UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2019
[_] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934 | |
For the transition period from ____________ to ____________ |
For the transition period from ____________ to ____________
Commission File Number 0-32637
AMES NATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
IOWA | 42-1039071 | |
(State | (I. R. S. Employer | |
| Identification Number) |
405 FIFTH STREET
AMES, IOWA 50010
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (515) 232-6251
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer,, a smaller reporting company or an emerging growth company. See definition of “accelerated“large accelerated filer”, “large accelerated“accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer filer____ Accelerated filer X (Do not check if a smaller reporting company) Non-accelerated filer filer____ Smaller reporting company X Emerging growth company company____
If an emerging growth company, indicate by check mark if the registrant has elected notnot to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(1)13(a) of the Exchange Act. ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
Indicate the numberAs of April 26, 2019 there were 9,241,916 shares outstanding of each of the issuer's classes of common stock, as$2 par value, outstanding.
Securities registered pursuant to Section 12(b) of the latest practicable date.Act:
| Trading Symbol(s) | Name of each exchange on which registered |
Common stock |
| NASDAQ |
Page | ||
Part I. | ||
Item 1. | 3 | |
Consolidated Balance Sheets at | 3 | |
4 | ||
5 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | ||
Item 4. | ||
Part II. | ||
Item 1. | ||
Item 1.A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
CONSOLIDATED BALANCE SHEETS |
(unaudited) |
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, | December 31, | |||||||
| 2019 | 2018 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | 24,133,336 | $ | 30,384,066 | ||||
Interest bearing deposits in financial institutions | 58,738,001 | 26,057,513 | ||||||
Securities available-for-sale | 455,553,634 | 458,971,162 | ||||||
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost | 2,661,600 | 3,191,200 | ||||||
Loans receivable, net | 886,556,795 | 890,461,479 | ||||||
Loans held for sale | 256,500 | 401,287 | ||||||
Bank premises and equipment, net | 15,698,236 | 15,813,196 | ||||||
Accrued income receivable | 9,101,698 | 9,415,570 | ||||||
Other real estate owned | 564,667 | 829,603 | ||||||
Bank-owned life insurance | 2,789,711 | 2,773,729 | ||||||
Deferred income taxes, net | 2,355,018 | 3,848,713 | ||||||
Intangible assets, net | 2,514,220 | 2,677,884 | ||||||
Goodwill | 9,744,472 | 9,744,472 | ||||||
Other assets | 1,649,475 | 1,117,477 | ||||||
Total assets | $ | 1,472,317,363 | $ | 1,455,687,351 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Demand, noninterest bearing | $ | 221,211,912 | $ | 230,113,170 | ||||
NOW accounts | 386,717,224 | 366,178,715 | ||||||
Savings and money market | 424,084,571 | 418,384,284 | ||||||
Time, $250,000 and over | 49,058,130 | 40,014,550 | ||||||
Other time | 171,442,325 | 166,393,120 | ||||||
Total deposits | 1,252,514,162 | 1,221,083,839 | ||||||
Securities sold under agreements to repurchase | 32,396,757 | 40,674,486 | ||||||
Federal Home Loan Bank (FHLB) advances | 2,000,000 | 14,600,000 | ||||||
Dividends payable | 2,218,277 | 2,137,460 | ||||||
Accrued expenses and other liabilities | 5,411,409 | 4,326,502 | ||||||
Total liabilities | 1,294,540,605 | 1,282,822,287 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,242,822 and 9,293,305 shares as of March 31, 2019 and December 31, 2018, respectively | 18,485,644 | 18,586,610 | ||||||
Additional paid-in capital | 19,276,388 | 20,461,724 | ||||||
Retained earnings | 139,910,979 | 137,891,821 | ||||||
Accumulated other comprehensive income (loss) - net unrealized income (loss) on securities available-for-sale | 103,747 | (4,075,091 | ) | |||||
Total stockholders' equity | 177,776,758 | 172,865,064 | ||||||
Total liabilities and stockholders' equity | $ | 1,472,317,363 | $ | 1,455,687,351 |
September 30, | December 31, | |||||||
ASSETS | 2017 | 2016 | ||||||
Cash and due from banks | $ | 23,087,890 | $ | 29,478,068 | ||||
Interest bearing deposits in financial institutions | 35,486,284 | 31,737,259 | ||||||
Securities available-for-sale | 506,610,435 | 516,079,506 | ||||||
Loans receivable, net | 764,228,850 | 752,181,730 | ||||||
Loans held for sale | 279,800 | 242,618 | ||||||
Bank premises and equipment, net | 15,595,418 | 16,049,379 | ||||||
Accrued income receivable | 8,423,038 | 7,768,689 | ||||||
Other real estate owned | 385,509 | 545,757 | ||||||
Deferred income taxes | 1,817,543 | 3,485,689 | ||||||
Intangible assets, net | 1,133,736 | 1,352,812 | ||||||
Goodwill | 6,732,216 | 6,732,216 | ||||||
Other assets | 1,159,533 | 799,306 | ||||||
Total assets | $ | 1,364,940,252 | $ | 1,366,453,029 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Demand, noninterest bearing | $ | 202,368,921 | $ | 212,074,792 | ||||
NOW accounts | 337,062,117 | 310,427,812 | ||||||
Savings and money market | 380,454,650 | 381,852,433 | ||||||
Time, $250,000 and over | 36,776,010 | 39,031,663 | ||||||
Other time | 157,876,361 | 166,022,165 | ||||||
Total deposits | 1,114,538,059 | 1,109,408,865 | ||||||
Securities sold under agreements to repurchase | 39,001,050 | 58,337,367 | ||||||
Federal Home Loan Bank (FHLB) advances | 19,000,000 | 14,500,000 | ||||||
Other borrowings | 13,000,000 | 13,000,000 | ||||||
Dividends payable | 2,048,401 | 1,955,292 | ||||||
Accrued expenses and other liabilities | 4,023,858 | 4,146,262 | ||||||
Total liabilities | 1,191,611,368 | 1,201,347,786 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,310,913 shares as of September 30, 2017 and December 31, 2016 | 18,621,826 | 18,621,826 | ||||||
Additional paid-in capital | 20,878,728 | 20,878,728 | ||||||
Retained earnings | 131,047,038 | 126,181,376 | ||||||
Accumulated other comprehensive income (loss) - net unrealized gain (loss) on securities available-for-sale | 2,781,292 | (576,687 | ) | |||||
Total stockholders' equity | 173,328,884 | 165,105,243 | ||||||
Total liabilities and stockholders' equity | $ | 1,364,940,252 | $ | 1,366,453,029 |
See Notes to Consolidated Financial Statements. |
CONSOLIDATED STATEMENTS OF INCOME |
(unaudited) |
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Interest income: | ||||||||
Loans, including fees | $ | 10,701,429 | $ | 8,888,855 | ||||
Securities: | ||||||||
Taxable | 1,488,852 | 1,529,122 | ||||||
Tax-exempt | 1,100,574 | 1,186,346 | ||||||
Interest bearing deposits and federal funds sold | 237,568 | 193,035 | ||||||
Total interest income | 13,528,423 | 11,797,358 | ||||||
Interest expense: | ||||||||
Deposits | 2,358,832 | 1,362,481 | ||||||
Other borrowed funds | 199,214 | 248,390 | ||||||
Total interest expense | 2,558,046 | 1,610,871 | ||||||
Net interest income | 10,970,377 | 10,186,487 | ||||||
Provision for loan losses | 98,094 | 29,000 | ||||||
Net interest income after provision for loan losses | 10,872,283 | 10,157,487 | ||||||
Noninterest income: | ||||||||
Wealth management income | 784,614 | 751,000 | ||||||
Service fees | 370,296 | 338,242 | ||||||
Gain on sale of loans held for sale | 172,726 | 177,200 | ||||||
Merchant and card fees | 361,141 | 309,659 | ||||||
Other noninterest income | 236,931 | 187,901 | ||||||
Total noninterest income | 1,925,708 | 1,764,002 | ||||||
Noninterest expense: | ||||||||
Salaries and employee benefits | 4,715,828 | 4,568,045 | ||||||
Data processing | 891,381 | 781,032 | ||||||
Occupancy expenses, net | 599,005 | 494,946 | ||||||
FDIC insurance assessments | 100,229 | 105,995 | ||||||
Professional fees | 388,846 | 345,407 | ||||||
Business development | 268,597 | 254,548 | ||||||
Intangible asset amortization | 163,664 | 87,535 | ||||||
Other operating expenses, net | 329,206 | 227,629 | ||||||
Total noninterest expense | 7,456,756 | 6,865,137 | ||||||
Income before income taxes | 5,341,235 | 5,056,352 | ||||||
Provision for income taxes | 1,103,800 | 1,019,600 | ||||||
Net income | $ | 4,237,435 | $ | 4,036,752 | ||||
Basic and diluted earnings per share | $ | 0.46 | $ | 0.43 | ||||
Dividends declared per share | $ | 0.24 | $ | 0.48 |
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest income: | ||||||||||||||||
Loans, including fees | $ | 8,729,702 | $ | 8,236,401 | $ | 25,345,116 | $ | 24,124,973 | ||||||||
Securities: | ||||||||||||||||
Taxable | 1,557,872 | 1,425,366 | 4,637,498 | 4,392,602 | ||||||||||||
Tax-exempt | 1,210,510 | 1,329,071 | 3,819,380 | 4,117,893 | ||||||||||||
Interest bearing deposits and federal funds sold | 114,820 | 86,869 | 365,346 | 296,925 | ||||||||||||
Total interest income | 11,612,904 | 11,077,707 | 34,167,340 | 32,932,393 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 1,169,296 | 753,642 | 3,204,115 | 2,259,140 | ||||||||||||
Other borrowed funds | 292,054 | 274,297 | 862,798 | 796,006 | ||||||||||||
Total interest expense | 1,461,350 | 1,027,939 | 4,066,913 | 3,055,146 | ||||||||||||
Net interest income | 10,151,554 | 10,049,768 | 30,100,427 | 29,877,247 | ||||||||||||
Provision for loan losses | 57,277 | 234,703 | 1,221,620 | 440,787 | ||||||||||||
Net interest income after provision for loan losses | 10,094,277 | 9,815,065 | 28,878,807 | 29,436,460 | ||||||||||||
Noninterest income: | ||||||||||||||||
Wealth management income | 747,634 | 684,908 | 2,180,941 | 2,210,229 | ||||||||||||
Service fees | 401,237 | 426,711 | 1,126,122 | 1,228,416 | ||||||||||||
Securities gains, net | 37,881 | 64,917 | 498,560 | 296,110 | ||||||||||||
Gain on sale of loans held for sale | 179,553 | 339,501 | 544,095 | 773,512 | ||||||||||||
Merchant and card fees | 348,847 | 350,488 | 1,017,362 | 1,051,378 | ||||||||||||
Other noninterest income | 144,953 | 137,153 | 598,791 | 469,138 | ||||||||||||
Total noninterest income | 1,860,105 | 2,003,678 | 5,965,871 | 6,028,783 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 4,026,932 | 3,977,495 | 12,058,903 | 11,883,696 | ||||||||||||
Data processing | 807,419 | 824,429 | 2,481,331 | 2,366,293 | ||||||||||||
Occupancy expenses, net | 527,071 | 449,775 | 1,546,657 | 1,461,201 | ||||||||||||
FDIC insurance assessments | 111,987 | 109,289 | 326,958 | 434,808 | ||||||||||||
Professional fees | 307,484 | 296,720 | 919,157 | 889,721 | ||||||||||||
Business development | 262,408 | 239,917 | 722,869 | 696,033 | ||||||||||||
Other real estate owned (income), net | (3,200 | ) | (91,173 | ) | (2,396 | ) | (87,564 | ) | ||||||||
Intangible asset amortization | 89,861 | 86,492 | 280,837 | 273,206 | ||||||||||||
Other operating expenses, net | 166,026 | 219,283 | 837,810 | 750,244 | ||||||||||||
Total noninterest expense | 6,295,988 | 6,112,227 | 19,172,126 | 18,667,638 | ||||||||||||
Income before income taxes | 5,658,394 | 5,706,516 | 15,672,552 | 16,797,605 | ||||||||||||
Provision for income taxes | 1,729,987 | 1,902,636 | 4,661,687 | 5,087,253 | ||||||||||||
Net income | $ | 3,928,407 | $ | 3,803,880 | $ | 11,010,865 | $ | 11,710,352 | ||||||||
Basic and diluted earnings per share | $ | 0.42 | $ | 0.41 | $ | 1.18 | $ | 1.26 | ||||||||
Dividends declared per share | $ | 0.22 | $ | 0.21 | $ | 0.66 | $ | 0.63 |
See Notes to Consolidated Financial Statements. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(unaudited) |
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Net income | $ | 4,237,435 | $ | 4,036,752 | ||||
Other comprehensive income (loss), before tax: | ||||||||
Unrealized gains (losses) on securities before tax: | ||||||||
Unrealized holding gains (losses) arising during the period | 5,571,784 | (5,033,043 | ) | |||||
Less: reclassification adjustment for gains realized in net income | - | - | ||||||
Other comprehensive income (loss), before tax | 5,571,784 | (5,033,043 | ) | |||||
Tax effect related to other comprehensive income (loss) | (1,392,946 | ) | 1,258,605 | |||||
Other comprehensive income (loss), net of tax | 4,178,838 | (3,774,438 | ) | |||||
Comprehensive income | $ | 8,416,273 | $ | 262,314 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 3,928,407 | $ | 3,803,880 | $ | 11,010,865 | $ | 11,710,352 | ||||||||
Other comprehensive income (loss), before tax: | ||||||||||||||||
Unrealized gains (losses) on securities before tax: | ||||||||||||||||
Unrealized holding gains (losses) arising during the period | (270,853 | ) | (1,838,831 | ) | 5,828,684 | 6,077,365 | ||||||||||
Less: reclassification adjustment for gains realized in net income | 37,881 | 64,917 | 498,560 | 296,110 | ||||||||||||
Other comprehensive income (loss), before tax | (308,734 | ) | (1,903,748 | ) | 5,330,124 | 5,781,255 | ||||||||||
Tax effect related to other comprehensive income (loss) | 114,233 | 704,387 | (1,972,145 | ) | (2,139,064 | ) | ||||||||||
Other comprehensive income (loss), net of tax | (194,501 | ) | (1,199,361 | ) | 3,357,979 | 3,642,191 | ||||||||||
Comprehensive income | $ | 3,733,906 | $ | 2,604,519 | $ | 14,368,844 | $ | 15,352,543 |
See Notes to Consolidated Financial Statements. |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
(unaudited) |
Three Months Ended March 31, 2019 and 2018 |
Common Stock | Additional Paid- in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss), Net of Taxes | Total Stockholders' Equity | ||||||||||||||||
Balance, December 31, 2017 | $ | 18,621,826 | $ | 20,878,728 | $ | 131,684,961 | $ | (432,373 | ) | $ | 170,753,142 | |||||||||
Net income | - | - | 4,036,752 | - | 4,036,752 | |||||||||||||||
Other comprehensive income | - | - | - | (3,774,438 | ) | (3,774,438 | ) | |||||||||||||
The cumulative effect from change in accounting policy (1) | - | - | 82,700 | (82,700 | ) | - | ||||||||||||||
Cash dividends declared, $0.48 per share | - | (4,469,238 | ) | - | (4,469,238 | ) | ||||||||||||||
Balance, March 31, 2018 | $ | 18,621,826 | $ | 20,878,728 | $ | 131,335,175 | $ | (4,289,511 | ) | �� | $ | 166,546,218 | ||||||||
Balance, December 31, 2018 | $ | 18,586,610 | $ | 20,461,724 | $ | 137,891,821 | $ | (4,075,091 | ) | $ | 172,865,064 | |||||||||
Net income | - | - | 4,237,435 | - | 4,237,435 | |||||||||||||||
Other comprehensive income | - | - | - | 4,178,838 | 4,178,838 | |||||||||||||||
Retirement of 50,483 shares of stock | (100,966 | ) | (1,185,336 | ) | - | - | (1,286,302 | ) | ||||||||||||
Cash dividends declared, $0.24 per share | - | - | (2,218,277 | ) | - | (2,218,277 | ) | |||||||||||||
Balance, March 31, 2019 | $ | 18,485,644 | $ | 19,276,388 | $ | 139,910,979 | $ | 103,747 | $ | 177,776,758 |
(1) The cumulative effect for the year ended December 31, 2018, reflects adoption in first quarter 2018 of ASU 2018-02. |
See Notes to Consolidated Financial Statements. |
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 4,237,435 | $ | 4,036,752 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 98,094 | 29,000 | ||||||
Provision for off-balance sheet commitments | - | (4,000 | ) | |||||
Amortization, net | 389,806 | 515,844 | ||||||
Amortization of intangible asset | 163,664 | 87,535 | ||||||
Depreciation | 283,521 | 260,358 | ||||||
Deferred income taxes | 100,750 | (48,299 | ) | |||||
(Gain) on sales of loans held for sale | (172,726 | ) | (177,200 | ) | ||||
Proceeds from loans held for sale | 6,681,879 | 7,516,348 | ||||||
Originations of loans held for sale | (6,364,366 | ) | (7,488,054 | ) | ||||
Loss on sale of premises and equipment, net | - | 115 | ||||||
Loss on sale and foreclosure of other real estate owned, net | 11,106 | - | ||||||
Change in assets and liabilities: | ||||||||
Decrease in accrued income receivable | 313,872 | 652,135 | ||||||
(Increase) decrease in other assets | (543,520 | ) | 104,485 | |||||
Increase in accrued expenses and other liabilities | 1,084,907 | 867,498 | ||||||
Net cash provided by operating activities | 6,284,422 | 6,352,517 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of securities available-for-sale | (3,781,499 | ) | (7,854,442 | ) | ||||
Proceeds from maturities and calls of securities available-for-sale | 12,251,722 | 8,364,369 | ||||||
Purchase of FHLB stock | (2,112,500 | ) | (227,700 | ) | ||||
Proceeds from the redemption of FHLB stock | 2,642,100 | 691,500 | ||||||
Net (increase) in interest bearing deposits in financial institutions | (32,680,488 | ) | (25,810,886 | ) | ||||
Net (increase) decrease in loans | 3,927,737 | (802,576 | ) | |||||
Net proceeds from the sale of other real estate owned | 253,830 | - | ||||||
Purchase of bank premises and equipment, net | (163,999 | ) | (204,726 | ) | ||||
Other | (15,982 | ) | (14,960 | ) | ||||
Net cash (used in) investing activities | (19,679,079 | ) | (25,859,421 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Increase in deposits | 31,445,418 | 36,032,857 | ||||||
(Decrease) in securities sold under agreements to repurchase | (8,277,729 | ) | (890,601 | ) | ||||
Payments on FHLB borrowings and other borrowings | - | (17,500,000 | ) | |||||
Payments on short-term borrowings | (12,600,000 | ) | - | |||||
Dividends paid | (2,137,460 | ) | (2,048,401 | ) | ||||
Stock repurchases | (1,286,302 | ) | - | |||||
Net cash provided by financing activities | 7,143,927 | 15,593,855 | ||||||
Net (decrease) in cash and due from banks | (6,250,730 | ) | (3,913,049 | ) | ||||
CASH AND DUE FROM BANKS | ||||||||
Beginning | 30,384,066 | 26,397,550 | ||||||
Ending | $ | 24,133,336 | $ | 22,484,501 |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) |
(unaudited) |
Three Months Ended March 31, 2019 and 2018 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, 2017 and 2016
2019 | 2018 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash payments for: | ||||||||
Interest | $ | 2,405,437 | $ | 1,538,837 | ||||
Income taxes | - | - |
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 11,010,865 | $ | 11,710,352 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,221,620 | 440,787 | ||||||
Provision for off-balance sheet commitments | 4,000 | 12,000 | ||||||
Amortization, net | 2,129,648 | 2,327,654 | ||||||
Amortization of intangible asset | 280,837 | 273,206 | ||||||
Depreciation | 861,700 | 885,202 | ||||||
Deferred income taxes | (303,999 | ) | 176,658 | |||||
Securities gains, net | (498,560 | ) | (296,110 | ) | ||||
(Gain) on sales of loans held for sale | (544,095 | ) | (773,511 | ) | ||||
Proceeds from loans held for sale | 22,668,307 | 34,782,288 | ||||||
Originations of loans held for sale | (22,161,394 | ) | (34,657,822 | ) | ||||
Loss on sale of premises and equipment, net | 56,168 | 2,769 | ||||||
Impairment of other real estate owned | - | 28,039 | ||||||
(Gain) on sale of other real estate owned, net | (14,648 | ) | (131,127 | ) | ||||
Change in assets and liabilities: | ||||||||
(Increase) in accrued income receivable | (654,349 | ) | (805,127 | ) | ||||
(Increase) decrease in other assets | (377,095 | ) | 286,238 | |||||
Increase (decrease) in accrued expenses and other liabilities | (126,404 | ) | 323,605 | |||||
Net cash provided by operating activities | 13,552,601 | 14,585,101 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of securities available-for-sale | (51,271,943 | ) | (49,668,267 | ) | ||||
Proceeds from sale of securities available-for-sale | 11,756,963 | 18,738,154 | ||||||
Proceeds from maturities and calls of securities available-for-sale | 52,588,102 | 54,611,331 | ||||||
Net (increase) decrease in interest bearing deposits in financial institutions | (3,749,025 | ) | 994,573 | |||||
Net (increase) in loans | (13,190,423 | ) | (39,394,414 | ) | ||||
Net proceeds from the sale of other real estate owned | 191,564 | 755,906 | ||||||
Purchase of bank premises and equipment, net | (447,039 | ) | (218,081 | ) | ||||
Other | (61,761 | ) | - | |||||
Net cash (used in) investing activities | (4,183,562 | ) | (14,180,798 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Increase (decrease) in deposits | 5,129,194 | (12,358,477 | ) | |||||
(Decrease) in securities sold under agreements to repurchase | (19,336,317 | ) | (4,431,520 | ) | ||||
Payments on FHLB borrowings and other borrowings | (1,000,000 | ) | (1,542,203 | ) | ||||
Proceeds from short-term FHLB borrowings, net | 5,500,000 | 21,000,000 | ||||||
Dividends paid | (6,052,094 | ) | (5,772,766 | ) | ||||
Net cash (used in) financing activities | (15,759,217 | ) | (3,104,966 | ) | ||||
Net (decrease) in cash and due from banks | (6,390,178 | ) | (2,700,663 | ) | ||||
CASH AND DUE FROM BANKS | ||||||||
Beginning | 29,478,068 | 24,005,801 | ||||||
Ending | $ | 23,087,890 | $ | 21,305,138 |
See Notes to Consolidated Financial Statements. |
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Nine Months Ended September 30, 2017 and 2016
2017 | 2016 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash payments for: | ||||||||
Interest | $ | 4,027,782 | $ | 3,145,519 | ||||
Income taxes | 5,050,220 | 4,223,653 | ||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES | ||||||||
Transfer of loans receivable to other real estate owned | $ | 16,668 | $ | 56,587 |
See Notes to Consolidated Financial Statements.
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
1. Significant Accounting Policies
The consolidated financial statements for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 20162018 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.
Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The second step, if necessary, measures the amount of impairment, if any.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. At September 30, 2017,March 31, 2019, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.
New and Pending Accounting Pronouncements:Pronouncements In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10):Recognition and Measurement of Financial Assets and Financial Liabilities. The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update includes requiring changes in fair value of equity securities with readily determinable fair value to be recognized in net income and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entities' other deferred tax assets. Among other items the ASC requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017, and is to be applied on a modified retrospective basis. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, which amends ASC 842, Leases. This update provides for an adoption option that will not require earlier periods to be restated at the adoption date. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance isdid not expected to have a material impact on the Company’sCompany’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company is currently planning for the implementation of this accounting standard.standard and has chosen a vendor for a software solution and has begun implementation of the software. It is too early to assess the impact that the guidance will have on the Company’sCompany’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates the Step 2 from the goodwill impairment test. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment test with a measurement date after January 1, 2017. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements. Reclassifications: Certain amounts in prior year financial statements have been reclassified, with no effect on net income, comprehensive income or stockholder’s equity, to conform to current period presentation.In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40) . The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics2. DividendsIn August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption will not have a material effect on the Company’s consolidated financial statements.
2. Bank Acquisition
On August September 14, 2018, First National Bank (FNB) completed the purchase and merger of Clarke County State Bank (CCSB) located in Osceola and Murray, Iowa (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. The acquired assets and liabilities are recorded at fair value at the date of acquisition and were reflected in the September 30, 2018 financial statements as such. 100% of the stock of CCSB was purchased for cash consideration of $14.8 million. As a result of this acquisition, the Company recorded a core deposit intangible asset of $2.0 million and goodwill of $3.0 million. The results of operations for this acquisition have been included since the transaction date of September 14, 2018. The fair value of purchased credit deteriorated loans related to the Acquisition is $386,000. These purchased loans are included in the impaired loan category in the financial statements.
The following table summarizes the fair value of the total consideration transferred as a part of the Acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.
Cash consideration transferred | $ | 14,806,981 | ||
Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||
Cash and due from banks | $ | 1,363,762 | ||
Federal funds sold | 1,154,000 | |||
Interest bearing deposits in financial institutions | 1,475,000 | |||
Securities available-for-sale | 17,196,715 | |||
Federal Home Loan Bank stock | 129,600 | |||
Loans receivable | 76,041,470 | |||
Accrued interest receivable | 862,895 | |||
Bank premises and equipment | 924,400 | |||
Other real estate owned | 120,000 | |||
Deferred income taxes | 49,150 | |||
Bank owned life insurance | 2,754,798 | |||
Core deposit intangible asset | 2,002,000 | |||
Other assets | 13,996 | |||
Deposits | (83,169,311 | ) | ||
Federal funds purchased | (9,000,000 | ) | ||
Accrued interest payable and other liabilities | (123,749 | ) | ||
Total identifiable net assets | 11,794,726 | |||
Goodwill | $ | 3,012,255 |
On September 14, 2018, the contractual balance of loans receivable acquired was $77.2 million and the contractual balance of deposits assumed was $83.1 million. Loans receivable acquired include commercial real estate, 1-4 family real estate agricultural real estate, commercial operating, agricultural operating and consumer loans.
The acquired loans at contractual values as of September 14, 2018 were determined to be risk rated as follows:
Pass | $ | 63,220,130 | ||
Watch | 9,430,540 | |||
Special Mention | 2,733,940 | |||
Substandard | 1,426,137 | |||
Deteriorated credit | 385,884 | |||
Total loans acquired at book value | $ | 77,196,631 |
Loans acquired as deteriorated credit loans will be included with impaired loans.
The core deposit intangible asset is amortized to expense on a declining basis over a period of ten years. The loan market valuation is accreted to income on the effective yield method over a ten year period. The time deposits market valuation is amortized to expense on a declining basis over a two year period.
3. Dividends
On February 13, 2019, the Company declared a cash dividend on its common stock, payable on NovemberMay 15, 20172019 to stockholders of record as of NovemberMay 1, 2017,2019, equal to $0.22$0.24 per share.share
3.4. Earnings Per Share
Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 were 9,310,913.9,258,047 and 9,310,913, respectively. The Company had no potentially dilutive securities outstanding during the periods presented.
4.5. Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2016.2018.
5.6. Fair Value Measurements
AssetsAssets and liabilities carried at fair value are required to be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The following table presents the balances of assets measured at fair value on a recurring basis by level as of September 30, 2017March 31, 2019 and December 31, 2016.2018. (in thousands)
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
2017 | ||||||||||||||||
U.S. government treasuries | $ | 4,449 | $ | 4,449 | $ | - | $ | - | ||||||||
U.S. government agencies | 112,657 | - | 112,657 | - | ||||||||||||
U.S. government mortgage-backed securities | 81,956 | - | 81,956 | - | ||||||||||||
State and political subdivisions | 243,438 | - | 243,438 | - | ||||||||||||
Corporate bonds | 60,834 | - | 60,834 | - | ||||||||||||
Equity securities, other | 3,276 | 34 | 3,242 | - | ||||||||||||
$ | 506,610 | $ | 4,483 | $ | 502,127 | $ | - | |||||||||
2016 | ||||||||||||||||
U.S. government treasuries | $ | 4,368 | $ | 4,368 | $ | - | $ | - | ||||||||
U.S. government agencies | 110,209 | - | 110,209 | - | ||||||||||||
U.S. government mortgage-backed securities | 82,858 | - | 82,858 | - | ||||||||||||
State and political subdivisions | 264,448 | - | 264,448 | - | ||||||||||||
Corporate bonds | 51,184 | - | 51,184 | - | ||||||||||||
Equity securities, other | 3,013 | - | 3,013 | - | ||||||||||||
$ | 516,080 | $ | 4,368 | $ | 511,712 | $ | - |
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
2019 | ||||||||||||||||
U.S. government treasuries | $ | 7,904 | $ | 7,904 | $ | - | $ | - | ||||||||
U.S. government agencies | 109,818 | - | 109,818 | - | ||||||||||||
U.S. government mortgage-backed securities | 68,493 | - | 68,493 | - | ||||||||||||
State and political subdivisions | 214,558 | - | 214,558 | - | ||||||||||||
Corporate bonds | 54,781 | - | 54,781 | - | ||||||||||||
$ | 455,554 | $ | 7,904 | $ | 447,650 | $ | - | |||||||||
2018 | ||||||||||||||||
U.S. government treasuries | $ | 7,800 | $ | 7,800 | $ | - | $ | - | ||||||||
U.S. government agencies | 110,268 | - | 110,268 | - | ||||||||||||
U.S. government mortgage-backed securities | 70,382 | - | 70,382 | - | ||||||||||||
State and political subdivisions | 215,955 | - | 215,955 | - | ||||||||||||
Corporate bonds | 54,566 | - | 54,566 | - | ||||||||||||
$ | 458,971 | $ | 7,800 | $ | 451,171 | $ | - |
Level 1 securities include U.S. Treasury securities and other equity securities that are traded by dealers or brokers in active over-the-counter markets. U.S government agencies, mortgage-backed securities, state and political subdivisions, and most corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.
The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three or nine months ended September 30, 2017.March 31, 2019.
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of September 30, 2017March 31, 2019 and December 31, 2016.2018. (in thousands)
Description | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||
2019 | ||||||||||||||||||||||||||||||||
Loans receivable | $ | 2,439 | $ | - | $ | - | $ | 2,439 | $ | 2,297 | $ | - | $ | - | $ | 2,297 | ||||||||||||||||
Other real estate owned | 386 | - | - | 386 | 565 | - | - | 565 | ||||||||||||||||||||||||
Total | $ | 2,825 | $ | - | $ | - | $ | 2,825 | $ | 2,862 | $ | - | $ | - | $ | 2,862 | ||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||
Loans receivable | $ | 683 | $ | - | $ | - | $ | 683 | $ | 2,030 | $ | - | $ | - | $ | 2,030 | ||||||||||||||||
Other real estate owned | 546 | - | - | 546 | 830 | - | - | 830 | ||||||||||||||||||||||||
Total | $ | 1,229 | $ | - | $ | - | $ | 1,229 | $ | 2,860 | $ | - | $ | - | $ | 2,860 |
Loans Receivable: Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans. Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation allowance is a component of the allowance for loan losses. The Company considers these fair value measurements as level 3.
Other Real Estate Owned: Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The valuation allowance was $287,000 as of September 30, 2017 and $331,000 as of December 31, 2016. The Company considers these fair value measurements as level 3.
TheThe significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2017March 31, 2019 and December 31, 20162018 are as follows: (in thousands)
2019 | |||||||||||||||||||||||||||
2017 | Estimated | Valuation | Unobservable | Range | |||||||||||||||||||||||
Estimated Fair Value | Valuation Techniques | Unobservable Inputs | Range (Average) | Fair Value | Techniques | Inputs | (Average) | ||||||||||||||||||||
Impaired Loans | $ | 2,439 | Evaluation of collateral | Estimation of value | NM* | $ | 2,297 | Evaluation of collateral | Estimation of value | NM* | |||||||||||||||||
Other real estate owned | $ | 386 | Appraisal | Appraisal adjustment | 6% | - | 8% | (7%) | $ | 565 | Appraisal | Appraisal adjustment | 6% | - | 8% | (7% | ) |
2018 | |||||||||||||||||||||||||||
2016 | Estimated | Valuation | Unobservable | Range | |||||||||||||||||||||||
Estimated Fair Value | Valuation Techniques | Unobservable Inputs | Range (Average) | Fair Value | Techniques | Inputs | (Average) | ||||||||||||||||||||
Impaired Loans | $ | 683 | Evaluation of collateral | Estimation of value | NM* | $ | 2,030 | Evaluation of collateral | Estimation of value | NM* | |||||||||||||||||
Other real estate owned | $ | 546 | Appraisal | Appraisal adjustment | 6% | - | 10% | (8%) | $ | 830 | Appraisal | Appraisal adjustment | 6% | - | 8% | (7% | ) |
* Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.
GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
Fair value of financial instruments:
Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.
The following disclosures represent financial instruments in which the ending balances at September 30, 2017March 31, 2019 and December 31, 20162018 are not carried at fair value in their entirety on the consolidated balance sheets.
Cash and due from banks and interest bearing deposits in financial institutions: The recorded amount of these assets approximates fair value.
Securities available-for-sale: Fair value measurement for Level 1 securities is based upon quoted prices. Fair value measurement for Level 2 securities are based upon quoted prices, if available. If quoted prices are not available, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. Level 1 securities include U.S. Treasury and other equity securities that are traded by dealers or brokers in active over-the-counter markets. U.S government mortgage-backed securities, state and political subdivisions, and some corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs.
Loans held for sale: The fair value of loans held for sale is based on prevailing market prices. Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The estimated fair values of the 2017 2016 2019 2018 Fair Value Estimated Estimated Fair Value Estimated Estimated Hierarchy Carrying Fair Carrying Fair Hierarchy Carrying Fair Carrying Fair Level Amount Value Amount Value Level Amount Value Amount Value Financial assets: Cash and due from banks Level 1 Level 1 Interest bearing deposits Level 1 Level 1 Securities available-for-sale See previous table See previous table FHLB and FRB stock Level 2 Loans receivable, net Level 2 Level 2 Loans held for sale Level 2 Level 2 Accrued income receivable Level 1 Level 1 Financial liabilities: Deposits Level 2 Level 2 Securities sold under agreements to repurchase Level 1 Level 1 FHLB advances Level 2 Level 2 Other borrowings Level 2 Accrued interest payable Level 1 Level 1 The The amortized cost of securities 2017: Gross Gross 2019: Gross Gross Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value Cost Gains Losses Fair Value U.S. government treasuries U.S. government agencies U.S. government mortgage-backed securities State and political subdivisions Corporate bonds Equity securities, other 2016: Gross Gross 2018: Gross Gross Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value Cost Gains Losses Fair Value U.S. government treasuries U.S. government agencies U.S. government mortgage-backed securities State and political subdivisions Corporate bonds Equity securities, other Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 Proceeds from sales of securities available-for-sale Gross realized gains on securities available-for-sale Gross realized losses on securities available-for-sale Tax provision applicable to net realized gains on securities available-for-sale Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of Less than 12 Months 12 Months or More Total Less than 12 Months 12 Months or More Total 2017: Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses 2019: Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Securities available-for-sale: U.S. government treasuries U.S. government agencies U.S. government mortgage-backed securities State and political subdivisions Corporate bonds Less than 12 Months 12 Months or More Total Less than 12 Months 12 Months or More Total 2016: Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 2018: Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities available-for-sale: U.S. government treasuries U.S. government agencies U.S. government mortgage-backed securities State and political subdivisions Corporate bonds Gross unrealized losses on debt securities totaled 8. The composition of loans receivable as of March 31, 2019 and 2019 2018 Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Less: Allowance for loan losses Deferred loan fees Activity in the allowance for loan losses, on a disaggregated basis, for the three Three Months Ended September 30, 2017 Three Months Ended March 31, 2019 1-4 Family 1-4 Family Construction Residential Commercial Agricultural Consumer Construction Residential Commercial Agricultural Consumer Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Balance, June 30, 2017 Balance, December 31, 2018 Provision (credit) for loan losses Recoveries of loans charged-off Loans charged-off Balance, September 30, 2017 Balance, March 31, 2019 Nine Months Ended September 30, 2017 1-4 Family Construction Residential Commercial Agricultural Consumer Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Balance, December 31, 2016 Provision (credit) for loan losses Recoveries of loans charged-off Loans charged-off Balance, September 30, 2017 Three Months Ended September 30, 2016 1-4 Family Construction Residential Commercial Agricultural Consumer Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Balance, June 30, 2016 Provision (credit) for loan losses Recoveries of loans charged-off Loans charged-off Balance, September 30, 2016 Nine Months Ended September 30, 2016 Three Months Ended March 31, 2018 1-4 Family 1-4 Family Construction Residential Commercial Agricultural Consumer Construction Residential Commercial Agricultural Consumer Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Balance, December 31, 2015 Balance, December 31, 2017 Provision (credit) for loan losses Recoveries of loans charged-off Loans charged-off Balance, September 30, 2016 Balance, March 31, 2018 Allowance for loan losses disaggregated on the basis of impairment analysis method as of 2017 1-4 Family 2019 1-4 Family Construction Residential Commercial Agricultural Consumer Construction Residential Commercial Agricultural Consumer Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Individually evaluated for impairment Collectively evaluated for impairment Balance September 30, 2017 Balance March 31, 2019 2016 1-4 Family 2018 1-4 Family Construction Residential Commercial Agricultural Consumer Construction Residential Commercial Agricultural Consumer Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Individually evaluated for impairment Collectively evaluated for impairment Balance December 31, 2016 Balance December 31, 2018 Loans receivable disaggregated on the basis of impairment analysis method as of 2017 1-4 Family 2019 1-4 Family Construction Residential Commercial Agricultural Consumer Construction Residential Commercial Agricultural Consumer Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Individually evaluated for impairment Collectively evaluated for impairment Balance September 30, 2017 Balance March 31, 2019 2016 1-4 Family 2018 1-4 Family Construction Residential Commercial Agricultural Consumer Construction Residential Commercial Agricultural Consumer Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Real Estate Real Estate Real Estate Real Estate Commercial Agricultural and Other Total Individually evaluated for impairment Collectively evaluated for impairment Balance December 31, 2016 Balance December 31, 2018 A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company will apply its normal loan review procedures to identify loans that should be evaluated for impairment. 2017 2016 2019 2018 Unpaid Unpaid Unpaid Unpaid Recorded Principal Related Recorded Principal Related Recorded Principal Related Recorded Principal Related Investment Balance Allowance Investment Balance Allowance Investment Balance Allowance Investment Balance Allowance With no specific reserve recorded: Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Total loans with no specific reserve: With an allowance recorded: Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Total loans with specific reserve: Total Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Three Months Ended September 30, Three Months Ended March 31, 2017 2016 2019 2018 Average Interest Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Recorded Income Investment Recognized Investment Recognized Investment Recognized Investment Recognized With no specific reserve recorded: Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Total loans with no specific reserve: With an allowance recorded: Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Total loans with specific reserve: Total Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Nine Months Ended September 30, 2017 2016 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 Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Total loans with no specific reserve: With an allowance recorded: Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Total loans with specific reserve: Total Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other The interest foregone on nonaccrual loans for the three months ended The Company had loans meeting the definition of a troubled debt restructuring (TDR) of Three Months Ended September 30, 2017 2016 Pre-Modification Post-Modification Pre-Modification Post-Modification Outstanding Outstanding Outstanding Outstanding Number of Recorded Recorded Number of Recorded Recorded Contracts Investment Investment Contracts Investment Investment Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other Nine Months Ended September 30, 2017 2016 Pre-Modification Post-Modification Pre-Modification Post-Modification Outstanding Outstanding Outstanding Outstanding Number of Recorded Recorded Number of Recorded Recorded Contracts Investment Investment Contracts Investment Investment Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other During the three months ended The Company considers TDR loans to have payment default when it is past due 60 days or more. No TDR modified during the three months ended March 31, 2019 had payment defaults. One TDR modified during the twelve months ended 2017 90 Days 90 Days 2019 90 Days 90 Days or Greater Total or Greater or Greater Total or Greater Past Due Past Due Past Due Current Total Accruing Past Due Past Due Past Due Current Total Accruing Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other 2016 90 Days 90 Days 2018 90 Days 90 Days or Greater Total or Greater or Greater Total or Greater Past Due Past Due Past Due Current Total Accruing Past Due Past Due Past Due Current Total Accruing Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial Agricultural Consumer and other The credit risk profile by internally assigned grade, on a disaggregated basis, 2017 Construction Commercial Agricultural 2019 Construction Commercial Agricultural Real Estate Real Estate Real Estate Commercial Agricultural Total Real Estate Real Estate Real Estate Commercial Agricultural Total Pass Watch Special Mention Substandard Substandard-Impaired 2016 Construction Commercial Agricultural 2018 Construction Commercial Agricultural Real Estate Real Estate Real Estate Commercial Agricultural Total Real Estate Real Estate Real Estate Commercial Agricultural Total Pass Watch Special Mention Substandard Substandard-Impaired The credit risk profile based on payment activity, on a disaggregated basis, 2017 1-4 Family 2019 1-4 Family Residential Consumer Residential Consumer Real Estate and Other Total Real Estate and Other Total Performing Non-performing 2016 1-4 Family 2018 1-4 Family Residential Consumer Residential Consumer Real Estate and Other Total Real Estate and Other Total Performing Non-performing 9. Goodwill 10. Intangible assets In conjunction with the acquisition of CCSB in 2018, the Company recorded $2.0 million in core deposit intangible assets. The following sets forth the carrying amounts and accumulated amortization of the intangible assets at 2017 2016 2019 2018 Gross Accumulated Gross Accumulated Gross Accumulated Gross Accumulated Amount Amortization Amount Amortization Amount Amortization Amount Amortization Core deposit intangible asset Customer list Total The weighted average life of the intangible assets is The following sets forth the activity related to the intangible assets for the three Three Months Ended Nine Months Ended Three Months Ended September 30, September 30, March 31, 2017 2016 2017 2016 2019 2018 Beginning intangible asset, net Adjustment to intangible asset Amortization Ending intangible asset, net 2017 2018 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 2024 After Intangible asset, net 11. The repurchase agreements mature daily and the following sets forth the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements 2017 2016 Remaining Contractual Maturity of the Agreements Overnight Greater than Total Overnight Greater than Total 90 days 90 days 2019 2018 Securities sold under agreements to repurchase: U.S. government treasuries U.S. government agencies U.S. government mortgage-backed securities Total Term repurchase agreements (Other borrowings): U.S. government agencies U.S. government mortgage-backed securities Total Total pledged collateral 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. 12. The Company and the Banks capital amounts and ratios are as follows: (dollars in thousands) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes * Action Provisions Amount Ratio Amount Ratio Amount Ratio As of September 30, 2017: Total capital (to risk- weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Tier 1 capital (to risk- weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Tier 1 capital (to average- weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Common equity tier 1 capital (to risk-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes * Action Provisions Amount Ratio Amount Ratio Amount Ratio As of March 31, 2019: Total capital (to risk-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Tier 1 capital (to risk-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Tier 1 capital (to average-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Common equity tier 1 capital (to risk-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust * These ratios for March 31, 2019 include a capital conservation buffer of 2.5%, except for the Tier 1 capital to average weighted assets ratios. To Be Well To Be Well Capitalized Under Capitalized Under For Capital Prompt Corrective For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Actual Adequacy Purposes * Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of December 31, 2016: Total capital (to risk- weighted assets): As of December 31, 2018: Total capital (to risk-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Tier 1 capital (to risk- weighted assets): Tier 1 capital (to risk-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Tier 1 capital (to average- weighted assets): Tier 1 capital (to average-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust Common equity tier 1 capital (to risk-weighted assets): Consolidated Boone Bank & Trust First National Bank Reliance State Bank State Bank & Trust United Bank & Trust * These ratios for December 31, 2018 include a capital conservation buffer of 1.875%, except for the Tier 1 capital to average weighted assets ratios. Beginning in 2016, an additional capital conservation buffer 13. Subsequent Events Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Ames National Corporation The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. The The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks and (v) Merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk. On September 14, 2018, FNB purchased the stock of CCSB for approximately $14.8 million. First National will operate all three bank offices previously owned by Clarke County as branches of First National. The Company had net income of The increase in quarterly earnings can be primarily attributed to The following management discussion and analysis will provide a review of important items relating to: ● Challenges ● Key Performance Indicators and Industry Results ● Critical Accounting Policies ● Income Statement Review ● Balance Sheet Review ● Asset Quality Review and Credit Risk Management ● Liquidity and Capital Resources ● Forward-Looking Statements and Business Risks ● Non-GAAP Financial Measures Challenges Management has identified certain events or circumstances that may negatively impact the 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 Selected Indicators for the Company and the Industry 3 Months 3 Months 9 Months Ended Ended Ended 3 Months Ended Years Ended December 31, March 31, Years Ended December 31, September 30, 2017 June 30, 2017 2016 2015 2019 2018 2017 Company Company Industry* Company Industry Company Industry Company Company Industry* Company Industry Return on assets Return on equity Net interest margin Efficiency ratio Capital ratio *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 ● 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 ● Net Interest Margin The net interest margin for the three months ended ● Efficiency Ratio This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was ● 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 Industry Results The FDIC Quarterly Banking Profile reported the following results for the Full-Year 2018 Net Income Grows to $236.7 Billion Growth in net operating revenue (up $53.1 billion, or 7%), coupled with lower income tax expenses (down $36.9 billion, or 37.7%) and loan-loss provisions (down $1.1 billion, or 2.2%), lifted full-year 2018 net income to $236.7 billion, an improvement of $72.4 billion (44.1%) from 2017. Assuming the effective tax rate before the new tax law, full-year 2018 net income would have totaled an estimated $207.9 billion, compared with $183.1 billion in Net Interest Income Increases 8.1% From a Year Earlier Quarterly net interest income rose to Loans receivable: The fair valueDeposits: Fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, are equal to the amount payable on demand as of the respective balance sheet date. Fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.Securities sold under agreements to repurchase: The carrying amounts of securities sold under agreements to repurchase approximate fair value because of the generally short-term nature of the instruments.FHLB advances and other borrowings: Fair values of FHLB advances and other borrowings are estimated using discounted cash flow analysis based on interest rates currently being offered with similar terms.Accrued income receivable and accrued interest payable: The carrying amounts of accrued income receivable and accrued interest payable approximate fair value.Commitments to extend credit and standby letters of credit: The fair values of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and credit worthiness of the counterparties. The carrying value and fair value of the commitments to extend credit and standby letters of credit are not considered significant.Company’sCompany’s financial instruments as described above as of September 30, 2017March 31, 2019 and December 31, 20162018 are as follows: (in thousands) $ 23,088 $ 23,088 $ 29,478 $ 29,478 $ 24,133 $ 24,133 $ 30,384 $ 30,384 35,486 35,486 31,737 31,737 58,738 58,738 26,058 26,058 506,610 506,610 516,080 516,080 455,554 455,554 458,971 458,971 2,662 2,662 3,191 3,191 764,229 753,977 752,182 746,580 886,557 861,710 890,461 864,417 280 280 243 243 257 257 401 401 8,423 8,423 7,769 7,769 9,102 9,102 9,416 9,416 $ 1,114,538 $ 1,115,076 $ 1,109,409 $ 1,110,211 $ 1,252,514 $ 1,251,841 $ 1,221,084 $ 1,219,643 39,001 39,001 58,337 58,337 32,397 32,397 40,674 40,674 19,000 19,046 14,500 14,681 2,000 1,970 14,600 14,559 13,000 13,159 13,000 13,386 447 447 408 408 816 816 649 649 methodologiesmethodologies used to determine fair value as of September 30, 2017March 31, 2019 did not change from the methodologies described in the December 31, 20162018 Annual Financial Statements.6.7. Debt and Equity Securitiesavailable-for-saleavailable-for-sale and their fair values as of September 30, 2017March 31, 2019 and December 31, 20162018 are summarized below: (in thousands) $ 4,412 $ 37 $ - $ 4,449 $ 7,935 $ - $ (31 ) $ 7,904 112,011 807 (161 ) 112,657 109,834 446 (462 ) 109,818 80,948 1,091 (83 ) 81,956 68,531 279 (317 ) 68,493 241,150 2,684 (396 ) 243,438 214,333 944 (719 ) 214,558 60,417 560 (143 ) 60,834 54,783 271 (273 ) 54,781 3,257 19 - 3,276 $ 502,195 $ 5,198 $ (783 ) $ 506,610 $ 455,416 $ 1,940 $ (1,802 ) $ 455,554 $ 4,396 $ 18 $ (46 ) $ 4,368 $ 7,925 $ - $ (125 ) $ 7,800 110,372 540 (703 ) 110,209 111,759 73 (1,564 ) 110,268 82,279 1,018 (439 ) 82,858 71,596 88 (1,302 ) 70,382 265,204 1,660 (2,416 ) 264,448 217,247 465 (1,757 ) 215,955 51,731 147 (694 ) 51,184 55,877 2 (1,313 ) 54,566 3,013 - - 3,013 $ 516,995 $ 3,383 $ (4,298 ) $ 516,080 $ 464,404 $ 628 $ (6,061 ) $ 458,971 TheThere were no proceeds, gains and losses from securities available-for-sale are summarized as follows: (in thousands)for the quarter ended March 31, 2019 and 2018. $ 933 $ 5,852 $ 11,757 $ 18,738 38 66 501 303 - (1 ) (2 ) (7 ) 14 29 175 110 September 30, 2017March 31, 2019 and December 31, 20162018 are as follows: (in thousands) $ - $ - $ 6,412 $ (31 ) $ 6,412 $ (31 ) $ 28,424 $ (125 ) $ 3,773 $ (36 ) $ 32,197 $ (161 ) - - 68,294 (462 ) 68,294 (462 ) 10,639 (71 ) 1,997 (12 ) 12,636 (83 ) 615 (4 ) 40,260 (313 ) 40,875 (317 ) 22,029 (81 ) 21,739 (315 ) 43,768 (396 ) 11,054 (5 ) 69,439 (714 ) 80,493 (719 ) 5,619 (11 ) 7,310 (132 ) 12,929 (143 ) 246 (1 ) 33,107 (272 ) 33,353 (273 ) $ 66,711 $ (288 ) $ 34,819 $ (495 ) $ 101,530 $ (783 ) $ 11,915 $ (10 ) $ 217,512 $ (1,792 ) $ 229,427 $ (1,802 ) $ 2,893 $ (46 ) $ - $ - $ 2,893 $ (46 ) $ 2,962 $ (11 ) $ 4,838 $ (114 ) $ 7,800 $ (125 ) 48,225 (703 ) - - 48,225 (703 ) 26,099 (218 ) 73,192 (1,346 ) 99,291 (1,564 ) 33,753 (439 ) - - 33,753 (439 ) 25,037 (277 ) 37,632 (1,025 ) 62,669 (1,302 ) 125,558 (2,226 ) 6,512 (190 ) 132,070 (2,416 ) 60,600 (302 ) 83,494 (1,455 ) 144,094 (1,757 ) 35,703 (694 ) - - 35,703 (694 ) 19,239 (256 ) 34,254 (1,057 ) 53,493 (1,313 ) $ 246,132 $ (4,108 ) $ 6,512 $ (190 ) $ 252,644 $ (4,298 ) $ 133,937 $ (1,064 ) $ 233,410 $ (4,997 ) $ 367,347 $ (6,061 ) $783,000$1,802,000 as of September 30, 2017.March 31, 2019. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.7. Loans Receivable and Credit DisclosuresCredit DisclosuresDecember 31, 2018 is as follows (inthousands): $ 53,533 $ 51,364 167,909 169,722 386,730 389,532 105,709 103,652 84,082 86,194 84,027 85,202 16,458 16,566 898,448 902,232 (11,812 ) (11,684 ) (79 ) (87 ) $ 886,557 $ 890,461 and nine months ended September 30, 2017March 31, 2019 and 20162018 is as follows: (in thousands) $ 780 $ 1,713 $ 4,437 $ 907 $ 2,071 $ 1,154 $ 126 $ 11,188 $ 699 $ 1,820 $ 4,615 $ 1,198 $ 1,777 $ 1,384 $ 191 $ 11,684 (74 ) 15 155 36 (80 ) (34 ) 39 57 26 28 155 60 (190 ) 8 11 98 - 4 - - 2 - 4 10 11 2 - - 28 - - 41 - - - - (109 ) - (6 ) (115 ) - - - - (5 ) - (6 ) (11 ) $ 706 $ 1,732 $ 4,592 $ 943 $ 1,884 $ 1,120 $ 163 $ 11,140 $ 736 $ 1,850 $ 4,770 $ 1,258 $ 1,610 $ 1,392 $ 196 $ 11,812 $ 908 $ 1,711 $ 3,960 $ 861 $ 1,728 $ 1,216 $ 123 $ 10,507 (202 ) 12 632 82 735 (96 ) 59 1,222 - 9 - - 30 - 8 47 - - - - (609 ) - (27 ) (636 ) $ 706 $ 1,732 $ 4,592 $ 943 $ 1,884 $ 1,120 $ 163 $ 11,140 $ 758 $ 1,742 $ 3,890 $ 834 $ 1,439 $ 1,219 $ 253 $ 10,135 121 32 (89 ) - 169 12 (10 ) 235 15 1 - - 75 - 2 93 - - - - (1 ) - (11 ) (12 ) $ 894 $ 1,775 $ 3,801 $ 834 $ 1,682 $ 1,231 $ 234 $ 10,451 $ 999 $ 1,806 $ 3,557 $ 760 $ 1,371 $ 1,256 $ 239 $ 9,988 $ 796 $ 1,716 $ 4,734 $ 997 $ 1,739 $ 1,171 $ 168 $ 11,321 (135 ) (34 ) 244 74 308 (25 ) 9 441 8 26 29 (20 ) (6 ) (3 ) (5 ) 29 30 3 - - 81 - 7 121 - 2 - - 18 - 8 28 - - - - (78 ) - (21 ) (99 ) - - - - (1 ) - (54 ) (55 ) $ 894 $ 1,775 $ 3,801 $ 834 $ 1,682 $ 1,231 $ 234 $ 10,451 $ 804 $ 1,744 $ 4,763 $ 977 $ 1,750 $ 1,168 $ 117 $ 11,323 September 30, 2017March 31, 2019 and December 31, 20162018 is as follows: (in thousands) $ - $ 28 $ - $ - $ 747 $ - $ 48 $ 823 $ - $ 52 $ - $ - $ 295 $ - $ 13 $ 360 706 1,704 4,592 943 1,137 1,120 115 10,317 736 1,798 4,770 1,258 1,315 1,392 183 11,452 $ 706 $ 1,732 $ 4,592 $ 943 $ 1,884 $ 1,120 $ 163 $ 11,140 $ 736 $ 1,850 $ 4,770 $ 1,258 $ 1,610 $ 1,392 $ 196 $ 11,812 $ - $ 76 $ - $ - $ 644 $ - $ - $ 720 $ - $ 53 $ - $ - $ 430 $ - $ 18 $ 501 908 1,635 3,960 861 1,084 1,216 123 9,787 699 1,767 4,615 1,198 1,347 1,384 173 11,183 $ 908 $ 1,711 $ 3,960 $ 861 $ 1,728 $ 1,216 $ 123 $ 10,507 $ 699 $ 1,820 $ 4,615 $ 1,198 $ 1,777 $ 1,384 $ 191 $ 11,684 September 30, 2017March 31, 2019 and December 31, 20162018 is as follows (in thousands): $ - $ 692 $ 703 $ - $ 3,250 $ - $ 85 $ 4,730 $ - $ 350 $ 133 $ 71 $ 2,773 $ - $ 13 $ 3,340 44,041 148,148 350,508 79,181 70,916 67,711 10,201 770,706 53,533 167,559 386,597 105,638 81,309 84,027 16,445 895,108 $ 44,041 $ 148,840 $ 351,211 $ 79,181 $ 74,166 $ 67,711 $ 10,286 $ 775,436 $ 53,533 $ 167,909 $ 386,730 $ 105,709 $ 84,082 $ 84,027 $ 16,458 $ 898,448 $ - $ 660 $ 399 $ - $ 3,942 $ - $ 76 $ 5,077 $ - $ 365 $ 128 $ 74 $ 2,648 $ - $ 19 $ 3,234 61,042 148,847 315,303 73,032 70,436 76,994 12,054 757,708 51,364 169,357 389,404 103,578 83,546 85,202 16,547 898,998 $ 61,042 $ 149,507 $ 315,702 $ 73,032 $ 74,378 $ 76,994 $ 12,130 $ 762,785 $ 51,364 $ 169,722 $ 389,532 $ 103,652 $ 86,194 $ 85,202 $ 16,566 $ 902,232 The following is a recap of impairedImpaired loans,, on a disaggregated basis, as of September 30, 2017March 31, 2019 and December 31, 2016:2018: (in thousands) $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - 610 750 - 452 473 - 241 248 - 252 277 - 703 1,369 - 399 1,025 - 133 585 - 128 601 - - - - - - - 71 86 - 74 88 - 127 150 - 2,747 2,672 - 238 251 - 248 258 - - - - - - - - - - - - - 28 30 - 76 81 - - - - 1 2 - 1,468 2,299 - 3,674 4,251 - 683 1,170 - 703 1,226 - - - - - - - - - - - - - 82 104 28 208 360 76 109 136 52 113 139 53 - - - - - - - - - - - - - - - - - - - - - - - - 3,123 3,392 747 1,195 1,286 644 2,535 2,537 295 2,400 2,506 430 - - - - - - - - - - - - 57 60 48 - - - 13 17 13 18 22 18 3,262 3,556 823 1,403 1,646 720 2,657 2,690 360 2,531 2,667 501 - - - - - - - - - - - - 692 854 28 660 833 76 350 384 52 365 416 53 703 1,369 - 399 1,025 - 133 585 - 128 601 - - - - - - - 71 86 - 74 88 - 3,250 3,542 747 3,942 3,958 644 2,773 2,788 295 2,648 2,764 430 - - - - - - - - - - - - 85 90 48 76 81 - 13 17 13 19 24 18 $ 4,730 $ 5,855 $ 823 $ 5,077 $ 5,897 $ 720 $ 3,340 $ 3,860 $ 360 $ 3,234 $ 3,893 $ 501 The following is a recap of the averageAverage recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2017March 31, 2019 and 2016:2018: (in thousands) $ - $ - $ - $ - $ - $ - $ - $ - 631 18 481 - 247 20 570 23 716 - 450 - 131 31 409 258 - - - - 73 - - - 139 2 67 - 243 - 95 - - - 11 - - - - - 46 - 88 6 1 - 13 - 1,532 20 1,097 6 695 51 1,087 281 - - - - - - - - 128 - 626 - 111 - 226 - - - - - - - 225 - - - - - - - - - 3,263 - 1,003 2 2,468 - 2,965 - - - - - - - - - 29 - 1 - 16 1 44 1 3,420 - 1,630 2 2,595 1 3,460 1 - - - - - - - - 759 18 1,107 - 358 20 796 23 716 - 450 - 131 31 634 258 - - - - 73 - - - 3,402 2 1,070 2 2,711 - 3,060 - - - 11 - - - - - 75 - 89 6 17 1 57 1 $ 4,952 $ 20 $ 2,727 $ 8 $ 3,290 $ 52 $ 4,547 $ 282 $ - $ - $ - $ 31 535 27 438 1 648 - 465 22 - - - - 1,457 3 39 - - - 11 - 60 - 66 6 2,700 30 1,019 60 16 2 - - 162 - 663 5 - - 26 - - - - - 2,193 - 732 2 - - - - 15 1 1 - 2,386 3 1,422 7 16 2 - 31 697 27 1,101 6 648 - 491 22 - - - - 3,650 3 771 2 - - 11 - 75 1 67 6 $ 5,086 $ 33 $ 2,441 $ 67 September 30, 2017March 31, 2019 and 20162018 was approximately $88,000$58,000 and $46,000,$83,000, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2017 and 2016 was approximately $289,000 and $124,000, respectively.TheNonaccrual loans at March 31, 2019 and December 31, 2018 were $3,339,000 and $3,234,000 respectively.$3,098,000$2,662,000 as of September 30, 2017,March 31, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000$2,350,000 as of December 31, 2016,2018, all of which were included in impaired and nonaccrual loans.The following table sets forth information on the Company’s TDRs, on a disaggregated basis, occurring in the three and nine months ended September 30, 2017 and 2016: (dollarsin thousands) - $ - $ - - $ - $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ - $ - - $ - $ - - $ - $ - - $ - $ - - - - - - - - - - - - - - - - - - - 2 93 99 3 702 705 - - - - - - - - - 3 70 70 2 $ 93 $ 99 6 $ 772 $ 775 During the three and nine months ended September 30, 2017, the Company granted concessions to two borrowers that were experiencing financial difficulties. The loans were extended beyond their normal terms and on one loan the interest was capitalized.September 30, 2016,March 31, 2019 and 2018, the Company did not grant any concessions to any borrowers facing financial difficulties. During the nine months ended September 30, 2016, the Company granted concessions to two borrowers experiencing financial difficulties with six loans. The three consumer loans were extended beyond normal terms at an interest rate below a market interest rate. The three commercial operating loans were extended beyond normal terms.borrowers.September 30, 2017 and 2016March 31, 2018 had payment defaults.A $530,000 specific reserve was established in the nine months ended September 30, 2017 on two TDR loans. There were $257,000 of net charge-offs related to TDRs for the nine months ended September 30, 2017. There were no charge-offs related to TDRs for the three and nine months ended September 30, 2016.March 31, 2019 and 2018. No additional specific reserve were provided for the three months ended March 31, 2019. A $12,000 specific reserve was established in the three months ended March 31, 2018.AnAn aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, 2017March 31, 2019 and December 31, 2016,2018, is as follows: (in thousands) 30-89 30-89 $ 205 $ - $ 205 $ 43,836 $ 44,041 $ - $ - $ - $ - $ 53,533 $ 53,533 $ - 1,065 476 1,541 147,299 148,840 81 1,095 370 1,465 166,444 167,909 20 312 398 710 350,501 351,211 - 1,065 - 1,065 385,665 386,730 - 377 - 377 78,804 79,181 - 1,290 - 1,290 104,419 105,709 - 129 429 558 73,608 74,166 - 545 12 557 83,525 84,082 - 207 - 207 67,504 67,711 - 3,201 30 3,231 80,796 84,027 30 43 32 75 10,211 10,286 - 106 13 119 16,339 16,458 - $ 2,338 $ 1,335 $ 3,673 $ 771,763 $ 775,436 $ 81 $ 7,302 $ 425 $ 7,727 $ 890,721 $ 898,448 $ 50 30-89 30-89 $ - $ - $ - $ 61,042 $ 61,042 $ - $ 376 $ - $ 376 $ 50,988 $ 51,364 $ - 1,577 35 1,612 147,895 149,507 19 1,032 302 1,334 168,388 169,722 150 1,420 - 1,420 314,282 315,702 - - - - 389,532 389,532 - - - - 73,032 73,032 - - - - 103,652 103,652 - 84 747 831 73,547 74,378 - 595 248 843 85,351 86,194 - - - - 76,994 76,994 - 89 - 89 85,113 85,202 - 36 3 39 12,091 12,130 3 76 - 76 16,490 16,566 - $ 3,117 $ 785 $ 3,902 $ 758,883 $ 762,785 $ 22 $ 2,168 $ 550 $ 2,718 $ 899,514 $ 902,232 $ 150 asas of September 30, 2017March 31, 2019 and December 31, 20162018 is as follows: (in thousands) $ 41,032 $ 329,263 $ 57,569 $ 59,420 $ 42,695 $ 529,979 $ 46,979 $ 337,461 $ 74,011 $ 59,708 $ 53,670 $ 571,829 3,009 17,927 18,984 10,020 23,828 73,768 6,554 30,086 23,268 17,510 27,799 105,217 - 189 1,234 - - 1,423 - 4,727 303 - 52 5,082 - 3,129 1,394 1,478 1,188 7,189 - 14,323 8,056 4,091 2,506 28,976 - 703 - 3,248 - 3,951 - 133 71 2,773 - 2,977 $ 44,041 $ 351,211 $ 79,181 $ 74,166 $ 67,711 $ 616,310 $ 53,533 $ 386,730 $ 105,709 $ 84,082 $ 84,027 $ 714,081 $ 57,420 $ 288,107 $ 51,720 $ 59,506 $ 57,415 $ 514,168 $ 45,991 $ 345,262 $ 72,562 $ 64,850 $ 58,818 $ 587,483 3,245 22,833 15,251 9,512 18,938 69,779 5,373 26,177 22,758 13,998 22,628 90,934 - 204 4,228 96 75 4,603 - 4,775 1,675 264 747 7,461 377 4,159 1,833 1,322 566 8,257 - 13,221 6,583 4,434 3,009 27,247 - 399 - 3,942 - 4,341 - 97 74 2,648 - 2,819 $ 61,042 $ 315,702 $ 73,032 $ 74,378 $ 76,994 $ 601,148 $ 51,364 $ 389,532 $ 103,652 $ 86,194 $ 85,202 $ 715,944 asas of September 30, 2017March 31, 2019 and December 31, 20162018 is as follows: $ 148,069 $ 10,202 $ 158,271 $ 167,539 $ 16,445 $ 183,984 771 84 855 370 13 383 $ 148,840 $ 10,286 $ 159,126 $ 167,909 $ 16,458 $ 184,367 $ 148,828 $ 12,051 $ 160,879 $ 169,206 $ 16,547 $ 185,753 679 79 758 516 19 535 $ 149,507 $ 12,130 $ 161,637 $ 169,722 $ 16,566 $ 186,288 8. As of September 14, 2018, as a result of the acquisition of CCSB, FNB recognized $3.0 million of goodwill. GoodwillGoodwill recognized in the Acquisition was primarily attributable to an expanded market share and economies of scale expected from combining the operations of CCSB branches with FNB. Goodwill is not amortized but is evaluated for impairment at least annually. For income tax purposes, goodwill associated with CCSB is not amortized and goodwill associated with previous acquisition is amortized over fifteen years.9. Intangible assetsSeptember 30, 2017March 31, 2019 and December 31, 2016:2018: (in thousands) $ 2,518 $ 1,793 $ 2,518 $ 1,563 $ 4,520 $ 2,358 $ 4,520 $ 2,212 474 65 412 14 535 183 535 165 $ 2,992 $ 1,858 $ 2,930 $ 1,577 $ 5,055 $ 2,541 $ 5,055 $ 2,377 33.4 years as of September 30, 2017March 31, 2019 and 3.5 years as of December 31, 2016.2018.and nine months ended September 30, 2017March 31, 2019 and 2016:2018: (in thousands) $ 1,212 $ 1,122 $ 1,353 $ 1,309 $ 2,678 $ 1,091 12 - 62 - - 15 (90 ) (86 ) (281 ) (273 ) (164 ) (87 ) $ 1,134 $ 1,036 $ 1,134 $ 1,036 $ 2,514 $ 1,019 EstimatedEstimated remaining amortization expense on core deposit intangible for the years ending December 31st is as follows: (in thousands) $ 85 319 196 139 139 133 123 $ 1,134 26 $ 376 440 402 368 315 166 447 $ 2,514 10. Pledged Collateral Related to Securities Sold Under Repurchase Agreementsand term repurchase agreements as of September 30, 2017March 31, 2019 and December 31, 2016:2018: (in thousands) $ 1,485 $ - $ 1,485 $ 1,476 $ - $ 1,476 $ 4,463 $ 4,406 48,363 - 48,363 46,557 - 46,557 39,179 41,375 24,514 - 24,514 30,376 - 30,376 20,022 19,893 $ 74,362 $ - $ 74,362 $ 78,409 $ - $ 78,409 $ - $ 15,174 $ 15,174 $ - $ 15,068 $ 15,068 - - - - 354 354 $ - $ 15,174 $ 15,174 $ - $ 15,422 $ 15,422 $ 74,362 $ 15,174 $ 89,536 $ 78,409 $ 15,422 $ 93,831 $ 63,664 $ 65,674 11. Regulatory Matters $ 175,203 17.7 % $ 91,324 9.25 % N/A N/A 15,325 16.7 8,486 9.25 $ 9,174 10.0 % 81,177 15.4 48,867 9.25 52,829 10.0 26,957 15.9 15,661 9.25 16,931 10.0 20,217 16.5 11,337 9.25 12,256 10.0 14,903 20.4 6,741 9.25 7,288 10.0 $ 163,536 16.6 % $ 71,578 7.25 % N/A N/A 14,419 15.7 6,651 7.25 $ 7,339 8.0 % 75,221 14.2 38,301 7.25 42,263 8.0 24,947 14.7 12,275 7.25 13,545 8.0 18,680 15.2 8,886 7.25 9,805 8.0 14,084 19.3 5,284 7.25 5,830 8.0 $ 163,536 12.1 % $ 53,995 4.00 % N/A N/A 14,419 10.5 5,484 4.00 $ 6,855 5.0 % 75,221 10.0 29,942 4.00 37,428 5.0 24,947 12.2 8,147 4.00 10,184 5.0 18,680 11.9 6,297 4.00 7,871 5.0 14,084 12.9 4,372 4.00 5,465 5.0 $ 163,536 16.6 % $ 56,769 5.75 % N/A N/A 14,419 15.7 5,275 5.75 $ 5,963 6.5 % 75,221 14.2 30,377 5.75 34,339 6.5 24,947 14.7 9,735 5.75 11,005 6.5 18,680 15.2 7,047 5.75 7,967 6.5 14,084 19.3 4,190 5.75 4,737 6.5 * These ratios for September 30, 2017 include a capital conservation buffer of 1.25%, except for the Tier 1 capital to average weighted assets ratios. $ 178,441 16.3 % $ 115,240 10.50 % N/A N/A 15,627 16.5 9,945 10.50 $ 9,472 10.0 % 82,776 13.5 64,310 10.50 61,247 10.0 28,032 15.5 18,997 10.50 18,093 10.0 20,360 15.9 13,461 10.50 12,820 10.0 14,801 18.6 8,333 10.50 7,936 10.0 $ 166,088 15.1 % $ 93,290 8.50 % N/A N/A 14,688 15.5 8,051 8.50 $ 7,577 8.0 % 76,249 12.4 52,060 8.50 48,998 8.0 25,779 14.2 15,379 8.50 14,474 8.0 18,755 14.6 10,897 8.50 10,256 8.0 13,983 17.6 6,746 8.50 6,349 8.0 $ 166,088 11.5 % $ 57,549 4.00 % N/A N/A 14,688 11.4 5,158 4.00 $ 6,447 5.0 % 76,249 9.2 33,042 4.00 41,302 5.0 25,779 11.9 8,687 4.00 10,859 5.0 18,755 11.5 6,485 4.00 8,106 5.0 13,983 12.9 4,345 4.00 5,432 5.0 $ 166,088 15.1 % $ 76,827 7.00 % N/A N/A 14,688 15.5 6,630 7.00 $ 6,156 6.5 % 76,249 12.4 42,873 7.00 39,811 6.5 25,779 14.2 12,665 7.00 11,760 6.5 18,755 14.6 8,974 7.00 8,333 6.5 13,983 17.6 5,555 7.00 5,159 6.5 $ 170,358 17.2 % $ 85,241 8.625 % N/A N/A $ 177,405 16.1 % $ 109,082 9.875 % N/A N/A 15,044 17.2 7,534 8.625 $ 8,735 10.0 % 15,632 17.0 9,092 9.875 $ 9,207 10.0 % 78,322 15.3 44,279 8.625 51,338 10.0 81,419 13.1 61,312 9.875 62,088 10.0 26,095 14.1 15,927 8.625 18,466 10.0 27,880 14.8 18,576 9.875 18,811 10.0 20,170 16.4 10,590 8.625 12,278 10.0 20,358 16.2 12,427 9.875 12,585 10.0 14,897 19.2 6,684 8.625 7,749 10.0 14,790 19.5 7,489 9.875 7,583 10.0 $ 159,325 16.1 % $ 65,475 6.625 % N/A N/A $ 165,181 15.0 % $ 86,989 7.875 % N/A N/A 14,132 16.2 5,787 6.625 $ 6,988 8.0 % 14,722 16.0 7,251 7.875 $ 7,366 8.0 % 72,750 14.2 34,011 6.625 41,070 8.0 74,995 12.1 48,894 7.875 49,671 8.0 24,139 13.1 12,234 6.625 14,773 8.0 25,622 13.6 14,813 7.875 15,049 8.0 18,633 15.2 8,134 6.625 9,822 8.0 18,783 14.9 9,910 7.875 10,068 8.0 14,078 18.2 5,134 6.625 6,199 8.0 13,974 18.4 5,972 7.875 6,067 8.0 $ 159,325 12.0 % $ 53,316 4.000 % N/A N/A $ 165,181 11.3 % $ 58,635 4.000 % N/A N/A 14,132 10.2 5,529 4.000 $ 6,911 5.0 % 14,722 11.2 5,277 4.000 $ 6,596 5.0 % 72,750 10.0 29,077 4.000 36,347 5.0 74,995 9.1 33,034 4.000 41,292 5.0 24,139 11.5 8,374 4.000 10,467 5.0 25,622 11.7 8,730 4.000 10,913 5.0 18,633 11.6 6,449 4.000 8,061 5.0 18,783 11.8 6,384 4.000 7,980 5.0 14,078 12.5 4,523 4.000 5,654 5.0 13,974 12.7 4,402 4.000 5,503 5.0 $ 159,325 16.1 % $ 50,650 5.125 % N/A N/A $ 165,181 15.0 % $ 70,420 6.375 % N/A N/A 14,132 16.2 4,477 5.125 $ 5,678 6.5 % 14,722 16.0 5,870 6.375 $ 5,985 6.5 % 72,750 14.2 26,311 5.125 33,370 6.5 74,995 12.1 39,581 6.375 40,357 6.5 24,139 13.1 9,464 5.125 12,003 6.5 25,622 13.6 11,992 6.375 12,227 6.5 18,633 15.2 6,292 5.125 7,981 6.5 18,783 14.9 8,023 6.375 8,180 6.5 14,078 18.2 3,972 5.125 5,037 6.5 13,974 18.4 4,834 6.375 4,929 6.5 * These ratios for December 31, 2016 include a capital conservation buffer of 0.625%, except for the Tier 1 capital to average weighted assets ratios.TheThe Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes in July 2013. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirements and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income.income (loss). The Company and the Banks have made the election to retain the existing treatment for accumulated other comprehensive income.income (loss). The final rules took effect for the Company and the Banks on January 1, 2015, subject to a transition period for certain parts of the rules.waswas added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At the present time, the ratios for the Company and the Banks are sufficient to meet the fully phased-in conservation buffer.12.September 30, 2017,March 31, 2019, but prior to November 8, 2017,May 7, 2019, that provided additional evidence about conditions that existed at September 30, 2017.March 31, 2019. There were no other significant events or transactions that provided evidence about conditions that did not exist at September 30, 2017.March 31, 2019.(the(the “Company”) is a bank holding company established in 1975 that owns and operates five bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), and United Bank & Trust NA (United Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.The Banks also offerWealth management services includes financial planning and managing trust, agencies, estates and investment services through a third-party broker-dealer.brokerage accounts. The Company employs fourteenthirteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training and the coordination of management activities, in addition to 205230 full-time equivalent individuals employed by the Banks.Banks, including employees from the Acquisition.Company’sCompany’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.$3,928,000,$4,237,000, or $0.42$0.46 per share, for the three months ended September 30, 2017,March 31, 2019, compared to net income of $3,804,000,$4,037,000, or $0.41$0.43 per share, for the three months ended September 30, 2016.March 31, 2018.an increase inimproved loan interest income, and a lower provision for loan losses, offset in part by increases inelevated deposit interest expense.expense, higher salary and employee benefits, data processing and occupancy expenses.NetNet loan charge-offs (recoveries) totaled $105,000$(30,000) and $(81,000)$27,000 for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The provision for loan losses totaled $57,000$98,000 and $235,000$29,000 for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively.The Company had net income of $11,011,000, or $1.18 per share, for the nine months ended September 30, 2017, compared to net income of $11,710,000, or $1.26 per share, for the nine months ended September 30, 2016. The decrease in nine month earnings can be primarily attributed to a higher provision for loan losses and increases in interest expense, offset in part by an increase in loan interest income.Net loan charge-offs (recoveries) totaled $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The provision for loan losses totaled $1,222,000 and $441,000 for the nine months ended September 30, 2017 and 2016, respectively.Challenges●Key Performance Indicators and Industry Results●Critical Accounting Policies●Income Statement Review●Balance Sheet Review●Asset Quality Review and Credit Risk Management●Liquidity and Capital Resources●Forward-Looking Statements and Business RisksCompany’sCompany’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 13, 2017.12, 2019.5,7875,406 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole. 1.15 % 1.07 % 1.01 % 1.14 % 1.18 % 1.04 % 1.13 % 1.04 % 1.17 % 1.23 % 1.35 % 1.00 % 0.97 % 9.08 % 8.64 % 8.17 % 10.11 % 9.38 % 9.32 % 9.44 % 9.31 % 9.73 % 10.09 % 11.98 % 8.02 % 8.64 % 3.29 % 3.25 % 3.25 % 3.22 % 3.36 % 3.13 % 3.33 % 3.07 % 3.23 % 3.23 % 3.40 % 3.25 % 3.25 % 52.42 % 53.16 % 52.93 % 56.32 % 51.95 % 58.28 % 53.59 % 59.91 % 57.82 % 55.90 % 56.27 % 52.70 % 57.94 % 12.70 % 12.41 % 12.37 % 9.69 % 12.60 % 9.48 % 12.00 % 9.59 % 12.05 % 12.18 % 9.70 % 12.48 % 9.62 % ●averageaverage assets was 1.15%1.17% and 1.19% for the three months ended September 30, 2017March 31, 2019 and 2016.2018, respectively. This ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in average assets.●at 9.08%9.73% and 8.91%9.55% for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. TheThis ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in this ratio in 2017 from the previous period is primarily due to an increase in net income.average equity.●September 30, 2017March 31, 2019 and 20162018 was 3.29%3.23% and 3.38%3.19%, respectively. The ratio is calculated by dividing net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. The decrease in this ratio in 2017 is primarily the result of an increase in the interest rates on deposits.●52.42%57.82% and 50.71%57.45% for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The efficiencyThis ratio remained consistent with prior periods.when comparing 2019 to 2018.●12.70%12.05% as of September 30, 2017March 31, 2019 is significantly higher than the industry average of 9.69%9.70% as of June 30, 2017.December 31, 2018.secondfourth quarter of 2017:2018:Higher Net Interest Income Lifts Industry EarningsRises $33.8 Billion Over Fourth Quarter 2017 to $59.1 BillionHigher net interest income and restrained growth in operating expenses helped lift banking industry profits in second quarter 2017. The 5,7875,406 FDIC-insured commercial banks and savings institutions insured by the FDIC reported quarterly net income of $48.3$59.1 billion forin the fourth quarter, an increase of $4.7$33.8 billion (10.7%(133.4%) compared with the second quarter of 2016. Almost two out of every three banks, 63.4% reported year-over-year earnings improvement, while only 4.1% were unprofitable, down from 4.6% a year earlier. The average return on assets (ROA) roseImprovement in quarterly net income was attributable to 1.14% from 1.06% the year before. This is the highest quarterly ROA for the industry since second quarter 2007.Net Interest Margins ImproveNethigher net operating revenue—the (the sum of net interest income and total noninterest income—roseincome) and lower income tax expenses. Assuming the effective tax rate before the new tax law, quarterly net income would have totaled an estimated $50.3 billion, up $7.9 billion (18.5%) from 12 months ago. The average return on assets was 1.33% for the quarter, up from 0.58% in fourth quarter 2017. The percentage of unprofitable banks in the fourth quarter declined to $190.56.5% from 16.6% a year ago.the second quarter, an $11 billion (6.1%) increase from second quarter 2016. Most of the improvement consisted of higher net interest income, which was $10.3 billion (9.1%) higher than a year earlier.2017. The increase in net interest income helped lift the industry’saverage net interest margin (NIM) rose from 3.25% in 2017 to 3.22%3.40%, as average asset yields (up 43 basis points) exceeded average funding costs (up 28 basis points). The average return on assets for 2018 was 1.35%, up from 3.08% in second quarter 2016. This is the highest quarterly NIM since fourth quarter 2013. While 57.7% of all banks reported higher NIMs, the improvement was greatest at larger institutions. More of their assets reprice or mature in the short term, and they are better-positioned0.97% for 2017.benefit from rising short-term interest rates. Noninterest income totaled $66.8$140.2 billion, up $654 million (1%$10.5 billion (8.1%) from a year earlier. Incomeearlier, owing to growth in interest-bearing assets and wider net interest margins (NIM). More than four out of five banks (82.6%) reported year-over-year increases in net interest income. NIM was 3.48% for the quarter, an improvement from the 3.31% margin reported a year ago, as average asset servicing was $1yields grew more rapidly than average funding costs. Banks with assets of $10 billion (93.9%) higher, while gains onto $250 billion reported the largest annual increases in average asset sales were $1.6 billion (31.7%) lower. Trading income fell $313 million (4.5%)yields (up 58 basis points) and average funding costs (up 40 basis points).
Noninterest Expense Growth Is ModerateLoan-Loss Provisions Increase Modestly
Banks set aside $12$14 billion in loan-loss provisions during the secondfourth quarter, up $273the highest level since fourth quarter 2012. Loan-loss provisions rose by $397.3 million (2.3%(2.9%) from the previous year. Slightly more than one-thirdfourth quarter 2017, with close to 40% of all banks—36.5%—increased their lossbanks reporting increases. Loan-loss provisions versus second quarter 2016, while 32.2% reported lower provisions. Noninterest expenses totaled $108.6 billion, an increaseas a percent of $3.5 billion (3.3%)net operating revenue declined from 8.3% at year-end 2017 to 8.2%. Expenses for salaries and employee benefits were $2.1 billion (4.3%) higher than a year earlier, as the total number of employees rose by 48,019 (2.3%).
Noncurrent Loan Balances Decline FurtherNoninterest Income Expands From a Year Earlier
Noninterest income increased $1.6 billion (2.6%) from a year earlier, as all other noninterest income grew by $3.5 billion (11.9%) and net gains on sales of other assets rose by $393 million (120.3%). Despite the overall increase in noninterest income, trading revenue declined by $1.5 billion (25.9%) and servicing fees fell by $850.9 million (36.1%). Slightly more than half of all banks (53.6%) reported increases in noninterest income compared with the year-ago quarter.
Noninterest Expense Increases From Fourth Quarter 2017
Noninterest expense posted a modest increase of $194.9 million (0.2%) over the past 12 months. Increases in other noninterest expense (up $2.6 billion, or 5%) and salary and employee benefits (up $717 million, or 1.3%) were partially offset by a decline in premises and fixed asset expense (down $2.7 billion, or 22.5%). The amountaverage assets per employee increased from $8.4 million in fourth quarter 2017 to $8.7 million.
Net Charge-Offs Decline 4.6% From a Year Ago
Banks charged off $12.6 billion in uncollectable loans during the quarter, a decline of $ 605.9 million (4.6%) from a year ago. This marks the first time since third quarter 2015 that net charge-offs registered a year-over-year decline. Credit card balances registered the largest annual dollar increase in net-charge offs (up $347.7 million, or 4.4%), while commercial and industrial loans and leases that were noncurrent—90had the largest annual dollar decline (down $522.6 million, or 23.4%). The average net charge-off rate declined from 0.55% in fourth quarter 2017 to 0.50%.
Noncurrent Loan Rate Falls Below 1%
Noncurrent loan balances (90 days or more past due or in nonaccrual status—fell forstatus) were $1 billion (1%) lower than the 28th timeprevious quarter. More than half of all banks (53.3%) reported lower noncurrent loan balances. The quarter-over-quarter decline was reflected in the last 29 quarters, decliningresidential mortgages balances, which declined by $8.4$2 billion (6.7%(4.4%) in the three months ended June 30. Noncurrent, and commercial and industrial loan balances, declined in all major loan categories during the quarter. Noncurrent residential mortgage loanswhich fell by $4.8$554.3 million (3.6%). Credit card balances continued to register the largest quarterly dollar increase, growing by $1.6 billion (7.9%), while noncurrent C&I loans declined by $2.2 billion (9.5%(13.8%). The average noncurrent loan rate fell from 1.34% to 1.23%was 0.99% during the current quarter, down 3 basis points from the lowestprevious quarter. This is the first time since second quarter 2007 that the noncurrent rate was below 1%.
Loan-Loss Reserves Increase From Third Quarter 2018
Loan-loss reserves totaled $124.7 billion at the end of the fourth quarter, an increase of $1 billion (0.8%) from third quarter 2007.
2018. The banking industry continued to build reserves, as loan-loss provisions of $14 billion exceeded net charge-offs of $12.6 billion. More than half of all banks (57.8%) reported a quarterly increase in loan-loss reserves. Banks Shift Their Reserve Allocations
Totalthat itemize their loan-loss reserves posted a modest ($197 million, 0.2%) decline during the second quarter. The industry’s coverage ratio of reserves to noncurrent loans and leases rose from 97.5% to 104.3%, the highest level since third quarter 2007. Banks(banks with assets greater than $1 billion which account for 90%and representing 93% of the industry’s loss reserves, increased theirtotal industry assets) reported higher reserves for credit card losses by $1.4 billion (4.3%), while reducing their reserves for commercial loan losses by $1.1 billion (3.3%(up $997.4 million, or 2.5%) and theirlower reserves for residential real estate loan losses by $922(down $556 million, (5.5%or 4.4%). After declining for the past nine consecutive quarters, itemized reserves for losses on commercial loans reported quarterly growth of $409 million (1.3%).
Retained Earnings DriveEquity Capital GrowthIncreases From the Third Quarter
Equity capital increased by $38.7$25.3 billion (2%(1.3%) during the quarter.fourth quarter, led by accumulated other comprehensive income. Retained earnings contributed $20rose by $70.8 billion to the growth in capital, $322 million (1.6%(10.3%) less than in second quarter 2016. Banks declared $28.3 billion infrom a year ago. Declared dividends in the fourth quarter up $5totaled $52.7 billion, (21.4%) from the year-earlier quarter. Lower long-term interest rates contributed to an $8 billion improvement in accumulated other comprehensive income, which was reflected inhighest level ever reported by the equity capital increase.banking industry. At the end of the quarter, 99.4%year-end 2018, 99.6% of all FDIC-insuredinsured institutions, representing 99.96%which account for 99.98% of total industry assets, met or exceeded the requirements for the well-capitalized banks,category, as defined for Prompt Corrective Action purposes.
Banks Reduce Their Federal Reserve Bank Balances
Industry assets surpassed $17 trillion for the first time at the end of the second quarter, rising by $100.8 billion (0.6%) during the three months ended June 30. Banks reduced their balances at Federal Reserve banks by $102.4 billion (8%). They also reduced their investment securities by $15 billion (0.4%), as U.S. Treasury securities fell by $49.9 billion (9.7%), and mortgage-backed securities rose by $38 billion (1.9%). Securities held in available-for-sale accounts declined by $59 billion (9.7%), while securities in held-to-maturity accounts increased by $44 billion (4.7%). Assets in trading accounts increased by $18.7 billion (3.2%) during the quarter. The percentage of industry assets maturing or repricing in more than three years remained unchanged from the first quarter, at 35.4%. The all-time high level for this percentage—35.5%—occurred at the end of fourth quarter 2016.
The Annual Loan Growth Rate Slows for a Third Consecutive Quarter
Total loans and leases increased by $161.2 billion (1.7%) during the second quarter. All major loan categories posted increases, led by residential mortgage loans (up $35.1 billion, 1.8%), credit card balances (up $23.6 billion, 3.1%), and C&I loans (up $22.1 billion, 1.1%). Unused loan commitments increased by $25.9 billion (0.4%). For the 12 months ended June 30, total loans and leases increased by $337.6 billion (3.7%), while unused loan commitments rose by $274.8 billion (3.9%). The 12-month growth rate for total loans and leases has slowed in each of the last three quarters. A year ago, the 12-month loan growth rate was 6.7%. The 12-month growth rate in unused loan commitments has slowed for six consecutive quarters. In 2015, unused commitments increased 6.6%.
Total Assets Increase 1.5% During the Fourth Quarter
Total assets rose by $270.4 billion (1.5%) during the fourth quarter. Cash and balances due from depository institutions declined by $144.4 billion (7.9%) and total securities holdings grew by $93 billion (2.6%). U.S. Treasury securities increased $55.4 billion (11.2%) during the quarter, the largest quarterly dollar increase since fourth quarter 2014.
Total Loan and Lease Balances Rise 4.4% Over 12 Months
Total loan and lease balances were $213 billion (2.1%) higher compared with the previous quarter. All major loan categories registered quarterly increases. Commercial and industrial loans increased by $80.7 billion (3.9%), and consumer loans (including credit card balances) rose by $52.2 billion (3.1%). During the 12 months ended December 31, total loan and lease balances rose by $431.2 billion (4.4%), a slight increase from the 4% annual grow rate reported last quarter. All major loan categories reported year-over-year increases, led by commercial and industrial loans, which increased by $156.2 billion (7.8%), and consumer loans (including credit card balances), which rose by $64.9 billion (3.9%).
Deposits Increase 2.2% From the Previous Quarter
Total deposits increased by $292.6 billion (2.2%) from the third quarter, the largest quarterly dollar increase since fourth quarter 2012. Interest-bearing deposits grew by $296.5 billion (3.2%), while noninterest-bearing deposits fell by $ 5.4 billion (0.2%). Reliance on nondeposit liabilities declined by $47.5 billion (2.3%) from the previous quarter, as trade liabilities were reduced by $23.1 billion (8.9%) and other liabilities fell by $24.4 billion (6%).
The Number of Banking Employees Rises 2.3% OverBanks on the Past Year“Problem Bank List” Declines to 60
The number of FDIC-insured commercial banks and savings institutions reporting financial resultson the FDIC’s “Problem Bank List” declined from 71 to 60 at year-end 2018, the fewest since first quarter 2007. Total assets of problem banks fell from $53.3 billion to 5,787 in the second quarter, from 5,856 in the first quarter.$48.5 billion. During the secondfourth quarter, three insured institutions failed, while 62two new charters were added, 70 institutions were absorbed by mergers. Nomergers, and there were no bank failures. For full-year 2018, eight new reporterscharters were added, during the quarter. The number of259 institutions on the FDIC’s Problem Bank List declined for a 25th consecutive quarter, from 112 to 105. This is the smallest number of problem banks since March 31, 2008,were absorbed by mergers, and is almost 90% below the peak of 888 at the end of March 2011. The number of full-time equivalent employees rose by 11,663 (0.6%) to 2,093,278 during the quarter, which was 48,019 higher than second quarter 2016 (2.3%). This is still 5.9% below the peak of 2,223,383 employees in first quarter 2007.there were no bank failures.
Critical Accounting Policies
The discussion contained in this Item 2 and other disclosures included within this report are based,, in part, on the Company’s audited December 31, 20162018 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’sCompany’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’sCompany’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of thethe 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’sCompany’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, it is at least reasonably possible that changes in management’smanagement’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 twothree acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. At September 30, 2017,March 31, 2019, 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.
Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP. (dollars in thousands)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP: | ||||||||
Net interest income (GAAP) | $ | 10,970 | $ | 10,186 | ||||
Tax-equivalent adjustment (1) | 293 | 316 | ||||||
Net interest income on an FTE basis (non-GAAP) | 11,263 | 10,502 | ||||||
Average interest-earning assets | $ | 1,393,813 | $ | 1,318,775 | ||||
Net interest margin on an FTE basis (non-GAAP) | 3.23 | % | 3.19 | % |
(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 30March 31, 20179 and 20168
The following highlights a comparative discussion of the major components of net income and their impact for the three monthsmonths ended September 30, 2017March 31, 2019 and 2016:2018:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company’sCompany’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.
AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans 1 | ||||||||||||||||||||||||
Commercial | $ | 77,788 | $ | 920 | 4.73 | % | $ | 88,265 | $ | 1,014 | 4.59 | % | ||||||||||||
Agricultural | 67,951 | 922 | 5.43 | % | 73,879 | 900 | 4.87 | % | ||||||||||||||||
Real estate | 623,214 | 6,756 | 4.34 | % | 555,002 | 6,131 | 4.42 | % | ||||||||||||||||
Consumer and other | 10,514 | 132 | 5.03 | % | 21,513 | 191 | 3.56 | % | ||||||||||||||||
Total loans (including fees) | 779,467 | 8,730 | 4.48 | % | 738,659 | 8,236 | 4.46 | % | ||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 275,498 | 1,558 | 2.26 | % | 259,212 | 1,425 | 2.20 | % | ||||||||||||||||
Tax-exempt 2 | 230,249 | 1,862 | 3.23 | % | 249,400 | 2,045 | 3.28 | % | ||||||||||||||||
Total investment securities | 505,747 | 3,420 | 2.70 | % | 508,612 | 3,470 | 2.73 | % | ||||||||||||||||
Interest bearing deposits with banks and federal funds sold | 27,183 | 115 | 1.69 | % | 25,533 | 87 | 1.36 | % | ||||||||||||||||
Total interest-earning assets | 1,312,397 | $ | 12,265 | 3.74 | % | 1,272,804 | $ | 11,793 | 3.71 | % | ||||||||||||||
Noninterest-earning assets | 49,366 | 55,732 | ||||||||||||||||||||||
TOTAL ASSETS | $ | 1,361,763 | $ | 1,328,536 |
AVERAGE BALANCE SHEETS AND INTEREST RATES |
Three Months Ended March 31, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans 1 | ||||||||||||||||||||||||
Commercial | $ | 84,182 | $ | 1,120 | 5.32 | % | $ | 73,424 | $ | 868 | 4.73 | % | ||||||||||||
Agricultural | 81,216 | 1,284 | 6.32 | % | 68,557 | 968 | 5.65 | % | ||||||||||||||||
Real estate | 714,021 | 8,092 | 4.53 | % | 632,041 | 6,941 | 4.39 | % | ||||||||||||||||
Consumer and other | 16,686 | 205 | 4.90 | % | 8,827 | 112 | 5.08 | % | ||||||||||||||||
Total loans (including fees) | 896,105 | 10,701 | 4.78 | % | 782,849 | 8,889 | 4.54 | % | ||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 251,145 | 1,489 | 2.37 | % | 272,013 | 1,529 | 2.25 | % | ||||||||||||||||
Tax-exempt 2 | 209,071 | 1,393 | 2.67 | % | 226,429 | 1,502 | 2.65 | % | ||||||||||||||||
Total investment securities | 460,216 | 2,882 | 2.50 | % | 498,442 | 3,031 | 2.43 | % | ||||||||||||||||
Other interest-earning assets | 37,492 | 238 | 2.53 | % | 37,484 | 193 | 2.06 | % | ||||||||||||||||
Total interest-earning assets | 1,393,813 | $ | 13,821 | 3.97 | % | 1,318,775 | $ | 12,113 | 3.67 | % | ||||||||||||||
Noninterest-earning assets | 52,602 | 41,368 | ||||||||||||||||||||||
TOTAL ASSETS | $ | 1,446,415 | $ | 1,360,143 |
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%
1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included. | |||||||
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate 21%. |
AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
NOW, savings accounts and money markets | $ | 712,550 | $ | 685 | 0.38 | % | $ | 658,522 | $ | 325 | 0.20 | % | ||||||||||||
Time deposits > $100,000 | 83,793 | 240 | 1.15 | % | 84,034 | 196 | 0.93 | % | ||||||||||||||||
Time deposits < $100,000 | 113,112 | 244 | 0.86 | % | 123,648 | 233 | 0.75 | % | ||||||||||||||||
Total deposits | 909,455 | 1,169 | 0.51 | % | 866,204 | 754 | 0.35 | % | ||||||||||||||||
Other borrowed funds | 71,266 | 292 | 1.64 | % | 94,504 | 274 | 1.16 | % | ||||||||||||||||
Total Interest-bearing liabilities | 980,721 | 1,461 | 0.60 | % | 960,708 | 1,028 | 0.43 | % | ||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||
Demand deposits | 200,934 | 188,419 | ||||||||||||||||||||||
Other liabilities | 7,132 | 8,710 | ||||||||||||||||||||||
Stockholders' equity | 172,976 | 170,699 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,361,763 | $ | 1,328,536 | ||||||||||||||||||||
Net interest income | $ | 10,804 | 3.29 | % | $ | 10,765 | 3.38 | % | ||||||||||||||||
Spread Analysis | ||||||||||||||||||||||||
Interest income/average assets | $ | 12,265 | 3.60 | % | $ | 11,793 | 3.55 | % | ||||||||||||||||
Interest expense/average assets | $ | 1,461 | 0.43 | % | $ | 1,028 | 0.31 | % | ||||||||||||||||
Net interest income/average assets | $ | 10,804 | 3.17 | % | $ | 10,765 | 3.24 | % |
AVERAGE BALANCE SHEETS AND INTEREST RATES |
Three Months Ended March 31, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
NOW, savings accounts and money markets | $ | 786,677 | $ | 1,517 | 0.77 | % | $ | 721,246 | $ | 830 | 0.46 | % | ||||||||||||
Time deposits | 213,970 | 842 | 1.57 | % | 195,073 | 531 | 1.09 | % | ||||||||||||||||
Total deposits | 1,000,647 | 2,359 | 0.94 | % | 916,319 | 1,362 | 0.59 | % | ||||||||||||||||
Other borrowed funds | 43,460 | 199 | 1.83 | % | 59,626 | 248 | 1.67 | % | ||||||||||||||||
Total Interest-bearing liabilities | 1,044,107 | 2,558 | 0.98 | % | 975,945 | 1,611 | 0.66 | % | ||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||
Demand deposits | 220,155 | 206,726 | ||||||||||||||||||||||
Other liabilities | 7,863 | 8,423 | ||||||||||||||||||||||
Stockholders' equity | 174,290 | 169,049 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,446,415 | $ | 1,360,143 | ||||||||||||||||||||
Net interest income | $ | 11,263 | 3.23 | % | $ | 10,502 | 3.19 | % | ||||||||||||||||
Spread Analysis | ||||||||||||||||||||||||
Interest income/average assets | $ | 13,821 | 3.82 | % | $ | 12,113 | 3.56 | % | ||||||||||||||||
Interest expense/average assets | $ | 2,558 | 0.71 | % | $ | 1,611 | 0.47 | % | ||||||||||||||||
Net interest income/average assets | $ | 11,263 | 3.11 | % | $ | 10,502 | 3.09 | % |
Net Interest Income
For the three months ended September 30, 2017March 31, 2019 and 2016,2018, the Company's net interest margin adjusted for tax exempt income was 3.29%3.23% and 3.38%3.19%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, 2017March 31, 2019 totaled $10,152,000$10,970,000 compared to $10,050,000$10,186,000 for the three months ended September 30, 2016.March 31, 2018.
For the three months ended September 30, 2017,March 31, 2019, interest income increased $535,000,$1,731,000, or 5%15%, when compared to the same period in 2016.2018. The increase from 20162018 was primarily attributable to higher average balanceincreased loan volume and rates, offset in part by recognition of loans.nonaccrual interest income in 2018. The higher average balances of loans wereincrease in loan volume was due primarily to the Acquisition and a favorable economic conditionslending environment in our market areas.areas since March 31, 2018. Nonaccrual interest income recognized in the three months ended March 31, 2019 was $52,000 as compared to $282,000 for the same period in 2018. Loan interest rates increased in conjunction with general market interest rates, as the Federal Reserve Bank increased short term interest rate targets by 1.00% since March 31, 2018.
Interest expense increased $433,000,$947,000, or 42%59%, for the three months ended September 30, 2017March 31, 2019 when compared to the same period in 2016.2018. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to market interest rates and competitive pressures.
Provision for Loan Losses
The Company’sCompany’s provision for loan losses was $57,000$98,000 and $235,000$29,000 for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The decrease in the provision for loan losses was due primarily to an increase in specific reserves for one loan in 2016. Net loan charge-offs (recoveries) were $105,000$(30,000) and $(81,000)$27,000 for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The increase net charge-offs related primarily to one commercial operating customer relationship. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy remains challenged as athe result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.prices and potential tariff concerns on Iowa exports.
Noninterest Income and Expense
Noninterest income decreased $144,000 for the three months ended September 30, 2017 compared to the same period in 2016. The decrease in noninterest income is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower gains on the sale of loans, offset in part by a 9% increase in wealth management income. The increase in wealth management income is primarily due to an revenue increases associated with an acquisition and higher revenues related to increases in assets under management, offset in part by lower one time estate fees. Exclusive of realized securities gains, noninterest income was 6% lower in the third quarter of 2017 compared to the same period in 2016.
Noninterest expense increased $184,000 or 3% for the three months ended September 30, 2017 compared to the same period in 2016 primarily as a result of lower other real estate owned income and higher occupancy costs. The decrease in other real estate income was due to the continuing lower levels of other real estate owned. The higher occupancy costs were primarily related to an increase in property tax expense. The efficiency ratio was 52.42% for the third quarter of 2017 as compared to 50.71% in 2016.
Income Taxes
The provision for income taxes expense for the three months ended September 30, 2017 and 2016 was $1,730,000 and $1,903,000, respectively, representing an effective tax rate of 31% and 33%, respectively. The lower effective tax rate than the expected tax rate of 35% for both periods is primarily due to tax-exempt interest income. The initial recording of a valuation allowance on a deferred tax asset resulted in a higher effective tax rate in 2016.
Income Statement Review for the Nine Months ended September 30, 2017 and 2016
The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 2017 and 2016:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.
AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans 1 | ||||||||||||||||||||||||
Commercial | $ | 77,471 | $ | 2,613 | 4.50 | % | $ | 94,121 | $ | 3,192 | 4.52 | % | ||||||||||||
Agricultural | 69,093 | 2,703 | 5.22 | % | 75,211 | 2,754 | 4.88 | % | ||||||||||||||||
Real estate | 612,845 | 19,620 | 4.27 | % | 528,179 | 17,595 | 4.44 | % | ||||||||||||||||
Consumer and other | 11,121 | 411 | 4.92 | % | 21,897 | 584 | 3.56 | % | ||||||||||||||||
Total loans (including fees) | 770,530 | 25,347 | 4.39 | % | 719,408 | 24,125 | 4.47 | % | ||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 271,913 | 4,637 | 2.27 | % | 262,604 | 4,393 | 2.23 | % | ||||||||||||||||
Tax-exempt 2 | 241,160 | 5,875 | 3.25 | % | 253,688 | 6,335 | 3.33 | % | ||||||||||||||||
Total investment securities | 513,073 | 10,512 | 2.73 | % | 516,292 | 10,728 | 2.77 | % | ||||||||||||||||
Interest bearing deposits with banks and federal funds sold | 36,633 | 365 | 1.33 | % | 34,930 | 297 | 1.13 | % | ||||||||||||||||
Total interest-earning assets | 1,320,236 | $ | 36,224 | 3.66 | % | 1,270,630 | $ | 35,150 | 3.69 | % | ||||||||||||||
Noninterest-earning assets | 49,268 | 54,989 | ||||||||||||||||||||||
TOTAL ASSETS | $ | 1,369,504 | $ | 1,325,619 |
1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%.
AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
NOW, savings accounts and money markets | $ | 717,946 | $ | 1,819 | 0.34 | % | $ | 663,891 | $ | 965 | 0.19 | % | ||||||||||||
Time deposits > $100,000 | 82,956 | 671 | 1.08 | % | 86,632 | 590 | 0.91 | % | ||||||||||||||||
Time deposits < $100,000 | 115,646 | 714 | 0.82 | % | 125,745 | 704 | 0.75 | % | ||||||||||||||||
Total deposits | 916,548 | 3,204 | 0.47 | % | 876,268 | 2,259 | 0.34 | % | ||||||||||||||||
Other borrowed funds | 75,662 | 863 | 1.52 | % | 84,261 | 796 | 1.26 | % | ||||||||||||||||
Total Interest-bearing liabilities | 992,210 | 4,067 | 0.55 | % | 960,529 | 3,055 | 0.42 | % | ||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||
Demand deposits | 200,020 | 190,176 | ||||||||||||||||||||||
Other liabilities | 7,319 | 7,606 | ||||||||||||||||||||||
Stockholders' equity | 169,955 | 167,308 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,369,504 | $ | 1,325,619 | ||||||||||||||||||||
Net interest income | $ | 32,157 | 3.25 | % | $ | 32,095 | 3.37 | % | ||||||||||||||||
Spread Analysis | ||||||||||||||||||||||||
Interest income/average assets | $ | 36,224 | 3.53 | % | $ | 35,150 | 3.54 | % | ||||||||||||||||
Interest expense/average assets | $ | 4,067 | 0.40 | % | $ | 3,055 | 0.31 | % | ||||||||||||||||
Net interest income/average assets | $ | 32,157 | 3.13 | % | $ | 32,095 | 3.23 | % |
Net Interest Income
For the nine months ended September 30, 2017 and 2016, the Company's net interest margin adjusted for tax exempt income was 3.25% and 3.37%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2017 totaled $30,100,000 compared to $29,877,000 for the nine months ended September 30, 2016.
For the nine months ended September 30, 2017, interest income increased $1,235,000, or 4%, when compared to the same period in 2016. The increase from 2016 was primarily attributable to higher average balance of loans, offset in part by lower yields on loans. The higher average balances of loans were due primarily to favorable economic conditions in our market areas. The lower yields on loans were due primarily to competitive pressures.
Interest expense increased $1,012,000, or 33%, for the nine months ended September 30, 2017 when compared to the same period in 2016. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to competitive pressures.
Provision for Loan Losses
The Company’s provision for loan losses was $1,222,000 and $441,000 for the nine months ended September 30, 2017 and 2016, respectively. The increase in the provision for loan losses was due primarily to the increase in the specific reserve for one commercial credit and growth in the loan portfolio. Net loan charge-offs (recoveries) were $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The increase in the net loan charge-offs were related primarily to commercial operating loans with construction contractors. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.
Noninterest Income and Expense
Noninterest income decreased $63,000increased $162,000 for the ninethree months ended September 30, 2017March 31, 2019 compared to the same period in 2016.2018. The decreaseincrease in noninterest income is primarily due to decreases in gain on sale of loansthe Acquisition and service fees, offset in part by an increase in security gains and other noninteresthigher wealth management income. The decrease in the gain on the sale of loans is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower revenue. The increase in other noninterest income is primarily due to the collection of $73,000 on a court judgement previously deemed uncollectible by First Bank prior to the Company’s acquisition in 2014. Exclusive of realized securities gains, noninterestwealth management income was 5% lowerprimarily related to growth in the assets under management, fueled by a growing equity market and new account relationships.
Noninterest expense increased $592,000 or 9% for the ninethree months ended September 30, 2017March 31, 2019 compared to the same period in 2016.
Noninterest expense increased $504,000 or 3% for the nine months ended September 30, 2017 compared to the same period in 20162018 primarily as a result of the Acquisition. Salaries and benefits was the largest component of the increase in noninterest expense which also includes normal salary and employee benefit increases, and higher data processing costs. Data processing increases were dueoffset in part by a one-time $1,000 bonus paid to increasing technology costs.full-time employees in 2018. The efficiency ratio was 53.16%57.8% for the nine months ended September 30, 2017first quarter of 2019 as compared to 51.99%57.4% in same period in 2016.2018.
Income Taxes
The provision for income taxes expense for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 was $4,662,000$1,104,000 and $5,087,000,$1,020,000, respectively, representing an effective tax rate of 30%21% and 30%20%, respectively. The lower than expected effective tax rate than the expected income tax rate of 35% for both periods is primarily due to tax-exempt interest income.
Balance Sheet Review
As of September 30, 2017,March 31, 2019, total assets were $1,364,940,000,$1,472,317,000, a $1,513,000 decrease$16,630,000 increase compared to December 31, 2016.2018. The decreaseincrease in assets, primarily interest bearing deposits, was duefunded primarily to a decrease in cash and due from banks and securities available for sale, offset by an increase in loans.deposits.
Investment Portfolio
The investmentinvestment portfolio totaled $506,610,000$455,554,000 as of September 30, 2017,March 31, 2019, a decrease of $9,469,000$3,418,000 from the December 31, 20162018 balance of $516,080,000.$458,971,000. The decrease in securities available-for-sale is primarily due to payments and maturities on the entire portfolio, offset in part by increases in the unrealized gain on the investment portfolio was primarily due to sales, calls and maturitiesas market interest rates caused an increase in the fair value of state and political subdivision bonds.the investment portfolio.
On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, 2017,March 31, 2019, gross unrealized losses of $783,000,$1,802,000, are considered to be temporary in nature due to the interest rate environment of 20172019 and other general economic factors. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.
At September 30, 2017,March 31, 2019, the Company’s investment securities portfolio included securities issued by 266249 government municipalities and agencies located within 2417 states with a fair value of $243.4$214.6 million. At December 31, 2016,2018, the Company’s investment securities portfolio included securities issued by 286263 government municipalities and agencies located within 2516 states with a fair value of $264.4$216.0 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of September 30, 2017March 31, 2019 was $4.4$3.9 million (approximately 2.0% of the fair value of the governmental municipalities and agencies) represented by the Dubuque,West Des Moines, Iowa Community School District to be repaid by sales tax revenues and property taxes.
The Company’sCompany’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’sCompany’s investment securities portfolios as of September 30, 2017March 31, 2019 and December 31, 20162018 identifying the state in which the issuing government municipality or agency operates. (Dollars in thousands)
2017 | 2016 | 2019 | 2018 | |||||||||||||||||||||||||||||
Estimated | Estimated | Estimated | Estimated | |||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||||||||||
General Obligation bonds: | ||||||||||||||||||||||||||||||||
Iowa | $ | 60,493 | $ | 60,732 | $ | 75,142 | $ | 74,408 | $ | 62,217 | $ | 62,304 | $ | 59,935 | $ | 59,481 | ||||||||||||||||
Texas | 12,188 | 12,359 | 11,091 | 11,065 | 10,803 | 10,880 | 11,822 | 11,803 | ||||||||||||||||||||||||
Pennsylvania | 8,720 | 8,795 | 8,728 | 8,654 | 9,171 | 9,235 | 9,167 | 9,144 | ||||||||||||||||||||||||
Washington | 6,640 | 6,609 | 7,221 | 6,957 | 6,878 | 6,842 | 6,905 | 6,762 | ||||||||||||||||||||||||
Other (2017: 16 states; 2016: 17 states) | 24,150 | 24,601 | 28,064 | 28,258 | ||||||||||||||||||||||||||||
Other (2019: 12 states; 2018: 12 states) | 16,966 | 17,118 | 17,138 | 17,198 | ||||||||||||||||||||||||||||
Total general obligation bonds | $ | 112,191 | $ | 113,096 | $ | 130,246 | $ | 129,342 | $ | 106,035 | $ | 106,379 | $ | 104,967 | $ | 104,388 | ||||||||||||||||
Revenue bonds: | ||||||||||||||||||||||||||||||||
Iowa | $ | 118,886 | $ | 120,175 | $ | 126,750 | $ | 126,964 | $ | 101,017 | $ | 100,873 | $ | 104,589 | $ | 103,925 | ||||||||||||||||
Other (2017: 9 states; 2016: 10 states) | 10,073 | 10,167 | 8,208 | 8,142 | ||||||||||||||||||||||||||||
Other (2019: 6 states; 2018: 7 states) | 7,281 | 7,306 | 7,691 | 7,642 | ||||||||||||||||||||||||||||
Total revenue bonds | $ | 128,959 | $ | 130,342 | $ | 134,958 | $ | 135,106 | $ | 108,298 | $ | 108,179 | $ | 112,280 | $ | 111,567 | ||||||||||||||||
Total obligations of states and political subdivisions | $ | 241,150 | $ | 243,438 | $ | 265,204 | $ | 264,448 | $ | 214,333 | $ | 214,558 | $ | 217,247 | $ | 215,955 |
As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 5 revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table. (in thousands)
2017 | 2016 | 2019 | 2018 | |||||||||||||||||||||||||||||
Estimated | Estimated | Estimated | Estimated | |||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||
Revenue bonds by revenue source | ||||||||||||||||||||||||||||||||
Sales tax | $ | 72,894 | $ | 73,917 | $ | 77,586 | $ | 78,085 | $ | 58,482 | $ | 58,648 | $ | 60,422 | $ | 60,322 | ||||||||||||||||
Water | 14,139 | 14,218 | 11,283 | 11,296 | 13,856 | 13,767 | 13,863 | 13,644 | ||||||||||||||||||||||||
College and universities, primarily dormitory revenues | 10,457 | 10,538 | 14,105 | 13,907 | 7,610 | 7,593 | 8,183 | 8,139 | ||||||||||||||||||||||||
Leases | 9,062 | 9,098 | 9,106 | 8,960 | 9,112 | 9,080 | 8,958 | 8,861 | ||||||||||||||||||||||||
Electric | 8,428 | 8,545 | 8,446 | 8,459 | ||||||||||||||||||||||||||||
Other | 13,979 | 14,026 | 14,432 | 14,399 | 19,238 | 19,091 | 20,854 | 20,601 | ||||||||||||||||||||||||
Total revenue bonds by revenue source | $ | 128,959 | $ | 130,342 | $ | 134,958 | $ | 135,106 | $ | 108,298 | $ | 108,179 | $ | 112,280 | $ | 111,567 |
Loan Portfolio
The loanloan portfolio, net of the allowance for loan losses, totaled $764,229,000, $768,208,000$886,557,000, $890,461,000 and $752,182,000$772,495,000 as of September 30, 2017, June 30, 2017 andMarch 31, 2019, December 31, 2016,2018 and March 31, 2018, respectively. Loan demand has moderated since year end. The increase in the loan portfolio since DecemberMarch 31, 20162018 is primarily due to steady loan demand, in the Ames and Des Moines markets. Loan demand has softened in the third quarter of 2017.Acquisition.
Deposits
Deposits totaled $1,114,538,000, $1,126,771,000$1,252,514,000, $1,221,084,000 and $1,109,409,000$1,170,424,000 as of September 30, 2017, June 30, 2017 andMarch 31, 2019, December 31, 2016,2018 and March 31, 2018, respectively. The increase in deposits since December 31, 20162018 was primarily due to increasespublic fund balances in public funds NOW account balances.accounts. The decreaseincrease in deposits since June 30, 2017 wasMarch 31, 2018 is primarily due to decreases in retail NOW and public funds money market account balances.the Acquisition.
SecuritiesSecurities Sold Under Agreements to Repurchase
SecuritiesSecurities sold under agreements to repurchase totaled $39,001,000$32,397,000 as of September 30, 2017,March 31, 2019, a decrease of $19,336,000,$8,278,000, or 33%20%, from the December 31, 20162018 balance of $58,337,000.$40,674,000. The decrease was due primarily to a decrease in primarily due to withdrawals from three commercial accounts.the balances of one existing customer.
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2016.2018.
Asset Quality Review and Credit Risk Management
The Company’sCompany’s credit risk is historically centered in the loan portfolio, which on September 30, 2017March 31, 2019 totaled $764,229,000$886,557,000 compared to $752,182,000$890,461,000 as of December 31, 2016.2018. Net loans comprise 56%60% of total assets as of September 30, 2017.March 31, 2019. The object in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of a transactionan 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 0.62%0.38% at September 30, 2017,March 31, 2019, as compared to 0.67%0.38% at December 31, 20162018 and 0.40%0.55% at September 30, 2016.March 31, 2018. The Company’s level of problem loans as a percentage of total loans at September 30, 2017March 31, 2019 of 0.62%0.38% is lower than the Company’sIowa State Average peer group (339 bank holding companies with assets of $1 billion to $3 billion) of 0.72%FDIC insured institutions as of June 30, 2017.December 31, 2018, of 0.58%.
Impaired
Impaired loans, net of specific reserves, totaled $3,907,000$2,980,000 as of September 30, 2017March 31, 2019 and have decreased $450,000increased $247,000 as compared to the impaired loans of $4,357,000$2,733,000 as of December 31, 2016.2018.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.
The Company had TDRs of $3,098,000$2,662,000 as of September 30, 2017,March 31, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000$2,350,000 as of December 31, 2016,2018, all of which were included in impaired and nonaccrual loans.
TDRsTDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.
For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. There were no charge-offs related to TDRs for the three months ended March 31, 2019 and 2018. No additional specific reserves were provided for the three months ended March 31, 2019. A $530,000$12,000 specific reserve was established in the ninethree months ended September 30, 2017 on a TDR loan. The Company had $257,000 of net charge-offs related to TDRs for the nine months ended September 30, 2017 and none for the same period in 2016.March 31, 2018.
Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there iscontinues to be a strong reason that the credit should not be placed on non-accrual. As of September 30, 2017,March 31, 2019, non-accrual loans totaled $4,726,000$3,339,000 and there was one loan in the amountwere $50,000 of $81,000loans past due 90 days and still accruing. This compares to non-accrual loans of $5,077,000$3,234,000 and loans past due 90 days and still accruing totaled $22,000$150,000 as of December 31, 2016.2018. Other real estate owned totaled $385,000$565,000 and $830,000 as of September 30, 2017March 31, 2019 and $546,000 as of December 31, 2016.2018, respectively.
The agricultural real estate and agricultural operating loan portfolio classifications remain inelevated as a weakened position.result of lower grain prices. The watch and special mention loans in these categories totaled $44,046,000$51,422,000 as of September 30, 2017March 31, 2019 as compared to $38,492,000$47,808,000 as of December 31, 2016.2018. The substandard loans in these categories totaled $2,582,000$10,633,000 as of September 30, 2017March 31, 2019 as compared to $2,399,000$9,592,000 as of December 31, 2016.2018. The increase in these categories is primarily due toIowa agricultural economy remains challenged as the impact on agricultural loansresult of the current low grain prices mitigated by indications of favorable yields in 2017.and tariff concerns on Iowa exports.
The allowance for loan losses as a percentage of outstanding loans as of September 30, 2017March 31, 2019 was 1.44%1.31%, as compared to 1.38%1.30% at December 31, 2016.2018. The allowance for loan losses totaled $11,140,000$11,812,000 and $10,507,000$11,684,000 as of September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively. Net charge-offs (recoveries) of loans totaled $589,000$(30,000) and $(22,000)$27,000 for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively.
The allowance for loan losses is management’smanagement’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans.
Liquidity and Capital Resources
Liquidity management is the process by which the Company, through its Banks’Banks’ Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of securities available-for-sale; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, FHLB advances and other capital market sources.
As of September 30, 2017,March 31, 2019, 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 discussiondiscussion will cover the following topics:
● | Review of the Company’s Current Liquidity Sources |
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Review of the Company’s Current Liquidity Sources
Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of September 30, 2017 and December 31, 2016 totaled $58,574,000 and $61,215,000, respectively, and provide an adequate level of liquidity given current economic conditions.
Other sources of liquidity available to the Banks as of September 30, 2017 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $183,824,000, with $19,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,571,000, with no outstanding federal fund purchase balances as of September 30, 2017. The Company had securities sold under agreements to repurchase totaling $39,001,000 and term repurchase agreements of $13,000,000 as of September 30, 2017.
Total investments as of September 30, 2017 were $506,610,000 compared to $516,080,000 as of December 31, 2016. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of September 30, 2017.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.
Review of Statements of Cash Flows
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| Company Only Cash Flows |
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| Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs |
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| Capital Resources
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Review of the Company’s Current Liquidity Sources
Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of March 31, 2019 and December 31, 2018 totaled $82,871,000 and $56,442,000, respectively, and provide an adequate level of liquidity given current economic conditions.
Other sources of liquidity available to the Banks as of March 31, 2019 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $197,066,000, with $2,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,739,000, with no outstanding federal fund purchase balances as of March 31, 2019. The Company had securities sold under agreements to repurchase totaling $32,397,000 as of March 31, 2019.
Total investments as of March 31, 2019 were $455,554,000 compared to $458,971,000 as of December 31, 2018. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of March 31, 2019.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.
Review of Statements of Cash Flows
Net cash provided by operating activities for the three months ended March 31, 2019 totaled $6,284,000 compared to $6,353,000 for the three months ended March 31, 2018. The cash flow from operations in 2019 is comparable to the same period in 2018.
Net cash used in investing activities for the three months ended March 31, 2019 was $19,679,000 compared to $25,859,000 for the three months ended March 31, 2018. The decrease of $6,180,000 in cash used in investing activities was primarily due to a lower level of purchases of investments; greater maturities and calls of investments; and a decrease in loan balances; offset in part by higher balances in interest bearing deposits in financial institutions.
Net cash provided by financing activities for the three months ended March 31, 2019 totaled $7,144,000 compared to $15,594,000 for the three months ended March 31, 2018. The decrease in cash provided by financing activities was $8,450,000. The decrease was primarily due to smaller increases in deposit balances and larger decreases in repurchase balances; offset in part by a lessor amount of repayments on FHLB advances. As of March 31, 2019, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.
Company Only Cash Flows
The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $3,198,000 and $2,570,000 for the three months ended March 31, 2019 and 2018, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.24 per share in 2019 from $0.23 per share in 2018.
The Company, on an unconsolidated basis, has interest bearing deposits totaling $14,671,000 as of March 31, 2019 that are presently available to provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs
No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of March 31, 2019 that are of concern to management.
Capital Resources
The Company’s total stockholders’ equity as of March 31, 2019 totaled $177,777,000 and was $4,912,000 higher than the $172,865,000 recorded as of December 31, 2018. The increase in stockholders’ equity was primarily due to net income and an increase in other comprehensive income, offset in part by dividends declared. The increase in other comprehensive income is created by lower market interest rates compared to December 31, 2018, which resulted in higher fair values in the securities available-for-sale portfolio. At March 31, 2019 and December 31, 2018, stockholders’ equity as a percentage of total assets was 12.07% and 11.88%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of March 31, 2019.
Forward-Looking Statements and Business Risks
The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: economic conditions, particularly in the concentrated geographic area in which the Company and its affiliate banks operate; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements and Business Risks” in the Company’s Annual Report. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Quantitative and Qualitative Disclosures About Market Risk |
The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2019 changed significantly when compared to 2018.
Forward-Looking Statements and Business Risks
The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: economic conditions, particularly in the concentrated geographic area in which the Company and its affiliate banks operate; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements and Business Risks” in the Company’s Annual Report. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2017 changed significantly when compared to 2016.
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.
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.
OTHER INFORMATION |
Legal Proceedings | |
Not applicable |
In November, 2018, 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 March 31, 2019, there were 31,909 shares remaining to be purchased under the plan. The following table provides information with respect to purchase made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended March 31, 2019.
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