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

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

[Mark One]

 

[X]

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

  

For the quarterly period ended June 30, 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

(Do not check if a smaller reporting company)

     

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(a) of the Exchange Act.  ____

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____     No     X   

 

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

 

COMMON STOCK, $2.00 PAR VALUE 

 

9,310,913

(Class)

 

(Shares Outstanding at July 28, 2017)

                        

 

AMES NATIONAL CORPORATION

 

INDEX

 

    Page
     

Part I.

Financial Information

 
     

Item 1.

Consolidated Financial Statements (Unaudited)

3

     
  Consolidated Balance Sheets at June 30, 2017 and December 31, 2016 3
     
  Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016 4
     
  Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016 5
     
  Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2017 and 2016 6
     
  Consolidated Statements of Cash Flows for the six months ended June 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  
     

Part II.

Other Information

 
     

Item 1.

Legal Proceedings

49

     

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

50

     

Item 6.

Exhibits

51

     
  Signatures 52

  

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(unaudited)

   

June 30,

   

December 31,

 

ASSETS

 

2017

   

2016

 
                 

Cash and due from banks

  $ 19,573,969     $ 29,478,068  

Interest bearing deposits in financial institutions

    28,126,299       31,737,259  

Securities available-for-sale

    518,914,246       516,079,506  

Loans receivable, net

    768,208,213       752,181,730  

Loans held for sale

    543,683       242,618  

Bank premises and equipment, net

    15,845,997       16,049,379  

Accrued income receivable

    7,413,393       7,768,689  

Other real estate owned

    425,359       545,757  

Deferred income taxes

    1,713,812       3,485,689  

Intangible assets, net

    1,212,470       1,352,812  

Goodwill

    6,732,216       6,732,216  

Other assets

    915,960       799,306  
                 

Total assets

  $ 1,369,625,617     $ 1,366,453,029  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

LIABILITIES

               

Deposits

               

Demand, noninterest bearing

  $ 202,864,782     $ 212,074,792  

NOW accounts

    332,846,478       310,427,812  

Savings and money market

    393,254,840       381,852,433  

Time, $250,000 and over

    37,291,573       39,031,663  

Other time

    160,513,103       166,022,165  

Total deposits

    1,126,770,776       1,109,408,865  
                 

Securities sold under agreements to repurchase

    38,683,268       58,337,367  

Federal Home Loan Bank (FHLB) advances

    13,500,000       14,500,000  

Other borrowings

    13,000,000       13,000,000  

Dividends payable

    2,048,401       1,955,292  

Accrued expenses and other liabilities

    3,979,793       4,146,262  

Total liabilities

    1,197,982,238       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 June 30, 2017 and December 31, 2016

    18,621,826       18,621,826  

Additional paid-in capital

    20,878,728       20,878,728  

Retained earnings

    129,167,032       126,181,376  

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

    2,975,793       (576,687 )

Total stockholders' equity

    171,643,379       165,105,243  
                 

Total liabilities and stockholders' equity

  $ 1,369,625,617     $ 1,366,453,029  

 

See Notes to Consolidated Financial Statements.

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Interest income:

                               

Loans, including fees

  $ 8,499,729     $ 8,030,602     $ 16,615,414     $ 15,888,572  

Securities:

                               

Taxable

    1,566,707       1,471,926       3,079,626       2,967,236  

Tax-exempt

    1,290,808       1,388,791       2,608,870       2,788,822  

Interest bearing deposits and federal funds sold

    113,353       114,353       250,526       210,056  

Total interest income

    11,470,597       11,005,672       22,554,436       21,854,686  
                                 

Interest expense:

                               

Deposits

    1,113,389       755,377       2,034,819       1,505,498  

Other borrowed funds

    291,343       258,339       570,744       521,709  

Total interest expense

    1,404,732       1,013,716       2,605,563       2,027,207  
                                 

Net interest income

    10,065,865       9,991,956       19,948,873       19,827,479  
                                 

Provision for loan losses

    766,769       14,070       1,164,343       206,084  
                                 

Net interest income after provision for loan losses

    9,299,096       9,977,886       18,784,530       19,621,395  
                                 

Noninterest income:

                               

Wealth management income

    734,375       738,213       1,433,307       1,525,321  

Service fees

    365,753       404,614       724,885       801,705  

Securities gains, net

    95,644       29,500       460,679       231,193  

Gain on sale of loans held for sale

    226,530       257,254       364,542       434,011  

Merchant and card fees

    353,479       356,817       668,515       700,890  

Other noninterest income

    249,367       139,235       453,838       331,985  

Total noninterest income

    2,025,148       1,925,633       4,105,766       4,025,105  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    3,986,327       3,854,417       8,031,971       7,906,201  

Data processing

    850,133       780,732       1,673,912       1,541,864  

Occupancy expenses, net

    475,556       407,989       1,019,586       1,011,426  

FDIC insurance assessments

    111,140       161,531       214,971       325,519  

Professional fees

    313,528       325,085       611,673       593,001  

Business development

    222,720       220,956       460,461       456,116  

Other real estate owned expense (income), net

    (3,330 )     23,225       804       3,609  

Intangible asset amortization

    92,174       91,466       190,976       186,714  

Other operating expenses, net

    351,166       255,286       671,784       530,961  

Total noninterest expense

    6,399,414       6,120,687       12,876,138       12,555,411  
                                 

Income before income taxes

    4,924,830       5,782,832       10,014,158       11,091,089  
                                 

Provision for income taxes

    1,452,500       1,683,451       2,931,700       3,184,617  
                                 

Net income

  $ 3,472,330     $ 4,099,381     $ 7,082,458     $ 7,906,472  
                                 

Basic and diluted earnings per share

  $ 0.37     $ 0.44     $ 0.76     $ 0.85  
                                 

Dividends declared per share

  $ 0.22     $ 0.21     $ 0.44     $ 0.42  

 

See Notes to Consolidated Financial Statements.  

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 
                                 

Net income

  $ 3,472,330     $ 4,099,381     $ 7,082,458     $ 7,906,472  

Other comprehensive income, before tax:

                               

Unrealized gains on securities before tax:

                               

Unrealized holding gains arising during the period

    3,417,455       3,952,639       6,099,537       7,916,196  

Less: reclassification adjustment for gains realized in net income

    95,644       29,500       460,679       231,193  

Other comprehensive income, before tax

    3,321,811       3,923,139       5,638,858       7,685,003  

Tax effect related to other comprehensive income

    (1,229,071 )     (1,451,561 )     (2,086,378 )     (2,843,451 )

Other comprehensive income, net of tax

    2,092,740       2,471,578       3,552,480       4,841,552  

Comprehensive income

  $ 5,565,070     $ 6,570,959     $ 10,634,938     $ 12,748,024  

 

See Notes to Consolidated Financial Statements.  

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

Six Months Ended June 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

    -       -       7,906,472       -       7,906,472  

Other comprehensive income

    -       -       -       4,841,552       4,841,552  

Cash dividends declared, $0.42 per share

    -       -       (3,910,584 )     -       (3,910,584 )

Balance, June 30, 2016

  $ 18,621,826     $ 20,878,728     $ 122,263,655     $ 8,323,288     $ 170,087,497  
                                         

Balance, December 31, 2016

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

Net income

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

Other comprehensive income

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

Cash dividends declared, $0.44 per share

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

Balance, June 30, 2017

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

 

See Notes to Consolidated Financial Statements. 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Six Months Ended June 30, 2017 and 2016

   

2017

   

2016

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 7,082,458     $ 7,906,472  

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

               

Provision for loan losses

    1,164,343       206,084  

Provision for off-balance sheet commitments

    10,000       32,000  

Amortization, net

    1,423,539       1,533,920  

Amortization of intangible asset

    190,976       186,714  

Depreciation

    567,889       572,632  

Deferred income taxes

    (314,501 )     (68,500 )

Securities gains, net

    (460,679 )     (231,193 )

Gain on sales of loans held for sale

    (364,542 )     (434,011 )

Proceeds from loans held for sale

    14,927,797       19,147,297  

Originations of loans held for sale

    (14,864,320 )     (19,819,006 )

Loss on sale of premises and equipment, net

    31,557       -  

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

    (11,573 )     (4,642 )

Change in assets and liabilities:

               

Decrease in accrued income receivable

    355,296       181,262  

(Increase) decrease in other assets

    (127,899 )     62,076  

Increase (decrease) in accrued expenses and other liabilities

    (176,469 )     594,883  

Net cash provided by operating activities

    9,433,872       9,865,988  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchase of securities available-for-sale

    (45,014,269 )     (36,400,109 )

Proceeds from sale of securities available-for-sale

    10,823,579       12,886,350  

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

    35,966,958       38,639,280  

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

    3,610,960       (4,242,204 )

Net (increase) in loans

    (17,142,504 )     (11,748,177 )

Net proceeds from the sale of other real estate owned

    148,639       200,634  

Purchase of bank premises and equipment, net

    (384,819 )     (152,490 )

Other

    (50,634 )     -  

Net cash (used in) investing activities

    (12,042,090 )     (816,716 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Increase (decrease) in deposits

    17,361,911       (8,810,492 )

(Decrease) in securities sold under agreements to repurchase

    (19,654,099 )     (11,385,259 )

Payments on FHLB borrowings and other borrowings

    (1,000,000 )     (1,542,203 )

Proceeds from short-term FHLB borrowings, net

    -       12,800,000  

Dividends paid

    (4,003,693 )     (3,817,475 )

Net cash (used in) by financing activities

    (7,295,881 )     (12,755,429 )
                 

Net (decrease) in cash and due from banks

    (9,904,099 )     (3,706,157 )
                 

CASH AND DUE FROM BANKS

               

Beginning

    29,478,068       24,005,801  

Ending

  $ 19,573,969     $ 20,299,644  

   

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Six Months Ended June 30, 2017 and 2016

   

2017

   

2016

 
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

               

Cash payments for:

               

Interest

  $ 2,595,215     $ 2,054,551  

Income taxes

    3,468,613       2,524,913  
                 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES

               

Transfer of loans receivable to other real estate owned

  $ 16,668     $ -  

 

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 six months ended June 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 June 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 May 10, 2017, the Company declared a cash dividend on its common stock, payable on August 15, 2017 to stockholders of record as of August 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 six months ended June 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 June 30, 2017 and December 31, 2016. (in thousands)

 

Description

 

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

2017

                               
                                 

U.S. government treasuries

  $ 4,448     $ 4,448     $ -     $ -  

U.S. government agencies

    112,922       -       112,922       -  

U.S. government mortgage-backed securities

    85,898       -       85,898       -  

State and political subdivisions

    251,644       -       251,644       -  

Corporate bonds

    60,945       -       60,945       -  

Equity securities, other

    3,057       30       3,027       -  
                                 
    $ 518,914     $ 4,478     $ 514,436     $ -  
                                 

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 months ended June 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 June 30, 2017 and December 31, 2016. (in thousands)

 

Description

 

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

2017

                               
                                 

Loans receivable

  $ 2,645     $ -     $ -     $ 2,645  

Other real estate owned

    425       -       -       425  
                                 

Total

  $ 3,070     $ -     $ -     $ 3,070  
                                 

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 $321,000 as of June 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 June 30, 2017 and December 31, 2016 are as follows: (in thousands)

 

   

2017

 
   

Estimated

 

Valuation

   

Range

 
   

Fair Value

 

Techniques

Unobservable Inputs  

(Average)

 
                         

Impaired Loans

  $ 2,645  

Evaluation of collateral

Estimation of value

  NM*  
                         

Other real estate owned

  $ 425  

Appraisal

Appraisal adjustment

  6% - 8% (7%)  

 

   

2016

 
   

Estimated

 

Valuation

   

Range

 
   

Fair Value

 

Techniques

Unobservable Inputs  

(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 June 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 June 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

  $ 19,574     $ 19,574     $ 29,478     $ 29,478  

Interest bearing deposits

Level 1

    28,126       28,126       31,737       31,737  

Securities available-for-sale

See previous table

    518,914       518,914       516,080       516,080  

Loans receivable, net

Level 2

    768,208       757,915       752,182       746,580  

Loans held for sale

Level 2

    544       544       243       243  

Accrued income receivable

Level 1

    7,413       7,413       7,769       7,769  

Financial liabilities:

                                 

Deposits

Level 2

  $ 1,126,771     $ 1,127,257     $ 1,109,409     $ 1,110,211  

Securities sold under agreements to repurchase

Level 1

    38,683       38,683       58,337       58,337  

FHLB advances

Level 2

    13,500       13,588       14,500       14,681  

Other borrowings

Level 2

    13,000       13,222       13,000       13,386  

Accrued interest payable

Level 1

    418       418       408       408  

 

The methodologies used to determine fair value as of June 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 June 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

  $ 4,407     $ 41     $ -     $ 4,448  

U.S. government agencies

    112,193       889       (160 )     112,922  

U.S. government mortgage-backed securities

    84,943       1,084       (129 )     85,898  

State and political subdivisions

    249,067       2,984       (407 )     251,644  

Corporate bonds

    60,539       555       (149 )     60,945  

Equity securities, other

    3,042       15       -       3,057  
    $ 514,191     $ 5,568     $ (845 )   $ 518,914  

 

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

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Proceeds from sales of securities available-for-sale

  $ 183     $ 521     $ 10,824     $ 12,886  

Gross realized gains on securities available-for-sale

    96       29       463       237  

Gross realized losses on securities available-for-sale

    -       -       (2 )     (6 )

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

    33       10       161       81  

 

  

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of June 30, 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

  $ 26,095     $ (105 )   $ 3,949     $ (55 )   $ 30,044     $ (160 )

U.S. government mortgage-backed securities

    15,178       (129 )     -       -       15,178       (129 )

State and political subdivisions

    42,933       (243 )     5,249       (164 )     48,182       (407 )

Corporate bonds

    19,027       (133 )     514       (16 )     19,541       (149 )
    $ 103,233     $ (610 )   $ 9,712     $ (235 )   $ 112,945     $ (845 )

 

   

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 $845,000 as of June 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 six months ended June 30, 2017 and 2016 is as follows: (in thousands)

 

   

Three Months Ended June 30, 2017

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, March 31, 2017

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

Provision (credit) for loan losses

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

Recoveries of loans charged-off

    -       3       -       -       27       -       1       31  

Loans charged-off

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

Balance, June 30, 2017

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

 

   

Six Months Ended June 30, 2017

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, December 31, 2016

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

Provision (credit) for loan losses

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

Recoveries of loans charged-off

    -       5       -       -       28       -       4       37  

Loans charged-off

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

Balance, June 30, 2017

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

 

   

Three Months Ended June 30, 2016

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, March 31, 2016

  $ 787     $ 1,757     $ 3,763     $ 817     $ 1,400     $ 1,322     $ 256     $ 10,102  

Provision (credit) for loan losses

    (44 )     (15 )     127       17       34       (103 )     (2 )     14  

Recoveries of loans charged-off

    15       -       -       -       5       -       4       24  

Loans charged-off

    -       -       -       -       -       -       (5 )     (5 )

Balance, June 30, 2016

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

 

   

Six Months Ended June 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

    (256 )     (66 )     333       74       139       (37 )     19       206  

Recoveries of loans charged-off

    15       2       -       -       6       -       5       28  

Loans charged-off

    -       -       -       -       (77 )     -       (10 )     (87 )

Balance, June 30, 2016

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

 

  

Allowance for loan losses disaggregated on the basis of impairment analysis method as of June 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

  $ -     $ 65     $ -     $ -     $ 866     $ -     $ -     $ 931  

Collectively evaluated for impairment

    780       1,648       4,437       907       1,205       1,154       126       10,257  

Balance June 30, 2017

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

 

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 June 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

  $ -     $ 825     $ 728     $ -     $ 3,554     $ -     $ 63     $ 5,170  

Collectively evaluated for impairment

    49,810       144,896       346,978       76,228       74,938       70,566       10,883       774,299  
                                                                 

Balance June 30, 2017

  $ 49,810     $ 145,721     $ 347,706     $ 76,228     $ 78,492     $ 70,566     $ 10,946     $ 779,469  

 

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 June 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

    652       682       -       452       473       -  

Real estate - commercial

    728       1,378       -       399       1,025       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    151       223       -       2,747       2,672       -  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    63       78       -       76       81       -  

Total loans with no specific reserve:

    1,594       2,361       -       3,674       4,251       -  
                                                 

With an allowance recorded:

                                               

Real estate - construction

    -       -       -       -       -       -  

Real estate - 1 to 4 family residential

    173       322       65       208       360       76  

Real estate - commercial

    -       -       -       -       -       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    3,403       3,565       866       1,195       1,286       644  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    -       -       -       -       -       -  

Total loans with specific reserve:

    3,576       3,887       931       1,403       1,646       720  
                                                 

Total

                                               

Real estate - construction

    -       -       -       -       -       -  

Real estate - 1 to 4 family residential

    825       1,004       65       660       833       76  

Real estate - commercial

    728       1,378       -       399       1,025       -  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    3,554       3,788       866       3,942       3,958       644  

Agricultural

    -       -       -       -       -       -  

Consumer and other

    63       78       -       76       81       -  
                                                 
    $ 5,170     $ 6,248     $ 931     $ 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 six months ended June 30, 2017 and 2016: (in thousands)

 

   

Three Months Ended June 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

    538       6       513       -  

Real estate - commercial

    744       -       487       22  

Real estate - agricultural

    -       -       -       -  

Commercial

    1,476       1       10       -  

Agricultural

    -       -       11       -  

Consumer and other

    69       -       88       -  

Total loans with no specific reserve:

    2,827       7       1,109       53  
                                 

With an allowance recorded:

                               

Real estate - construction

    32       2       -       -  

Real estate - 1 to 4 family residential

    178       -       640       -  

Real estate - commercial

    -       -       -       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    2,227       -       729       -  

Agricultural

    -       -       -       -  

Consumer and other

    2       1       1       -  

Total loans with specific reserve:

    2,439       3       1,370       -  
                                 

Total

                               

Real estate - construction

    32       2       -       31  

Real estate - 1 to 4 family residential

    716       6       1,153       -  

Real estate - commercial

    744       -       487       22  

Real estate - agricultural

    -       -       -       -  

Commercial

    3,703       1       739       -  

Agricultural

    -       -       11       -  

Consumer and other

    71       1       89       -  
                                 
    $ 5,266     $ 10     $ 2,479     $ 53  

 

 
   

Six Months Ended June 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

    509       9       441       1  

Real estate - commercial

    629       -       476       22  

Real estate - agricultural

    -       -       -       -  

Commercial

    1,900       1       10       -  

Agricultural

    -       -       11       -  

Consumer and other

    71       -       59       -  

Total loans with no specific reserve:

    3,109       10       997       54  
                                 

With an allowance recorded:

                               

Real estate - construction

    21       2       -       -  

Real estate - 1 to 4 family residential

    188       -       678       5  

Real estate - commercial

    -       -       34       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    1,883       -       548       -  

Agricultural

    -       -       -       -  

Consumer and other

    1       1       1       -  

Total loans with specific reserve:

    2,093       3       1,261       5  
                                 

Total

                               

Real estate - construction

    21       2       -       31  

Real estate - 1 to 4 family residential

    697       9       1,119       6  

Real estate - commercial

    629       -       510       22  

Real estate - agricultural

    -       -       -       -  

Commercial

    3,783       1       558       -  

Agricultural

    -       -       11       -  

Consumer and other

    72       1       60       -  
                                 
    $ 5,202     $ 13     $ 2,258     $ 59  

 

The interest foregone on nonaccrual loans for the three months ended June 30, 2017 and 2016 was approximately $103,000 and $39,000, respectively. The interest foregone on nonaccrual loans for the six months ended June 30, 2017 and 2016 was approximately $201,000 and $79,000, respectively.

 

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $3,302,000 as of June 30, 2017, all of which were included in impaired loans and $3,231,000 were included as 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 six months ended June 30, 2017 and 2016: (dollars in thousands)

 

   

Three Months Ended March 31,

 
   

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

    -       -       -       -       -       -  
                                                 
      2     $ 93     $ 99       3     $ 702     $ 705  

 

   

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

 

During the three months ended June 30, 2016, the Company granted concessions to a borrower that was experiencing financial difficulties with three loans. During the six months ended June 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 June 30, 2017 and 2016 had payment defaults.

 

A $500,000 specific reserve was established in the three months ended June 30, 2017 on a TDR loan. There were $257,000 of net charge-offs related to TDRs for the three and six months ended June 30, 2017. There were no charge-offs related to TDRs for the three and six months ended June 30, 2016.

 

 

An aging analysis of the recorded investments in loans, on a disaggregated basis, as of June 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

  $ 1,392     $ -     $ 1,392     $ 48,418     $ 49,810     $ -  

Real estate - 1 to 4 family residential

    352       472       824       144,897       145,721       80  

Real estate - commercial

    1,092       391       1,483       346,223       347,706       -  

Real estate - agricultural

    116       -       116       76,112       76,228       -  

Commercial

    657       -       657       77,835       78,492       -  

Agricultural

    16       -       16       70,550       70,566       -  

Consumer and other

    65       -       65       10,881       10,946       -  
                                                 
    $ 3,690     $ 863     $ 4,553     $ 774,916     $ 779,469     $ 80  

 

 

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 June 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

  $ 47,538     $ 331,799     $ 54,397     $ 63,465     $ 46,294     $ 543,493  

Watch

    2,272       10,110       19,175       10,270       22,885       64,712  

Special Mention

    -       194       1,234       -       -       1,428  

Substandard

    -       4,875       1,422       1,203       1,387       8,887  

Substandard-Impaired

    -       728       -       3,554       -       4,282  
                                                 
    $ 49,810     $ 347,706     $ 76,228     $ 78,492     $ 70,566     $ 622,802  

 

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 June 30, 2017 and December 31, 2016 is as follows:

 

2017

 

1-4 Family

                 
   

Residential

   

Consumer

         
   

Real Estate

   

and Other

   

Total

 
                         

Performing

  $ 144,814     $ 10,883     $ 155,697  

Non-performing

    907       63       970  
                         
    $ 145,721     $ 10,946     $ 156,667  

 

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

  

   

2017

   

2016

 
   

Gross

   

Accumulated

   

Gross

   

Accumulated

 
   

Amount

   

Amortization

   

Amount

   

Amortization

 
                                 

Core deposit intangible asset

  $ 2,518     $ 1,720     $ 2,518     $ 1,563  

Customer list

    478       64       412       14  
                                 

Total

  $ 2,996     $ 1,784     $ 2,930     $ 1,577  

  

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

  

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Beginning intangible asset, net

  $ 1,238     $ 1,214     $ 1,353     $ 1,309  

Adjustment to intangible asset

    66       -       50       -  

Amortization

    (92 )     (92 )     (191 )     (187 )
                                 

Ending intangible asset, net

  $ 1,212     $ 1,122     $ 1,212     $ 1,122  

  

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

 

2017

  $ 174  

2018

    317  

2019

    194  

2020

    137  

2021

    137  

2022

    131  

2023

    122  
         
    $ 1,212  

 

10.

Pledged Collateral Related to Securities Sold Under Repurchase Agreements

 

The following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements and term repurchase agreements as of June 30, 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

    40,933       -       40,933       46,557       -       46,557  

U.S. government mortgage-backed securities

    25,410       -       25,410       30,376       -       30,376  
                                                 

Total

  $ 67,828     $ -     $ 67,828     $ 78,409     $ -     $ 78,409  
                                                 

Term repurchase agreements (Other borrowings):

                                               

U.S. government agencies

  $ -     $ 15,188     $ 15,188     $ -     $ 15,068     $ 15,068  

U.S. government mortgage-backed securities

    -       -       -       -       354       354  
                                                 

Total

  $ -     $ 15,188     $ 15,188     $ -     $ 15,422     $ 15,422  
                                                 

Total pledged collateral

  $ 67,828     $ 15,188     $ 83,016     $ 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 June 30, 2017:

                                               

Total capital (to risk-weighted assets):

                                               

Consolidated

  $ 173,282       17.4 %   $ 92,333       9.25 %     N/A       N/A  

Boone Bank & Trust

    15,224       16.4       8,595       9.25     $ 9,292       10.0 %

First National Bank

    80,300       15.1       49,144       9.25       53,129       10.0  

Reliance State Bank

    26,685       15.7       15,758       9.25       17,036       10.0  

State Bank & Trust

    19,792       15.9       11,522       9.25       12,457       10.0  

United Bank & Trust

    14,845       20.0       6,871       9.25       7,429       10.0  
                                                 

Tier 1 capital (to risk-weighted assets):

                                               

Consolidated

  $ 161,558       16.2 %   $ 72,369       7.25 %     N/A       N/A  

Boone Bank & Trust

    14,312       15.4       6,736       7.25     $ 7,433       8.0 %

First National Bank

    74,293       14.0       38,518       7.25       42,503       8.0  

Reliance State Bank

    24,695       14.5       12,351       7.25       13,629       8.0  

State Bank & Trust

    18,230       14.6       9,031       7.25       9,965       8.0  

United Bank & Trust

    14,028       18.9       5,386       7.25       5,943       8.0  
                                                 

Tier 1 capital (to average-weighted assets):

                                               

Consolidated

  $ 161,558       11.8 %   $ 54,574       4.00 %     N/A       N/A  

Boone Bank & Trust

    14,312       10.3       5,539       4.00     $ 6,924       5.0 %

First National Bank

    74,293       9.9       30,143       4.00       37,678       5.0  

Reliance State Bank

    24,695       12.0       8,261       4.00       10,326       5.0  

State Bank & Trust

    18,230       11.4       6,404       4.00       8,005       5.0  

United Bank & Trust

    14,028       12.5       4,486       4.00       5,607       5.0  
                                                 

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

                                               

Consolidated

  $ 161,558       16.2 %   $ 57,396       5.75 %     N/A       N/A  

Boone Bank & Trust

    14,312       15.4       5,343       5.75     $ 6,039       6.5 %

First National Bank

    74,293       14.0       30,549       5.75       34,534       6.5  

Reliance State Bank

    24,695       14.5       9,796       5.75       11,073       6.5  

State Bank & Trust

    18,230       14.6       7,162       5.75       8,097       6.5  

United Bank & Trust

    14,028       18.9       4,271       5.75       4,829       6.5  

 

* These ratios for June 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 June 30, 2017, but prior to August 8, 2017, that provided additional evidence about conditions that existed at June 30, 2017. There were no other significant events or transactions that provided evidence about conditions that did not exist at June 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 207 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 Company and 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 $3,472,000, or $0.37 per share, for the three months ended June 30, 2017, compared to net income of $4,099,000, or $0.44 per share, for the three months ended June 30, 2016. Total equity capital as of June 30, 2017 totaled $171.6 million or 12.5% of total assets.

 

The decrease in quarterly 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 $479,000 and $(19,000) for the three months ended June 30, 2017 and 2016, respectively. The provision for loan losses totaled $767,000 and $14,000 for the three months ended June 30, 2017 and 2016, respectively. 

 

The Company had net income of $7,082,000, or $0.76 per share, for the six months ended June 30, 2017, compared to net income of $7,906,000, or $0.85 per share, for the six months ended June 30, 2016.

 

The decrease in six 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 totaled $482,000 and $59,000 for the six months ended June 30, 2017 and 2016, respectively. The provision for loan losses totaled $1,164,000 and $206,000 for the six months ended June 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 5,856 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

   

6 Months

                                                 
   

Ended

   

Ended

   

3 Months Ended

   

Years Ended December 31,

 
   

June 30, 2017

   

March 31, 2017

   

2016

   

2015

 
   

Company

   

Company

   

Industry*

   

Company

   

Industry

   

Company

   

Industry

 
                                                                 

Return on assets

    1.01 %     1.03 %     1.05 %     1.04 %     1.18 %     1.04 %     1.13 %     1.04 %
                                                                 

Return on equity

    8.17 %     8.41 %     8.66 %     9.37 %     9.38 %     9.32 %     9.44 %     9.31 %
                                                                 

Net interest margin

    3.25 %     3.22 %     3.20 %     3.19 %     3.36 %     3.13 %     3.33 %     3.07 %
                                                                 

Efficiency ratio

    52.93 %     53.53 %     54.14 %     58.77 %     51.95 %     58.28 %     53.59 %     59.91 %
                                                                 

Capital ratio

    12.37 %     12.26 %     12.16 %     9.57 %     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 1.01% and 1.23% for the three months ended June 30, 2017 and 2016, respectively. The decrease in this ratio in 2017 from the previous period is primarily due to a decrease in net income associated with an increased provision for loan losses and increases in interest expense, offset in part by an increase in loan interest income. 

 

●       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 8.17% and 9.82% for the three months ended June 30, 2017 and 2016, respectively. The decrease in this ratio in 2017 from the previous period is primarily due to a decrease in net income.

 

●       Net Interest Margin

 

The net interest margin for the three months ended June 30, 2017 and 2016 was 3.25% and 3.36%, 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 a decrease in the yield on loans and 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 52.93% and 51.36% for the three months ended June 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 12.37% as of June 30, 2017 is significantly higher than the industry average as of March 31, 2017.

 

Industry Results

 

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

 

First Quarter Net Income of $44 Billion Is 12.7% Higher Than a Year Ago

 

Higher net operating revenue helped lift quarterly earnings of FDIC-insured institutions to $44 billion in the first quarter of 2017. First quarter net income was $5 billion (12.7%) higher than the year-earlier total. More than 57% of all banks reported year-over-year increases in quarterly earnings, while only 4.1% reported negative net income for the quarter. In the first quarter of 2016, 5.1% of banks were unprofitable. The average return on assets (ROA) rose to 1.04%, from 0.97% a year ago.

 

Banks Post 6.3% Year-Over-Year Growth in Net Operating Revenue

 

Net operating revenue, the sum of net interest income and total noninterest income, totaled $183.6 billion, an increase of $10.9 billion (6.3%) from a year ago. More than two out of three banks, 69.7%, reported year-over-year growth in net operating revenue. Noninterest income increased $2.1 billion (3.4%) over first quarter 2016, as trading income rose by $1.5 billion (26%), and servicing income increased by $1.9 billion (220.6%). Net interest income was $8.8 billion (7.8%) higher, as average interest-bearing assets rose 4.9%, and the average net interest margin (NIM) improved to 3.19% from 3.10% a year ago. Much of the NIM improvement occurred at large banks, as higher short-term interest rates lifted average asset yields. Smaller banks, which have a larger share of their assets in longer-term investments, did not see their NIMs benefit from the rise in short-term rates. More than half of all banks, 53.7%, reported lower NIMs than a year ago. Noninterest expenses were $4.5 billion (4.3%) higher than a year ago. Salary and employee benefits costs rose $3.3 billion (6.6%), as FDIC-insured institutions reported 41,469 more employees than a year ago, a 2% increase. Expenses for premises and fixed assets increased by $435 million (3.9%) compared to first quarter 2016.

 

Provisions Register First Decline in Almost Three Years

 

Banks set aside $12 billion in provisions for loan losses in the first quarter, a decline of $541 million (4.3%) from a year earlier. This is the first time in the past 11 quarters that loss provisions have fallen. A slightly larger proportion of banks reported higher provision expenses, 34.8%, compared to the 31.5% who had lower quarterly provisions.

 

 

Banks Report Higher Charge-Offs on Loans to Individuals

  

During the first quarter, banks charged-off $11.5 billion in loans, an increase of $1.4 billion (13.4%) over the total for first quarter 2016. This is the sixth consecutive quarter that charge-offs have posted a year-over-year increase. Most of the increase consisted of higher losses on loans to individuals. Net charge-offs of credit card balances were up $1.3 billion (22.1%), while auto loan charge-offs increased $199 million (27.7%), and charge-offs of other loans to individuals rose by $474 million (66.4%). In contrast, charge-offs on loans to commercial and industrial (C&I) borrowers were $291 million (15.7%) lower than a year ago, while residential mortgage charge-offs were $221 million (52.5%) lower. The average net charge-off rate in the first quarter was 0.49%, compared to 0.46% a year earlier.

 

Noncurrent Loan Balances Continue to Decline

 

The amount of loans and leases that were noncurrent, 90 days or more past due or in nonaccrual status, fell for the 27th time in the last 28 quarters. In the first three months of 2017, noncurrent loan balances declined by $7 billion (5.3%). All major loan categories saw noncurrent balances fall during the quarter. Noncurrent residential mortgage loans declined by $5.3 billion (8.2%), while noncurrent C&I loans fell by $1.2 billion (4.6%). The average noncurrent loan rate improved from 1.42% at year-end 2016 to 1.34% at the end of March. This is the lowest average noncurrent rate for the industry since third quarter 2007.

 

Coverage Ratio Nears 100%

 

The industry’s reserves for loan losses were essentially unchanged in the first quarter. Industry reserves stood at $121.8 billion at the end of the quarter, only $99 million (0.1%) higher than the total at year-end 2016. Banks with assets greater than $1 billion, which together account for more than 96% of total industry reserves, increased their reserves for credit card losses by $1.1 billion (3.7%) during the quarter, while reducing their reserves for residential real estate losses by $646 million (3.7%), and lowering their reserves for commercial loan losses by $559 million (1.6%). As a result of the decline in noncurrent loan balances during the quarter, the industry’s coverage ratio of reserves to noncurrent loans improved from 92.2% to 97.5%. This is the highest level for the coverage ratio since the end of third quarter 2007.

 

Equity Capital Posts Relatively Strong Increase

 

Equity capital increased by $28.6 billion (1.5%) during the quarter. Retained earnings contributed $16.7 billion to equity growth in the quarter. This is $1.6 billion (8.9%) less than a year ago, as first quarter dividends were $6.6 billion (31.7%) higher. Accumulated other comprehensive income posted a $3.3 billion improvement, as a slight decline in long-term interest rates caused a reduction in unrealized losses in securities portfolios.

 

Banks Increase Balances at Federal Reserve Banks

 

Total assets increased by $186.1 billion (1.1%) during the quarter. Banks increased their balances at Federal Reserve banks by $187.4 billion (17%), while assets in trading accounts rose by $27 billion (4.9%). Securities portfolios increased by $24.5 billion (0.7%), as securities in held-to-maturity accounts rose by $52.6 billion (5.9%), and securities in available-for-sale accounts declined by 28.1 billion (1.1%). Balances due from banks in foreign countries declined by $30.3 billion (8%).

  

 

Pace of Loan Growth Slows

 

Total loans and leases declined by $8.1 billion (0.1%) during the three months ended March 31. This is the first quarterly decline in loan balances since first quarter 2013. Credit card loans posted a seasonal decline of $43.7 billion (5.5%), as cardholders paid down outstanding balances. Residential mortgage loans fell by $10.2 billion (0.5%), reflecting increased loan sales activity. C&I loans increased by $25.6 billion (1.3%), while real estate loans secured by nonfarm nonresidential properties rose by $22.5 billion (1.7%). Unused loan commitments increased by $119.3 billion (1.7%) during the quarter. The slowing in loan growth that began in the second half of last year continued through the first quarter. The 12-month loan growth rate slowed to 4%, down from 5.3% in calendar year 2016. While all major loan categories saw balances rise over the past 12 months, annual growth rates are now lower than they were in the previous quarter and a year ago. The rate of loan growth remains above the nominal GDP growth rate.

 

Retail Deposits Provide Most of the Growth in Funding

 

Buoyed by growth in consumer accounts, total deposits increased by $189.1 billion (1.5%) during the quarter. Deposits in domestic offices of FDIC-insured institutions rose by $165.5 billion (1.4%), while deposits in foreign offices were up $23.6 billion (1.9%). Domestic deposit balances in consumer accounts increased by $181 billion (4.3%). During the quarter, banks reduced their nondeposit liabilities by $30.7 billion (1.5%), as Federal Home Loan Bank advances declined by $40.8 billion (7.2%), and trading liabilities fell by $8.4 billion (3.4%).

 

Two New Charters Added in the First Quarter

 

The number of FDIC-insured commercial banks and savings institutions declined from 5,913 to 5,856 during the first quarter. In the first three months of 2017, mergers absorbed 54 insured institutions, while 3 banks failed. Two new charters were added during the quarter, the first new charters since third quarter 2015. Banks reported 2,081,422 full-time equivalent employees in the first quarter, an increase of 28,444 from fourth quarter 2016, and 41,469 (2%) more than a year ago. The number of insured institutions on the FDIC’s Problem Bank List fell from 123 to 112 during the first quarter. This is the smallest number since first quarter 2008. Total assets of “Problem” banks declined from $27.6 billion to $23.4 billion.

 

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 June 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 June 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 June 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 June 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

  $ 79,493     $ 879       4.42 %   $ 93,880     $ 1,073       4.57 %

Agricultural

    71,939       946       5.26 %     77,100       938       4.87 %

Real estate

    613,289       6,537       4.26 %     522,043       5,822       4.46 %

Consumer and other

    11,241       138       4.91 %     22,163       197       3.55 %
                                                 

Total loans (including fees)

    775,962       8,500       4.38 %     715,186       8,030       4.49 %
                                                 

Investment securities

                                               

Taxable

    272,735       1,567       2.30 %     263,108       1,472       2.24 %

Tax-exempt 2

    244,088       1,986       3.25 %     254,342       2,138       3.36 %

Total investment securities

    516,823       3,553       2.75 %     517,450       3,610       2.79 %
                                                 

Interest bearing deposits with banks and federal funds sold

    33,200       113       1.37 %     47,610       114       0.96 %
                                                 

Total interest-earning assets

    1,325,985     $ 12,166       3.67 %     1,280,246     $ 11,754       3.67 %
                                                 

Noninterest-earning assets

    48,727                       54,989                  
                                                 

TOTAL ASSETS

  $ 1,374,712                     $ 1,335,235                  

 

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 June 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

  $ 728,850     $ 656       0.36 %   $ 680,576     $ 332       0.20 %

Time deposits > $100,000

    82,362       221       1.07 %     85,585       194       0.91 %

Time deposits < $100,000

    115,130       237       0.82 %     125,692       230       0.73 %

Total deposits

    926,342       1,114       0.48 %     891,853       756       0.34 %

Other borrowed funds

    76,769       291       1.52 %     78,070       258       1.32 %
                                                 

Total Interest-bearing liabilities

    1,003,111       1,405       0.56 %     969,923       1,014       0.42 %
                                                 

Noninterest-bearing liabilities

                                               

Demand deposits

    194,505                       190,941                  

Other liabilities

    7,064                       7,352                  
                                                 

Stockholders' equity

    170,032                       167,019                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,374,712                     $ 1,335,235                  
                                                 
                                                 

Net interest income

          $ 10,761       3.25 %           $ 10,740       3.36 %
                                                 

Spread Analysis

                                               

Interest income/average assets

  $ 12,166       3.54 %           $ 11,754       3.52 %        

Interest expense/average assets

  $ 1,405       0.41 %           $ 1,014       0.30 %        

Net interest income/average assets

  $ 10,761       3.13 %           $ 10,740       3.22 %        

 

Net Interest Income

 

For the three months ended June 30, 2017 and 2016, the Company's net interest margin adjusted for tax exempt income was 3.25% and 3.36%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended June 30, 2017 totaled $10,066,000 compared to $9,992,000 for the three months ended June 30, 2016.

 

For the three months ended June 30, 2017, interest income increased $465,000, 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 the low interest rate environment. 

  

 

Interest expense increased $391,000, or 39%, for the three months ended June 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 $767,000 and $14,000 for the three months ended June 30, 2017 and 2016, respectively. Net loan charge-offs (recoveries) were $481,000 and $(19,000) for the three months ended June 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 to a lessor extent growth in the loan portfolio. The increase in the specific reserve and the net charge-offs 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 low grain prices; however, crop growing conditions for the Company’s market areas have been generally favorable as of the end of the current quarter.

 

Noninterest Income and Expense

 

Noninterest income increased $100,000 for the three months ended June 30, 2017 compared to the same period in 2016. The increase in noninterest income is primarily due to higher other noninterest income and to a lessor extent securities gains. The increase in other noninterest income is primarily due to the collection of a $73,000 court judgement previously deemed uncollectible by First Bank prior to the Company’s acquisition in 2014. Exclusive of realized securities gains, noninterest income was 2% higher in the second quarter of 2017 compared to the same period in 2016.

 

Noninterest expense increased $278,000 or 5% for the three months ended June 30, 2017 compared to the same period in 2016 primarily as a result of increases in salaries and benefits and other operating expenses. Increases in salaries and benefits were due primarily to normal annual increases. Increases in other operating expenses were due primarily to fraud losses of $91,000 in connection with a customer’s commercial deposit account. The efficiency ratio was 52.93% for the second quarter of 2017 as compared to 51.36% in 2016.

 

Income Taxes

 

The provision for income taxes expense for the three months ended June 30, 2017 and 2016 was $1,453,000 and $1,683,000, respectively, representing an effective tax rate of 29% for both periods. The lower effective tax rate than the expected tax rate of 35% for both periods is primarily due to tax-exempt interest income.

 

 

Income Statement Review for the Six Months ended June 30, 2017 and 2016


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

 
                                                 
   

Six Months Ended June 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

  $ 77,310     $ 1,693       4.38 %   $ 98,194     $ 2,180       4.44 %

Agricultural

    69,674       1,781       5.11 %     75,884       1,854       4.89 %

Real estate

    607,575       12,863       4.23 %     513,507       11,462       4.46 %

Consumer and other

    11,429       278       4.87 %     22,091       393       3.56 %
                                                 

Total loans (including fees)

    765,988       16,615       4.34 %     709,676       15,889       4.48 %
                                                 

Investment securities

                                               

Taxable

    270,092       3,080       2.28 %     264,319       2,967       2.25 %

Tax-exempt 2

    246,706       4,013       3.25 %     255,855       4,290       3.35 %

Total investment securities

    516,798       7,093       2.74 %     520,174       7,257       2.79 %
                                                 

Interest bearing deposits with banks and federal funds sold

    41,736       251       1.20 %     39,680       210       1.06 %
                                                 

Total interest-earning assets

    1,324,522     $ 23,959       3.62 %     1,269,530     $ 23,356       3.68 %
                                                 

Noninterest-earning assets

    49,217                       54,614                  
                                                 

TOTAL ASSETS

  $ 1,373,739                     $ 1,324,144                  

 

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

 
                                                 
   

Six Months Ended June 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

  $ 720,989     $ 1,135       0.31 %   $ 666,603     $ 641       0.19 %

Time deposits > $100,000

    82,531       430       1.04 %     87,945       393       0.89 %

Time deposits < $100,000

    116,934       470       0.80 %     126,805       471       0.74 %

Total deposits

    920,454       2,035       0.44 %     881,353       1,505       0.34 %

Other borrowed funds

    77,896       571       1.47 %     79,084       522       1.32 %
                                                 

Total Interest-bearing liabilities

    998,350       2,606       0.52 %     960,437       2,027       0.42 %
                                                 

Noninterest-bearing liabilities

                                               

Demand deposits

    199,555                       191,685                  

Other liabilities

    7,414                       6,643                  
                                                 

Stockholders' equity

    168,420                       158,178                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,373,739                     $ 1,316,944                  
                                                 
                                                 

Net interest income

          $ 21,353       3.22 %           $ 21,329       3.36 %
                                                 

Spread Analysis

                                               

Interest income/average assets

  $ 23,959       3.49 %           $ 23,356       3.53 %        

Interest expense/average assets

  $ 2,606       0.38 %           $ 2,027       0.31 %        

Net interest income/average assets

  $ 21,353       3.11 %           $ 21,329       3.24 %        

  

Net Interest Income

 

For the six months ended June 30, 2017 and 2016, the Company's net interest margin adjusted for tax exempt income was 3.22% and 3.36%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the six months ended June 30, 2017 totaled $19,949,000 compared to $19,827,000 for the six months ended June 30, 2016.

 

For the six months ended June 30, 2017, interest income increased $700,000, or 3%, 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 $578,000, or 29%, for the six months ended June 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 1,164,000 and $206,000 for the six months ended June 30, 2017 and 2016, respectively. Net loan charge-offs were $483,000 and $59,000 for the six months ended June 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. The increase in the specific reserve and the net charge-offs 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 low grain prices; however, crop growing conditions for the Company’s market areas have been generally favorable as of the end of the current period.

 

Noninterest Income and Expense

 

Noninterest income increased $81,000 for the six months ended June 30, 2017 compared to the same period in 2016. The increase in noninterest income is primarily due to security gains, other noninterest income, offset in part by a decrease in wealth management income. 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. The lower wealth management income was primarily due to lower one time estate fees, offset in part by revenues related to increases in assets under management. Exclusive of realized securities gains, noninterest income was 4% lower for the six months ended June 30, 2017 compared to the same period in 2016.

 

Noninterest expense increased $321,000 or 3% for the six months ended June 30, 2017 compared to the same period in 2016 primarily as a result of increases in other operating expenses, data processing costs and salaries and benefits, offset in part by a decrease in FDIC insurance assessments. Increases in other operating expenses were primarily due to fraud losses of $91,000 in connection with a customer’s commercial deposit account. Data processing increases was due to increasing technology costs. Salary and benefit increases were due to normal annual increases. The lower FDIC insurance assessment is due to lower assessment rates. The efficiency ratio was 53.53% for the six months ended June 30, 2017 as compared to 52.64% in same period in 2016.

 

Income Taxes

 

The provision for income taxes expense for the six months ended June 30, 2017 and 2016 was $2,932,000 and $3,185,000, respectively, representing an effective tax rate of 29% for both periods. 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 June 30, 2017, total assets were $1,369,626,000, a $3,173,000 increase compared to December 31, 2016. The increase in assets was due primarily to an increase in loans, offset by a decrease in cash and due from banks.

 

 

Investment Portfolio


The investment portfolio totaled $518,914,000 as of June 30, 2017, an increase of $2,834,000 from the December 31, 2016 balance of $516,080,000. The increase in the investment portfolio was primarily due to an increase in the unrealized gain in the investment portfolio and the purchases of corporate bonds offset in part by 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 June 30, 2017, gross unrealized losses of $845,000, 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 June 30, 2017, the Company’s investment securities portfolio included securities issued by 276 government municipalities and agencies located within 25 states with a fair value of $251.6 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 June 30, 2017 was $5.1 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 June 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

  $ 62,024     $ 62,308     $ 75,142     $ 74,408  

Texas

    13,228       13,409       11,091       11,065  

Pennsylvania

    8,723       8,802       8,728       8,654  

Washington

    7,166       7,144       7,221       6,957  

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

    24,666       25,169       28,064       28,258  
                                 

Total general obligation bonds

  $ 115,807     $ 116,832     $ 130,246     $ 129,342  
                                 

Revenue bonds:

                               

Iowa

  $ 124,165     $ 125,637     $ 126,750     $ 126,964  

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

    9,095       9,175       8,208       8,142  
                                 

Total revenue bonds

  $ 133,260     $ 134,812     $ 134,958     $ 135,106  
                                 

Total obligations of states and political subdivisions

  $ 249,067     $ 251,644     $ 265,204     $ 264,448  

 

As of June 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

  $ 78,241     $ 79,399     $ 77,586     $ 78,085  

Water

    14,151       14,232       11,283       11,296  

College and universities, primarily dormitory revenues

    9,985       10,086       14,105       13,907  

Leases

    9,077       9,129       9,106       8,960  

Electric

    8,434       8,565       8,446       8,459  

Other

    13,372       13,401       14,432       14,399  
                                 

Total revenue bonds by revenue source

  $ 133,260     $ 134,812     $ 134,958     $ 135,106  

 

Loan Portfolio

 

The loan portfolio, net of the allowance for loan losses of $11,188,000, totaled $768,208,000 as of June 30, 2017, an increase of $16,026,000, or 2%, from the December 31, 2016 balance of $752,182,000. The increase in the loan portfolio is primarily due to steady loan demand, primarily in the Ames and Des Moines markets.

  

 

Deposits

 

Deposits totaled $1,126,771,000 as of June 30, 2017, an increase of $17,362,000, or 2%, from the December 31, 2016 balance of $1,109,409,000. The increase in deposits was primarily due to increases in NOW and money market account balances for retail and public customers.

 

Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase totaled $38,683,000 as of June 30, 2017, a decrease of $19,654,000, or 34%, from the December 31, 2016 balance of $58,337,000. The decrease in primarily due to withdrawals from one commercial account.

 

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 June 30, 2017 totaled $768,208,000 compared to $752,182,000 as of December 31, 2016. Net loans comprise 56.1% of total assets as of June 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 0.66% at June 30, 2017, as compared to 0.67% at December 31, 2016 and 0.35% at June 30, 2016. The Company’s level of problem loans as a percentage of total loans at June 30, 2017 of 0.66% is lower than the Company’s peer group (348 bank holding companies with assets of $1 billion to $3 billion) of 0.72% as of March 31, 2017.

 

Impaired loans, net of specific reserves, totaled $4,239,000 as of June 30, 2017 and have decreased $118,000 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 $3,302,000 as of June 30, 2017, all of which were included in impaired loans and $3,231,000 were included in nonaccrual status. 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 $500,000 specific reserve was established in the three months ended June 30, 2017 on a TDR loan. The Company had $257,000 of net charge-offs related to TDRs for the six months ended June 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 June 30, 2017, non-accrual loans totaled $5,102,000 and there was one loan in the amount of $80,000 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 $425,000 as of June 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 totalled $43,294,000 as of June 30, 2017 as compared to $38,492,000 as of December 31, 2016. The substandard loans in these categories totalled $2,809,000 as of June 30, 2017 as compared to $2,399,000 as of December 31, 2016. The increase in these categories is primarily due to low grain prices, mitigated by favorable yields in 2016.

 

The allowance for loan losses as a percentage of outstanding loans as of June 30, 2017 was 1.44%, as compared to 1.38% at December 31, 2016. The allowance for loan losses totaled $11,188,000 and $10,507,000 as of June 30, 2017 and December 31, 2016, respectively. Net charge-offs of loans totaled $483,000 and $59,000 for the six months ended June 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 June 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 June 30, 2017 and December 31, 2016 totaled $47,700,000 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 June 30, 2017 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $191,645,000, with $13,500,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,957,000, with no outstanding federal fund purchase balances as of June 30, 2017. The Company had securities sold under agreements to repurchase totaling $38,683,000 and term repurchase agreements of $13,000,000 as of June 30, 2017.

 

Total investments as of June 30, 2017 were $518,914,000 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 June 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 six months ended June 30, 2017 totaled $9,434,000 compared to $9,866,000 for the six months ended June 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 six months ended June 30, 2017 was $12,042,000 compared to $817,000 for the six months ended June 30, 2016. The increase of $11,255,000 in cash used in investing activities was primarily due to a higher level of purchases of securities available-for-sale of $45,014,000 in 2017 compared to $36,400,000 in 2016; a net increase in the loan portfolio; offset in part by a decrease in the change in the interest bearing deposits.

 

Net cash used in financing activities for the six months ended June 30, 2017 totaled $7,296,000 compared to $12,755,000 for the six months ended June 30, 2016. The change of $5,459,000 in net cash used in financing activities was primarily due to an increase in deposits in 2017 of $17,362,000 as compared to a decrease of $8,810,000 in 2016; offset in part by a decrease in securities sold under agreements to repurchase in 2017 of $19,654,000 as compared to a decrease of $11,385,000 in 2016. As of June 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 $5,345,000 and $4,325,000 for the six months ended June 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 $13,032,000 as of June 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 June 30, 2017 that are of concern to management.

 

Capital Resources

 

The Company’s total stockholders’ equity as of June 30, 2017 totaled $171,643,000 and was $6,538,000 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 June 30, 2017 and December 31, 2016, stockholders’ equity as a percentage of total assets was 12.53% and 12.08%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of June 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 June 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 June 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

 
                                     
April 1, 2017 to

April 30, 2017

    -     $ -       -       100,000  
                                     
May 1, 2017 to

May 31, 2017

    -     $ -       -       100,000  
                                     
June 1, 2017 to

June 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: August 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 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.

 

 

53