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 SeptemberJune 30, 20192020
| 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)
| 42-1039071 | ||
| (State of Incorporation) | (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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock | ATLO | NASDAQ |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ☒ No ___☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X ☒ No ____☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer____filer ☐ Accelerated filer X ☒ Non-accelerated filer____filer ☐ Smaller reporting company X ☒ Emerging growth company___company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____☐ No X ☒
As of October 29, 2019,July 31, 2020, there were 9,222,7479,122,747 shares of common stock, par value $2, outstanding.
INDEX
| Page | ||||
Part I. | ||||
Item 1. | ||||
Consolidated Balance Sheets at | ||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | ||||
Item | ||||
Part II. | ||||
Item 1. | ||||
Item 1.A. | ||||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
Item 5. | ||||
Item 6. | ||||
| Signatures |
CONSOLIDATED BALANCE SHEETS |
(unaudited) |
June 30, | December 31, | |||||||
ASSETS | 2020 | 2019 | ||||||
Cash and due from banks | $ | 32,528,234 | $ | 34,616,880 | ||||
Interest-bearing deposits in financial institutions and federal funds sold | 145,990,834 | 108,947,624 | ||||||
Securities available-for-sale | 513,615,814 | 479,843,448 | ||||||
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost | 3,154,800 | 3,138,900 | ||||||
Loans receivable, net | 1,146,046,388 | 1,048,147,496 | ||||||
Loans held for sale | 2,033,360 | 2,776,785 | ||||||
Bank premises and equipment, net | 17,628,860 | 17,810,605 | ||||||
Accrued income receivable | 10,801,448 | 11,788,409 | ||||||
Other real estate owned | 631,647 | 4,003,684 | ||||||
Bank-owned life insurance | 2,878,838 | 2,842,713 | ||||||
Deferred income taxes, net | - | 1,151,016 | ||||||
Intangible assets, net | 3,524,814 | 3,959,260 | ||||||
Goodwill | 12,424,434 | 12,114,559 | ||||||
Other assets | 5,712,963 | 6,041,126 | ||||||
Total assets | $ | 1,896,972,434 | $ | 1,737,182,505 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Noninterest-bearing checking | $ | 332,285,659 | $ | 267,441,988 | ||||
Interest-bearing checking | 483,065,694 | 461,857,728 | ||||||
Savings and money market | 553,546,573 | 481,642,221 | ||||||
Time, $250,000 and over | 69,189,546 | 74,206,421 | ||||||
Other time | 205,455,750 | 208,026,740 | ||||||
Total deposits | 1,643,543,222 | 1,493,175,098 | ||||||
Securities sold under agreements to repurchase | 36,892,657 | 42,033,570 | ||||||
FHLB advances | 3,000,000 | 5,000,000 | ||||||
Dividends payable | - | 2,213,459 | ||||||
Deferred income taxes, net | 1,194,894 | - | ||||||
Accrued expenses and other liabilities | 11,191,759 | 7,180,906 | ||||||
Total liabilities | 1,695,822,532 | 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 June 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 | 151,910,115 | 146,225,085 | ||||||
Accumulated other comprehensive income | 13,992,557 | 4,114,752 | ||||||
Total stockholders' equity | 201,149,902 | 187,579,472 | ||||||
Total liabilities and stockholders' equity | $ | 1,896,972,434 | $ | 1,737,182,505 | ||||
See Notes to Consolidated Financial Statements.
CONSOLIDATED |
(unaudited) |
|
September 30, | December 31, | |||||||
| 2019 | 2018 | ||||||
| ASSETS | ||||||||
Cash and due from banks | $ | 33,485,066 | $ | 30,384,066 | ||||
Interest bearing deposits in financial institutions | 78,930,485 | 26,057,513 | ||||||
Securities available-for-sale | 457,994,898 | 458,971,162 | ||||||
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost | 2,655,200 | 3,191,200 | ||||||
Loans receivable, net | 882,130,277 | 890,461,479 | ||||||
Loans held for sale | 1,637,225 | 401,287 | ||||||
Bank premises and equipment, net | 15,558,457 | 15,813,196 | ||||||
Accrued income receivable | 9,736,328 | 9,415,570 | ||||||
Other real estate owned | 217,856 | 829,603 | ||||||
Bank-owned life insurance | 2,823,861 | 2,773,729 | ||||||
Deferred income taxes, net | 820,400 | 3,848,713 | ||||||
Intangible assets, net | 2,250,663 | 2,677,884 | ||||||
Goodwill | 9,744,472 | 9,744,472 | ||||||
Other assets | 1,990,450 | 1,117,477 | ||||||
Total assets | $ | 1,499,975,638 | $ | 1,455,687,351 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Demand, noninterest bearing | $ | 226,521,237 | $ | 230,113,170 | ||||
NOW accounts | 391,739,201 | 366,178,715 | ||||||
Savings and money market | 402,665,343 | 418,384,284 | ||||||
Time, $250,000 and over | 52,068,331 | 40,014,550 | ||||||
Other time | 176,138,860 | 166,393,120 | ||||||
Total deposits | 1,249,132,972 | 1,221,083,839 | ||||||
Securities sold under agreements to repurchase | 52,196,061 | 40,674,486 | ||||||
Federal Home Loan Bank (FHLB) advances | 5,000,000 | 14,600,000 | ||||||
Dividends payable | 2,213,459 | 2,137,460 | ||||||
Accrued expenses and other liabilities | 5,269,746 | 4,326,502 | ||||||
Total liabilities | 1,313,812,238 | 1,282,822,287 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,222,747 and 9,293,305 shares as of September 30, 2019 and December 31, 2018, respectively | 18,445,494 | 18,586,610 | ||||||
Additional paid-in capital | 18,794,141 | 20,461,724 | ||||||
Retained earnings | 144,140,565 | 137,891,821 | ||||||
Accumulated other comprehensive income (loss) - net unrealized income (loss) on securities available-for-sale | 4,783,200 | (4,075,091 | ) | |||||
Total stockholders' equity | 186,163,400 | 172,865,064 | ||||||
Total liabilities and stockholders' equity | $ | 1,499,975,638 | $ | 1,455,687,351 | ||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 12,569,869 | $ | 10,808,142 | $ | 25,156,883 | $ | 21,509,571 | ||||||||
Securities: | ||||||||||||||||
Taxable | 1,917,332 | 1,554,713 | 3,738,572 | 3,043,565 | ||||||||||||
Tax-exempt | 954,525 | 1,067,955 | 1,864,422 | 2,168,529 | ||||||||||||
Other interest and dividend income | 195,703 | 290,465 | 713,015 | 528,033 | ||||||||||||
Total interest income | 15,637,429 | 13,721,275 | 31,472,892 | 27,249,698 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 1,898,046 | 2,606,384 | 4,548,412 | 4,965,216 | ||||||||||||
Other borrowed funds | 59,355 | 184,634 | 198,527 | 383,848 | ||||||||||||
Total interest expense | 1,957,401 | 2,791,018 | 4,746,939 | 5,349,064 | ||||||||||||
Net interest income | 13,680,028 | 10,930,257 | 26,725,953 | 21,900,634 | ||||||||||||
Provision for loan losses | 1,566,476 | 68,320 | 3,882,631 | 166,414 | ||||||||||||
Net interest income after provision for loan losses | 12,113,552 | 10,861,937 | 22,843,322 | 21,734,220 | ||||||||||||
Noninterest income: | ||||||||||||||||
Wealth management income | 909,728 | 1,019,143 | 1,771,461 | 1,803,757 | ||||||||||||
Service fees | 305,544 | 387,133 | 746,237 | 757,429 | ||||||||||||
Securities gains, net | 43,910 | 1,890 | 429,925 | 1,890 | ||||||||||||
Gain on sale of loans held for sale | 572,718 | 224,031 | 839,458 | 396,757 | ||||||||||||
Merchant and card fees | 410,414 | 386,384 | 836,254 | 747,525 | ||||||||||||
Other noninterest income | 185,910 | 194,358 | 436,081 | 431,289 | ||||||||||||
Total noninterest income | 2,428,224 | 2,212,939 | 5,059,416 | 4,138,647 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 5,812,449 | 4,797,497 | 11,587,645 | 9,513,325 | ||||||||||||
Data processing | 1,336,401 | 872,064 | 2,527,453 | 1,763,445 | ||||||||||||
Occupancy expenses, net | 656,752 | 518,559 | 1,347,938 | 1,117,564 | ||||||||||||
FDIC insurance assessments | 49,857 | 91,666 | 49,857 | 191,895 | ||||||||||||
Professional fees | 397,755 | 382,983 | 741,479 | 771,829 | ||||||||||||
Business development | 181,546 | 248,178 | 445,689 | 516,775 | ||||||||||||
Intangible asset amortization | 217,223 | 139,314 | 434,446 | 302,978 | ||||||||||||
New market tax credit projects amortization | 145,390 | - | 290,771 | - | ||||||||||||
Other operating expenses, net | 302,138 | 167,717 | 724,282 | 496,923 | ||||||||||||
Total noninterest expense | 9,099,511 | 7,217,978 | 18,149,560 | 14,674,734 | ||||||||||||
Income before income taxes | 5,442,265 | 5,856,898 | 9,753,178 | 11,198,133 | ||||||||||||
Provision for income taxes | 1,014,600 | 1,239,305 | 1,771,000 | 2,343,105 | ||||||||||||
Net income | $ | 4,427,665 | $ | 4,617,593 | $ | 7,982,178 | $ | 8,855,028 | ||||||||
Basic and diluted earnings per share | $ | 0.49 | $ | 0.50 | $ | 0.87 | $ | 0.96 | ||||||||
Dividends declared per share | $ | - | $ | 0.24 | $ | 0.25 | $ | 0.48 | ||||||||
See Notes to Consolidated Financial Statements. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(unaudited) |
|
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Interest income: | ||||||||||||||||
Loans, including fees | $ | 10,513,426 | $ | 9,557,527 | $ | 32,022,997 | $ | 27,442,604 | ||||||||
Securities: | ||||||||||||||||
Taxable | 1,671,572 | 1,545,541 | 4,715,137 | 4,638,503 | ||||||||||||
Tax-exempt | 945,769 | 1,085,131 | 3,114,298 | 3,451,084 | ||||||||||||
Interest bearing deposits and federal funds sold | 400,963 | 272,358 | 928,996 | 721,417 | ||||||||||||
Total interest income | 13,531,730 | 12,460,557 | 40,781,428 | 36,253,608 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 2,547,763 | 1,740,579 | 7,512,979 | 4,736,455 | ||||||||||||
Other borrowed funds | 170,082 | 134,017 | 553,930 | 533,870 | ||||||||||||
Total interest expense | 2,717,845 | 1,874,596 | 8,066,909 | 5,270,325 | ||||||||||||
Net interest income | 10,813,885 | 10,585,961 | 32,714,519 | 30,983,283 | ||||||||||||
Provision for loan losses | 378,789 | 100,000 | 545,203 | 192,978 | ||||||||||||
Net interest income after provision for loan losses | 10,435,096 | 10,485,961 | 32,169,316 | 30,790,305 | ||||||||||||
Noninterest income: | ||||||||||||||||
Wealth management income | 857,664 | 877,146 | 2,661,421 | 2,534,510 | ||||||||||||
Service fees | 400,919 | 363,993 | 1,158,348 | 1,036,841 | ||||||||||||
Securities gains, net | 15,141 | - | 17,031 | - | ||||||||||||
Gain on sale of loans held for sale | 289,033 | 207,856 | 685,790 | 576,441 | ||||||||||||
Merchant and card fees | 372,073 | 358,816 | 1,119,598 | 1,035,338 | ||||||||||||
Gain on foreclosure of other real estate owned | - | 162,862 | - | 162,862 | ||||||||||||
Other noninterest income | 184,399 | 191,130 | 615,688 | 570,685 | ||||||||||||
Total noninterest income | 2,119,229 | 2,161,803 | 6,257,876 | 5,916,677 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 4,780,894 | 4,331,976 | 14,294,219 | 13,216,844 | ||||||||||||
Data processing | 1,085,951 | 838,414 | 2,849,396 | 2,506,804 | ||||||||||||
Occupancy expenses, net | 526,360 | 536,004 | 1,643,924 | 1,490,395 | ||||||||||||
FDIC insurance assessments | 1,698 | 99,934 | 193,593 | 308,002 | ||||||||||||
Professional fees | 386,339 | 423,172 | 1,158,168 | 1,123,577 | ||||||||||||
Business development | 310,786 | 327,985 | 827,561 | 821,344 | ||||||||||||
Intangible asset amortization | 124,243 | 94,883 | 427,221 | 266,337 | ||||||||||||
Data conversion costs | - | 167,815 | - | 167,815 | ||||||||||||
Other operating expenses, net | 259,048 | 167,649 | 755,971 | 664,914 | ||||||||||||
Total noninterest expense | 7,475,319 | 6,987,832 | 22,150,053 | 20,566,032 | ||||||||||||
Income before income taxes | 5,079,006 | 5,659,932 | 16,277,139 | 16,140,950 | ||||||||||||
Provision for income taxes | 1,037,845 | 1,201,100 | 3,380,950 | 3,328,100 | ||||||||||||
Net income | $ | 4,041,161 | $ | 4,458,832 | $ | 12,896,189 | $ | 12,812,850 | ||||||||
Basic and diluted earnings per share | $ | 0.44 | $ | 0.48 | $ | 1.40 | $ | 1.38 | ||||||||
Dividends declared per share | $ | 0.24 | $ | 0.23 | $ | 0.72 | $ | 0.94 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 4,427,665 | $ | 4,617,593 | $ | 7,982,178 | $ | 8,855,028 | ||||||||
Unrealized gains on securities before tax: | ||||||||||||||||
Unrealized holding gains arising during the period | 12,729,731 | 4,469,777 | 13,600,333 | 10,041,561 | ||||||||||||
Less: reclassification adjustment for gains realized in net income | 43,910 | 1,890 | 429,925 | 1,890 | ||||||||||||
Other comprehensive income, before tax | 12,685,821 | 4,467,887 | 13,170,408 | 10,039,671 | ||||||||||||
Tax effect related to other comprehensive income | (3,171,456 | ) | (1,116,972 | ) | (3,292,603 | ) | (2,509,918 | ) | ||||||||
Other comprehensive income, net of tax | 9,514,365 | 3,350,915 | 9,877,805 | 7,529,753 | ||||||||||||
Comprehensive income | $ | 13,942,030 | $ | 7,968,508 | $ | 17,859,983 | $ | 16,384,781 | ||||||||
See Notes to Consolidated Financial Statements. |
|
|
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | 4,041,161 | $ | 4,458,832 | $ | 12,896,189 | $ | 12,812,850 | ||||||||
Other comprehensive income (loss), before tax: | ||||||||||||||||
Unrealized gains (losses) on securities before tax: | ||||||||||||||||
Unrealized holding gains (losses) arising during the period | 1,786,525 | (2,171,391 | ) | 11,828,086 | (8,245,692 | ) | ||||||||||
Less: reclassification adjustment for gains realized in net income | 15,141 | - | 17,031 | - | ||||||||||||
Other comprehensive income (loss), before tax | 1,771,384 | (2,171,391 | ) | 11,811,055 | (8,245,692 | ) | ||||||||||
Tax effect related to other comprehensive income (loss) | (442,846 | ) | 542,848 | (2,952,764 | ) | 2,061,767 | ||||||||||
Other comprehensive income (loss), net of tax | 1,328,538 | (1,628,543 | ) | 8,858,291 | (6,183,925 | ) | ||||||||||
Comprehensive income | $ | 5,369,699 | $ | 2,830,289 | $ | 21,754,480 | $ | 6,628,925 | ||||||||
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
(unaudited) |
Three and |
Common Stock | Additional Paid- in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss), Net of Taxes | Total Stockholders' Equity | ||||||||||||||||
Balance, June 30, 2018 | $ | 18,621,826 | $ | 20,878,728 | $ | 133,510,931 | $ | (5,070,455 | ) | $ | 167,941,030 | |||||||||
Net income | - | - | 4,458,832 | - | 4,458,832 | |||||||||||||||
Other comprehensive (loss) | - | - | - | (1,628,543 | ) | (1,628,543 | ) | |||||||||||||
Cash dividends declared, $0.23 per share | - | - | (2,141,510 | ) | - | (2,141,510 | ) | |||||||||||||
Balance, September 30, 2018 | $ | 18,621,826 | $ | 20,878,728 | $ | 135,828,253 | $ | (6,698,998 | ) | $ | 168,629,809 | |||||||||
Balance, June 30, 2019 | $ | 18,464,244 | $ | 19,019,767 | $ | 142,312,863 | $ | 3,454,662 | $ | 183,251,536 | ||||||||||
Net income | - | - | 4,041,161 | - | 4,041,161 | |||||||||||||||
Other comprehensive income | - | - | - | 1,328,538 | 1,328,538 | |||||||||||||||
Retirement of 9,375 shares of stock | (18,750 | ) | (225,626 | ) | - | - | (244,376 | ) | ||||||||||||
Cash dividends declared, $0.24 per share | - | - | (2,213,459 | ) | - | (2,213,459 | ) | |||||||||||||
Balance, September 30, 2019 | $ | 18,445,494 | $ | 18,794,141 | $ | 144,140,565 | $ | 4,783,200 | $ | 186,163,400 | ||||||||||
Common Stock | Additional Paid- in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss), Net of Taxes | Total Stockholders' Equity | ||||||||||||||||
Balance, December 31, 2017 | $ | 18,621,826 | $ | 20,878,728 | $ | 131,684,961 | $ | (432,373 | ) | $ | 170,753,142 | |||||||||
Net income | - | - | 12,812,850 | - | 12,812,850 | |||||||||||||||
Other comprehensive (loss) | - | - | - | (6,183,925 | ) | (6,183,925 | ) | |||||||||||||
The cumulative effect from change in accounting policy (1) | - | - | 82,700 | (82,700 | ) | - | ||||||||||||||
Cash dividends declared, $0.94 per share | - | - | (8,752,258 | ) | - | (8,752,258 | ) | |||||||||||||
Balance, September 30, 2018 | $ | 18,621,826 | $ | 20,878,728 | $ | 135,828,253 | $ | (6,698,998 | ) | $ | 168,629,809 | |||||||||
Balance, December 31, 2018 | $ | 18,586,610 | $ | 20,461,724 | $ | 137,891,821 | $ | (4,075,091 | ) | $ | 172,865,064 | |||||||||
Net income | - | - | 12,896,189 | - | 12,896,189 | |||||||||||||||
Other comprehensive income | - | - | - | 8,858,291 | 8,858,291 | |||||||||||||||
Retirement of 70,558 shares of stock | (141,116 | ) | (1,667,583 | ) | - | - | (1,808,699 | ) | ||||||||||||
Cash dividends declared, $0.72 per share | - | - | (6,647,445 | ) | - | (6,647,445 | ) | |||||||||||||
Balance, September 30, 2019 | $ | 18,445,494 | $ | 18,794,141 | $ | 144,140,565 | $ | 4,783,200 | $ | 186,163,400 | ||||||||||
|
|
Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive Income, Net of | Total Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Earnings | Taxes | Equity | |||||||||||||||||||
Balance, March 31, 2019 | 9,242,822 | $ | 18,485,644 | $ | 19,276,388 | $ | 139,910,979 | $ | 103,747 | $ | 177,776,758 | |||||||||||||
Net income | - | - | - | 4,617,593 | - | 4,617,593 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 3,350,915 | 3,350,915 | ||||||||||||||||||
Retirement of stock | (10,700 | ) | (21,400 | ) | (256,621 | ) | - | - | (278,021 | ) | ||||||||||||||
Cash dividends declared, $0.24 per share | - | - | - | (2,215,709 | ) | - | (2,215,709 | ) | ||||||||||||||||
Balance, June 30, 2019 | 9,232,122 | $ | 18,464,244 | $ | 19,019,767 | $ | 142,312,863 | $ | 3,454,662 | $ | 183,251,536 | |||||||||||||
Balance, March 31, 2020 | 9,188,594 | $ | 18,377,188 | $ | 18,155,547 | $ | 147,482,450 | $ | 4,478,192 | $ | 188,493,377 | |||||||||||||
Net income | - | - | - | 4,427,665 | - | 4,427,665 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 9,514,365 | 9,514,365 | ||||||||||||||||||
Retirement of stock | (65,847 | ) | (131,694 | ) | (1,153,811 | ) | - | - | (1,285,505 | ) | ||||||||||||||
Balance, June 30, 2020 | 9,122,747 | $ | 18,245,494 | $ | 17,001,736 | $ | 151,910,115 | $ | 13,992,557 | $ | 201,149,902 | |||||||||||||
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 | - | - | - | 8,855,028 | - | 8,855,028 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 7,529,753 | 7,529,753 | ||||||||||||||||||
Retirement of stock | (61,183 | ) | (122,366 | ) | (1,441,957 | ) | - | - | (1,564,323 | ) | ||||||||||||||
Cash dividends declared, $0.48 per share | - | - | - | (4,433,986 | ) | - | (4,433,986 | ) | ||||||||||||||||
Balance, June 30, 2019 | 9,232,122 | $ | 18,464,244 | $ | 19,019,767 | $ | 142,312,863 | $ | 3,454,662 | $ | 183,251,536 | |||||||||||||
Balance, December 31, 2019 | 9,222,747 | $ | 18,445,494 | $ | 18,794,141 | $ | 146,225,085 | $ | 4,114,752 | $ | 187,579,472 | |||||||||||||
Net income | - | - | - | 7,982,178 | - | 7,982,178 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 9,877,805 | 9,877,805 | ||||||||||||||||||
Retirement of stock | (100,000 | ) | (200,000 | ) | (1,792,405 | ) | (1,992,405 | ) | ||||||||||||||||
Cash dividends declared, $0.25 per share | - | - | - | (2,297,148 | ) | - | (2,297,148 | ) | ||||||||||||||||
Balance, June 30, 2020 | 9,122,747 | $ | 18,245,494 | $ | 17,001,736 | $ | 151,910,115 | $ | 13,992,557 | �� | $ | 201,149,902 | ||||||||||||
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(unaudited) |
|
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 7,982,178 | $ | 8,855,028 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 3,882,631 | 166,414 | ||||||
Provision for off-balance sheet commitments | 41,000 | - | ||||||
Amortization of securities, available-for-sale, loans and deposits, net | 252,269 | 739,633 | ||||||
Amortization of intangible asset | 434,446 | 302,978 | ||||||
Depreciation | 711,942 | 576,757 | ||||||
Deferred income taxes | (946,692 | ) | 125,049 | |||||
Securities (gains), net | (429,925 | ) | (1,890 | ) | ||||
(Gain) on sales of loans held for sale | (839,458 | ) | (396,757 | ) | ||||
Proceeds from loans held for sale | 41,226,181 | 17,485,451 | ||||||
Originations of loans held for sale | (39,643,298 | ) | (17,454,352 | ) | ||||
Loss on sale of premises and equipment, net | - | 500 | ||||||
Amortization of investment in new market tax credit projects | 290,771 | - | ||||||
(Gain) on sale of other real estate owned, net | (21,958 | ) | (43,414 | ) | ||||
Change in assets and liabilities: | ||||||||
Decrease in accrued income receivable | 986,961 | 417,561 | ||||||
(Increase) decrease in other assets | 28,462 | (523,361 | ) | |||||
Increase in accrued expenses and other liabilities | 3,969,853 | 651,186 | ||||||
Net cash provided by operating activities | 17,925,363 | 10,900,783 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of securities available-for-sale | (102,224,803 | ) | (35,113,621 | ) | ||||
Proceeds from sale of securities available-for-sale | 5,462,657 | 5,973,154 | ||||||
Proceeds from maturities and calls of securities available-for-sale | 75,571,989 | 38,381,532 | ||||||
Purchase of FHLB stock | (116,500 | ) | (3,912,500 | ) | ||||
Proceeds from the redemption of FHLB stock | 100,600 | 4,448,000 | ||||||
Net (increase) in interest bearing deposits in financial institutions and federal funds sold | (37,043,210 | ) | (41,377,929 | ) | ||||
Net (increase) decrease in loans | (101,265,019 | ) | 16,896,403 | |||||
Net proceeds from the sale of other real estate owned | 3,404,733 | 655,161 | ||||||
Purchase of bank premises and equipment | (528,647 | ) | (492,149 | ) | ||||
Cash paid for bank acquired | (309,875 | ) | - | |||||
Other | (36,125 | ) | (28,300 | ) | ||||
Net cash (used in) investing activities | (156,984,200 | ) | (14,570,249 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Increase in deposits | 150,614,117 | 23,402,168 | ||||||
Decrease in securities sold under agreements to repurchase | (5,140,913 | ) | (8,981,386 | ) | ||||
Payments on FHLB borrowings | (2,000,000 | ) | (12,600,000 | ) | ||||
Dividends paid | (4,510,608 | ) | (4,355,737 | ) | ||||
Stock repurchases | (1,992,405 | ) | (1,564,323 | ) | ||||
Net cash provided by (used in) financing activities | 136,970,191 | (4,099,278 | ) | |||||
Net (decrease) in cash and due from banks | (2,088,646 | ) | (7,768,744 | ) | ||||
CASH AND DUE FROM BANKS | ||||||||
Beginning | 34,616,880 | 30,384,066 | ||||||
Ending | $ | 32,528,234 | $ | 22,615,322 | ||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 12,896,189 | $ | 12,812,850 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 545,203 | 192,978 | ||||||
Provision for off-balance sheet commitments | - | 9,000 | ||||||
Amortization, net | 1,048,818 | 1,583,534 | ||||||
Amortization of intangible asset | 427,221 | 266,337 | ||||||
Depreciation | 903,070 | 845,163 | ||||||
Deferred income taxes | 75,549 | (24,000 | ) | |||||
Securities gains, net | (17,031 | ) | - | |||||
(Gain) on sales of loans held for sale | (685,790 | ) | (576,441 | ) | ||||
Proceeds from loans held for sale | 34,023,953 | 23,480,924 | ||||||
Originations of loans held for sale | (34,574,101 | ) | (23,184,423 | ) | ||||
Loss on sale and disposal of bank equipment, net | 9,360 | 11,479 | ||||||
(Gain) on sale and foreclosure of other real estate owned, net | (43,414 | ) | (226,054 | ) | ||||
Change in assets and liabilities: | ||||||||
(Increase) in accrued income receivable | (320,758 | ) | (239,749 | ) | ||||
(Increase) decrease in other assets | (892,594 | ) | 133,639 | |||||
Increase in accrued expenses and other liabilities | 943,244 | 385,983 | ||||||
Net cash provided by operating activities | 14,338,919 | 15,471,220 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of securities available-for-sale | (61,502,161 | ) | (24,209,779 | ) | ||||
Proceeds from sale of securities available-for-sale | 8,211,157 | - | ||||||
Proceeds from maturities and calls of securities available-for-sale | 64,641,695 | 52,143,244 | ||||||
Purchase of FHLB stock | (3,912,600 | ) | (3,070,400 | ) | ||||
Proceeds from the redemption of FHLB stock | 4,448,600 | 3,275,100 | ||||||
Net (increase) decrease in interest bearing deposits in financial institutions | (52,872,972 | ) | 6,448,428 | |||||
Net (increase) decrease in loans | 8,159,497 | (12,239,005 | ) | |||||
Net proceeds from the sale of other real estate owned | 655,161 | 117,905 | ||||||
Purchase of bank premises and equipment | (648,005 | ) | (591,165 | ) | ||||
Proceeds from the sale of bank equipment | 4,000 | - | ||||||
Cash paid, net of cash acquired, for bank acquired | - | (13,443,219 | ) | |||||
Other | (50,132 | ) | 1,139,029 | |||||
Net cash provided by (used in) investing activities | (32,865,760 | ) | 9,570,138 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Increase (decrease) in deposits | 28,086,411 | (1,795,096 | ) | |||||
Increase in securities sold under agreements to repurchase | 11,521,575 | 2,434,281 | ||||||
Payments on FHLB borrowings and other borrowings | (12,600,000 | ) | (24,500,000 | ) | ||||
Proceeds from FHLB borrowings | 3,000,000 | - | ||||||
Proceeds from short-term borrowings and other borrowings | - | 6,400,000 | ||||||
Dividends paid | (6,571,446 | ) | (8,659,149 | ) | ||||
Stock repurchases | (1,808,699 | ) | - | |||||
Net cash provided by (used in) financing activities | 21,627,841 | (26,119,964 | ) | |||||
Net increase (decrease) in cash and due from banks | 3,101,000 | (1,078,606 | ) | |||||
CASH AND DUE FROM BANKS | ||||||||
Beginning | 30,384,066 | 26,397,550 | ||||||
Ending | $ | 33,485,066 | $ | 25,318,944 | ||||
See Notes to Consolidated Financial Statements.
AMES NATIONAL CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) |
(unaudited) |
|
2019 | 2018 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash payments for: | ||||||||
Interest | $ | 7,852,381 | $ | 5,039,767 | ||||
Income taxes | 3,360,844 | 3,484,746 | ||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES | ||||||||
Transfer of loans receivable to other real estate owned | $ | - | $ | 116,137 | ||||
Business Combination: | ||||||||
Fair value of interest bearing deposits in financial institutions acquired | $ | - | $ | 1,475,000 | ||||
Fair value of federal funds sold acquired | - | 1,154,000 | ||||||
Fair value of securities available-for-sale acquired | - | 17,196,715 | ||||||
Fair value of loans receivable acquired | - | 76,041,470 | ||||||
Fair value of bank premises and equipment acquired | - | 924,400 | ||||||
Fair value of accrued interst receivable acquired | - | 862,895 | ||||||
Fair value of other real estate owned acquired | - | 120,000 | ||||||
Fair value of other tangible assets acquired | - | 318,596 | ||||||
Fair value of bank owned life insurance | - | 2,754,798 | ||||||
Goodwill | - | 3,012,255 | ||||||
Core deposit intangible | - | 2,002,000 | ||||||
Deposits assumed | - | 83,169,311 | ||||||
Federal funds purchased assumed | - | 9,000,000 | ||||||
Other liabilities assumed | - | 123,749 | ||||||
2020 | 2019 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash payments for: | ||||||||
Interest | $ | 5,259,558 | $ | 5,148,519 | ||||
Income taxes | 675,614 | 2,248,474 | ||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES | ||||||||
Transfer of loans receivable to other real estate owned | $ | 10,738 | $ | - | ||||
See Notes to Consolidated Financial Statements. |
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
1. |
|
The consolidated financial statements for the three and ninesix months ended SeptemberJune 30, 2019 2020 and 20182019 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, 2018 (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.
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 SeptemberJune 30, 2019, 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:Pronouncements: In FebruaryJune 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, which amends ASC 842, Leases. This update provides for an adoption option that does not require earlier periods to be restated at the adoption date. For public companies, this update was effective for interim and annual periods beginning after December 15, 2018. Early application was permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2016 the FASB issued ASU No. 2016-13,-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. In October 2019, the FASB voted to delayapprove amendments to the implementationeffective date of ASU No.2016-13 for smaller reporting companies, so foras defined by the Company, should FASB finalize this pronouncement,SEC, and other non-SEC reporting entities. The amendment delays the effective woulddate for our Company until interim and annual periods beginning after December 15, 2022. The Company does not plan to early adopt this ASU. The Company is currently planning for the implementation of this accounting standard and has chosen a vendor for a software solution. The Company continues to refinecollecting 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. 2016-132016-13 are expected to impact the Company’s financial statements. The Company is continuing to evaluate the extent of the potential impact.
In January 2017, the FASB issued ASU 2017-04,2017-04, 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.
In August 2018, the FASB issued ASU No. 2018-13,2018-13, Fair Value Measurement (Topic 820)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 isbecame effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will bewere adopted on a retrospective basis, and the new disclosures will bewere adopted on a prospective basis. The adoption will did not have a material effect on the Company’s consolidated financial statements.
2. |
|
On September 14, 2018, First National Bank (FNB)October 25, 2019, the Company completed the purchase of Iowa State Savings Bank (“ISSB”), including its’ 4 branches in Creston, Diagonal, Lennox and merger of Clarke County State Bank (CCSB) located in Osceola and Murray,Corning, Iowa (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. TheISSB’s acquired assets and liabilities arewere recorded at fair value at the date of acquisition and were reflected in the September 30, 2018 financial statements as such. 100% of the stock of CCSBacquisition. This bank was purchased for cash consideration of $14.8$22.6 million. As a result of thisthe acquisition, the Company recorded a core deposit intangible asset of $2.0 million$1,891,000 and goodwill of $3.0 million.approximately $2,680,000. The results of operations for this acquisition have been included since the transaction date of September 14, 2018. The fair valueOctober 25, 2019. Since the acquisition date, there has been no significant credit deterioration of purchased credit deteriorated loans related to the Acquisition was $386,000. These purchased loans are included in the impaired loan category in the financial statements.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.transaction (in thousands):
Cash consideration transferred | $ | 14,806,981 | $ | 22,643 | ||||
Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||||||
Cash and due from banks | $ | 1,363,762 | $ | 3,188 | ||||
Federal funds sold | 1,154,000 | 2,792 | ||||||
Interest bearing deposits in financial institutions | 1,475,000 | 21,035 | ||||||
Securities available-for-sale | 17,196,715 | 33,615 | ||||||
Federal Home Loan Bank stock | 129,600 | |||||||
Federal Home Loan Bank stock at cost | 365 | |||||||
Loans receivable | 76,041,470 | 137,776 | ||||||
Accrued interest receivable | 862,895 | 2,888 | ||||||
Bank premises and equipment | 924,400 | 2,452 | ||||||
Other real estate owned | 120,000 | 3,582 | ||||||
Deferred income taxes | 49,150 | |||||||
Bank owned life insurance | 2,754,798 | 2,499 | ||||||
Core deposit intangible asset | 2,002,000 | 1,891 | ||||||
Other assets | 13,996 | 204 | ||||||
Deposits | (83,169,311 | ) | (188,631 | ) | ||||
Federal funds purchased | (9,000,000 | ) | ||||||
Securities sold under repurchase agreements | (1,747 | ) | ||||||
Accrued interest payable and other liabilities | (123,749 | ) | (1,946 | ) | ||||
Total identifiable net assets | 11,794,726 | 19,963 | ||||||
Goodwill | $ | 3,012,255 | $ | 2,680 | ||||
On September 14, 2018,October 25, 2019, associated with the ISSB Acquisition, the contractual balance of loans receivable acquired was $77.2 million$139,703,000 and the contractual balance of the deposits assumed was $83.1 million.$188,068,000. Loans receivable acquired include commercial real estate, 1-41-4 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 September 14, 2018 October 25, 2019 were determined to be risk rated as follows:follows (in thousands):
Pass | $ | 63,220,130 | ||
Watch | 9,430,540 | |||
Special Mention | 2,733,940 | |||
Substandard | 1,426,137 | |||
Deteriorated credit | 385,884 | |||
Total loans acquired at book value | $ | 77,196,631 |
Loans acquired as deteriorated credit loans will be included with impaired loans.
Pass | $ | 121,346 | ||
Watch | 12,333 | |||
Special Mention | - | |||
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. |
|
On August 14, 2019, July 8, 2020, the Company declared a cash dividend on its common stock, payable on November 15, 2019 August 14, 2020to stockholders of record as of November 1, 2019, July 31, 2020, equal to $0.24$0.25 per shareshare.
4. |
|
Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended SeptemberJune 30, 2019 2020 and 20182019 was 9,227,6859,128,848 and 9,310,913,9,239,969, respectively. The weighted average outstanding shares for the ninesix months ended SeptemberJune 30, 2019 2020 and 20182019 were 9,236,9899,174,021 and 9,310,913,9,250,392, respectively. The Company had no0 potentially dilutive securities outstanding during the periods presented.
5. |
|
The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2018.2019.
6. |
|
Assets and liabilities carried at fair value are required to be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The following table presents the balances of assets measured at fair value on a recurring basis by level as of SeptemberJune 30, 2019 2020 and December 31, 2018. 2019 (in thousands):
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
2019 | ||||||||||||||||
U.S. government treasuries | $ | 7,528 | $ | 7,528 | $ | - | $ | - | ||||||||
U.S. government agencies | 128,882 | - | 128,882 | - | ||||||||||||
U.S. government mortgage-backed securities | 64,146 | - | 64,146 | - | ||||||||||||
State and political subdivisions | 187,940 | - | 187,940 | - | ||||||||||||
Corporate bonds | 69,499 | - | 69,499 | - | ||||||||||||
| $ | 457,995 | $ | 7,528 | $ | 450,467 | $ | - | |||||||||
2018 | ||||||||||||||||
U.S. government treasuries | $ | 7,800 | $ | 7,800 | $ | - | $ | - | ||||||||
U.S. government agencies | 110,268 | - | 110,268 | - | ||||||||||||
U.S. government mortgage-backed securities | 70,382 | - | 70,382 | - | ||||||||||||
State and political subdivisions | 215,955 | - | 215,955 | - | ||||||||||||
Corporate bonds | 54,566 | - | 54,566 | - | ||||||||||||
| $ | 458,971 | $ | 7,800 | $ | 451,171 | $ | - | |||||||||
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
2020 | ||||||||||||||||
U.S. government treasuries | $ | 9,280 | $ | 9,280 | $ | - | $ | - | ||||||||
U.S. government agencies | 104,288 | - | 104,288 | - | ||||||||||||
U.S. government mortgage-backed securities | 107,150 | - | 107,150 | - | ||||||||||||
State and political subdivisions | 216,797 | - | 216,797 | - | ||||||||||||
Corporate bonds | 76,101 | - | 76,101 | - | ||||||||||||
| $ | 513,616 | $ | 9,280 | $ | 504,336 | $ | - | |||||||||
2019 | ||||||||||||||||
U.S. government treasuries | $ | 9,452 | $ | 9,452 | $ | - | $ | - | ||||||||
U.S. government agencies | 126,433 | - | 126,433 | - | ||||||||||||
U.S. government mortgage-backed securities | 81,128 | - | 81,128 | - | ||||||||||||
State and political subdivisions | 195,302 | - | 195,302 | - | ||||||||||||
Corporate bonds | 67,528 | - | 67,528 | - | ||||||||||||
| $ | 479,843 | $ | 9,452 | $ | 470,391 | $ | - | |||||||||
Level 1 securities include U.S. Treasury securities and other equity securities that are traded by dealers or brokers in active over-the-counter markets. U.SU.S. government agencies, mortgage-backed securities, state and political subdivisions, and most corporate bonds are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.
The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the nine months ended September 30, 2019.
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment 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 SeptemberJune 30, 2019 2020 and December 31, 2018. 2019 (in thousands):
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
2019 | ||||||||||||||||
Loans receivable | $ | 377 | $ | - | $ | - | $ | 377 | ||||||||
Other real estate owned | 218 | - | - | 218 | ||||||||||||
Total | $ | 595 | $ | - | $ | - | $ | 595 | ||||||||
2018 | ||||||||||||||||
Loans receivable | $ | 2,030 | $ | - | $ | - | $ | 2,030 | ||||||||
Other real estate owned | 830 | - | - | 830 | ||||||||||||
Total | $ | 2,860 | $ | - | $ | - | $ | 2,860 | ||||||||
Loans Receivable: Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans. Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation allowance is a component of the allowance for loan losses. The Company considers these fair value measurements as level 3.
Other Real Estate Owned: Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The Company considers these fair value measurements as level 3.
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
2020 | ||||||||||||||||
Loans receivable | $ | 2,017 | $ | - | $ | - | $ | 2,017 | ||||||||
Other real estate owned | 632 | - | - | 632 | ||||||||||||
Total | $ | 2,649 | $ | - | $ | - | $ | 2,649 | ||||||||
2019 | ||||||||||||||||
Loans receivable | $ | 535 | $ | - | $ | - | $ | 535 | ||||||||
Other real estate owned | 4,004 | - | - | 4,004 | ||||||||||||
Total | $ | 4,539 | $ | - | $ | - | $ | 4,539 | ||||||||
The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of SeptemberJune 30, 2019 2020 and December 31, 2018 2019 are as follows:follows (in thousands):
2019 | 2020 | ||||||||||||||||||||||||
Estimated | Valuation |
| Range | Estimated | Valuation | Range | |||||||||||||||||||
Fair Value | Techniques | Unobservable Inputs | (Average) | Fair Value | Techniques | Unobservable Inputs | (Average) | ||||||||||||||||||
Impaired Loans | $ | 377 | Evaluation of collateral | Estimation of value | NM* | $ | 2,017 | Evaluation of collateral | Estimation of value | NM* | |||||||||||||||
Other real estate owned | $ | 218 | Appraisal | Appraisal adjustment | 6% | - | 8% | (7%) | $ | 632 | Appraisal | Appraisal adjustment | 6% | - | 8% | (7%) | |||||||||
2018 | 2019 | ||||||||||||||||||||||||
Estimated | Valuation |
| Range | Estimated | Valuation | Range | |||||||||||||||||||
Fair Value | Techniques | Unobservable Inputs | (Average) | Fair Value | Techniques | Unobservable Inputs | (Average) | ||||||||||||||||||
Impaired Loans | $ | 2,030 | Evaluation of collateral | Estimation of value | NM* | $ | 535 | Evaluation of collateral | Estimation of value | NM* | |||||||||||||||
Other real estate owned | $ | 830 | Appraisal | Appraisal adjustment | 6% | - | 8% | (7%) | $ | 4,004 | Appraisal | Appraisal adjustment | 6% | - | 8% | (7%) | |||||||||
* Not Meaningful. Evaluations of the underlying assets are completed for each collateral dependent impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.
GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
Fair value of financial instruments:
Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.
The following disclosures represent financial instruments in which the ending balances at September 30, 2019 and December 31, 2018 are not carried at fair value in their entirety on the consolidated balance sheets.
Securities available-for-sale: Fair value measurement for Level 1 securities is based upon quoted prices. Fair value measurement for Level 2 securities are based upon quoted prices, if available. If quoted prices are not available, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. Level 1 securities include U.S. Treasury and other equity securities that are traded by dealers or brokers in active over-the-counter markets. U.S government mortgage-backed securities, state and political subdivisions, and some corporate bonds are reported at fair value utilizing Level 2 inputs.
Loans held for saleThe following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of June 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 | $ | 32,528 | $ | 32,528 | $ | 34,617 | $ | 34,617 | ||||||||
Interest-bearing deposits | Level 1 | 145,991 | 145,991 | 108,948 | 108,948 | ||||||||||||
Securities available-for-sale | See previous table | 513,616 | 513,616 | 479,843 | 479,843 | ||||||||||||
FHLB and FRB stock | Level 2 | 3,155 | 3,155 | 3,139 | 3,139 | ||||||||||||
Loans receivable, net | Level 2 | 1,146,046 | 1,106,246 | 1,048,147 | 1,025,032 | ||||||||||||
Loans held for sale | Level 2 | 2,033 | 2,033 | 2,777 | 2,777 | ||||||||||||
Accrued income receivable | Level 1 | 10,801 | 10,801 | 11,788 | 11,788 | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | Level 2 | $ | 1,643,543 | $ | 1,646,977 | $ | 1,493,175 | $ | 1,495,155 | ||||||||
Securities sold under agreements to repurchase | Level 1 | 36,893 | 36,893 | 42,034 | 42,034 | ||||||||||||
FHLB advances | Level 2 | 3,000 | 3,110 | 5,000 | 4,935 | ||||||||||||
Accrued interest payable | Level 1 | 966 | 966 | 1,163 | 1,163 | ||||||||||||
The methodologies used to determine fair value as of June 30, 2020 did not change from the methodologies described in the December 31, 2019 Annual Financial Statements.
Commitments to extend credit and standby letters of credit: The fair values of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and credit worthiness of the counterparties. The carrying value and fair value of loans held for sale is based on prevailing market prices.the commitments to extend credit and standby letters of credit are not considered significant.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The estimated fair values of the Company’s financial instruments as described above as of September 30, 2019 and December 31, 2018 are as follows: (in thousands)
2019 | 2018 | ||||||||||||||||
Fair Value | Estimated | Estimated | |||||||||||||||
Hierarchy | Carrying | Fair | Carrying | Fair | |||||||||||||
Level | Amount | Value | Amount | Value | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and due from banks | Level 1 | $ | 33,485 | $ | 33,485 | $ | 30,384 | $ | 30,384 | ||||||||
Interest bearing deposits | Level 1 | 78,930 | 78,930 | 26,058 | 26,058 | ||||||||||||
Securities available-for-sale | See previous table | 457,995 | 457,995 | 458,971 | 458,971 | ||||||||||||
FHLB and FRB stock | Level 2 | 2,655 | 2,655 | 3,191 | 3,191 | ||||||||||||
Loans receivable, net | Level 2 | 882,130 | 863,585 | 890,461 | 864,417 | ||||||||||||
Loans held for sale | Level 2 | 1,637 | 1,637 | 401 | 401 | ||||||||||||
Accrued income receivable | Level 1 | 9,736 | 9,736 | 9,416 | 9,416 | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | Level 2 | $ | 1,249,133 | $ | 1,250,478 | $ | 1,221,084 | $ | 1,219,643 | ||||||||
Securities sold under agreements to repurchase | Level 1 | 52,196 | 52,196 | 40,674 | 40,674 | ||||||||||||
FHLB advances | Level 2 | 5,000 | 4,940 | 14,600 | 14,559 | ||||||||||||
Accrued interest payable | Level 1 | 901 | 901 | 649 | 649 | ||||||||||||
The methodologies used to determine fair value as of September 30, 2019 did not change from the methodologies described in the December 31, 2018 Annual Financial Statements.
7. |
|
The amortized cost of securities available-for-sale and their approximate fair values as of SeptemberJune 30, 2019 2020 and December 31, 2018 2019 are summarized below:below (in thousands):
2019: | 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 | $ | 7,454 | $ | 74 | $ | - | $ | 7,528 | $ | 8,893 | $ | 387 | $ | - | $ | 9,280 | ||||||||||||||||
U.S. government agencies | 126,716 | 2,199 | (33 | ) | 128,882 | 99,091 | 5,203 | (6 | ) | 104,288 | ||||||||||||||||||||||
U.S. government mortgage-backed securities | 63,410 | 753 | (17 | ) | 64,146 | 104,063 | 3,114 | (27 | ) | 107,150 | ||||||||||||||||||||||
State and political subdivisions | 186,295 | 1,898 | (253 | ) | 187,940 | 211,593 | 5,322 | (118 | ) | 216,797 | ||||||||||||||||||||||
Corporate bonds | 67,743 | 1,773 | (17 | ) | 69,499 | 71,319 | 4,793 | (11 | ) | 76,101 | ||||||||||||||||||||||
| $ | 451,618 | $ | 6,697 | $ | (320 | ) | $ | 457,995 | $ | 494,959 | $ | 18,819 | $ | (162 | ) | $ | 513,616 | |||||||||||||||
2018: | 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 | $ | 7,925 | $ | - | $ | (125 | ) | $ | 7,800 | $ | 9,392 | $ | 64 | $ | (4 | ) | $ | 9,452 | ||||||||||||||
U.S. government agencies | 111,759 | 73 | (1,564 | ) | 110,268 | 124,913 | 1,609 | (89 | ) | 126,433 | ||||||||||||||||||||||
U.S. government mortgage-backed securities | 71,596 | 88 | (1,302 | ) | 70,382 | 80,295 | 867 | (34 | ) | 81,128 | ||||||||||||||||||||||
State and political subdivisions | 217,247 | 465 | (1,757 | ) | 215,955 | 193,745 | 1,852 | (295 | ) | 195,302 | ||||||||||||||||||||||
Corporate bonds | 55,877 | 2 | (1,313 | ) | 54,566 | 66,012 | 1,542 | (26 | ) | 67,528 | ||||||||||||||||||||||
| $ | 464,404 | $ | 628 | $ | (6,061 | ) | $ | 458,971 | $ | 474,357 | $ | 5,934 | $ | (448 | ) | $ | 479,843 | |||||||||||||||
The amortized cost and fair value of debt securities available-for-sale as of SeptemberJune 30, 2019, 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.penalties (in thousands).
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
Due in one year or less | $ | 79,205 | $ | 79,247 | $ | 48,856 | $ | 49,216 | ||||||||
Due after one year through five years | 227,409 | 230,137 | 234,542 | 243,595 | ||||||||||||
Due after five years through ten years | 132,816 | 136,197 | 181,220 | 189,531 | ||||||||||||
Due after ten years | 12,188 | 12,414 | 30,341 | 31,274 | ||||||||||||
Total | $ | 451,618 | $ | 457,995 | $ | 494,959 | $ | 513,616 | ||||||||
Securities with a carrying value of $152.3$197.1 million and $145.7$180.0 million at SeptemberJune 30, 2019 2020 and December 31, 2018, 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 for securities available-for-sale for the three and ninesix months ended SeptemberJune 30, 2019 2020 and 20182019 are summarized below (in thousands):
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Proceeds from sales of securities available-for-sale | $ | 2,238 | $ | - | $ | 8,211 | $ | - | $ | 2,078 | $ | 5,973 | $ | 5,463 | $ | 5,973 | ||||||||||||||||
Gross realized gains on securities available-for-sale | 16 | - | 37 | - | 44 | 21 | 430 | 21 | ||||||||||||||||||||||||
Gross realized losses on securities available-for-sale | (1 | ) | - | (20 | ) | - | - | (19 | ) | - | (19 | ) | ||||||||||||||||||||
Tax provision applicable to net realized gains on securities available-for-sale | 4 | - | 4 | - | 11 | - | 108 | - | ||||||||||||||||||||||||
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 SeptemberJune 30, 2019 2020 and December 31, 2018 2019 are as follows:follows (in thousands):
Less than 12 Months | 12 Months or More | Total | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||
2019: | 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 treasuries | $ | - | $ | - | $ | 998 | $ | - | $ | 998 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
U.S. government agencies | 10,347 | (8 | ) | 15,531 | (25 | ) | 25,878 | (33 | ) | 938 | (6 | ) | - | - | 938 | (6 | ) | |||||||||||||||||||||||||||||||
U.S. government mortgage-backed securities | 3,292 | (9 | ) | 1,987 | (8 | ) | 5,279 | (17 | ) | 11,784 | (25 | ) | 1,712 | (2 | ) | 13,496 | (27 | ) | ||||||||||||||||||||||||||||||
State and political subdivisions | 15,787 | (55 | ) | 6,023 | (198 | ) | 21,810 | (253 | ) | 6,697 | (114 | ) | 180 | (4 | ) | 6,877 | (118 | ) | ||||||||||||||||||||||||||||||
Corporate bonds | 3,072 | (14 | ) | 3,539 | (3 | ) | 6,611 | (17 | ) | 493 | (11 | ) | - | - | 493 | (11 | ) | |||||||||||||||||||||||||||||||
| $ | 32,498 | $ | (86 | ) | $ | 28,078 | $ | (234 | ) | $ | 60,576 | $ | (320 | ) | $ | 19,912 | $ | (156 | ) | $ | 1,892 | $ | (6 | ) | $ | 21,804 | $ | (162 | ) | |||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||
2018: | 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 | $ | 2,962 | $ | (11 | ) | $ | 4,838 | $ | (114 | ) | $ | 7,800 | $ | (125 | ) | $ | 3,023 | $ | (4 | ) | $ | - | $ | - | $ | 3,023 | $ | (4 | ) | |||||||||||||||||||
U.S. government agencies | 26,099 | (218 | ) | 73,192 | (1,346 | ) | 99,291 | (1,564 | ) | 23,827 | (85 | ) | 2,520 | (4 | ) | 26,347 | (89 | ) | ||||||||||||||||||||||||||||||
U.S. government mortgage-backed securities | 25,037 | (277 | ) | 37,632 | (1,025 | ) | 62,669 | (1,302 | ) | 14,885 | (28 | ) | 1,934 | (6 | ) | 16,819 | (34 | ) | ||||||||||||||||||||||||||||||
State and political subdivisions | 60,600 | (302 | ) | 83,494 | (1,455 | ) | 144,094 | (1,757 | ) | 17,512 | (125 | ) | 5,954 | (170 | ) | 23,466 | (295 | ) | ||||||||||||||||||||||||||||||
Corporate bonds | 19,239 | (256 | ) | 34,254 | (1,057 | ) | 53,493 | (1,313 | ) | 4,129 | (26 | ) | - | - | 4,129 | (26 | ) | |||||||||||||||||||||||||||||||
| $ | 133,937 | $ | (1,064 | ) | $ | 233,410 | $ | (4,997 | ) | $ | 367,347 | $ | (6,061 | ) | $ | 63,376 | $ | (268 | ) | $ | 10,408 | $ | (180 | ) | $ | 73,784 | $ | (448 | ) | |||||||||||||||||||
Gross unrealized losses on debt securities totaled $320,000$162,000 as of SeptemberJune 30, 2019. 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.
8. | Loans Receivable and Credit Disclosures |
The composition of loans receivable as of SeptemberJune 30, 2019 2020 and December 31, 2018 2019 is as follows (in thousands):
2019 | 2018 | 2020 | 2019 | |||||||||||||
Real estate - construction | $ | 52,486 | $ | 51,364 | $ | 51,045 | $ | 47,895 | ||||||||
Real estate - 1 to 4 family residential | 167,698 | 169,722 | 205,254 | 201,510 | ||||||||||||
Real estate - commercial | 396,651 | 389,532 | 463,077 | 435,850 | ||||||||||||
Real estate - agricultural | 108,387 | 103,652 | 160,286 | 160,771 | ||||||||||||
Commercial | 73,457 | 86,194 | ||||||||||||||
Commercial 1 | 158,217 | 84,084 | ||||||||||||||
Agricultural | 79,900 | 85,202 | 109,066 | 111,945 | ||||||||||||
Consumer and other | 15,553 | 16,566 | 17,704 | 18,791 | ||||||||||||
| 894,132 | 902,232 | 1,164,649 | 1,060,846 | |||||||||||||
Less: | ||||||||||||||||
Allowance for loan losses | (11,934 | ) | (11,684 | ) | (16,005 | ) | (12,619 | ) | ||||||||
Deferred loan fees | (68 | ) | (87 | ) | ||||||||||||
Deferred loan fees 2 | (2,598 | ) | (80 | ) | ||||||||||||
Loans receivable, net | $ | 882,130 | $ | 890,461 | $ | 1,146,046 | $ | 1,048,147 | ||||||||
1 Commercial loan portfolio as of June 30, 2020 includes $78.3 million Payroll Protection Program ("PPP") loans |
2Deferred loan fees as of June 30, 2020 includes $2.5 million of fees related to the PPP loans. |
Activity in the allowance for loan losses, on a disaggregated basis, for the three and ninesix months ended SeptemberJune 30, 2019 2020 and 20182019 is as follows:follows (in thousands):
Three Months Ended September 30, 2019 | Three Months Ended June 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, 2019 | $ | 721 | $ | 1,847 | $ | 4,906 | $ | 1,301 | $ | 1,590 | $ | 1,332 | $ | 172 | $ | 11,869 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | $ | 753 | $ | 2,336 | $ | 6,552 | $ | 1,563 | $ | 1,672 | $ | 1,815 | $ | 218 | $ | 14,909 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision (credit) for loan losses | 41 | 237 | 158 | 9 | (112 | ) | 10 | 36 | 379 | 96 | 183 | 724 | 150 | 366 | 15 | 32 | 1,566 | |||||||||||||||||||||||||||||||||||||||||||||||
Recoveries of loans charged-off | - | 2 | 3 | - | 5 | - | 2 | 12 | - | 3 | 1 | - | 2 | - | 2 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged-off | - | - | - | - | (326 | ) | - | - | (326 | ) | - | (17 | ) | (413 | ) | - | (46 | ) | - | (2 | ) | (478 | ) | |||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | $ | 762 | $ | 2,086 | $ | 5,067 | $ | 1,310 | $ | 1,157 | $ | 1,342 | $ | 210 | $ | 11,934 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2020 | $ | 849 | $ | 2,505 | $ | 6,864 | $ | 1,713 | $ | 1,994 | $ | 1,830 | $ | 250 | $ | 16,005 | ||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2019 | Six Months Ended June 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, 2018 | $ | 699 | $ | 1,820 | $ | 4,615 | $ | 1,198 | $ | 1,777 | $ | 1,384 | $ | 191 | $ | 11,684 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | $ | 672 | $ | 2,122 | $ | 5,362 | $ | 1,326 | $ | 1,458 | $ | 1,478 | $ | 201 | $ | 12,619 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision (credit) for loan losses | 63 | 265 | 437 | 112 | (324 | ) | (42 | ) | 34 | 545 | 176 | 397 | 1,944 | 387 | 578 | 352 | 49 | 3,883 | ||||||||||||||||||||||||||||||||||||||||||||||
Recoveries of loans charged-off | - | 4 | 15 | - | 34 | - | 6 | 59 | 1 | 3 | 2 | - | 4 | - | 4 | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged-off | - | (3 | ) | - | - | (330 | ) | - | (21 | ) | (354 | ) | - | (17 | ) | (444 | ) | - | (46 | ) | - | (4 | ) | (511 | ) | |||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | $ | 762 | $ | 2,086 | $ | 5,067 | $ | 1,310 | $ | 1,157 | $ | 1,342 | $ | 210 | $ | 11,934 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2020 | $ | 849 | $ | 2,505 | $ | 6,864 | $ | 1,713 | $ | 1,994 | $ | 1,830 | $ | 250 | $ | 16,005 | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2018 | Three Months Ended June 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, 2018 | $ | 846 | $ | 1,732 | $ | 4,842 | $ | 977 | $ | 1,688 | $ | 1,178 | $ | 120 | $ | 11,383 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | $ | 736 | $ | 1,850 | $ | 4,770 | $ | 1,258 | $ | 1,610 | $ | 1,392 | $ | 196 | $ | 11,812 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision (credit) for loan losses | (209 | ) | 131 | (372 | ) | 218 | 92 | 168 | 72 | 100 | (15 | ) | (1 | ) | 136 | 43 | (21 | ) | (61 | ) | (13 | ) | 68 | |||||||||||||||||||||||||||||||||||||||||
Recoveries of loans charged-off | - | 2 | - | - | 1 | - | 5 | 8 | - | 1 | - | - | 1 | 1 | 4 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged-off | - | (23 | ) | (107 | ) | - | (10 | ) | (58 | ) | (5 | ) | (203 | ) | - | (3 | ) | - | - | - | - | (15 | ) | (18 | ) | |||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2018 | $ | 637 | $ | 1,842 | $ | 4,363 | $ | 1,195 | $ | 1,771 | $ | 1,288 | $ | 192 | $ | 11,288 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2019 | $ | 721 | $ | 1,847 | $ | 4,906 | $ | 1,301 | $ | 1,590 | $ | 1,332 | $ | 172 | $ | 11,869 | ||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2018 | Six Months Ended June 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, 2017 | $ | 796 | $ | 1,716 | $ | 4,734 | $ | 997 | $ | 1,739 | $ | 1,171 | $ | 168 | $ | 11,321 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | $ | 699 | $ | 1,820 | $ | 4,615 | $ | 1,198 | $ | 1,777 | $ | 1,384 | $ | 191 | $ | 11,684 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision (credit) for loan losses | (159 | ) | 144 | (264 | ) | 198 | 33 | 175 | 66 | 193 | 11 | 27 | 291 | 103 | (211 | ) | (53 | ) | (2 | ) | 166 | |||||||||||||||||||||||||||||||||||||||||||
Recoveries of loans charged-off | - | 5 | - | - | 22 | - | 19 | 46 | 11 | 3 | - | - | 29 | 1 | 4 | 48 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged-off | - | (23 | ) | (107 | ) | - | (23 | ) | (58 | ) | (61 | ) | (272 | ) | - | (3 | ) | - | - | (5 | ) | - | (21 | ) | (29 | ) | ||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2018 | $ | 637 | $ | 1,842 | $ | 4,363 | $ | 1,195 | $ | 1,771 | $ | 1,288 | $ | 192 | $ | 11,288 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2019 | $ | 721 | $ | 1,847 | $ | 4,906 | $ | 1,301 | $ | 1,590 | $ | 1,332 | $ | 172 | $ | 11,869 | ||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses disaggregated on the basis of impairment analysis method as of SeptemberJune 30, 2019 2020 and December 31, 2018 2019 is as follows:follows (in thousands):
2019 | 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 | $ | - | $ | 235 | $ | - | $ | - | $ | - | $ | - | $ | 9 | $ | 244 | $ | - | $ | 150 | $ | - | $ | - | $ | 558 | $ | 40 | $ | 6 | $ | 754 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 762 | 1,851 | 5,067 | 1,310 | 1,157 | 1,342 | 201 | 11,690 | 849 | 2,355 | 6,864 | 1,713 | 1,436 | 1,790 | 244 | 15,251 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2019 | $ | 762 | $ | 2,086 | $ | 5,067 | $ | 1,310 | $ | 1,157 | $ | 1,342 | $ | 210 | $ | 11,934 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance June 30, 2020 | $ | 849 | $ | 2,505 | $ | 6,864 | $ | 1,713 | $ | 1,994 | $ | 1,830 | $ | 250 | $ | 16,005 | ||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 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 | $ | - | $ | 53 | $ | - | $ | - | $ | 430 | $ | - | $ | 18 | $ | 501 | $ | - | $ | 209 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 209 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 699 | 1,767 | 4,615 | 1,198 | 1,347 | 1,384 | 173 | 11,183 | 672 | 1,913 | 5,362 | 1,326 | 1,458 | 1,478 | 201 | 12,410 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2018 | $ | 699 | $ | 1,820 | $ | 4,615 | $ | 1,198 | $ | 1,777 | $ | 1,384 | $ | 191 | $ | 11,684 | ||||||||||||||||||||||||||||||||||||||||||||||||
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 SeptemberJune 30, 2019 2020 and December 31, 2018 2019 is as follows (in thousands):
2019 | 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 | $ | - | $ | 1,163 | $ | 1,136 | $ | 87 | $ | 247 | $ | 2,525 | $ | 9 | $ | 5,167 | $ | - | $ | 1,192 | $ | 11,136 | $ | 2,063 | $ | 1,775 | $ | 1,711 | $ | 24 | $ | 17,901 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 52,486 | 166,535 | 395,515 | 108,300 | 73,210 | 77,375 | 15,544 | 888,965 | 51,045 | 204,062 | 451,941 | 158,223 | 156,442 | 107,355 | 17,680 | 1,146,748 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2019 | $ | 52,486 | $ | 167,698 | �� | $ | 396,651 | $ | 108,387 | $ | 73,457 | $ | 79,900 | $ | 15,553 | $ | 894,132 | |||||||||||||||||||||||||||||||||||||||||||||||
Balance June 30, 2020 | $ | 51,045 | $ | 205,254 | $ | 463,077 | $ | 160,286 | $ | 158,217 | $ | 109,066 | $ | 17,704 | $ | 1,164,649 | ||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 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 | $ | - | $ | 365 | $ | 128 | $ | 74 | $ | 2,648 | $ | - | $ | 19 | $ | 3,234 | $ | - | $ | 1,204 | $ | 83 | $ | 84 | $ | 462 | $ | 2,951 | $ | 4 | $ | 4,788 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 51,364 | 169,357 | 389,404 | 103,578 | 83,546 | 85,202 | 16,547 | 898,998 | 47,895 | 200,306 | 435,767 | 160,687 | 83,622 | 108,994 | 18,787 | 1,056,058 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2018 | $ | 51,364 | $ | 169,722 | $ | 389,532 | $ | 103,652 | $ | 86,194 | $ | 85,202 | $ | 16,566 | $ | 902,232 | ||||||||||||||||||||||||||||||||||||||||||||||||
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.
Impaired loans, on a disaggregated basis, as of SeptemberJune 30, 2019 2020 and December 31, 2018: 2019 (in thousands):
2019 | 2018 | 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 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 551 | 840 | - | 252 | 277 | - | 224 | 269 | - | 460 | 796 | - | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 1,136 | 1,610 | - | 128 | 601 | - | 11,136 | 11,907 | - | 83 | 435 | - | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | 87 | 100 | - | 74 | 88 | - | 2,063 | 2,079 | - | 84 | 97 | - | ||||||||||||||||||||||||||||||||||||
Commercial | 247 | 298 | - | 248 | 258 | - | 523 | 568 | - | 462 | 517 | - | ||||||||||||||||||||||||||||||||||||
Agricultural | 2,525 | 2,525 | - | - | - | - | 1,178 | 1,335 | - | 2,951 | 3,071 | - | ||||||||||||||||||||||||||||||||||||
Consumer and other | - | - | - | 1 | 2 | - | 6 | 6 | - | 4 | 4 | - | ||||||||||||||||||||||||||||||||||||
Total loans with no specific reserve: | 4,546 | 5,373 | - | 703 | 1,226 | - | 15,130 | 16,164 | - | 4,044 | 4,920 | - | ||||||||||||||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 612 | 645 | 235 | 113 | 139 | 53 | 968 | 1,293 | 150 | 744 | 755 | 209 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Commercial | - | - | - | 2,400 | 2,506 | 430 | 1,252 | 1,252 | 558 | - | - | - | ||||||||||||||||||||||||||||||||||||
Agricultural | - | - | - | - | - | - | 533 | 535 | 40 | - | - | - | ||||||||||||||||||||||||||||||||||||
Consumer and other | 9 | 9 | 9 | 18 | 22 | 18 | 18 | 18 | 6 | - | - | - | ||||||||||||||||||||||||||||||||||||
Total loans with specific reserve: | 621 | 654 | 244 | 2,531 | 2,667 | 501 | 2,771 | 3,098 | 754 | 744 | 755 | 209 | ||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 1,163 | 1,485 | 235 | 365 | 416 | 53 | 1,192 | 1,562 | 150 | 1,204 | 1,551 | 209 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 1,136 | 1,610 | - | 128 | 601 | - | 11,136 | 11,907 | - | 83 | 435 | - | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | 87 | 100 | - | 74 | 88 | - | 2,063 | 2,079 | - | 84 | 97 | - | ||||||||||||||||||||||||||||||||||||
Commercial | 247 | 298 | - | 2,648 | 2,764 | 430 | 1,775 | 1,820 | 558 | 462 | 517 | - | ||||||||||||||||||||||||||||||||||||
Agricultural | 2,525 | 2,525 | - | - | - | - | 1,711 | 1,870 | 40 | 2,951 | 3,071 | - | ||||||||||||||||||||||||||||||||||||
Consumer and other | 9 | 9 | 9 | 19 | 24 | 18 | 24 | 24 | 6 | 4 | 4 | - | ||||||||||||||||||||||||||||||||||||
| $ | 5,167 | $ | 6,027 | $ | 244 | $ | 3,234 | $ | 3,893 | $ | 501 | $ | 17,901 | $ | 19,262 | $ | 754 | $ | 4,788 | $ | 5,675 | $ | 209 | |||||||||||||||||||||||||
Average recorded investment and interest income recognized on impaired loans for the three and ninesix months ended SeptemberJune 30, 2019 2020 and 2018:2019 (in thousands):
Three Months Ended September 30, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
Recorded | Income | Recorded | Income | |||||||||||||
Investment | Recognized | Investment | Recognized | |||||||||||||
With no specific reserve recorded: | ||||||||||||||||
Real estate - construction | $ | - | $ | - | $ | - | $ | - | ||||||||
Real estate - 1 to 4 family residential | 364 | 4 | 315 | 135 | ||||||||||||
Real estate - commercial | 637 | 45 | 123 | - | ||||||||||||
Real estate - agricultural | 86 | - | 38 | - | ||||||||||||
Commercial | 240 | - | 160 | - | ||||||||||||
Agricultural | 2,206 | - | - | - | ||||||||||||
Consumer and other | - | - | - | - | ||||||||||||
Total loans with no specific reserve: | 3,533 | 49 | 636 | 135 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Real estate - construction | - | - | - | - | ||||||||||||
Real estate - 1 to 4 family residential | 341 | - | 120 | 6 | ||||||||||||
Real estate - commercial | - | - | 74 | - | ||||||||||||
Real estate - agricultural | - | - | - | - | ||||||||||||
Commercial | 1,267 | - | 2,838 | 2 | ||||||||||||
Agricultural | - | - | 29 | - | ||||||||||||
Consumer and other | 5 | - | 26 | - | ||||||||||||
Total loans with specific reserve: | 1,613 | - | 3,087 | 8 | ||||||||||||
Total | ||||||||||||||||
Real estate - construction | - | - | - | - | ||||||||||||
Real estate - 1 to 4 family residential | 705 | 4 | 435 | 141 | ||||||||||||
Real estate - commercial | 637 | 45 | 197 | - | ||||||||||||
Real estate - agricultural | 86 | - | 38 | - | ||||||||||||
Commercial | 1,507 | - | 2,998 | 2 | ||||||||||||
Agricultural | 2,206 | - | 29 | - | ||||||||||||
Consumer and other | 5 | - | 26 | - | ||||||||||||
| $ | 5,146 | $ | 49 | $ | 3,723 | $ | 143 | |||||||||
Three Months Ended June 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
Recorded | Income | Recorded | Income | |||||||||||||
Investment | Recognized | Investment | Recognized | |||||||||||||
With no specific reserve recorded: | ||||||||||||||||
Real estate - construction | $ | - | $ | - | $ | - | $ | - | ||||||||
Real estate - 1 to 4 family residential | 164 | - | 209 | 6 | ||||||||||||
Real estate - commercial | 10,877 | - | 135 | 29 | ||||||||||||
Real estate - agricultural | 1,429 | - | 78 | - | ||||||||||||
Commercial | 468 | 2 | 235 | - | ||||||||||||
Agricultural | 2,092 | - | 943 | - | ||||||||||||
Consumer and other | 45 | - | - | - | ||||||||||||
Total loans with no specific reserve: | 15,075 | 2 | 1,600 | 35 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Real estate - construction | - | - | - | - | ||||||||||||
Real estate - 1 to 4 family residential | 1,031 | - | 89 | - | ||||||||||||
Real estate - commercial | 488 | - | - | - | ||||||||||||
Real estate - agricultural | - | - | - | - | ||||||||||||
Commercial | 710 | - | 2,535 | - | ||||||||||||
Agricultural | 495 | - | - | - | ||||||||||||
Consumer and other | 9 | - | 7 | - | ||||||||||||
Total loans with specific reserve: | 2,733 | - | 2,631 | - | ||||||||||||
Total | ||||||||||||||||
Real estate - construction | - | - | - | - | ||||||||||||
Real estate - 1 to 4 family residential | 1,195 | - | 298 | 6 | ||||||||||||
Real estate - commercial | 11,365 | - | 135 | 29 | ||||||||||||
Real estate - agricultural | 1,429 | - | 78 | - | ||||||||||||
Commercial | 1,178 | 2 | 2,770 | - | ||||||||||||
Agricultural | 2,587 | - | 943 | - | ||||||||||||
Consumer and other | 54 | - | 7 | - | ||||||||||||
| $ | 17,808 | $ | 2 | $ | 4,231 | $ | 35 | |||||||||
| Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2019 | 2018 | 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 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Real estate - 1 to 4 family residential | 305 | 30 | 442 | 180 | 263 | - | 223 | 26 | ||||||||||||||||||||||||
Real estate - commercial | 384 | 105 | 266 | 258 | 7,279 | - | 133 | 60 | ||||||||||||||||||||||||
Real estate - agricultural | 79 | - | 19 | - | 980 | 6 | 76 | - | ||||||||||||||||||||||||
Commercial | 241 | - | 127 | 5 | 466 | 2 | 239 | - | ||||||||||||||||||||||||
Agricultural | 1,103 | - | - | - | 2,378 | - | 629 | - | ||||||||||||||||||||||||
Consumer and other | - | - | 6 | - | 31 | - | - | - | ||||||||||||||||||||||||
Total loans with no specific reserve: | 2,112 | 135 | 860 | 443 | 11,397 | 8 | 1,300 | 86 | ||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 226 | - | 173 | 6 | 935 | - | 97 | - | ||||||||||||||||||||||||
Real estate - commercial | - | - | 149 | - | 325 | - | - | - | ||||||||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Commercial | 1,867 | - | 2,901 | 2 | 473 | - | 2,490 | - | ||||||||||||||||||||||||
Agricultural | - | - | 15 | - | 330 | - | - | - | ||||||||||||||||||||||||
Consumer and other | 10 | 1 | 35 | 1 | 6 | - | 10 | 1 | ||||||||||||||||||||||||
Total loans with specific reserve: | 2,103 | 1 | 3,273 | 9 | 2,069 | - | 2,597 | 1 | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 531 | 30 | 615 | 186 | 1,198 | - | 320 | 26 | ||||||||||||||||||||||||
Real estate - commercial | 384 | 105 | 415 | 258 | 7,604 | - | 133 | 60 | ||||||||||||||||||||||||
Real estate - agricultural | 79 | - | 19 | - | 980 | 6 | 76 | - | ||||||||||||||||||||||||
Commercial | 2,108 | - | 3,028 | 7 | 939 | 2 | 2,729 | - | ||||||||||||||||||||||||
Agricultural | 1,103 | - | 15 | - | 2,708 | - | 629 | - | ||||||||||||||||||||||||
Consumer and other | 10 | 1 | 41 | 1 | 37 | - | 10 | 1 | ||||||||||||||||||||||||
| $ | 4,215 | $ | 136 | $ | 4,133 | $ | 452 | $ | 13,466 | $ | 8 | $ | 3,897 | $ | 87 | |||||||||||||||||
The interest foregone on nonaccrual loans for the three months ended SeptemberJune 30, 2019 2020 and 20182019 was approximately $272,000$312,000 and $80,000,$59,000, respectively. The interest foregone on nonaccrual loans for the ninesix months ended SeptemberJune 30, 2019 2020 and 20182019 was approximately $389,000$501,000 and $283,000,$117,000, respectively.
Nonaccrual loans at SeptemberJune 30, 2019 2020 and December 31, 2018 2019 were $5,167,000$17,901,000 and $3,234,000$4,788,000 respectively.
The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $1,171,000$1,276,000 as of SeptemberJune 30, 2019, 2020, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $2,350,000$1,171,000 as of December 31, 2018, 2019, all of which were included in impaired and nonaccrual loans.
The Company’s TDR, on a disaggregated basis, occurring inDuring the three and nine months ended SeptemberJune 30, 2019 2020 and 2018, is as follows: (dollars in thousands)
Three Months Ended September 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||
Real estate - construction | - | $ | - | $ | - | - | $ | - | $ | - | ||||||||||||||
Real estate - 1 to 4 family residential | 3 | 1,035 | 1,035 | - | - | - | ||||||||||||||||||
Real estate - commercial | - | - | - | - | - | - | ||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | ||||||||||||||||||
Commercial | - | - | - | - | - | - | ||||||||||||||||||
Agricultural | - | - | - | - | - | - | ||||||||||||||||||
Consumer and other | - | - | - | - | - | - | ||||||||||||||||||
| 3 | $ | 1,035 | $ | 1,035 | - | $ | - | $ | - | |||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||
Real estate - construction | - | $ | - | $ | - | - | $ | - | $ | - | ||||||||||||||
Real estate - 1 to 4 family residential | 3 | 1,035 | 1,035 | - | - | - | ||||||||||||||||||
Real estate - commercial | - | - | - | - | - | - | ||||||||||||||||||
Real estate - agricultural | - | - | - | - | - | - | ||||||||||||||||||
Commercial | - | - | - | 3 | 80 | 80 | ||||||||||||||||||
Agricultural | - | - | - | - | - | - | ||||||||||||||||||
Consumer and other | - | - | - | - | - | - | ||||||||||||||||||
| 3 | $ | 1,035 | $ | 1,035 | 3 | $ | 80 | $ | 80 | |||||||||||||||
2019, the Company did not grant any concessions to borrowers that are facing financial difficulties. During the three and ninesix months ended SeptemberJune 30, 2019, 2020, the Company granted concessions to one borrower with three 1-4 family residential contractstwo borrowers facing financial difficulties. TheOne loan was secured by commercial real estate and the second loan was secured by a commercial operating note. Payments on these loans were originated with terms less than normal related to collateral. During the three and ninedeferred for six months ended September 30, 2018, the Company granted concessions to one borrower with three commercial operating contracts facing financial difficulties. The loan was extended beyond its normal terms and the interest rate was capitalized.reduced below the market interest rate. During the six months ended June 30, 2019, the Company did not grant concessions to any borrowers facing financial difficulty. COVID-19 related loan modifications are not reported as TDR’s.
There were 0 TDR loans that were modified during the six months ended June 30, 2020 and twelve months ended June 30, 2019 that had payment defaults. The Company considers TDR loans to have payment default when it is past due 60 days or more.
No TDR modifications during the twelve months ended September 30, 2019 and 2018 had payment defaults. A $200,000 specific reserve was established in the nine months ended September 30, 2019. An $80,000 specific reserve was established in the nine months ended September 30, 2018. There were $275,000 and $12,000$16,000 of net charge-offs related to TDRs for the ninethree months ended SeptemberJune 30, 2019 2020 and 2018, respectively.$31,000 of net charge-offs related to TDRs for the six months ended June 30, 2020. There were 0 charge-offs related to TDRs for the three and six months ended June 30, 2019.
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. Under ASC 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” a restructuring of debt constitutes a TDR if the creditor grants a concession and the debtor is experiencing financial difficulties. 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. The Company is applying this guidance to qualifying loan modifications. There were $122,778,000 of loans modified under these rules during the six months ended June 30, 2020. 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.
An aging analysis of the recorded investments in loans, on a disaggregated basis, as of SeptemberJune 30, 2019 2020 and December 31, 2018, 2019, is as follows:follows (in thousands):
2019 | 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 | $ | 849 | $ | - | $ | 849 | $ | 51,637 | $ | 52,486 | $ | - | $ | 429 | $ | - | $ | 429 | $ | 50,616 | $ | 51,045 | $ | - | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 1,359 | 1 | 1,360 | 166,338 | 167,698 | - | 749 | 233 | 982 | 204,272 | 205,254 | 109 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | - | 1,057 | 1,057 | 395,594 | 396,651 | - | 4,940 | 10,325 | 15,265 | 447,812 | 463,077 | - | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | 1,936 | - | 1,936 | 106,451 | 108,387 | - | 586 | 2,004 | 2,590 | 157,696 | 160,286 | - | ||||||||||||||||||||||||||||||||||||
Commercial | 456 | 16 | 472 | 72,985 | 73,457 | - | 268 | 1,572 | 1,840 | 156,377 | 158,217 | - | ||||||||||||||||||||||||||||||||||||
Agricultural | 314 | 2,533 | 2,847 | 77,053 | 79,900 | 8 | 149 | 1,747 | 1,896 | 107,170 | 109,066 | 532 | ||||||||||||||||||||||||||||||||||||
Consumer and other | 124 | 10 | 134 | 15,419 | 15,553 | 1 | 30 | 20 | 50 | 17,654 | 17,704 | - | ||||||||||||||||||||||||||||||||||||
| $ | 5,038 | $ | 3,617 | $ | 8,655 | $ | 885,477 | $ | 894,132 | $ | 9 | $ | 7,151 | $ | 15,901 | $ | 23,052 | $ | 1,141,597 | $ | 1,164,649 | $ | 641 | |||||||||||||||||||||||||
2018 | 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 | $ | 376 | $ | - | $ | 376 | $ | 50,988 | $ | 51,364 | $ | - | $ | 1,796 | $ | - | $ | 1,796 | $ | 46,099 | $ | 47,895 | $ | - | ||||||||||||||||||||||||
Real estate - 1 to 4 family residential | 1,032 | 302 | 1,334 | 168,388 | 169,722 | 150 | 811 | 290 | 1,101 | 200,409 | 201,510 | 188 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | - | - | - | 389,532 | 389,532 | - | 387 | - | 387 | 435,463 | 435,850 | - | ||||||||||||||||||||||||||||||||||||
Real estate - agricultural | - | - | - | 103,652 | 103,652 | - | 422 | - | 422 | 160,349 | 160,771 | - | ||||||||||||||||||||||||||||||||||||
Commercial | 595 | 248 | 843 | 85,351 | 86,194 | - | 518 | 237 | 755 | 83,329 | 84,084 | - | ||||||||||||||||||||||||||||||||||||
Agricultural | 89 | - | 89 | 85,113 | 85,202 | - | 666 | 2,587 | 3,253 | 108,692 | 111,945 | 62 | ||||||||||||||||||||||||||||||||||||
Consumer and other | 76 | - | 76 | 16,490 | 16,566 | - | 146 | 6 | 152 | 18,639 | 18,791 | 5 | ||||||||||||||||||||||||||||||||||||
| $ | 2,168 | $ | 550 | $ | 2,718 | $ | 899,514 | $ | 902,232 | $ | 150 | $ | 4,746 | $ | 3,120 | $ | 7,866 | $ | 1,052,980 | $ | 1,060,846 | $ | 255 | |||||||||||||||||||||||||
The increase in the 90 days or greater loans from December 31, 2018 2019 is primarily due to agricultural loans that are well securedone hospitality loan as of SeptemberJune 30, 2019.2020.
The credit risk profile by internally assigned grade, on a disaggregated basis, as of SeptemberJune 30, 2019 2020 and December 31, 2018 2019 is as follows:follows (in thousands):
2019 | 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 | $ | 43,527 | $ | 344,649 | $ | 78,514 | $ | 52,671 | $ | 57,072 | $ | 576,433 | $ | 38,995 | $ | 352,549 | $ | 115,509 | $ | 135,955 | $ | 79,597 | $ | 722,605 | ||||||||||||||||||||||||
Watch | 8,959 | 31,319 | 23,800 | 15,723 | 19,436 | 99,237 | 12,050 | 90,122 | 33,718 | 16,302 | 24,570 | 176,762 | ||||||||||||||||||||||||||||||||||||
Special Mention | - | 4,630 | - | - | - | 4,630 | - | 5,015 | - | 1,057 | - | 6,072 | ||||||||||||||||||||||||||||||||||||
Substandard | - | 14,917 | 5,986 | 4,816 | 867 | 26,586 | - | 4,255 | 8,996 | 3,128 | 3,188 | 19,567 | ||||||||||||||||||||||||||||||||||||
Substandard-Impaired | - | 1,136 | 87 | 247 | 2,525 | 3,995 | - | 11,136 | 2,063 | 1,775 | 1,711 | 16,685 | ||||||||||||||||||||||||||||||||||||
| $ | 52,486 | $ | 396,651 | $ | 108,387 | $ | 73,457 | $ | 79,900 | $ | 710,881 | $ | 51,045 | $ | 463,077 | $ | 160,286 | $ | 158,217 | $ | 109,066 | $ | 941,691 | |||||||||||||||||||||||||
2018 | 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 | $ | 45,991 | $ | 345,262 | $ | 72,562 | $ | 64,850 | $ | 58,818 | $ | 587,483 | $ | 41,073 | $ | 387,274 | $ | 118,692 | $ | 62,655 | $ | 90,083 | $ | 699,777 | ||||||||||||||||||||||||
Watch | 5,373 | 26,177 | 22,758 | 13,998 | 22,628 | 90,934 | 6,822 | 29,209 | 32,780 | 16,147 | 15,248 | 100,206 | ||||||||||||||||||||||||||||||||||||
Special Mention | - | 4,775 | 1,675 | 264 | 747 | 7,461 | - | 4,581 | - | - | - | 4,581 | ||||||||||||||||||||||||||||||||||||
Substandard | - | 13,221 | 6,583 | 4,434 | 3,009 | 27,247 | - | 14,703 | 9,215 | 4,820 | 3,663 | 32,401 | ||||||||||||||||||||||||||||||||||||
Substandard-Impaired | - | 97 | 74 | 2,648 | - | 2,819 | - | 83 | 84 | 462 | 2,951 | 3,580 | ||||||||||||||||||||||||||||||||||||
| $ | 51,364 | $ | 389,532 | $ | 103,652 | $ | 86,194 | $ | 85,202 | $ | 715,944 | $ | 47,895 | $ | 435,850 | $ | 160,771 | $ | 84,084 | $ | 111,945 | $ | 840,545 | |||||||||||||||||||||||||
The credit risk profile based on payment activity, on a disaggregated basis, as of SeptemberJune 30, 2019 2020 and December 31, 2018 2019 is as follows:follows (in thousands):
2020 | 1-4 Family | ||||||||||||
Residential | Consumer | ||||||||||||
Real Estate | and Other | Total | |||||||||||
Performing | $ | 203,953 | $ | 17,684 | $ | 221,637 | |||||||
Non-performing | 1,301 | 20 | 1,321 | ||||||||||
| $ | 205,254 | $ | 17,704 | $ | 222,958 | ||||||||
2019 | 1-4 Family | ||||||||||||
Residential | Consumer | ||||||||||||
Real Estate | and Other | Total | |||||||||||
Performing | $ | 200,117 | $ | 18,782 | $ | 218,899 | |||||||
Non-performing | 1,393 | 9 | 1,402 | ||||||||||
| $ | 201,510 | $ | 18,791 | $ | 220,301 | ||||||||
2019 | 1-4 Family | |||||||||||
Residential | Consumer | |||||||||||
Real Estate | and Other | Total | ||||||||||
Performing | $ | 166,533 | $ | 15,544 | $ | 182,077 | ||||||
Non-performing | 1,165 | 9 | 1,174 | |||||||||
| $ | 167,698 | $ | 15,553 | $ | 183,251 | |||||||
2018 | 1-4 Family | |||||||||||
Residential | Consumer | |||||||||||
Real Estate | and Other | Total | ||||||||||
Performing | $ | 169,206 | $ | 16,547 | $ | 185,753 | ||||||
Non-performing | 516 | 19 | 535 | |||||||||
| $ | 169,722 | $ | 16,566 | $ | 186,288 | |||||||
9. | Goodwill |
As of September 14, 2018, as a result of the acquisition of CCSB, FNB recognized $3.0ISSB in 2019, goodwill of $2.7 million of goodwill.was recognized. Goodwill recognized in the Acquisition was primarily attributable to an expanded market share and economies of scale expected from combining the operations of CCSB branchesISSB. For income tax purposes, goodwill associated with FNB.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 associated with CCSB is not amortized and goodwill associated with previous acquisition is amortized over fifteen years.
10. | Intangible assets |
In conjunction with the acquisition of CCSBISSB in 2018,2019, the Company recorded $2.0$1.9 million in core deposit intangible assets. The following sets forth the carrying amounts and accumulated amortization of the intangible assets at SeptemberJune 30, 2019 2020 and December 31, 2018: 2019 (in thousands):
2019 | 2018 | |||||||||||||||
Gross | Accumulated | Gross | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
Core deposit intangible asset | $ | 4,520 | $ | 2,582 | $ | 4,520 | $ | 2,212 | ||||||||
Customer list | 535 | 222 | 535 | 165 | ||||||||||||
Total | $ | 5,055 | $ | 2,804 | $ | 5,055 | $ | 2,377 | ||||||||
2020 | 2019 | |||||||||||||||
Gross | Accumulated | Gross | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
Core deposit intangible asset | $ | 6,411 | $ | 3,140 | $ | 6,411 | $ | 2,745 | ||||||||
Customer list | 535 | 281 | 535 | 242 | ||||||||||||
Total | $ | 6,946 | $ | 3,421 | $ | 6,946 | $ | 2,987 | ||||||||
The weighted average life of the intangible assets is 3.24.0 years as of SeptemberJune 30, 2019 2020 and 3.54.2 years as of December 31, 2018.
2019.
The following sets forth the activity related to the intangible assets for the three and ninesix months ended SeptemberJune 30, 2019 2020 and 2018:2019 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Beginning intangible asset, net | $ | 2,375 | $ | 935 | $ | 2,678 | $ | 1,091 | ||||||||
Purchase | - | 2,002 | - | 2,002 | ||||||||||||
Adjustment to intangible asset | - | - | - | 15 | ||||||||||||
Amortization | (124 | ) | (95 | ) | (427 | ) | (266 | ) | ||||||||
Ending intangible asset, net | $ | 2,251 | $ | 2,842 | $ | 2,251 | $ | 2,842 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning intangible assets, net | $ | 3,742 | $ | 2,514 | $ | 3,959 | $ | 2,678 | ||||||||
Amortization | (217 | ) | (139 | ) | (434 | ) | (303 | ) | ||||||||
Ending intangible assets, net | $ | 3,525 | $ | 2,375 | $ | 3,525 | $ | 2,375 | ||||||||
Estimated remaining amortization expense on core deposit intangible assets for the years ending December 31 is as follows:follows (in thousands):
2020 | $ | 392 | ||
2021 | 628 | |||
2022 | 574 | |||
2023 | 502 | |||
2024 | 337 | |||
2025 | 301 | |||
After | 791 | |||
Total | $ | 3,525 |
2019 | $ | 113 | ||
2020 | 440 | |||
2021 | 402 | |||
2022 | 368 | |||
2023 | 315 | |||
2024 | 166 | |||
After | 447 | |||
Intangible asset, net | $ | 2,251 |
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 as of SeptemberJune 30, 2019 2020 and December 31, 2018: 2019 (in thousands):
2019 | 2018 | |||||||||||||||||||||||||||||||
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: | Securities sold under agreements to repurchase: | |||||||||||||||||||||||||||||||
U.S. government treasuries | $ | 4,529 | $ | - | $ | 4,529 | $ | 4,406 | $ | - | $ | 4,406 | $ | 2,486 | $ | 3,528 | ||||||||||||||||
U.S. government agencies | 38,562 | - | 38,562 | 41,375 | - | 41,375 | 39,793 | 35,557 | ||||||||||||||||||||||||
U.S. government mortgage-backed securities | 17,375 | - | 17,375 | 19,893 | - | 19,893 | 14,495 | 19,614 | ||||||||||||||||||||||||
Total pledged collateral | $ | 60,466 | $ | - | $ | 60,466 | $ | 65,674 | $ | - | $ | 65,674 | $ | 56,774 | $ | 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 the deferred income taxes asset since December 31, 2019 is due primarily to the increase in fair value of the available for salenet unrealized gains on investment portfolio.securities.
13. | Regulatory Matters |
|
On June 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. The CBLR will 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 June 30, 2020 and December 31, 2019 are as follows:follows (dollars in thousands):
To Be Well | ||||||||||||||||
Capitalized Under | ||||||||||||||||
Prompt Corrective | ||||||||||||||||
Actual | Action Provisions | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
As of June 30, 2020: | ||||||||||||||||
Community Bank Leverage Ratio: | ||||||||||||||||
(Tier 1 capital to average assets for leverage ratio): | ||||||||||||||||
Boone Bank & Trust | $ | 13,508 | 9.3 | % | $ | 11,658 | 8.0 | % | ||||||||
First National Bank | 84,372 | 8.7 | 78,018 | 8.0 | ||||||||||||
Iowa State Savings Bank | 20,913 | 9.4 | 17,873 | 8.0 | ||||||||||||
Reliance State Bank | 22,330 | 9.8 | 18,283 | 8.0 | ||||||||||||
State Bank & Trust | 15,881 | 8.8 | 14,403 | 8.0 | ||||||||||||
United Bank & Trust | 10,204 | 9.6 | 8,537 | 8.0 | ||||||||||||
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes * | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of September 30, 2019: | ||||||||||||||||||||||||
Total capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 182,951 | 16.6 | % | $ | 115,854 | 10.50 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 15,730 | 16.2 | 10,195 | 10.50 | $ | 9,710 | 10.0 | % | ||||||||||||||||
First National Bank | 86,143 | 13.9 | 65,270 | 10.50 | 62,162 | 10.0 | ||||||||||||||||||
Reliance State Bank | 28,113 | 15.7 | 18,813 | 10.50 | 17,917 | 10.0 | ||||||||||||||||||
State Bank & Trust | 20,112 | 15.9 | 13,250 | 10.50 | 12,619 | 10.0 | ||||||||||||||||||
United Bank & Trust | 14,777 | 18.9 | 8,231 | 10.50 | 7,839 | 10.0 | ||||||||||||||||||
Tier 1 capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 170,478 | 15.5 | % | $ | 93,787 | 8.50 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,801 | 15.2 | 8,253 | 8.50 | $ | 7,768 | 8.0 | % | ||||||||||||||||
First National Bank | 79,496 | 12.8 | 52,838 | 8.50 | 49,730 | 8.0 | ||||||||||||||||||
Reliance State Bank | 25,873 | 14.4 | 15,229 | 8.50 | 14,333 | 8.0 | ||||||||||||||||||
State Bank & Trust | 18,532 | 14.7 | 10,726 | 8.50 | 10,095 | 8.0 | ||||||||||||||||||
United Bank & Trust | 13,956 | 17.8 | 6,663 | 8.50 | 6,271 | 8.0 | ||||||||||||||||||
Tier 1 capital (to average- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 170,478 | 11.8 | % | $ | 57,849 | 4.00 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,801 | 11.1 | 5,334 | 4.00 | $ | 6,668 | 5.0 | % | ||||||||||||||||
First National Bank | 79,496 | 9.5 | 33,576 | 4.00 | 41,970 | 5.0 | ||||||||||||||||||
Reliance State Bank | 25,873 | 12.0 | 8,589 | 4.00 | 10,736 | 5.0 | ||||||||||||||||||
State Bank & Trust | 18,532 | 11.4 | 6,481 | 4.00 | 8,101 | 5.0 | ||||||||||||||||||
United Bank & Trust | 13,956 | 13.3 | 4,186 | 4.00 | 5,232 | 5.0 | ||||||||||||||||||
Common equity tier 1 capital (to risk-weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 170,478 | 15.5 | % | $ | 77,236 | 7.00 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,801 | 15.2 | 6,797 | 7.00 | $ | 6,311 | 6.5 | % | ||||||||||||||||
First National Bank | 79,496 | 12.8 | 43,513 | 7.00 | 40,405 | 6.5 | ||||||||||||||||||
Reliance State Bank | 25,873 | 14.4 | 12,542 | 7.00 | 11,646 | 6.5 | ||||||||||||||||||
State Bank & Trust | 18,532 | 14.7 | 8,834 | 7.00 | 8,203 | 6.5 | ||||||||||||||||||
United Bank & Trust | 13,956 | 17.8 | 5,487 | 7.00 | 5,095 | 6.5 | ||||||||||||||||||
|
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes * | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2018: | ||||||||||||||||||||||||
Total capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 177,405 | 16.1 | % | $ | 109,082 | 9.875 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 15,632 | 17.0 | 9,092 | 9.875 | $ | 9,207 | 10.0 | % | ||||||||||||||||
First National Bank | 81,419 | 13.1 | 61,312 | 9.875 | 62,088 | 10.0 | ||||||||||||||||||
Reliance State Bank | 27,880 | 14.8 | 18,576 | 9.875 | 18,811 | 10.0 | ||||||||||||||||||
State Bank & Trust | 20,358 | 16.2 | 12,427 | 9.875 | 12,585 | 10.0 | ||||||||||||||||||
United Bank & Trust | 14,790 | 19.5 | 7,489 | 9.875 | 7,583 | 10.0 | ||||||||||||||||||
Tier 1 capital (to risk- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 165,181 | 15.0 | % | $ | 86,989 | 7.875 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,722 | 16.0 | 7,251 | 7.875 | $ | 7,366 | 8.0 | % | ||||||||||||||||
First National Bank | 74,995 | 12.1 | 48,894 | 7.875 | 49,671 | 8.0 | ||||||||||||||||||
Reliance State Bank | 25,622 | 13.6 | 14,813 | 7.875 | 15,049 | 8.0 | ||||||||||||||||||
State Bank & Trust | 18,783 | 14.9 | 9,910 | 7.875 | 10,068 | 8.0 | ||||||||||||||||||
United Bank & Trust | 13,974 | 18.4 | 5,972 | 7.875 | 6,067 | 8.0 | ||||||||||||||||||
Tier 1 capital (to average- weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 165,181 | 11.3 | % | $ | 58,635 | 4.000 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,722 | 11.2 | 5,277 | 4.000 | $ | 6,596 | 5.0 | % | ||||||||||||||||
First National Bank | 74,995 | 9.1 | 33,034 | 4.000 | 41,292 | 5.0 | ||||||||||||||||||
Reliance State Bank | 25,622 | 11.7 | 8,730 | 4.000 | 10,913 | 5.0 | ||||||||||||||||||
State Bank & Trust | 18,783 | 11.8 | 6,384 | 4.000 | 7,980 | 5.0 | ||||||||||||||||||
United Bank & Trust | 13,974 | 12.7 | 4,402 | 4.000 | 5,503 | 5.0 | ||||||||||||||||||
Common equity tier 1 capital (to risk-weighted assets): | ||||||||||||||||||||||||
Consolidated | $ | 165,181 | 15.0 | % | $ | 70,420 | 6.375 | % | N/A | N/A | ||||||||||||||
Boone Bank & Trust | 14,722 | 16.0 | 5,870 | 6.375 | $ | 5,985 | 6.5 | % | ||||||||||||||||
First National Bank | 74,995 | 12.1 | 39,581 | 6.375 | 40,357 | 6.5 | ||||||||||||||||||
Reliance State Bank | 25,622 | 13.6 | 11,992 | 6.375 | 12,227 | 6.5 | ||||||||||||||||||
State Bank & Trust | 18,783 | 14.9 | 8,023 | 6.375 | 8,180 | 6.5 | ||||||||||||||||||
United Bank & Trust | 13,974 | 18.4 | 4,834 | 6.375 | 4,929 | 6.5 | ||||||||||||||||||
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On January 1, 2015, the Company and Banks became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules included the implementation of a capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer was subject to a three year phase-in period that began on January 1, 2016 and was fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At September 30, 2019, the ratios for the Company and Banks were sufficient to meet the conservation buffer.
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 | ||||||||||||||||||
14. |
|
Management evaluated subsequent events through the date the financial statements were issued. On October 25, 2019, Ames National Corporation (the “Company”) completed the acquisition of all the outstanding stock of Iowa State Savings Bank (“Iowa State”), an Iowa state chartered bank, from Iowa Community Bancorp, Inc. (“Iowa Community”) in accordance with the terms of the Stock Purchase Agreement dated July 29, 2019 (the “Purchase Agreement”) by and among Iowa State, Iowa Community and the Company (the “Stock Acquisition”). Pursuant to the Purchase Agreement, the Company paid Iowa Community cash of approximately $22.3 million to complete the Stock Acquisition. Iowa State, located in Creston, Iowa, has assets of approximately $210 million, loans of approximately $138 million and deposits of approximately $187 million. Iowa State, with five offices located in Creston, Corning, Diagonal and Lenox, Iowa became a 100% owned subsidiary of the Company following the closing. The banks paid dividends to the Company in October, 2019 in the amount of $15,500,000. There were no significant events or transactions occurring after June 30, 2020, but prior to August 6, 2020, that provided additional evidence about conditions that existed at June 30, 2020. Except for dividends declared on July 8, 2020, there were no other significant events or transactions that provided evidence about conditions that did not exist at SeptemberJune 30, 2019. 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates 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. Wealth management services includes financial planning and managing trust, agencies, estates and investment brokerage accounts. The Company employs thirteensixteen 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 230269 full-time equivalent individuals employed by the Banks, including employees from the Acquisition.Banks.
The Company’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.
The Company announced the closing of two branches of Iowa State Bank located in Diagonal and Corning, Iowa and the closing of one branch of First National located in Murray, Iowa as a result of limited customer activity. We expect to serve these customers at other branches.
The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks and (v) merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
The Company had net income of $4,428,000, or $0.49 per share, for the three months ended June 30, 2020, compared to net income of $4,618,000, or $0.50 per share, for the three months ended June 30, 2019.
The decrease in earnings is primarily due to the additional provision for loan losses in 2020. The increase in the provision for loan losses was primarily due to the economic slowdown associated with COVID-19 and to a lesser extent the increase in net charge-offs. The economic slowdown associated with COVID-19 will adversely affect our loan portfolios, but will more quickly affect the loans associated with hospitality and entertainment industries. As of June 30, 2020 approximately 8.3% of our loan portfolio is associated with these industries. There have been requests for loan payment modifications across all loan portfolios. These modifications were primarily related to payment deferrals or interest only payments for up to six months. The total loans modified was approximately $122,778,000 as of June 30, 2020. The federal government is providing numerous programs to lessen the effects of COVID-19 on the economy and on our loan portfolio. The severity of the effect of COVID-19 on our operations is difficult to determine at this time. The State of Iowa has been easing restrictions on non-essential businesses. The longer these restrictions are in place the more severe the effects of the economic slowdown will be and the greater the negative consequences for our loan customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.
On September 14, 2018, FNB purchasedNet loan charge-offs totaled $470,000 and $11,000 for the stock of CCSBthree months ended June 30, 2020 and 2019, respectively. The provision for approximately $14.8 million. First National operates allloan losses totaled $1,566,000 and $68,000 for the three bank offices previously owned by Clarke County as branches of First National.months ended June 30, 2020 and 2019, respectively.
The Company had net income of $4,041,000,$7,982,000, or $0.44$0.87 per share, for the threesix months ended SeptemberJune 30, 2019,2020, compared to net income of $4,459,000,$8,855,000, or $0.48$0.96 per share, for the threesix months ended SeptemberJune 30, 2018.2019.
The decrease in earnings is primarily the result of higher deposit interest expense, salaries and employee benefits andthe additional provision for loan losses offset in part by improved2020. The increase in the provision for loan interest income.losses was primarily due to the economic slowdown associated with COVID-19 and to a lesser extent loan growth and the increase in net charge-offs.
Net loan charge-offs (recoveries) totaled $314,000$497,000 and $195,000($19,000) for the threesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The provision for loan losses totaled $379,000$3,883,000 and $100,000$166,000 for the threesix months ended SeptemberJune 30, 20192020 and 2018, respectively.
The Company had net income of $12,896,000, or $1.40 per share, for the nine months ended September 30, 2019, compared to net income of $12,813,000, or $1.38 per share, for the nine months ended September 30, 2018.
The increase in earnings is primarily the result of improved loan interest income, offset in part by elevated deposit interest expense and higher salary and employee benefits.
Net loan charge-offs totaled $295,000 and $226,000 for the nine months ended September 30, 2019 and 2018, respectively. The provision for loan losses totaled $545,000 and $193,000 for the nine months ended September 30, 2019 and 2018, 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 |
● | Critical Accounting Policies |
● | Income Statement Review |
● | Balance Sheet Review |
● | Asset Quality Review and Credit Risk Management |
● | Liquidity and Capital Resources |
● | Forward-Looking Statements and Business Risks |
● |
|
Challenges 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’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 12, 2019.10, 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, as a financial institution, is considered an essential business and therefore continues to operate. The Company’s bank lobbies are generally open to the public, with business also being transacted through our drive up facilities, online, telephone or by appointment. Some of the mitigations in place at our offices related to COVID-19 include face coverings, social distancing, frequent hand washing, and protective shields. Although the Company anticipates moving toward normalized operations, changes in restrictions by governmental authorities may change these plans.
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. Although the economic slowdown will adversely affect the loan portfolio in general, it will more quickly affect loans associated with the hospitality and entertainment industries which comprise approximately 8.3% of the loan portfolio as of June 30, 2020. As detailed herein, the Company recognized a significant increase in provision expense during the six months ended June 30, 2020. The increase was due in part to the economic slowdown, and management anticipates additional increases in the allowance if the effects of COVID-19 restrictions continue to negatively impact the loan portfolio. |
● | 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 COVID-19 restrictions. 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 June 30, 2020. In the future goodwill may be impaired if the effects of COVID-19 restrictions 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 COVID-19 restrictions have 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 restrictions have an adverse effect on net income, an unanticipated increase in deposits or other unidentified risks that may negatively affect the Company’s capital ratios. |
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 5,3035,116 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 | 6 Months | Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ended | Ended | 3 Months Ended | Years Ended December 31, | Ended | Ended | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2019 | June 30, 2019 | 2018 | 2017 | June 30, 2020 | March 31, 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Company | Company | Industry* | Company | Industry* | Company | Industry* | Company | Company | Industry* | Company | Industry* | Company | Industry* | |||||||||||||||||||||||||||||||||||||||||||||||||||
Return on assets | 1.10 | % | 1.18 | % | 1.27 | % | 1.36 | % | 1.23 | % | 1.35 | % | 1.00 | % | 0.97 | % | 0.94 | % | 0.88 | % | 0.81 | % | 0.38 | % | 1.14 | % | 1.29 | % | 1.23 | % | 1.35 | % | ||||||||||||||||||||||||||||||||
Return on equity | 8.74 | % | 9.58 | % | 10.32 | % | 12.01 | % | 10.09 | % | 11.98 | % | 8.02 | % | 8.64 | % | 9.09 | % | 8.27 | % | 7.44 | % | 3.50 | % | 9.48 | % | 11.40 | % | 10.09 | % | 11.98 | % | ||||||||||||||||||||||||||||||||
Net interest margin | 3.15 | % | 3.20 | % | 3.20 | % | 3.40 | % | 3.23 | % | 3.40 | % | 3.25 | % | 3.25 | % | 3.10 | % | 3.14 | % | 3.18 | % | 3.13 | % | 3.21 | % | 3.36 | % | 3.23 | % | 3.40 | % | ||||||||||||||||||||||||||||||||
Efficiency ratio | 57.80 | % | 56.84 | % | 54.92 | % | 55.58 | % | 55.90 | % | 56.27 | % | 52.70 | % | 57.94 | % | 56.49 | % | 57.10 | % | 57.73 | % | 58.50 | % | 58.51 | % | 56.63 | % | 55.90 | % | 56.27 | % | ||||||||||||||||||||||||||||||||
Capital ratio | 12.64 | % | 12.33 | % | 12.30 | % | 9.81 | % | 12.18 | % | 9.70 | % | 12.48 | % | 9.62 | % | 10.35 | % | 10.63 | % | 10.92 | % | 10.44 | % | 12.05 | % | 9.66 | % | 12.18 | % | 9.70 | % | ||||||||||||||||||||||||||||||||
*Latest available data
Key performances indicators include:
● |
|
This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on average assets was 1.10%0.94% and 1.31%1.27% for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. This ratio declined primarily due to lower net incomean increase in the provision for loan losses for the three months ended SeptemberJune 30, 20192020 as compared to 2018.2019.
● |
|
This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 8.74%9.09% and 10.54%10.32% for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. This ratio declined primarily due to lower net income and higher average stockholders’ equityan increase in the provision for loan losses for the three months ended SeptemberJune 30, 20192020 as compared to 2018.2019.
● |
|
The net interest margin for the three months ended SeptemberJune 30, 2020 and 2019 was 3.10% and 2018 was 3.15% and 3.28%3.20%, 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.
● |
|
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 57.80%56.49% and 54.82%54.92% for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The efficiency ratio increased primarily due to higher noninterest expenses, which was mainly dueremains comparable to the Acquisition.prior quarter last year.
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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 12.64%10.35% as of SeptemberJune 30, 20192020 is significantly higher thancomparable to the industry average of 9.81%10.44% as of June 30, 2019.March 31, 2020.
Industry Results:
The FDIC Quarterly Banking Profile reported the following results for the secondfirst quarter of 2019:2020
Quarterly Net Income Rises 4.1% to $62.6 Billion on Higher Net Interest IncomeFalls by 69.6% From First Quarter 2019
During the three months ended June 30, quarterlyAggregate net income for the 5,3035,116 FDIC-insured commercial banks and savings institutions totaled $62.6$18.5 billion an increaseduring first quarter 2020, a decline of $2.5$42.2 billion (4.1%(69.6%) from a year ago. ImprovementThe decline in quarterly net income was attributable to higher net interest income andis a reflection of deteriorating economic activity, which resulted in an increase in realized securities gains. Almost 60%provision expenses and goodwill impairment charges. The decline was broad-based, as slightly more than half (55.9%) of all banks reported annual increasesdeclines in net incomeincome. The share of unprofitable banks increased from the year-ago quarter, while less than 4% of banks were unprofitable during the second quarter.a year ago to 7.3%. The average return on assets increasedratio declined from 1.35% in first quarter 2019 to 1.38% from 1.37%0.38% in second quarter 2018.the current quarter.
Net Interest Income Expands 3.7%Declines 1.4% From a Year Earlier12 Months Ago
Net interest income of $139 billion increased by $4.9 billion (3.7%) from a year earlier, the slowest year over-year growth rate since fourth quarter 2015. Slightly more than three-quarters of all banks (75.1%) reportedOn an increase inannual basis, net interest income from second quarter 2018. Net interest margindeclined for the banking industry was 3.39% during thesecond consecutive quarter, up slightly from 3.38% a year ago but below a recent high of 3.48% in fourth quarter 2018. Since year-end 2018, the average yield on earning assets rosefalling by 1 basis point, while the average cost of funding increased by 11 basis points. During this period, the largest increase in the average cost of funding was among banks with assets from $1 billion to $10 billion.
Loan-Loss Provisions Increase More Than 9% From Second Quarter 2018
Banks set aside $12.8 billion in loan-loss provisions during the second quarter, an increase of $1.1 billion (9.3%) from a year earlier. More than one-third of all banks (36.1%) reported year-over-year increases in loan-loss provisions. Loan-loss provisions as a percentage of net operating revenue increased from 5.80% in second quarter 2018 to 6.25%.
Noninterest Income Falls 2.7% From a Year Earlier
Noninterest income fell by $1.8 billion (2.7%) from 12 months ago, although less than half of all banks (41%) reported declines. The overall decline in noninterest income was driven primarily by servicing fees, which fell by $3.1 billion from a year ago to $332.7 million, and investment banking fees, which declined by $533.5 million (16.1%). Increases in all other noninterest income (up $1.2 billion, or 3.8%) and trading revenue (up $742.5 million, or 9.8%) helped offset the decline in noninterest income during the year.
Noninterest Expense Increases From Second Quarter 2018
Noninterest expense rose by $1.6$2 billion (1.4%) from a year ago. The increase was widespread with 75.3%Less than half (44.6%) of all banks contributingreported annual declines in net interest income. The average net interest margin (NIM) for the banking industry was down 29 basis points from a year ago to 3.13%, as the growth. Salarydecline in average earning asset yields outpaced the decline in average funding costs. The year over-year compression of the NIM was broad-based, as it declined for all five asset size groups featured in the Quarterly Banking Profile.
Noninterest Income Increases 2.3% From a Year Ago
Noninterest income of $66.9 billion increased by $1.5 billion (2.3%) from 12 months ago. The annual increase was broad-based, as almost two-thirds (64.7%) of all banks reported higher noninterest income. The year-over-year increase in noninterest income was led by the all other noninterest income category, which includes merchant credit card fees, annual credit card fees, and employee benefitscredit card interchange fees. This category of income rose by $1.8$6.6 billion (3.2%(22.7%), but was partially offset by declines in trading revenue on equity contracts (down $3.9 billion, or 136%) and servicing fee income (down $3.3 billion, or 215.3%).
Noninterest Expense Increases Almost 12% From First Quarter 2019
Noninterest expense increased by $13.6 billion (11.8%) from a year ago, asago. Goodwill impairment charges, driven by a few institutions, rose by $8.4 billion. Approximately three out of every four banks (72.2%) reported annual increases in noninterest expense. All other noninterest expense rose by $3.4 billion (7.3%), and salary and employee benefits grew by $1.4 billion (2.5%). The average assets per employee increased from $8.4$8.8 million in first quarter 2019 to $8.8 million.$9.8 million in first quarter 2020.
Net Charge-Offs Rise 9.3%Provisions for Credit Losses Increase From a Year Ago
Banks charged off $12.8Due to deteriorating economic conditions and the implementation of the current expected credit losses (CECL) accounting methodology, which requires banks to allocate for expected losses over the life of the loan, provisions for credit losses increased by $38.8 billion (279.9%) from a year ago to $52.7 billion. Two hundred forty three banks adopted the CECL accounting standards in the first quarter. These institutions reported an aggregate $47.6 billion in uncollectable loans duringprovisions for credit losses. Almost half (49.9%) of all banks reported year-over-year increases in provisions for credit losses.
Net Charge-Offs Rise Almost 15% From a Year Ago
Net charge-offs totaled $14.6 billion in the secondfirst quarter, up $1.1an increase of $1.9 billion (9.3%(14.9%) from a year ago. The overallSlightly more than two-thirds (68%) of the increase in total net charge-offs was led by credit card balances (up $669.4 million, or 8.3%) andin the commercial and industrial loans (up $368.9(C&I) loan portfolio. C&I loan portfolio net charge-offs increased by $1.3 billion (86.9%). Credit card portfolio net charge-offs increased by $387.3 million or 25.2%(4.4%). The average net charge-off rate increased modestly from 0.48% in second quarter 2018 to 0.50%. The net charge-off rate for commercial and industrial loans rose by 5 basis points from a year ago to 0.33%, while the0.55%. The C&I net charge-off rate for credit cards rose by 1220 basis points from a year ago to 4.03%, surpassing the 4% level for the first time since second quarter 2012.0.47% but remains below a recent high of 0.50%.
Noncurrent Loan Rate Improves toRemains Stable at 0.93%
Noncurrent loan balances (90 days or more past due or in nonaccrual status) declinedincreased by $4.9$7 billion (4.8%(7.3%) from the previous quarter, the highest quarterly dollar increase since first quarter 2019.2010. Slightly moreless than half (46%) of all banks (50.6%) reported declinesquarterly increases in noncurrent loan balances. The quarter-over-quarter improvement was reflectedNoncurrent loan balances in residential mortgages, which fellall major loan categories increased from the previous quarter. C&I noncurrent loan balances increased by $2.1$3.6 billion (5%(20.7%), and credit cardnonfarm nonresidential noncurrent loan balances which declinedincreased by $1.1$2 billion (8.7%(25.3%). The average noncurrent loan rate declined by 6rose just 2 basis points from the previous quarter to 0.93%.
Loan-Loss Reserves Decline Modestly From, because of an increase in total loans and leases that also occurred in the Previous Quarter
Loan-loss reserves totaled $124.9 billion at the end of second quarter, down $292.5 million (0.2%) from the first quarter. Just over one-quarter of all banks (26.3%) reported quarterly declines in loan-loss reserves. At banks that itemize their loan-loss reserves, which are banks with total assets of $1 billion or more and represent 91% of total industry loan-loss reserves, the quarterly decline was attributable to residential real estate (down $762.7 million, or 6.5%) and credit cards (down $59.3 million, or 0.1%). Loan-loss reserves for commercial loansThe C&I noncurrent rate increased by $445.2 million (1.4%)4 basis points from the previous quarter.quarter to 0.83%.
Total Assets IncreaseRise 8.6% From FirstFourth Quarter 2019
Total assets rose by $177.3 billion (1%$1.6 trillion (8.6%) from the previous quarter. Cashquarter, driven by increases in cash and balances due from depository institutions declined by $81.5(up $740.4 billion, (4.8%or 44.4%) and loan and lease balances (up $442.9 billion, or 4.2%). Banks increased their investment securities holdings by $54.8$226.9 billion (1.5%(5.7%), as during the first quarter, with most of the growth led by mortgage-backed securities (up $152.6 billion, or 6.4%). With recent short term rate reductions in the first quarter, unrealized gains on available-for-sale securities rose by $65$41.8 billion (2.9%(151.7%) and state and municipalunrealized gains on held-to-maturity securities declinedgrew by $14.5$18.4 billion (4.5%(110.2%). After reaching an all-time high
Loan Balances IncreaseRegister Strong Growth From the Previous Quarter and a Year Ago
Total loan and lease balances roseexpanded by $152.3$442.9 billion (1.5%(4.2%) from first quarter 2019. Almost three-quartersthe previous quarter. Slightly more than half (58.7%) of all banks (72.7%) reported quarterly increases inincreased their loan and lease balances. Allbalances from fourth quarter 2019. Almost all of the major loan categories reported quarter-over-quarter increases, led by consumer loans, which rose by $42.2 billion (2.5%), and residential mortgage loans, whichquarterly increases. The C&I loan portfolio increased by $38.3$339.4 billion (1.8%(15.4%), with most of the growth concentrated at the largest banks. Unfunded C&I loan commitments declined by $269 billion (12.7%), the largest quarterly dollar decrease in the ten years for which data are available. Loans to nondepository institutions grew by $87.0 billion (17.8%), while credit card balances declined by $68.6 billion (7.3%). Over the past year,12 months, total loan and lease balances rose by $443$813.7 billion (4.5%(8%), a modest increase from the 4.1%highest annual growth rate reported last quarter. Commercial and industrial loans had the largest dollar increase from a year ago, increasing by $142.8 billion (6.9%).since first quarter 2008.
Deposits Increase $1.2 Trillion From Firstthe Previous Quarter 2019
Total deposit balances grew by $1.2 trillion (8.5%) from fourth quarter 2019. Interest-bearing accounts increased by $114$639.6 billion (0.8%) from the previous quarter, as deposits in foreign offices increased by $51.3 billion (4.1%(6.4%) and domestic office deposits rosenoninterest-bearing accounts expanded by $62.7$446.3 billion (0.5%(14.1%). Domestic deposits in noninterest-bearing accounts larger than $250,000 increased by $761.4 billion (10.8%) from fourth quarter 2019. Deposits held in foreign offices rose by $37.2$155.9 billion (1.2%), while interest-bearing deposits increased by $25.5 billion (0.3%(11.8%). Nondeposit liabilities, which includes fed funds purchased, repurchase agreements, Federal Home Loan Bank (FHLB) advances, and secured and unsecured borrowings, increased by $25.1$147.1 billion (1.2%(11.3%) from the previous quarter, as otherquarter. The rise in nondeposit liabilities rosewas primarily attributable to FHLB advances, which increased by $25.2$130.2 billion (6.2%(27%). On an annual basis, total deposits increased by $1.9 trillion (13.3%), the largest year-over-year growth rate ever reported by the Quarterly Banking Profile.
Equity Capital RisesIncreases From the Previous Quarter
Equity capital rose to $2.1 trillion in the second quarter, up $38.6increased by $4.2 billion (1.9%(0.2%) from the previous quarter, led by accumulated other comprehensive income.quarter. Declared dividends totaled $48.6of $32.7 billion an increaseexceeded the quarterly net income of $10.8$18.5 billion, (28.6%) from second quarter 2018. At endresulting in a $14.2 billion reduction of second quarter, 16retained earnings. Twelve insured institutions with $2.2$2 billion in total assets were below the requirements for the well-capitalized category as defined for Prompt Corrective Action purposes.
FiveTwo New Banks Are AddedOpen in SecondFirst Quarter 20192020
The number of FDIC-insured commercial banks and savings institutions declined from 5,3625,177 to 5,3035,116 during the three months ended June 30. Fivefirst quarter 2020. Two new banks were added, during the second quarter, 6057 institutions were absorbed by mergers, and one bank failed. The number of institutions on the FDIC’s “Problem Bank List” declinedincreased from 5951 in fourth quarter 2019 to 56 at the end of second quarter, the lowest number since first quarter 2007.54. Total assets of problem banks increaseddeclined from $46.7$46.2 billion to $48.5$44.5 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, 20182019 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, including the recent 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 the Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.
Fair Value and Other-Than-Temporary Impairment of Investment Securities
The Company’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, including the recent onset of the COVID-19 pandemic, it is at least reasonably possible that changes in management’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
Goodwill
Goodwill arose in connection with threefour 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 SeptemberJune 30, 2019,2020, 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.
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.GAAP (dollars in thousands).
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP: | ||||||||||||||||||||||||||||||||
Net interest income (GAAP) | $ | 10,814 | $ | 10,586 | $ | 32,715 | $ | 30,983 | $ | 13,680 | $ | 10,930 | $ | 26,726 | $ | 21,901 | ||||||||||||||||
Tax-equivalent adjustment (1) | 251 | 288 | 827 | 917 | 255 | 284 | 496 | 576 | ||||||||||||||||||||||||
Net interest income on an FTE basis (non-GAAP) | 11,065 | 10,874 | 33,542 | 31,900 | 13,935 | 11,214 | 27,222 | 22,477 | ||||||||||||||||||||||||
Average interest-earning assets | $ | 1,403,303 | $ | 1,324,697 | $ | 1,399,302 | $ | 1,324,817 | $ | 1,797,290 | $ | 1,400,685 | $ | 1,733,323 | $ | 1,397,269 | ||||||||||||||||
Net interest margin on an FTE basis (non-GAAP) | 3.15 | % | 3.28 | % | 3.20 | % | 3.21 | % | 3.10 | % | 3.20 | % | 3.14 | % | 3.22 | % | ||||||||||||||||
(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent, |
Income Statement Review for the Three Months ended September 30June 30, 201920 and 20189
The following highlights a comparative discussion of the major components of net income and their impact for the three months ended SeptemberJune 30, 2020 and 2019:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest-bearing liabilities. The net interest margin is equal to interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.
AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Three Months Ended June 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 | $ | 145,337 | $ | 1,642 | 4.52 | % | $ | 82,133 | $ | 1,119 | 5.45 | % | ||||||||||||
Agricultural | 111,289 | 1,322 | 4.75 | % | 81,803 | 1,304 | 6.37 | % | ||||||||||||||||
Real estate | 881,437 | 9,371 | 4.25 | % | 712,534 | 8,174 | 4.59 | % | ||||||||||||||||
Consumer and other | 18,195 | 235 | 5.16 | % | 16,694 | 211 | 5.06 | % | ||||||||||||||||
Total loans (including fees) | 1,156,258 | 12,570 | 4.35 | % | 893,164 | 10,808 | 4.84 | % | ||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 317,447 | 1,948 | 2.45 | % | 255,671 | 1,555 | 2.43 | % | ||||||||||||||||
Tax-exempt (2) | 176,812 | 1,208 | 2.73 | % | 202,232 | 1,352 | 2.67 | % | ||||||||||||||||
Total investment securities | 494,259 | 3,156 | 2.55 | % | 457,903 | 2,907 | 2.54 | % | ||||||||||||||||
Interest-bearing deposits with banks and federal funds sold | 146,773 | 166 | 0.45 | % | 49,618 | 290 | 2.34 | % | ||||||||||||||||
Total interest-earning assets | 1,797,290 | $ | 15,892 | 3.54 | % | 1,400,685 | $ | 14,005 | 4.00 | % | ||||||||||||||
Noninterest-earning assets | 83,938 | 53,992 | ||||||||||||||||||||||
TOTAL ASSETS | $ | 1,881,228 | $ | 1,454,677 | ||||||||||||||||||||
(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 June 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 | $ | 1,026,705 | $ | 699 | 0.27 | % | $ | 790,872 | $ | 1,616 | 0.82 | % | ||||||||||||
Time deposits | 277,939 | 1,199 | 1.73 | % | 222,740 | 990 | 1.78 | % | ||||||||||||||||
Total deposits | 1,304,644 | 1,898 | 0.58 | % | 1,013,612 | 2,606 | 1.03 | % | ||||||||||||||||
Other borrowed funds | 50,800 | 59 | 0.47 | % | 40,930 | 185 | 1.80 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,355,444 | 1,957 | 0.58 | % | 1,054,542 | 2,791 | 1.06 | % | ||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||
Noninterest-bearing checking | 318,609 | 212,929 | ||||||||||||||||||||||
Other liabilities | 12,412 | 8,315 | ||||||||||||||||||||||
Stockholders' equity | 194,763 | 178,890 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,881,228 | $ | 1,454,676 | ||||||||||||||||||||
Net interest income | $ | 13,935 | 3.10 | % | $ | 11,214 | 3.20 | % | ||||||||||||||||
Spread Analysis | ||||||||||||||||||||||||
Interest income/average assets | $ | 15,892 | 3.38 | % | $ | 14,005 | 3.85 | % | ||||||||||||||||
Interest expense/average assets | $ | 1,957 | 0.42 | % | $ | 2,791 | 0.77 | % | ||||||||||||||||
Net interest income/average assets | $ | 13,935 | 2.96 | % | $ | 11,214 | 3.08 | % | ||||||||||||||||
Net Interest Income
For the three months ended June 30, 2020 and 2019, the Company's net interest margin adjusted for tax exempt income was 3.10% and 3.20%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended June 30, 2020 totaled $13,680,000 compared to $10,930,000 for the three months ended June 30, 2019.
For the three months ended June 30, 2020, interest income increased $1,916,000, or 14%, when compared to the same period in 2019. The increase from 2019 was primarily attributable to increased loan volume, related to the Acquisition. The increase in loan interest income due to loan volume was offset in part by an increase in foregone interest on nonaccrual loans of $253,000.
Interest expense decreased $834,000, or 30%, for the three months ended June 30, 2020 when compared to the same period in 2019. The lower interest expense for the period is primarily attributable to a decrease in rates on deposits due to market interest rates.
Provision for Loan Losses
A provision for loan losses of $1,566,000 was recognized for the three months ended June 30, 2020 as compared to $68,000 for the three months ended June 30, 2019. Net loan charge offs totaled $470,000 for the three months ended June 30, 2020 compared to $11,000 for the three months ended June 30, 2019. The increase in the provision for loan losses was primarily due to the economic slowdown associated with COVID-19 and to a lesser extent the increase in net charge-offs. The economic slowdown associated with COVID-19 will adversely affect our loan portfolios, but will more quickly affect loans associated with the hospitality and entertainment industries. As of June 30, 2020 approximately 8.3% of our loan portfolio is associated with these industries. There have been requests for loan payment modifications across all loan portfolios. These modifications were primarily related to payment deferrals or interest only payments for up to six months. The total loans modified was approximately $122,778,000 as of June 30, 2020. The federal government is providing numerous programs to lessen the effects of COVID-19 on the economy and on our loan portfolio. The severity of the effect of COVID-19 on our operations is difficult to determine at this time. The State of Iowa has been easing restrictions on non-essential businesses. The longer these restrictions are in place the more severe the effects of the economic slowdown will be and the greater the negative consequences for our loan customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.
Noninterest Income and Expense
Noninterest income for the three months ended June 30, 2020 totaled $2,428,000 as compared to $2,213,000 for the three months ended June 30, 2019, an increase of 10%. The increase in noninterest income was primarily due to gain on sale of loans held for sale from increased refinancing in a low interest rate environment and 2018:to a lesser extent the Acquisition.
Noninterest expense for the three months ended June 30, 2020 totaled $9,100,000 compared to $7,218,000 recorded for the three months ended June 30, 2019, an increase of 26%. Most of the increase was related to the Acquisition. Excluding the Acquisition, the increases were related to salaries and employee benefits, data processing and the amortization of the investment in Federal New Market Tax Credit projects, offset in part by a decrease in FDIC insurance assessments. Salaries and employee benefits, excluding the Acquisition, increased 6% primarily due to normal increases in salaries, other employee benefits including health insurance costs and additional personnel. Data processing costs, excluding the Acquisition, increased primarily to facilitate remote access for customers and employees. The decrease in FDIC insurance assessments was due to the receipt of a small bank credit as the deposit insurance reserve ratio exceeded 1.35%. The remaining credit was fully utilized in the second quarter. The efficiency ratio was 56.5% for the second quarter of 2020 as compared to 54.9% in the second quarter of 2019.
Income Taxes
Income tax expense for the three months ended June 30, 2020 totaled $1,015,000 compared to $1,239,000 recorded for the three months ended June 30, 2019. The effective tax rate was 19% and 21% for the three months ended June 30, 2020 and 2019, respectively. The lower than expected tax rate in 2020 and 2019 was due primarily to tax-exempt interest income and New Market Tax Credits further lowered the tax rate in 2020.
Income Statement Review for the Six Months ended June 30, 2020 and 2019
The following highlights a comparative discussion of the major components of net income and their impact for the six months ended June 30, 2020 and 2019:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.
AVERAGE BALANCE SHEETS AND INTEREST RATES | AVERAGE BALANCE SHEETS AND INTEREST RATES | AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||||||||||||||||||||
balance | expense | rate | balance | expense | rate | balance | expense | rate | balance | expense | rate | |||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans 1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 76,808 | $ | 1,062 | 5.53 | % | $ | 75,533 | $ | 972 | 5.15 | % | $ | 115,369 | $ | 2,723 | 4.72 | % | $ | 83,164 | $ | 2,239 | 5.38 | % | ||||||||||||||||||||||||
Agricultural | 78,286 | 989 | 5.05 | % | 70,925 | 1,075 | 6.06 | % | 110,792 | 3,021 | 5.45 | % | 81,511 | 2,587 | 6.35 | % | ||||||||||||||||||||||||||||||||
Real estate | 713,796 | 8,255 | 4.63 | % | 648,628 | 7,375 | 4.55 | % | 872,044 | 18,928 | 4.34 | % | 713,274 | 16,267 | 4.56 | % | ||||||||||||||||||||||||||||||||
Consumer and other | 15,861 | 207 | 5.22 | % | 10,206 | 136 | 5.34 | % | 18,339 | 485 | 5.29 | % | 16,678 | 416 | 4.99 | % | ||||||||||||||||||||||||||||||||
Total loans (including fees) | 884,751 | 10,513 | 4.75 | % | 805,292 | 9,558 | 4.75 | % | 1,116,544 | 25,157 | 4.51 | % | 894,627 | 21,509 | 4.81 | % | ||||||||||||||||||||||||||||||||
Investment securities | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 277,264 | 1,672 | 2.41 | % | 266,510 | 1,545 | 2.32 | % | 310,656 | 3,802 | 2.45 | % | 253,421 | 3,044 | 2.40 | % | ||||||||||||||||||||||||||||||||
Tax-exempt 2 | 177,431 | 1,197 | 2.70 | % | 205,003 | 1,374 | 2.68 | % | ||||||||||||||||||||||||||||||||||||||||
Tax-exempt (2) | 173,649 | 2,360 | 2.72 | % | 205,633 | 2,745 | 2.67 | % | ||||||||||||||||||||||||||||||||||||||||
Total investment securities | 454,695 | 2,869 | 2.52 | % | 471,513 | 2,919 | 2.48 | % | 484,305 | 6,162 | 2.54 | % | 459,054 | 5,789 | 2.52 | % | ||||||||||||||||||||||||||||||||
Interest bearing deposits with banks and federal funds sold | 63,857 | 401 | 2.51 | % | 47,892 | 272 | 2.27 | % | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits with banks and federal funds sold | 132,474 | 650 | 0.98 | % | 43,588 | 528 | 2.42 | % | ||||||||||||||||||||||||||||||||||||||||
Total interest-earning assets | 1,403,303 | $ | 13,783 | 3.93 | % | 1,324,697 | $ | 12,749 | 3.85 | % | 1,733,323 | $ | 31,969 | 3.69 | % | 1,397,269 | $ | 27,826 | 3.98 | % | ||||||||||||||||||||||||||||
Noninterest-earning assets | 59,894 | 41,596 | 82,742 | 53,300 | ||||||||||||||||||||||||||||||||||||||||||||
TOTAL ASSETS | $ | 1,463,197 | $ | 1,366,293 | $ | 1,816,065 | $ | 1,450,569 | ||||||||||||||||||||||||||||||||||||||||
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AVERAGE BALANCE SHEETS AND INTEREST RATES | AVERAGE BALANCE SHEETS AND INTEREST RATES | AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||||||||||||||||||||
balance | expense | rate | balance | expense | rate | balance | expense | rate | balance | expense | rate | |||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||||||||||||||||||
NOW, savings accounts and money markets | $ | 777,506 | $ | 1,451 | 0.75 | % | $ | 732,905 | $ | 1,109 | 0.61 | % | ||||||||||||||||||||||||||||||||||||
Interest-bearing checking, savings accounts and money markets | $ | 991,298 | $ | 2,083 | 0.42 | % | $ | 788,786 | $ | 3,133 | 0.79 | % | ||||||||||||||||||||||||||||||||||||
Time deposits | 226,972 | 1,097 | 1.93 | % | 196,664 | 632 | 1.29 | % | 280,386 | 2,465 | 1.76 | % | 218,380 | 1,832 | 1.68 | % | ||||||||||||||||||||||||||||||||
Total deposits | 1,004,478 | 2,548 | 1.01 | % | 929,569 | 1,741 | 0.75 | % | 1,271,684 | 4,548 | 0.72 | % | 1,007,166 | 4,965 | 0.99 | % | ||||||||||||||||||||||||||||||||
Other borrowed funds | 43,204 | 170 | 1.57 | % | 45,100 | 134 | 1.19 | % | 50,495 | 199 | 0.79 | % | 42,188 | 384 | 1.82 | % | ||||||||||||||||||||||||||||||||
Total Interest-bearing liabilities | 1,047,682 | 2,718 | 1.04 | % | 974,669 | 1,875 | 0.77 | % | ||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 1,322,179 | 4,747 | 0.72 | % | 1,049,354 | 5,349 | 1.02 | % | ||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 221,586 | 214,956 | ||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing checking | 289,350 | 216,522 | ||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 8,975 | 7,523 | 11,561 | 8,090 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders' equity | 184,954 | 169,145 | 192,975 | 176,603 | ||||||||||||||||||||||||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,463,197 | $ | 1,366,293 | $ | 1,816,065 | $ | 1,450,569 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 11,065 | 3.15 | % | $ | 10,874 | 3.28 | % | $ | 27,222 | 3.14 | % | $ | 22,477 | 3.22 | % | ||||||||||||||||||||||||||||||||
Spread Analysis | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest income/average assets | $ | 13,783 | 3.77 | % | $ | 12,749 | 3.73 | % | $ | 31,969 | 3.52 | % | $ | 27,826 | 3.84 | % | ||||||||||||||||||||||||||||||||
Interest expense/average assets | $ | 2,718 | 0.74 | % | $ | 1,875 | 0.55 | % | $ | 4,747 | 0.52 | % | $ | 5,349 | 0.74 | % | ||||||||||||||||||||||||||||||||
Net interest income/average assets | $ | 11,065 | 3.02 | % | $ | 10,874 | 3.18 | % | $ | 27,222 | 3.00 | % | $ | 22,477 | 3.10 | % | ||||||||||||||||||||||||||||||||
Net Interest Income
For the threesix months ended SeptemberJune 30, 20192020 and 2018,2019, the Company's net interest margin adjusted for tax exempt income was 3.15%3.14% and 3.28%3.22%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the threesix months ended SeptemberJune 30, 20192020 totaled $10,814,000$26,726,000 compared to $10,586,000$21,901,000 for the threesix months ended SeptemberJune 30, 2018.2019.
For the threesix months ended SeptemberJune 30, 2019,2020, interest income increased $1,071,000,$4,223,000, or 9%15%, when compared to the same period in 2018.2019. The increase from 2019 was primarily attributable to increased loan volume, related to the Acquisition. The increase in loan interest income due to loan volume was offset in part by an increase in foregone interest on nonaccrual loans which was $272,000 for the three months ended September 30, 2019, as compared to $80,000 for the three months ended September 30, 2018. The increase in loan interest income was also offset in part by a decrease in tax-exempt income due to maturity of municipal bonds.$384,000.
Interest expense increased $843,000,decreased $602,000, or 45%11%, for the threesix months ended SeptemberJune 30, 20192020 when compared to the same period in 2018.2019. The higherlower interest expense for the period is primarily attributable to highera decrease in rates on deposits due to market interest rates and competitive pressures.
rates.
Provision for Loan Losses
A provision for loan losses of $379,000$3,883,000 was recognized infor the third quarter of 2019six months ended June 30, 2020 as compared to $100,000 in$166,000 for the third quarter of 2018.six months ended June 30, 2019. Net loan charge offs totaled $314,000$497,000 for the quartersix months ended SeptemberJune 30, 20192020 compared to net loan charge offsrecoveries of $195,000$19,000 for the quartersix months ended SeptemberJune 30, 2018.2019. The loan charge offs this quarter were primarily related to one commercial relationship that was restructured. Whileincrease in the current provision for loan losses are not relatedwas primarily due to agricultural loans, the Iowa agricultural economy remains challenged aseconomic slowdown associated with COVID-19 and to a lesser extent loan growth and the result of the low grain prices throughout much of 2018 and 2019 and tariff concerns on Iowa exports. Grain prices rebounded since the second quarter of 2019; however, initial crop reportsincrease in our markets indicate significant variability in crop yields. Presently, it is too early to gauge the financial impact of the 2019 growing season on most of our agricultural borrowers.net charge-offs.
Noninterest Income and Expense
Noninterest income for the third quarter of 2019six months ended June 30, 2020 totaled $2,119,000$5,059,000 as compared to $2,162,000 in$4,139,000 for the third quartersix months ended June 30, 2019, an increase of 2018, a decrease of 2%22%. The decreaseincrease in noninterest income was primarily due to the $162,000 gain on foreclosure of real estate in 2018, offset in part by increases due to the Acquisition and gain on the sale of loans. Thean increase in thesecurity gains, gain on sale of loans washeld for sale due to higher loan volume driven byincreased refinancing in a healthy residential mortgage market in central Iowa.low interest rate environment, and the Acquisition.
Noninterest expense for the third quarter of 2019six months ended June 30, 2020 totaled $7,475,000$18,150,000 compared to $6,988,000 recorded in$14,675,000 for the third quarter of 2018,six months ended June 30, 2019, an increase of 7%24%. Most of the increase was related to higherthe Acquisition. Excluding the Acquisition, the increases were related to salaries and employee benefits, and data processing costs,and the amortization of the investment in Federal New Market Tax Credit projects, offset in part by one time data conversion costs incurred in 2018 related to the Acquisition and a decrease in FDIC insurance assessments. The increase in salaries and employee benefits were primarily due to the Acquisition and normal salary increases. The increase in data processing costs were due to the cost associated with expanded services and the Acquisition. The decrease in FDIC insurance assessments was due to the receipt of a small bank credit as the deposit insurance reserve ratio exceeded 1.38%. The efficiency ratio was 57.8% for the third quarter of 2019 as compared to 54.8% in the third quarter of 2018.
Income Taxes
The provision for income taxes expense for the three months ended September 30, 2019 and 2018 was $1,038,000 and $1,201,000, respectively, representing an effective tax rate of 20% and 21%, respectively. The lower than expected effective tax rate for both periods is primarily due to tax-exempt interest income.
Income Statement Review for the Nine Months endedSeptember 30, 2019 and 2018
The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 2019 and 2018:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.
AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans 1 | ||||||||||||||||||||||||
Commercial | $ | 81,022 | $ | 3,301 | 5.43 | % | $ | 73,973 | $ | 2,766 | 4.99 | % | ||||||||||||
Agricultural | 80,424 | 3,576 | 5.93 | % | 69,500 | 3,023 | 5.80 | % | ||||||||||||||||
Real estate | 713,449 | 24,523 | 4.58 | % | 639,563 | 21,290 | 4.44 | % | ||||||||||||||||
Consumer and other | 16,403 | 623 | 5.06 | % | 9,096 | 364 | 5.33 | % | ||||||||||||||||
Total loans (including fees) | 891,298 | 32,023 | 4.79 | % | 792,132 | 27,443 | 4.62 | % | ||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 261,456 | 4,715 | 2.40 | % | 268,284 | 4,639 | 2.31 | % | ||||||||||||||||
Tax-exempt 2 | 196,129 | 3,942 | 2.68 | % | 218,392 | 4,368 | 2.67 | % | ||||||||||||||||
Total investment securities | 457,585 | 8,657 | 2.52 | % | 486,676 | 9,007 | 2.47 | % | ||||||||||||||||
Interest bearing deposits with banks and federal funds sold | 50,419 | 929 | 2.46 | % | 46,009 | 721 | 2.09 | % | ||||||||||||||||
Total interest-earning assets | 1,399,302 | $ | 41,609 | 3.96 | % | 1,324,817 | $ | 37,171 | 3.74 | % | ||||||||||||||
Noninterest-earning assets | 55,522 | 40,619 | ||||||||||||||||||||||
TOTAL ASSETS | $ | 1,454,824 | $ | 1,365,436 | ||||||||||||||||||||
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AVERAGE BALANCE SHEETS AND INTEREST RATES | ||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||
balance | expense | rate | balance | expense | rate | |||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
NOW, savings accounts and money markets | $ | 784,985 | $ | 4,584 | 0.78 | % | $ | 733,072 | $ | 3,009 | 0.55 | % | ||||||||||||
Time deposits | 221,275 | 2,929 | 1.76 | % | 195,217 | 1,727 | 1.18 | % | ||||||||||||||||
Total deposits | 1,006,260 | 7,513 | 1.00 | % | 928,289 | 4,736 | 0.68 | % | ||||||||||||||||
Other borrowed funds | 42,530 | 554 | 1.74 | % | 49,563 | 534 | 1.44 | % | ||||||||||||||||
Total Interest-bearing liabilities | 1,048,790 | 8,067 | 1.03 | % | 977,852 | 5,270 | 0.72 | % | ||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||
Demand deposits | 218,229 | 211,120 | ||||||||||||||||||||||
Other liabilities | 8,388 | 8,141 | ||||||||||||||||||||||
Stockholders' equity | 179,417 | 168,323 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,454,824 | $ | 1,365,436 | ||||||||||||||||||||
Net interest income | $ | 33,542 | 3.20 | % | $ | 31,900 | 3.21 | % | ||||||||||||||||
Spread Analysis | ||||||||||||||||||||||||
Interest income/average assets | $ | 41,609 | 3.81 | % | $ | 37,171 | 3.63 | % | ||||||||||||||||
Interest expense/average assets | $ | 8,067 | 0.74 | % | $ | 5,270 | 0.51 | % | ||||||||||||||||
Net interest income/average assets | $ | 33,542 | 3.07 | % | $ | 31,900 | 3.12 | % | ||||||||||||||||
Net Interest Income
For the nine months ended September 30, 2019 and 2018, the Company's net interest margin adjusted for tax exempt income was 3.20% and 3.21%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2019 totaled $32,715,000 compared to $30,983,000 for the nine months ended September 30, 2018.
For the nine months ended September 30, 2019, interest income increased $4,528,000, or 12%, when compared to the same period in 2018. The increase from 2019 was primarily attributable to increased loan volume and to a lesser extent rates. The increase in loan volume was due to the Acquisition and a favorable lending environment in the Company’s market areas.
Interest expense increased $2,797,000, or 53%, for the nine months ended September 30, 2019 when compared to the same period in 2018. The higher interest expense for the period is primarily attributable to higher rates on deposits due to market interest rates and competitive pressures.
Provision for Loan Losses
A provision for loan losses of $545,000 was recognized in the nine months ended September 30, 2019 as compared to $193,000 for the nine months ended September 30, 2018. Net loan charge offs totaled $295,000 for the nine months ended September 30, 2019 compared to $226,000 for the nine months ended September 30, 2018. While the current provision for loan losses are not related to agricultural loans, the Iowa agricultural economy remains challenged as the result of the low grain prices throughout much of 2018 and 2019 and tariff concerns on Iowa exports. Grain prices rebounded since the second quarter of 2019; however, initial crop reports in our markets indicate significant variability in crop yields. Presently, it is too early to gauge the financial impact of the 2019 growing season on most of our agricultural borrowers.
Noninterest Income and Expense
Noninterest income for the nine months ended September 30, 2019 totaled $6,258,000 as compared to $5,917,000 for the nine months ended September 30, 2018, an increase of 6%. The increase in noninterest income is primarily due to the Acquisition and higher wealth management income, offset in part by a gain on foreclosure of other real estate owned in 2018. The increase in wealth management income was primarily related to growth in the assets under management, fueled by a favorable equity market and new account relationships.
Noninterest expense for the nine months ended September 30, 2019 totaled $22,150,000 compared to $20,566,000 for the nine months ended September 30, 2018, an increase of 8%, which was primarily due to the Acquisition. Salaries and benefits was the largest component of the increase in noninterest expense which also includes normal salaryincreases in salaries, other employee benefits including health insurance costs and employee benefit increases, offset in part by a one-time $1,000 bonus paid to full-time employees in 2018. Another component of the increase in noninterest expense was the increase in dataadditional personnel. Data processing costs, which was dueexcluding the Acquisition, increased primarily to the cost associated with expanded servicesfacilitate remote access for customers and the Acquisition.employees. The efficiency ratio was 56.8%57.1% and 55.7%56.4% for the ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively.
Income Taxes
The provision for income taxesIncome tax expense for the ninesix months ended SeptemberJune 30, 2020 and 2019 totaled $1,771,000 and 2018 was $3,381,000 and $3,328,000, respectively, representing an$2,343,000, respectively. The effective tax rate ofwas 18% and 21%. for the six months ended June 30, 2020 and 2019, respectively. The lower than expected effective tax rate 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 SeptemberJune 30, 2019,2020, total assets were $1,499,976,000,$1,896,972,000, a $44,288,000$159,790,000 increase compared to December 31, 2018.2019. The increase in assets, primarily interest bearing deposits and loans, was funded primarily by deposits and repurchase agreements.deposits.
Investment Portfolio
The investment portfolio totaled $457,995,000$513,616,000 as of SeptemberJune 30, 2019, a decrease2020, an increase of $976,000$33,773,000 from the December 31, 20182019 balance of $458,971,000.$479,843,000. The decreaseincrease in securities available-for-sale is primarily due to maturities in thepurchases of municipal, investment portfoliomortgage-backed securities, and to a lesser extent payments on mortgage backed securities. This decrease in investments wascorporate bonds, offset in part by increasesmaturities in the unrealized gain on the investment portfolio as market interest rates caused an increase in the fair value of the investment portfolio and purchases of U.S. Agencies and corporate bonds.Government Agency portfolio.
On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of SeptemberJune 30, 2019,2020, gross unrealized losses of $320,000,$162,000, are considered to be temporary in nature due to the interest rate environment of 20192020 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 SeptemberJune 30, 2020, the Company’s investment securities portfolio included securities issued by 267 government municipalities and agencies located within 22 states with a fair value of $216.8 million. At December 31, 2019, the Company’s investment securities portfolio included securities issued by 222251 government municipalities and agencies located within 1718 states with a fair value of $187.9 million. At December 31, 2018, the Company’s investment securities portfolio included securities issued by 263 government municipalities and agencies located within 16 states with a fair value of $216.0$195.3 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of SeptemberJune 30, 20192020 was $3.6$3.1 million (approximately 1.9%1.4% of the fair value of the governmental municipalities and agencies) represented by the West Des Moines, Iowa Community School District to be repaid by sales tax revenues and property taxes.
The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.
The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of SeptemberJune 30, 20192020 and December 31, 20182019 identifying the state in which the issuing government municipality or agency operates.operates (Dollars inin thousands):
2019 | 2018 | 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 | $ | 56,464 | $ | 57,108 | $ | 59,935 | $ | 59,481 | $ | 55,991 | $ | 57,557 | $ | 58,457 | $ | 59,072 | ||||||||||||||||
Texas | 9,524 | 9,717 | 11,822 | 11,803 | 10,802 | 11,216 | 11,243 | 11,382 | ||||||||||||||||||||||||
Washington | 8,385 | 8,698 | 6,530 | 6,629 | ||||||||||||||||||||||||||||
Pennsylvania | 8,580 | 8,675 | 9,167 | 9,144 | 7,805 | 7,949 | 7,895 | 7,989 | ||||||||||||||||||||||||
Washington | 6,822 | 6,903 | 6,905 | 6,762 | ||||||||||||||||||||||||||||
Other (2019: 12 states; 2018: 12 states) | 17,924 | 18,176 | 17,138 | 17,198 | ||||||||||||||||||||||||||||
Oregon | 6,269 | 6,492 | 3,441 | 3,505 | ||||||||||||||||||||||||||||
Other (2020: 13 states; 2019: 12 states) | 21,962 | 22,480 | 14,727 | 14,870 | ||||||||||||||||||||||||||||
Total general obligation bonds | $ | 99,314 | $ | 100,579 | $ | 104,967 | $ | 104,388 | $ | 111,214 | $ | 114,392 | $ | 102,293 | $ | 103,447 | ||||||||||||||||
Revenue bonds: | ||||||||||||||||||||||||||||||||
Iowa | $ | 78,971 | $ | 79,230 | $ | 104,589 | $ | 103,925 | $ | 71,086 | $ | 72,040 | $ | 78,281 | $ | 78,624 | ||||||||||||||||
Other (2019: 5 states; 2018: 7 states) | 8,010 | 8,131 | 7,691 | 7,642 | ||||||||||||||||||||||||||||
Texas | 8,634 | 9,094 | 480 | 476 | ||||||||||||||||||||||||||||
Other (2020: 15 states; 2019: 12 states) | 20,659 | 21,271 | 12,691 | 12,755 | ||||||||||||||||||||||||||||
Total revenue bonds | $ | 86,981 | $ | 87,361 | $ | 112,280 | $ | 111,567 | $ | 100,379 | $ | 102,405 | $ | 91,452 | $ | 91,855 | ||||||||||||||||
Total obligations of states and political subdivisions | $ | 186,295 | $ | 187,940 | $ | 217,247 | $ | 215,955 | $ | 211,593 | $ | 216,797 | $ | 193,745 | $ | 195,302 | ||||||||||||||||
As of SeptemberJune 30, 20192020 and December 31, 2018,2019, 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 56 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):
2019 | 2018 | 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 | $ | 44,153 | $ | 44,412 | $ | 60,422 | $ | 60,322 | $ | 37,679 | $ | 38,064 | $ | 37,928 | $ | 38,173 | ||||||||||||||||
Water | 12,929 | 12,977 | 13,863 | 13,644 | 19,411 | 19,969 | 7,271 | 7,272 | ||||||||||||||||||||||||
College and universities, primarily dormitory revenues | 5,463 | 5,481 | 8,183 | 8,139 | 12,207 | 12,621 | 14,016 | 14,103 | ||||||||||||||||||||||||
Leases | 7,477 | 7,534 | 8,958 | 8,861 | 7,493 | 7,680 | 7,291 | 7,351 | ||||||||||||||||||||||||
Electric power & light revenues | 4,659 | 4,693 | 5,223 | 5,185 | 6,133 | 6,283 | 4,370 | 4,405 | ||||||||||||||||||||||||
Sewer | 5,404 | 5,644 | 4,612 | 4,645 | ||||||||||||||||||||||||||||
Other | 12,300 | 12,264 | 15,631 | 15,416 | 12,052 | 12,144 | 15,964 | 15,906 | ||||||||||||||||||||||||
Total revenue bonds by revenue source | $ | 86,981 | $ | 87,361 | $ | 112,280 | $ | 111,567 | $ | 100,379 | $ | 102,405 | $ | 91,452 | $ | 91,855 | ||||||||||||||||
Loan Portfolio
The loan portfolio, net of the allowance for loan losses, totaled $882,130,000$1,146,046,000 and $890,461,000$1,048,147,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Loan demand has moderated sinceThe increase in loans was primarily due to government guaranteed loans under the Paycheck Protection Program (“PPP”). The PPP loans totaled $78.3 million as of June 30, 2020. The PPP loans bear an interest rate of 1.0% and primarily have a two year end.
Deposits
Deposits totaled $1,249,133,000$1,643,543,000 and $1,221,084,000$1,493,175,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. The increase in deposits since December 31, 20182019 was primarily due to account balances in NOW accountinterest-bearing checking accounts, money market and certificate of deposit public funds and certificates of deposits,retail interest-bearing checking accounts, offset in part by a decline in account balances of retail demandmoney market and certificate of deposits. Balance fluctuations were primarily due to normal customer activity, as corporate customers’ liquidity needs vary at any given time. In addition, funds disbursed under the PPP program were deposited into customer accounts and will impact overall deposit account balances. fluctuations as customers spend those funds according to the PPP rules. We believe that deposit levels could decrease in future periods as a result of the distressed economic conditions in our market areas related to the COVID-19 pandemic and the low interest rates.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase totaled $52,196,000$36,893,000 as of SeptemberJune 30, 2019, an increase2020, a decrease of $11,522,000,$5,141,000, or 28%12%, from the December 31, 20182019 balance of $40,674,000.$42,034,000. The decrease was primarily due to account balances that transferred to interest bearing checking, offset in part by increased balances in existing accounts.
Dividends Payable
There was no dividends payable as of June 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 June 30, 2020 the dividend was not declared until July 8, 2020 and will be paid in the third quarter of 2020.
Accrued Expense and Other Liabilities
Accrued expenses and other liabilities totaled $11,192,000 as of June 30, 2020, an increase of $4,010,000 or 56% from the December 31, 2019 balance of $7,181,000. The increase wasin mainly due primarily to an increase in accrued federal income taxes due to the balancesdeferral of one existing customer.federal income tax estimates payments.
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2018.2019.
Asset Quality Review and Credit Risk Management
The Company’s credit risk is historically centered in the loan portfolio, which on SeptemberJune 30, 20192020 totaled $882,130,000$1,146,046,000 compared to $890,461,000$1,048,147,000 as of December 31, 2018.2019. Net loans comprise 59%60% of total assets as of SeptemberJune 30, 2019.2020. 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 an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 0.58%1.63% at SeptemberJune 30, 2019,2020, as compared to 0.38%0.48% at December 31, 2018 and 0.42% at September 30, 2018.2019. The increase in the level of problem loans is due primarily to two agriculturalthe deterioration of one loan relationships.relationship in the hospitality portfolio. The Company’s level of problem loans as a percentage of total loans at SeptemberJune 30, 20192020 of 0.58%1.63% is lowerhigher as compared to the Iowa State Average peer group of FDIC insured institutions as of June 30, 2019,March 31, 2020, of 0.72%.0.82%, most recent available.
Impaired loans net of specific reserves, totaled $4,923,000$17,901,000 as of SeptemberJune 30, 20192020 and have increased $2,190,000$13,113,000 as compared to the impaired loans of $2,733,000$4,788,000 as of December 31, 2018.2019. 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 $1,171,000$1,276,000 as of SeptemberJune 30, 2019, all of which were included in impaired2020 and nonaccrual loans. The Company had TDRs of $2,350,000$1,171,000 as of December 31, 2018,2019, all of which were included in impaired and nonaccrual loans.
TDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the Coronavirus Disease 2019 (COVID-19) pandemic. The guidance interprets current accounting standards and indicates that financial institutions may presume that borrowers are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program. These modifications may include payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working 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 TDRs.
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. ANo additional specific reserve was established inreserves were provided for the amount of $200,000 in the ninethree and six months ended SeptemberJune 30, 2020 and 2019. An $80,000 specific reserve was established in the nine months ended September 30, 2018 on a TDR loan, respectively. The Company had $275,000$16,000 and $31,000 of charge-offs for TDR’s for the ninethree and six months ended SeptemberJune 30, 2019. The Company had $12,000 of2020, respectively. There were no charge-offs related to TDRs for the ninethree and six months ended SeptemberJune 30, 2018.2019. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.
Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on non-accrual. As of SeptemberJune 30, 2019,2020, non-accrual loans totaled $5,167,000$17,901,000 and there were $9,000$641,000 of loans past due 90 days and still accruing. This compares to non-accrual loans of $3,234,000$4,788,000 and loans past due 90 days and still accruing totaled $150,000$255,000 as of December 31, 2018.2019. The increases areincrease in non-accrual loans is due primarily to two agricultural loan relationships.a hospitality loan. Real estate owned totaled $218,000$632,000 and $830,000$4,004,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.
The agricultural real estate and agricultural operating loan portfolio classifications remain elevated as a result of lower grain prices. The watch and special mention loans in these categories totaled $43,236,000$58,288,000 as of SeptemberJune 30, 20192020 as compared to $47,808,000$48,028,000 as of December 31, 2018.2019. This increase is primarily due to one agricultural customer relationship. The substandard loans in these categories totaled $9,465,000$15,957,000 as of SeptemberJune 30, 20192020 as compared to $9,666,000$15,913,000 as of December 31, 2018.2019. The Iowa agricultural economy remains challenged as the result of the delayed planting, late maturing crops, current grain pricesprice of commodities, including corn, soybeans, cattle, hogs and tariff concerns on Iowa exports.ethanol, along with export concerns. The effects of the COVID-19 pandemic could exacerbate these challenges.
The watch and special mention loans classified as commercial real estate totaled $35,949,000$95,137,000 as of SeptemberJune 30, 20192020 as compared to $30,952,000$33,790,000 as of December 31, 2018.2019. This increase in commercial real estate loans was due primarily to the hospitality loan portfolio. The substandard commercial real estate loans in this category totaled $16,053,000$15,391,000 as of SeptemberJune 30, 20192020 as compared to $13,318,000$14,786,000 as of December 31, 2018.2019.
The allowance for loan losses as a percentage of outstanding loans as of SeptemberJune 30, 20192020 was 1.33%1.37%, as compared to 1.30%1.19% at December 31, 2018.2019. The allowance for loan losses totaled $11,934,000$16,005,000 and $11,684,000$12,619,000 as of SeptemberJune 30, 20192020 and December 31, 2018, respectively. Net charge-offs of loans totaled $295,000 and $226,000 for the nine months ended September 30, 2019, and 2018, respectively.
The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans. 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’ 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 SeptemberJune 30, 2019,2020, 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 discussion will cover the following topics:
●
| Review of the Company’s Current Liquidity Sources |
● | Review of Statements of Cash Flows |
●
| Company Only Cash Flows |
●
| Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs |
●
| Capital Resources
|
Review of the Company’s Current Liquidity Sources
Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of June 30, 2020 and December 31, 2019 totaled $178,519,000 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 June 30, 2020 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $213,884,000, with $3,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $110,102,000, with no outstanding federal fund purchase balances as of June 30, 2020. The Company had securities sold under agreements to repurchase totaling $36,893,000 as of June 30, 2020.
Total investments as of June 30, 2020 were $513,616,000 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 June 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 six months ended June 30, 2020 totaled $17,925,000 compared to $10,901,000 for the six months ended June 30, 2019, an increase of $7,024,000. This increase was primarily due to the proceeds from loans held for sale, a decrease in the balance of accrued income receivable and an increase in accrued expenses and other liabilities, offset in part by the increase in originations from loans held for sale.
Net cash used in investing activities for the six months ended June 30, 2020 was $156,984,000 compared to $14,570,000 for the six months ended June 30, 2019. The increase of $142,414,000 in cash used in investing activities was primarily due to a higher level of loans and purchases of investments, offset in part by proceeds from the maturities and calls of investments.
Net cash provided by financing activities for the six months ended June 30, 2020 totaled $136,970,000 compared to $4,099,000 used in financing activities for the six months ended June 30, 2019. The increase in cash provided by financing activities of $141,069,000 was primarily due to an increase in deposits and a lower amount of repayments of FHLB advances in 2020 as compared to 2019. As of June 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 $4,859,000 and $6,368,000 for the six months ended June 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 $2,867,000 as of June 30, 2020 that are presently available to provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs
No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of June 30, 2020 that are of concern to management.
Capital Resources
The Company’s total stockholders’ equity as of June 30, 2020 totaled $201,150,000 and was $13,571,000 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 June 30, 2020 and December 31, 2019, stockholders’ equity as a percentage of total assets was 10.6% and 10.8% respectively. The capital levels of the Company exceed applicable regulatory guidelines as of June 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 restrictions 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 COVID-19 restrictions 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.
Quantitative and Qualitative Disclosures About Market Risk
|
The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 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.
OTHER INFORMATION |
Legal Proceedings |
Not applicable |
Risk Factors |
|
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 has resulted in temporary closures 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 a decrease in 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. The Company’s bank lobbies are generally open to the public, with business also being transacted through our drive up facilities, online, telephone or by appointment. Some of the mitigations in place at our offices related to COVID-19 include face coverings, social distancing, frequent hand washing, and protective shields. Although the Company anticipates moving toward normalized operations, changes in restrictions by governmental authorities may change these plans. 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, 2018, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2019, there were 11,834 shares remaining to be purchased under the plan.
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2019.
Total | ||||||||||||||||
Number | Maximum | |||||||||||||||
of Shares | Number of | |||||||||||||||
Purchased as | Shares that | |||||||||||||||
Total | Part of | May Yet Be | ||||||||||||||
Number | Average | Publicly | Purchased | |||||||||||||
of Shares | Price Paid | Announced | Under | |||||||||||||
Period | Purchased | Per Share | Plans | The Plan | ||||||||||||
July 1, 2019 to July 31, 2019 | 148 | $ | 26.28 | 148 | 21,061 | |||||||||||
August 1, 2019 to August 31, 2019 | 9,227 | $ | 26.06 | 9,227 | 11,834 | |||||||||||
September 1, 2019 to September 30, 2019 | - | $ | - | - | 11,834 | |||||||||||
Total | 9,375 | 9,375 | ||||||||||||||
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 June 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 price per share averaged $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 June 30, 2020.
Total | ||||||||||||||||
Number | Maximum | |||||||||||||||
of Shares | Number of | |||||||||||||||
Purchased as | Shares that | |||||||||||||||
Total | Part of | May Yet Be | ||||||||||||||
Number | Average | Publicly | Purchased | |||||||||||||
of Shares | Price Paid | Announced | Under | |||||||||||||
Period | Purchased | Per Share | Plans | The Plan | ||||||||||||
April 1, 2020 to April 30, 2020 | 65,847 | $ | 19.52 | 65,847 | - | |||||||||||
May 1, 2020 to May 31, 2020 | - | $ | - | - | - | |||||||||||
June 1, 2020 to June 30, 2020 | - | $ | - | - | - | |||||||||||
Total | 65,847 | 65,847 | ||||||||||||||
Defaults Upon Senior Securities |
Not applicable |
Mine Safety Disclosures |
Not applicable |
Other information |
Not applicable
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document (1) | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document (1) | 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.1) | (1) These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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