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AMES NATIONAL CORP - Quarter Report: 2017 September (Form 10-Q)

atlo20170930_10q.htm

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 September 30, 2017

 

[_]

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

(I. R. S. Employer

Incorporation or Organization)

Identification Number)

 

405 FIFTH STREET

AMES, IOWA 50010

(Address of Principal Executive Offices)

 

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

 

Not Applicable

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   X   No       

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated 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 October 27, 2017)

 

 

AMES NATIONAL CORPORATION

 

INDEX

 

   

Page

     

Part I.

Financial Information

 

 

   

Item 1.

Consolidated Financial Statements (Unaudited)

3
     

 

Consolidated Balance Sheets at September 30, 2017 and December 31, 2016

3
     

 

Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016

4
     
 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016

5
     
 

Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2017 and 2016

6
     

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

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

49
     

Item 4.

Controls and Procedures 49
     

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

50
     

Item 3.

Defaults Upon Senior Securities

50
     

Item 4.

Mine Safety Disclosures

50
     

Item 5.

Other Information

51
     

Item 6.

Exhibits

51
     
 

Signatures

52

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   

September 30,

   

December 31,

 

ASSETS

 

2017

   

2016

 
                 

Cash and due from banks

  $ 23,087,890     $ 29,478,068  

Interest bearing deposits in financial institutions

    35,486,284       31,737,259  

Securities available-for-sale

    506,610,435       516,079,506  

Loans receivable, net

    764,228,850       752,181,730  

Loans held for sale

    279,800       242,618  

Bank premises and equipment, net

    15,595,418       16,049,379  

Accrued income receivable

    8,423,038       7,768,689  

Other real estate owned

    385,509       545,757  

Deferred income taxes

    1,817,543       3,485,689  

Intangible assets, net

    1,133,736       1,352,812  

Goodwill

    6,732,216       6,732,216  

Other assets

    1,159,533       799,306  
                 

Total assets

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

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

LIABILITIES

               

Deposits

               

Demand, noninterest bearing

  $ 202,368,921     $ 212,074,792  

NOW accounts

    337,062,117       310,427,812  

Savings and money market

    380,454,650       381,852,433  

Time, $250,000 and over

    36,776,010       39,031,663  

Other time

    157,876,361       166,022,165  

Total deposits

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

Securities sold under agreements to repurchase

    39,001,050       58,337,367  

Federal Home Loan Bank (FHLB) advances

    19,000,000       14,500,000  

Other borrowings

    13,000,000       13,000,000  

Dividends payable

    2,048,401       1,955,292  

Accrued expenses and other liabilities

    4,023,858       4,146,262  

Total liabilities

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

STOCKHOLDERS' EQUITY

               

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

    18,621,826       18,621,826  

Additional paid-in capital

    20,878,728       20,878,728  

Retained earnings

    131,047,038       126,181,376  

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

    2,781,292       (576,687 )

Total stockholders' equity

    173,328,884       165,105,243  
                 

Total liabilities and stockholders' equity

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

 

See Notes to Consolidated Financial Statements.

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Interest income:

                               

Loans, including fees

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

Securities:

                               

Taxable

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

Tax-exempt

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

Interest bearing deposits and federal funds sold

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

Total interest income

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

Interest expense:

                               

Deposits

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

Other borrowed funds

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

Total interest expense

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

Net interest income

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

Provision for loan losses

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

Net interest income after provision for loan losses

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

Noninterest income:

                               

Wealth management income

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

Service fees

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

Securities gains, net

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

Gain on sale of loans held for sale

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

Merchant and card fees

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

Other noninterest income

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

Total noninterest income

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

Noninterest expense:

                               

Salaries and employee benefits

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

Data processing

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

Occupancy expenses, net

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

FDIC insurance assessments

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

Professional fees

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

Business development

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

Other real estate owned (income), net

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

Intangible asset amortization

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

Other operating expenses, net

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

Total noninterest expense

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

Income before income taxes

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

Provision for income taxes

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

Net income

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

Basic and diluted earnings per share

  $ 0.42     $ 0.41     $ 1.18     $ 1.26  
                                 

Dividends declared per share

  $ 0.22     $ 0.21     $ 0.66     $ 0.63  

 

See Notes to Consolidated Financial Statements.

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 
                                 

Net income

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

Other comprehensive income (loss), before tax:

                               

Unrealized gains (losses) on securities before tax:

                               

Unrealized holding gains (losses) arising during the period

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

Less: reclassification adjustment for gains realized in net income

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

Other comprehensive income (loss), before tax

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

Tax effect related to other comprehensive income (loss)

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

Other comprehensive income (loss), net of tax

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

Comprehensive income

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

 

See Notes to Consolidated Financial Statements.

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

Nine Months Ended September 30, 2017 and 2016

 

   

Common Stock

   

Additional Paid-in Capital

   

Retained Earnings

   

Accumulated Other Comprehensive Income (Loss), Net of Taxes

   

Total Stockholders' Equity

 
                                         

Balance, December 31, 2015

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

Net income

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

Other comprehensive income

    -       -       -       3,642,191       3,642,191  

Cash dividends declared, $0.63 per share

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

Balance, September 30, 2016

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

Balance, December 31, 2016

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

Net income

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

Other comprehensive income

    -       -       -       3,357,979       3,357,979  

Cash dividends declared, $0.66 per share

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

Balance, September 30, 2017

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

 

See Notes to Consolidated Financial Statements.

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Nine Months Ended September 30, 2017 and 2016

 

   

2017

   

2016

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 11,010,865     $ 11,710,352  

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

               

Provision for loan losses

    1,221,620       440,787  

Provision for off-balance sheet commitments

    4,000       12,000  

Amortization, net

    2,129,648       2,327,654  

Amortization of intangible asset

    280,837       273,206  

Depreciation

    861,700       885,202  

Deferred income taxes

    (303,999 )     176,658  

Securities gains, net

    (498,560 )     (296,110 )

(Gain) on sales of loans held for sale

    (544,095 )     (773,511 )

Proceeds from loans held for sale

    22,668,307       34,782,288  

Originations of loans held for sale

    (22,161,394 )     (34,657,822 )

Loss on sale of premises and equipment, net

    56,168       2,769  

Impairment of other real estate owned

    -       28,039  

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

    (14,648 )     (131,127 )

Change in assets and liabilities:

               

(Increase) in accrued income receivable

    (654,349 )     (805,127 )

(Increase) decrease in other assets

    (377,095 )     286,238  

Increase (decrease) in accrued expenses and other liabilities

    (126,404 )     323,605  

Net cash provided by operating activities

    13,552,601       14,585,101  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchase of securities available-for-sale

    (51,271,943 )     (49,668,267 )

Proceeds from sale of securities available-for-sale

    11,756,963       18,738,154  

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

    52,588,102       54,611,331  

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

    (3,749,025 )     994,573  

Net (increase) in loans

    (13,190,423 )     (39,394,414 )

Net proceeds from the sale of other real estate owned

    191,564       755,906  

Purchase of bank premises and equipment, net

    (447,039 )     (218,081 )

Other

    (61,761 )     -  

Net cash (used in) investing activities

    (4,183,562 )     (14,180,798 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Increase (decrease) in deposits

    5,129,194       (12,358,477 )

(Decrease) in securities sold under agreements to repurchase

    (19,336,317 )     (4,431,520 )

Payments on FHLB borrowings and other borrowings

    (1,000,000 )     (1,542,203 )

Proceeds from short-term FHLB borrowings, net

    5,500,000       21,000,000  

Dividends paid

    (6,052,094 )     (5,772,766 )

Net cash (used in) financing activities

    (15,759,217 )     (3,104,966 )
                 

Net (decrease) in cash and due from banks

    (6,390,178 )     (2,700,663 )
                 

CASH AND DUE FROM BANKS

               

Beginning

    29,478,068       24,005,801  

Ending

  $ 23,087,890     $ 21,305,138  

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Nine Months Ended September 30, 2017 and 2016

 

   

2017

   

2016

 
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

               

Cash payments for:

               

Interest

  $ 4,027,782     $ 3,145,519  

Income taxes

    5,050,220       4,223,653  
                 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES

               

Transfer of loans receivable to other real estate owned

  $ 16,668     $ 56,587  

 

See Notes to Consolidated Financial Statements.

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements (unaudited)

 

1.     Significant Accounting Policies

 

The consolidated financial statements for the nine months ended September 30, 2017 and 2016 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, 2016 (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 September 30, 2017, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.

 

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

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. 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. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The guidance does not apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. Based upon management’s revenue recognition analysis, the Company does not expect the guidance to 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.

 

2.      Dividends

 

On August 9, 2017, the Company declared a cash dividend on its common stock, payable on November 15, 2017 to stockholders of record as of November 1, 2017, equal to $0.22 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 nine months ended September 30, 2017 and 2016 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, 2016.

 

 

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 September 30, 2017 and December 31, 2016. (in thousands)

 

Description

 

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

2017

                               
                                 

U.S. government treasuries

  $ 4,449     $ 4,449     $ -     $ -  

U.S. government agencies

    112,657       -       112,657       -  

U.S. government mortgage-backed securities

    81,956       -       81,956       -  

State and political subdivisions

    243,438       -       243,438       -  

Corporate bonds

    60,834       -       60,834       -  

Equity securities, other

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

2016

                               
                                 

U.S. government treasuries

  $ 4,368     $ 4,368     $ -     $ -  

U.S. government agencies

    110,209       -       110,209       -  

U.S. government mortgage-backed securities

    82,858       -       82,858       -  

State and political subdivisions

    264,448       -       264,448       -  

Corporate bonds

    51,184       -       51,184       -  

Equity securities, other

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

 

 

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

 

The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three or nine months ended September 30, 2017.

 

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 September 30, 2017 and December 31, 2016. (in thousands)

 

Description

 

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

2017

                               
                                 

Loans receivable

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

Other real estate owned

    386       -       -       386  
                                 

Total

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

2016

                               
                                 

Loans receivable

  $ 683     $ -     $ -     $ 683  

Other real estate owned

    546       -       -       546  
                                 

Total

  $ 1,229     $ -     $ -     $ 1,229  

 

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

 

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

 

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016 are as follows: (in thousands)

 

   

2017

 
   

Estimated

Fair Value

 

Valuation

Techniques

Unobservable Inputs  

Range

(Average)

 
                         

Impaired Loans

  $ 2,439  

Evaluation of collateral

Estimation of value

  NM*        
                         

Other real estate owned

  $ 386  

Appraisal

Appraisal adjustment

  6% - 8% (7%)  

 

   

2016

 
   

Estimated

Fair Value

 

Valuation

Techniques

Unobservable Inputs  

Range

(Average)

 
                         

Impaired Loans

  $ 683  

Evaluation of collateral

Estimation of value

  NM*        
                         

Other real estate owned

  $ 546  

Appraisal

Appraisal adjustment

  6% - 10% (8%)  

 

* 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 September 30, 2017 and December 31, 2016 are not carried at fair value in their entirety on the consolidated balance sheets.

 

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

 

 

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 securities that are traded by dealers or brokers in active over-the-counter markets.  U.S government mortgage-backed securities, state and political subdivisions, some corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

The estimated fair values of the Company’s financial instruments as described above as of September 30, 2017 and December 31, 2016 are as follows: (in thousands)

 

     

2017

   

2016

 
 

Fair Value

         

Estimated

           

Estimated

 
 

Hierarchy

 

Carrying

   

Fair

   

Carrying

   

Fair

 
 

Level

 

Amount

   

Value

   

Amount

   

Value

 
                                   

Financial assets:

                                 

Cash and due from banks

Level 1

  $ 23,088     $ 23,088     $ 29,478     $ 29,478  

Interest bearing deposits

Level 1

    35,486       35,486       31,737       31,737  

Securities available-for-sale

See previous table

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

Loans receivable, net

Level 2

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

Loans held for sale

Level 2

    280       280       243       243  

Accrued income receivable

Level 1

    8,423       8,423       7,769       7,769  

Financial liabilities:

                                 

Deposits

Level 2

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

Securities sold under agreements to repurchase

Level 1

    39,001       39,001       58,337       58,337  

FHLB advances

Level 2

    19,000       19,046       14,500       14,681  

Other borrowings

Level 2

    13,000       13,159       13,000       13,386  

Accrued interest payable

Level 1

    447       447       408       408  

 

The methodologies used to determine fair value as of September 30, 2017 did not change from the methodologies described in the December 31, 2016 Annual Financial Statements.

 

 

6.     Debt and Equity Securities

 

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

 

2017:

         

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 
   

Cost

   

Gains

   

Losses

   

Fair Value

 
                                 

U.S. government treasuries

  $ 4,412     $ 37     $ -     $ 4,449  

U.S. government agencies

    112,011       807       (161 )     112,657  

U.S. government mortgage-backed securities

    80,948       1,091       (83 )     81,956  

State and political subdivisions

    241,150       2,684       (396 )     243,438  

Corporate bonds

    60,417       560       (143 )     60,834  

Equity securities, other

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

 

2016:

         

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 
   

Cost

   

Gains

   

Losses

   

Fair Value

 
                                 

U.S. government treasuries

  $ 4,396     $ 18     $ (46 )   $ 4,368  

U.S. government agencies

    110,372       540       (703 )     110,209  

U.S. government mortgage-backed securities

    82,279       1,018       (439 )     82,858  

State and political subdivisions

    265,204       1,660       (2,416 )     264,448  

Corporate bonds

    51,731       147       (694 )     51,184  

Equity securities, other

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

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Proceeds from sales of securities available-for-sale

  $ 933     $ 5,852     $ 11,757     $ 18,738  

Gross realized gains on securities available-for-sale

    38       66       501       303  

Gross realized losses on securities available-for-sale

    -       (1 )     (2 )     (7 )

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

    14       29       175       110  

 

 

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 September 30, 2017 and December 31, 2016 are as follows: (in thousands)

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

2017:

 

Estimated Fair Value

   

Unrealized Losses

   

Estimated Fair Value

   

Unrealized Losses

   

Estimated Fair Value

   

Unrealized Losses

 
                                                 

Securities available-for-sale:

                                               

U.S. government agencies

  $ 28,424     $ (125 )   $ 3,773     $ (36 )   $ 32,197     $ (161 )

U.S. government mortgage-backed securities

    10,639       (71 )     1,997       (12 )     12,636       (83 )

State and political subdivisions

    22,029       (81 )     21,739       (315 )     43,768       (396 )

Corporate bonds

    5,619       (11 )     7,310       (132 )     12,929       (143 )
    $ 66,711     $ (288 )   $ 34,819     $ (495 )   $ 101,530     $ (783 )

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

2016:

 

Fair Value

   

Unrealized Losses

   

Fair Value

   

Unrealized Losses

   

Fair Value

   

Unrealized Losses

 
                                                 

Securities available-for-sale:

                                               

U.S. government treasuries

  $ 2,893     $ (46 )   $ -     $ -     $ 2,893     $ (46 )

U.S. government agencies

    48,225       (703 )     -       -       48,225       (703 )

U.S. government mortgage-backed securities

    33,753       (439 )     -       -       33,753       (439 )

State and political subdivisions

    125,558       (2,226 )     6,512       (190 )     132,070       (2,416 )

Corporate bonds

    35,703       (694 )     -       -       35,703       (694 )
    $ 246,132     $ (4,108 )   $ 6,512     $ (190 )   $ 252,644     $ (4,298 )

 

Gross unrealized losses on debt securities totaled $783,000 as of September 30, 2017. 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 nine months ended September 30, 2017 and 2016 is as follows: (in thousands)

 

   

Three Months Ended September 30, 2017

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, June 30, 2017

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

Provision (credit) for loan losses

    (74 )     15       155       36       (80 )     (34 )     39       57  

Recoveries of loans charged-off

    -       4       -       -       2       -       4       10  

Loans charged-off

    -       -       -       -       (109 )     -       (6 )     (115 )

Balance, September 30, 2017

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

 

   

Nine Months Ended September 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

    (202 )     12       632       82       735       (96 )     59       1,222  

Recoveries of loans charged-off

    -       9       -       -       30       -       8       47  

Loans charged-off

    -       -       -       -       (609 )     -       (27 )     (636 )

Balance, September 30, 2017

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

 

   

Three Months Ended September 30, 2016

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, June 30, 2016

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

Provision (credit) for loan losses

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

Recoveries of loans charged-off

    15       1       -       -       75       -       2       93  

Loans charged-off

    -       -       -       -       (1 )     -       (11 )     (12 )

Balance, September 30, 2016

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

 

   

Nine Months Ended September 30, 2016

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, December 31, 2015

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

Provision (credit) for loan losses

    (135 )     (34 )     244       74       308       (25 )     9       441  

Recoveries of loans charged-off

    30       3       -       -       81       -       7       121  

Loans charged-off

    -       -       -       -       (78 )     -       (21 )     (99 )

Balance, September 30, 2016

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

 

 

Allowance for loan losses disaggregated on the basis of impairment analysis method as of September 30, 2017 and December 31, 2016 is as follows: (in thousands)

 

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

  $ -     $ 28     $ -     $ -     $ 747     $ -     $ 48     $ 823  

Collectively evaluated for impairment

    706       1,704       4,592       943       1,137       1,120       115       10,317  

Balance September 30, 2017

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

 

2016

         

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

  $ -     $ 76     $ -     $ -     $ 644     $ -     $ -     $ 720  

Collectively evaluated for impairment

    908       1,635       3,960       861       1,084       1,216       123       9,787  

Balance December 31, 2016

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

 

Loans receivable disaggregated on the basis of impairment analysis method as of September 30, 2017 and December 31, 2016 is as follows (in thousands):

 

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

  $ -     $ 692     $ 703     $ -     $ 3,250     $ -     $ 85     $ 4,730  

Collectively evaluated for impairment

    44,041       148,148       350,508       79,181       70,916       67,711       10,201       770,706  
                                                                 

Balance September 30, 2017

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

 

2016

         

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

  $ -     $ 660     $ 399     $ -     $ 3,942     $ -     $ 76     $ 5,077  

Collectively evaluated for impairment

    61,042       148,847       315,303       73,032       70,436       76,994       12,054       757,708  
                                                                 

Balance December 31, 2016

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

 

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.

 

 

The following is a recap of impaired loans, on a disaggregated basis, as of September 30, 2017 and December 31, 2016: (in thousands)

 

   

2017

   

2016

 
           

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

    610       750       -       452       473       -  

Real estate - commercial

    703       1,369       -       399       1,025       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    127       150       -       2,747       2,672       -  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    28       30       -       76       81       -  

Total loans with no specific reserve:

    1,468       2,299       -       3,674       4,251       -  
                                                 

With an allowance recorded:

                                               

Real estate - construction

    -       -       -       -       -       -  

Real estate - 1 to 4 family residential

    82       104       28       208       360       76  

Real estate - commercial

    -       -       -       -       -       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    3,123       3,392       747       1,195       1,286       644  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    57       60       48       -       -       -  

Total loans with specific reserve:

    3,262       3,556       823       1,403       1,646       720  
                                                 

Total

                                               

Real estate - construction

    -       -       -       -       -       -  

Real estate - 1 to 4 family residential

    692       854       28       660       833       76  

Real estate - commercial

    703       1,369       -       399       1,025       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    3,250       3,542       747       3,942       3,958       644  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    85       90       48       76       81       -  
                                                 
    $ 4,730     $ 5,855     $ 823     $ 5,077     $ 5,897     $ 720  

 

 

The following is a recap of the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2017 and 2016: (in thousands)

 

   

Three Months Ended September 30,

 
   

2017

   

2016

 
   

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

    631       18       481       -  

Real estate - commercial

    716       -       450       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    139       2       67       -  

Agricultural

    -       -       11       -  

Consumer and other

    46       -       88       6  

Total loans with no specific reserve:

    1,532       20       1,097       6  
                                 

With an allowance recorded:

                               

Real estate - construction

    -       -       -       -  

Real estate - 1 to 4 family residential

    128       -       626       -  

Real estate - commercial

    -       -       -       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    3,263       -       1,003       2  

Agricultural

    -       -       -       -  

Consumer and other

    29       -       1       -  

Total loans with specific reserve:

    3,420       -       1,630       2  
                                 

Total

                               

Real estate - construction

    -       -       -       -  

Real estate - 1 to 4 family residential

    759       18       1,107       -  

Real estate - commercial

    716       -       450       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    3,402       2       1,070       2  

Agricultural

    -       -       11       -  

Consumer and other

    75       -       89       6  
                                 
    $ 4,952     $ 20     $ 2,727     $ 8  

 

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 
   

Investment

   

Recognized

   

Investment

   

Recognized

 

With no specific reserve recorded:

                               

Real estate - construction

  $ -     $ -     $ -     $ 31  

Real estate - 1 to 4 family residential

    535       27       438       1  

Real estate - commercial

    648       -       465       22  

Real estate - agricultural

    -       -       -       -  

Commercial

    1,457       3       39       -  

Agricultural

    -       -       11       -  

Consumer and other

    60       -       66       6  

Total loans with no specific reserve:

    2,700       30       1,019       60  
                                 

With an allowance recorded:

                               

Real estate - construction

    16       2       -       -  

Real estate - 1 to 4 family residential

    162       -       663       5  

Real estate - commercial

    -       -       26       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    2,193       -       732       2  

Agricultural

    -       -       -       -  

Consumer and other

    15       1       1       -  

Total loans with specific reserve:

    2,386       3       1,422       7  
                                 

Total

                               

Real estate - construction

    16       2       -       31  

Real estate - 1 to 4 family residential

    697       27       1,101       6  

Real estate - commercial

    648       -       491       22  

Real estate - agricultural

    -       -       -       -  

Commercial

    3,650       3       771       2  

Agricultural

    -       -       11       -  

Consumer and other

    75       1       67       6  
                                 
    $ 5,086     $ 33     $ 2,441     $ 67  

 

The interest foregone on nonaccrual loans for the three months ended September 30, 2017 and 2016 was approximately $88,000 and $46,000, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2017 and 2016 was approximately $289,000 and $124,000, respectively.

 

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $3,098,000 as of September 30, 2017, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000 as of December 31, 2016, 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 nine months ended September 30, 2017 and 2016: (dollars in thousands)

 

   

Three Months Ended September 30,

 
   

2017

   

2016

 
           

Pre-Modification

   

Post-Modification

           

Pre-Modification

   

Post-Modification

 
           

Outstanding

   

Outstanding

           

Outstanding

   

Outstanding

 
   

Number of

   

Recorded

   

Recorded

   

Number of

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

 
                                                 

Real estate - construction

    -     $ -     $ -       -     $ -     $ -  

Real estate - 1 to 4 family residential

    -       -       -       -       -       -  

Real estate - commercial

    -       -       -       -       -       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    -       -       -       -       -       -  

Agricultural

    -       -       -       -       -       -  

Consumer and other

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

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
           

Pre-Modification

   

Post-Modification

           

Pre-Modification

   

Post-Modification

 
           

Outstanding

   

Outstanding

           

Outstanding

   

Outstanding

 
   

Number of

   

Recorded

   

Recorded

   

Number of

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

 
                                                 

Real estate - construction

    -     $ -     $ -       -     $ -     $ -  

Real estate - 1 to 4 family residential

    -       -       -       -       -       -  

Real estate - commercial

    -       -       -       -       -       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    2       93       99       3       702       705  

Agricultural

    -       -       -       -       -       -  

Consumer and other

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

 

During the three and nine months ended September 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.

 

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

 

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

 

No TDR modified during the twelve months ended September 30, 2017 and 2016 had payment defaults.

 

A $530,000 specific reserve was established in the nine months ended September 30, 2017 on two TDR loans. There were $257,000 of net charge-offs related to TDRs for the nine months ended September 30, 2017. There were no charge-offs related to TDRs for the three and nine months ended September 30, 2016.

 

 

An aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, 2017 and December 31, 2016, is as follows: (in thousands)

 

2017

         

90 Days

                           

90 Days

 
    30-89    

or Greater

   

Total

                   

or Greater

 
   

Past Due

   

Past Due

   

Past Due

   

Current

   

Total

   

Accruing

 
                                                 

Real estate - construction

  $ 205     $ -     $ 205     $ 43,836     $ 44,041     $ -  

Real estate - 1 to 4 family residential

    1,065       476       1,541       147,299       148,840       81  

Real estate - commercial

    312       398       710       350,501       351,211       -  

Real estate - agricultural

    377       -       377       78,804       79,181       -  

Commercial

    129       429       558       73,608       74,166       -  

Agricultural

    207       -       207       67,504       67,711       -  

Consumer and other

    43       32       75       10,211       10,286       -  
                                                 
    $ 2,338     $ 1,335     $ 3,673     $ 771,763     $ 775,436     $ 81  

 

2016

         

90 Days

                           

90 Days

 
    30-89    

or Greater

   

Total

                   

or Greater

 
   

Past Due

   

Past Due

   

Past Due

   

Current

   

Total

   

Accruing

 
                                                 

Real estate - construction

  $ -     $ -     $ -     $ 61,042     $ 61,042     $ -  

Real estate - 1 to 4 family residential

    1,577       35       1,612       147,895       149,507       19  

Real estate - commercial

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

Real estate - agricultural

    -       -       -       73,032       73,032       -  

Commercial

    84       747       831       73,547       74,378       -  

Agricultural

    -       -       -       76,994       76,994       -  

Consumer and other

    36       3       39       12,091       12,130       3  
                                                 
    $ 3,117     $ 785     $ 3,902     $ 758,883     $ 762,785     $ 22  

 

 

The credit risk profile by internally assigned grade, on a disaggregated basis, as of September 30, 2017 and December 31, 2016 is as follows: (in thousands)

 

2017

 

Construction

   

Commercial

   

Agricultural

                         
   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

Total

 
                                                 

Pass

  $ 41,032     $ 329,263     $ 57,569     $ 59,420     $ 42,695     $ 529,979  

Watch

    3,009       17,927       18,984       10,020       23,828       73,768  

Special Mention

    -       189       1,234       -       -       1,423  

Substandard

    -       3,129       1,394       1,478       1,188       7,189  

Substandard-Impaired

    -       703       -       3,248       -       3,951  
                                                 
    $ 44,041     $ 351,211     $ 79,181     $ 74,166     $ 67,711     $ 616,310  

 

2016

 

Construction

   

Commercial

   

Agricultural

                         
   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

Total

 
                                                 

Pass

  $ 57,420     $ 288,107     $ 51,720     $ 59,506     $ 57,415     $ 514,168  

Watch

    3,245       22,833       15,251       9,512       18,938       69,779  

Special Mention

    -       204       4,228       96       75       4,603  

Substandard

    377       4,159       1,833       1,322       566       8,257  

Substandard-Impaired

    -       399       -       3,942       -       4,341  
                                                 
    $ 61,042     $ 315,702     $ 73,032     $ 74,378     $ 76,994     $ 601,148  

 

The credit risk profile based on payment activity, on a disaggregated basis, as of September 30, 2017 and December 31, 2016 is as follows:

 

2017

 

1-4 Family

                 
   

Residential

   

Consumer

         
   

Real Estate

   

and Other

   

Total

 
                         

Performing

  $ 148,069     $ 10,202     $ 158,271  

Non-performing

    771       84       855  
                         
    $ 148,840     $ 10,286     $ 159,126  

 

2016

 

1-4 Family

                 
   

Residential

   

Consumer

         
   

Real Estate

   

and Other

   

Total

 
                         

Performing

  $ 148,828     $ 12,051     $ 160,879  

Non-performing

    679       79       758  
                         
    $ 149,507     $ 12,130     $ 161,637  

 

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 September 30, 2017 and December 31, 2016: (in thousands)

 

   

2017

   

2016

 
   

Gross

   

Accumulated

   

Gross

   

Accumulated

 
   

Amount

   

Amortization

   

Amount

   

Amortization

 
                                 

Core deposit intangible asset

  $ 2,518     $ 1,793     $ 2,518     $ 1,563  

Customer list

    474       65       412       14  
                                 

Total

  $ 2,992     $ 1,858     $ 2,930     $ 1,577  

 

The weighted average life of the intangible assets is 3 years as of September 30, 2017 and December 31, 2016.

 

The following sets forth the activity related to the intangible assets for the three and nine months ended September 30, 2017 and 2016: (in thousands)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Beginning intangible asset, net

  $ 1,212     $ 1,122     $ 1,353     $ 1,309  

Adjustment to intangible asset

    12       -       62       -  

Amortization

    (90 )     (86 )     (281 )     (273 )
                                 

Ending intangible asset, net

  $ 1,134     $ 1,036     $ 1,134     $ 1,036  

 

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

 

2017

  $ 85  

2018

    319  

2019

    196  

2020

    139  

2021

    139  

2022

    133  

2023

    123  
         
    $ 1,134  

 

 

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 September 30, 2017 and December 31, 2016: (in thousands)

 

   

2017

   

2016

 
   

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

  $ 1,485     $ -     $ 1,485     $ 1,476     $ -     $ 1,476  

U.S. government agencies

    48,363       -       48,363       46,557       -       46,557  

U.S. government mortgage-backed securities

    24,514       -       24,514       30,376       -       30,376  
                                                 

Total

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

Term repurchase agreements (Other borrowings):

                                               

U.S. government agencies

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

U.S. government mortgage-backed securities

    -       -       -       -       354       354  
                                                 

Total

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

Total pledged collateral

  $ 74,362     $ 15,174     $ 89,536     $ 78,409     $ 15,422     $ 93,831  

 

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 September 30, 2017:

                                               

Total capital (to risk- weighted assets):

                                               

Consolidated

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

Boone Bank & Trust

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

First National Bank

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

Reliance State Bank

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

State Bank & Trust

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

United Bank & Trust

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

Tier 1 capital (to risk- weighted assets):

                                               

Consolidated

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

Boone Bank & Trust

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

First National Bank

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

Reliance State Bank

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

State Bank & Trust

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

United Bank & Trust

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

Tier 1 capital (to average- weighted assets):

                                               

Consolidated

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

Boone Bank & Trust

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

First National Bank

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

Reliance State Bank

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

State Bank & Trust

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

United Bank & Trust

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

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

                                               

Consolidated

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

Boone Bank & Trust

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

First National Bank

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

Reliance State Bank

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

State Bank & Trust

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

United Bank & Trust

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

 

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

 

 

                                   

To Be Well

 
                                   

Capitalized Under

 
                   

For Capital

   

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                                 

As of December 31, 2016:

                                               

Total capital (to risk- weighted assets):

                                               

Consolidated

  $ 170,358       17.2 %   $ 85,241       8.625 %     N/A       N/A  

Boone Bank & Trust

    15,044       17.2       7,534       8.625     $ 8,735       10.0 %

First National Bank

    78,322       15.3       44,279       8.625       51,338       10.0  

Reliance State Bank

    26,095       14.1       15,927       8.625       18,466       10.0  

State Bank & Trust

    20,170       16.4       10,590       8.625       12,278       10.0  

United Bank & Trust

    14,897       19.2       6,684       8.625       7,749       10.0  
                                                 

Tier 1 capital (to risk- weighted assets):

                                               

Consolidated

  $ 159,325       16.1 %   $ 65,475       6.625 %     N/A       N/A  

Boone Bank & Trust

    14,132       16.2       5,787       6.625     $ 6,988       8.0 %

First National Bank

    72,750       14.2       34,011       6.625       41,070       8.0  

Reliance State Bank

    24,139       13.1       12,234       6.625       14,773       8.0  

State Bank & Trust

    18,633       15.2       8,134       6.625       9,822       8.0  

United Bank & Trust

    14,078       18.2       5,134       6.625       6,199       8.0  
                                                 

Tier 1 capital (to average- weighted assets):

                                               

Consolidated

  $ 159,325       12.0 %   $ 53,316       4.000 %     N/A       N/A  

Boone Bank & Trust

    14,132       10.2       5,529       4.000     $ 6,911       5.0 %

First National Bank

    72,750       10.0       29,077       4.000       36,347       5.0  

Reliance State Bank

    24,139       11.5       8,374       4.000       10,467       5.0  

State Bank & Trust

    18,633       11.6       6,449       4.000       8,061       5.0  

United Bank & Trust

    14,078       12.5       4,523       4.000       5,654       5.0  
                                                 

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

                                               

Consolidated

  $ 159,325       16.1 %   $ 50,650       5.125 %     N/A       N/A  

Boone Bank & Trust

    14,132       16.2       4,477       5.125     $ 5,678       6.5 %

First National Bank

    72,750       14.2       26,311       5.125       33,370       6.5  

Reliance State Bank

    24,139       13.1       9,464       5.125       12,003       6.5  

State Bank & Trust

    18,633       15.2       6,292       5.125       7,981       6.5  

United Bank & Trust

    14,078       18.2       3,972       5.125       5,037       6.5  

 

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

 

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. The Company and the Banks have made the election to retain the existing treatment for accumulated other comprehensive income. 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 September 30, 2017, but prior to November 8, 2017, that provided additional evidence about conditions that existed at September 30, 2017. There were no other significant events or transactions that provided evidence about conditions that did not exist at September 30, 2017.

 

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 205 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.

 

 

The Company had net income of $3,928,000, or $0.42 per share, for the three months ended September 30, 2017, compared to net income of $3,804,000, or $0.41 per share, for the three months ended September 30, 2016.

 

The increase in quarterly earnings can be primarily attributed to an increase in loan interest income and a lower provision for loan losses, offset in part by increases in interest expense.

 

Net loan charge-offs (recoveries) totaled $105,000 and $(81,000) for the three months ended September 30, 2017 and 2016, respectively. The provision for loan losses totaled $57,000 and $235,000 for the three months ended September 30, 2017 and 2016, respectively.

 

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

 

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

 

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

 

Challenges

Key Performance Indicators and Industry Results

Critical Accounting Policies

Income Statement Review

Balance Sheet Review

Asset Quality Review and Credit Risk Management

Liquidity and Capital Resources

Forward-Looking Statements and Business Risks

 

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 13, 2017.

 

 

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 5,787 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.

 

Selected Indicators for the Company and the Industry 

 

   

3 Months

   

9 Months

                                                 
   

Ended

   

Ended

   

3 Months Ended

   

Years Ended December 31,

 
   

September 30, 2017

   

June 30, 2017

   

2016

   

2015

 
   

Company

   

Company

   

Industry*

   

Company

   

Industry

   

Company

   

Industry

 
                                                                 

Return on assets

    1.15 %     1.07 %     1.01 %     1.14 %     1.18 %     1.04 %     1.13 %     1.04 %
                                                                 

Return on equity

    9.08 %     8.64 %     8.17 %     10.11 %     9.38 %     9.32 %     9.44 %     9.31 %
                                                                 

Net interest margin

    3.29 %     3.25 %     3.25 %     3.22 %     3.36 %     3.13 %     3.33 %     3.07 %
                                                                 

Efficiency ratio

    52.42 %     53.16 %     52.93 %     56.32 %     51.95 %     58.28 %     53.59 %     59.91 %
                                                                 

Capital ratio

    12.70 %     12.41 %     12.37 %     9.69 %     12.60 %     9.48 %     12.00 %     9.59 %

 

*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 1.15% for the three months ended September 30, 2017 and 2016.

 

Return on Equity

 

This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 9.08% and 8.91% for the three months ended September 30, 2017 and 2016, respectively. The increase in this ratio in 2017 from the previous period is primarily due to an increase in net income.

 

Net Interest Margin

 

The net interest margin for the three months ended September 30, 2017 and 2016 was 3.29% and 3.38%, respectively. The ratio is calculated by dividing net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. The decrease in this ratio in 2017 is primarily the result of an increase in the interest rates on deposits.

 

 

Efficiency Ratio

 

This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 52.42% and 50.71% for the three months ended September 30, 2017 and 2016, respectively. The efficiency ratio remained consistent with prior periods.

 

Capital Ratio

 

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

 

Industry Results

 

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

 

Higher Net Interest Income Lifts Industry Earnings

 

Higher net interest income and restrained growth in operating expenses helped lift banking industry profits in second quarter 2017. The 5,787 commercial banks and savings institutions insured by the FDIC reported net income of $48.3 billion for the quarter, an increase of $4.7 billion (10.7%) compared with the second quarter of 2016. Almost two out of every three banks, 63.4% reported year-over-year earnings improvement, while only 4.1% were unprofitable, down from 4.6% a year earlier. The average return on assets (ROA) rose to 1.14% from 1.06% the year before. This is the highest quarterly ROA for the industry since second quarter 2007.

 

Net Interest Margins Improve

 

Net operating revenue—the sum of net interest income and total noninterest income—rose to $190.5 billion in the second quarter, an $11 billion (6.1%) increase from second quarter 2016. Most of the improvement consisted of higher net interest income, which was $10.3 billion (9.1%) higher than a year earlier. The increase in net interest income helped lift the industry’s net interest margin (NIM) to 3.22%, from 3.08% in second quarter 2016. This is the highest quarterly NIM since fourth quarter 2013. While 57.7% of all banks reported higher NIMs, the improvement was greatest at larger institutions. More of their assets reprice or mature in the short term, and they are better-positioned to benefit from rising short-term interest rates. Noninterest income totaled $66.8 billion, up $654 million (1%) from a year earlier. Income from asset servicing was $1 billion (93.9%) higher, while gains on asset sales were $1.6 billion (31.7%) lower. Trading income fell $313 million (4.5%).

 

Noninterest Expense Growth Is Moderate

 

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

 

 

Noncurrent Loan Balances Decline Further

 

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

 

Banks Shift Their Reserve Allocations

 

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

 

Retained Earnings Drive Capital Growth

 

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

 

Banks Reduce Their Federal Reserve Bank Balances

 

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

 

The Annual Loan Growth Rate Slows for a Third Consecutive Quarter

 

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

 

 

The Number of Banking Employees Rises 2.3% Over the Past Year

 

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

 

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, 2016 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.

 

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 September 30, 2017, 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.

 

 

Income Statement Review for the Three Months ended September 30, 2017 and 2016

 

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended September 30, 2017 and 2016:

 

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 September 30,

 
                                                 
   

2017

   

2016

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

ASSETS

                                               

(dollars in thousands)

                                               

Interest-earning assets

                                               

Loans 1

                                               

Commercial

  $ 77,788     $ 920       4.73 %   $ 88,265     $ 1,014       4.59 %

Agricultural

    67,951       922       5.43 %     73,879       900       4.87 %

Real estate

    623,214       6,756       4.34 %     555,002       6,131       4.42 %

Consumer and other

    10,514       132       5.03 %     21,513       191       3.56 %
                                                 

Total loans (including fees)

    779,467       8,730       4.48 %     738,659       8,236       4.46 %
                                                 

Investment securities

                                               

Taxable

    275,498       1,558       2.26 %     259,212       1,425       2.20 %

Tax-exempt 2

    230,249       1,862       3.23 %     249,400       2,045       3.28 %

Total investment securities

    505,747       3,420       2.70 %     508,612       3,470       2.73 %
                                                 

Interest bearing deposits with banks and federal funds sold

    27,183       115       1.69 %     25,533       87       1.36 %
                                                 

Total interest-earning assets

    1,312,397     $ 12,265       3.74 %     1,272,804     $ 11,793       3.71 %
                                                 

Noninterest-earning assets

    49,366                       55,732                  
                                                 

TOTAL ASSETS

  $ 1,361,763                     $ 1,328,536                  

 

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

 

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

 

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                 
   

Three Months Ended September 30,

 
                                                 
   

2017

   

2016

 
                                                 
   

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

  $ 712,550     $ 685       0.38 %   $ 658,522     $ 325       0.20 %

Time deposits > $100,000

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

Time deposits < $100,000

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

Total deposits

    909,455       1,169       0.51 %     866,204       754       0.35 %

Other borrowed funds

    71,266       292       1.64 %     94,504       274       1.16 %
                                                 

Total Interest-bearing liabilities

    980,721       1,461       0.60 %     960,708       1,028       0.43 %
                                                 

Noninterest-bearing liabilities

                                               

Demand deposits

    200,934                       188,419                  

Other liabilities

    7,132                       8,710                  
                                                 

Stockholders' equity

    172,976                       170,699                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,361,763                     $ 1,328,536                  
                                                 
                                                 

Net interest income

          $ 10,804       3.29 %           $ 10,765       3.38 %
                                                 

Spread Analysis

                                               

Interest income/average assets

  $ 12,265       3.60 %           $ 11,793       3.55 %        

Interest expense/average assets

  $ 1,461       0.43 %           $ 1,028       0.31 %        

Net interest income/average assets

  $ 10,804       3.17 %           $ 10,765       3.24 %        

 

Net Interest Income

 

For the three months ended September 30, 2017 and 2016, the Company's net interest margin adjusted for tax exempt income was 3.29% and 3.38%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, 2017 totaled $10,152,000 compared to $10,050,000 for the three months ended September 30, 2016.

 

For the three months ended September 30, 2017, interest income increased $535,000, or 5%, when compared to the same period in 2016. The increase from 2016 was primarily attributable to higher average balance of loans. The higher average balances of loans were due primarily to favorable economic conditions in our market areas.

 

Interest expense increased $433,000, or 42%, for the three months ended September 30, 2017 when compared to the same period in 2016. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to competitive pressures.

 

 

Provision for Loan Losses

 

The Company’s provision for loan losses was $57,000 and $235,000 for the three months ended September 30, 2017 and 2016, respectively. The decrease in the provision for loan losses was due primarily to an increase in specific reserves for one loan in 2016. Net loan charge-offs (recoveries) were $105,000 and $(81,000) for the three months ended September 30, 2017 and 2016, respectively. The increase net charge-offs related primarily to one commercial operating customer relationship. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.

 

Noninterest Income and Expense

 

Noninterest income decreased $144,000 for the three months ended September 30, 2017 compared to the same period in 2016. The decrease in noninterest income is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower gains on the sale of loans, offset in part by a 9% increase in wealth management income. The increase in wealth management income is primarily due to an revenue increases associated with an acquisition and higher revenues related to increases in assets under management, offset in part by lower one time estate fees. Exclusive of realized securities gains, noninterest income was 6% lower in the third quarter of 2017 compared to the same period in 2016.

 

Noninterest expense increased $184,000 or 3% for the three months ended September 30, 2017 compared to the same period in 2016 primarily as a result of lower other real estate owned income and higher occupancy costs. The decrease in other real estate income was due to the continuing lower levels of other real estate owned. The higher occupancy costs were primarily related to an increase in property tax expense. The efficiency ratio was 52.42% for the third quarter of 2017 as compared to 50.71% in 2016.

 

Income Taxes

 

The provision for income taxes expense for the three months ended September 30, 2017 and 2016 was $1,730,000 and $1,903,000, respectively, representing an effective tax rate of 31% and 33%, respectively. The lower effective tax rate than the expected tax rate of 35% for both periods is primarily due to tax-exempt interest income. The initial recording of a valuation allowance on a deferred tax asset resulted in a higher effective tax rate in 2016.

 

 

Income Statement Review for the Nine Months ended September 30, 2017 and 2016

 

The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 2017 and 2016:

 

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

 
                                                 
   

Nine Months Ended September 30,

 
                                                 
   

2017

   

2016

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

ASSETS

                                               

(dollars in thousands)

                                               

Interest-earning assets

                                               

Loans 1

                                               

Commercial

  $ 77,471     $ 2,613       4.50 %   $ 94,121     $ 3,192       4.52 %

Agricultural

    69,093       2,703       5.22 %     75,211       2,754       4.88 %

Real estate

    612,845       19,620       4.27 %     528,179       17,595       4.44 %

Consumer and other

    11,121       411       4.92 %     21,897       584       3.56 %
                                                 

Total loans (including fees)

    770,530       25,347       4.39 %     719,408       24,125       4.47 %
                                                 

Investment securities

                                               

Taxable

    271,913       4,637       2.27 %     262,604       4,393       2.23 %

Tax-exempt 2

    241,160       5,875       3.25 %     253,688       6,335       3.33 %

Total investment securities

    513,073       10,512       2.73 %     516,292       10,728       2.77 %
                                                 

Interest bearing deposits with banks and federal funds sold

    36,633       365       1.33 %     34,930       297       1.13 %
                                                 

Total interest-earning assets

    1,320,236     $ 36,224       3.66 %     1,270,630     $ 35,150       3.69 %
                                                 

Noninterest-earning assets

    49,268                       54,989                  
                                                 

TOTAL ASSETS

  $ 1,369,504                     $ 1,325,619                  

 

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

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

 

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                 
   

Nine Months Ended September 30,

 
                                                 
   

2017

   

2016

 
                                                 
   

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

  $ 717,946     $ 1,819       0.34 %   $ 663,891     $ 965       0.19 %

Time deposits > $100,000

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

Time deposits < $100,000

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

Total deposits

    916,548       3,204       0.47 %     876,268       2,259       0.34 %

Other borrowed funds

    75,662       863       1.52 %     84,261       796       1.26 %
                                                 

Total Interest-bearing liabilities

    992,210       4,067       0.55 %     960,529       3,055       0.42 %
                                                 

Noninterest-bearing liabilities

                                               

Demand deposits

    200,020                       190,176                  

Other liabilities

    7,319                       7,606                  
                                                 

Stockholders' equity

    169,955                       167,308                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,369,504                     $ 1,325,619                  
                                                 
                                                 

Net interest income

          $ 32,157       3.25 %           $ 32,095       3.37 %
                                                 

Spread Analysis

                                               

Interest income/average assets

  $ 36,224       3.53 %           $ 35,150       3.54 %        

Interest expense/average assets

  $ 4,067       0.40 %           $ 3,055       0.31 %        

Net interest income/average assets

  $ 32,157       3.13 %           $ 32,095       3.23 %        

 

Net Interest Income

 

For the nine months ended September 30, 2017 and 2016, the Company's net interest margin adjusted for tax exempt income was 3.25% and 3.37%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2017 totaled $30,100,000 compared to $29,877,000 for the nine months ended September 30, 2016.

 

For the nine months ended September 30, 2017, interest income increased $1,235,000, or 4%, when compared to the same period in 2016. The increase from 2016 was primarily attributable to higher average balance of loans, offset in part by lower yields on loans. The higher average balances of loans were due primarily to favorable economic conditions in our market areas. The lower yields on loans were due primarily to competitive pressures.

 

 

Interest expense increased $1,012,000, or 33%, for the nine months ended September 30, 2017 when compared to the same period in 2016. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to competitive pressures.

 

Provision for Loan Losses

 

The Company’s provision for loan losses was $1,222,000 and $441,000 for the nine months ended September 30, 2017 and 2016, respectively. The increase in the provision for loan losses was due primarily to the increase in the specific reserve for one commercial credit and growth in the loan portfolio. Net loan charge-offs (recoveries) were $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The increase in the net loan charge-offs were related primarily to commercial operating loans with construction contractors. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.

 

Noninterest Income and Expense

 

Noninterest income decreased $63,000 for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease in noninterest income is primarily due to decreases in gain on sale of loans and service fees, offset in part by an increase in security gains and other noninterest income. The decrease in the gain on the sale of loans is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower revenue. The increase in other noninterest income is primarily due to the collection of $73,000 on a court judgement previously deemed uncollectible by First Bank prior to the Company’s acquisition in 2014. Exclusive of realized securities gains, noninterest income was 5% lower for the nine months ended September 30, 2017 compared to the same period in 2016.

 

Noninterest expense increased $504,000 or 3% for the nine months ended September 30, 2017 compared to the same period in 2016 primarily as a result of normal salary and benefit increases and higher data processing costs. Data processing increases were due to increasing technology costs. The efficiency ratio was 53.16% for the nine months ended September 30, 2017 as compared to 51.99% in same period in 2016.

 

Income Taxes

 

The provision for income taxes expense for the nine months ended September 30, 2017 and 2016 was $4,662,000 and $5,087,000, respectively, representing an effective tax rate of 30% and 30%, respectively. The lower effective tax rate than the expected income tax rate of 35% for both periods is primarily due to tax-exempt interest income.

 

Balance Sheet Review

 

As of September 30, 2017, total assets were $1,364,940,000, a $1,513,000 decrease compared to December 31, 2016. The decrease in assets was due primarily to a decrease in cash and due from banks and securities available for sale, offset by an increase in loans.

 

Investment Portfolio

 

The investment portfolio totaled $506,610,000 as of September 30, 2017, a decrease of $9,469,000 from the December 31, 2016 balance of $516,080,000. The decrease in the investment portfolio was primarily due to sales, calls and maturities of state and political subdivision bonds.

 

 

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, 2017, gross unrealized losses of $783,000, are considered to be temporary in nature due to the interest rate environment of 2017 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.

 

At September 30, 2017, the Company’s investment securities portfolio included securities issued by 266 government municipalities and agencies located within 24 states with a fair value of $243.4 million. At December 31, 2016, the Company’s investment securities portfolio included securities issued by 286 government municipalities and agencies located within 25 states with a fair value of $264.4 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 September 30, 2017 was $4.4 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.

 

 

The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of September 30, 2017 and December 31, 2016 identifying the state in which the issuing government municipality or agency operates. (Dollars in thousands)

 

   

2017

   

2016

 
           

Estimated

           

Estimated

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
                                 

Obligations of states and political subdivisions:

                               

General Obligation bonds:

                               

Iowa

  $ 60,493     $ 60,732     $ 75,142     $ 74,408  

Texas

    12,188       12,359       11,091       11,065  

Pennsylvania

    8,720       8,795       8,728       8,654  

Washington

    6,640       6,609       7,221       6,957  

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

    24,150       24,601       28,064       28,258  
                                 

Total general obligation bonds

  $ 112,191     $ 113,096     $ 130,246     $ 129,342  
                                 

Revenue bonds:

                               

Iowa

  $ 118,886     $ 120,175     $ 126,750     $ 126,964  

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

    10,073       10,167       8,208       8,142  
                                 

Total revenue bonds

  $ 128,959     $ 130,342     $ 134,958     $ 135,106  
                                 

Total obligations of states and political subdivisions

  $ 241,150     $ 243,438     $ 265,204     $ 264,448  

 

As of September 30, 2017 and December 31, 2016, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 5 revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table. (in thousands)

 

   

2017

   

2016

 
           

Estimated

           

Estimated

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
                                 

Revenue bonds by revenue source

                               

Sales tax

  $ 72,894     $ 73,917     $ 77,586     $ 78,085  

Water

    14,139       14,218       11,283       11,296  

College and universities, primarily dormitory revenues

    10,457       10,538       14,105       13,907  

Leases

    9,062       9,098       9,106       8,960  

Electric

    8,428       8,545       8,446       8,459  

Other

    13,979       14,026       14,432       14,399  
                                 

Total revenue bonds by revenue source

  $ 128,959     $ 130,342     $ 134,958     $ 135,106  

 

Loan Portfolio

 

The loan portfolio, net of the allowance for loan losses, totaled $764,229,000, $768,208,000 and $752,182,000 as of September 30, 2017, June 30, 2017 and December 31, 2016, respectively. The increase in the loan portfolio since December 31, 2016 is primarily due to steady loan demand, in the Ames and Des Moines markets.   Loan demand has softened in the third quarter of 2017.

 

 

Deposits

 

Deposits totaled $1,114,538,000, $1,126,771,000 and $1,109,409,000 as of September 30, 2017, June 30, 2017 and December 31, 2016, respectively. The increase in deposits since December 31, 2016 was primarily due to increases in public funds NOW account balances. The decrease in deposits since June 30, 2017 was primarily due to decreases in retail NOW and public funds money market account balances.

 

Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase totaled $39,001,000 as of September 30, 2017, a decrease of $19,336,000, or 33%, from the December 31, 2016 balance of $58,337,000. The decrease in primarily due to withdrawals from three commercial accounts.

 

Off-Balance Sheet Arrangements

 

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2016.

 

Asset Quality Review and Credit Risk Management

 

The Company’s credit risk is historically centered in the loan portfolio, which on September 30, 2017 totaled $764,229,000 compared to $752,182,000 as of December 31, 2016. Net loans comprise 56% of total assets as of September 30, 2017. 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 0.62% at September 30, 2017, as compared to 0.67% at December 31, 2016 and 0.40% at September 30, 2016. The Company’s level of problem loans as a percentage of total loans at September 30, 2017 of 0.62% is lower than the Company’s peer group (339 bank holding companies with assets of $1 billion to $3 billion) of 0.72% as of June 30, 2017.

 

Impaired loans, net of specific reserves, totaled $3,907,000 as of September 30, 2017 and have decreased $450,000 as compared to the impaired loans of $4,357,000 as of December 31, 2016.

 

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

 

The Company had TDRs of $3,098,000 as of September 30, 2017, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000 as of December 31, 2016, 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.

 

 

For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. A $530,000 specific reserve was established in the nine months ended September 30, 2017 on a TDR loan. The Company had $257,000 of net charge-offs related to TDRs for the nine months ended September 30, 2017 and none for the same period in 2016.

 

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there is a strong reason that the credit should not be placed on non-accrual. As of September 30, 2017, non-accrual loans totaled $4,726,000 and there was one loan in the amount of $81,000 past due 90 days and still accruing. This compares to non-accrual loans of $5,077,000 and loans past due 90 days and still accruing totaled $22,000 as of December 31, 2016. Other real estate owned totaled $385,000 as of September 30, 2017 and $546,000 as of December 31, 2016.

 

The agricultural real estate and agricultural operating loan portfolio classifications remain in a weakened position. The watch and special mention loans in these categories totaled $44,046,000 as of September 30, 2017 as compared to $38,492,000 as of December 31, 2016. The substandard loans in these categories totaled $2,582,000 as of September 30, 2017 as compared to $2,399,000 as of December 31, 2016. The increase in these categories is primarily due to the impact on agricultural loans of low grain prices, mitigated by indications of favorable yields in 2017.

 

The allowance for loan losses as a percentage of outstanding loans as of September 30, 2017 was 1.44%, as compared to 1.38% at December 31, 2016. The allowance for loan losses totaled $11,140,000 and $10,507,000 as of September 30, 2017 and December 31, 2016, respectively. Net charge-offs (recoveries) of loans totaled $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, 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.

 

 

As of September 30, 2017, 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 September 30, 2017 and December 31, 2016 totaled $58,574,000 and $61,215,000, respectively, and provide an adequate level of liquidity given current economic conditions.

 

Other sources of liquidity available to the Banks as of September 30, 2017 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $183,824,000, with $19,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,571,000, with no outstanding federal fund purchase balances as of September 30, 2017. The Company had securities sold under agreements to repurchase totaling $39,001,000 and term repurchase agreements of $13,000,000 as of September 30, 2017.

 

Total investments as of September 30, 2017 were $506,610,000 compared to $516,080,000 as of December 31, 2016. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of September 30, 2017.

 

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 nine months ended September 30, 2017 totaled $13,553,000 compared to $14,585,000 for the nine months ended September 30, 2016. The decrease in cash provided by operating activities was primarily due to lower net income.

 

Net cash used in investing activities for the nine months ended September 30, 2017 was $4,184,000 compared to $14,181,000 for the nine months ended September 30, 2016. The decrease of $9,997,000 in cash used in investing activities was primarily due to a net decrease in the change in the loan portfolio of $26,204,000, offset in part by lower levels of proceeds from the sale of securities of $6,981,000 and a net increase in the change in the interest bearing deposits.

 

 

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

 

Company Only Cash Flows

 

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7,655,000 and $6,825,000 for the nine months ended September 30, 2017 and 2016, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.22 per share in 2017 from $0.21 per share in 2016.   

 

The Company, on an unconsolidated basis, has interest bearing deposits totaling $13,287,000 as of September 30, 2017 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 September 30, 2017 that are of concern to management.

 

Capital Resources

 

The Company’s total stockholders’ equity as of September 30, 2017 totaled $173,329,000 and was $8,224,000 higher than the $165,105,000 recorded as of December 31, 2016. The increase in stockholders’ equity was primarily due to net income and an increase in accumulated other comprehensive income, reduced by dividends declared. The increase in other comprehensive income is created by lower market interest rates on the longer end of the interest yield curve compared to December 31, 2016, which resulted in higher fair values in the securities available-for-sale portfolio. At September 30, 2017 and December 31, 2016, stockholders’ equity as a percentage of total assets was 12.70% and 12.08%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2017.

 

 

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 2017 changed significantly when compared to 2016.

 

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.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

In November, 2016, 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 September 30, 2017, 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 September 30, 2017.

 

                   

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

 
                                 

July 1, 2017 to July 31, 2017

    -     $ -       -       100,000  
                                 

August 1, 2017 to August 31, 2017

    -     $ -       -       100,000  
                                 

September 1, 2017 to September 30, 2017

    -     $ -       -       100,000  
                                 

Total

    -               -          

 

Item 3.

Defaults Upon Senior Securities

 

Not applicable

 

Item 4.

Mine Safety Disclosures

 

Not applicable

 

 

Item 5.

Other information

 

Not applicable

 

Item 6.

Exhibits

 

31.1

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

31.2

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

32.1

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.

 

SIGNATURES

 

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

 

  AMES NATIONAL CORPORATION
     

DATE: November 8, 2017

By:

/s/ Thomas H. Pohlman

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

/s/ John P. Nelson

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

 

 

EXHIBIT INDEX

 

The following exhibits are filed herewith:

 

Exhibit No.

Description

-----------

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

31.1

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

31.2

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

32.1

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

32.2

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

101.INS

XBRL Instance Document (1)

101.SCH

XBRL Taxonomy Extension Schema Document (1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

 

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

 

53