AMES NATIONAL CORP - Quarter Report: 2019 September (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

[Mark One]

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

 

For the quarterly period ended September 30, 2019

 

[_]	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 of Incorporation)		(I. R. S. Employer
		Identification Number)

                                                          

405 FIFTH STREET

AMES, IOWA 50010

(Address of Principal Executive Offices) (Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	ATLO	NASDAQ

 

 

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 every Interactive Data File required to be submitted 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 such files). Yes  X   No ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “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   X    Non-accelerated filer____ Smaller reporting company   X   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  

 

As of October 29, 2019, there were 9,222,747 shares of common stock, par value $2, outstanding.

 

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		September 30,				December 31,
		2019				2018
ASSETS
Cash and due from banks		$	33,485,066			$	30,384,066
Interest bearing deposits in financial institutions			78,930,485				26,057,513
Securities available-for-sale			457,994,898				458,971,162
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost			2,655,200				3,191,200
Loans receivable, net			882,130,277				890,461,479
Loans held for sale			1,637,225				401,287
Bank premises and equipment, net			15,558,457				15,813,196
Accrued income receivable			9,736,328				9,415,570
Other real estate owned			217,856				829,603
Bank-owned life insurance			2,823,861				2,773,729
Deferred income taxes, net			820,400				3,848,713
Intangible assets, net			2,250,663				2,677,884
Goodwill			9,744,472				9,744,472
Other assets			1,990,450				1,117,477
Total assets		$	1,499,975,638			$	1,455,687,351
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand, noninterest bearing		$	226,521,237			$	230,113,170
NOW accounts			391,739,201				366,178,715
Savings and money market			402,665,343				418,384,284
Time, $250,000 and over			52,068,331				40,014,550
Other time			176,138,860				166,393,120
Total deposits			1,249,132,972				1,221,083,839
Securities sold under agreements to repurchase			52,196,061				40,674,486
Federal Home Loan Bank (FHLB) advances			5,000,000				14,600,000
Dividends payable			2,213,459				2,137,460
Accrued expenses and other liabilities			5,269,746				4,326,502
Total liabilities			1,313,812,238				1,282,822,287
STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,222,747 and 9,293,305 shares as of September 30, 2019 and December 31, 2018, respectively			18,445,494				18,586,610
Additional paid-in capital			18,794,141				20,461,724
Retained earnings			144,140,565				137,891,821
Accumulated other comprehensive income (loss) - net unrealized income (loss) on securities available-for-sale			4,783,200				(4,075,091	)
Total stockholders' equity			186,163,400				172,865,064
Total liabilities and stockholders' equity		$	1,499,975,638			$	1,455,687,351

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2019				2018				2019				2018
Interest income:
Loans, including fees		$	10,513,426			$	9,557,527			$	32,022,997			$	27,442,604
Securities:
Taxable			1,671,572				1,545,541				4,715,137				4,638,503
Tax-exempt			945,769				1,085,131				3,114,298				3,451,084
Interest bearing deposits and federal funds sold			400,963				272,358				928,996				721,417
Total interest income			13,531,730				12,460,557				40,781,428				36,253,608
Interest expense:
Deposits			2,547,763				1,740,579				7,512,979				4,736,455
Other borrowed funds			170,082				134,017				553,930				533,870
Total interest expense			2,717,845				1,874,596				8,066,909				5,270,325
Net interest income			10,813,885				10,585,961				32,714,519				30,983,283
Provision for loan losses			378,789				100,000				545,203				192,978
Net interest income after provision for loan losses			10,435,096				10,485,961				32,169,316				30,790,305
Noninterest income:
Wealth management income			857,664				877,146				2,661,421				2,534,510
Service fees			400,919				363,993				1,158,348				1,036,841
Securities gains, net			15,141				-				17,031				-
Gain on sale of loans held for sale			289,033				207,856				685,790				576,441
Merchant and card fees			372,073				358,816				1,119,598				1,035,338
Gain on foreclosure of other real estate owned			-				162,862				-				162,862
Other noninterest income			184,399				191,130				615,688				570,685
Total noninterest income			2,119,229				2,161,803				6,257,876				5,916,677
Noninterest expense:
Salaries and employee benefits			4,780,894				4,331,976				14,294,219				13,216,844
Data processing			1,085,951				838,414				2,849,396				2,506,804
Occupancy expenses, net			526,360				536,004				1,643,924				1,490,395
FDIC insurance assessments			1,698				99,934				193,593				308,002
Professional fees			386,339				423,172				1,158,168				1,123,577
Business development			310,786				327,985				827,561				821,344
Intangible asset amortization			124,243				94,883				427,221				266,337
Data conversion costs			-				167,815				-				167,815
Other operating expenses, net			259,048				167,649				755,971				664,914
Total noninterest expense			7,475,319				6,987,832				22,150,053				20,566,032
Income before income taxes			5,079,006				5,659,932				16,277,139				16,140,950
Provision for income taxes			1,037,845				1,201,100				3,380,950				3,328,100
Net income		$	4,041,161			$	4,458,832			$	12,896,189			$	12,812,850
Basic and diluted earnings per share		$	0.44			$	0.48			$	1.40			$	1.38
Dividends declared per share		$	0.24			$	0.23			$	0.72			$	0.94

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2019				2018				2019				2018
Net income		$	4,041,161			$	4,458,832			$	12,896,189			$	12,812,850
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities before tax:
Unrealized holding gains (losses) arising during the period			1,786,525				(2,171,391	)			11,828,086				(8,245,692	)
Less: reclassification adjustment for gains realized in net income			15,141				-				17,031				-
Other comprehensive income (loss), before tax			1,771,384				(2,171,391	)			11,811,055				(8,245,692	)
Tax effect related to other comprehensive income (loss)			(442,846	)			542,848				(2,952,764	)			2,061,767
Other comprehensive income (loss), net of tax			1,328,538				(1,628,543	)			8,858,291				(6,183,925	)
Comprehensive income		$	5,369,699			$	2,830,289			$	21,754,480			$	6,628,925

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		Common Stock				Additional Paid- in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss), Net of Taxes				Total Stockholders' Equity
Balance, June 30, 2018		$	18,621,826			$	20,878,728			$	133,510,931			$	(5,070,455	)		$	167,941,030
Net income			-				-				4,458,832				-				4,458,832
Other comprehensive (loss)			-				-				-				(1,628,543	)			(1,628,543	)
Cash dividends declared, $0.23 per share			-				-				(2,141,510	)			-				(2,141,510	)
Balance, September 30, 2018		$	18,621,826			$	20,878,728			$	135,828,253			$	(6,698,998	)		$	168,629,809
Balance, June 30, 2019		$	18,464,244			$	19,019,767			$	142,312,863			$	3,454,662			$	183,251,536
Net income			-				-				4,041,161				-				4,041,161
Other comprehensive income			-				-				-				1,328,538				1,328,538
Retirement of 9,375 shares of stock			(18,750	)			(225,626	)			-				-				(244,376	)
Cash dividends declared, $0.24 per share			-				-				(2,213,459	)			-				(2,213,459	)
Balance, September 30, 2019		$	18,445,494			$	18,794,141			$	144,140,565			$	4,783,200			$	186,163,400

		Common Stock				Additional Paid- in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss), Net of Taxes				Total Stockholders' Equity
Balance, December 31, 2017		$	18,621,826			$	20,878,728			$	131,684,961			$	(432,373	)		$	170,753,142
Net income			-				-				12,812,850				-				12,812,850
Other comprehensive (loss)			-				-				-				(6,183,925	)			(6,183,925	)
The cumulative effect from change in accounting policy (1)			-				-				82,700				(82,700	)			-
Cash dividends declared, $0.94 per share			-				-				(8,752,258	)			-				(8,752,258	)
Balance, September 30, 2018		$	18,621,826			$	20,878,728			$	135,828,253			$	(6,698,998	)		$	168,629,809
Balance, December 31, 2018		$	18,586,610			$	20,461,724			$	137,891,821			$	(4,075,091	)		$	172,865,064
Net income			-				-				12,896,189				-				12,896,189
Other comprehensive income			-				-				-				8,858,291				8,858,291
Retirement of 70,558 shares of stock			(141,116	)			(1,667,583	)			-				-				(1,808,699	)
Cash dividends declared, $0.72 per share			-				-				(6,647,445	)			-				(6,647,445	)
Balance, September 30, 2019		$	18,445,494			$	18,794,141			$	144,140,565			$	4,783,200			$	186,163,400

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		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	12,896,189			$	12,812,850
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			545,203				192,978
Provision for off-balance sheet commitments			-				9,000
Amortization, net			1,048,818				1,583,534
Amortization of intangible asset			427,221				266,337
Depreciation			903,070				845,163
Deferred income taxes			75,549				(24,000	)
Securities gains, net			(17,031	)			-
(Gain) on sales of loans held for sale			(685,790	)			(576,441	)
Proceeds from loans held for sale			34,023,953				23,480,924
Originations of loans held for sale			(34,574,101	)			(23,184,423	)
Loss on sale and disposal of bank equipment, net			9,360				11,479
(Gain) on sale and foreclosure of other real estate owned, net			(43,414	)			(226,054	)
Change in assets and liabilities:
(Increase) in accrued income receivable			(320,758	)			(239,749	)
(Increase) decrease in other assets			(892,594	)			133,639
Increase in accrued expenses and other liabilities			943,244				385,983
Net cash provided by operating activities			14,338,919				15,471,220
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale			(61,502,161	)			(24,209,779	)
Proceeds from sale of securities available-for-sale			8,211,157				-
Proceeds from maturities and calls of securities available-for-sale			64,641,695				52,143,244
Purchase of FHLB stock			(3,912,600	)			(3,070,400	)
Proceeds from the redemption of FHLB stock			4,448,600				3,275,100
Net (increase) decrease in interest bearing deposits in financial institutions			(52,872,972	)			6,448,428
Net (increase) decrease in loans			8,159,497				(12,239,005	)
Net proceeds from the sale of other real estate owned			655,161				117,905
Purchase of bank premises and equipment			(648,005	)			(591,165	)
Proceeds from the sale of bank equipment			4,000				-
Cash paid, net of cash acquired, for bank acquired			-				(13,443,219	)
Other			(50,132	)			1,139,029
Net cash provided by (used in) investing activities			(32,865,760	)			9,570,138
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits			28,086,411				(1,795,096	)
Increase in securities sold under agreements to repurchase			11,521,575				2,434,281
Payments on FHLB borrowings and other borrowings			(12,600,000	)			(24,500,000	)
Proceeds from FHLB borrowings			3,000,000				-
Proceeds from short-term borrowings and other borrowings			-				6,400,000
Dividends paid			(6,571,446	)			(8,659,149	)
Stock repurchases			(1,808,699	)			-
Net cash provided by (used in) financing activities			21,627,841				(26,119,964	)
Net increase (decrease) in cash and due from banks			3,101,000				(1,078,606	)
CASH AND DUE FROM BANKS
Beginning			30,384,066				26,397,550
Ending		$	33,485,066			$	25,318,944

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		2019				2018
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest		$	7,852,381			$	5,039,767
Income taxes			3,360,844				3,484,746
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer of loans receivable to other real estate owned		$	-			$	116,137
Business Combination:
Fair value of interest bearing deposits in financial institutions acquired		$	-			$	1,475,000
Fair value of federal funds sold acquired			-				1,154,000
Fair value of securities available-for-sale acquired			-				17,196,715
Fair value of loans receivable acquired			-				76,041,470
Fair value of bank premises and equipment acquired			-				924,400
Fair value of accrued interst receivable acquired			-				862,895
Fair value of other real estate owned acquired			-				120,000
Fair value of other tangible assets acquired			-				318,596
Fair value of bank owned life insurance			-				2,754,798
Goodwill			-				3,012,255
Core deposit intangible			-				2,002,000
Deposits assumed			-				83,169,311
Federal funds purchased assumed			-				9,000,000
Other liabilities assumed			-				123,749

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1.     Significant Accounting Policies

 

The consolidated financial statements for the three and nine months ended September 30, 2019 and 2018 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, 2018 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.

 

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

 

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

 

New and Pending Accounting Pronouncements: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, which amends ASC 842, Leases. This update provides for an adoption option that does not require earlier periods to be restated at the adoption date. For public companies, this update was effective for interim and annual periods beginning after December 15, 2018. Early application was permitted. The adoption of this guidance did not 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. FASB voted to delay the implementation date for smaller reporting companies, so for the Company, should FASB finalize this pronouncement, the effective would for interim and annual periods beginning after December 15, 2022. The Company does not plan to early adopt this ASU. The Company is currently planning for the implementation of this accounting standard and has chosen a vendor for a software solution. The Company continues to refine the implementation of the software and its approach for determining the expected credit losses under the new guidance. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s financial statements. The Company is continuing to evaluate the extent of the potential impact.

 

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

 

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

 

2.      Bank Acquisition

 

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

 

 

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

 

 

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

 

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

 

 

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

 

 

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

 

3.     Dividends

 

On August 14, 2019, the Company declared a cash dividend on its common stock, payable on November 15, 2019 to stockholders of record as of November 1, 2019, equal to $0.24 per share

 

4.     Earnings Per Share

 

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended September 30, 2019 and 2018 was 9,227,685 and 9,310,913, respectively. The weighted average outstanding shares for the nine months ended September 30, 2019 and 2018 were 9,236,989 and 9,310,913, respectively. The Company had no potentially dilutive securities outstanding during the periods presented.

 

5.     Off-Balance Sheet Arrangements

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2018.

 

6.     Fair Value Measurements

 

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

 

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

 

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

 

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

 

 

The following table presents the balances of assets measured at fair value on a recurring basis by level as of September 30, 2019 and December 31, 2018. (in thousands)

 

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

 

The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the nine months ended September 30, 2019.

 

 

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of September 30, 2019 and December 31, 2018. (in thousands)

 

 

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 Company considers these fair value measurements as level 3.

 

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018 are as follows: (in thousands)

 

 

 

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

 

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

 

Fair value of financial instruments: 

 

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

 

The following disclosures represent financial instruments in which the ending balances at September 30, 2019 and December 31, 2018 are not carried at fair value in their entirety on the consolidated balance sheets.

 

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

 

 

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

 

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

 

The estimated fair values of the Company’s financial instruments as described above as of September 30, 2019 and December 31, 2018 are as follows: (in thousands)

 

 

The methodologies used to determine fair value as of September 30, 2019 did not change from the methodologies described in the December 31, 2018 Annual Financial Statements.

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7.     Debt and Equity Securities

 

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

 

 

 

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

 

 

Securities with a carrying value of $152.3 million and $145.7 million at September 30, 2019 and December 31, 2018, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

 

 

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

 

 

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of September 30, 2019 and December 31, 2018 are as follows: (in thousands)

 

 

 

Gross unrealized losses on debt securities totaled $320,000 as of September 30, 2019. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

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8.	Loans Receivable and Credit Disclosures

 

The composition of loans receivable as of September 30, 2019 and December 31, 2018 is as follows (in     thousands):

 

 

 

Activity in the allowance for loan losses, on a disaggregated basis, for the three and nine months ended September 30, 2019 and 2018 is as follows: (in thousands)

 

 

 

 

 

 

Allowance for loan losses disaggregated on the basis of impairment analysis method as of September 30, 2019 and December 31, 2018 is as follows: (in thousands)

 

 

 

Loans receivable disaggregated on the basis of impairment analysis method as of September 30, 2019 and December 31, 2018 is as follows (in thousands):

 

 

 

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

 

 

Impaired loans, on a disaggregated basis, as of September 30, 2019 and December 31, 2018: (in thousands)

 

 

 

Average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2019 and 2018: (in thousands)

 

 

 

 

The interest foregone on nonaccrual loans for the three months ended September 30, 2019 and 2018 was approximately $272,000 and $80,000, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2019 and 2018 was approximately $389,000 and $283,000, respectively.

 

Nonaccrual loans at September 30, 2019 and December 31, 2018 were $5,167,000 and $3,234,000 respectively.

 

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $1,171,000 as of September 30, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $2,350,000 as of December 31, 2018, all of which were included in impaired and nonaccrual loans.

 

 

The Company’s TDR, on a disaggregated basis, occurring in the three and nine months ended September 30, 2019 and 2018, is as follows: (dollars in thousands)

 

 

 

During the three and nine months ended September 30, 2019, the Company granted concessions to one borrower with three 1-4 family residential contracts facing financial difficulties. The loans were originated with terms less than normal related to collateral. During the three and nine months ended September 30, 2018, the Company granted concessions to one borrower with three commercial operating contracts facing financial difficulties. The loan was extended beyond its normal terms and the interest was capitalized.

 

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

 

No TDR modifications during the twelve months ended September 30, 2019 and 2018 had payment defaults. A $200,000 specific reserve was established in the nine months ended September 30, 2019. An $80,000 specific reserve was established in the nine months ended September 30, 2018. There were $275,000 and $12,000 of net charge-offs related to TDRs for the nine months ended September 30, 2019 and 2018, respectively.

 

 

An aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, 2019 and December 31, 2018, is as follows: (in thousands)

 

 

 

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

 

 

The credit risk profile by internally assigned grade, on a disaggregated basis, as of September 30, 2019 and December 31, 2018 is as follows: (in thousands)

 

 

 

The credit risk profile based on payment activity, on a disaggregated basis, as of September 30, 2019 and December 31, 2018 is as follows: