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AMES NATIONAL CORP - Quarter Report: 2022 September (Form 10-Q)

atlo20220930_10q.htm
 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

[Mark One]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934
  
For the quarterly period ended September 30, 2022
  
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)

 

Iowa42-1039071
(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  ☒  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  ☒  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  ☐    Non-accelerated filer  ☒    Smaller reporting company  ☒    Emerging growth company  ☐

 

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

 

As of October 31, 2022, there were 8,992,167 shares of common stock, par value $2, outstanding.

 

 

 

AMES NATIONAL CORPORATION

 

INDEX

 

    Page
     
PART I. FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements (Unaudited) 3
     
 

Consolidated Balance Sheets at September 30, 2022 and December 31, 2021

3
     
  Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 4
     
  Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 5
     
  Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 6
     
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 7
     
  Notes to Consolidated Financial Statements 9
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 32
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 51
     
Item 4. Controls and Procedures 51
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 51
     
Item 1.A. Risk Factors 51
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3. Defaults Upon Senior Securities 52
     
Item 4. Mine Safety Disclosures 52
     
Item 5. Other Information 52
     
Item 6. Exhibits  53
     
  Signatures 54
 

                                                                                                                                                                                           

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

  

September 30,

  

December 31,

 

 

 

2022

  

2021

 
  

(unaudited)

  

(audited)

 
ASSETS        

Cash and due from banks

 $22,944  $19,590 

Interest-bearing deposits in financial institutions and federal funds sold

  6,311   69,539 

Total cash and cash equivalents

  29,255   89,129 

Interest-bearing time deposits

  15,410   16,922 

Securities available-for-sale

  783,967   831,003 

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

  4,141   3,422 

Loans receivable, net

  1,175,247   1,144,108 

Loans held for sale

  467   - 

Bank premises and equipment, net

  18,155   17,512 

Accrued income receivable

  12,073   10,124 

Bank-owned life insurance

  3,036   2,985 

Deferred income taxes, net

  25,453   1,922 

Intangible assets, net

  2,067   2,505 

Goodwill

  12,424   12,424 

Other assets

  5,244   4,985 
         

Total assets

 $2,086,939  $2,137,041 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

LIABILITIES

        

Deposits

        

Noninterest-bearing checking

 $381,137  $411,585 

Interest-bearing checking

  621,082   575,997 

Savings and money market

  675,826   674,975 

Time, $250 and over

  34,955   40,793 

Other time

  160,011   174,669 

Total deposits

  1,873,011   1,878,019 
         

Securities sold under agreements to repurchase

  41,069   39,851 

FHLB advances and other borrowings

  27,450   3,000 

Dividends payable

  2,428   2,364 

Accrued expenses and other liabilities

  5,710   6,029 

Total liabilities

  1,949,668   1,929,263 
         

STOCKHOLDERS' EQUITY

        

Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 8,992,167 shares and 9,092,167 shares as of September 30, 2022 and December 31, 2021, respectively

  17,984   18,184 

Additional paid-in capital

  14,253   16,353 

Retained earnings

  177,947   170,377 

Accumulated other comprehensive income (loss)

  (72,913)  2,864 

Total stockholders' equity

  137,271   207,778 
         

Total liabilities and stockholders' equity

 $2,086,939  $2,137,041 

 

See Notes to Consolidated Financial Statements.

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Interest and dividend income:

                               

Loans, including fees

  $ 11,688     $ 12,530     $ 33,229     $ 36,641  

Securities:

                               

Taxable

    3,226       2,256       8,861       6,457  

Tax-exempt

    641       725       1,990       2,392  

Other interest and dividend income

    250       168       675       515  

Total interest income

    15,805       15,679       44,755       46,005  
                                 

Interest expense:

                               

Deposits

    1,847       993       3,921       3,411  

Other borrowed funds

    295       34       383       106  

Total interest expense

    2,142       1,027       4,304       3,517  
                                 

Net interest income

    13,663       14,652       40,451       42,488  
                                 

Provision (credit) for loan losses

    (520 )     (94 )     (706 )     (540 )
                                 

Net interest income after provision (credit) for loan losses

    14,183       14,746       41,157       43,028  
                                 

Noninterest income:

                               

Wealth management income

    1,063       1,147       3,589       3,224  

Service fees

    348       385       1,013       1,065  

Securities gains, net

    2       24       37       24  

Gain on sale of loans held for sale

    137       429       501       1,313  

Merchant and card fees

    462       488       1,362       1,508  

Other noninterest income

    274       200       716       681  

Total noninterest income

    2,286       2,673       7,218       7,815  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    5,731       5,487       17,092       16,766  

Data processing

    1,494       1,307       4,594       3,989  

Occupancy expenses, net

    674       632       2,097       1,999  

FDIC insurance assessments

    155       154       450       441  

Professional fees

    431       396       1,407       1,307  

Business development

    346       344       981       835  

Intangible asset amortization

    145       159       438       479  

New market tax credit projects amortization

    189       160       567       479  

Other operating expenses, net

    322       258       1,091       1,022  

Total noninterest expense

    9,487       8,897       28,717       27,317  
                                 

Income before income taxes

    6,982       8,522       19,658       23,526  
                                 

Provision for income taxes

    1,439       1,808       4,777       4,910  
                                 

Net income

  $ 5,543     $ 6,714     $ 14,881     $ 18,616  
                                 

Basic and diluted earnings per share

  $ 0.62     $ 0.74     $ 1.64     $ 2.04  
                                 

Dividends declared per share

  $ 0.27     $ 0.52     $ 0.81     $ 1.03  

 

See Notes to Consolidated Financial Statements.

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(in thousands)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 
                                 
                                 

Net income

  $ 5,543     $ 6,714     $ 14,881     $ 18,616  

Unrealized gains (losses) on securities before tax:

                               

Unrealized holding (losses) arising during the period

    (30,439 )     (1,507 )     (100,257 )     (10,325 )

Less: reclassification adjustment for gains realized in net income

    2       24       37       24  

Other comprehensive (loss), before tax

    (30,441 )     (1,531 )     (100,294 )     (10,349 )

Tax effect related to other comprehensive (loss)

    7,246       383       24,517       2,587  

Other comprehensive (loss), net of tax

    (23,195 )     (1,148 )     (75,777 )     (7,762 )

Comprehensive income (loss)

  $ (17,652 )   $ 5,566     $ (60,896 )   $ 10,854  

 

See Notes to Consolidated Financial Statements

 

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (unaudited)

(in thousands, except share and per share data)

Three and Nine Months Ended September 30, 2022 and 2021

 

                  Accumulated     
                  Other     
                  

Comprehensive

  

Total

 
  

Common Stock

  Additional Paid-  Retained  Income (Loss),  Stockholders' 
  

Shares

  

Amount

  in Capital  Earnings  Net of Taxes  Equity 
                         

Balance, June 30, 2021

  9,122,747  $18,245  $17,002  $165,466  $9,409  $210,122 

Net income

  -   -   -   6,714   -   6,714 

Other comprehensive (loss)

  -   -   -   -   (1,148)  (1,148)

Repurchase and retirement of stock

  (24,603)  (49)  (522)  -   -   (571)

Cash dividends declared, $0.52 per share

  -   -   -   (4,737)  -   (4,737)

Balance, September 30, 2021

  9,098,144  $18,196  $16,480  $167,443  $8,261  $210,380 
                         
                         

Balance, June 30, 2022

  8,992,167  $17,984  $14,253  $174,832  $(49,718) $157,351 

Net income

  -   -   -   5,543   -   5,543 

Other comprehensive (loss)

  -   -   -   -   (23,195)  (23,195)

Cash dividends declared, $0.27 per share

  -   -   -   (2,428)  -   (2,428)

Balance, September 30, 2022

  8,992,167  $17,984  $14,253  $177,947  $(72,913) $137,271 

 

 

                  

Accumulated

     
                  Other     
                  Comprehensive  Total 
  

Common Stock

  Additional Paid  Retained  Income (Loss),  Stockholders' 
  

Shares

  

Amount

  in Capital  Earnings  Net of Taxes  Equity 
                         

Balance, December 31, 2020

  9,122,747  $18,245  $17,002  $158,217  $16,023  $209,487 

Net income

  -   -   -   18,616   -   18,616 

Other comprehensive (loss)

  -   -   -   -   (7,762)  (7,762)

Repurchase and retirement of stock

  (24,603)  (49)  (522)  -   -   (571)

Cash dividends declared, $1.03 per share

  -   -   -   (9,390)  -   (9,390)

Balance, September 30, 2021

  9,098,144  $18,196  $16,480  $167,443  $8,261  $210,380 
                         
                         

Balance, December 31, 2021

  9,092,167  $18,184  $16,353  $170,377  $2,864  $207,778 

Net income

  -   -   -   14,881   -   14,881 

Other comprehensive (loss)

  -   -   -   -   (75,777)  (75,777)

Repurchase and retirement of stock

  (100,000)  (200)  (2,100)  -   -   (2,300)

Cash dividends declared, $0.81 per share

  -   -   -   (7,311)  -   (7,311)

Balance, September 30, 2022

  8,992,167  $17,984  $14,253  $177,947  $(72,913) $137,271 

 

See Notes to Consolidated Financial Statements.

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

Nine Months Ended September 30, 2022 and 2021

 

   

2022

   

2021

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 14,881     $ 18,616  

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

               

Provision (credit) for loan losses

    (706 )     (540 )

Provision (credit) for off-balance sheet commitments

    131       (2 )

Amortization of securities available-for-sale, loans and deposits, net

    1,729       1,909  

Amortization of intangible assets

    438       479  

Depreciation

    1,064       1,032  

Deferred income taxes

    985       131  

Securities (gains), net

    (37 )     (24 )

Increase in cash value of bank-owned life insurance

    (51 )     (52 )

(Gain) on sales of loans held for sale

    (501 )     (1,313 )

Proceeds from loans held for sale

    22,904       55,004  

Originations of loans held for sale

    (22,870 )     (52,448 )

(Gain) loss on sale and disposal of premises and equipment, net

    (76 )     13  

Amortization of investment in New Markets Tax Credit projects

    567       479  

Impairment of other real estate owned

    -       83  

Loss on sale of other real estate owned, net

    -       1  

Change in assets and liabilities:

               

(Increase) in accrued income receivable

    (1,949 )     (35 )

(Increase) decrease in other assets

    (1,059 )     377  

(Decrease) in accrued expenses and other liabilities

    (450 )     (24 )

Net cash provided by operating activities

    15,000       23,686  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Net decrease in interest-bearing time deposits

    1,512       1,261  

Purchase of securities available-for-sale

    (138,006 )     (282,379 )

Proceeds from sale of securities available-for-sale

    10,548       622  

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

    72,304       100,573  

Purchase of FHLB stock

    (5,946 )     (286 )

Proceeds from the redemption of FHLB and FRB stock

    5,227       10  

Net (increase) decrease in loans

    (29,997 )     3,822  

Net proceeds from the sale of other real estate owned

    -       7  

Purchase of premises and equipment

    (1,754 )     (927 )

Proceeds from the sale of premises and equipment

    125       -  

Net cash (used in) investing activities

    (85,987 )     (177,297 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Increase (decrease) in deposits

    (5,008 )     120,353  

Increase (decrease) in securities sold under agreements to repurchase

    1,218       (1,016 )

Payments on FHLB and other borrowings

    (3,150 )     -  

Proceeds from other borrowings

    4,000       -  

Net proceeds from FHLB short-term borrowings

    23,600       -  

Dividends paid

    (7,247 )     (7,024 )

Stock repurchases

    (2,300 )     (571 )

Net cash provided by financing activities

    11,113       111,742  
                 

Net decrease in cash and cash equivalents

    (59,874 )     (41,869 )
                 

CASH AND CASH EQUIVALENTS

               

Beginning

    89,129       173,097  

Ending

  $ 29,255     $ 131,228  

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)

(in thousands)

Nine Months Ended September 30, 2022 and 2021

 

   

2022

   

2021

 
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

               

Cash payments for:

               

Interest

  $ 4,553     $ 3,987  

Income taxes

    3,603       4,327  
                 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES

               

Transfer of loans receivable to other real estate owned

  $ -     $ 560  

 

See Notes to Consolidated Financial Statements.

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements (unaudited)

 

 

1.         Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements have been prepared by Ames National Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these interim financial statements 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, 2021 (the “Annual Report”). In the opinion of management, the accompanying consolidated financial statements of the Company contain all adjustments necessary to fairly present the financial results for the interim periods reported. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. 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.

 

Reclassifications: Certain reclassifications have been made to the prior period’s consolidated financial statements to present them on a basis comparable with the current period’s consolidated financial statements. Interest-bearing deposits in financial institutions and federal funds sold were reclassified as cash and cash equivalents in 2021 resulting in net cash used in investing activities decreasing by approximately $43 million. No other reclassifications were significant. The reclassifications had no effect on stockholders’ equity and net income of the prior periods.

 

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 with an estimation of the fair value of a reporting unit.

 

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Company’s stock price. 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. The Company completed a quantitative assessment of goodwill as of October 1, 2021 which indicated that goodwill was not impaired. Subsequently, the Company determined there were no adverse changes in criteria and key considerations to the previous assessment. Accordingly, the Company concluded there is no impairment of goodwill as of September 30, 2022.

 

New and Pending Accounting Pronouncements: 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. In October 2019, the FASB voted to approve amendments to the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The amendment delays the effective date for our Company until interim and annual periods beginning after December 15, 2022. The Company continues collecting and retaining loan and credit data, along with refining 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 impact will be influenced by the composition, characteristics, and quality of our loan and securities portfolios, as well as the economic conditions and forecasts as of the adoption date. The Company will continue to evaluate the extent of the potential impact.

 

9

 

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU improve the usefulness of information provided to investors about certain loan refinancing, restructurings, and write-offs. The amendments eliminate the accounting guidance for troubled debt restructurings (TDRs) by creditors that have adopted ASU No. 2016-13. It also enhances disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Lastly, the amendments require that a public business entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The Company is currently evaluating the impact of the ASU on the Company's consolidated financial statements.

 

 

2.          Dividends

 

On August 10, 2022, the Company declared a cash dividend on its common stock, payable on November 15, 2022 to stockholders of record as of November 1, 2022, equal to $0.27 per share.

 

Two dividends were declared during the three months ended September 30, 2021. Dividends are typically declared in one quarter and then paid in the subsequent quarter. Beginning in July 2020 the dividends were declared and paid in the same quarter before returning to the previous practice in August 2021.

 

 

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 months ended September 30, 2022 and 2021 was 8,992,167 and 9,119,871, respectively. The weighted average outstanding shares for the nine months ended September 30, 2022 and 2021 were 9,047,308 and 9,121,778, respectively. 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, 2021.

 

10

 
 

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.

 

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 is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.

 

Securities available-for-sale: Level 1 securities include U.S. Treasury 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.

 

Derivative financial instruments: The Company’s derivative financial instruments consist of interest rate swaps accounted for as fair value hedges. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.

 

11

 

The following table presents the balances of assets measured at fair value on a recurring basis by level as of September 30, 2022 and December 31, 2021 (in thousands):

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2022

                

Assets

                

Securities available-for-sale

                

U.S. government treasuries

 $208,086  $208,086  $-  $- 

U.S. government agencies

  103,643   -   103,643   - 

U.S. government mortgage-backed securities

  118,357   -   118,357   - 

State and political subdivisions

  280,489   -   280,489   - 

Corporate bonds

  73,392   -   73,392   - 

Derivative financial instruments

  1,165   -   1,165   - 
                 

2021

                

Assets

                

Securities available-for-sale

                

U.S. government treasuries

 $190,479  $190,479  $-  $- 

U.S. government agencies

  116,014   -   116,014   - 

U.S. government mortgage-backed securities

  149,601   -   149,601   - 

State and political subdivisions

  292,859   -   292,859   - 

Corporate bonds

  82,050   -   82,050   - 
                 

Liabilities

                

Derivative financial instruments

 $527  $-  $527  $- 

 

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 or a change in previously recognized 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, 2022 and December 31, 2021 (in thousands):

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2022

                
                 

Loans receivable

 $8,885  $-  $-  $8,885 
                 

2021

                
                 

Loans receivable

 $9,012  $-  $-  $9,012 

Other real estate owned

  218   -   -   218 
                 

Total

 $9,230  $-  $-  $9,230 

 

12

 

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, 2022 and December 31, 2021 are as follows (in thousands):

 

  

2022

 
  

Estimated

 

Valuation

 

 

Range

 
  

Fair Value

 

Techniques

 Unobservable Inputs 

(Average)

 
          

Loans receivable

 $8,885 

Evaluation of collateral

Estimation of value

 NM* 

 

  

2021

  
  

Estimated

 

Valuation

 

 

Range

  
  

Fair Value

 

Techniques

 Unobservable Inputs 

(Average)

  
             

Loans receivable

 $9,012 

Evaluation of collateral

Estimation of value

 NM*    
             

Other real estate owned

 $218 

Appraisal

Appraisal adjustment

 6%-8%(7%) 

 

* Not Meaningful.

 

Evaluations of the underlying assets are completed for each collateral dependent 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.

 

13

 

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 following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of September 30, 2022 and December 31, 2021 (in thousands):

 

   

2022

  

2021

 
 

Fair Value

     

Estimated

      

Estimated

 
 

Hierarchy

 

Carrying

  

Fair

  

Carrying

  

Fair

 
 

Level

 

Amount

  

Value

  

Amount

  

Value

 
                  

Financial assets:

                 

Cash and cash equivalents

Level 1

 $29,255  $29,255  $89,129  $89,129 

Interest-bearing time deposits

Level 1

  15,410   15,410   16,922   16,922 

Securities available-for-sale

See previous table

  783,967   783,967   831,003   831,003 

FHLB and FRB stock

Level 2

  4,141   4,141   3,422   3,422 

Loans receivable, net

Level 2

  1,175,247   1,120,219   1,144,108   1,112,684 

Loans held for sale

Level 2

  467   467   -   - 

Accrued income receivable

Level 1

  12,073   12,073   10,124   10,124 

Derivative financial instruments

Level 2

  1,165   1,165   -   - 

Financial liabilities:

                 

Deposits

Level 2

 $1,873,011  $1,871,699  $1,878,019  $1,880,137 

Securities sold under agreements to repurchase

Level 1

  41,069   41,069   39,851   39,851 

FHLB advances and other borrowings

Level 2

  27,450   27,310   3,000   3,071 

Accrued interest payable

Level 1

  319   319   353   353 

Derivative financial instruments

Level 2

  -   -   527   527 

 

The methodologies used to determine fair value as of September 30, 2022 did not change from the methodologies described in the December 31, 2021 Annual Financial Statements.

 

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

 

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

 

14

 
 

6.         Debt Securities

 

The amortized cost of securities available-for-sale and their approximate fair values as of September 30, 2022 and December 31, 2021 are summarized below (in thousands):

 

2022:

     

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 
                 

U.S. government treasuries

 $230,063  $-  $(21,977) $208,086 

U.S. government agencies

  114,018   5   (10,380)  103,643 

U.S. government mortgage-backed securities

  138,117   6   (19,766)  118,357 

State and political subdivisions

  316,532   5   (36,048)  280,489 

Corporate bonds

  81,713   -   (8,321)  73,392 
  $880,443  $16  $(96,492) $783,967 
                 

2021:

     

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 
                 

U.S. government treasuries

 $192,323  $239  $(2,083) $190,479 

U.S. government agencies

  114,531   2,235   (752)  116,014 

U.S. government mortgage-backed securities

  149,896   1,375   (1,670)  149,601 

State and political subdivisions

  290,548   4,035   (1,724)  292,859 

Corporate bonds

  79,887   2,437   (274)  82,050 
  $827,185  $10,321  $(6,503) $831,003 

 

The amortized cost and fair value of debt securities available-for-sale as of September 30, 2022, are shown below by expected maturity. Expected maturity will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).

 

  

Amortized

  

Estimated

 
  

Cost

  

Fair Value

 
         

Due in one year or less

 $32,318  $32,029 

Due after one year through five years

  452,629   414,093 

Due after five years through ten years

  382,700   326,965 

Due after ten years

  12,796   10,880 

Total

 $880,443  $783,967 

 

Securities with a carrying value of $207.4 million and $219.7 million at September 30, 2022 and December 31, 2021, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

 

15

 

The proceeds and gains on securities available-for-sale for the three and nine months ended September 30, 2022 and 2021 are summarized below (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Proceeds from sales of securities available-for-sale

 $10,013  $622  $10,548  $622 

Gross realized gains on securities available-for-sale

  25   24   60   24 

Gross realized losses on securities available-for-sale

  (23)  -   (23)  - 

 

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2022 and December 31, 2021 are summarized as follows (in thousands):

 

  

Less than 12 Months

  

12 Months or More

  

Total

 

2022:

 

Estimated

Fair Value

  

Unrealized

Losses

  

Estimated

Fair Value

  

Unrealized

Losses

  

Estimated

Fair Value

  

Unrealized

Losses

 
                         

Securities available-for-sale:

                        

U.S. government treasuries

 $119,179  $(10,309) $88,907  $(11,668) $208,086  $(21,977)

U.S. government agencies

  76,888   (6,433)  26,095   (3,947)  102,983   (10,380)

U.S. government mortgage-backed securities

  47,837   (5,541)  69,785   (14,225)  117,622   (19,766)

State and political subdivisions

  218,288   (23,921)  59,639   (12,127)  277,927   (36,048)

Corporate bonds

  63,812   (6,032)  9,580   (2,289)  73,392   (8,321)
  $526,004  $(52,236) $254,006  $(44,256) $780,010  $(96,492)
                         
  

Less than 12 Months

  

12 Months or More

  

Total

 

2021:

 

Estimated

Fair Value

  

Unrealized

Losses

  

Estimated

Fair Value

  

Unrealized

Losses

  

Estimated

Fair Value

  

Unrealized

Losses

 
                         

Securities available-for-sale:

                        

U.S. government treasuries

 $163,206  $(2,083) $-  $-  $163,206  $(2,083)

U.S. government agencies

  30,647   (570)  5,836   (182)  36,483   (752)

U.S. government mortgage-backed securities

  92,192   (1,580)  2,524   (90)  94,716   (1,670)

State and political subdivisions

  115,204   (1,667)  1,725   (57)  116,929   (1,724)

Corporate bonds

  16,484   (274)  -   -   16,484   (274)
  $417,733  $(6,174) $10,085  $(329) $427,818  $(6,503)

 

Gross unrealized losses on debt securities totaled $96.5 million as of September 30, 2022. 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.

 

16

 
 

7.       Loans Receivable and Credit Disclosures

 

The composition of loans receivable as of September 30, 2022 and December 31, 2021 is as follows (in thousands):

 

  

2022

  

2021

 
         

Real estate - construction

 $42,816  $42,638 

Real estate - 1 to 4 family residential

  281,046   246,745 

Real estate - commercial

  519,345   515,367 

Real estate - agricultural

  159,099   153,457 

Commercial 1

  73,554   75,482 

Agricultural

  98,914   111,881 

Consumer and other

  15,994   15,097 
   1,190,768   1,160,667 

Less:

        

Allowance for loan losses

  (15,897)  (16,621)

Deferred loan costs, net

  376   62 

Loans receivable, net

 $1,175,247  $1,144,108 

 

1 Commercial loan portfolio includes $0.2 million and $6.0 million of Paycheck Protection Program ("PPP") loans as of September 30, 2022 and December 31, 2021, respectively.

 

The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in response to the Coronavirus Disease 2019 (COVID-19) pandemic. Funding was extended into 2021. The PPP is administered by the Small Business Administration (SBA). PPP loans are forgivable by the SBA in qualifying circumstances and are 100 percent guaranteed by the SBA.

 

17

 

Activity in the allowance for loan losses, on a disaggregated basis, for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):

 

  

Three Months Ended September 30, 2022

 
      

1-4 Family

                         
  

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, June 30, 2022

 $606  $2,920  $8,360  $1,692  $1,125  $1,484  $233  $16,420 

Provision (credit) for loan losses

  (2)  83   (492)  (94)  (25)  24   (14)  (520)

Recoveries of loans charged-off

  -   4   1   -   1   -   -   6 

Loans charged-off

  -   -   -   -   (2)  (7)  -   (9)

Balance, September 30, 2022

 $604  $3,007  $7,869  $1,598  $1,099  $1,501  $219  $15,897 

 

  

Nine Months Ended September 30, 2022

 
      

1-4 Family

                         
  

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, December 31, 2021

 $675  $2,752  $8,406  $1,584  $1,170  $1,836  $198  $16,621 

Provision (credit) for loan losses

  (71)  257   (539)  14   (72)  (328)  33   (706)

Recoveries of loans charged-off

  -   8   2   -   3   -   4   17 

Loans charged-off

  -   (10)  -   -   (2)  (7)  (16)  (35)

Balance, September 30, 2022

 $604  $3,007  $7,869  $1,598  $1,099  $1,501  $219  $15,897 

 

  

Three Months Ended September 30, 2021

 
      

1-4 Family

                         
  

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, June 30, 2021

 $738  $2,603  $8,889  $1,614  $1,140  $1,675  $234  $16,893 

Provision (credit) for loan losses

  (156)  59   33   (36)  64   (59)  1   (94)

Recoveries of loans charged-off

  -   1   1   -   1   43   1   47 

Loans charged-off

  -   (4)  -   -   -   -   (12)  (16)

Balance, September 30, 2021

 $582  $2,659  $8,923  $1,578  $1,205  $1,659  $224  $16,830 

 

  

Nine Months Ended September 30, 2021

 
      

1-4 Family

                         
  

Construction

  

Residential

  

Commercial

  

Agricultural

          

Consumer

     
  

Real Estate

  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

and Other

  

Total

 

Balance, December 31, 2020

 $725  $2,581  $8,930  $1,595  $1,453  $1,696  $235  $17,215 

Provision (credit) for loan losses

  (143)  (155)  (10)  (17)  (138)  (85)  8   (540)

Recoveries of loans charged-off

  -   267   3   -   3   48   8   329 

Loans charged-off

  -   (34)  -   -   (113)  -   (27)  (174)

Balance, September 30, 2021

 $582  $2,659  $8,923  $1,578  $1,205  $1,659  $224  $16,830 

 

18

 

Allowance for loan losses disaggregated on the basis of impairment analysis method as of September 30, 2022 and December 31, 2021 is as follows (in thousands):

 

2022

     

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

 $-  $30  $874  $-  $-  $83  $18  $1,005 

Collectively evaluated for impairment

  604   2,977   6,995   1,598   1,099   1,418   201   14,892 

Balance September 30, 2022

 $604  $3,007  $7,869  $1,598  $1,099  $1,501  $219  $15,897 
                                 

2021

     

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

 $-  $40  $1,139  $-  $60  $132  $21  $1,392 

Collectively evaluated for impairment

  675   2,712   7,267   1,584   1,110   1,704   177   15,229 

Balance December 31, 2021

 $675  $2,752  $8,406  $1,584  $1,170  $1,836  $198  $16,621 

 

Loans receivable disaggregated on the basis of impairment analysis method as of September 30, 2022 and December 31, 2021 is as follows (in thousands):

 

2022

     

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

 $-  $1,035  $13,144  $169  $276  $319  $26  $14,969 

Collectively evaluated for impairment

  42,816   280,011   506,201   158,930   73,278   98,595   15,968   1,175,799 
                                 

Balance September 30, 2022

 $42,816  $281,046  $519,345  $159,099  $73,554  $98,914  $15,994  $1,190,768 
                                 

2021

     

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

 $-  $980  $9,792  $546  $330  $637  $27  $12,312 

Collectively evaluated for impairment

  42,638   245,765   505,575   152,911   75,152   111,244   15,070   1,148,355 
                                 

Balance December 31, 2021

 $42,638  $246,745  $515,367  $153,457  $75,482  $111,881  $15,097  $1,160,667 

 

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.

 

19

 

Impaired loans, on a disaggregated basis, as of September 30, 2022 and December 31, 2021 (in thousands):

 

  

2022

  

2021

 
      

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

  839   879   -   677   739   - 

Real estate - commercial

  3,739   3,774   -   124   142   - 

Real estate - agricultural

  169   194   -   546   1,001   - 

Commercial

  276   320   -   233   269   - 

Agricultural

  48   58   -   322   521   - 

Consumer and other

  8   10   -   6   8   - 

Total loans with no specific reserve:

  5,079   5,235   -   1,908   2,680   - 
                         

With an allowance recorded:

                        

Real estate - construction

  -   -   -   -   -   - 

Real estate - 1 to 4 family residential

  196   187   30   303   314   40 

Real estate - commercial

  9,405   9,944   874   9,668   10,001   1,139 

Real estate - agricultural

  -   -   -   -   -   - 

Commercial

  -   -   -   97   98   60 

Agricultural

  271   294   83   315   315   132 

Consumer and other

  18   20   18   21   23   21 

Total loans with specific reserve:

  9,890   10,445   1,005   10,404   10,751   1,392 
                         

Total

                        

Real estate - construction

  -   -   -   -   -   - 

Real estate - 1 to 4 family residential

  1,035   1,066   30   980   1,053   40 

Real estate - commercial

  13,144   13,718   874   9,792   10,143   1,139 

Real estate - agricultural

  169   194   -   546   1,001   - 

Commercial

  276   320   -   330   367   60 

Agricultural

  319   352   83   637   836   132 

Consumer and other

  26   30   18   27   31   21 
                         
  $14,969  $15,680  $1,005  $12,312  $13,431  $1,392 

 

20

 

Average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2022 and 2021 (in thousands):

 

  

Three Months Ended September 30,

 
  

2022

  

2021

 
  

Average

  

Interest

  

Average

  

Interest

 
  

Recorded

  

Income

  

Recorded

  

Income

 
  

Investment

  

Recognized

  

Investment

  

Recognized

 

With no specific reserve recorded:

                

Real estate - construction

 $-  $-  $-  $- 

Real estate - 1 to 4 family residential

  781   39   813   8 

Real estate - commercial

  1,929   -   132   - 

Real estate - agricultural

  170   -   602   - 

Commercial

  242   -   255   - 

Agricultural

  39   -   318   - 

Consumer and other

  6   -   6   - 

Total loans with no specific reserve:

  3,167   39   2,126   8 
                 

With an allowance recorded:

                

Real estate - construction

  -   -   -   - 

Real estate - 1 to 4 family residential

  98   -   164   - 

Real estate - commercial

  9,500   -   9,922   - 

Real estate - agricultural

  -   -   -   - 

Commercial

  17   1   29   - 

Agricultural

  286   -   327   - 

Consumer and other

  19   -   30   - 

Total loans with specific reserve:

  9,920   1   10,472   - 
                 

Total

                

Real estate - construction

  -   -   -   - 

Real estate - 1 to 4 family residential

  879   39   977   8 

Real estate - commercial

  11,429   -   10,054   - 

Real estate - agricultural

  170   -   602   - 

Commercial

  259   1   284   - 

Agricultural

  325   -   645   - 

Consumer and other

  25   -   36   - 
                 
  $13,087  $40  $12,598  $8 

 

21

 
  

Nine Months Ended September 30,

 
  

2022

  

2021

 
  

Average

  

Interest

  

Average

  

Interest

 
  

Recorded

  

Income

  

Recorded

  

Income

 
  

Investment

  

Recognized

  

Investment

  

Recognized

 

With no specific reserve recorded:

                

Real estate - construction

 $-  $-  $84  $- 

Real estate - 1 to 4 family residential

  722   55   587   19 

Real estate - commercial

  1,026   -   162   297 

Real estate - agricultural

  357   14   990   25 

Commercial

  234   5   400   - 

Agricultural

  164   -   339   14 

Consumer and other

  5   -   6   - 

Total loans with no specific reserve:

  2,508   74   2,568   355 
                 

With an allowance recorded:

                

Real estate - construction

  -   -   -   - 

Real estate - 1 to 4 family residential

  206   1   336   - 

Real estate - commercial

  9,584   -   9,969   - 

Real estate - agricultural

  -   -   -   - 

Commercial

  43   1   181   - 

Agricultural

  299   -   385   - 

Consumer and other

  20   -   35   - 

Total loans with specific reserve:

  10,152   2   10,906   - 
                 

Total

                

Real estate - construction

  -   -   84   - 

Real estate - 1 to 4 family residential

  928   56   923   19 

Real estate - commercial

  10,610   -   10,131   297 

Real estate - agricultural

  357   14   990   25 

Commercial

  277   6   581   - 

Agricultural

  463   -   724   14 

Consumer and other

  25   -   41   - 
                 
  $12,660  $76  $13,474  $355 

 

The interest foregone on nonaccrual loans for the three months ended September 30, 2022 and 2021 was approximately $224 thousand and $154 thousand, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2022 and 2021 was approximately $535 thousand and $523 thousand, respectively.

 

Nonaccrual loans at September 30, 2022 and December 31, 2021 were $15.2 million and $12.7 million, respectively.

 

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $10.8 million as of September 30, 2022, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $11.3 million as of December 31, 2021, all of which were included in impaired and nonaccrual loans.

 

22

 

The Company’s TDRs, on a disaggregated basis, occurring in the three and nine months ended September 30, 2022 and 2021, were as follows (dollars in thousands):

 

  

Three Months Ended September 30,

 
  

2022

  

2021

 
      

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

  -   -   -   1   6   6 

Agricultural

  -   -   -   -   -   - 

Consumer and other

  -   -   -   -   -   - 
                         
   -  $-  $-   1  $6  $6 

 

 

  

Nine Months Ended September 30,

 
  

2022

  

2021

 
      

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

  -   -   -   3   578   578 

Real estate - commercial

  -   -   -   -   -   - 

Real estate - agricultural

  -   -   -   -   -   - 

Commercial

  -   -   -   2   64   64 

Agricultural

  -   -   -   -   -   - 

Consumer and other

  -   -   -   -   -   - 
                         
   -  $-  $-   5  $642  $642 

 

During the three and nine months ended September 30, 2022, the Company did not grant any concessions to borrowers facing financial difficulties. During the three months ended September 30, 2021, the Company granted concessions to one borrower facing financial difficulties. The loan was restructured with a lower interest rate and accrued interest was waived. During the nine months ended September 30, 2021, the Company granted concessions to four borrowers, with five contracts, facing financial difficulties. The loans were restructured with a lower interest rate or amortization periods longer than a typical loan.

 

There were no TDR loans that were modified during the twelve months ended September 30, 2022 that had payment defaults. The Company considers TDR loans to have payment default when it is past due 60 days or more.

 

23

 

There were no net charge-offs related to TDRs for the three months ended September 30, 2022 and 2021. There were no net charge-offs and $262 thousand of net recoveries related to TDRs for the nine months ended September 30, 2022 and 2021, respectively. No additional specific reserve was provided for the three and nine months ended September 30, 2022 and 2021.

 

An aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, 2022 and December 31, 2021, is as follows (in thousands):

 

2022

     

90 Days

              

90 Days

 
   30-89  

or Greater

  

Total

          

or Greater

 
  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total

  

Accruing

 
                         

Real estate - construction

 $305  $-  $305  $42,511  $42,816  $- 

Real estate - 1 to 4 family residential

  701   72   773   280,273   281,046   7 

Real estate - commercial

  512   1,483   1,995   517,350   519,345   - 

Real estate - agricultural

  -   -   -   159,099   159,099   - 

Commercial

  276   75   351   73,203   73,554   - 

Agricultural

  67   12   79   98,835   98,914   - 

Consumer and other

  38   10   48   15,946   15,994   5 
                         
  $1,899  $1,652  $3,551  $1,187,217  $1,190,768  $12 
                         

2021

     

90 Days

              

90 Days

 
  300899  

or Greater

  

Total

          

or Greater

 
  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total

  

Accruing

 
                         

Real estate - construction

 $-  $-  $-  $42,638  $42,638  $- 

Real estate - 1 to 4 family residential

  1,198   482   1,680   245,065   246,745   169 

Real estate - commercial

  24   -   24   515,343   515,367   - 

Real estate - agricultural

  30   -   30   153,427   153,457   - 

Commercial

  251   15   266   75,216   75,482   - 

Agricultural

  172   -   172   111,709   111,881   - 

Consumer and other

  49   -   49   15,048   15,097   - 
                         
  $1,724  $497  $2,221  $1,158,446  $1,160,667  $169 

 

24

 

The credit risk profile by internally assigned grade, on a disaggregated basis, as of September 30, 2022 and December 31, 2021 is as follows (in thousands):

 

2022

 

Construction

  

Commercial

  

Agricultural

             
  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

Total

 
                         

Pass

 $42,588  $413,090  $134,873  $65,221  $81,530  $737,302 

Watch

  228   71,674   19,105   6,452   16,556   114,015 

Special Mention

  -   -   -   -   -   - 

Substandard

  -   21,437   4,952   1,605   509   28,503 

Substandard-Impaired

  -   13,144   169   276   319   13,908 
                         
  $42,816  $519,345  $159,099  $73,554  $98,914  $893,728 
                         

2021

 

Construction

  

Commercial

  

Agricultural

             
  

Real Estate

  

Real Estate

  

Real Estate

  

Commercial

  

Agricultural

  

Total

 
                         

Pass

 $38,753  $381,346  $126,157  $63,141  $95,289  $704,686 

Watch

  239   99,127   17,853   8,132   7,421   132,772 

Special Mention

  -   3,085   3,519   762   7,664   15,030 

Substandard

  3,646   22,017   5,382   3,117   870   35,032 

Substandard-Impaired

  -   9,792   546   330   637   11,305 
                         
  $42,638  $515,367  $153,457  $75,482  $111,881  $898,825 

 

The credit risk profile based on payment activity, on a disaggregated basis, as of September 30, 2022 and December 31, 2021 is as follows (in thousands):

 

2022

 

1-4 Family

         
  

Residential

  

Consumer

     
  

Real Estate

  

and Other

  

Total

 
             

Performing

 $280,011  $15,964  $295,975 

Non-performing

  1,035   30   1,065 
             
  $281,046  $15,994  $297,040 
             

2021

 

1-4 Family

         
  

Residential

  

Consumer

     
  

Real Estate

  

and Other

  

Total

 
             

Performing

 $245,598  $15,067  $260,665 

Non-performing

  1,147   30   1,177 
             
  $246,745  $15,097  $261,842 

 

25

 
 

8.     Intangible assets

 

The following sets forth the carrying amounts and accumulated amortization of the intangible assets at September 30, 2022 and December 31, 2021 (in thousands):

 

  

2022

  

2021

 
  

Gross

  

Accumulated

  

Gross

  

Accumulated

 
  

Amount

  

Amortization

  

Amount

  

Amortization

 
                 

Core deposit intangible asset

 $6,411  $4,422  $6,411  $4,043 

Customer list

  535   457   535   398 
                 

Total

 $6,946  $4,879  $6,946  $4,441 

 

The weighted average remaining life of the intangible assets is approximately 3 years and 4 years as of September 30, 2022 and December 31, 2021, respectively.

 

The following sets forth the activity related to the intangible assets for the three and nine months ended September 30, 2022 and 2021 (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Beginning intangible assets, net

 $2,212  $2,813  $2,505  $3,133 

Amortization

  (145)  (159)  (438)  (479)
                 

Ending intangible assets, net

 $2,067  $2,654  $2,067  $2,654 

 

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

 

2022

  136 

2023

  502 

2024

  337 

2025

  300 

2026

  268 

2027

  240 

After

  284 
     

Total

 $2,067 

 

26

 
 

9.     Pledged Collateral Related to Securities Sold Under Repurchase Agreements

 

The repurchase agreements mature daily and the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements as of September 30, 2022 and December 31, 2021 (in thousands):

 

  

2022

  

2021

 

Securities sold under agreements to repurchase:

        

U.S. government treasuries

 $6,467  $4,971 

U.S. government agencies

  35,966   38,045 

U.S. government mortgage-backed securities

  8,645   11,127 
         

Total pledged collateral

 $51,078  $54,143 

 

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.

 

 

10.     Borrowings

 

On June 6, 2022, the Company advanced $4.0 million on a five-year promissory note at a rate of 3.35% with an unaffiliated bank. The Company had outstanding borrowings of $3.9 million as of September 30, 2022 and none as of December 31, 2021.

 

The Company had $23.6 million of short-term FHLB advances as of September 30, 2022 and $3.0 million of long-term FHLB advances as of December 31, 2021.

 

 

11.     Derivative Financial Instruments

 

Fair Value Hedges

The Company uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. The Company uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income.

 

The Company was required to pledge $1.0 million and $1.5 million of securities as collateral for these fair value hedges at September 30, 2022, and December 31, 2021, respectively.

 

The table below identifies the notional amount, fair value and balance sheet category of the Company's fair value hedges at September 30, 2021, and December 31, 2021 (in thousands):

 

  

Notional Amount

  

Fair Value

 

Balance Sheet Category

September 30, 2022

         

Fair value hedges

 $9,408  $1,165 

Other assets

December 31, 2021

         

Fair value hedges

 $20,399  $(527)

Other liabilities

 

27

 
 

12.     Income Taxes

 

The tax effects of temporary differences related to income taxes are included in deferred income taxes. The change in deferred income taxes since December 31, 2021 is due primarily to the increase in the unrealized losses on investment securities.

 

Effective June 17, 2022, the State of Iowa enacted a phased-in reduction to the bank franchise tax rate through annual reductions of 0.3% over a five-year period. The reduction commences in 2023 and results in the current rate of 5% declining to 3.5% in 2027. This rate decrease created a non-recurring reduction to the Company’s deferred income tax asset and increased income tax expense by $780 thousand for the nine months ended September 30, 2022.

 

 

13.     Commitments, Contingencies and Concentrations of Credit Risk

 

On June 9, 2022, the Company entered into a $3.7 million commitment with a contractor to remodel a branch in Ames, Iowa. The Company has $3.2 million of the commitment remaining at September 30, 2022.

 

 

14.       Regulatory Matters

 

The Company and the Banks are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believed the Company and the Banks met all capital adequacy requirements to which they were subject as of September 30, 2022.

 

28

 

The Company and the Banks’ capital amounts and ratios as of September 30, 2022 and December 31, 2021 are as follows (dollars in thousands):

 

                  

To Be Well

 
                  

Capitalized Under

 
          

For Capital

  

Prompt Corrective

 
  

Actual

  

Adequacy Purposes

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
                         

As of September 30, 2022:

                        

Total capital (to risk- weighted assets):

                        

Consolidated

 $213,649   14.6% $153,337   10.50%  N/A   N/A 

Boone Bank & Trust

  15,864   12.7   13,148   10.50   12,522   10.0%

First National Bank

  109,914   14.8   78,045   10.50   74,328   10.0 

Iowa State Savings Bank

  24,918   15.6   16,784   10.50   15,985   10.0 

Reliance State Bank

  28,124   13.5   21,898   10.50   20,855   10.0 

State Bank & Trust

  21,793   14.9   15,349   10.50   14,618   10.0 

United Bank & Trust

  12,450   15.1   8,663   10.50   8,250   10.0 
                         

Tier 1 capital (to risk- weighted assets):

                        

Consolidated

 $196,922   13.5% $124,130   8.50%  N/A   N/A 

Boone Bank & Trust

  14,932   11.9   10,644   8.50   10,018   8.0%

First National Bank

  100,627   13.5   63,179   8.50   59,463   8.0 

Iowa State Savings Bank

  23,735   14.8   13,587   8.50   12,788   8.0 

Reliance State Bank

  25,544   12.2   17,727   8.50   16,684   8.0 

State Bank & Trust

  20,181   13.8   12,425   8.50   11,694   8.0 

United Bank & Trust

  11,418   13.8   7,013   8.50   6,600   8.0 
                         

Tier 1 capital (to average- assets):

                        

Consolidated

 $196,922   9.1% $86,685   4.00%  N/A   N/A 

Boone Bank & Trust

  14,932   9.0   6,654   4.00   8,318   5.0%

First National Bank

  100,627   9.0   44,824   4.00   56,030   5.0 

Iowa State Savings Bank

  23,735   9.1   10,411   4.00   13,014   5.0 

Reliance State Bank

  25,544   8.7   11,782   4.00   14,728   5.0 

State Bank & Trust

  20,181   8.8   9,132   4.00   11,415   5.0 

United Bank & Trust

  11,418   8.5   5,370   4.00   6,713   5.0 
                         

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

                        

Consolidated

 $196,922   13.5% $102,225   7.00%  N/A   N/A 

Boone Bank & Trust

  14,932   11.9   8,766   7.00   8,139   6.5%

First National Bank

  100,627   13.5   52,030   7.00   48,313   6.5 

Iowa State Savings Bank

  23,735   14.8   11,189   7.00   10,390   6.5 

Reliance State Bank

  25,544   12.2   14,599   7.00   13,556   6.5 

State Bank & Trust

  20,181   13.8   10,233   7.00   9,502   6.5 

United Bank & Trust

  11,418   13.8   5,775   7.00   5,363   6.5 

 

29

 
                  

To Be Well

 
                  

Capitalized Under

 
          

For Capital

  

Prompt Corrective

 
  

Actual

  

Adequacy Purposes

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
                         

As of December 31, 2021:

                        

Total capital (to risk- weighted assets):

                        

Consolidated

 $208,480   14.8% $146,881   10.50%  N/A   N/A 

Boone Bank & Trust

  15,603   14.2   11,562   10.50   11,012   10.0%

First National Bank

  104,608   14.5   75,832   10.50   72,221   10.0 

Iowa State Savings Bank

  24,008   15.9   15,895   10.50   15,138   10.0 

Reliance State Bank

  27,292   13.6   21,136   10.50   20,129   10.0 

State Bank & Trust

  20,885   15.2   14,416   10.50   13,730   10.0 

United Bank & Trust

  12,001   15.7   8,039   10.50   7,657   10.0 
                         

Tier 1 capital (to risk- weighted assets):

                        

Consolidated

 $191,161   13.7% $118,904   8.50%  N/A   N/A 

Boone Bank & Trust

  14,652   13.3   9,360   8.50   8,809   8.0%

First National Bank

  95,573   13.2   61,388   8.50   57,777   8.0 

Iowa State Savings Bank

  22,747   15.0   12,868   8.50   12,111   8.0 

Reliance State Bank

  24,774   12.3   17,110   8.50   16,103   8.0 

State Bank & Trust

  19,231   14.0   11,670   8.50   10,984   8.0 

United Bank & Trust

  11,042   14.4   6,508   8.50   6,125   8.0 
                         

Tier 1 capital (to average- assets):

                        

Consolidated

 $191,161   9.0% $84,585   4.00%  N/A   N/A 

Boone Bank & Trust

  14,652   9.0   6,525   4.00   8,157   5.0%

First National Bank

  95,573   8.7   44,333   4.00   55,416   5.0 

Iowa State Savings Bank

  22,747   9.1   10,102   4.00   12,628   5.0 

Reliance State Bank

  24,774   8.8   11,396   4.00   14,245   5.0 

State Bank & Trust

  19,231   9.1   8,469   4.00   10,586   5.0 

United Bank & Trust

  11,042   8.9   4,955   4.00   6,193   5.0 
                         

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

                        

Consolidated

 $191,161   13.7% $97,921   7.00%  N/A   N/A 

Boone Bank & Trust

  14,652   13.3   7,708   7.00   7,158   6.5%

First National Bank

  95,573   13.2   50,555   7.00   46,944   6.5 

Iowa State Savings Bank

  22,747   15.0   10,597   7.00   9,840   6.5 

Reliance State Bank

  24,774   12.3   14,091   7.00   13,084   6.5 

State Bank & Trust

  19,231   14.0   9,611   7.00   8,924   6.5 

United Bank & Trust

  11,042   14.4   5,360   7.00   4,977   6.5 

 

30

 

The Company and the Banks are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules included the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes for all capital ratios except tier 1 capital to average assets. A banking organization with a capital conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. At September 30, 2022, the capital ratios for the Company and the Banks were sufficient to meet the conservation buffer.

 

 

15.   Subsequent Events

 

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after September 30, 2022, but prior to November 8, 2022, that provided additional evidence about conditions that existed at September 30, 2022. There were no other significant events or transactions that provided evidence about conditions that did not exist at September 30, 2022.

 

31

 
 

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 six bank subsidiaries in central, north-central and south-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), United Bank & Trust Co. (United Bank) and Iowa State Savings Bank (Iowa State 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. Wealth management services includes financial planning and managing trust, agencies, estates and investment brokerage accounts. The Company employs nineteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training, real estate valuation services and the coordination of management activities, in addition to 247 full-time equivalent individuals employed by the Banks.

 

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

 

The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks; (v) gain on sale of loans; and (vi) 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 $5.5 million, or $0.62 per share, for the three months ended September 30, 2022, compared to net income of $6.7 million, or $0.74 per share, for the three months ended September 30, 2021. The decrease in earnings is primarily the result of lower interest income on loans and higher interest expense on deposits, offset in part by an increase in interest income on taxable securities. The reduction in interest income on loans was primarily due to fewer Paycheck Protection Program (“PPP”) fees and interest recognized into income compared to the same period in 2021. Fees recognized from PPP loans during the three months ended September 30, 2022 were $2 thousand as compared to $1.7 million of fees during the three months ended September 30, 2021. The higher interest expense on deposits is due to an increase in market rates in 2022. The increase in interest income on taxable securities was primarily due to growth in the portfolio.

 

 

Net loan charge-offs totaled $3 thousand for the three months ended September 30, 2022 compared to net loan recoveries of $31 thousand for the three months ended September 30, 2021. A credit for loan losses of $520 thousand was recognized for the three months ended September 30, 2022 as compared to a $94 thousand credit for loan losses for the three months ended September 30, 2021. The credit for loan losses in 2022 was primarily due to a reduction in specific reserves and an overall improvement in the quality of the loan portfolio.

 

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

Non-GAAP Financial Measures

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 11, 2022.

 

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 4,333 community banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.

 

 

Selected Indicators for the Company and the Industry

 

   

3 Months

   

9 Months

                   

Years Ended December 31,

 
   

Ended

   

Ended

   

3 Months Ended

                                 
   

September 30, 2022

   

June 30, 2022

   

2021

   

2020

 
   

Company

   

Company

   

Industry*

   

Company

   

Industry*

   

Company

   

Industry*

 
                                                                 

Return on assets

    1.05 %     0.93 %     0.77 %     1.10 %     1.15 %     1.25 %     1.01 %     1.09 %
                                                                 

Return on equity

    13.65 %     11.15 %     9.78 %     11.49 %     11.43 %     11.61 %     9.48 %     9.72 %
                                                                 

Net interest margin

    2.63 %     2.58 %     2.57 %     3.33 %     2.83 %     3.27 %     3.13 %     3.39 %
                                                                 

Efficiency ratio

    59.48 %     60.24 %     61.51 %     61.54 %     55.04 %     61.42 %     55.83 %     62.34 %
                                                                 

Capital ratio

    7.67 %     8.30 %     7.90 %     10.31 %     10.04 %     10.16 %     10.66 %     10.32 %

 

*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 1.05% and 1.29% for the three months ended September 30, 2022 and 2021, respectively. This ratio decrease was primarily the result of lower net 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 13.65% and 12.60% for the three months ended September 30, 2022 and 2021, respectively. This ratio increase was primarily the result of a decrease in the average balance of stockholders’ equity due an increase in unrealized losses on securities.

 

Net Interest Margin

 

The net interest margin for the three months ended September 30, 2022 and 2021 was 2.63% and 2.97%, respectively. The ratio is calculated by dividing tax equivalent 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.

 

Efficiency Ratio

 

This ratio is calculated by dividing noninterest expense by the sum of 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 59.48% and 51.35% for the three months ended September 30, 2022 and 2021, respectively. The efficiency ratio has increased compared to the same quarter last year primarily due to a reduction in net interest income and an increase in noninterest expense.

 

 

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 7.67% as of September 30, 2022 is lower than the industry average of 10.31% as of June 30, 2022 primarily due an increase in accumulated other comprehensive losses as interest rates have risen during the third quarter of 2022.

 

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, 2021 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 impairment 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, including economic disruption, high inflation levels, and rising interest rates, 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, including economic disruption, high inflation levels, and rising interest rates, 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 four acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment.  For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions.   Impairment would arise if the fair value of a reporting unit is less than its carrying value. At September 30, 2022, 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. The effects of economic disruption, high inflation levels, and rising interest rates may negatively impact our net income, fair value and correspondingly goodwill. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.

 

 

Non-GAAP Financial Measures

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2022

   

2021

   

2022

   

2021

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

Net interest income (GAAP)

  $ 13,663     $ 14,652     $ 40,451     $ 42,488  

Tax-equivalent adjustment (1)

    170       193       529       636  

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

    13,833       14,845       40,980       43,124  

Average interest-earning assets

  $ 2,105,313     $ 1,999,147     $ 2,114,305     $ 1,989,226  

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

    2.63 %     2.97 %     2.58 %     2.89 %

 

(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.

 

 

Income Statement Review for the Three Months ended September 30, 2022 and 2021

 

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended September 30, 2022 and 2021:

 

AVERAGE BALANCES AND INTEREST RATES

 

The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. 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 interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 

   

Three Months Ended September 30,

 
                                                 
   

2022

   

2021

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

ASSETS

                                               

(dollars in thousands)

                                               

Interest-earning assets

                                               

Loans (1)

                                               

Commercial

  $ 72,356     $ 815       4.51 %   $ 96,436     $ 2,411       10.00 %

Agricultural

    92,853       1,210       5.21 %     98,942       1,014       4.10 %

Real estate

    991,574       9,503       3.83 %     934,427       8,936       3.83 %

Consumer and other

    16,147       160       3.96 %     15,167       169       4.46 %
                                                 

Total loans (including fees)

    1,172,930       11,688       3.99 %     1,144,972       12,530       4.38 %
                                                 

Investment securities

                                               

Taxable

    762,535       3,226       1.69 %     598,634       2,256       1.51 %

Tax-exempt (2)

    132,064       811       2.46 %     146,805       918       2.50 %

Total investment securities

    894,599       4,037       1.81 %     745,439       3,174       1.70 %
                                                 

Interest-bearing deposits with banks and federal funds sold

    37,784       250       2.65 %     108,736       168       0.62 %
                                                 

Total interest-earning assets

    2,105,313     $ 15,975       3.04 %     1,999,147     $ 15,872       3.18 %
                                                 

Noninterest-earning assets

    13,016                       76,490                  
                                                 

TOTAL ASSETS

  $ 2,118,329                     $ 2,075,637                  

 

(1) Average loan balances include nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

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

 

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 

   

Three Months Ended September 30,

 
                                                 
   

2022

   

2021

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 
LIABILITIES AND STOCKHOLDERS' EQUITY                                                

(dollars in thousands)

                                               

Interest-bearing liabilities

                                               

Deposits

                                               

Interest-bearing checking, savings accounts and money markets

  $ 1,290,911     $ 1,461       0.45 %   $ 1,212,084     $ 467       0.15 %

Time deposits

    197,731       386       0.78 %     227,760       526       0.92 %

Total deposits

    1,488,642       1,847       0.50 %     1,439,844       993       0.28 %

Other borrowed funds

    63,660       295       1.85 %     38,863       34       0.35 %
                                                 

Total interest-bearing liabilities

    1,552,302       2,142       0.55 %     1,478,707       1,027       0.28 %
                                                 

Noninterest-bearing liabilities

                                               

Noninterest-bearing checking

    394,845                       373,973                  

Other liabilities

    8,687                       9,786                  
                                                 

Stockholders' equity

    162,495                       213,171                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 2,118,329                     $ 2,075,637                  
                                                 
                                                 

Net interest income (FTE)(3)

          $ 13,833       2.63 %           $ 14,845       2.97 %
                                                 

Spread Analysis (FTE)

                                               

Interest income/average assets

  $ 15,975       3.02 %           $ 15,872       3.06 %        

Interest expense/average assets

  $ 2,142       0.40 %           $ 1,027       0.20 %        

Net interest income/average assets

  $ 13,833       2.61 %           $ 14,845       2.86 %        

 

(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

 

Net Interest Income

 

For the three months ended September 30, 2022 and 2021, the Company's net interest margin adjusted for tax exempt income was 2.63% and 2.97%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, 2022 totaled $13.7 million compared to $14.7 million for the three months ended September 30, 2021.

 

 

For the three months ended September 30, 2022, interest income increased $126 thousand, or 1%, when compared to the same period in 2021. The increase is primarily due to higher interest income on taxable securities and partially offset by fewer PPP fees and interest recognized into income. Taxable securities interest income was $970 thousand higher than the third quarter of 2021 due primarily to increased balances. Fees recognized from PPP loans during the third quarter of 2022 were $2 thousand as compared to $1.7 million of fees during the third quarter of 2021.

 

Interest expense increased $1.1 million, or 109%, for the three months ended September 30, 2022 when compared to the same period in 2021. The higher interest expense for the period is primarily due to an increase in market rates on deposits. In 2022, the Federal Open Market Committee has increased its target for the federal funds interest rate by 3.00%.

 

Provision (Credit) for Loan Losses

 

A credit for loan losses of ($520) thousand was recognized for the three months ended September 30, 2022 as compared to a credit for loan losses of ($94) thousand for the three months ended September 30, 2021. Net loan charge-offs totaled $3 thousand for the three months ended September 30, 2022 compared to net loan recoveries of $31 thousand for the three months ended September 30, 2021. The credit for loan losses in 2022 was primarily due to a reduction in specific reserves and an overall improvement in the quality of the loan portfolio.

 

Noninterest Income and Expense

 

Noninterest income for the three months ended September 30, 2022 totaled $2.3 million compared to $2.7 million for the three months ended September 30, 2021, a decrease of 14%. The decrease in noninterest income was primarily due to fewer gains on sale of residential loans held for sale as refinancing volume has slowed as mortgage rates have risen.

 

Noninterest expense for the three months ended September 30, 2022 totaled $9.5 million compared to $8.9 million recorded for the three months ended September 30, 2021, an increase of 7%. The increase is primarily due to data processing costs as a result of additional investments in technology and normal increases in salaries and benefits. The efficiency ratio was 59.5% for the third quarter of 2022 as compared to 51.4% in the third quarter of 2021.

 

Income Taxes

 

Income tax expense for the three months ended September 30, 2022 totaled $1.4 million compared to $1.8 million recorded for the three months ended September 30, 2021. The effective tax rate was 21% for the three months ended September 30, 2022 and 2021. The lower than expected tax rate in 2022 and 2021 was due primarily to tax-exempt interest income and New Markets Tax Credits.

 

 

Income Statement Review for the Nine Months ended September 30, 2022 and 2021

 

The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 2022 and 2021:

 

AVERAGE BALANCES AND INTEREST RATES

 

The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. 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 interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 

   

Nine Months Ended September 30,

 
                                                 
   

2022

   

2021

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

ASSETS

                                               

(dollars in thousands)

                                               

Interest-earning assets

                                               

Loans (1)

                                               

Commercial

  $ 71,700     $ 2,438       4.53 %   $ 113,448     $ 6,281       7.38 %

Agricultural

    93,832       3,141       4.46 %     96,173       2,999       4.16 %

Real estate

    973,314       27,173       3.72 %     918,384       26,845       3.90 %

Consumer and other

    16,210       477       3.92 %     14,768       516       4.66 %
                                                 

Total loans (including fees)

    1,155,056       33,229       3.84 %     1,142,773       36,641       4.28 %
                                                 

Investment securities

                                               

Taxable

    739,206       8,861       1.60 %     533,161       6,457       1.61 %

Tax-exempt (2)

    137,375       2,519       2.45 %     156,969       3,028       2.57 %

Total investment securities

    876,581       11,380       1.73 %     690,130       9,485       1.83 %
                                                 

Interest-bearing deposits with banks and federal funds sold

    82,668       675       1.09 %     156,323       515       0.44 %
                                                 

Total interest-earning assets

    2,114,305     $ 45,284       2.86 %     1,989,226     $ 46,641       3.13 %
                                                 

Noninterest-earning assets

    30,398                       76,434                  
                                                 

TOTAL ASSETS

  $ 2,144,703                     $ 2,065,660                  

 

(1) Average loan balances include nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

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

 

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 

   

Nine Months Ended September 30,

 
                                                 
   

2022

   

2021

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

LIABILITIES AND

                                               
STOCKHOLDERS' EQUITY                                                

(dollars in thousands)

                                               

Interest-bearing liabilities

                                               

Deposits

                                               

Interest-bearing checking, savings accounts and money markets

  $ 1,303,599     $ 2,768       0.28 %   $ 1,198,914     $ 1,435       0.16 %

Time deposits

    206,672       1,153       0.74 %     239,691       1,976       1.10 %

Total deposits

    1,510,271       3,921       0.35 %     1,438,605       3,411       0.32 %

Other borrowed funds

    47,412       383       1.08 %     39,927       106       0.35 %
                                                 

Total interest-bearing liabilities

    1,557,683       4,304       0.37 %     1,478,532       3,517       0.32 %
                                                 

Noninterest-bearing liabilities

                                               

Noninterest-bearing checking

    400,393                       367,698                  

Other liabilities

    8,697                       9,880                  
                                                 

Stockholders' equity

    177,930                       209,550                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 2,144,703                     $ 2,065,660                  
                                                 
                                                 

Net interest income (FTE)(3)

          $ 40,980       2.58 %           $ 43,124       2.89 %
                                                 

Spread Analysis (FTE)

                                               

Interest income/average assets

  $ 45,284       2.82 %           $ 46,641       3.01 %        

Interest expense/average assets

  $ 4,304       0.27 %           $ 3,517       0.23 %        

Net interest income/average assets

  $ 40,980       2.55 %           $ 43,124       2.78 %        

 

(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

 

Net Interest Income

 

For the nine months ended September 30, 2022 and 2021, the Company's net interest margin adjusted for tax exempt income was 2.58% and 2.89%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2022 totaled $40.5 million compared to $42.5 million for the nine months ended September 30, 2021.

 

 

For the nine months ended September 30, 2022, interest income declined $1.3 million, or 3%, when compared to the same period in 2021. The decrease is primarily due to less income recognized from PPP fees and a reduction in the recovery of interest income on nonaccrual loans, partially offset by an increase in income from taxable securities. Fees recognized from PPP loans during the nine months ended September 30, 2022 were $217 thousand as compared to $3.9 million of fees during the same period 2021. Nonaccrual interest income recognized in the nine months ended September 30, 2022 was $76 thousand compared to $355 thousand recognized during the same period of 2021. Taxable securities interest income was $2.4 million higher than 2021 due primarily to increased balances.

 

Interest expense increased $787 thousand, or 22%, for the nine months ended September 30, 2022 when compared to the same period in 2021. The higher interest expense for the period is primarily attributable to a an increase in market rates on core deposits and partially offset by lower volume of time deposits.

 

Provision (Credit) for Loan Losses

 

A (credit) for loan losses of ($706) thousand was recognized for the nine months ended September 30, 2022 as compared to a (credit) for loan losses of ($540) thousand for the nine months ended September 30, 2021. Net loan charge-offs totaled $18 thousand for the nine months ended September 30, 2022 compared to net loan recoveries of $155 thousand for the nine months ended September 30, 2021. The credit for loan losses in 2022 was primarily due to a reduction in specific reserves and an overall improvement in the quality of the loan portfolio. The credit for loan losses in 2021 was primarily due to loan recoveries and a reduction in a specific reserve.

 

Noninterest Income and Expense

 

Noninterest income for the nine months ended September 30, 2022 totaled $7.2 million compared to $7.8 million for the nine months ended September 30, 2021, a decrease of 8%. The decrease in noninterest income was primarily due to fewer gains on sale of residential loans held for sale as refinancing volume has slowed as mortgage rates have risen.

 

Noninterest expense for the nine months ended September 30, 2022 totaled $28.7 million compared to $27.3 million recorded for the nine months ended September 30, 2021, an increase of 5%. The increase is primarily due to data processing costs as a result of additional investments in technology and normal increases in salaries and benefits. The efficiency ratio was 60.2% and 54.3% for the nine months ended September 30, 2022 and 2021, respectively.

 

Income Taxes

 

Income tax expense for the nine months ended September 30, 2022 totaled $4.8 million compared to $4.9 million recorded for the nine months ended September 30, 2021. The effective tax rate was 24% and 21% for the nine months ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate in 2022 was due to a $780 thousand adjustment to deferred taxes for the reduction in future Iowa bank franchise tax rates enacted in the second quarter of 2022. The lower than expected tax rate in 2022 and 2021 was due primarily to tax-exempt interest income and New Markets Tax Credits.

 

 

Balance Sheet Review

 

As of September 30, 2022, total assets were $2.09 billion, a $50.1 million decrease compared to December 31, 2021. This decrease in assets is primarily due to an increase in unrealized losses and offset in part by purchases in the investment portfolio. The purchase of investments was primarily funded by a decrease in interest-bearing deposits in financial institutions and federal funds sold.

 

Investment Portfolio

 

The investment portfolio totaled $784.0 million as of September 30, 2022, a decrease of $47.0 million from the December 31, 2021 balance of $831.0 million. The decrease in securities available-for-sale is primarily due to a decline in fair value, offset in part by purchases of investments. The decline in fair value occurred as a result of interest rates increasing during 2022. In 2022, the Federal Open Market Committee has increased its target for the federal funds interest rate by 3.00%.

 

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, 2022, gross unrealized losses of $96.5 million, are considered to be temporary in nature due to the interest rate environment and other general economic factors. Certain bonds in the investment portfolio may become other-than-temporarily impaired and could negatively affect the Company’s net income. 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 expects full principal and interest to be collected. Therefore, the Company does not consider these investments to have other-than-temporary impairment as of September 30, 2022.

 

At September 30, 2022, the Company’s investment securities portfolio included securities issued by 294 government municipalities and agencies located within 29 states with a fair value of $280.5 million. At December 31, 2021, the Company’s investment securities portfolio included securities issued by 298 government municipalities and agencies located within 28 states with a fair value of $292.9 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. Storm Lake, Iowa, general obligation bonds with a fair value of $5.7 million (approximately 2.0% of the fair value of the government municipalities and agencies) represent the largest exposure to any one municipality or agency for the Company as of September 30, 2022; the bonds are repayable from the levy of continuing annual tax on all the taxable property within the territory of the city of Storm Lake.

 

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

 

 

The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of September 30, 2022 and December 31, 2021 identifying the state in which the issuing government municipality or agency operates (in thousands):

 

   

2022

   

2021

 
           

Estimated

           

Estimated

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
                                 

Obligations of states and political subdivisions:

                               

General Obligation bonds:

                               

Iowa

  $ 66,206     $ 59,761     $ 72,128     $ 72,830  

Texas

    29,788       25,963       24,742       24,953  

Nebraska

    20,166       16,813       19,546       19,486  

Oregon

    11,064       10,014       4,757       4,864  

Washington

    10,936       9,767       11,013       11,241  

Other (2022: 15 states; 2021: 15 states)

    41,361       36,461       36,614       36,753  
                                 

Total general obligation bonds

  $ 179,521     $ 158,779     $ 168,800     $ 170,127  
                                 

Revenue bonds:

                               

Iowa

  $ 57,301     $ 52,057     $ 61,718     $ 62,181  

Texas

    14,832       12,544       11,898       12,090  

Nebraska

    9,947       8,344       9,727       9,636  

Other (2022: 23 states; 2021: 21 states)

    54,931       48,765       38,405       38,825  
                                 

Total revenue bonds

  $ 137,011     $ 121,710     $ 121,748     $ 122,732  
                                 

Total obligations of states and political subdivisions

  $ 316,532     $ 280,489     $ 290,548     $ 292,859  

 

As of September 30, 2022 and December 31, 2021, 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 5 primary 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):

 

   

2022

   

2021

 
           

Estimated

           

Estimated

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
                                 

Revenue bonds by revenue source

                               

Sales tax

  $ 31,297     $ 27,883     $ 31,632     $ 31,896  

Water

    21,884       19,416       22,611       22,924  

College and universities, primarily dormitory revenues

    19,400       17,028       17,169       17,353  

Sewer

    13,339       11,484       14,248       14,327  

Leases

    11,199       10,217       8,788       8,894  

Other

    39,892       35,682       27,300       27,338  
                                 

Total revenue bonds by revenue source

  $ 137,011     $ 121,710     $ 121,748     $ 122,732  

 

 

Loan Portfolio

 

The loan portfolio, net of the allowance for loan losses, totaled $1.18 billion and $1.14 billion as of September 30, 2022 and December 31, 2021, respectively. The increase was primarily due to an increase in the 1-4 family residential loan portfolio, offset in part by a decrease in agricultural operating loans.

 

Deposits

 

Deposits totaled $1.87 billion and $1.88 billion as of September 30, 2022 and December 31, 2021, respectively. The change in deposits since December 31, 2021 was due to decreases in noninterest-bearing deposits and time deposits, partially offset by an increase in interest-bearing checking. Deposit balances fluctuate as customers’ liquidity needs vary at any given time and could be impacted by prevailing market interest rates, competition, and economic conditions.

 

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, 2021.

 

Asset Quality Review and Credit Risk Management

 

The Company’s credit risk is historically centered in the loan portfolio, which totaled $1.18 and $1.14 billion as of September 30, 2022 and December 31, 2021, respectively. Net loans comprise 56% of total assets as of September 30, 2022. The objective 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 an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 1.28% at September 30, 2022, as compared to 1.11% at December 31, 2021. The Company’s level of problem loans as a percentage of total loans at September 30, 2022 of 1.28% is higher as compared to the Iowa State Average peer group of FDIC insured institutions as of June 30, 2022, of 0.40%, most recent available.

 

Impaired loans totaled $15.0 million as of September 30, 2022 and have increased $2.7 million as compared to the impaired loans of $12.3 million as of December 31, 2021. The increase is primarily due to one borrower with no associated specific reserve.

 

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 $10.8 million as of September 30, 2022 and $11.3 million as of December 31, 2021, 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 nine 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. No additional specific reserve was provided for the three and nine months ended September 30, 2022 and 2021. The Company had no charge-offs for TDRs for the three and nine months ended September 30, 2022, respectively. The Company had no charge-offs and $262 thousand of recoveries for TDR’s for the three and nine months ended September 30, 2021, respectively. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.

 

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on nonaccrual. As of September 30, 2022, nonaccrual loans totaled $15.2 million and there were $12 thousand of loans past due 90 days and still accruing. This compares to nonaccrual loans of $12.7 million and loans past due 90 days and still accruing totaled $169 thousand as of December 31, 2021. The increase in nonaccrual loans is primarily due to one borrower with no associated specific reserve. There was no real estate owned and $218 thousand as of September 30, 2022 and December 31, 2021, respectively.

 

The watch and special mention loans classified as agricultural real estate and operating totaled $35.7 million as of September 30, 2022 as compared to $36.5 million as of December 31, 2021. The substandard and impaired loans in these categories totaled $5.9 million and $7.4 million as of September 30, 2022 and December 31, 2021, respectively.

 

The watch and special mention loans classified as commercial real estate totaled $71.7 million as of September 30, 2022 as compared to $102.2 million as of December 31, 2021. The substandard and impaired commercial real estate loans totaled $34.6 million and $31.8 million as of September 30, 2022 and December 31, 2021, respectively. The increase in substandard and impaired commercial real estate loans is due to one borrower with no associated specific reserve.

 

The allowance for loan losses as a percentage of outstanding loans as of September 30, 2022 was 1.33%, as compared to 1.43% at December 31, 2021. The allowance for loan losses totaled $15.9 million and $16.6 million as of September 30, 2022 and December 31, 2021, respectively. The decrease in the allowance for loan losses is mainly due to lower specific reserves and improved quality of the loan portfolio, offset in part by loan growth.

 

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. Due to potential changes in conditions, including economic disruption, high inflation levels, and rising interest rates, additional increases in the allowance for loan losses are possible.

 

 

Liquidity and Capital Resources

 

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

 

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

 

As of September 30, 2022, 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 on hand, balances due from other banks and interest-bearing deposits in financial institutions as of September 30, 2022 and December 31, 2021 totaled $29.3 million and $89.1 million, respectively, and management believes these sources provide an adequate level of liquidity given current economic conditions.

 

Other sources of liquidity available to the Banks as of September 30, 2022 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $287.2 million, with $23.6 million of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $100.4 million, with no outstanding federal fund purchase balances as of September 30, 2022. The Company had securities sold under agreements to repurchase totaling $41.1 million as of September 30, 2022.

 

Total investments as of September 30, 2022 were $784.0 million compared to $831.0 million as of December 31, 2021. These investments provide the Company with liquidity since all of the investments are classified as available-for-sale as of September 30, 2022. 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 the Consolidated Statements of Cash Flows

 

Net cash provided by operating activities for the nine months ended September 30, 2022 totaled $15.0 million compared to $23.7 million for the nine months ended September 30, 2021. The decrease of $8.7 million in cash provided by operating activities was primarily due to lower net income and fewer net proceeds from loans held for sale.

 

Net cash used in investing activities for the nine months ended September 30, 2022 was $86.0 million compared to $177.3 million for the nine months ended September 30, 2021. The decrease of $91.3 million in cash used in investing activities was primarily due to fewer purchases of investments.

 

Net cash provided by financing activities for the nine months ended September 30, 2022 totaled $11.1 million compared to $111.7 million for the nine months ended September 30, 2021. The decrease in cash provided by financing activities of $100.6 million was primarily due to a decrease in deposits between periods. As of September 30, 2022, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

 

Review of Company Only Cash Flows

 

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7.6 million and $7.1 million for the nine months ended September 30, 2022 and 2021, 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 Company, on an unconsolidated basis, has interest-bearing deposits totaling $3.9 million as of September 30, 2022.

 

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

 

On June 9, 2022, the Company entered into a commitment with a contractor to remodel a branch in Ames, Iowa for $3.7 million. The Company has $3.2 million of the commitment remaining at September 30, 2022. No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of September 30, 2022 that are of concern to management.

 

 

Capital Resources

 

The Company’s total stockholders’ equity as of September 30, 2022 totaled $137.3 million and was $70.5 million less than the $207.8 million recorded as of December 31, 2021. The decrease in stockholders’ equity was primarily the result of an increase in unrealized losses on the investment portfolio and stock repurchases, offset in part by the retention of net income in excess of dividends. At September 30, 2022 and December 31, 2021, stockholders’ equity as a percentage of total assets was 6.6% and 9.7%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2022. Unrealized losses on the investment portfolio are excluded from regulatory capital.

 

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 financial performance and asset quality.  Forward-looking statements contained in this Quarterly Report are not historical facts and are based on management’s current beliefs, assumptions, predictions and expectations of future events, including the Company’s future performance, taking into account all information currently available to management.  These beliefs, assumptions, predictions and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to management and many of which are beyond management’s control.  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.  Accordingly, investors are cautioned not to place undue reliance on such forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “forecasts”, “continuing,” “ongoing,” “expects,” “views,” “intends” and similar words or phrases. The risks and uncertainties that may affect the Company’s future performance and asset quality include, but are not limited to, the following:  the substantial negative impact of the continuing COVID-19 pandemic on national, regional and local economies in general and on the Company’s customers in particular; 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 resulting from the COVID-19 pandemic or as 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 Forward-Looking Statements and Business Risks” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2021.  Any forward-looking statements are qualified in their entirety by the foregoing risks and uncertainties and speak only as of the date on which such statements are made. The Company undertakes no obligation to revise or update such forward-looking statements to reflect events or circumstances after the date on which the statements are made 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. Our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities. Management continually develops and applies strategies to mitigate this risk. The Company’s primary market risk exposure has increased in 2022 due to rising short-term interest rates and an inversion of the treasury yield curve. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of the bank subsidiaries. Economic uncertainty and high inflation levels may cause market rates to continue to deviate from historical norms.

 

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 Proceeding
   
  Not applicable
   
Item 1.A. Risk Factors
   
  Management does not believe there have been any material changes in the risk factors that were disclosed in the Company's Form 10-K filed with the SEC on March 11, 2022.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
  In November, 2021, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2022, there were no shares remaining to be purchased under the plan.
   
  The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2022.

 

                   

Total

         
                   

Number

   

Maximum

 
                   

of Shares

   

Number of

 
                   

Purchased as

   

Shares that

 
   

Total

           

Part of

   

May Yet Be

 
   

Number

   

Average

   

Publicly

   

Purchased

 
   

of Shares

   

Price Paid

   

Announced

   

Under

 

Period

 

Purchased

   

Per Share

   

Plans

   

The Plan

 
                                 

July 1, 2022 to July 31, 2022

    -     $ -       -       -  
                                 

August 1, 2022 to August 31, 2022

    -     $ -       -       -  
                                 

September 1, 2022 to September 30, 2022

    -     $ -       -       -  
                                 

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 Inline XBRL Instance Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (1)
101.SCH Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)
   
104 Cover page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101.1)

 

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

 

 

SIGNATURES

 

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

 

 

 

AMES NATIONAL CORPORATION

 

 

 

 

 

DATE:         November 8, 2022 

By:

/s/ John P. Nelson

 

 

 

 

 

 

John P. Nelson, Chief Executive Officer and President

 

  (Principal Executive Officer)  
       
  By: /s/ John L. Pierschbacher  
       
  John L. Pierschbacher, Chief Financial Officer  
  (Principal Financial and Accounting Officer)  

                  

54