/average assets

  $ 1,785       0.52 %           $ 1,405       0.41 %        

Net interest income/average assets

  $ 10,524       3.07 %           $ 10,761       3.13 %        

 

Net Interest Income

 

For the three months ended June 30, 2018 and 2017, the Company's net interest margin adjusted for tax exempt income was 3.16% and 3.25%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended June 30, 2018 totaled $10,211,000 compared to $10,066,000 for the three months ended June 30, 2017.

 

For the three months ended June 30, 2018, interest income increased $525,000, or 5%, when compared to the same period in 2017. The increase from 2017 was primarily attributable to higher rates on loans. The higher rates on loans were primarily due to an increase in general market interest rates, as the Federal Reserve Bank increased short term interest rate targets by 0.75% since June 30, 2017.

 

Interest expense increased $380,000, or 27%, for the three months ended June 30, 2018 when compared to the same period in 2017. The higher interest expense for the period is primarily attributable to higher rates on deposits due to market interest rates and competitive pressures.

 

39

 

Provision for Loan Losses

 

The Company’s provision for loan losses was $64,000 and $767,000 for the three months ended June 30, 2018 and 2017, respectively. An increase in the specific reserve on one commercial credit was the primary factor for the provision for loan losses for the quarter ended June 30, 2017, with no significant growth in the loan portfolio for the quarter ended June 30, 2018. Net loan charge-offs were $4,000 and $481,000 for the three months ended June 30, 2018 and 2017, respectively. While the current provision for loan losses are not related to agricultural loans, the Iowa agricultural economy remains challenged as the result of the current low grain prices, potential tariff concerns on Iowa exports and excessive rainfall in a portion of our markets.

 

Noninterest Income and Expense

 

Noninterest income decreased $34,000 for the three months ended June 30, 2018 compared to the same period in 2017. The decrease in noninterest income is primarily due to lower security gains and other noninterest income, offset in part by higher wealth management income. The higher wealth management income was primarily due to an increase in one time estate fees. Exclusive of realized securities gains, noninterest income was 3% higher in the second quarter of 2018 compared to the same period in 2017.

 

Noninterest expense increased $314,000 or 5% for the three months ended June 30, 2018 compared to the same period in 2017 primarily as a result of increases in salaries and employee benefits. This increase in salaries and benefits was primarily due to increases in employee benefit costs, additional personnel, changes in the Company’s paid time off benefits and normal salary increases. The efficiency ratio was 55.0% for the second quarter of 2018 as compared to 52.9% in 2017.

 

Income Taxes

 

The provision for income taxes expense for the three months ended June 30, 2018 and 2017 was $1,107,000 and $1,453,000, respectively, representing an effective tax rate of 20% and 29%, respectively. The expected combined federal and state tax rate was 25% and 37% for the three months ended June 30, 2018 and 2017, respectively. The lower expected tax rate in 2018 is due to the enactment of the Tax Cut and Jobs Act Bill on December 22, 2017. The lower than expected effective tax rate for both periods is primarily due to tax-exempt interest income.

 

 

40

 

Income Statement Review for the Six Months ended June 30, 2018 and 2017

 

The following highlights a comparative discussion of the major components of net income and their impact for the six months ended June 30, 2018 and 2017:

 

AVERAGE BALANCES AND INTEREST RATES

 

The following two tables are used to calculate the Company’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

 
                                                 
   

Six Months Ended June 30,

 
                                                 
   

2018

   

2017

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

ASSETS

                                               

(dollars in thousands)

                                               

Interest-earning assets

                                               

Loans 1

                                               

Commercial

  $ 73,180     $ 1,795       4.90 %   $ 77,310     $ 1,693       4.38 %

Agricultural

    68,776       1,913       5.56 %     69,674       1,781       5.11 %

Real estate

    634,953       13,949       4.39 %     607,575       12,863       4.23 %

Consumer and other

    8,532       228       5.34 %     11,429       278       4.87 %
                                                 

Total loans (including fees)

    785,441       17,885       4.55 %     765,988       16,615       4.34 %
                                                 

Investment securities

                                               

Taxable

    271,924       3,147       2.31 %     270,092       3,080       2.28 %

Tax-exempt 2

    225,197       2,995       2.66 %     246,706       4,013       3.25 %

Total investment securities

    497,121       6,142       2.47 %     516,798       7,093       2.74 %
                                                 

Interest bearing deposits with banks and federal funds sold

    42,313       395       1.87 %     41,736       251       1.20 %
                                                 

Total interest-earning assets

    1,324,875     $ 24,422       3.69 %     1,324,522     $ 23,959       3.62 %
                                                 

Noninterest-earning assets

    40,125                       49,217                  
                                                 

TOTAL ASSETS

  $ 1,365,000                     $ 1,373,739                  

 

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 for the six months ended June 30, 2018 and 2017 of 21% and 35%, respectively.

 

41

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                 
   

Six Months Ended June 30,

 
                                                 
   

2018

   

2017

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

(dollars in thousands)

                                               

Interest-bearing liabilities

                                               

Deposits

                                               

NOW, savings accounts and money markets

  $ 733,157     $ 1,901       0.52 %   $ 720,989     $ 1,135       0.31 %

Time deposits

    194,481       1,095       1.13 %     199,465       900       0.90 %

Total deposits

    927,638       2,996       0.65 %     920,454       2,035       0.44 %

Other borrowed funds

    51,832       400       1.54 %     77,896       571       1.47 %
                                                 

Total Interest-bearing liabilities

    979,470       3,396       0.69 %     998,350       2,606       0.52 %
                                                 

Noninterest-bearing liabilities

                                               

Demand deposits

    209,169                       199,555                  

Other liabilities

    8,456                       7,414                  
                                                 

Stockholders' equity

    167,905                       168,420                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,365,000                     $ 1,373,739                  
                                                 
                                                 

Net interest income

          $ 21,026       3.17 %           $ 21,353       3.22 %
                                                 

Spread Analysis

                                               

Interest income/average assets

  $ 24,422       3.58 %           $ 23,959       3.49 %        

Interest expense/average assets

  $ 3,396       0.50 %           $ 2,606       0.38 %        

Net interest income/average assets

  $ 21,026       3.08 %           $ 21,353       3.11 %        

 

Net Interest Income

 

For the six months ended June 30, 2018 and 2017, the Company's net interest margin adjusted for tax exempt income was 3.17% and 3.22%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the six months ended June 30, 2018 totaled $20,397,000 compared to $19,949,000 for the six months ended June 30, 2017.

 

For the six months ended June 30, 2018, interest income increased $1,239,000, or 5%, when compared to the same period in 2017. The increase from 2017 was primarily attributable to increased loan rates and recognition of nonaccrual loan interest income on loans, offset by a decrease in interest income on tax-exempt investments.

 

Interest expense increased $790,000, or 30%, for the six months ended June 30, 2018 when compared to the same period in 2017. The higher interest expense for the period is primarily attributable to higher rates on deposits due to market interest rates and competitive pressures.

 

42

 

Provision for Loan Losses

 

The Company’s provision for loan losses was $93,000 and $1,164,000 for the six months ended June 30, 2018 and 2017, respectively. An increase in the specific reserve on one loan credit and the growth in the loan portfolio was the primary factor for the provision for loan losses for the six months ended June 30, 2017, with no significant growth in the loan portfolio for the six months ended June 30, 2018. Net loan charge-offs were $31,000 and $483,000 for the six months ended June 30, 2018 and 2017, respectively. While the current provision for loan losses are not related to agricultural loans, the Iowa agricultural economy remains challenged as the result of the current low grain prices, potential tariff concerns on Iowa exports and excessive rainfall in a portion of our markets.

 

Noninterest Income and Expense

 

Noninterest income decreased $351,000 for the six months ended June 30, 2018 compared to the same period in 2017. The decrease in noninterest income is primarily due to lower security gains, offset in part by higher wealth management income. The higher wealth management income was primarily due to an increase in one time estate fees. Exclusive of realized securities gains, noninterest income was 3% higher for the six months ended June 30, 2018 as compared to the same period in 2017.

 

Noninterest expense increased $702,000 or 5% for the six months ended June 30, 2018 compared to the same period in 2017 primarily as a result of increases in salaries and employee benefits. This increase in salaries and benefits was primarily due to a one-time $1,000 bonus paid to full-time employees, increases in employee benefit costs, additional personnel, changes in the Company’s paid time off benefits and normal salary increases. The efficiency ratio was 56.2% for the six months ended June 30, 2018 as compared to 53.5% in 2017.

 

Income Taxes

 

The provision for income taxes expense for the six months ended June 30, 2018 and 2017 was $2,127,000 and $2,932,000, respectively, representing an effective tax rate of 20% and 29%, respectively. The expected combined federal and state tax rate was 25% and 37% for the six months ended June 30, 2018 and 2017, respectively. The lower expected tax rate in 2018 is due to the enactment of the Tax Cut and Jobs Act Bill on December 22, 2017. The lower than expected effective tax rate for both periods is primarily due to tax-exempt interest income.

 

Balance Sheet Review

 

As of June 30, 2018, total assets were $1,362,055,000, a $13,005,000 decrease compared to December 31, 2017. The decrease in assets was due primarily to a decrease in cash and due from banks and securities available-for-sale, offset in part by an increase in loans. This decrease in asset funding was primarily due to a decrease in FHLB advances and other borrowings, offset in part by an increase in deposits.  

 

Investment Portfolio

 

The investment portfolio totaled $478,733,000 as of June 30, 2018, a decrease of $16,589,000 from the December 31, 2017 balance of $495,322,000. The decrease in the investment portfolio was primarily due to maturities and call on municipal bonds.

 

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of June 30, 2018, gross unrealized losses of $7,513,000, are considered to be temporary in nature due to the interest rate environment of 2018 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.

 

43

 

At June 30, 2018, the Company’s investment securities portfolio included securities issued by 256 government municipalities and agencies located within 20 states with a fair value of $223.2 million. At December 31, 2017, the Company’s investment securities portfolio included securities issued by 272 government municipalities and agencies located within 25 states with a fair value of $261.6 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 June 30, 2018 was $4.3 million (approximately 2.0% of the fair value of the governmental municipalities and agencies) represented by the Dubuque, Iowa Community School District to be repaid by sales tax revenues and property taxes.

 

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.

 

44

 

The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of June 30, 2018 and December 31, 2017 identifying the state in which the issuing government municipality or agency operates. (Dollars in thousands)

 

   

2018

   

2017

 
           

Estimated

           

Estimated

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
                                 

Obligations of states and political subdivisions:

                               

General Obligation bonds:

                               

Iowa

  $ 53,078     $ 52,451     $ 56,029     $ 55,829  

Texas

    11,521       11,457       12,141       12,174  

Pennsylvania

    9,725       9,689       8,719       8,745  

Washington

    6,961       6,766       7,017       6,900  

Other (2018: 13 states; 2017: 17 states)

    19,544       19,630       22,023       22,228  
                                 

Total general obligation bonds

  $ 100,829     $ 99,993     $ 105,929     $ 105,876  
                                 

Revenue bonds:

                               

Iowa

  $ 114,333     $ 113,693     $ 122,044     $ 122,140  

Other (2018: 9 states; 2017: 9 states)

    9,598       9,541       9,376       9,397  
                                 

Total revenue bonds

  $ 123,931     $ 123,234     $ 131,420     $ 131,537  
                                 

Total obligations of states and political subdivisions

  $ 224,760     $ 223,227     $ 237,349     $ 237,413  

 

As of June 30, 2018 and December 31, 2017, 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)

 

   

2018

   

2017

 
           

Estimated

           

Estimated

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
                                 

Revenue bonds by revenue source

                               

Sales tax

  $ 72,868     $ 72,788     $ 74,631     $ 74,973  

Water

    11,776       11,528       12,763       12,611  

College and universities, primarily dormitory revenues

    9,240       9,193       10,452       10,443  

Leases

    9,556       9,454       9,383       9,331  

Electric

    7,371       7,345       7,382       7,416  

Other

    13,120       12,926       16,809       16,763  
                                 

Total revenue bonds by revenue source

  $ 123,931     $ 123,234     $ 131,420     $ 131,537  

 

Loan Portfolio

 

The loan portfolio, net of the allowance for loan losses, totaled $780,260,000, $771,550,000 and $768,208,000 as of June 30, 2018, December 31, 2017 and June 30, 2017, respectively. Loan demand has moderated since year end.

 

45

 

Deposits

 

Deposits totaled $1,151,815,000, $1,134,391,000 and $1,126,771,000 as of June 30, 2018, December 31, 2017 and June 30, 2017, respectively. The increase in deposits since December 31, 2017 was primarily due to increases in commercial and public funds NOW account balances, retail savings account balances and money market account balances, offset in part by a decrease in retail NOW account balances. The increase in deposits since June 30, 2017 was primarily due to increases in retail and commercial demand deposit and retail savings account balances.

 

Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase totaled $34,108,000 as of June 30, 2018, a decrease of $3,317,000, or 9%, from the December 31, 2017 balance of $37,425,000.

 

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, 2017.

 

Asset Quality Review and Credit Risk Management

 

The Company’s credit risk is historically centered in the loan portfolio, which on June 30, 2018 totaled $780,260,000 compared to $771,550,000 as of December 31, 2017. Net loans comprise 57% of total assets as of June 30, 2018. 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 transaction 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 0.49% at June 30, 2018, as compared to 0.62% at December 31, 2017 and 0.66% at June 30, 2017. The Company’s level of problem loans as a percentage of total loans at June 30, 2018 of 0.49% is slightly lower than the Company’s peer group (334 bank holding companies with assets of $1 billion to $3 billion) of 0.66% as of March 31, 2018.

 

Impaired loans, net of specific reserves, totaled $3,014,000 as of June 30, 2018 and have decreased $985,000 as compared to the impaired loans of $3,999,000 as of December 31, 2017.

 

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 $2,828,000 as of June 30, 2018, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $2,984,000 as of December 31, 2017, all of which were included in impaired and nonaccrual loans.

 

TDRs 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.

 

46

 

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 $80,000 specific reserve was established in the three and six months ended June 30, 2018 on a TDR loan, respectively. The Company had $12,000 of charge-offs related to TDRs for the six months ended June 30, 2018. A $500,000 specific reserve was established in the six months ended June 30, 2017 on a TDR loan. The Company had $12,000 and $257,000 of net charge-offs related to TDRs for the six months ended June 30, 2018 and 2017, respectively.

 

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on non-accrual. As of June 30, 2018, non-accrual loans totaled $3,803,000 and there was a loan in the amount of $96,000 that was past due 90 days and still accruing. This compares to non-accrual loans of $4,810,000 and loans past due 90 days and still accruing totaled $18,000 as of December 31, 2017. Other real estate owned totaled $386,000 as of June 30, 2018 and December 31, 2017.

 

The agricultural real estate and agricultural operating loan portfolio classifications remain elevated as a result of lower grain prices. The watch and special mention loans in these categories totaled $37,104,000 as of June 30, 2018 as compared to $42,754,000 as of December 31, 2017. The substandard loans in these categories totaled $9,326,000 as of June 30, 2018 as compared to $2,725,000 as of December 31, 2017. The Iowa agricultural economy remains challenged as the result of the current low grain prices, potential tariff concerns on Iowa exports and excessive rainfall in a portion of our markets.

 

The allowance for loan losses as a percentage of outstanding loans as of June 30, 2018 was 1.44%, as compared to 1.45% at December 31, 2017. The allowance for loan losses totaled $11,383,000 and $11,321,000 as of June 30, 2018 and December 31, 2017, respectively. Net charge-offs of loans totaled $31,000 and $483,000 for the six months ended June 30, 2018 and 2017, respectively.

 

The allowance for loan losses is management’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’ 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.

 

47

 

As of June 30, 2018, 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 discussion 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’s Current Liquidity Sources

 

Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of June 30, 2018 and December 31, 2017 totaled $62,386,000 and $69,420,000, respectively, and provide an adequate level of liquidity given current economic conditions.

 

Other sources of liquidity available to the Banks as of June 30, 2018 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $185,490,000, with $2,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $109,035,000, with no outstanding federal fund purchase balances as of June 30, 2018. The Company had securities sold under agreements to repurchase totaling $34,108,000 as of June 30, 2018.

 

Total investments as of June 30, 2018 were $478,733,000 compared to $495,322,000 as of December 31, 2017. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of June 30, 2018.

 

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’s scheduled maturities and payments represent a significant source of liquidity.

 

Review of Statements of Cash Flows

 

Net cash provided by operating activities for the six months ended June 30, 2018 totaled $9,157,000 compared to $9,434,000 for the six months ended June 30, 2017.

 

Net cash provided by (used in) investing activities for the six months ended June 30, 2018 was $1,910,000 compared to $(12,042,000) for the six months ended June 30, 2017. The increase of $13,952,000 in cash provided by investing activities was primarily due to lower purchases of securities of $21,497,000 and a net increase in the change in the loan portfolio of $8,576,000, offset in part by decreases in the proceeds from the sale of securities available-for-sale of $10,824,000.

 

Net cash used in financing activities for the six months ended June 30, 2018 totaled $16,910,000 compared to $7,296,000 for the six months ended June 30, 2017. The change of $9,614,000 in net cash used in financing activities was primarily due to repayments on FHLB and other borrowings, offset in part by a net decrease in the change in the securities sold under agreements to repurchase. As of June 30, 2018, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

 

48

 

Company Only Cash Flows

 

The Company’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 $5,690,000 and $5,345,000 for the six months ended June 30, 2018 and 2017, 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 $0.23 per share in 2018 from $0.22 per share in 2017.

 

The Company, on an unconsolidated basis, has interest bearing deposits totaling $13,101,000 as of June 30, 2018 that are presently available to provide additional liquidity to the Banks.

 

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. 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 June 30, 2018 that are of concern to management.

 

Capital Resources

 

The Company’s total stockholders’ equity as of June 30, 2018 totaled $167,941,000 and was $2,812,000 lower than the $170,753,000 recorded as of December 31, 2017. The decrease in stockholders’ equity was primarily due to an increase in other comprehensive loss and dividends declared, offset in part by net income. The increase in other comprehensive loss is created by higher market interest rates compared to December 31, 2017, which resulted in lower fair values in the securities available-for-sale portfolio. At June 30, 2018 and December 31, 2017, stockholders’ equity as a percentage of total assets was 12.33% and 12.42%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of June 30, 2018.

 

49

 

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.

 

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 2018 changed significantly when compared to 2017.

 

Item 4.          Controls and Procedures

 

As of the end of the period covered by this report, an 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.

 

PART II.      OTHER INFORMATION

 

Item 1.      Legal Proceedings

 

Not applicable

 

Item 1.A.     Risk Factors

 

None.

 

50

 

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

 

In November, 2017, 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 June 30, 2018, there were 100,000 shares remaining to be purchased under the plan.

 

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 June 30, 2018.

 

                   

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, 2018 to April 30, 2018

    -     $ -       -       100,000  
                                 

May 1, 2018 to May 31, 2018

    -     $ -       -       100,000  
                                 

June 1, 2018 to June 30, 2018

    -     $ -       -       100,000  
                                 

Total

    -               -          

 

Item 3.      Defaults Upon Senior Securities

 

Not applicable

 

Item 4.      Mine Safety Disclosures

 

Not applicable

 

Item 5.     Other information

 

Not applicable

 

51

 

Item 6.           Exhibits

 

2

Stock purchase agreement (incorporated by reference to Exhibit 2 to the Form 10-Q filed on May 8, 2018).

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 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.

52

 

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:     August 7, 2018

By:

/s/ John P. Nelson

 

 

 

 

 

  John P. Nelson, Chief Executive Officer and President  
       
  By: /s/ John L. Pierschbacher  
       

 

John L. Pierschbacher, Chief Financial Officer

 

 

 

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EXHIBIT INDEX

 

The following exhibits are filed herewith:

 

Exhibit No.   Description
2   Stock purchase agreement (incorporated by reference to Exhibit 2 to the Form 10-Q filed on May 8, 2018).
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   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.

 

 

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