UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172020
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission File Number 0-32637
AMES NATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
(State of Incorporation) | 42-1039071 |
| (I. R. S. Employer |
| Identification Number) |
405 FIFTH STREETFifth Street
AMES, IOWAAmes, Iowa 50010
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (515) 232-6251
Not ApplicableSecurities registered pursuant to Section 12(b) of the Act:
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock | ATLO | NASDAQ |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 ☐ Accelerated filer X (Do not check if a smaller reporting company)☒ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected 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 October 30, 2020, there were 9,122,747 shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.par value $2, outstanding.
| |
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INDEX
Page | |||
| |||
Item 1. | 3 | ||
Consolidated Balance Sheets at September 30, | 3 | ||
4 | |||
5 | |||
6 | |||
Consolidated Statements of Cash Flows for the nine months ended September 30, | 7 | ||
9 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 30 | |
Item 3. | 52 | ||
Item 4. | 53 | ||
| |||
Item 1. | 53 | ||
Item 1.A. | 53 | ||
Item 2. | 54 | ||
Item 3. | 55 | ||
Item 4. | 55 | ||
Item 5. | 55 | ||
Item 6. | 55 | ||
Signatures |
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, | December 31, | |||||||
ASSETS | 2017 | 2016 | ||||||
Cash and due from banks | $ | 23,087,890 | $ | 29,478,068 | ||||
Interest bearing deposits in financial institutions | 35,486,284 | 31,737,259 | ||||||
Securities available-for-sale | 506,610,435 | 516,079,506 | ||||||
Loans receivable, net | 764,228,850 | 752,181,730 | ||||||
Loans held for sale | 279,800 | 242,618 | ||||||
Bank premises and equipment, net | 15,595,418 | 16,049,379 | ||||||
Accrued income receivable | 8,423,038 | 7,768,689 | ||||||
Other real estate owned | 385,509 | 545,757 | ||||||
Deferred income taxes | 1,817,543 | 3,485,689 | ||||||
Intangible assets, net | 1,133,736 | 1,352,812 | ||||||
Goodwill | 6,732,216 | 6,732,216 | ||||||
Other assets | 1,159,533 | 799,306 | ||||||
Total assets | $ | 1,364,940,252 | $ | 1,366,453,029 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Demand, noninterest bearing | $ | 202,368,921 | $ | 212,074,792 | ||||
NOW accounts | 337,062,117 | 310,427,812 | ||||||
Savings and money market | 380,454,650 | 381,852,433 | ||||||
Time, $250,000 and over | 36,776,010 | 39,031,663 | ||||||
Other time | 157,876,361 | 166,022,165 | ||||||
Total deposits | 1,114,538,059 | 1,109,408,865 | ||||||
Securities sold under agreements to repurchase | 39,001,050 | 58,337,367 | ||||||
Federal Home Loan Bank (FHLB) advances | 19,000,000 | 14,500,000 | ||||||
Other borrowings | 13,000,000 | 13,000,000 | ||||||
Dividends payable | 2,048,401 | 1,955,292 | ||||||
Accrued expenses and other liabilities | 4,023,858 | 4,146,262 | ||||||
Total liabilities | 1,191,611,368 | 1,201,347,786 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,310,913 shares as of September 30, 2017 and December 31, 2016 | 18,621,826 | 18,621,826 | ||||||
Additional paid-in capital | 20,878,728 | 20,878,728 | ||||||
Retained earnings | 131,047,038 | 126,181,376 | ||||||
Accumulated other comprehensive income (loss) - net unrealized gain (loss) on securities available-for-sale | 2,781,292 | (576,687 | ) | |||||
Total stockholders' equity | 173,328,884 | 165,105,243 | ||||||
Total liabilities and stockholders' equity | $ | 1,364,940,252 | $ | 1,366,453,029 |
CONSOLIDATED BALANCE SHEETS |
(unaudited) |
September 30, | December 31, | |||||||
ASSETS | 2020 | 2019 | ||||||
Cash and due from banks | $ | 22,750,013 | $ | 34,616,880 | ||||
Interest-bearing deposits in financial institutions and federal funds sold | 119,643,061 | 108,947,624 | ||||||
Securities available-for-sale | 548,817,733 | 479,843,448 | ||||||
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost | 3,148,191 | 3,138,900 | ||||||
Loans receivable, net | 1,159,063,052 | 1,048,147,496 | ||||||
Loans held for sale | 2,797,141 | 2,776,785 | ||||||
Bank premises and equipment, net | 17,295,829 | 17,810,605 | ||||||
Accrued income receivable | 12,172,766 | 11,788,409 | ||||||
Other real estate owned | 620,909 | 4,003,684 | ||||||
Bank-owned life insurance | 2,897,480 | 2,842,713 | ||||||
Deferred income taxes, net | 0 | 1,151,016 | ||||||
Intangible assets, net | 3,309,239 | 3,959,260 | ||||||
Goodwill | 12,424,434 | 12,114,559 | ||||||
Other assets | 5,455,601 | 6,041,126 | ||||||
Total assets | $ | 1,910,395,449 | $ | 1,737,182,505 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Noninterest-bearing checking | $ | 337,487,550 | $ | 267,441,988 | ||||
Interest-bearing checking | 504,329,496 | 461,857,728 | ||||||
Savings and money market | 548,918,915 | 481,642,221 | ||||||
Time, $250,000 and over | 66,910,762 | 74,206,421 | ||||||
Other time | 202,526,378 | 208,026,740 | ||||||
Total deposits | 1,660,173,101 | 1,493,175,098 | ||||||
Securities sold under agreements to repurchase | 30,492,436 | 42,033,570 | ||||||
FHLB advances | 3,000,000 | 5,000,000 | ||||||
Dividends payable | 0 | 2,213,459 | ||||||
Deferred income taxes, net | 1,697,985 | 0 | ||||||
Accrued expenses and other liabilities | 8,995,285 | 7,180,906 | ||||||
Total liabilities | 1,704,358,807 | 1,549,603,033 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,122,747 and 9,222,747 as of September 30, 2020 and December 31, 2019, respectively | 18,245,494 | 18,445,494 | ||||||
Additional paid-in capital | 17,001,736 | 18,794,141 | ||||||
Retained earnings | 155,300,906 | 146,225,085 | ||||||
Accumulated other comprehensive income | 15,488,506 | 4,114,752 | ||||||
Total stockholders' equity | 206,036,642 | 187,579,472 | ||||||
Total liabilities and stockholders' equity | $ | 1,910,395,449 | $ | 1,737,182,505 |
See Notes to Consolidated Financial Statements.
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest income: | ||||||||||||||||
Loans, including fees | $ | 8,729,702 | $ | 8,236,401 | $ | 25,345,116 | $ | 24,124,973 | ||||||||
Securities: | ||||||||||||||||
Taxable | 1,557,872 | 1,425,366 | 4,637,498 | 4,392,602 | ||||||||||||
Tax-exempt | 1,210,510 | 1,329,071 | 3,819,380 | 4,117,893 | ||||||||||||
Interest bearing deposits and federal funds sold | 114,820 | 86,869 | 365,346 | 296,925 | ||||||||||||
Total interest income | 11,612,904 | 11,077,707 | 34,167,340 | 32,932,393 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 1,169,296 | 753,642 | 3,204,115 | 2,259,140 | ||||||||||||
Other borrowed funds | 292,054 | 274,297 | 862,798 | 796,006 | ||||||||||||
Total interest expense | 1,461,350 | 1,027,939 | 4,066,913 | 3,055,146 | ||||||||||||
Net interest income | 10,151,554 | 10,049,768 | 30,100,427 | 29,877,247 | ||||||||||||
Provision for loan losses | 57,277 | 234,703 | 1,221,620 | 440,787 | ||||||||||||
Net interest income after provision for loan losses | 10,094,277 | 9,815,065 | 28,878,807 | 29,436,460 | ||||||||||||
Noninterest income: | ||||||||||||||||
Wealth management income | 747,634 | 684,908 | 2,180,941 | 2,210,229 | ||||||||||||
Service fees | 401,237 | 426,711 | 1,126,122 | 1,228,416 | ||||||||||||
Securities gains, net | 37,881 | 64,917 | 498,560 | 296,110 | ||||||||||||
Gain on sale of loans held for sale | 179,553 | 339,501 | 544,095 | 773,512 | ||||||||||||
Merchant and card fees | 348,847 | 350,488 | 1,017,362 | 1,051,378 | ||||||||||||
Other noninterest income | 144,953 | 137,153 | 598,791 | 469,138 | ||||||||||||
Total noninterest income | 1,860,105 | 2,003,678 | 5,965,871 | 6,028,783 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 4,026,932 | 3,977,495 | 12,058,903 | 11,883,696 | ||||||||||||
Data processing | 807,419 | 824,429 | 2,481,331 | 2,366,293 | ||||||||||||
Occupancy expenses, net | 527,071 | 449,775 | 1,546,657 | 1,461,201 | ||||||||||||
FDIC insurance assessments | 111,987 | 109,289 | 326,958 | 434,808 | ||||||||||||
Professional fees | 307,484 | 296,720 | 919,157 | 889,721 | ||||||||||||
Business development | 262,408 | 239,917 | 722,869 | 696,033 | ||||||||||||
Other real estate owned (income), net | (3,200 | ) | (91,173 | ) | (2,396 | ) | (87,564 | ) | ||||||||
Intangible asset amortization | 89,861 | 86,492 | 280,837 | 273,206 | ||||||||||||
Other operating expenses, net | 166,026 | 219,283 | 837,810 | 750,244 | ||||||||||||
Total noninterest expense | 6,295,988 | 6,112,227 | 19,172,126 | 18,667,638 | ||||||||||||
Income before income taxes | 5,658,394 | 5,706,516 | 15,672,552 | 16,797,605 | ||||||||||||
Provision for income taxes | 1,729,987 | 1,902,636 | 4,661,687 | 5,087,253 | ||||||||||||
Net income | $ | 3,928,407 | $ | 3,803,880 | $ | 11,010,865 | $ | 11,710,352 | ||||||||
Basic and diluted earnings per share | $ | 0.42 | $ | 0.41 | $ | 1.18 | $ | 1.26 | ||||||||
Dividends declared per share | $ | 0.22 | $ | 0.21 | $ | 0.66 | $ | 0.63 |
CONSOLIDATED STATEMENTS OF INCOME |
(unaudited) |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 12,865,021 | $ | 10,513,426 | $ | 38,021,904 | $ | 32,022,997 | ||||||||
Securities: | ||||||||||||||||
Taxable | 1,986,904 | 1,671,572 | 5,725,476 | 4,715,137 | ||||||||||||
Tax-exempt | 891,093 | 945,769 | 2,755,515 | 3,114,298 | ||||||||||||
Other interest and dividend income | 175,397 | 400,963 | 888,412 | 928,996 | ||||||||||||
Total interest income | 15,918,415 | 13,531,730 | 47,391,307 | 40,781,428 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 1,718,746 | 2,547,763 | 6,267,158 | 7,512,979 | ||||||||||||
Other borrowed funds | 39,787 | 170,082 | 238,314 | 553,930 | ||||||||||||
Total interest expense | 1,758,533 | 2,717,845 | 6,505,472 | 8,066,909 | ||||||||||||
Net interest income | 14,159,882 | 10,813,885 | 40,885,835 | 32,714,519 | ||||||||||||
Provision for loan losses | 541,844 | 378,789 | 4,424,475 | 545,203 | ||||||||||||
Net interest income after provision for loan losses | 13,618,038 | 10,435,096 | 36,461,360 | 32,169,316 | ||||||||||||
Noninterest income: | ||||||||||||||||
Wealth management income | 1,036,131 | 857,664 | 2,807,592 | 2,661,421 | ||||||||||||
Service fees | 380,620 | 400,919 | 1,126,857 | 1,158,348 | ||||||||||||
Securities gains, net | 0 | 15,141 | 429,925 | 17,031 | ||||||||||||
Gain on sale of loans held for sale | 646,589 | 289,033 | 1,486,047 | 685,790 | ||||||||||||
Merchant and card fees | 459,600 | 372,073 | 1,295,854 | 1,119,598 | ||||||||||||
Other noninterest income | 271,803 | 184,399 | 707,884 | 615,688 | ||||||||||||
Total noninterest income | 2,794,743 | 2,119,229 | 7,854,159 | 6,257,876 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 5,839,963 | 4,780,894 | 17,427,608 | 14,294,219 | ||||||||||||
Data processing | 1,209,973 | 1,085,951 | 3,737,426 | 2,849,396 | ||||||||||||
Occupancy expenses, net | 668,003 | 526,360 | 2,015,941 | 1,643,924 | ||||||||||||
FDIC insurance assessments | 135,859 | 1,698 | 185,716 | 193,593 | ||||||||||||
Professional fees | 407,118 | 386,339 | 1,148,597 | 1,158,168 | ||||||||||||
Business development | 307,386 | 310,786 | 753,075 | 827,561 | ||||||||||||
Intangible asset amortization | 215,575 | 124,243 | 650,021 | 427,221 | ||||||||||||
New market tax credit projects amortization | 145,395 | 0 | 436,166 | 0 | ||||||||||||
Other operating expenses, net | 361,280 | 259,048 | 1,085,562 | 755,971 | ||||||||||||
Total noninterest expense | 9,290,552 | 7,475,319 | 27,440,112 | 22,150,053 | ||||||||||||
Income before income taxes | 7,122,229 | 5,079,006 | 16,875,407 | 16,277,139 | ||||||||||||
Provision for income taxes | 1,450,750 | 1,037,845 | 3,221,750 | 3,380,950 | ||||||||||||
Net income | $ | 5,671,479 | $ | 4,041,161 | $ | 13,653,657 | $ | 12,896,189 | ||||||||
Basic and diluted earnings per share | $ | 0.62 | $ | 0.44 | $ | 1.49 | $ | 1.40 | ||||||||
Dividends declared per share | $ | 0.25 | $ | 0.24 | $ | 0.50 | $ | 0.72 |
See Notes to Consolidated Financial Statements.
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 3,928,407 | $ | 3,803,880 | $ | 11,010,865 | $ | 11,710,352 | ||||||||
Other comprehensive income (loss), before tax: | ||||||||||||||||
Unrealized gains (losses) on securities before tax: | ||||||||||||||||
Unrealized holding gains (losses) arising during the period | (270,853 | ) | (1,838,831 | ) | 5,828,684 | 6,077,365 | ||||||||||
Less: reclassification adjustment for gains realized in net income | 37,881 | 64,917 | 498,560 | 296,110 | ||||||||||||
Other comprehensive income (loss), before tax | (308,734 | ) | (1,903,748 | ) | 5,330,124 | 5,781,255 | ||||||||||
Tax effect related to other comprehensive income (loss) | 114,233 | 704,387 | (1,972,145 | ) | (2,139,064 | ) | ||||||||||
Other comprehensive income (loss), net of tax | (194,501 | ) | (1,199,361 | ) | 3,357,979 | 3,642,191 | ||||||||||
Comprehensive income | $ | 3,733,906 | $ | 2,604,519 | $ | 14,368,844 | $ | 15,352,543 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(unaudited) |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 5,671,479 | $ | 4,041,161 | $ | 13,653,657 | $ | 12,896,189 | ||||||||
Unrealized gains on securities before tax: | ||||||||||||||||
Unrealized holding gains arising during the period | 1,994,598 | 1,786,525 | 15,594,931 | 11,828,086 | ||||||||||||
Less: reclassification adjustment for gains realized in net income | 0 | 15,141 | 429,925 | 17,031 | ||||||||||||
Other comprehensive income, before tax | 1,994,598 | 1,771,384 | 15,165,006 | 11,811,055 | ||||||||||||
Tax effect related to other comprehensive income | (498,649 | ) | (442,846 | ) | (3,791,252 | ) | (2,952,764 | ) | ||||||||
Other comprehensive income, net of tax | 1,495,949 | 1,328,538 | 11,373,754 | 8,858,291 | ||||||||||||
Comprehensive income | $ | 7,167,428 | $ | 5,369,699 | $ | 25,027,411 | $ | 21,754,480 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
(unaudited) |
Three and Nine Months Ended September 30, 2020 and 2019 |
Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive Income, | Total Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Earnings | Net of Taxes | Equity | |||||||||||||||||||
Balance, June 30, 2019 | 9,232,122 | $ | 18,464,244 | $ | 19,019,767 | $ | 142,312,863 | $ | 3,454,662 | $ | 183,251,536 | |||||||||||||
Net income | - | 0 | 0 | 4,041,161 | 0 | 4,041,161 | ||||||||||||||||||
Other comprehensive income | - | 0 | 0 | 0 | 1,328,538 | 1,328,538 | ||||||||||||||||||
Retirement of stock | (9,375 | ) | (18,750 | ) | (225,626 | ) | 0 | 0 | (244,376 | ) | ||||||||||||||
Cash dividends declared, $0.24 per share | - | 0 | 0 | (2,213,459 | ) | 0 | (2,213,459 | ) | ||||||||||||||||
Balance, September 30, 2019 | 9,222,747 | $ | 18,445,494 | $ | 18,794,141 | $ | 144,140,565 | $ | 4,783,200 | $ | 186,163,400 | |||||||||||||
Balance, June 30, 2020 | 9,122,747 | $ | 18,245,494 | $ | 17,001,736 | $ | 151,910,115 | $ | 13,992,557 | $ | 201,149,902 | |||||||||||||
Net income | - | 0 | 0 | 5,671,479 | 0 | 5,671,479 | ||||||||||||||||||
Other comprehensive income | - | 0 | 0 | 0 | 1,495,949 | 1,495,949 | ||||||||||||||||||
Retirement of stock | - | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Cash dividends declared, $0.25 per share | - | 0 | 0 | (2,280,688 | ) | 0 | (2,280,688 | ) | ||||||||||||||||
Balance, September 30, 2020 | 9,122,747 | $ | 18,245,494 | $ | 17,001,736 | $ | 155,300,906 | $ | 15,488,506 | $ | 206,036,642 |
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
Nine Months Ended September 30, 2017 and 2016
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss), Net of Taxes | Total Stockholders' Equity | ||||||||||||||||
Balance, December 31, 2015 | $ | 18,621,826 | $ | 20,878,728 | $ | 118,267,767 | $ | 3,481,736 | $ | 161,250,057 | ||||||||||
Net income | - | - | 11,710,352 | - | 11,710,352 | |||||||||||||||
Other comprehensive income | - | - | - | 3,642,191 | 3,642,191 | |||||||||||||||
Cash dividends declared, $0.63 per share | - | - | (5,865,875 | ) | - | (5,865,875 | ) | |||||||||||||
Balance, September 30, 2016 | $ | 18,621,826 | $ | 20,878,728 | $ | 124,112,244 | $ | 7,123,927 | $ | 170,736,725 | ||||||||||
Balance, December 31, 2016 | $ | 18,621,826 | $ | 20,878,728 | $ | 126,181,376 | $ | (576,687 | ) | $ | 165,105,243 | |||||||||
Net income | - | - | 11,010,865 | - | 11,010,865 | |||||||||||||||
Other comprehensive income | - | - | - | 3,357,979 | 3,357,979 | |||||||||||||||
Cash dividends declared, $0.66 per share | - | - | (6,145,203 | ) | - | (6,145,203 | ) | |||||||||||||
Balance, September 30, 2017 | $ | 18,621,826 | $ | 20,878,728 | $ | 131,047,038 | $ | 2,781,292 | $ | 173,328,884 |
Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive Income (Loss), | Total Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Earnings | Net of Taxes | Equity | |||||||||||||||||||
Balance, December 31, 2018 | 9,293,305 | $ | 18,586,610 | $ | 20,461,724 | $ | 137,891,821 | $ | (4,075,091 | ) | $ | 172,865,064 | ||||||||||||
Net income | - | 0 | 0 | 12,896,189 | 0 | 12,896,189 | ||||||||||||||||||
Other comprehensive income | - | 0 | 0 | 0 | 8,858,291 | 8,858,291 | ||||||||||||||||||
Retirement of stock | (70,558 | ) | (141,116 | ) | (1,667,583 | ) | 0 | 0 | (1,808,699 | ) | ||||||||||||||
Cash dividends declared, $0.72 per share | - | 0 | 0 | (6,647,445 | ) | 0 | (6,647,445 | ) | ||||||||||||||||
Balance, September 30, 2019 | 9,222,747 | $ | 18,445,494 | $ | 18,794,141 | $ | 144,140,565 | $ | 4,783,200 | $ | 186,163,400 | |||||||||||||
Balance, December 31, 2019 | 9,222,747 | $ | 18,445,494 | $ | 18,794,141 | $ | 146,225,085 | $ | 4,114,752 | $ | 187,579,472 | |||||||||||||
Net income | - | 0 | 0 | 13,653,657 | 0 | 13,653,657 | ||||||||||||||||||
Other comprehensive income | - | 0 | 0 | 0 | 11,373,754 | 11,373,754 | ||||||||||||||||||
Retirement of stock | (100,000 | ) | (200,000 | ) | (1,792,405 | ) | (1,992,405 | ) | ||||||||||||||||
Cash dividends declared, $0.50 per share | - | 0 | 0 | (4,577,836 | ) | 0 | (4,577,836 | ) | ||||||||||||||||
Balance, September 30, 2020 | 9,122,747 | $ | 18,245,494 | $ | 17,001,736 | $ | 155,300,906 | $ | 15,488,506 | $ | 206,036,642 |
See Notes to Consolidated Financial Statements.
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, 2017 and 2016
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 11,010,865 | $ | 11,710,352 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,221,620 | 440,787 | ||||||
Provision for off-balance sheet commitments | 4,000 | 12,000 | ||||||
Amortization, net | 2,129,648 | 2,327,654 | ||||||
Amortization of intangible asset | 280,837 | 273,206 | ||||||
Depreciation | 861,700 | 885,202 | ||||||
Deferred income taxes | (303,999 | ) | 176,658 | |||||
Securities gains, net | (498,560 | ) | (296,110 | ) | ||||
(Gain) on sales of loans held for sale | (544,095 | ) | (773,511 | ) | ||||
Proceeds from loans held for sale | 22,668,307 | 34,782,288 | ||||||
Originations of loans held for sale | (22,161,394 | ) | (34,657,822 | ) | ||||
Loss on sale of premises and equipment, net | 56,168 | 2,769 | ||||||
Impairment of other real estate owned | - | 28,039 | ||||||
(Gain) on sale of other real estate owned, net | (14,648 | ) | (131,127 | ) | ||||
Change in assets and liabilities: | ||||||||
(Increase) in accrued income receivable | (654,349 | ) | (805,127 | ) | ||||
(Increase) decrease in other assets | (377,095 | ) | 286,238 | |||||
Increase (decrease) in accrued expenses and other liabilities | (126,404 | ) | 323,605 | |||||
Net cash provided by operating activities | 13,552,601 | 14,585,101 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of securities available-for-sale | (51,271,943 | ) | (49,668,267 | ) | ||||
Proceeds from sale of securities available-for-sale | 11,756,963 | 18,738,154 | ||||||
Proceeds from maturities and calls of securities available-for-sale | 52,588,102 | 54,611,331 | ||||||
Net (increase) decrease in interest bearing deposits in financial institutions | (3,749,025 | ) | 994,573 | |||||
Net (increase) in loans | (13,190,423 | ) | (39,394,414 | ) | ||||
Net proceeds from the sale of other real estate owned | 191,564 | 755,906 | ||||||
Purchase of bank premises and equipment, net | (447,039 | ) | (218,081 | ) | ||||
Other | (61,761 | ) | - | |||||
Net cash (used in) investing activities | (4,183,562 | ) | (14,180,798 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Increase (decrease) in deposits | 5,129,194 | (12,358,477 | ) | |||||
(Decrease) in securities sold under agreements to repurchase | (19,336,317 | ) | (4,431,520 | ) | ||||
Payments on FHLB borrowings and other borrowings | (1,000,000 | ) | (1,542,203 | ) | ||||
Proceeds from short-term FHLB borrowings, net | 5,500,000 | 21,000,000 | ||||||
Dividends paid | (6,052,094 | ) | (5,772,766 | ) | ||||
Net cash (used in) financing activities | (15,759,217 | ) | (3,104,966 | ) | ||||
Net (decrease) in cash and due from banks | (6,390,178 | ) | (2,700,663 | ) | ||||
CASH AND DUE FROM BANKS | ||||||||
Beginning | 29,478,068 | 24,005,801 | ||||||
Ending | $ | 23,087,890 | $ | 21,305,138 |
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Nine Months Ended September 30, 2017 and 2016
2017 | 2016 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash payments for: | ||||||||
Interest | $ | 4,027,782 | $ | 3,145,519 | ||||
Income taxes | 5,050,220 | 4,223,653 | ||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES | ||||||||
Transfer of loans receivable to other real estate owned | $ | 16,668 | $ | 56,587 |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(unaudited) |
Nine Months Ended September 30, 2020 and 2019 |
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 13,653,657 | $ | 12,896,189 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 4,424,475 | 545,203 | ||||||
Provision for off-balance sheet commitments | 51,000 | 0 | ||||||
Amortization of securities, available-for-sale, loans and deposits, net | 558,579 | 1,048,818 | ||||||
Amortization of intangible asset | 650,021 | 427,221 | ||||||
Depreciation | 1,083,790 | 903,070 | ||||||
Deferred income taxes | (942,251 | ) | 75,549 | |||||
Securities (gains), net | (429,925 | ) | (17,031 | ) | ||||
(Gain) on sales of loans held for sale | (1,486,047 | ) | (685,790 | ) | ||||
Proceeds from loans held for sale | 67,934,569 | 34,023,953 | ||||||
Originations of loans held for sale | (66,468,878 | ) | (34,574,101 | ) | ||||
Loss on sale and disposal of premises and equipment, net | 59,212 | 9,360 | ||||||
Amortization of investment in new market tax credit projects | 436,166 | 0 | ||||||
(Gain) on sale of other real estate owned, net | (21,617 | ) | (43,414 | ) | ||||
Change in assets and liabilities: | ||||||||
Increase in accrued income receivable | (384,357 | ) | (320,758 | ) | ||||
(Increase) decrease in other assets | 441,024 | (892,594 | ) | |||||
Increase in accrued expenses and other liabilities | 1,763,379 | 943,244 | ||||||
Net cash provided by operating activities | 21,322,797 | 14,338,919 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of securities available-for-sale | (165,075,991 | ) | (61,502,161 | ) | ||||
Proceeds from sale of securities available-for-sale | 5,462,657 | 8,211,157 | ||||||
Proceeds from maturities and calls of securities available-for-sale | 104,636,283 | 64,641,695 | ||||||
Purchase of FHLB stock | (1,148,500 | ) | (3,912,600 | ) | ||||
Proceeds from the redemption of FHLB stock | 1,133,200 | 4,448,600 | ||||||
Net (increase) in interest-bearing deposits in financial institutions and federal funds sold | (10,695,437 | ) | (52,872,972 | ) | ||||
Net (increase) decrease in loans | (114,712,894 | ) | 8,159,497 | |||||
Net proceeds from the sale of other real estate owned | 3,415,130 | 655,161 | ||||||
Purchase of bank premises and equipment | (851,876 | ) | (648,005 | ) | ||||
Proceeds from the sale of bank equipment | 0 | 4,000 | ||||||
Cash paid for bank acquired | (309,875 | ) | 0 | |||||
Other | (54,767 | ) | (50,132 | ) | ||||
Net cash (used in) investing activities | (178,202,070 | ) | (32,865,760 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Increase in deposits | 167,337,240 | 28,086,411 | ||||||
Increase (decrease) in securities sold under agreements to repurchase | (11,541,134 | ) | 11,521,575 | |||||
Payments on FHLB borrowings | (2,000,000 | ) | (12,600,000 | ) | ||||
Proceeds from FHLB borrowings | 0 | 3,000,000 | ||||||
Dividends paid | (6,791,295 | ) | (6,571,446 | ) | ||||
Stock repurchases | (1,992,405 | ) | (1,808,699 | ) | ||||
Net cash provided by financing activities | 145,012,406 | 21,627,841 | ||||||
Net increase (decrease) in cash and due from banks | (11,866,867 | ) | 3,101,000 | |||||
CASH AND DUE FROM BANKS | ||||||||
Beginning | 34,616,880 | 30,384,066 | ||||||
Ending | $ | 22,750,013 | $ | 33,485,066 |
See Notes to Consolidated Financial Statements.
AMES NATIONAL CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) |
(unaudited) |
Nine Months Ended September 30, 2020 and 2019 |
2020 | 2019 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash payments for: | ||||||||
Interest | $ | 7,133,940 | $ | 7,852,381 | ||||
Income taxes | 3,987,474 | 3,360,844 | ||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES | ||||||||
Transfer of loans receivable to other real estate owned | $ | 10,738 | $ | 0 |
See Notes to Consolidated Financial Statements.
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
1. Significant Accounting Policies
1. | Significant Accounting Policies |
The consolidated financial statements for the three and nine months ended September 30, 2017 2020 and 20162019 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,adjustments, 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-K10-K for the year ended December 31, 2016 (the2019 (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.
The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Company’s stock price. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. At September 30, 2017, 2020, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.
Reclassifications: Certain reclassifications have been made to the prior consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on stockholders’ equity and net income of the prior periods.
New and Pending Accounting Pronouncements: In JanuarySeptember 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update includes requiring changes in fair value of equity securities with readily determinable fair value to be recognized in net income and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entities' other deferred tax assets. Among other items the ASC requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017, and is to be applied on a modified retrospective basis. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2016 the FASB issued ASU No. 2016-13,-13, Financial Instruments-Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments.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 publicIn October 2019, the FASB voted to approve amendments to the effective date of ASU No.2016-13 for smaller reporting companies, this update will beas defined by the SEC, and other non-SEC reporting entities. The amendment delays the effective date for our Company until interim and annual periods beginning after December 15, 2019.2022. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models, along with refining the implementation of the software and its approach for determining the expected credit losses under the new guidance. The Company’s preliminary evaluation indicates the provisions of ASU No.2016-13 are expected to impact the Company’s financial statements. The Company is currently planning forcontinuing to evaluate the implementationextent of this accounting standard. It is too early to assess the impact that the guidance will have on the Company’s consolidated financial statements.potential impact.
In May 2014, January 2017, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40) . The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The guidance does not apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. Based upon management’s revenue recognition analysis, the Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.
In January 2017 the FASB issued ASU 2017-04,-04, Intangibles-Goodwill and Other (Topic 350)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 bebecame effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment testtests with a measurement date after January 1, 2017. The Company does not expectASU 2017-04 was adopted on January 1, 2020 and the adoption of this guidance todid not have a material impact on the Company'sCompany’s consolidated financial statements.
2. 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 became 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 were adopted on a retrospective basis, and the new disclosures were adopted on a prospective basis. The adoption did not have a material effect on the Company’s consolidated financial statements.
2. | Bank Acquisition |
On August 9, 2017, October 25, 2019, the Company completed the purchase of Iowa State Savings Bank (“ISSB”), (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. ISSB’s acquired assets and liabilities were recorded at fair value at the date of acquisition. This bank was purchased for cash consideration of $22.6 million. As a result of the acquisition, the Company recorded a core deposit intangible asset of $1,891,000 and goodwill of approximately $2,680,000. The results of operations for this acquisition have been included since the transaction date of October 25, 2019. Since the acquisition date, there has been no significant credit deterioration of the acquired loans.
The following table summarizes the fair value of the total consideration transferred as a part of the ISSB Acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction (in thousands):
Cash consideration transferred | $ | 22,643 | ||
Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||
Cash and due from banks | $ | 3,188 | ||
Federal funds sold | 2,792 | |||
Interest bearing deposits in financial institutions | 21,035 | |||
Securities available-for-sale | 33,615 | |||
Federal Home Loan Bank stock at cost | 365 | |||
Loans receivable | 137,776 | |||
Accrued interest receivable | 2,888 | |||
Bank premises and equipment | 2,452 | |||
Other real estate owned | 3,582 | |||
Bank owned life insurance | 2,499 | |||
Core deposit intangible asset | 1,891 | |||
Other assets | 204 | |||
Deposits | (188,631 | ) | ||
Securities sold under repurchase agreements | (1,747 | ) | ||
Accrued interest payable and other liabilities | (1,946 | ) | ||
Total identifiable net assets | 19,963 | |||
Goodwill | $ | 2,680 |
On October 25, 2019, associated with the ISSB Acquisition, the contractual balance of loans receivable acquired was $139,703,000 and the contractual balance of the deposits assumed was $188,068,000. Loans receivable acquired include commercial real estate, 1-4 family real estate, agricultural real estate, commercial operating, agricultural operating and consumer loans. During the first quarter of 2020, an additional $310,000 of goodwill was recorded due to an adjustment to the initial purchase price.
The acquired loans associated with the ISSB Acquisition at contractual values as of October 25, 2019 were determined to be risk rated as follows (in thousands):
Pass | $ | 121,346 | ||
Watch | 12,333 | |||
Special Mention | 0 | |||
Substandard | 6,024 | |||
Total loans acquired at book value | $ | 139,703 |
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 October 14, 2020, the Company declared a cash dividend on its common stock, payable on November 15, 2017 13, 2020 to stockholders of record as of November 1, 2017, October 30, 2020, equal to $0.22$0.25 per share.
3. Earnings Per Share
4. | Earnings Per Share |
Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three and nine months ended September 30, 2017 2020 and 20162019 was 9,122,747 and 9,227,685, respectively. The weighted average outstanding shares for the nine months ended September 30, 2020 and 2019 were 9,310,913.9,156,805 and 9,241,789, respectively. The Company had no0 potentially dilutive securities outstanding during the periods presented.
4. Off-Balance Sheet Arrangements
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, 2016.2019.
6. | Fair Value Measurements |
5. 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, 2017 2020 and December 31, 2016. 2019 (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 | ||||||||||||
2020 | ||||||||||||||||
U.S. government treasuries | $ | 8,856 | $ | 8,856 | $ | 0 | $ | 0 | ||||||||
U.S. government agencies | 97,984 | 0 | 97,984 | 0 | ||||||||||||
U.S. government mortgage-backed securities | 133,796 | 0 | 133,796 | 0 | ||||||||||||
State and political subdivisions | 233,563 | 0 | 233,563 | 0 | ||||||||||||
Corporate bonds | 74,619 | 0 | 74,619 | 0 | ||||||||||||
$ | 548,818 | $ | 8,856 | $ | 539,962 | $ | 0 | |||||||||
2019 | ||||||||||||||||
U.S. government treasuries | $ | 9,452 | $ | 9,452 | $ | 0 | $ | 0 | ||||||||
U.S. government agencies | 126,433 | 0 | 126,433 | 0 | ||||||||||||
U.S. government mortgage-backed securities | 81,128 | 0 | 81,128 | 0 | ||||||||||||
State and political subdivisions | 195,302 | 0 | 195,302 | 0 | ||||||||||||
Corporate bonds | 67,528 | 0 | 67,528 | 0 | ||||||||||||
$ | 479,843 | $ | 9,452 | $ | 470,391 | $ | 0 |
Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. U.SU.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.
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment or a change in previously recognized impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of September 30, Description Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 2017 2020 Loans receivable Other real estate owned Total 2016 2019 Loans receivable Other real estate owned Total 2020 2017 Estimated Valuation Range Estimated Fair Value Valuation Techniques Range (Average) Fair Value Techniques Unobservable Inputs (Average) Impaired Loans Evaluation of collateral Estimation of value Evaluation of collateral Estimation of value Other real estate owned Appraisal Appraisal adjustment Appraisal Appraisal adjustment 2020 2016 Estimated Valuation Range Estimated Fair Value Valuation Techniques Range (Average) Fair Value Techniques Unobservable Inputs (Average) Impaired Loans Evaluation of collateral Estimation of value Evaluation of collateral Estimation of value Other real estate owned Appraisal Appraisal adjustment Appraisal Appraisal adjustment * GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of September 30, 2020 and December 31, 2019 (in thousands): 2020 2019 Fair Value Estimated Estimated Hierarchy Carrying Fair Carrying Fair Level Amount Value Amount Value Financial assets: Cash and due from banks Level 1 Interest-bearing deposits Level 1 Securities available-for-sale See previous table FHLB and FRB stock Level 2 Loans receivable, net Level 2 Loans held for sale Level 2 Accrued income receivable Level 1 Financial liabilities: Deposits Level 2 Securities sold under agreements to repurchase Level 1 FHLB advances Level 2 Accrued interest payable Level 1 Commitments to extend credit and standby letters of 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. 2017 2016 Fair Value Estimated Estimated Hierarchy Carrying Fair Carrying Fair Level Amount Value Amount Value Financial assets: Cash and due from banks Level 1 Interest bearing deposits Level 1 Securities available-for-sale See previous table Loans receivable, net Level 2 Loans held for sale Level 2 Accrued income receivable Level 1 Financial liabilities: Deposits Level 2 Securities sold under agreements to repurchase Level 1 FHLB advances Level 2 Other borrowings Level 2 Accrued interest payable Level 1 7. Debt Securities The amortized cost of securities 2017: Gross Gross 2020: 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 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 The amortized cost and fair value of debt securities available-for-sale as of September 30, 2020, are shown below by expected maturity. Expected maturity will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands). Amortized Estimated Cost Fair Value Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total Securities with a carrying value of $193.4 million and $180.0 million at September 30, 2020 and December 31, 2019, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The proceeds, gains and losses 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 Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 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 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 2020: Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Securities available-for-sale: 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 2019: 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. Loans Receivable and Credit Disclosures 2020 2019 Real estate - construction Real estate - 1 to 4 family residential Real estate - commercial Real estate - agricultural Commercial 1 Agricultural Consumer and other Less: Allowance for loan losses Deferred loan fees 2 Loans receivable, net 1 Commercial loan portfolio as of September 30, 2020 includes $79.6 million Payroll Protection Program ("PPP") loans 2 Deferred loan fees as of September 30, 2020 includes $1.9 million of fees related to the PPP loans. The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, in response to the Coronavirus Disease 2019 (COVID-19) pandemic. The PPP is administered by the Small Business Administration (SBA). PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA. Activity in the allowance for loan losses, on a disaggregated basis, for the three and nine months ended September 30, The Company's policy is to recognize transfers between levels at the end2017 2020 and December 31, 2016. 2019 (in thousands): $ 2,439 $ - $ - $ 2,439 $ 1,295 $ 0 $ 0 $ 1,295 386 - - 386 621 0 0 621 $ 2,825 $ - $ - $ 2,825 $ 1,916 $ 0 $ 0 $ 1,916 $ 683 $ - $ - $ 683 $ 535 $ 0 $ 0 $ 535 546 - - 546 4,004 0 0 4,004 $ 1,229 $ - $ - $ 1,229 $ 4,539 $ 0 $ 0 $ 4,539 Loans Receivable: Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans. Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation allowance is a component of the allowance for loan losses. The Company considers these fair value measurements as level 3.Other Real Estate Owned: Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The valuation allowance was $287,000 as of September 30, 2017 and $331,000 as of December 31, 2016. The Company considers these fair value measurements as level 3.The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2017 2020 and December 31, 2016 2019 are as follows:follows (in thousands): Unobservable Inputs $ 2,439 NM* $ 1,295 NM* $ 386 6% - 8% (7%) $ 621 6% - 8% (7%) Unobservable Inputs $ 683 NM* $ 535 NM* $ 546 6% - 10% (8%) $ 4,004 6% - 8% (7%) Not Meaningful. Evaluations of the underlying assets are completed for each collateral dependent impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.Fair value of financial instruments:Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.The following disclosures represent financial instruments in which the ending balances at September 30, 2017 and December 31, 2016 are not carried at fair value in their entirety on the consolidated balance sheets.Cash and due from banks and interest bearing deposits in financial institutions: The recorded amount of these assets approximates fair value.13 $ 22,750 $ 22,750 $ 34,617 $ 34,617 119,643 119,643 108,948 108,948 548,818 548,818 479,843 479,843 3,148 3,148 3,139 3,139 1,159,063 1,135,210 1,048,147 1,025,032 2,797 2,797 2,777 2,777 12,173 12,173 11,788 11,788 $ 1,660,173 $ 1,663,366 $ 1,493,175 $ 1,495,155 30,492 30,492 42,034 42,034 3,000 3,115 5,000 4,935 945 945 1,163 1,163 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 obtainsThe methodologies used to determine fair value measurementsas of September 30, 2020 did not change 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 andmethodologies described in the security’s terms and conditions, among other things. Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. U.S government mortgage-backed securities, state and political subdivisions, some corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs.December 31, 2019 Annual Financial Statements.Loans receivable: The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. The effect of nonperforming loans is considered in assessing the credit risk inherent in the fair value estimate.Loans held for sale: The fair value of loans held for sale is based on prevailing market prices.Deposits: Fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, are equal to the amount payable on demand as of the respective balance sheet date. Fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.Securities sold under agreements to repurchase: The carrying amounts of securities sold under agreements to repurchase approximate fair value because of the generally short-term nature of the instruments.FHLB advances and other borrowings: Fair values of FHLB advances and other borrowings are estimated using discounted cash flow analysis based on interest rates currently being offered with similar terms.Accrued income receivable and accrued interest payable: The carrying amounts of accrued income receivable and accrued interest payable approximate fair value.credit: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.14The estimated fair values of the Company’s financial instruments as described above as of September 30, 2017 and December 31, 2016 are as follows: (in thousands) $ 23,088 $ 23,088 $ 29,478 $ 29,478 35,486 35,486 31,737 31,737 506,610 506,610 516,080 516,080 764,229 753,977 752,182 746,580 280 280 243 243 8,423 8,423 7,769 7,769 $ 1,114,538 $ 1,115,076 $ 1,109,409 $ 1,110,211 39,001 39,001 58,337 58,337 19,000 19,046 14,500 14,681 13,000 13,159 13,000 13,386 447 447 408 408 The methodologies used to determine fair value as of September 30, 2017 did not change from the methodologies described in the December 31, 2016 Annual Financial Statements.6. Debt and Equity Securitiesavailable-for-saleavailable-for-sale and their approximate fair values as of September 30, 2017 2020 and December 31, 2016 2019 are summarized below:below (in thousands): $ 4,412 $ 37 $ - $ 4,449 $ 8,492 $ 364 $ 0 $ 8,856 112,011 807 (161 ) 112,657 92,650 5,340 (6 ) 97,984 80,948 1,091 (83 ) 81,956 130,706 3,140 (50 ) 133,796 241,150 2,684 (396 ) 243,438 226,574 7,024 (35 ) 233,563 60,417 560 (143 ) 60,834 69,744 4,875 0 74,619 3,257 19 - 3,276 $ 502,195 $ 5,198 $ (783 ) $ 506,610 $ 528,166 $ 20,743 $ (91 ) $ 548,818 $ 4,396 $ 18 $ (46 ) $ 4,368 $ 9,392 $ 64 $ (4 ) $ 9,452 110,372 540 (703 ) 110,209 124,913 1,609 (89 ) 126,433 82,279 1,018 (439 ) 82,858 80,295 867 (34 ) 81,128 265,204 1,660 (2,416 ) 264,448 193,745 1,852 (295 ) 195,302 51,731 147 (694 ) 51,184 66,012 1,542 (26 ) 67,528 3,013 - - 3,013 $ 516,995 $ 3,383 $ (4,298 ) $ 516,080 $ 474,357 $ 5,934 $ (448 ) $ 479,843 $ 46,260 $ 46,694 226,833 236,081 211,689 220,972 43,384 45,071 $ 528,166 $ 548,818 fromfor securities available-for-sale for the three and nine months ended September 30, 2020 and 2019are summarized as follows: below ((in thousands)thousands): $ 933 $ 5,852 $ 11,757 $ 18,738 38 66 501 303 - (1 ) (2 ) (7 ) 14 29 175 110 $ 0 $ 2,238 $ 5,463 $ 8,211 0 16 430 37 0 (1 ) 0 (20 ) 0 4 108 4 UnrealizedGross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of September 30, 2017 2020 and December 31, 2016 2019 are as follows:follows (in thousands): $ 28,424 $ (125 ) $ 3,773 $ (36 ) $ 32,197 $ (161 ) $ 0 $ 0 $ 917 $ (6 ) $ 917 $ (6 ) 10,639 (71 ) 1,997 (12 ) 12,636 (83 ) 21,671 (50 ) 0 0 21,671 (50 ) 22,029 (81 ) 21,739 (315 ) 43,768 (396 ) 5,924 (32 ) 180 (3 ) 6,104 (35 ) 5,619 (11 ) 7,310 (132 ) 12,929 (143 ) $ 66,711 $ (288 ) $ 34,819 $ (495 ) $ 101,530 $ (783 ) $ 27,595 $ (82 ) $ 1,097 $ (9 ) $ 28,692 $ (91 ) $ 2,893 $ (46 ) $ - $ - $ 2,893 $ (46 ) $ 3,023 $ (4 ) $ 0 $ 0 $ 3,023 $ (4 ) 48,225 (703 ) - - 48,225 (703 ) 23,827 (85 ) 2,520 (4 ) 26,347 (89 ) 33,753 (439 ) - - 33,753 (439 ) 14,885 (28 ) 1,934 (6 ) 16,819 (34 ) 125,558 (2,226 ) 6,512 (190 ) 132,070 (2,416 ) 17,512 (125 ) 5,954 (170 ) 23,466 (295 ) 35,703 (694 ) - - 35,703 (694 ) 4,129 (26 ) 0 0 4,129 (26 ) $ 246,132 $ (4,108 ) $ 6,512 $ (190 ) $ 252,644 $ (4,298 ) $ 63,376 $ (268 ) $ 10,408 $ (180 ) $ 73,784 $ (448 ) $783,000$91,000 as of September 30, 2017. 2020. 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.177. Loans Receivable The composition of loans receivable as of September 30, 2020 and Credit DisclosuresDecember 31, 2019 is as follows (inthousands): $ 45,521 $ 47,895 211,239 201,510 491,399 435,850 157,495 160,771 152,707 84,084 102,199 111,945 16,539 18,791 1,177,099 1,060,846 (15,932 ) (12,619 ) (2,104 ) (80 ) $ 1,159,063 $ 1,048,147 2017 2020 and 20162019 is as follows:follows (in thousands)
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | $ | 780 | $ | 1,713 | $ | 4,437 | $ | 907 | $ | 2,071 | $ | 1,154 | $ | 126 | $ | 11,188 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2020 | $ | 849 | $ | 2,505 | $ | 6,864 | $ | 1,713 | $ | 1,994 | $ | 1,830 | $ | 250 | $ | 16,005 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision (credit) for loan losses | (74 | ) | 15 | 155 | 36 | (80 | ) | (34 | ) | 39 | 57 | (105 | ) | 80 | 583 | (15 | ) | (5 | ) | (14 | ) | 18 | 542 | |||||||||||||||||||||||||||||||||||||||||
Recoveries of loans charged-off | - | 4 | - | - | 2 | - | 4 | 10 | 0 | 2 | 1 | 0 | 9 | 0 | 272 | 284 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged-off | - | - | - | - | (109 | ) | - | (6 | ) | (115 | ) | 0 | (1 | ) | 0 | 0 | (582 | ) | (48 | ) | (268 | ) | (899 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2017 | $ | 706 | $ | 1,732 | $ | 4,592 | $ | 943 | $ | 1,884 | $ | 1,120 | $ | 163 | $ | 11,140 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | $ | 744 | $ | 2,586 | $ | 7,448 | $ | 1,698 | $ | 1,416 | $ | 1,768 | $ | 272 | $ | 15,932 |
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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, 2016 | $ | 908 | $ | 1,711 | $ | 3,960 | $ | 861 | $ | 1,728 | $ | 1,216 | $ | 123 | $ | 10,507 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | $ | 672 | $ | 2,122 | $ | 5,362 | $ | 1,326 | $ | 1,458 | $ | 1,478 | $ | 201 | $ | 12,619 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision (credit) for loan losses | (202 | ) | 12 | 632 | 82 | 735 | (96 | ) | 59 | 1,222 | 71 | 477 | 2,527 | 372 | 573 | 338 | 66 | 4,424 | ||||||||||||||||||||||||||||||||||||||||||||||
Recoveries of loans charged-off | - | 9 | - | - | 30 | - | 8 | 47 | 1 | 5 | 3 | 0 | 13 | 0 | 277 | 299 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged-off | - | - | - | - | (609 | ) | - | (27 | ) | (636 | ) | 0 | (18 | ) | (444 | ) | 0 | (628 | ) | (48 | ) | (272 | ) | (1,410 | ) | |||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2017 | $ | 706 | $ | 1,732 | $ | 4,592 | $ | 943 | $ | 1,884 | $ | 1,120 | $ | 163 | $ | 11,140 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | $ | 744 | $ | 2,586 | $ | 7,448 | $ | 1,698 | $ | 1,416 | $ | 1,768 | $ | 272 | $ | 15,932 |
Three Months Ended September 30, 2016 | Three Months Ended September 30, 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, 2016 | $ | 758 | $ | 1,742 | $ | 3,890 | $ | 834 | $ | 1,439 | $ | 1,219 | $ | 253 | $ | 10,135 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2019 | $ | 721 | $ | 1,847 | $ | 4,906 | $ | 1,301 | $ | 1,590 | $ | 1,332 | $ | 172 | $ | 11,869 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision (credit) for loan losses | 121 | 32 | (89 | ) | - | 169 | 12 | (10 | ) | 235 | 41 | 237 | 158 | 9 | (112 | ) | 10 | 36 | 379 | |||||||||||||||||||||||||||||||||||||||||||||
Recoveries of loans charged-off | 15 | 1 | - | - | 75 | - | 2 | 93 | 0 | 2 | 3 | 0 | 5 | 0 | 2 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged-off | - | - | - | - | (1 | ) | - | (11 | ) | (12 | ) | 0 | 0 | 0 | 0 | (326 | ) | 0 | 0 | (326 | ) | |||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2016 | $ | 894 | $ | 1,775 | $ | 3,801 | $ | 834 | $ | 1,682 | $ | 1,231 | $ | 234 | $ | 10,451 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | $ | 762 | $ | 2,086 | $ | 5,067 | $ | 1,310 | $ | 1,157 | $ | 1,342 | $ | 210 | $ | 11,934 |
Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 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, December 31, 2015 | $ | 999 | $ | 1,806 | $ | 3,557 | $ | 760 | $ | 1,371 | $ | 1,256 | $ | 239 | $ | 9,988 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | $ | 699 | $ | 1,820 | $ | 4,615 | $ | 1,198 | $ | 1,777 | $ | 1,384 | $ | 191 | $ | 11,684 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision (credit) for loan losses | (135 | ) | (34 | ) | 244 | 74 | 308 | (25 | ) | 9 | 441 | 63 | 265 | 437 | 112 | (324 | ) | (42 | ) | 34 | 545 | |||||||||||||||||||||||||||||||||||||||||||
Recoveries of loans charged-off | 30 | 3 | - | - | 81 | - | 7 | 121 | 0 | 4 | 15 | 0 | 34 | 0 | 6 | 59 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged-off | - | - | - | - | (78 | ) | - | (21 | ) | (99 | ) | 0 | (3 | ) | 0 | 0 | (330 | ) | 0 | (21 | ) | (354 | ) | |||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2016 | $ | 894 | $ | 1,775 | $ | 3,801 | $ | 834 | $ | 1,682 | $ | 1,231 | $ | 234 | $ | 10,451 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | $ | 762 | $ | 2,086 | $ | 5,067 | $ | 1,310 | $ | 1,157 | $ | 1,342 | $ | 210 | $ | 11,934 |
Allowance for loan losses disaggregated on the basis of impairment analysis method as of September 30, 2017 2020 and December 31, 2016 2019 is as follows:follows (in thousands):
2017 | 1-4 Family | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 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 | $ | - | $ | 28 | $ | - | $ | - | $ | 747 | $ | - | $ | 48 | $ | 823 | $ | 0 | $ | 150 | $ | 0 | $ | 0 | $ | 2 | $ | 41 | $ | 30 | $ | 223 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 706 | 1,704 | 4,592 | 943 | 1,137 | 1,120 | 115 | 10,317 | 744 | 2,436 | 7,448 | 1,698 | 1,414 | 1,727 | 242 | 15,709 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2017 | $ | 706 | $ | 1,732 | $ | 4,592 | $ | 943 | $ | 1,884 | $ | 1,120 | $ | 163 | $ | 11,140 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2020 | $ | 744 | $ | 2,586 | $ | 7,448 | $ | 1,698 | $ | 1,416 | $ | 1,768 | $ | 272 | $ | 15,932 |
2016 | 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 | $ | - | $ | 76 | $ | - | $ | - | $ | 644 | $ | - | $ | - | $ | 720 | $ | 0 | $ | 209 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 209 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 908 | 1,635 | 3,960 | 861 | 1,084 | 1,216 | 123 | 9,787 | 672 | 1,913 | 5,362 | 1,326 | 1,458 | 1,478 | 201 | 12,410 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2016 | $ | 908 | $ | 1,711 | $ | 3,960 | $ | 861 | $ | 1,728 | $ | 1,216 | $ | 123 | $ | 10,507 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2019 | $ | 672 | $ | 2,122 | $ | 5,362 | $ | 1,326 | $ | 1,458 | $ | 1,478 | $ | 201 | $ | 12,619 |
Loans receivable disaggregated on the basis of impairment analysis method as of September 30, 2017 2020 and December 31, 2016 2019 is as follows (in thousands):
2017 | 1-4 Family | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 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 | $ | - | $ | 692 | $ | 703 | $ | - | $ | 3,250 | $ | - | $ | 85 | $ | 4,730 | $ | 165 | $ | 1,332 | $ | 11,046 | $ | 1,868 | $ | 949 | $ | 977 | $ | 51 | $ | 16,388 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 44,041 | 148,148 | 350,508 | 79,181 | 70,916 | 67,711 | 10,201 | 770,706 | 45,356 | 209,907 | 480,353 | 155,627 | 151,758 | 101,222 | 16,488 | 1,160,711 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2017 | $ | 44,041 | $ | 148,840 | $ | 351,211 | $ | 79,181 | $ | 74,166 | $ | 67,711 | $ | 10,286 | $ | 775,436 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2020 | $ | 45,521 | $ | 211,239 | $ | 491,399 | $ | 157,495 | $ | 152,707 | $ | 102,199 | $ | 16,539 | $ | 1,177,099 |
2016 | 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 | $ | - | $ | 660 | $ | 399 | $ | - | $ | 3,942 | $ | - | $ | 76 | $ | 5,077 | $ | 0 | $ | 1,204 | $ | 83 | $ | 84 | $ | 462 | $ | 2,951 | $ | 4 | $ | 4,788 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 61,042 | 148,847 | 315,303 | 73,032 | 70,436 | 76,994 | 12,054 | 757,708 | 47,895 | 200,306 | 435,767 | 160,687 | 83,622 | 108,994 | 18,787 | 1,056,058 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2016 | $ | 61,042 | $ | 149,507 | $ | 315,702 | $ | 73,032 | $ | 74,378 | $ | 76,994 | $ | 12,130 | $ | 762,785 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2019 | $ | 47,895 | $ | 201,510 | $ | 435,850 | $ | 160,771 | $ | 84,084 | $ | 111,945 | $ | 18,791 | $ | 1,060,846 |
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 applyapplies its normal loan review procedures to identify loans that should be evaluated for impairment.
The following is a recap of impairedImpaired loans,, on a disaggregated basis, as of September 30, 2017 2020 and December 31, 2016: 2019 (in thousands):
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
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 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 165 | $ | 165 | $ | - | $ | 0 | $ | 0 | $ | - | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 610 | 750 | - | 452 | 473 | - | 386 | 436 | - | 460 | 796 | - | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 703 | 1,369 | - | 399 | 1,025 | - | 11,046 | 11,836 | - | 83 | 435 | - | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | 1,868 | 1,885 | - | 84 | 97 | - | ||||||||||||||||||||||||||||||||||||
Commercial | 127 | 150 | - | 2,747 | 2,672 | - | 947 | 1,567 | - | 462 | 517 | - | ||||||||||||||||||||||||||||||||||||
Agricultural | - | - | - | - | - | - | 448 | 605 | - | 2,951 | 3,071 | - | ||||||||||||||||||||||||||||||||||||
Consumer and other | 28 | 30 | - | 76 | 81 | - | 10 | 10 | - | 4 | 4 | - | ||||||||||||||||||||||||||||||||||||
Total loans with no specific reserve: | 1,468 | 2,299 | - | 3,674 | 4,251 | - | 14,870 | 16,504 | - | 4,044 | 4,920 | - | ||||||||||||||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 82 | 104 | 28 | 208 | 360 | 76 | 946 | 1,283 | 150 | 744 | 755 | 209 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial | 3,123 | 3,392 | 747 | 1,195 | 1,286 | 644 | 2 | 2 | 2 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Agricultural | - | - | - | - | - | - | 529 | 531 | 41 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Consumer and other | 57 | 60 | 48 | - | - | - | 41 | 43 | 30 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Total loans with specific reserve: | 3,262 | 3,556 | 823 | 1,403 | 1,646 | 720 | 1,518 | 1,859 | 223 | 744 | 755 | 209 | ||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | - | - | 165 | 165 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 692 | 854 | 28 | 660 | 833 | 76 | 1,332 | 1,719 | 150 | 1,204 | 1,551 | 209 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 703 | 1,369 | - | 399 | 1,025 | - | 11,046 | 11,836 | 0 | 83 | 435 | 0 | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | 1,868 | 1,885 | 0 | 84 | 97 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial | 3,250 | 3,542 | 747 | 3,942 | 3,958 | 644 | 949 | 1,569 | 2 | 462 | 517 | 0 | ||||||||||||||||||||||||||||||||||||
Agricultural | - | - | - | - | - | - | 977 | 1,136 | 41 | 2,951 | 3,071 | 0 | ||||||||||||||||||||||||||||||||||||
Consumer and other | 85 | 90 | 48 | 76 | 81 | - | 51 | 53 | 30 | 4 | 4 | 0 | ||||||||||||||||||||||||||||||||||||
$ | 4,730 | $ | 5,855 | $ | 823 | $ | 5,077 | $ | 5,897 | $ | 720 | $ | 16,388 | $ | 18,363 | $ | 223 | $ | 4,788 | $ | 5,675 | $ | 209 |
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, 2017 2020 and 2016:2019 (in thousands):
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||
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 | $ | - | $ | - | $ | - | $ | - | $ | 83 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||
Real estate - 1 to 4 family residential | 631 | 18 | 481 | - | 305 | 0 | 364 | 4 | ||||||||||||||||||||||||
Real estate - commercial | 716 | - | 450 | - | 11,091 | 0 | 637 | 45 | ||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | 1,966 | 0 | 86 | 0 | ||||||||||||||||||||||||
Commercial | 139 | 2 | 67 | - | 735 | 21 | 240 | 0 | ||||||||||||||||||||||||
Agricultural | - | - | 11 | - | 813 | 340 | 2,206 | 0 | ||||||||||||||||||||||||
Consumer and other | 46 | - | 88 | 6 | 8 | 0 | 0 | 0 | ||||||||||||||||||||||||
Total loans with no specific reserve: | 1,532 | 20 | 1,097 | 6 | 15,001 | 361 | 3,533 | 49 | ||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 128 | - | 626 | - | 957 | 0 | 341 | 0 | ||||||||||||||||||||||||
Real estate - commercial | - | - | - | - | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Commercial | 3,263 | - | 1,003 | 2 | 627 | 0 | 1,267 | 0 | ||||||||||||||||||||||||
Agricultural | - | - | - | - | 531 | 0 | 0 | 0 | ||||||||||||||||||||||||
Consumer and other | 29 | - | 1 | - | 30 | 0 | 5 | 0 | ||||||||||||||||||||||||
Total loans with specific reserve: | 3,420 | - | 1,630 | 2 | 2,145 | 0 | 1,613 | 0 | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | 83 | 0 | 0 | 0 | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 759 | 18 | 1,107 | - | 1,262 | 0 | 705 | 4 | ||||||||||||||||||||||||
Real estate - commercial | 716 | - | 450 | - | 11,091 | 0 | 637 | 45 | ||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | 1,966 | 0 | 86 | 0 | ||||||||||||||||||||||||
Commercial | 3,402 | 2 | 1,070 | 2 | 1,362 | 21 | 1,507 | 0 | ||||||||||||||||||||||||
Agricultural | - | - | 11 | - | 1,344 | 340 | 2,206 | 0 | ||||||||||||||||||||||||
Consumer and other | 75 | - | 89 | 6 | 38 | 0 | 5 | 0 | ||||||||||||||||||||||||
$ | 4,952 | $ | 20 | $ | 2,727 | $ | 8 | $ | 17,146 | $ | 361 | $ | 5,146 | $ | 49 |
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
Recorded | Income | Recorded | Income | |||||||||||||
Investment | Recognized | Investment | Recognized | |||||||||||||
With no specific reserve recorded: | ||||||||||||||||
Real estate - construction | $ | - | $ | - | $ | - | $ | 31 | ||||||||
Real estate - 1 to 4 family residential | 535 | 27 | 438 | 1 | ||||||||||||
Real estate - commercial | 648 | - | 465 | 22 | ||||||||||||
Real estate - agricultural | - | - | - | - | ||||||||||||
Commercial | 1,457 | 3 | 39 | - | ||||||||||||
Agricultural | - | - | 11 | - | ||||||||||||
Consumer and other | 60 | - | 66 | 6 | ||||||||||||
Total loans with no specific reserve: | 2,700 | 30 | 1,019 | 60 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Real estate - construction | 16 | 2 | - | - | ||||||||||||
Real estate - 1 to 4 family residential | 162 | - | 663 | 5 | ||||||||||||
Real estate - commercial | - | - | 26 | - | ||||||||||||
Real estate - agricultural | - | - | - | - | ||||||||||||
Commercial | 2,193 | - | 732 | 2 | ||||||||||||
Agricultural | - | - | - | - | ||||||||||||
Consumer and other | 15 | 1 | 1 | - | ||||||||||||
Total loans with specific reserve: | 2,386 | 3 | 1,422 | 7 | ||||||||||||
Total | ||||||||||||||||
Real estate - construction | 16 | 2 | - | 31 | ||||||||||||
Real estate - 1 to 4 family residential | 697 | 27 | 1,101 | 6 | ||||||||||||
Real estate - commercial | 648 | - | 491 | 22 | ||||||||||||
Real estate - agricultural | - | - | - | - | ||||||||||||
Commercial | 3,650 | 3 | 771 | 2 | ||||||||||||
Agricultural | - | - | 11 | - | ||||||||||||
Consumer and other | 75 | 1 | 67 | 6 | ||||||||||||
$ | 5,086 | $ | 33 | $ | 2,441 | $ | 67 |
Nine Months Ended September 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
Recorded | Income | Recorded | Income | |||||||||||||
Investment | Recognized | Investment | Recognized | |||||||||||||
With no specific reserve recorded: | ||||||||||||||||
Real estate - construction | $ | 41 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Real estate - 1 to 4 family residential | 294 | 0 | 305 | 30 | ||||||||||||
Real estate - commercial | 8,221 | 0 | 384 | 105 | ||||||||||||
Real estate - agricultural | 1,202 | 6 | 79 | 0 | ||||||||||||
Commercial | 586 | 23 | 241 | 0 | ||||||||||||
Agricultural | 1,896 | 340 | 1,103 | 0 | ||||||||||||
Consumer and other | 26 | 0 | 0 | 0 | ||||||||||||
Total loans with no specific reserve: | 12,266 | 369 | 2,112 | 135 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Real estate - construction | 0 | 0 | 0 | 0 | ||||||||||||
Real estate - 1 to 4 family residential | 938 | 0 | 226 | 0 | ||||||||||||
Real estate - commercial | 244 | 0 | 0 | 0 | ||||||||||||
Real estate - agricultural | 0 | 0 | 0 | 0 | ||||||||||||
Commercial | 356 | 0 | 1,867 | 0 | ||||||||||||
Agricultural | 380 | 0 | 0 | 0 | ||||||||||||
Consumer and other | 15 | 0 | 10 | 1 | ||||||||||||
Total loans with specific reserve: | 1,933 | 0 | 2,103 | 1 | ||||||||||||
Total | ||||||||||||||||
Real estate - construction | 41 | 0 | 0 | 0 | ||||||||||||
Real estate - 1 to 4 family residential | 1,232 | 0 | 531 | 30 | ||||||||||||
Real estate - commercial | 8,465 | 0 | 384 | 105 | ||||||||||||
Real estate - agricultural | 1,202 | 6 | 79 | 0 | ||||||||||||
Commercial | 942 | 23 | 2,108 | 0 | ||||||||||||
Agricultural | 2,276 | 340 | 1,103 | 0 | ||||||||||||
Consumer and other | 41 | 0 | 10 | 1 | ||||||||||||
$ | 14,199 | $ | 369 | $ | 4,215 | $ | 136 |
The interest foregone on nonaccrual loans for the three months ended September 30, 2017 2020 and 20162019 was approximately $88,000$247,000 and $46,000,$272,000, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2017 2020 and 20162019 was approximately $289,000$747,000 and $124,000,$389,000, respectively.
TheNonaccrual loans at September 30, 2020 and December 31, 2019 were $16,388,000 and $4,788,000 respectively.
The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $3,098,000$11,480,000 as of September 30, 2017, 2020, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000$1,171,000 as of December 31, 2016, 2019, all of which were included in impaired and nonaccrual loans.
The following table sets forth information on theThe Company’s TDRs,TDR, on a disaggregated basis, occurring in the three and nine months ended September 30, 2017 2020 and 2016: 2019, is as follows (dollarsin thousands)thousands):
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||||||||||||||||||||
Contracts | Investment | Investment | Contracts | Investment | Investment | Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||||||||||||||||||||
Real estate - construction | - | $ | - | $ | - | - | $ | - | $ | - | 0 | $ | 0 | $ | 0 | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
Real estate - 1 to 4 family residential | - | - | - | - | - | - | 0 | 0 | 0 | 3 | 1,035 | 1,035 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | - | - | - | - | - | - | 1 | 10,157 | 10,157 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Agricultural | - | - | - | - | - | - | 3 | 56 | 56 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Consumer and other | - | - | - | - | - | - | 1 | 27 | 27 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
- | $ | - | $ | - | - | $ | - | $ | - | 5 | $ | 10,240 | $ | 10,240 | 3 | $ | 1,035 | $ | 1,035 |
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||||||||||||||||||||
Contracts | Investment | Investment | Contracts | Investment | Investment | Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||||||||||||||||||||
Real estate - construction | - | $ | - | $ | - | - | $ | - | $ | - | 0 | $ | 0 | $ | 0 | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
Real estate - 1 to 4 family residential | - | - | - | - | - | - | 0 | 0 | 0 | 3 | 1,035 | 1,035 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | - | - | - | - | - | - | 2 | 10,341 | 10,341 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial | 2 | 93 | 99 | 3 | 702 | 705 | 1 | 61 | 61 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Agricultural | - | - | - | - | - | - | 3 | 56 | 56 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Consumer and other | - | - | - | 3 | 70 | 70 | 1 | 27 | 27 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
2 | $ | 93 | $ | 99 | 6 | $ | 772 | $ | 775 | 7 | $ | 10,485 | $ | 10,485 | 3 | $ | 1,035 | $ | 1,035 |
During the three and nine months ended September 30, 2017, 2020, the Company granted concessions to twothree borrowers thatfacing financial difficulties which were experiencingunrelated to COVID-19. Payments on these loans were deferred for an extended period of time and the interest rate was reduced below the market interest rate. During the nine months ended September 30, 2020, the Company granted concessions to five borrowers facing financial difficulties. Payments on these loans were deferred for an extended period of time and the interest rate was reduced below the market interest rate. During the three and nine months ended September 30, 2019, the Company granted concessions to one borrower with three1-4 family residential contracts facing financial difficulties. The loans were extended beyond theiroriginated with terms less than normal terms and on one loan the interest was capitalized.related to collateral.
DuringThere were no TDR loans that were modified during the threetwelve months ended September 30, 2016, the Company did not grant any concessions to any borrowers facing financial difficulties. During the nine months ended September 30, 2016, the Company granted concessions to two borrowers experiencing financial difficulties with six loans.2020 and 2019 that had payment defaults. The three consumer loans were extended beyond normal terms at an interest rate below a market interest rate. The three commercial operating loans were extended beyond normal terms.
The Company considers TDR loans to have payment default when it is past due 60 days or more.
No TDR modified during the twelve months ended September 30, 2017 and 2016 had payment defaults.
A $530,000 specific reserve was established in the nine months ended September 30, 2017 on two TDR loans. There were $257,000$15,000 and $31,000 of net charge-offs related to TDRs for the three and nine months ended September 30, 2017.2020, respectively. There were no$275,000 of net charge-offs related to TDRs for the three and nine months ended September 30, 2016.2019.
Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the FDIC, (the "agencies") issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.
As of September 30, 2020, the Company had executed 199 COVID-19 related loan modifications under these rules on a total outstanding principal balance of $127.5 million. Of those loans, 100 loans with a total outstanding principal balance of $94.8 million remain on deferral, including $11.7 million of loans that were less than 30 days past due after the modification period expired. The remaining loans of $32.7 million have been returned to a normal payment status. These loans did not have financial difficulty prior to the COVID-19 pandemic and were generally modified for principal and interest payment deferral or interest only payments for up to six months. Modified loans continue to accrue interest and are evaluated for past due status based on the revised payment terms.
AnAn aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, 2017 2020 and December 31, 2016, 2019, is as follows:follows (in thousands):
2017 | 90 Days | 90 Days | ||||||||||||||||||||||||||||||||||||||||||||||
2020 | 90 Days | 90 Days | ||||||||||||||||||||||||||||||||||||||||||||||
30-89 | or Greater | Total | or Greater | 30-89 | 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 | $ | 205 | $ | - | $ | 205 | $ | 43,836 | $ | 44,041 | $ | - | $ | 26 | $ | 165 | $ | 191 | $ | 45,330 | $ | 45,521 | $ | 0 | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 1,065 | 476 | 1,541 | 147,299 | 148,840 | 81 | 763 | 385 | 1,148 | 210,091 | 211,239 | 131 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 312 | 398 | 710 | 350,501 | 351,211 | - | 176 | 75 | 251 | 491,148 | 491,399 | 0 | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | 377 | - | 377 | 78,804 | 79,181 | - | 1,014 | 1,835 | 2,849 | 154,646 | 157,495 | 33 | ||||||||||||||||||||||||||||||||||||
Commercial | 129 | 429 | 558 | 73,608 | 74,166 | - | 104 | 647 | 751 | 151,956 | 152,707 | 0 | ||||||||||||||||||||||||||||||||||||
Agricultural | 207 | - | 207 | 67,504 | 67,711 | - | 574 | 472 | 1,046 | 101,153 | 102,199 | 0 | ||||||||||||||||||||||||||||||||||||
Consumer and other | 43 | 32 | 75 | 10,211 | 10,286 | - | 37 | 36 | 73 | 16,466 | 16,539 | 16 | ||||||||||||||||||||||||||||||||||||
$ | 2,338 | $ | 1,335 | $ | 3,673 | $ | 771,763 | $ | 775,436 | $ | 81 | $ | 2,694 | $ | 3,615 | $ | 6,309 | $ | 1,170,790 | $ | 1,177,099 | $ | 180 |
2016 | 90 Days | 90 Days | ||||||||||||||||||||||||||||||||||||||||||||||
2019 | 90 Days | 90 Days | ||||||||||||||||||||||||||||||||||||||||||||||
30-89 | or Greater | Total | or Greater | 30-89 | 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 | $ | - | $ | - | $ | - | $ | 61,042 | $ | 61,042 | $ | - | $ | 1,796 | $ | 0 | $ | 1,796 | $ | 46,099 | $ | 47,895 | $ | 0 | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 1,577 | 35 | 1,612 | 147,895 | 149,507 | 19 | 811 | 290 | 1,101 | 200,409 | 201,510 | 188 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 1,420 | - | 1,420 | 314,282 | 315,702 | - | 387 | 0 | 387 | 435,463 | 435,850 | 0 | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | - | - | - | 73,032 | 73,032 | - | 422 | 0 | 422 | 160,349 | 160,771 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial | 84 | 747 | 831 | 73,547 | 74,378 | - | 518 | 237 | 755 | 83,329 | 84,084 | 0 | ||||||||||||||||||||||||||||||||||||
Agricultural | - | - | - | 76,994 | 76,994 | - | 666 | 2,587 | 3,253 | 108,692 | 111,945 | 62 | ||||||||||||||||||||||||||||||||||||
Consumer and other | 36 | 3 | 39 | 12,091 | 12,130 | 3 | 146 | 6 | 152 | 18,639 | 18,791 | 5 | ||||||||||||||||||||||||||||||||||||
$ | 3,117 | $ | 785 | $ | 3,902 | $ | 758,883 | $ | 762,785 | $ | 22 | $ | 4,746 | $ | 3,120 | $ | 7,866 | $ | 1,052,980 | $ | 1,060,846 | $ | 255 |
The credit risk profile by internally assigned grade, on a disaggregated basis, asas of September 30, 2017 2020 and December 31, 2016 2019 is as follows:follows (in thousands):
2017 | Construction | Commercial | Agricultural | |||||||||||||||||||||||||||||||||||||||||||||
2020 | Construction | Commercial | Agricultural | |||||||||||||||||||||||||||||||||||||||||||||
Real Estate | Real Estate | Real Estate | Commercial | Agricultural | Total | Real Estate | Real Estate | Real Estate | Commercial | Agricultural | Total | |||||||||||||||||||||||||||||||||||||
Pass | $ | 41,032 | $ | 329,263 | $ | 57,569 | $ | 59,420 | $ | 42,695 | $ | 529,979 | $ | 39,626 | $ | 380,297 | $ | 113,790 | $ | 132,487 | $ | 76,116 | $ | 742,316 | ||||||||||||||||||||||||
Watch | 3,009 | 17,927 | 18,984 | 10,020 | 23,828 | 73,768 | 5,730 | 74,178 | 34,810 | 14,820 | 23,843 | 153,381 | ||||||||||||||||||||||||||||||||||||
Special Mention | - | 189 | 1,234 | - | - | 1,423 | 0 | 3,200 | 0 | 0 | 0 | 3,200 | ||||||||||||||||||||||||||||||||||||
Substandard | - | 3,129 | 1,394 | 1,478 | 1,188 | 7,189 | 0 | 22,678 | 7,027 | 4,451 | 1,263 | 35,419 | ||||||||||||||||||||||||||||||||||||
Substandard-Impaired | - | 703 | - | 3,248 | - | 3,951 | 165 | 11,046 | 1,868 | 949 | 977 | 15,005 | ||||||||||||||||||||||||||||||||||||
$ | 44,041 | $ | 351,211 | $ | 79,181 | $ | 74,166 | $ | 67,711 | $ | 616,310 | $ | 45,521 | $ | 491,399 | $ | 157,495 | $ | 152,707 | $ | 102,199 | $ | 949,321 |
2016 | 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 | $ | 57,420 | $ | 288,107 | $ | 51,720 | $ | 59,506 | $ | 57,415 | $ | 514,168 | $ | 41,073 | $ | 387,274 | $ | 118,692 | $ | 62,655 | $ | 90,083 | $ | 699,777 | ||||||||||||||||||||||||
Watch | 3,245 | 22,833 | 15,251 | 9,512 | 18,938 | 69,779 | 6,822 | 29,209 | 32,780 | 16,147 | 15,248 | 100,206 | ||||||||||||||||||||||||||||||||||||
Special Mention | - | 204 | 4,228 | 96 | 75 | 4,603 | 0 | 4,581 | 0 | 0 | 0 | 4,581 | ||||||||||||||||||||||||||||||||||||
Substandard | 377 | 4,159 | 1,833 | 1,322 | 566 | 8,257 | 0 | 14,703 | 9,215 | 4,820 | 3,663 | 32,401 | ||||||||||||||||||||||||||||||||||||
Substandard-Impaired | - | 399 | - | 3,942 | - | 4,341 | 0 | 83 | 84 | 462 | 2,951 | 3,580 | ||||||||||||||||||||||||||||||||||||
$ | 61,042 | $ | 315,702 | $ | 73,032 | $ | 74,378 | $ | 76,994 | $ | 601,148 | $ | 47,895 | $ | 435,850 | $ | 160,771 | $ | 84,084 | $ | 111,945 | $ | 840,545 |
The credit risk profile based on payment activity, on a disaggregated basis, asas of September 30, 2017 2020 and December 31, 2016 2019 is as follows:follows (in thousands):
2017 | 1-4 Family | |||||||||||||||||||||||
2020 | 1-4 Family | |||||||||||||||||||||||
Residential | Consumer | Residential | Consumer | |||||||||||||||||||||
Real Estate | and Other | Total | Real Estate | and Other | Total | |||||||||||||||||||
Performing | $ | 148,069 | $ | 10,202 | $ | 158,271 | $ | 209,778 | $ | 16,472 | $ | 226,250 | ||||||||||||
Non-performing | 771 | 84 | 855 | 1,461 | 67 | 1,528 | ||||||||||||||||||
$ | 148,840 | $ | 10,286 | $ | 159,126 | $ | 211,239 | $ | 16,539 | $ | 227,778 |
2016 | 1-4 Family | |||||||||||||||||||||||
2019 | 1-4 Family | |||||||||||||||||||||||
Residential | Consumer | Residential | Consumer | |||||||||||||||||||||
Real Estate | and Other | Total | Real Estate | and Other | Total | |||||||||||||||||||
Performing | $ | 148,828 | $ | 12,051 | $ | 160,879 | $ | 200,117 | $ | 18,782 | $ | 218,899 | ||||||||||||
Non-performing | 679 | 79 | 758 | 1,393 | 9 | 1,402 | ||||||||||||||||||
$ | 149,507 | $ | 12,130 | $ | 161,637 | $ | 201,510 | $ | 18,791 | $ | 220,301 |
9. | Goodwill |
8. As a result of the acquisition of ISSB in 2019, goodwill of $2.7 million was recognized. Goodwill
Goodwill recognized in the Acquisition was primarily attributable to an expanded market share and economies of scale expected from combining the operations of ISSB. For income tax purposes, goodwill associated with ISSB is amortized over a fifteen year period. Goodwill for this acquisition and previous acquisitions is not amortized but is evaluated for impairment at least annually. For income tax purposes, goodwill is amortized over fifteen years.
10. | Intangible assets |
9. Intangible assets
In conjunction with the acquisition of ISSB in 2019, the Company recorded $1.9 million in core deposit intangible assets. The following sets forth the carrying amounts and accumulated amortization of the intangible assets at September 30, 2017 2020 and December 31, 2016: 2019 (in thousands):
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||
Gross | Accumulated | Gross | Accumulated | Gross | Accumulated | Gross | Accumulated | |||||||||||||||||||||||||
Amount | Amortization | Amount | Amortization | Amount | Amortization | Amount | Amortization | |||||||||||||||||||||||||
Core deposit intangible asset | $ | 2,518 | $ | 1,793 | $ | 2,518 | $ | 1,563 | $ | 6,411 | $ | 3,336 | $ | 6,411 | $ | 2,745 | ||||||||||||||||
Customer list | 474 | 65 | 412 | 14 | 535 | 301 | 535 | 242 | ||||||||||||||||||||||||
Total | $ | 2,992 | $ | 1,858 | $ | 2,930 | $ | 1,577 | $ | 6,946 | $ | 3,637 | $ | 6,946 | $ | 2,987 |
The weighted average life of the intangible assets is 33.7 years as of September 30, 2017 2020 and 4.2 years as of December 31, 2016.2019.
The following sets forth the activity related to the intangible assets for the three and nine months ended September 30, 2017 2020 and 2016:2019 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Beginning intangible asset, net | $ | 1,212 | $ | 1,122 | $ | 1,353 | $ | 1,309 | ||||||||
Adjustment to intangible asset | 12 | - | 62 | - | ||||||||||||
Amortization | (90 | ) | (86 | ) | (281 | ) | (273 | ) | ||||||||
Ending intangible asset, net | $ | 1,134 | $ | 1,036 | $ | 1,134 | $ | 1,036 |
Estimated remaining amortization expense on core deposit intangible for the years ending December 31st is as follows: (in thousands)
2017 | $ | 85 | ||
2018 | 319 | |||
2019 | 196 | |||
2020 | 139 | |||
2021 | 139 | |||
2022 | 133 | |||
2023 | 123 | |||
$ | 1,134 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning intangible assets, net | $ | 3,525 | $ | 2,375 | $ | 3,959 | $ | 2,678 | ||||||||
Amortization | (216 | ) | (124 | ) | (650 | ) | (427 | ) | ||||||||
Ending intangible assets, net | $ | 3,309 | $ | 2,251 | $ | 3,309 | $ | 2,251 |
Estimated remaining amortization expense on intangible assets for the years ending December 31 is as follows (in thousands):
2020 | $ | 176 | ||
2021 | 628 | |||
2022 | 574 | |||
2023 | 502 | |||
2024 | 337 | |||
2025 | 301 | |||
After | 791 | |||
Total | $ | 3,309 |
10.
11. | Pledged Collateral Related to Securities Sold Under Repurchase Agreements |
The repurchase agreements mature daily and the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements and term repurchase agreements as of September 30, 2017 2020 and December 31, 2016: 2019 (in thousands):
2017 | 2016 | |||||||||||||||||||||||||||||||
Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||||||||||||||
Overnight | Greater than | Total | Overnight | Greater than | Total | |||||||||||||||||||||||||||
90 days | 90 days | |||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase: | ||||||||||||||||||||||||||||||||
U.S. government treasuries | $ | 1,485 | $ | - | $ | 1,485 | $ | 1,476 | $ | - | $ | 1,476 | $ | 2,078 | $ | 3,528 | ||||||||||||||||
U.S. government agencies | 48,363 | - | 48,363 | 46,557 | - | 46,557 | 39,851 | 35,557 | ||||||||||||||||||||||||
U.S. government mortgage-backed securities | 24,514 | - | 24,514 | 30,376 | - | 30,376 | 14,046 | 19,614 | ||||||||||||||||||||||||
Total | $ | 74,362 | $ | - | $ | 74,362 | $ | 78,409 | $ | - | $ | 78,409 | ||||||||||||||||||||
Term repurchase agreements (Other borrowings): | ||||||||||||||||||||||||||||||||
U.S. government agencies | $ | - | $ | 15,174 | $ | 15,174 | $ | - | $ | 15,068 | $ | 15,068 | ||||||||||||||||||||
U.S. government mortgage-backed securities | - | - | - | - | 354 | 354 | ||||||||||||||||||||||||||
Total | $ | - | $ | 15,174 | $ | 15,174 | $ | - | $ | 15,422 | $ | 15,422 | ||||||||||||||||||||
Total pledged collateral | $ | 74,362 | $ | 15,174 | $ | 89,536 | $ | 78,409 | $ | 15,422 | $ | 93,831 | $ | 55,975 | $ | 58,699 |
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. | Income Taxes |
The tax effects of temporary differences related to income taxes are included in deferred income taxes. The change in deferred income taxes since December 31, 2019 is due primarily to the increase in the unrealized gains on investment securities.
13. | Regulatory Matters |
11. Regulatory MattersOn September 30, 2020, the Banks qualified for and elected to use the community bank leverage ratio (CBLR) framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 8%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year and will again increase to 9% beginning January 1, 2022. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.
The Company and the BanksBanks’ capital amounts and ratios as of September 30, 2020 and December 31, 2019 are as follows:follows (dollars in thousands):
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes * | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of September 30, 2017: | ||||||||||||||||||||||||
Total capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 175,203 | 17.7 | % | $ | 91,324 | 9.25 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 15,325 | 16.7 | 8,486 | 9.25 | $ | 9,174 | 10.0 | % | ||||||||||||||||
First National Bank | 81,177 | 15.4 | 48,867 | 9.25 | 52,829 | 10.0 | ||||||||||||||||||
Reliance State Bank | 26,957 | 15.9 | 15,661 | 9.25 | 16,931 | 10.0 | ||||||||||||||||||
State Bank & Trust | 20,217 | 16.5 | 11,337 | 9.25 | 12,256 | 10.0 | ||||||||||||||||||
United Bank & Trust | 14,903 | 20.4 | 6,741 | 9.25 | 7,288 | 10.0 | ||||||||||||||||||
Tier 1 capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 163,536 | 16.6 | % | $ | 71,578 | 7.25 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,419 | 15.7 | 6,651 | 7.25 | $ | 7,339 | 8.0 | % | ||||||||||||||||
First National Bank | 75,221 | 14.2 | 38,301 | 7.25 | 42,263 | 8.0 | ||||||||||||||||||
Reliance State Bank | 24,947 | 14.7 | 12,275 | 7.25 | 13,545 | 8.0 | ||||||||||||||||||
State Bank & Trust | 18,680 | 15.2 | 8,886 | 7.25 | 9,805 | 8.0 | ||||||||||||||||||
United Bank & Trust | 14,084 | 19.3 | 5,284 | 7.25 | 5,830 | 8.0 | ||||||||||||||||||
Tier 1 capital (to average- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 163,536 | 12.1 | % | $ | 53,995 | 4.00 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,419 | 10.5 | 5,484 | 4.00 | $ | 6,855 | 5.0 | % | ||||||||||||||||
First National Bank | 75,221 | 10.0 | 29,942 | 4.00 | 37,428 | 5.0 | ||||||||||||||||||
Reliance State Bank | 24,947 | 12.2 | 8,147 | 4.00 | 10,184 | 5.0 | ||||||||||||||||||
State Bank & Trust | 18,680 | 11.9 | 6,297 | 4.00 | 7,871 | 5.0 | ||||||||||||||||||
United Bank & Trust | 14,084 | 12.9 | 4,372 | 4.00 | 5,465 | 5.0 | ||||||||||||||||||
Common equity tier 1 capital (to risk-weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 163,536 | 16.6 | % | $ | 56,769 | 5.75 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,419 | 15.7 | 5,275 | 5.75 | $ | 5,963 | 6.5 | % | ||||||||||||||||
First National Bank | 75,221 | 14.2 | 30,377 | 5.75 | 34,339 | 6.5 | ||||||||||||||||||
Reliance State Bank | 24,947 | 14.7 | 9,735 | 5.75 | 11,005 | 6.5 | ||||||||||||||||||
State Bank & Trust | 18,680 | 15.2 | 7,047 | 5.75 | 7,967 | 6.5 | ||||||||||||||||||
United Bank & Trust | 14,084 | 19.3 | 4,190 | 5.75 | 4,737 | 6.5 |
* These ratios for September 30, 2017 include a capital conservation buffer of 1.25%, except for the Tier 1 capital to average weighted assets ratios.
To Be Well | ||||||||||||||||
Capitalized Under | ||||||||||||||||
Prompt Corrective | ||||||||||||||||
Actual | Action Provisions | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
As of September 30, 2020: | ||||||||||||||||
Community Bank Leverage Ratio: | ||||||||||||||||
(Tier 1 capital to average assets for leverage ratio): | ||||||||||||||||
Boone Bank & Trust | $ | 13,770 | 9.5 | % | $ | 11,642 | 8.0 | % | ||||||||
First National Bank | 84,275 | 8.8 | 76,901 | 8.0 | ||||||||||||
Iowa State Savings Bank | 21,251 | 9.5 | 17,883 | 8.0 | ||||||||||||
Reliance State Bank | 22,923 | 9.9 | 18,438 | 8.0 | ||||||||||||
State Bank & Trust | 16,181 | 8.9 | 14,590 | 8.0 | ||||||||||||
United Bank & Trust | 10,436 | 9.6 | 8,720 | 8.0 |
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2016: | ||||||||||||||||||||||||
Total capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 170,358 | 17.2 | % | $ | 85,241 | 8.625 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 15,044 | 17.2 | 7,534 | 8.625 | $ | 8,735 | 10.0 | % | ||||||||||||||||
First National Bank | 78,322 | 15.3 | 44,279 | 8.625 | 51,338 | 10.0 | ||||||||||||||||||
Reliance State Bank | 26,095 | 14.1 | 15,927 | 8.625 | 18,466 | 10.0 | ||||||||||||||||||
State Bank & Trust | 20,170 | 16.4 | 10,590 | 8.625 | 12,278 | 10.0 | ||||||||||||||||||
United Bank & Trust | 14,897 | 19.2 | 6,684 | 8.625 | 7,749 | 10.0 | ||||||||||||||||||
Tier 1 capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 159,325 | 16.1 | % | $ | 65,475 | 6.625 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,132 | 16.2 | 5,787 | 6.625 | $ | 6,988 | 8.0 | % | ||||||||||||||||
First National Bank | 72,750 | 14.2 | 34,011 | 6.625 | 41,070 | 8.0 | ||||||||||||||||||
Reliance State Bank | 24,139 | 13.1 | 12,234 | 6.625 | 14,773 | 8.0 | ||||||||||||||||||
State Bank & Trust | 18,633 | 15.2 | 8,134 | 6.625 | 9,822 | 8.0 | ||||||||||||||||||
United Bank & Trust | 14,078 | 18.2 | 5,134 | 6.625 | 6,199 | 8.0 | ||||||||||||||||||
Tier 1 capital (to average- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 159,325 | 12.0 | % | $ | 53,316 | 4.000 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,132 | 10.2 | 5,529 | 4.000 | $ | 6,911 | 5.0 | % | ||||||||||||||||
First National Bank | 72,750 | 10.0 | 29,077 | 4.000 | 36,347 | 5.0 | ||||||||||||||||||
Reliance State Bank | 24,139 | 11.5 | 8,374 | 4.000 | 10,467 | 5.0 | ||||||||||||||||||
State Bank & Trust | 18,633 | 11.6 | 6,449 | 4.000 | 8,061 | 5.0 | ||||||||||||||||||
United Bank & Trust | 14,078 | 12.5 | 4,523 | 4.000 | 5,654 | 5.0 | ||||||||||||||||||
Common equity tier 1 capital (to risk-weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 159,325 | 16.1 | % | $ | 50,650 | 5.125 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,132 | 16.2 | 4,477 | 5.125 | $ | 5,678 | 6.5 | % | ||||||||||||||||
First National Bank | 72,750 | 14.2 | 26,311 | 5.125 | 33,370 | 6.5 | ||||||||||||||||||
Reliance State Bank | 24,139 | 13.1 | 9,464 | 5.125 | 12,003 | 6.5 | ||||||||||||||||||
State Bank & Trust | 18,633 | 15.2 | 6,292 | 5.125 | 7,981 | 6.5 | ||||||||||||||||||
United Bank & Trust | 14,078 | 18.2 | 3,972 | 5.125 | 5,037 | 6.5 |
* These ratios for December 31, 2016 include a capital conservation buffer of 0.625%, except for the Tier 1 capital to average weighted assets ratios.
The Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes in July 2013. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirements and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. The Company and the Banks have made the election to retain the existing treatment for accumulated other comprehensive income. The final rules took effect for the Company and the Banks on January 1, 2015, subject to a transition period for certain parts of the rules.
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2019: | ||||||||||||||||||||||||
Total capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 180,834 | 14.3 | % | $ | 132,878 | 10.50 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,205 | 14.1 | 10,610 | 10.50 | $ | 10,105 | 10.0 | % | ||||||||||||||||
First National Bank | 87,375 | 13.9 | 66,180 | 10.50 | 63,028 | 10.0 | ||||||||||||||||||
Iowa State Savings Bank | 20,610 | 14.2 | 15,208 | 10.50 | 14,483 | 10.0 | ||||||||||||||||||
Reliance State Bank | 24,487 | 13.0 | 19,778 | 10.50 | 18,836 | 10.0 | ||||||||||||||||||
State Bank & Trust | 16,800 | 13.5 | 13,115 | 10.50 | 12,490 | 10.0 | ||||||||||||||||||
United Bank & Trust | 10,775 | 14.3 | 7,910 | 10.50 | 7,534 | 10.0 | ||||||||||||||||||
Tier 1 capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 167,514 | 13.2 | % | $ | 107,568 | 8.50 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 13,274 | 13.1 | 8,589 | 8.50 | $ | 8,084 | 8.0 | % | ||||||||||||||||
First National Bank | 80,665 | 12.8 | 53,574 | 8.50 | 50,423 | 8.0 | ||||||||||||||||||
Iowa State Savings Bank | 20,151 | 13.9 | 12,311 | 8.50 | 11,587 | 8.0 | ||||||||||||||||||
Reliance State Bank | 22,166 | 11.8 | 16,010 | 8.50 | 15,069 | 8.0 | ||||||||||||||||||
State Bank & Trust | 15,233 | 12.2 | 10,617 | 8.50 | 9,992 | 8.0 | ||||||||||||||||||
United Bank & Trust | 9,955 | 13.2 | 6,403 | 8.50 | 6,027 | 8.0 | ||||||||||||||||||
Tier 1 capital (to average- assets): | ||||||||||||||||||||||||
Consolidated | $ | 167,544 | 10.1 | % | $ | 66,234 | 4.00 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 13,274 | 9.5 | 5,604 | 4.00 | $ | 7,005 | 5.0 | % | ||||||||||||||||
First National Bank | 80,665 | 9.3 | 34,702 | 4.00 | 43,378 | 5.0 | ||||||||||||||||||
Iowa State Savings Bank | 20,151 | 9.5 | 8,453 | 4.00 | 10,567 | 5.0 | ||||||||||||||||||
Reliance State Bank | 22,166 | 10.0 | 8,886 | 4.00 | 11,108 | 5.0 | ||||||||||||||||||
State Bank & Trust | 15,233 | 9.5 | 6,384 | 4.00 | 7,980 | 5.0 | ||||||||||||||||||
United Bank & Trust | 9,955 | 9.8 | 4,073 | 4.00 | 5,091 | 5.0 | ||||||||||||||||||
Common equity tier 1 capital (to risk-weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 167,544 | 13.2 | % | $ | 88,585 | 7.00 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 13,274 | 13.1 | 7,074 | 7.00 | $ | 6,568 | 6.5 | % | ||||||||||||||||
First National Bank | 80,665 | 12.8 | 44,120 | 7.00 | 40,968 | 6.5 | ||||||||||||||||||
Iowa State Savings Bank | 20,151 | 13.9 | 10,138 | 7.00 | 9,414 | 6.5 | ||||||||||||||||||
Reliance State Bank | 22,166 | 11.8 | 13,185 | 7.00 | 12,243 | 6.5 | ||||||||||||||||||
State Bank & Trust | 15,233 | 12.2 | 8,743 | 7.00 | 8,119 | 6.5 | ||||||||||||||||||
United Bank & Trust | 9,955 | 13.2 | 5,273 | 7.00 | 4,897 | 6.5 |
Beginning in 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At the present time, the ratios for the Company and the Banks are sufficient to meet the fully phased-in conservation buffer.
12. Subsequent Events
14. | Subsequent Events |
Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after September 30, 2017, 2020, but prior to November 8, 2017, 5, 2020, that provided additional evidence about conditions that existed at September 30, 2017. There2020. Except for dividends declared on October 14, 2020, there were no other significant events or transactions that provided evidence about conditions that did not exist at September 30, 2017.2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Ames National Corporation (the(the “Company”) is a bank holding company established in 1975 that owns and operates fivesix 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) and Iowa State Savings Bank (Iowa State Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.
The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. 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 fourteensixteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training, real estate valuation services and the coordination of management activities, in addition to 205265 full-time equivalent individuals employed by the Banks.
The 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.
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 BanksBanks; (v) gain on sale of loans; and (v) Merchant(vi) merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearinginterest-bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
The Company had net income of $3,928,000,$5,671,000, or $0.42$0.62 per share, for the three months ended September 30, 2017,2020, compared to net income of $3,804,000,$4,041,000, or $0.41$0.44 per share, for the three months ended September 30, 2016.2019. The increase in earnings is primarily the result of a reduction in interest expense due to market rate decreases and the Iowa State Savings Bank acquisition.
The increase in quarterly earnings can be primarily attributed to an increase in loan interest income and a lower provision for loan losses, offset in part by increases in interest expense.
NetNet loan charge-offs (recoveries) totaled $105,000$615,000 and $(81,000)$314,000 for the three months ended September 30, 20172020 and 2016,2019, respectively. The provision for loan losses totaled $57,000$542,000 and $235,000$379,000 for the three months ended September 30, 20172020 and 2016,2019, respectively.
The Company had net income of $11,011,000,$13,654,000, or $1.18$1.49 per share, for the nine months ended September 30, 2017,2020, compared to net income of $11,710,000,$12,896,000, or $1.26$1.40 per share, for the nine months ended September 30, 2016. 2019.
The decreaseincrease in nine month earnings can beis primarily attributed to a higher provision for loan losses and increasesthe result of the Acquisition, reduction in interest expense due to market rate decreases, and was partially offset in part by an increase in provision for loan interest income.losses.
Net loan charge-offs (recoveries) totaled $589,000$1,111,000 and $(22,000)$295,000 for the nine months ended September 30, 20172020 and 2016,2019, respectively. The provision for loan losses totaled $1,222,000$4,424,000 and $441,000$545,000 for the nine months ended September 30, 20172020 and 2016,2019, respectively.
The following management discussion and analysis will provide a review of important items relating to:
● | Challenges and COVID-19 Status, Risks and Uncertainties |
● | Key Performance Indicators and Industry Results |
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● | Asset Quality Review and Credit Risk Management |
● | Liquidity and Capital Resources |
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Challenges and COVID-19 Status, Risks and Uncertainties
Management hasPrior to the onset of the COVID-19 pandemic during the first quarter of 2020, management had identified certain events or circumstances that may negatively impact the Company’sCompany’s financial condition and results of operations in the future and is attemptingdetailed its efforts 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, 2017.10, 2020.
The Company conducts business in the State of Iowa and Iowa began to place significant restrictions on companies and individuals on March 9, 2020 as a result of the COVID-19 pandemic. The State of Iowa has eased many of the restrictions related to the COVID-19 pandemic. As an organization that focuses on community banking, we are concerned about the health of our customers, employees and local communities and keep that thought at the forefront of our decisions. The Company’s bank lobbies are open to the public, with business also being transacted through our drive up facilities, online, telephone or by appointment.
The onset of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing the Company and its operations, including the following:
● | As the economic slowdown continues to evolve due to the pandemic, some of the Company’s customers may experience decreased revenues, which may correlate to an inability to make timely loan payments or maintain payrolls. This, in turn, could adversely impact the revenues and earnings of the Company by, among other things, requiring further increases in the allowance for loan losses and increases in the level of charge-offs in the loan portfolio. As detailed herein, the Company recognized a significant increase in provision expense during the nine months ended September 30, 2020. The increase was due in part to the economic slowdown. Management anticipates additional increases in the allowance if the effects of the COVID-19 pandemic continue to negatively impact the loan portfolio. |
● | The Federal Reserve decreased the range for the federal funds target rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on March 16, 2020, reaching a current range of 0.0 – 0.25 percent. |
● | Local and the State of Iowa’s elevated unemployment may continue to cause economic challenges to our consumer and commercial customers due to the economic effects of the COVID-19 pandemic. Higher levels of unemployment may adversely impact the revenues and earnings of the Company. |
● | The Company anticipates a slowdown in demand for its products and services, including in the demand for traditional loans, although the timing of the recovery is uncertain. |
● | Goodwill is currently evaluated for impairment quarterly and goodwill has been determined to not be impaired as of September 30, 2020. In the future goodwill may be impaired if the effects of the economic slowdown negatively impacts our net income and fair value, particularly of our most recent acquisition. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded. |
● | The uncertain economic conditions has created significant volatility and disruption in the financial markets, and these conditions may require the Company to recognize an elevated level of other than temporary impairments on securities held in the Company’s investment portfolio as issuers of these securities are negatively impacted by the economic slowdown. Declines in fair value of securities held in the portfolio could also reduce the unrealized gains reported as part of the Company’s other comprehensive income. |
● | Market interest rates have declined significantly and these reductions, especially if prolonged, could adversely affect the Company’s net interest income, net interest margin and earnings. |
● | Dividends in the future may be reduced or eliminated if the COVID-19 pandemic has an adverse effect on net income, an unanticipated increase in deposits or other unidentified risks that may negatively affect the Company’s capital ratios. |
We have taken numerous steps in response to the COVID-19 pandemic, including the following:
● | We have been actively working with loan customers to evaluate prudent loan modification terms. As of September 30, 2020, approximately $94.8 million, or 8.1%, of loans were in payment deferral status under COVID-19 related modifications. COVID-19 related modifications primarily involve a delay of principal and/or interest payments for up to six months. |
● | We had 942 PPP loans with an aggregate outstanding balance of $79.6 million as of September 30, 2020. Borrowers have begun the process of filing for forgiveness with the SBA. When the borrower applies for loan forgiveness, the Bank has 60 days to submit the application to the SBA. The SBA then has 90 days to approve the loan forgiveness. We began receiving forgiveness payments from the SBA in October 2020 and expect the forgiveness process to extend into 2021 |
● | We have successfully deployed a modified working environment to emphasize the safety of our teams and continuity of our business processes. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. No material operational or internal control challenges or risks have been identified to date. |
Certain industries are widely expected to be particularly impacted by shutdowns, capacity restrictions, quarantines and social distancing in response to COVID-19 and efforts to contain it. As of September 30, 2020 approximately 8.4% of our loan portfolio is associated with the hospitality and entertainment industries. Because of the significant uncertainties related to the duration of the COVID-19 pandemic and its potential effects on our customers, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.
Key Performance Indicators and Industry Results
Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 5,7875,066 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.
Selected Indicators for the Company and the Industry
3 Months | 9 Months | 3 Months | 9 Months | Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ended | Ended | 3 Months Ended | Years Ended December 31, | Ended | Ended | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | June 30, 2017 | 2016 | 2015 | September 30, 2020 | June 30, 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Company | Company | Industry* | Company | Industry | Company | Industry | Company | Company | Industry* | Company | Industry* | Company | Industry* | |||||||||||||||||||||||||||||||||||||||||||||||||||
Return on assets | 1.15 | % | 1.07 | % | 1.01 | % | 1.14 | % | 1.18 | % | 1.04 | % | 1.13 | % | 1.04 | % | 1.21 | % | 0.99 | % | 0.94 | % | 0.36 | % | 1.14 | % | 1.29 | % | 1.23 | % | 1.35 | % | ||||||||||||||||||||||||||||||||
Return on equity | 9.08 | % | 8.64 | % | 8.17 | % | 10.11 | % | 9.38 | % | 9.32 | % | 9.44 | % | 9.31 | % | 11.18 | % | 9.27 | % | 9.09 | % | 3.53 | % | 9.48 | % | 11.40 | % | 10.09 | % | 11.98 | % | ||||||||||||||||||||||||||||||||
Net interest margin | 3.29 | % | 3.25 | % | 3.25 | % | 3.22 | % | 3.36 | % | 3.13 | % | 3.33 | % | 3.07 | % | 3.21 | % | 3.16 | % | 3.10 | % | 2.81 | % | 3.21 | % | 3.36 | % | 3.23 | % | 3.40 | % | ||||||||||||||||||||||||||||||||
Efficiency ratio | 52.42 | % | 53.16 | % | 52.93 | % | 56.32 | % | 51.95 | % | 58.28 | % | 53.59 | % | 59.91 | % | 54.80 | % | 56.30 | % | 56.49 | % | 58.69 | % | 58.51 | % | 56.63 | % | 55.90 | % | 56.27 | % | ||||||||||||||||||||||||||||||||
Capital ratio | 12.70 | % | 12.41 | % | 12.37 | % | 9.69 | % | 12.60 | % | 9.48 | % | 12.00 | % | 9.59 | % | 10.80 | % | 10.69 | % | 10.35 | % | 8.77 | % | 12.05 | % | 9.66 | % | 12.18 | % | 9.70 | % |
*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 averageaverage assets was 1.15%1.21% and 1.10% for the three months ended September 30, 20172020 and 2016.2019, respectively. This ratio increase was primarily the result of a reduction in interest expense due to market rate decreases.
● | Return on Equity |
This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 9.08%11.18% and 8.91%8.74% for the three months ended September 30, 20172020 and 2016,2019, respectively. TheThis ratio increase was primarily the result of a reduction in this ratio in 2017 from the previous period is primarilyinterest expense due to an increase in net income.market rate decreases.
● | Net Interest Margin |
The net interest margin for the three months ended September 30, 20172020 and 20162019 was 3.29%3.21% and 3.38%3.15%, respectively. The ratio is calculated by dividing tax equivalent net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. The decrease in this ratio in 2017 is primarily the result of an increase in the interest rates on deposits.
● | Efficiency Ratio |
This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 52.42%54.80% and 50.71%57.80% for the three months ended September 30, 20172020 and 2016,2019, respectively. The efficiency ratio remained consistent withhas slightly improved compared to the prior periods.quarter last year.
● | Capital Ratio |
The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 12.70%10.80% as of September 30, 20172020 is significantly higher than the industry average of 9.69%8.77% as of June 30, 2017.2020.
Industry ResultsResults:
The FDIC Quarterly Banking Profile reported the following results for the second quarter of 2017:2020
HigherQuarterly Net Interest Income Lifts Industry EarningsDeclines $43.7 Billion (70%) From 12 Months Ago
HigherQuarterly net interest income and restrained growth in operating expenses helped lift banking industry profits in second quarter 2017. The 5,787for the 5,066 FDIC-insured commercial banks and savings institutions insuredtotaled $18.8 billion during second quarter 2020, a decline of $43.7 billion (70%) from a year ago. The decline in net income reflects a continuation of uncertain economic activity, which drove an increase in provision expenses. Slightly less than half (47.5%) of all banks reported lower net income compared to a year ago. The average return on assets ratio was 0.36% for the current quarter, down 102 basis points from a year ago.
Net Interest Margin Declines to 2.81%
Net interest income was $131.5 billion in second quarter 2020, down $7.6 billion (5.4%) from a year ago. This marks the third consecutive quarter that net interest income declined on a year-over-year basis. Most of the decline was driven by the FDICthree largest institutions, as less than half (42.2%) of all banks reported lower net interest income of $48.3 billionfrom a year ago. The average net interest margin (NIM) for the quarter, anbanking industry declined below the 3% level, or down 58 basis point from a year ago to 2.81%. This is the lowest NIM ever reported in the Quarterly Banking Profile (QBP). The NIM compression was broad-based, as it declined for all five asset size groups featured in the QBP. The decline in NIM was caused by asset yields declining at a faster rate than funding costs, as low-yielding assets grew substantially.
Noninterest Income Increases Nearly 7% From a Year Ago
With almost half (47.8%) of all banks increasing their noninterest income from a year ago, the aggregate noninterest income for the banking industry rose by $4.6 billion (6.9%) to $70.8 billion. The annual increase of $4.7in noninterest income was attributable to higher trading revenue, which rose by $6.7 billion (10.7%(80.2%) compared with, and net gains on loan sales, which increased by $4.1 billion (110.8%).
Noninterest Expense Increases 6.2% From Second Quarter 2019
Noninterest expense rose to $122.3 billion in the second quarter, up $7.2 billion (6.2%) from a year ago. More than half (58.6%) of 2016.all banks reported year-over-year increases in noninterest expense. The annual increase in noninterest expense was attributable to higher salary and employee benefits (up $2.7 billion, or 4.8%) and goodwill impairment charges (up $2.5 billion). The average assets per employee increased from $8.8 million in second quarter 2019 to $10.2 million in second quarter 2020. Noninterest expense as a percentage of average assets declined by 16 basis points from a year ago to 2.37%, the lowest level ever reported in the QBP.
Provisions for Credit Losses Rise From 12 Months Ago
The continuation of weak economic activity and the recent implementation of the current expected credit losses (CECL) accounting methodology resulted in provisions for credit losses to increase by $49.1 billion (382.2%) or from $12.8 billion in second quarter 2019 to $61.9 billion this quarter. Quarter over quarter, provisions for credit losses rose by $9.2 billion (17.4%). During the second quarter, 253 banks used the CECL accounting standard. CECL adopters reported $56.3 billion in provisions for credit losses in second quarter, up 419.2% from a year ago, and non-CECL adopters reported $5.6 billion, up 207.3%. Almost two out of every three banks 63.4%(61.2%) reported year-over-year earnings improvement, while only 4.1% were unprofitable, downyearly increases in provision for credit losses.
Average Net Charge-Off Rate Increases by 7 Basis Points From a Year Ago
The average net charge-off rate increased by 7 basis points from 4.6% a year earlier. The average return on assets (ROA) roseago to 1.14% from 1.06% the year before. This is the highest quarterly ROA for the industry since second quarter 2007.
0.57%. Net Interest Margins Improve
Net operating revenue—the sum of net interest income and total noninterest income—rose to $190.5charge-offs increased by $2.8 billion in the second quarter, an $11 billion (6.1%) increase from second quarter 2016. Most of the improvement consisted of higher net interest income, which was $10.3 billion (9.1%) higher than a year earlier. The increase in net interest income helped lift the industry’s net interest margin (NIM) to 3.22%, from 3.08% in second quarter 2016. This is the highest quarterly NIM since fourth quarter 2013. While 57.7% of all banks reported higher NIMs, the improvement was greatest at larger institutions. More of their assets reprice or mature in the short term, and they are better-positioned to benefit from rising short-term interest rates. Noninterest income totaled $66.8 billion, up $654 million (1%(22.2%) from a year earlier. Income from asset servicingago, the largest percentage increase since first quarter 2010. The annual increase in total net chargeoffs was $1attributable to the commercial and industrial (C&I) loan portfolio, in which charge-offs increased by $2.4 billion (93.9%) higher, while gains on asset sales were $1.6 billion (31.7%) lower. Trading income fell $313 million (4.5%).
Noninterest Expense Growth Is Moderate
Banks set aside $12 billion in loan-loss provisions during the second quarter, up $273 million (2.3%) from the previous year. Slightly more than one-third of all banks—36.5%—increased their loss provisions versus second quarter 2016, while 32.2% reported lower provisions. Noninterest expenses totaled $108.6 billion, an increase of $3.5 billion (3.3%(128.5%). Expenses for salaries and employee benefits were $2.1 billion (4.3%) higher thanThe C&I net charge-off rate rose by 31 basis points from a year earlier, asago to 0.64%, but remains well below the total numberpost-crisis high of employees rose by 48,019 (2.3%).2.72% reported in fourth quarter 2009.
Noncurrent Loan Balances Decline FurtherRate Increases to 1.08%
The amount of loans and leases that wereaverage noncurrent—90 rate increased by 15 basis points from the previous quarter to 1.08%. Noncurrent loan balances (90 days or more past due or in nonaccrual status—status) totaled $118.3 billion in the second quarter, an increase of $15.9 billion (15.5%) from the previous quarter. Less than half (41.6%) of all banks reported quarterly increases in noncurrent loan balances. The increase in noncurrent loan balances was led by 1–4 family residential mortgage loans (up $7.6 billion, or 19.5%) and C&I loan portfolio (up $6.1 billion, or 29%). The rise in noncurrent loan balances for 1–4 family residential mortgage loans reflects Ginnie Mae (GNMA) loans, which are guaranteed by the U.S. government, that have been brought back on banks’ books. The noncurrent rate for 1–4 family residential mortgage loans increased by 33 basis points to 2.09%, and for C&I the noncurrent rate rose by 18 basis points to 1.01%.
Total Assets Expand 4.4% From the Previous Quarter
The banking industry reported total assets of $21.1 trillion in the second quarter, an increase of $884.6 billion (4.4%) from first quarter 2020. Cash and balances due from depository institutions increased by $478 billion (19.9%) to $2.9 trillion or 13.7% of total assets. Banks increased their securities holdings by $307.2 billion (7.3%), the largest quarterly dollar increase ever reported in the QBP. Most of this growth was attributable to U.S. Treasury securities, which rose by $173 billion (26.3%), and mortgage backed securities, which increased by $105.4 billion (4.1%).
Loan Balances Increase Modestly From the Previous Quarter, Driven by Paycheck Protection Program Lending
Total loan and lease balances increased by $33.9 billion (0.3%) from the previous quarter, led by C&I loan portfolio, which rose by $146.5 billion (5.8%). The rise in C&I loan portfolio was attributable to the implementation of the Small Business Administration-guaranteed Paycheck Protection Program (PPP), with $482.2 billion in PPP loans on banks’ balance sheets at the end of the quarter. The increase in total loan and lease balances was partially offset by consumer loans, which includes credit cards (down $67.1 billion, or 3.8%).
Deposits Expand by More Than $1 Trillion for Second Consecutive Quarter
Total deposit balances increased by $1.2 trillion (7.5%) from the previous quarter. Noninterest-bearing account balances rose by $637 billion (17.7%) and interest-bearing account balances rose by $575.3 billion (5.4%). Nondeposit liabilities declined by $330.9 billion (14%) from the previous quarter. The decline in nondeposit liabilities was attributable to lower Federal Home Loan Bank advances, which fell forby $234.1 billion (38.2%). Over the 28th timepast 12 months, total deposits rose by $2.9 trillion (20.8%), led by the increase of $2.4 trillion in the last 29 quarters, declining by $8.4 billion (6.7%) in the three months ended June 30. Noncurrent balances declined in all major loan categories during the quarter. Noncurrent residential mortgage loans fell by $4.8 billion (7.9%), while noncurrent C&I loans declined by $2.2 billion (9.5%). The average noncurrent loan rate fell from 1.34% to 1.23% during the quarter, the lowest since third quarter 2007.two quarters.
Banks Shift Their Reserve Allocations
Total loan-loss reserves posted a modest ($197 million, 0.2%) decline duringEquity Capital Rises From the second quarter. The industry’s coverage ratio of reserves to noncurrent loans and leases rose from 97.5% to 104.3%, the highest level since third quarter 2007. Banks with assets greater than $1 billion, which account for 90% of the industry’s loss reserves, increased their reserves for credit card losses by $1.4 billion (4.3%), while reducing their reserves for commercial loan losses by $1.1 billion (3.3%) and their reserves for residential real estate loan losses by $922 million (5.5%).
Retained Earnings Drive Capital GrowthPrevious Quarter
Equity capital increased by $38.7totaled $2.1 trillion in the second quarter, an increase of $31.9 billion (2%(1.5%) duringfrom the previous quarter. Retained earnings contributed $20$4.8 billion to the growthequity formation in capital, $322 million (1.6%) less than inthe second quarter, 2016. Banksas net income of $18.8 billion exceeded declared $28.3dividends of $14 billion. Nine insured institutions with $1.4 billion in dividends in the quarter, up $5 billion (21.4%) from the year-earlier quarter. Lower long-term interest rates contributed to an $8 billion improvement in accumulated other comprehensive income, which was reflected in the equity capital increase. At the end of the quarter, 99.4% of all FDIC-insured institutions, representing 99.96% of total industry assets met or exceededwere below the requirements for the well-capitalized banks,category as defined for Prompt Corrective Action purposes.
Banks Reduce Their Federal ReserveOne New 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 heldOpens 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 ConsecutiveSecond Quarter
Total loans and leases increased by $161.2 billion (1.7%) during the second quarter. All major loan categories posted increases, led by residential mortgage loans (up $35.1 billion, 1.8%), credit card balances (up $23.6 billion, 3.1%), and C&I loans (up $22.1 billion, 1.1%). Unused loan commitments increased by $25.9 billion (0.4%). For the 12 months ended June 30, total loans and leases increased by $337.6 billion (3.7%), while unused loan commitments rose by $274.8 billion (3.9%). The 12-month growth rate for total loans and leases has slowed in each of the last three quarters. A year ago, the 12-month loan growth rate was 6.7%. The 12-month growth rate in unused loan commitments has slowed for six consecutive quarters. In 2015, unused commitments increased 6.6%.
The Number of Banking Employees Rises 2.3% Over the Past Year 2020
The number of FDIC-insured commercial banks and savings institutions reporting financial results felldeclined from 5,116 to 5,787 in the5,066 during second quarter from 5,856 in the first quarter. During the second quarter, three insured institutions failed, while 622020. One new bank was added, 47 institutions were absorbed by mergers. No new reporters were added during the quarter.mergers, and one bank failed. Additionally, three institutions, who did not report this quarter, sold a majority of their assets and are in process of ceasing operations. The number of institutions on the FDIC’s Problem“Problem Bank ListList” declined for a 25th consecutivefrom 54 in first quarter from 1122020 to 105. This is the smallest number52, falling to near historic lows. Total assets of problem banks since March 31, 2008, and is almost 90% below the peak of 888 at the end of March 2011. The number of full-time equivalent employees rose by 11,663 (0.6%)increased from $44.5 billion 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.$48.1 billion.
Critical Accounting Policies
The discussion contained in this Item 2 and other disclosures included within this report are based,, in part, on the Company’s audited December 31, 20162019 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 impairment to be the Company’s most critical accounting policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’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, including the onset of the COVID-19 pandemic, 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, including the onset of the COVID-19 pandemic, 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 twofour 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, 2017,2020, 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. Goodwill may be impaired in the future if the effects of the COVID-19 pandemic negatively impacts our net income and fair value, particularly of our most recent acquisition. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.
Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures are widely used in the financial institutions industry and provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP (dollars in thousands).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP: | ||||||||||||||||
Net interest income (GAAP) | $ | 14,160 | $ | 10,814 | $ | 40,886 | $ | 32,715 | ||||||||
Tax-equivalent adjustment (1) | 237 | 251 | 732 | 827 | ||||||||||||
Net interest income on an FTE basis (non-GAAP) | 14,397 | 11,065 | 41,618 | 33,542 | ||||||||||||
Average interest-earning assets | $ | 1,796,452 | $ | 1,403,303 | $ | 1,754,519 | $ | 1,399,302 | ||||||||
Net interest margin on an FTE basis (non-GAAP) | 3.21 | % | 3.15 | % | 3.16 | % | 3.20 | % |
(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.
Income Statement Review for the Three Months ended September 30, 201720 and 20169
The following highlights a comparative discussion of the major components of net income and their impact for the three monthsmonths ended September 30, 20172020 and 2016:2019:
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 bearinginterest-bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.
AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
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 September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans (1) | ||||||||||||||||||||||||
Commercial | $ | 154,887 | $ | 1,732 | 4.47 | % | $ | 76,808 | $ | 1,062 | 5.53 | % | ||||||||||||
Agricultural | 105,568 | 1,580 | 5.99 | % | 78,286 | 989 | 5.05 | % | ||||||||||||||||
Real estate | 890,097 | 9,324 | 4.19 | % | 713,796 | 8,255 | 4.63 | % | ||||||||||||||||
Consumer and other | 17,667 | 229 | 5.18 | % | 15,861 | 207 | 5.22 | % | ||||||||||||||||
Total loans (including fees) | 1,168,219 | 12,865 | 4.41 | % | 884,751 | 10,513 | 4.75 | % | ||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 362,553 | 1,987 | 2.19 | % | 277,264 | 1,672 | 2.41 | % | ||||||||||||||||
Tax-exempt (2) | 164,010 | 1,128 | 2.75 | % | 177,431 | 1,197 | 2.70 | % | ||||||||||||||||
Total investment securities | 526,563 | 3,115 | 2.37 | % | 454,695 | 2,869 | 2.52 | % | ||||||||||||||||
Interest-bearing deposits with banks and federal funds sold | 101,670 | 176 | 0.69 | % | 63,857 | 401 | 2.51 | % | ||||||||||||||||
Total interest-earning assets | 1,796,452 | $ | 16,156 | 3.60 | % | 1,403,303 | $ | 13,783 | 3.93 | % | ||||||||||||||
Noninterest-earning assets | 81,654 | 59,894 | ||||||||||||||||||||||
TOTAL ASSETS | $ | 1,878,106 | $ | 1,463,197 |
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 of 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 September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
Interest-bearing checking, savings accounts and money markets | $ | 1,027,277 | $ | 586 | 0.23 | % | $ | 777,506 | $ | 1,451 | 0.75 | % | ||||||||||||
Time deposits | 272,361 | 1,133 | 1.66 | % | 226,972 | 1,097 | 1.93 | % | ||||||||||||||||
Total deposits | 1,299,638 | 1,719 | 0.53 | % | 1,004,478 | 2,548 | 1.01 | % | ||||||||||||||||
Other borrowed funds | 37,597 | 40 | 0.42 | % | 43,204 | 170 | 1.57 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,337,235 | 1,759 | 0.53 | % | 1,047,682 | 2,718 | 1.04 | % | ||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||
Noninterest-bearing checking | 325,339 | 221,586 | ||||||||||||||||||||||
Other liabilities | 12,689 | 8,975 | ||||||||||||||||||||||
Stockholders' equity | 202,843 | 184,954 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,878,106 | $ | 1,463,197 | ||||||||||||||||||||
Net interest income | $ | 14,397 | 3.21 | % | $ | 11,065 | 3.15 | % | ||||||||||||||||
Spread Analysis | ||||||||||||||||||||||||
Interest income/average assets | $ | 16,156 | 3.44 | % | $ | 13,783 | 3.77 | % | ||||||||||||||||
Interest expense/average assets | $ | 1,759 | 0.37 | % | $ | 2,718 | 0.74 | % | ||||||||||||||||
Net interest income/average assets | $ | 14,397 | 3.07 | % | $ | 11,065 | 3.02 | % |
Net Interest Income
For the three months ended September 30, 20172020 and 2016,2019, the Company's net interest margin adjusted for tax exempt income was 3.29%3.21% and 3.38%3.15%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, 20172020 totaled $10,152,000$14,160,000 compared to $10,050,000$10,814,000 for the three months ended September 30, 2016.2019.
For the three months ended September 30, 2017,2020, interest income increased $535,000,$2,387,000, or 5%18%, when compared to the same period in 2016.2019. The increase from 20162019 was primarily attributabledue to higher average balancethe Acquisition, organic loan growth including PPP loans and to a lesser extent $313,000 of loans. The higher average balances ofadditional interest recognized on loans were due primarily to favorable economic conditionspreviously recorded as nonaccrual, offset in our market areas.part by a reduction in interest rates on loans.
Interest expense increased $433,000,decreased $959,000, or 42%35%, for the three months ended September 30, 20172020 when compared to the same period in 2016.2019. The higherlower interest expense for the period is primarily attributable to highera decrease in market interest rates on core deposits due to competitive pressures.deposits.
Provision for Loan Losses
The Company’sA provision for loan losses of $542,000 was $57,000 and $235,000recognized for the three months ended September 30, 2017 and 2016, respectively.2020 as compared to $379,000 for the three months ended September 30, 2019. Net loan charge offs totaled $615,000 for the three months ended September 30, 2020 compared to $314,000 for the three months ended September 30, 2019. The decreaseincrease in the provision for loan losses was primarily due primarily to anthe economic slowdown associated with COVID-19 and to a lesser extent loan growth and the increase in specific reserves for one loan in 2016. Net loan charge-offs (recoveries) were $105,000net charge-offs.
Noninterest Income and $(81,000)Expense
Noninterest income for the three months ended September 30, 2017 and 2016, respectively. The increase net charge-offs related primarily2020 totaled $2,795,000 as compared to one commercial operating customer relationship. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.
Noninterest Income and Expense
Noninterest income decreased $144,000$2,119,000 for the three months ended September 30, 2017 compared to the same period in 2016.2019, an increase of 32%. The decreaseincrease in noninterest income iswas primarily due to a slowdown in the refinancegains on sale of home loans held for sale resultingfrom increased refinancing volume in lower gains ona low interest rate environment and to a lesser extent 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.Acquisition.
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 Noninterest expense for the three months ended September 30, 20172020 totaled $9,291,000 compared to $7,475,000 recorded for the three months ended September 30, 2019, an increase of 24%. Most of the increase was related to the Acquisition. Excluding the Acquisition, the increases were related to salaries and 2016employee benefits, FDIC insurance assessments and the amortization of the investment in Federal New Market Tax Credit projects. The increase in salaries and employee benefits, excluding the Acquisition, was $1,730,000primarily due to normal increases in salaries and $1,903,000, respectively, representing another employee benefits including health insurance costs. The increase in FDIC insurance assessments was due to the receipt of a small bank credit in 2019 as the deposit insurance reserve ratio exceeded 1.35%. The remaining credit was fully utilized by the second quarter of 2020. The efficiency ratio was 54.8% for the third quarter of 2020 as compared to 57.8% in the third quarter of 2019.
Income Taxes
Income tax expense for the three months ended September 30, 2020 totaled $1,451,000 compared to $1,038,000 recorded for the three months ended September 30, 2019. The effective tax rate of 31%was 20% for the three months ended September 30, 2020 and 33%, respectively.2019. The lower effective tax rate than the expected tax rate of 35% for both periods isin 2020 and 2019 was due primarily due to tax-exempt interest income. The initial recording of a valuation allowance on a deferred tax asset resulted in a higher effectiveincome and New Market Tax Credits which further lowered the tax rate in 2016.2020.
Income Statement Review for the Nine Months ended September 30,, 2017 2020 and 20162019
The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 20172020 and 2016:2019:
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 bearinginterest-bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.
AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
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 |
AVERAGE BALANCE SHEETS AND INTEREST RATES |
Nine Months Ended September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans (1) | ||||||||||||||||||||||||
Commercial | $ | 128,638 | $ | 4,455 | 4.62 | % | $ | 81,022 | $ | 3,301 | 5.43 | % | ||||||||||||
Agricultural | 109,038 | 4,601 | 5.63 | % | 80,424 | 3,576 | 5.93 | % | ||||||||||||||||
Real estate | 878,105 | 28,252 | 4.29 | % | 713,449 | 24,523 | 4.58 | % | ||||||||||||||||
Consumer and other | 18,113 | 713 | 5.25 | % | 16,403 | 623 | 5.06 | % | ||||||||||||||||
Total loans (including fees) | 1,133,894 | 38,021 | 4.47 | % | 891,298 | 32,023 | 4.79 | % | ||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 328,081 | 5,725 | 2.33 | % | 261,456 | 4,715 | 2.40 | % | ||||||||||||||||
Tax-exempt (2) | 170,413 | 3,488 | 2.73 | % | 196,129 | 3,942 | 2.68 | % | ||||||||||||||||
Total investment securities | 498,494 | 9,213 | 2.46 | % | 457,585 | 8,657 | 2.52 | % | ||||||||||||||||
Interest-bearing deposits with banks and federal funds sold | 122,131 | 889 | 0.97 | % | 50,419 | 929 | 2.46 | % | ||||||||||||||||
Total interest-earning assets | 1,754,519 | $ | 48,123 | 3.66 | % | 1,399,302 | $ | 41,609 | 3.96 | % | ||||||||||||||
Noninterest-earning assets | 82,377 | 55,522 | ||||||||||||||||||||||
TOTAL ASSETS | $ | 1,836,896 | $ | 1,454,824 |
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%
(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 21%. |
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 | % |
AVERAGE BALANCE SHEETS AND INTEREST RATES |
Nine Months Ended September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
Interest-bearing checking, savings accounts and money markets | $ | 1,003,378 | $ | 2,668 | 0.35 | % | $ | 784,985 | $ | 4,584 | 0.78 | % | ||||||||||||
Time deposits | 277,691 | 3,599 | 1.73 | % | 221,275 | 2,929 | 1.76 | % | ||||||||||||||||
Total deposits | 1,281,069 | 6,267 | 0.65 | % | 1,006,260 | 7,513 | 1.00 | % | ||||||||||||||||
Other borrowed funds | 46,164 | 238 | 0.69 | % | 42,530 | 554 | 1.74 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,327,233 | 6,505 | 0.65 | % | 1,048,790 | 8,067 | 1.03 | % | ||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||
Noninterest-bearing checking | 301,434 | 218,229 | ||||||||||||||||||||||
Other liabilities | 11,941 | 8,388 | ||||||||||||||||||||||
Stockholders' equity | 196,288 | 179,417 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,836,896 | $ | 1,454,824 | ||||||||||||||||||||
Net interest income | $ | 41,618 | 3.16 | % | $ | 33,542 | 3.20 | % | ||||||||||||||||
Spread Analysis | ||||||||||||||||||||||||
Interest income/average assets | $ | 48,123 | 3.49 | % | $ | 41,609 | 3.81 | % | ||||||||||||||||
Interest expense/average assets | $ | 6,505 | 0.47 | % | $ | 8,067 | 0.74 | % | ||||||||||||||||
Net interest income/average assets | $ | 41,618 | 3.02 | % | $ | 33,542 | 3.07 | % |
Net Interest Income
For the nine months ended September 30, 20172020 and 2016,2019, the Company's net interest margin adjusted for tax exempt income was 3.25%3.16% and 3.37%3.20%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 20172020 totaled $30,100,000$40,886,000 compared to $29,877,000$32,715,000 for the nine months ended September 30, 2016.2019.
For the nine months ended September 30, 2017,2020, interest income increased $1,235,000,$6,610,000, or 4%16%, when compared to the same period in 2016.2019. The increase from 20162019 was primarily attributabledue to higher average balance ofthe Acquisition and organic loan growth including PPP loans, offset in part by lower yields on loans. The higher average balances of loans were due primarily to favorable economic conditionsa reduction in our market areas. The lower yields on loans were due primarily to competitive pressures.interest rates.
Interest expense increased $1,012,000,decreased $1,562,000, or 33%19%, for the nine months ended September 30, 20172020 when compared to the same period in 2016.2019. The higherlower interest expense for the period is primarily attributable to highera decrease in market interest rates on core deposits due to competitive pressures.deposits.
Provision for Loan Losses
The Company’sA provision for loan losses of $4,424,000 was $1,222,000 and $441,000recognized for the nine months ended September 30, 2017 and 2016, respectively.2020 as compared to $545,000 for the nine months ended September 30, 2019. Net loan charge offs totaled $1,111,000 for the nine months ended September 30, 2020 compared to $295,000 for the nine months ended September 30, 2019. The increase in the provision for loan losses was primarily due primarily to the economic slowdown associated with COVID-19 and to a lesser extent loan growth and 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.charge-offs.
Noninterest Income and Expense
Noninterest income decreased $63,000 for the nine months ended September 30, 20172020 totaled $7,854,000 as compared to the same period in 2016. The decrease in noninterest income is primarily due to decreases in gain on sale of loans and service fees, offset in part by an increase in security gains and other noninterest income. The decrease in the gain on the sale of loans is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower revenue. The increase in other noninterest income is primarily due to the collection of $73,000 on a court judgement previously deemed uncollectible by First Bank prior to the Company’s acquisition in 2014. Exclusive of realized securities gains, noninterest income was 5% lower$6,258,000 for the nine months ended September 30, 2017 compared2019, an increase of 26%. The increase in noninterest income was primarily due to an increase in gains on sale of loans held for sale due to increased refinancing volume in a low interest rate environment, security gains, and the same period in 2016.Acquisition.
Noninterest expenseincreased $504,000 or 3% for the nine months ended September 30, 20172020 totaled $27,440,000 compared to the same period in 2016 primarily as a result of normal salary and benefit increases and higher data processing costs. Data processing increases were due to increasing technology costs. The efficiency ratio was 53.16%$22,150,000 for the nine months ended September 30, 2017 as compared2019, an increase of 24%. Most of the increase was related to 51.99%the Acquisition. Excluding the Acquisition, the increases were related to salaries and employee benefits and the amortization of the investment in same periodFederal New Market Tax Credit projects. The increase in 2016.salaries and employee benefits, excluding the Acquisition, was primarily due to normal increases in salaries and other employee benefits including health insurance costs. The efficiency ratio was 56.3% and 56.8% for the nine months ended September 30, 2020 and 2019, respectively.
Income Taxes
The provision for income taxesIncome tax expense for the nine months ended September 30, 20172020 and 2016 was $4,662,0002019 totaled $3,222,000 and $5,087,000, respectively, representing an$3,381,000, respectively. The effective tax rate of 30%was 19% and 30%,21% for the nine months ended September 30, 2020 and 2019, respectively. The lower effectivethan expected tax rate than the expected income tax rate of 35% for both periods isin 2020 and 2019 was due primarily due to tax-exempt interest income.income and New Market Tax Credits further lowered the tax rate in 2020.
Balance Sheet Review
As of September 30, 2017,2020, total assets were $1,364,940,000,$1,910,395,000, a $1,513,000 decrease$173,212,000 increase compared to December 31, 2016.2019. The decreaseincrease in assets, primarily securities available-for-sale and loans, 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$548,818,000 as of September 30, 2017, a decrease2020, an increase of $9,469,000$68,975,000 from the December 31, 20162019 balance of $516,080,000.$479,843,000. The decreaseincrease in the investment portfolio wassecurities available-for-sale is primarily due to sales, callspurchases of municipal, mortgage-backed securities, and corporate bonds, offset in part by maturities of state and political subdivision bonds.in the U.S. Government Agency portfolio.
On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, 2017,2020, gross unrealized losses of $783,000,$91,000, are considered to be temporary in nature due to the interest rate environment of 20172020 and other general economic factors. As a result of the economic slowdown resulting from the COVID-19 pandemic, certain bonds in the investment portfolio may become other-than-temporarily impaired and could negatively affect the Company’s net income. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.
At September 30, 2017,2020, the Company’s investment securities portfolio included securities issued by 266275 government municipalities and agencies located within 2423 states with a fair value of $243.4$233.6 million. At December 31, 2016,2019, the Company’s investment securities portfolio included securities issued by 286251 government municipalities and agencies located within 2518 states with a fair value of $264.4$195.3 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. TheStorm Lake, Iowa, general obligation bonds with a fair value of $8.2 million (approximately 3.5% of the fair value of the government municipalities and agencies) represent the largest exposure to any one municipality or agency for the Company as of September 30, 2017 was $4.4 million (approximately 2.0%2020; the bonds are repayable from the levy of continuing annual tax on all the taxable property within the territory of the fair valuecity of the governmental municipalities and agencies) represented by the Dubuque, Iowa Community School District to be repaid by sales tax revenues and property taxes.Storm Lake.
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, 20172020 and December 31, 20162019 identifying the state in which the issuing government municipality or agency operates.operates (Dollars inin thousands):
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||
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 | $ | 67,161 | $ | 68,964 | $ | 58,457 | $ | 59,072 | ||||||||||||||||
Nebraska | 12,273 | 12,597 | 3,414 | 3,427 | ||||||||||||||||||||||||||||
Texas | 12,188 | 12,359 | 11,091 | 11,065 | 10,246 | 10,829 | 11,243 | 11,382 | ||||||||||||||||||||||||
Pennsylvania | 8,720 | 8,795 | 8,728 | 8,654 | ||||||||||||||||||||||||||||
Washington | 6,640 | 6,609 | 7,221 | 6,957 | 8,356 | 8,730 | 6,530 | 6,629 | ||||||||||||||||||||||||
Other (2017: 16 states; 2016: 17 states) | 24,150 | 24,601 | 28,064 | 28,258 | ||||||||||||||||||||||||||||
Oregon | 6,780 | 7,064 | 3,441 | 3,505 | ||||||||||||||||||||||||||||
Other (2020: 13 states; 2019: 12 states) | 24,736 | 25,462 | 19,208 | 19,432 | ||||||||||||||||||||||||||||
Total general obligation bonds | $ | 112,191 | $ | 113,096 | $ | 130,246 | $ | 129,342 | $ | 129,552 | $ | 133,646 | $ | 102,293 | $ | 103,447 | ||||||||||||||||
Revenue bonds: | ||||||||||||||||||||||||||||||||
Iowa | $ | 118,886 | $ | 120,175 | $ | 126,750 | $ | 126,964 | $ | 66,293 | $ | 67,803 | $ | 78,281 | $ | 78,624 | ||||||||||||||||
Other (2017: 9 states; 2016: 10 states) | 10,073 | 10,167 | 8,208 | 8,142 | ||||||||||||||||||||||||||||
Texas | 8,629 | 9,213 | 480 | 476 | ||||||||||||||||||||||||||||
Other (2020: 16 states; 2019: 12 states) | 22,100 | 22,901 | 12,691 | 12,755 | ||||||||||||||||||||||||||||
Total revenue bonds | $ | 128,959 | $ | 130,342 | $ | 134,958 | $ | 135,106 | $ | 97,022 | $ | 99,917 | $ | 91,452 | $ | 91,855 | ||||||||||||||||
Total obligations of states and political subdivisions | $ | 241,150 | $ | 243,438 | $ | 265,204 | $ | 264,448 | $ | 226,574 | $ | 233,563 | $ | 193,745 | $ | 195,302 |
As of September 30, 20172020 and December 31, 2016,2019, 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 57 primary revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table.table (in thousands):
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||
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 | $ | 31,734 | $ | 32,260 | $ | 37,928 | $ | 38,173 | ||||||||||||||||
Water | 14,139 | 14,218 | 11,283 | 11,296 | 21,117 | 21,792 | 7,271 | 7,272 | ||||||||||||||||||||||||
College and universities, primarily dormitory revenues | 10,457 | 10,538 | 14,105 | 13,907 | 11,647 | 12,182 | 14,016 | 14,103 | ||||||||||||||||||||||||
Leases | 9,062 | 9,098 | 9,106 | 8,960 | 7,484 | 7,697 | 7,291 | 7,351 | ||||||||||||||||||||||||
Electric | 8,428 | 8,545 | 8,446 | 8,459 | ||||||||||||||||||||||||||||
Electric power & light revenues | 6,127 | 6,291 | 4,370 | 4,405 | ||||||||||||||||||||||||||||
Sewer | 5,274 | 5,554 | 4,612 | 4,645 | ||||||||||||||||||||||||||||
Tax increment financing | 5,063 | 5,413 | 2,545 | 2,428 | ||||||||||||||||||||||||||||
Other | 13,979 | 14,026 | 14,432 | 14,399 | 8,576 | 8,728 | 13,419 | 13,478 | ||||||||||||||||||||||||
Total revenue bonds by revenue source | $ | 128,959 | $ | 130,342 | $ | 134,958 | $ | 135,106 | $ | 97,022 | $ | 99,917 | $ | 91,452 | $ | 91,855 |
Loan Portfolio
The loanloan portfolio, net of the allowance for loan losses, totaled $764,229,000, $768,208,000$1,159,063,000 and $752,182,000$1,048,147,000 as of September 30, 2017, June 30, 20172020 and December 31, 2016,2019, respectively. The increase in the loan portfolio since December 31, 2016 isloans was primarily due to steady loan demand, ingovernment guaranteed loans under the AmesPaycheck Protection Program (“PPP”). The PPP loans totaled $79.6 million as of September 30, 2020. The PPP loans bear an interest rate of 1.0% and Des Moines markets. Loan demandgenerally have a two-year maturity. The Small Business Administration has softened inprovided fees to financial institutions to originate the third quarterPPP loans with recognition of 2017.
Deposits
Deposits totaled $1,114,538,000, $1,126,771,000$1,660,173,000 and $1,109,409,000$1,493,175,000 as of September 30, 2017, June 30, 20172020 and December 31, 2016,2019, respectively. The increasechange in deposits since December 31, 20162019 was primarily due to increases in account balances of noninterest-bearing commercial checking accounts, interest-bearing public funds NOW account balances. The decrease in deposits since June 30, 2017 waschecking accounts and retail savings accounts. Balance fluctuations were primarily due to decreasesnormal customer activity, as customers’ liquidity needs vary at any given time. In addition, funds disbursed under the PPP program were deposited into customer accounts and may impact overall deposit fluctuations as customers spend those funds according to the PPP rules. Deposit levels may decrease in retail NOWfuture periods as a result of the distressed economic conditions in our market areas related to the COVID-19 pandemic and public funds money market account balances.the low interest rate environment.
SecuritiesSecurities Sold Under Agreements to Repurchase
SecuritiesSecurities sold under agreements to repurchase totaled $39,001,000$30,492,000 as of September 30, 2017,2020, a decrease of $19,336,000,$11,542,000, or 33%27%, from the December 31, 20162019 balance of $58,337,000.$42,034,000. The decrease inwas primarily due to withdrawals from three commercial accounts.account balances that transferred to interest-bearing checking.
Dividends Payable
There were no dividends payable as of September 30, 2020 as compared to $2,213,000 as of December 31, 2019. In the past, dividends were declared in one quarter and then paid in the subsequent quarter. For the quarter ended September 30, 2020 the dividend was not declared until October 14, 2020 and will be paid in the fourth quarter of 2020.
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, 2016.2019.
Asset Quality Review and Credit Risk Management
The Company’sCompany’s credit risk is historically centered in the loan portfolio, which on September 30, 20172020 totaled $764,229,000$1,159,063,000 compared to $752,182,000$1,048,147,000 as of December 31, 2016.2019. Net loans comprise 56%61% of total assets as of September 30, 2017.2020. The objectobjective 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%1.44% at September 30, 2017,2020, as compared to 0.67%0.48% at December 31, 2016 and 0.40% at September 30, 2016.2019. The increase in the level of problem loans is due primarily to the deterioration of one loan relationship in the hospitality portfolio. The Company’s level of problem loans as a percentage of total loans at September 30, 20172020 of 0.62%1.44% is lower thanhigher as compared to 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, 2017.2020, of 0.85%, most recent available.
ImpairedImpaired loans net of specific reserves, totaled $3,907,000$16,388,000 as of September 30, 20172020 and have decreased $450,000increased $11,600,000 as compared to the impaired loans of $4,357,000$4,788,000 as of December 31, 2016.2019. The increase is primarily due to one hospitality loan relationship.
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$11,480,000 as of September 30, 2017,2020 and $1,171,000 as of December 31, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $3,672,000 as of December 31, 2016, all of which were included in impaired and nonaccrual loans.
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 sixnine 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.
Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. In March 2020 various regulatory agencies issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program was implemented.
For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. A $530,000 specific reserve was established inSpecific reserves of $40,000 were provided for the three and nine months ended September 30, 2017 on a TDR loan. The Company had $257,000 of net charge-offs related to TDRs2020. No additional specific reserve was provided for the three and nine months ended September 30, 20172019. The Company had $15,000 and none$31,000 of charge-offs for TDR’s for the same periodthree and nine months ended September 30, 2020, respectively. The Company had $275,000 of charge-offs for TDR’s for the three and nine months ended September 30, 2019. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in 2016.troubled debt restructurings or whose loans are on nonaccrual.
Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there iscontinues to be a strong reason that the credit should not be placed on non-accrual.nonaccrual. As of September 30, 2017, non-accrual2020, nonaccrual loans totaled $4,726,000$16,388,000 and there was one loan in the amountwere $180,000 of $81,000loans past due 90 days and still accruing. This compares to non-accrualnonaccrual loans of $5,077,000$4,788,000 and loans past due 90 days and still accruing totaled $22,000$255,000 as of December 31, 2016. Other real2019. The increase in nonaccrual loans is due primarily to a hospitality loan. Real estate owned totaled $385,000$621,000 and $4,004,000 as of September 30, 20172020 and $546,000 as of December 31, 2016.2019, respectively.
The agricultural real estate and agricultural operating loan portfolio classifications remain in a weakened position.elevated. The watch and special mention loans in these categories totaled $44,046,000$58,653,000 as of September 30, 20172020 as compared to $38,492,000$48,028,000 as of December 31, 2016.2019. This increase is primarily due to one agricultural customer relationship. The substandard loans in these categories totaled $2,582,000$11,135,000 as of September 30, 20172020 as compared to $2,399,000$15,913,000 as of December 31, 2016.2019. The Iowa agricultural economy was challenging for most of 2020 as a result of the price of commodities, including corn, soybeans, cattle, hogs and ethanol, along with export concerns. Crop yields were also negatively impacted in some markets as a result of the Derecho and drought conditions.
The watch and special mention loans classified as commercial real estate totaled $77,378,000 as of September 30, 2020 as compared to $33,790,000 as of December 31, 2019. This increase in these categories iscommercial real estate loans was due primarily due to the impact on agriculturalhospitality and entertainment loan portfolio. The substandard commercial real estate loans totaled $33,724,000 as of low grain prices, mitigated by indicationsSeptember 30, 2020 as compared to $14,786,000 as of favorable yields in 2017.December 31, 2019.
The allowance for loan losses as a percentage of outstanding loans as of September 30, 20172020 was 1.44%1.35%, as compared to 1.38%1.19% at December 31, 2016.2019. The allowance for loan losses totaled $11,140,000$15,932,000 and $10,507,000$12,619,000 as of September 30, 20172020 and December 31, 2016,2019, respectively. Net charge-offs (recoveries) of loans totaled $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively.
The allowance for loan losses is management’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. The increase in the allowance for loan losses is mainly due to increased risk associated with the loan portfolio due to the economic slowdown associated with COVID-19 and to a lesser extent organic growth in the loan portfolio. Additional increases in the allowance for loan losses are anticipated if the effects of the COVID-19 conditions negatively impacts our loan portfolio. These increases may be due to increased charge-offs or an increase in the qualitative factors. The qualitative factors are considered as a part of our allowance for loan loss calculation and may deteriorate if the economic effects of COVID-19 continue in the State of Iowa and a resumption to typical social and economic activity is delayed.
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, 2017,2020, 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:
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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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| Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs |
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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 and federal funds sold as of September 30, 2020 and December 31, 2019 totaled $142,393,000 and $143,565,000, respectively, and management believes these sources provide an adequate level of liquidity given current economic conditions.
Other sources of liquidity available to the Banks as of September 30, 2020 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $214,567,000, with $3,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $106,250,000, with no outstanding federal fund purchase balances as of September 30, 2020. The Company had securities sold under agreements to repurchase totaling $30,492,000 as of September 30, 2020.
Total investments as of September 30, 2020 were $548,818,000 compared to $479,843,000 as of December 31, 2019. 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, 2020.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.
Review of the Consolidated Statements of Cash Flows
Net cash provided by operating activities for the nine months ended September 30, 2020 totaled $21,323,000 compared to $14,339,000 for the nine months ended September 30, 2019, an increase of $6,984,000. This increase was primarily due to an increase in net income and the provision for loan losses.
Net cash used in investing activities for the nine months ended September 30, 2020 was $178,202,000 compared to $32,866,000 for the nine months ended September 30, 2019. The increase of $145,336,000 in cash used in investing activities was primarily due to a higher level of loans and purchases of investments, offset in part by increases in the proceeds from the maturities and calls of investments.
Net cash provided by financing activities for the nine months ended September 30, 2020 totaled $145,012,000 compared to $21,628,000 for the nine months ended September 30, 2019. The increase in cash provided by financing activities of $123,384,000 was primarily due to an increase in deposits, a lower amount of repayments of FHLB advances in 2020 as compared to 2019, and partially offset by changes in securities sold under repurchase agreements. As of September 30, 2020, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.
Review of Company Only Cash Flows
The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7,229,000 and $9,568,000 for the nine months ended September 30, 2020 and 2019, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order.
The Company, on an unconsolidated basis, has interest-bearing deposits totaling $2,979,000 as of September 30, 2020.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs
No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of September 30, 2020 that are of concern to management.
Capital Resources
The Company’s total stockholders’ equity as of September 30, 2020 totaled $206,037,000 and was $18,458,000 higher than the $187,579,000 recorded as of December 31, 2019. The increase in stockholders’ equity was primarily due to net income and an increase in other comprehensive income, offset in part by dividends declared and stock repurchases. The increase in other comprehensive income is created by lower market interest rates compared to December 31, 2019, which resulted in higher fair values in the securities available-for-sale portfolio. At September 30, 2020 and December 31, 2019, stockholders’ equity as a percentage of total assets was 10.8%. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2020.
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: the substantial negative impact of the COVID-19 pandemic on national, regional and local economies in general and on our customers in particular; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses resulting from the COVID-19 pandemic or as dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s annual report on Form 10-K. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should”, “forecasting” 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.
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
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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 2020 changed significantly when compared to 2019. Uncertainty due to the federal governmental actions stemming from reactions to the COVID-19 pandemic, may cause market interest rates to deviate from historical norms.
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
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The COVID-19 pandemic has adversely impacted, and is expected to continue adversely impacting, our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted at this time given the evolving nature of the pandemic, including the scope and duration of the pandemic, the short and long term effects on national, state and local economies and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has negatively impacted the national, Iowa and local economies in which the Company conducts business, created significant volatility and disruption in financial markets, and substantially increased unemployment levels. In addition, the pandemic resulted in temporary closures and slowdowns of many businesses and significant restrictions on companies and individuals beginning in Iowa on March 9, 2020. The State of Iowa has eased many of these restrictions related to the COVID-19 pandemic. As a result, the demand for our products and services may be significantly impacted, including the demand for new loans and deposits. Furthermore, the pandemic will likely result in the recognition of an elevated level of credit losses in our loan portfolios and continued increases in our allowance for loan losses, particularly if businesses remain closed or not fully operational, the impact on the Iowa and local economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold in our investment portfolio, as well as reductions in the unrealized gains component of other comprehensive income. Additionally, goodwill arising from recent bank acquisitions could become impaired if our net income and the fair value of the acquired assets decline due to the economic slowdown. Each of the foregoing events could negatively impact our revenues, earnings or both, as well as our financial condition.
Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The Company, as a financial institution, is considered an essential business and, therefore, continues to operate and maintain our customer relationships. Changes in restrictions by governmental authorities may change the way the Company conducts its business. Current and future governmental actions may temporarily require the Company to conduct business related to foreclosures, repossessions, payments deferrals and other customer-related transactions differently. The Company could also take actions to preserve its capital levels, such as lowering or suspending dividends, in response to the COVID-19 pandemic.
The extent to which the COVID-19 pandemic impacts our business, prospects, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted at this time due to the evolving nature of the pandemic, including the scope and duration of the pandemic, the short and long term effects on national, state and local economies and actions taken by governmental authorities and other third parties in response to the pandemic.
Unregistered Sales of Equity Securities and Use of Proceeds |
In November, 2016, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2017, there were 100,000 shares remaining to be purchased under the plan.
In November, 2019, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2020, there were no shares remaining to be purchased under the plan. Ames National Corporation completed the stock repurchase program in April, 2020 and the average price per share was $19.92.
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2020.
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Total | Part of | May Yet Be | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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of Shares | Price Paid | Announced | Under | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Period | Purchased | Per Share | Plans | The | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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