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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2021

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from ____________ to ____________

 

Commission File Number 0-32637

 

AMES NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Iowa 42-1039071
(State of Incorporation) (I. R. S. Employer
  Identification Number)

 

405 Fifth Street

Ames, Iowa 50010

(Address of Principal Executive Offices) (Zip Code)

 

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

 

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

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock

ATLO

NASDAQ

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐      Accelerated filer ☐       Non-accelerated filer ☒       Smaller reporting company ☒       Emerging growth company ☐

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of October 29, 2021, there were 9,092,167 shares of common stock, par value $2, outstanding.

 

 

AMES NATIONAL CORPORATION

 

 

INDEX

 

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

Consolidated Balance Sheets at September 30, 2021 and December 31, 2020 

3
     
  Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020 4
     
  Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 5
     
  Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020 6
     
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 7
     
  Notes to Consolidated Financial Statements 9
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 52
     
Item 4. Controls and Procedures 53
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 53
     
Item 1.A. Risk Factors 53
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
     
Item 3. Defaults Upon Senior Securities 54
     
Item 4. Mine Safety Disclosures 54
     
Item 5. Other Information 54
     
Item 6. Exhibits 55
     
  Signatures 56
 

                                                                                                                                                                                            

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

   

September 30,

   

December 31,

 
   

2021

   

2020

 
   

(unaudited)

   

(audited)

 
ASSETS                

Cash and due from banks

  $ 25,607     $ 24,819  

Interest-bearing deposits in financial institutions and federal funds sold

    122,786       166,704  

Securities available-for-sale

    765,423       596,999  

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

    3,424       3,148  

Loans receivable, net

    1,126,059       1,129,505  

Loans held for sale

    378       1,621  

Bank premises and equipment, net

    16,929       17,340  

Accrued income receivable

    11,178       11,143  

Bank-owned life insurance

    2,968       2,916  

Deferred income taxes, net

    725       -  

Intangible assets, net

    2,654       3,133  

Goodwill

    12,424       12,424  

Other assets

    5,841       5,896  
                 

Total assets

  $ 2,096,396     $ 1,975,648  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

LIABILITIES

               

Deposits

               

Noninterest-bearing checking

  $ 373,883     $ 349,500  

Interest-bearing checking

    585,056       528,796  

Savings and money market

    654,345       581,224  

Time, $250 and over

    44,641       60,019  

Other time

    178,783       196,907  

Total deposits

    1,836,708       1,716,446  
                 

Securities sold under agreements to repurchase

    36,277       37,293  

FHLB advances

    3,000       3,000  

Dividends payable

    2,366       -  

Deferred income taxes, net

    -       1,731  

Accrued expenses and other liabilities

    7,665       7,691  

Total liabilities

    1,886,016       1,766,161  
                 

STOCKHOLDERS' EQUITY

               

Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,098,144 and 9,122,747 as of September 30, 2021 and December 31, 2020, respectively

    18,196       18,245  

Additional paid-in capital

    16,480       17,002  

Retained earnings

    167,443       158,217  

Accumulated other comprehensive income

    8,261       16,023  

Total stockholders' equity

    210,380       209,487  
                 

Total liabilities and stockholders' equity

  $ 2,096,396     $ 1,975,648  

 

See Notes to Consolidated Financial Statements.

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2021

   

2020

   

2021

   

2020

 
                                 

Interest and dividend income:

                               

Loans, including fees

  $ 12,530     $ 12,865     $ 36,641     $ 38,022  

Securities:

                               

Taxable

    2,256       1,986       6,457       5,725  

Tax-exempt

    725       892       2,392       2,756  

Other interest and dividend income

    168       175       515       888  

Total interest income

    15,679       15,918       46,005       47,391  
                                 

Interest expense:

                               

Deposits

    993       1,719       3,411       6,267  

Other borrowed funds

    34       39       106       238  

Total interest expense

    1,027       1,758       3,517       6,505  
                                 

Net interest income

    14,652       14,160       42,488       40,886  
                                 

Provision (credit) for loan losses

    (94 )     541       (540 )     4,424  
                                 

Net interest income after provision (credit) for loan losses

    14,746       13,619       43,028       36,462  
                                 

Noninterest income:

                               

Wealth management income

    1,147       1,037       3,224       2,808  

Service fees

    385       381       1,065       1,127  

Securities gains, net

    24       -       24       430  

Gain on sale of loans held for sale

    429       647       1,313       1,486  

Merchant and card fees

    488       460       1,508       1,296  

Other noninterest income

    200       271       681       708  

Total noninterest income

    2,673       2,796       7,815       7,855  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    5,487       5,840       16,766       17,428  

Data processing

    1,307       1,210       3,989       3,737  

Occupancy expenses, net

    632       668       1,999       2,016  

FDIC insurance assessments

    154       136       441       186  

Professional fees

    396       408       1,307       1,149  

Business development

    344       307       835       753  

Intangible asset amortization

    159       216       479       650  

New market tax credit projects amortization

    160       145       479       436  

Other operating expenses, net

    258       362       1,022       1,086  

Total noninterest expense

    8,897       9,292       27,317       27,441  
                                 

Income before income taxes

    8,522       7,123       23,526       16,876  
                                 

Provision for income taxes

    1,808       1,451       4,910       3,222  
                                 

Net income

  $ 6,714     $ 5,672     $ 18,616     $ 13,654  
                                 

Basic and diluted earnings per share

  $ 0.74     $ 0.62     $ 2.04     $ 1.49  
                                 

Dividends declared per share

  $ 0.52     $ 0.25     $ 1.03     $ 0.50  

 

See Notes to Consolidated Financial Statements.

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2021

   

2020

   

2021

   

2020

 
                                 
                                 

Net income

  $ 6,714     $ 5,672     $ 18,616     $ 13,654  

Unrealized gains (losses) on securities before tax:

                               

Unrealized holding gains (losses) arising during the period

    (1,507 )     1,995       (10,325 )     15,595  

Less: reclassification adjustment for gains realized in net income

    24       -       24       430  

Other comprehensive income (loss), before tax

    (1,531 )     1,995       (10,349 )     15,165  

Tax effect related to other comprehensive income (loss)

    383       (499 )     2,587       (3,791 )

Other comprehensive income (loss), net of tax

    (1,148 )     1,496       (7,762 )     11,374  

Comprehensive income

  $ 5,566     $ 7,168     $ 10,854     $ 25,028  

 

See Notes to Consolidated Financial Statements.

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (unaudited)

(in thousands, except share and per share data)

Three and Nine Months Ended September 30, 2021 and 2020

 

   

Common Stock

    Additional Paid-in     Retained    

Accumulated

Other

Comprehensive

Income, Net of

   

Total

Stockholders'

 
   

Shares

   

Amount

    Capital     Earnings     Taxes     Equity  
                                                 

Balance, June 30, 2020

    9,122,747     $ 18,245     $ 17,002     $ 151,910     $ 13,993     $ 201,150  

Net income

    -       -       -       5,672       -       5,672  

Other comprehensive income

    -       -       -       -       1,496       1,496  

Cash dividends declared, $0.25 per share

    -       -       -       (2,281 )     -       (2,281 )

Balance, September 30, 2020

    9,122,747     $ 18,245     $ 17,002     $ 155,301     $ 15,489     $ 206,037  
                                                 
                                                 

Balance, June 30, 2021

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

Net income

    -       -       -       6,714       -       6,714  

Other comprehensive (loss)

    -       -       -       -       (1,148 )     (1,148 )

Repurchase and retirement of stock

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

Cash dividends declared, $0.52 per share

    -       -       -       (4,737 )     -       (4,737 )

Balance, September 30, 2021

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

 

 

   

Common Stock

    Additional Paid-in     Retained    

Accumulated

Other

Comprehensive

Income (Loss),

   

Total

Stockholders'

 
   

Shares

   

Amount

    Capital     Earnings     Net of Taxes     Equity  
                                                 

Balance, December 31, 2019

    9,222,747     $ 18,445     $ 18,794     $ 146,225     $ 4,115     $ 187,579  

Net income

    -       -       -       13,654       -       13,654  

Other comprehensive income

    -       -       -       -       11,374       11,374  

Repurchase and retirement of stock

    (100,000 )     (200 )     (1,792 )     -       -       (1,992 )

Cash dividends declared, $0.50 per share

    -       -       -       (4,578 )     -       (4,578 )

Balance, September 30, 2020

    9,122,747     $ 18,245     $ 17,002     $ 155,301     $ 15,489     $ 206,037  
                                                 
                                                 

Balance, December 31, 2020

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

Net income

    -       -       -       18,616       -       18,616  

Other comprehensive (loss)

    -       -       -       -       (7,762 )     (7,762 )

Repurchase and retirement of stock

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

Cash dividends declared, $1.03 per share

    -       -       -       (9,390 )     -       (9,390 )

Balance, September 30, 2021

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

 

See Notes to Consolidated Financial Statements.

 

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

Nine Months Ended September 30, 2021 and 2020

 

   

2021

   

2020

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 18,616     $ 13,654  

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

               

Provision (credit) for loan losses

    (540 )     4,424  

Provision (credit) for off-balance sheet commitments

    (2 )     51  

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

    1,909       559  

Amortization of intangible assets

    479       650  

Depreciation

    1,032       1,084  

Deferred income taxes

    131       (942 )

Securities (gains), net

    (24 )     (430 )

(Gain) on sales of loans held for sale

    (1,313 )     (1,486 )

Proceeds from loans held for sale

    55,004       67,935  

Originations of loans held for sale

    (52,448 )     (66,469 )

Loss on sale and disposal of premises and equipment, net

    13       59  

Amortization of investment in New Markets Tax Credit projects

    479       436  

Impairment of other real estate owned

    83       -  

(Gain) loss on sale of other real estate owned, net

    1       (22 )

Change in assets and liabilities:

               

(Increase) in accrued income receivable

    (35 )     (385 )

Decrease in other assets

    377       441  

Increase (decrease) in accrued expenses and other liabilities

    (24 )     1,763  

Net cash provided by operating activities

    23,738       21,322  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchase of securities available-for-sale

    (282,379 )     (165,076 )

Proceeds from sale of securities available-for-sale

    622       5,463  

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

    100,573       104,636  

Purchase of FHLB stock

    (286 )     (1,148 )

Proceeds from the redemption of FHLB stock

    10       1,133  

Net (increase) decrease in interest-bearing deposits in financial institutions and federal funds sold

    43,918       (10,695 )

Net (increase) decrease in loans

    3,822       (114,713 )

Net proceeds from the sale of other real estate owned

    7       3,415  

Purchase of bank premises and equipment

    (927 )     (852 )

Cash paid for bank acquired

    -       (310 )

Other

    (52 )     (55 )

Net cash (used in) investing activities

    (134,692 )     (178,202 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Increase in deposits

    120,353       167,337  

(Decrease) in securities sold under agreements to repurchase

    (1,016 )     (11,541 )

Payments on FHLB borrowings

    -       (2,000 )

Dividends paid

    (7,024 )     (6,791 )

Stock repurchases

    (571 )     (1,992 )

Net cash provided by financing activities

    111,742       145,013  
                 

Net increase (decrease) in cash and due from banks

    788       (11,867 )
                 

CASH AND DUE FROM BANKS

               

Beginning

    24,819       34,617  

Ending

  $ 25,607     $ 22,750  

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)

(in thousands)

Nine Months Ended September 30, 2021 and 2020

 

   

2021

   

2020

 
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW

               

INFORMATION

               

Cash payments for:

               

Interest

  $ 3,987     $ 7,134  

Income taxes

    4,327       3,987  
                 

SUPPLEMENTAL DISCLOSURE OF NONCASH

               

INVESTING ACTIVITIES

               

Transfer of loans receivable to other real estate owned

  $ 560     $ 11  

 

See Notes to Consolidated Financial Statements.

 

 

AMES NATIONAL CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements (unaudited)

 

 

1.

Significant Accounting Policies

 

The consolidated financial statements for the three and nine months ended September 30, 2021 and 2020 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting of normal recurring 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-K for the year ended December 31, 2020 (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 with an estimation of the fair value of a reporting unit.

 

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Company’s stock price. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. The Company completed a quantitative assessment of goodwill as of May 31, 2020 which indicated that goodwill was not impaired. Subsequently, the Company determined there were no adverse changes in criteria and key considerations to the previous assessment. Accordingly, the Company concluded there is no impairment of goodwill as of September 30, 2021.

 

New and Pending Accounting Pronouncements: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In October 2019, the FASB voted to approve amendments to the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The amendment delays the effective date for our Company until interim and annual periods beginning after December 15, 2022. The Company continues collecting and retaining loan and credit data 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 impact of ASU No. 2016-13 on the Company’s financial statements are unknown at this time due to economic uncertainty due to the pandemic. The Company will continue to evaluate the extent of the potential impact.

 

9

 

 

 

2.

Dividends

 

On July 14, 2021, the Company declared a cash dividend on its common stock, payable on August 13, 2021 to stockholders of record as of July 30, 2021, equal to $0.26 per share; and on August 17, 2021, the Company declared a cash dividend on its common stock, payable on November 15, 2021 to stockholders of record as of November 1, 2021, equal to $0.26 per share.

 

 

3.

Earnings Per Share

 

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended September 30, 2021 and 2020 was 9,119,871 and 9,122,747, respectively. The weighted average outstanding shares for the nine months ended September 30, 2021 and 2020 were 9,121,778 and 9,156,805, respectively. The Company had no potentially dilutive securities outstanding during the periods presented.

 

 

4.

Off-Balance Sheet Arrangements

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2020.

 

 

5.

Fair Value Measurements

 

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

 

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.

 

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

 

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

 

10

 

The following table presents the balances of assets measured at fair value on a recurring basis by level as of September 30, 2021 and December 31, 2020 (in thousands):

 

Description

 

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

2021

                               
                                 

U.S. government treasuries

  $ 138,035     $ 138,035     $ -     $ -  

U.S. government agencies

    113,568       -       113,568       -  

U.S. government mortgage-backed securities

    158,766       -       158,766       -  

State and political subdivisions

    276,652       -       276,652       -  

Corporate bonds

    78,402       -       78,402       -  
                                 
    $ 765,423     $ 138,035     $ 627,388     $ -  
                                 

2020

                               
                                 

U.S. government treasuries

  $ 12,053     $ 12,053     $ -     $ -  

U.S. government agencies

    111,199       -       111,199       -  

U.S. government mortgage-backed securities

    150,195       -       150,195       -  

State and political subdivisions

    251,584       -       251,584       -  

Corporate bonds

    71,968       -       71,968       -  
                                 
    $ 596,999     $ 12,053     $ 584,946     $ -  

 

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

 

11

 

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment or a change in previously recognized impairment).  The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of September 30, 2021 and December 31, 2020 (in thousands):

 

Description

 

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

2021

                               
                                 

Loans receivable

  $ 8,989     $ -     $ -     $ 8,989  

Other real estate owned

    768       -       -       768  
                                 

Total

  $ 9,757     $ -     $ -     $ 9,757  
                                 

2020

                               
                                 

Loans receivable

  $ 10,306     $ -     $ -     $ 10,306  

Other real estate owned

    218       -       -       218  
                                 

Total

  $ 10,524     $ -     $ -     $ 10,524  

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020 are as follows (in thousands):

 

    2020  
   

Estimated

 

Valuation

 

 

Range

 
   

Fair Value

 

Techniques

 Unobservable Inputs  

(Average)

 
                         

Loans receivable

  $ 8,989  

Evaluation of collateral

Estimation of value

     NM*      
                         

Other real estate owned

  $ 768  

Appraisal

Appraisal adjustment

  6%  - 8% (7%)  

 

    2020  
   

Estimated

 

Valuation

 

 

Range

 
   

Fair Value

 

Techniques

 Unobservable Inputs  

(Average)

 
                         

Loans receivable

  $ 10,306  

Evaluation of collateral

Estimation of value

     NM*      
                         

Other real estate owned

  $ 218  

Appraisal

Appraisal adjustment

  6%  - 8% (7%)  

 

* 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. 

 

12

 

The following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of September 30, 2021 and December 31, 2020 (in thousands):

 

     

2021

   

2020

 
 

Fair Value

         

Estimated

           

Estimated

 
 

Hierarchy

 

Carrying

   

Fair

   

Carrying

   

Fair

 
 

Level

 

Amount

   

Value

   

Amount

   

Value

 
                                   

Financial assets:

                                 

Cash and due from banks

Level 1

  $ 25,607     $ 25,607     $ 24,819     $ 24,819  

Interest-bearing deposits in financial institutions and federal funds sold

Level 1

    122,786       122,786       166,704       166,704  

Securities available-for-sale

See previous table

    765,423       765,423       596,999       596,999  

FHLB and FRB stock

Level 2

    3,424       3,424       3,148       3,148  

Loans receivable, net

Level 2

    1,126,059       1,102,573       1,129,505       1,116,352  

Loans held for sale

Level 2

    378       378       1,621       1,621  

Accrued income receivable

Level 1

    11,178       11,178       11,143       11,143  

Financial liabilities:

                                 

Deposits

Level 2

  $ 1,836,708     $ 1,839,016     $ 1,716,446     $ 1,720,023  

Securities sold under agreements to repurchase

Level 1

    36,277       36,277       37,293       37,293  

FHLB advances

Level 2

    3,000       3,069       3,000       3,111  

Accrued interest payable

Level 1

    450       450       829       829  

 

The methodologies used to determine fair value as of September 30, 2021 did not change from the methodologies described in the December 31, 2020 Annual Financial Statements.

 

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

 

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

 

13

 

 

 

6.

Debt Securities

 

The amortized cost of securities available-for-sale and their approximate fair values as of September 30, 2021 and December 31, 2020 are summarized below (in thousands):

 

2021:

         

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 
   

Cost

   

Gains

   

Losses

   

Fair Value

 
                                 

U.S. government treasuries

  $ 138,401     $ 350     $ (716 )   $ 138,035  

U.S. government agencies

    110,832       3,172       (436 )     113,568  

U.S. government mortgage-backed securities

    158,104       1,839       (1,177 )     158,766  

State and political subdivisions

    271,918       5,429       (695 )     276,652  

Corporate bonds

    75,154       3,345       (97 )     78,402  
    $ 754,409     $ 14,135     $ (3,121 )   $ 765,423  
                                 

2020:

         

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 
   

Cost

   

Gains

   

Losses

   

Fair Value

 
                                 

U.S. government treasuries

  $ 11,725     $ 328     $ -     $ 12,053  

U.S. government agencies

    106,337       4,875       (13 )     111,199  

U.S. government mortgage-backed securities

    146,889       3,337       (31 )     150,195  

State and political subdivisions

    243,438       8,182       (36 )     251,584  

Corporate bonds

    67,247       4,722       (1 )     71,968  
    $ 575,636     $ 21,444     $ (81 )   $ 596,999  

 

The amortized cost and fair value of debt securities available-for-sale as of September 30, 2021, are shown below by expected maturity. Expected maturity will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).

 

   

Amortized

   

Estimated

 
   

Cost

   

Fair Value

 
                 

Due in one year or less

  $ 47,083     $ 47,560  

Due after one year through five years

    353,573       358,552  

Due after five years through ten years

    321,680       326,523  

Due after ten years

    32,073       32,788  

Total

  $ 754,409     $ 765,423  

 

Securities with a carrying value of $218.6 million and $202.0 million at September 30, 2021 and December 31, 2020, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

 

14

 

The proceeds and gains on securities available-for-sale for the three and nine months ended September 30, 2021 and 2020 are summarized below (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Proceeds from sales of securities available-for-sale

  $ 622     $ -     $ 622     $ 5,463  

Gross realized gains on securities available-for-sale

    24       -       24       430  

Gross realized losses on securities available-for-sale

    -       -       -       -  

 

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

2021:

 

Estimated

Fair Value

   

Unrealized

Losses

   

Estimated Fair

Value

   

Unrealized

Losses

   

Estimated Fair

Value

   

Unrealized

Losses

 
                                                 

Securities available-for-sale:

                                               

U.S. government treasuries

  $ 102,182     $ (716 )   $ -     $ -     $ 102,182     $ (716 )

U.S. government agencies

    29,722       (436 )     -       -       29,722       (436 )

U.S. government mortgage-backed securities

    100,746       (1,177 )     -       -       100,746       (1,177 )

State and political subdivisions

    67,527       (672 )     896       (23 )     68,423       (695 )

Corporate bonds

    9,378       (97 )     -       -       9,378       (97 )
    $ 309,555     $ (3,098 )   $ 896     $ (23 )   $ 310,451     $ (3,121 )

 

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

2020:

 

Fair Value

   

Unrealized

Losses

   

Fair Value

   

Unrealized

Losses

   

Fair Value

   

Unrealized

Losses

 
                                                 

Securities available-for-sale:

                                               

U.S. government agencies

  $ 6,016     $ (7 )   $ 896     $ (6 )   $ 6,912     $ (13 )

U.S. government mortgage-backed securities

    5,097       (31 )     -       -       5,097       (31 )

State and political subdivisions

    7,875       (34 )     180       (2 )     8,055       (36 )

Corporate bonds

    534       (1 )     -       -       534       (1 )
    $ 19,522     $ (73 )   $ 1,076     $ (8 )   $ 20,598     $ (81 )

 

Gross unrealized losses on debt securities totaled $3.1 million as of September 30, 2021. 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.

 

15

 

 

 

7.

 Loans Receivable and Credit Disclosures

 

The composition of loans receivable as of September 30, 2021 and December 31, 2020 is as follows (in thousands):

 

   

2021

   

2020

 
                 

Real estate - construction

  $ 37,476     $ 45,497  

Real estate - 1 to 4 family residential

    231,468       213,562  

Real estate - commercial

    519,112       496,357  

Real estate - agricultural

    153,247       151,992  

Commercial 1

    85,569       122,535  

Agricultural

    101,087       102,586  

Consumer and other

    15,346       15,048  
      1,143,305       1,147,577  

Less:

               

Allowance for loan losses

    (16,830 )     (17,215 )

Deferred loan (fees) and costs, net 2

    (416 )     (857 )

Loans receivable, net

  $ 1,126,059     $ 1,129,505  

 

1 Commercial loan portfolio includes $14.8 million and $50.9 million of Paycheck Protection Program ("PPP") loans as of September 30, 2021 and December 31, 2020, respectively.
2 Deferred loan (fees) and costs, net includes $0.7 million and $0.9 million of fees, net of costs, related to the  PPP loans as of September 30, 2021 and December 31, 2020, respectively.

 

The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, and expanded by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted December 27, 2020 and the American Rescue Plan Act, enacted March 11, 2021, in response to the Coronavirus Disease 2019 (COVID-19) pandemic. The PPP is administered by the Small Business Administration (SBA). PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA.

 

16

 

Activity in the allowance for loan losses, on a disaggregated basis, for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):

 

   

Three Months Ended September 30, 2021

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, June 30, 2021

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

Provision (credit) for loan losses

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

Recoveries of loans charged-off

    -       1       1       -       1       43       1       47  

Loans charged-off

    -       (4 )     -       -       -       -       (12 )     (16 )

Balance, September 30, 2021

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

 

   

Nine Months Ended September 30, 2021

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, December 31, 2020

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

Provision (credit) for loan losses

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

Recoveries of loans charged-off

    -       267       3       -       3       48       8       329  

Loans charged-off

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

Balance, September 30, 2021

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

 

   

Three Months Ended September 30, 2020

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, June 30, 2020

  $ 849     $ 2,505     $ 6,864     $ 1,713     $ 1,994     $ 1,830     $ 250     $ 16,005  

Provision (credit) for loan losses

    (105 )     80       583       (15 )     (5 )     (14 )     17       541  

Recoveries of loans charged-off

    -       2       1       -       9       -       273       285  

Loans charged-off

    -       (1 )     -       -       (582 )     (48 )     (268 )     (899 )

Balance, September 30, 2020

  $ 744     $ 2,586     $ 7,448     $ 1,698     $ 1,416     $ 1,768     $ 272     $ 15,932  

 

   

Nine Months Ended September 30, 2020

 
           

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Balance, December 31, 2019

  $ 672     $ 2,122     $ 5,362     $ 1,326     $ 1,458     $ 1,478     $ 201     $ 12,619  

Provision for loan losses

    71       477       2,527       372       573       338       66       4,424  

Recoveries of loans charged-off

    1       5       3       -       13       -       277       299  

Loans charged-off

    -       (18 )     (444 )     -       (628 )     (48 )     (272 )     (1,410 )

Balance, September 30, 2020

  $ 744     $ 2,586     $ 7,448     $ 1,698     $ 1,416     $ 1,768     $ 272     $ 15,932  

 

17

 

Allowance for loan losses disaggregated on the basis of impairment analysis method as of September 30, 2021 and December 31, 2020 is as follows (in thousands):

 

2021

         

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Individually evaluated for impairment

  $ -     $ 40     $ 1,326     $ -     $ 18     $ 132     $ 23     $ 1,539  

Collectively evaluated for impairment

    582       2,619       7,597       1,578       1,187       1,527       201       15,291  

Balance September 30, 2021

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

 

2020

         

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Individually evaluated for impairment

  $ -     $ 150     $ 1,486     $ -     $ 115     $ 40     $ 28     $ 1,819  

Collectively evaluated for impairment

    725       2,431       7,444       1,595       1,338       1,656       207       15,396  

Balance December 31, 2020

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

 

Loans receivable disaggregated on the basis of impairment analysis method as of September 30, 2021 and December 31, 2020 is as follows (in thousands):

 

 

2021

         

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Individually evaluated for impairment

  $ -     $ 1,000     $ 9,954     $ 576     $ 295     $ 638     $ 30     $ 12,493  

Collectively evaluated for impairment

    37,476       230,468       509,158       152,671       85,274       100,449       15,316       1,130,812  
                                                                 

Balance September 30, 2021

  $ 37,476     $ 231,468     $ 519,112     $ 153,247     $ 85,569     $ 101,087     $ 15,346     $ 1,143,305  

 

2020

         

1-4 Family

                                                 
   

Construction

   

Residential

   

Commercial

   

Agricultural

                   

Consumer

         
   

Real Estate

   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

and Other

   

Total

 

Individually evaluated for impairment

  $ 167     $ 1,340     $ 10,258     $ 1,664     $ 940     $ 859     $ 45     $ 15,273  

Collectively evaluated for impairment

    45,330       212,222       486,099       150,328       121,595       101,727       15,003       1,132,304  
                                                                 

Balance December 31, 2020

  $ 45,497     $ 213,562     $ 496,357     $ 151,992     $ 122,535     $ 102,586     $ 15,048     $ 1,147,577  

 

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.

 

18

 

Impaired loans, on a disaggregated basis, as of September 30, 2021 and December 31, 2020 (in thousands):

 

   

2021

   

2020

 
           

Unpaid

                   

Unpaid

         
   

Recorded

   

Principal

   

Related

   

Recorded

   

Principal

   

Related

 
   

Investment

   

Balance

   

Allowance

   

Investment

   

Balance

   

Allowance

 

With no specific reserve recorded:

                                               

Real estate - construction

  $ -     $ -     $ -     $ 167     $ 167     $ -  

Real estate - 1 to 4 family residential

    694       747       -       416       475       -  

Real estate - commercial

    127       142       -       242       578       -  

Real estate - agricultural

    576       631       -       1,664       1,698       -  

Commercial

    238       271       -       274       318       -  

Agricultural

    323       523       -       377       542       -  

Consumer and other

    7       9       -       8       10       -  

Total loans with no specific reserve:

    1,965       2,323       -       3,148       3,788       -  
                                                 

With an allowance recorded:

                                               

Real estate - construction

    -       -       -       -       -       -  

Real estate - 1 to 4 family residential

    306       316       40       924       1,278       150  

Real estate - commercial

    9,827       10,081       1,326       10,016       10,157       1,486  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    57       58       18       666       1,247       115  

Agricultural

    315       315       132       482       484       40  

Consumer and other

    23       24       23       37       39       28  

Total loans with specific reserve:

    10,528       10,794       1,539       12,125       13,205       1,819  
                                                 

Total

                                               

Real estate - construction

    -       -       -       167       167       -  

Real estate - 1 to 4 family residential

    1,000       1,063       40       1,340       1,753       150  

Real estate - commercial

    9,954       10,223       1,326       10,258       10,735       1,486  

Real estate - agricultural

    576       631       -       1,664       1,698       -  

Commercial

    295       329       18       940       1,565       115  

Agricultural

    638       838       132       859       1,026       40  

Consumer and other

    30       33       23       45       49       28  
                                                 
    $ 12,493     $ 13,117     $ 1,539     $ 15,273     $ 16,993     $ 1,819  

 

19

 

Average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2021 and 2020 (in thousands):

 

   

Three Months Ended September 30,

 
   

2021

   

2020

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 
   

Investment

   

Recognized

   

Investment

   

Recognized

 

With no specific reserve recorded:

                               

Real estate - construction

  $ -     $ -     $ 83     $ -  

Real estate - 1 to 4 family residential

    813       8       305       -  

Real estate - commercial

    132       -       11,091       -  

Real estate - agricultural

    602       -       1,966       -  

Commercial

    255       -       735       21  

Agricultural

    318       -       813       340  

Consumer and other

    6       -       8       -  

Total loans with no specific reserve:

    2,126       8       15,001       361  
                                 

With an allowance recorded:

                               

Real estate - construction

    -       -       -       -  

Real estate - 1 to 4 family residential

    164       -       957       -  

Real estate - commercial

    9,922       -       -       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    29       -       627       -  

Agricultural

    327       -       531       -  

Consumer and other

    30       -       30       -  

Total loans with specific reserve:

    10,472       -       2,145       -  
                                 

Total

                               

Real estate - construction

    -       -       83       -  

Real estate - 1 to 4 family residential

    977       8       1,262       -  

Real estate - commercial

    10,054       -       11,091       -  

Real estate - agricultural

    602       -       1,966       -  

Commercial

    284       -       1,362       21  

Agricultural

    645       -       1,344       340  

Consumer and other

    36       -       38       -  
                                 
    $ 12,598     $ 8     $ 17,146     $ 361  

 

20

 
   

Nine Months Ended September 30,

 
   

2021

   

2020

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 
   

Investment

   

Recognized

   

Investment

   

Recognized

 

With no specific reserve recorded:

                               

Real estate - construction

  $ 84     $ -     $ 41     $ -  

Real estate - 1 to 4 family residential

    587       19       294       -  

Real estate - commercial

    162       297       8,221       -  

Real estate - agricultural

    990       25       1,202       6  

Commercial

    400       -       586       23  

Agricultural

    339       14       1,896       340  

Consumer and other

    6       -       26       -  

Total loans with no specific reserve:

    2,568       355       12,266       369  
                                 

With an allowance recorded:

                               

Real estate - construction

    -       -       -       -  

Real estate - 1 to 4 family residential

    336       -       938       -  

Real estate - commercial

    9,969       -       244       -  

Real estate - agricultural

    -       -       -       -  

Commercial

    181       -       356       -  

Agricultural

    385       -       380       -  

Consumer and other

    35       -       15       -  

Total loans with specific reserve:

    10,906       -       1,933       -  
                                 

Total

                               

Real estate - construction

    84       -       41       -  

Real estate - 1 to 4 family residential

    923       19       1,232       -  

Real estate - commercial

    10,131       297       8,465       -  

Real estate - agricultural

    990       25       1,202       6  

Commercial

    581       -       942       23  

Agricultural

    724       14       2,276       340  

Consumer and other

    41       -       41       -  
                                 
    $ 13,474     $ 355     $ 14,199     $ 369  

 

The interest foregone on nonaccrual loans for the three months ended September 30, 2021 and 2020 was approximately $154 thousand and $247 thousand, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2021 and 2020 was approximately $523 thousand and $747 thousand, respectively.

 

Nonaccrual loans at September 30, 2021 and December 31, 2020 were $12.5 million and $15.3 million, respectively.

 

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $10.6 million as of September 30, 2021, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $11.3 million as of December 31, 2020, all of which were included in impaired and nonaccrual loans.

 

21

 

The Company’s TDRs, on a disaggregated basis, occurring in the three and nine months ended September 30, 2021 and 2020, were as follows (dollars in thousands):

 

   

Three Months Ended September 30,

 
   

2021

   

2020

 
           

Pre-Modification

   

Post-Modification

           

Pre-Modification

   

Post-Modification

 
           

Outstanding

   

Outstanding

           

Outstanding

   

Outstanding

 
   

Number of

   

Recorded

   

Recorded

   

Number of

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

 
                                                 

Real estate - construction

    -     $ -     $ -       -     $ -     $ -  

Real estate - 1 to 4 family residential

    -       -       -       -       -       -  

Real estate - commercial

    -       -       -       1       10,157       10,157  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    1       6       6       -       -       -  

Agricultural

    -       -       -       3       56       56  

Consumer and other

    -       -       -       1       27       27  
                                                 
      1     $ 6     $ 6       5     $ 10,240     $ 10,240  

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 
           

Pre-Modification

   

Post-Modification

           

Pre-Modification

   

Post-Modification

 
           

Outstanding

   

Outstanding

           

Outstanding

   

Outstanding

 
   

Number of

   

Recorded

   

Recorded

   

Number of

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

 
                                                 

Real estate - construction

    -     $ -     $ -       -     $ -     $ -  

Real estate - 1 to 4 family residential

    3       578       578       -       -       -  

Real estate - commercial

    -       -       -       2       10,341       10,341  

Real estate - agricultural

    -       -       -       -       -       -  

Commercial

    2       64       64       1       61       61  

Agricultural

    -       -       -       3       56       56  

Consumer and other

    -       -       -       1       27       27  
                                                 
      5     $ 642     $ 642       7     $ 10,485     $ 10,485  

 

During the three months ended September 30, 2021, the Company granted concessions to one borrower facing financial difficulties which was unrelated to COVID-19. The loan was restructured with a lower interest rate and accrued interest was waived. During the three months ended September 30, 2020, the Company granted concessions to three borrowers facing financial difficulties which were unrelated to COVID-19. Payments on these loans were deferred for an extended period of time and the interest rate was reduced below the market interest rate. During the nine months ended September 30, 2021, the Company granted concessions to four borrowers facing financial difficulties. The loans were restructured with a lower interest rate or amortization periods longer than a typical loan. During the nine months ended September 30, 2020, the Company granted concessions to five borrowers facing financial difficulties. Payments on these loans were deferred for an extended period of time and the interest rate was reduced below the market interest rate.

 

There were no TDR loans that were modified during the twelve months ended September 30, 2021 that had payment defaults. The Company considers TDR loans to have payment default when it is past due 60 days or more.

 

22

 

There were no net charge-offs and $15 thousand of net charge-offs related to TDRs for the three months ended September 30, 2021 and 2020, respectively. There were $262 thousand of net recoveries and $31 thousand of net charge-offs related to TDRs for the nine months ended September 30, 2021 and 2020, respectively. No additional specific reserve was provided for the three and nine months ended September 30, 2021 and 2020.

 

Section 4013 of the CARES Act, “Temporary Relief From TDRs,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, extended to January 1, 2022 under the Coronavirus Response and Relief Supplemental Appropriations Act, or 60 days after the termination of the COVID-19 national emergency. In March 2020, federal banking regulators in consultation with the FASB issued interagency statements that include similar guidance on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement provided 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.

 

As of December 31, 2020, the Company had 24 COVID-19 related loan modifications still in the modification period with a total outstanding principal balance of $45.9 million. As of September 30, 2021, substantially all the remaining COVID-19 related loan modifications have returned to normal payment status. Modified loans continued to accrue interest and were evaluated for past due status based on the revised payment terms.

 

23

 

An aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, 2021 and December 31, 2020, is as follows (in thousands):

 

2021

         

90 Days

                           

90 Days

 
     30-89    

or Greater

   

Total

                   

or Greater

 
   

Past Due

   

Past Due

   

Past Due

   

Current

   

Total

   

Accruing

 
                                                 

Real estate - construction

  $ 140     $ -     $ 140     $ 37,336     $ 37,476     $ -  

Real estate - 1 to 4 family residential

    1,080       170       1,250       230,218       231,468       84  

Real estate - commercial

    -       -       -       519,112       519,112       -  

Real estate - agricultural

    1,139       -       1,139       152,108       153,247       -  

Commercial

    495       -       495       85,074       85,569       -  

Agricultural

    136       315       451       100,636       101,087       -  

Consumer and other

    56       -       56       15,290       15,346       -  
                                                 
    $ 3,046     $ 485     $ 3,531     $ 1,139,774     $ 1,143,305     $ 84  

 

2020

         

90 Days

                           

90 Days

 
     30-89    

or Greater

   

Total

                   

or Greater

 
   

Past Due

   

Past Due

   

Past Due

   

Current

   

Total

   

Accruing

 
                                                 

Real estate - construction

  $ 169     $ 167     $ 336     $ 45,161     $ 45,497     $ -  

Real estate - 1 to 4 family residential

    1,523       176       1,699       211,863       213,562       6  

Real estate - commercial

    152       56       208       496,149       496,357       -  

Real estate - agricultural

    574       1,618       2,192       149,800       151,992       -  

Commercial

    283       3       286       122,249       122,535       3  

Agricultural

    79       458       537       102,049       102,586       30  

Consumer and other

    18       16       34       15,014       15,048       -  
                                                 
    $ 2,798     $ 2,494     $ 5,292     $ 1,142,285     $ 1,147,577     $ 39  

 

24

 

The credit risk profile by internally assigned grade, on a disaggregated basis, as of September 30, 2021 and December 31, 2020 is as follows (in thousands):

 

2021

 

Construction

   

Commercial

   

Agricultural

                         
   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

Total

 
                                                 

Pass

  $ 35,797     $ 381,055     $ 125,868     $ 72,151     $ 84,960     $ 699,831  

Watch

    326       79,194       21,037       8,077       14,717       123,351  

Special Mention

    1,353       24,687       167       1,370       -       27,577  

Substandard

    -       24,222       5,599       3,676       772       34,269  

Substandard-Impaired

    -       9,954       576       295       638       11,463  
                                                 
    $ 37,476     $ 519,112     $ 153,247     $ 85,569     $ 101,087     $ 896,491  

 

2020

 

Construction

   

Commercial

   

Agricultural

                         
   

Real Estate

   

Real Estate

   

Real Estate

   

Commercial

   

Agricultural

   

Total

 
                                                 

Pass

  $ 39,980     $ 346,591     $ 110,925     $ 101,858     $ 80,075     $ 679,429  

Watch

    5,350       88,113       33,144       15,897       20,793       163,297  

Special Mention

    -       23,753       175       52       -       23,980  

Substandard

    -       27,642       6,084       3,788       859       38,373  

Substandard-Impaired

    167       10,258       1,664       940       859       13,888  
                                                 
    $ 45,497     $ 496,357     $ 151,992     $ 122,535     $ 102,586     $ 918,967  

 

The credit risk profile based on payment activity, on a disaggregated basis, as of September 30, 2021 and December 31, 2020 is as follows (in thousands):

 

2021

 

1-4 Family

                 
   

Residential

   

Consumer

         
   

Real Estate

   

and Other

   

Total

 
                         

Performing

  $ 230,385     $ 15,343     $ 245,728  

Non-performing

    1,083       3       1,086  
                         
    $ 231,468     $ 15,346     $ 246,814  

 

2020

 

1-4 Family

                 
   

Residential

   

Consumer

         
   

Real Estate

   

and Other

   

Total

 
                         

Performing

  $ 212,282     $ 15,003     $ 227,285  

Non-performing

    1,280       45       1,325  
                         
    $ 213,562     $ 15,048     $ 228,610  

 

25

 

 

 

8.

Intangible assets

 

The following sets forth the carrying amounts and accumulated amortization of the intangible assets at September 30, 2021 and December 31, 2020 (in thousands):

 

   

2021

   

2020

 
   

Gross

   

Accumulated

   

Gross

   

Accumulated

 
   

Amount

   

Amortization

   

Amount

   

Amortization

 
                                 

Core deposit intangible asset

  $ 6,411     $ 3,913     $ 6,411     $ 3,493  

Customer list

    535       379       535       320  
                                 

Total

  $ 6,946     $ 4,292     $ 6,946     $ 3,813  

 

The weighted average remaining life of the intangible assets is approximately 4 years as of September 30, 2021 and December 31, 2020.

 

The following sets forth the activity related to the intangible assets for the three and nine months ended September 30, 2021 and 2020 (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2021

   

2020

   

2021

   

2020

 
                                 

Beginning intangible assets, net

  $ 2,813     $ 3,525     $ 3,133     $ 3,959  

Amortization

    (159 )     (216 )     (479 )     (650 )
                                 

Ending intangible assets, net

  $ 2,654     $ 3,309     $ 2,654     $ 3,309  

 

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

 

2021

  $ 148  

2022

    575  

2023

    502  

2024

    337  

2025

    300  

2026

    268  

After

    524  
         

Total

  $ 2,654  

 

26

 

 

 

9.

Pledged Collateral Related to Securities Sold Under Repurchase Agreements

 

The repurchase agreements mature daily and the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements as of September 30, 2021 and December 31, 2020 (in thousands):

 

   

2021

   

2020

 

Securities sold under agreements to repurchase:

               

U.S. government treasuries

  $ 6,034     $ 2,069  

U.S. government agencies

    38,985       39,362  

U.S. government mortgage-backed securities

    11,307       14,320  
                 

Total pledged collateral

  $ 56,326     $ 55,751  

 

In the event the repurchase agreements exceed the estimated fair value of the pledged securities available-for-sale, the Company has unpledged securities available-for-sale that may be pledged on the repurchase agreements.

 

 

10.

Borrowings

 

On June 11, 2021, the Company entered into a promissory note and line of credit agreement with an unaffiliated bank, providing for a five-year four million dollar line of credit facility. The Company had no outstanding borrowings on the line of credit as of September 30, 2021.

 

 

11.

Income Taxes

 

The tax effects of temporary differences related to income taxes are included in deferred income taxes. The change in deferred income taxes since December 31, 2020 is due primarily to the decrease in the unrealized gains on investment securities.

 

 

12.

Commitments, Contingencies and Concentrations of Credit Risk

 

On April 16, 2021, the Company entered into a $1.7 million commitment with a contractor to build a new branch in West Des Moines, Iowa. The Company has $1.5 million of the commitment remaining at September 30, 2021.

 

 

13.

Regulatory Matters

 

The Company and the Banks are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believed the Company and the Banks met all capital adequacy requirements to which they were subject as of September 30, 2021.

 

27

 

The Company and the Banks’ capital amounts and ratios as of September 30, 2021 and December 31, 2020 are as follows (dollars in thousands):

 

                                   

To Be Well

 
                                   

Capitalized Under

 
                   

For Capital

   

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                                 

As of September 30, 2021:

                                               

Total capital (to risk- weighted assets):

                                               

Consolidated

  $ 204,524       15.3 %   $ 140,431       10.50 %     N/A       N/A  

Boone Bank & Trust

    15,611       16.0       10,269       10.50       9,780       10.0 %

First National Bank

    101,785       14.7       72,926       10.50       69,454       10.0  

Iowa State Savings Bank

    23,755       16.5       15,102       10.50       14,383       10.0  

Reliance State Bank

    26,824       14.4       19,581       10.50       18,648       10.0  

State Bank & Trust

    20,327       15.0       14,247       10.50       13,568       10.0  

United Bank & Trust

    11,873       15.7       7,926       10.50       7,549       10.0  
                                                 

Tier 1 capital (to risk- weighted assets):

                                               

Consolidated

  $ 187,806       14.0 %   $ 113,682       8.50 %     N/A       N/A  

Boone Bank & Trust

    14,665       15.0       8,313       8.50       7,824       8.0 %

First National Bank

    93,084       13.4       59,035       8.50       55,563       8.0  

Iowa State Savings Bank

    22,734       15.8       12,226       8.50       11,507       8.0  

Reliance State Bank

    24,491       13.1       15,851       8.50       14,919       8.0  

State Bank & Trust

    18,643       13.7       11,533       8.50       10,855       8.0  

United Bank & Trust

    10,927       14.5       6,417       8.50       6,039       8.0  
                                                 

Tier 1 capital (to average- assets):

                                               

Consolidated

  $ 187,806       9.2 %   $ 81,851       4.00 %     N/A       N/A  

Boone Bank & Trust

    14,665       9.4       6,269       4.00       7,836       5.0 %

First National Bank

    93,084       8.8       42,354       4.00       52,942       5.0  

Iowa State Savings Bank

    22,734       9.4       9,631       4.00       12,038       5.0  

Reliance State Bank

    24,491       9.1       10,731       4.00       13,413       5.0  

State Bank & Trust

    18,643       8.7       8,530       4.00       10,663       5.0  

United Bank & Trust

    10,927       9.1       4,799       4.00       5,999       5.0  
                                                 

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

                                               

Consolidated

  $ 187,806       14.0 %   $ 93,621       7.00 %     N/A       N/A  

Boone Bank & Trust

    14,665       15.0       6,846       7.00       6,357       6.5 %

First National Bank

    93,084       13.4       48,617       7.00       45,145       6.5  

Iowa State Savings Bank

    22,734       15.8       10,068       7.00       9,349       6.5  

Reliance State Bank

    24,491       13.1       13,054       7.00       12,121       6.5  

State Bank & Trust

    18,643       13.7       9,498       7.00       8,819       6.5  

United Bank & Trust

    10,927       14.5       5,284       7.00       4,907       6.5  

 

28

 
                   

To Be Well

 
                   

Capitalized Under

 
                   

Prompt Corrective

 
   

Actual

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                 

As of December 31, 2020:

                               

Community Bank Leverage Ratio:

                               

(Tier 1 capital to average assets for leverage ratio):

                               
                                 

Boone Bank & Trust

  $ 13,967       9.2 %   $ 12,170       8.0 %

First National Bank

    86,071       8.6       80,393       8.0  

Iowa State Savings Bank

    21,610       9.4       18,321       8.0  

Reliance State Bank

    23,278       9.4       19,741       8.0  

State Bank & Trust

    16,564       8.5       15,657       8.0  

United Bank & Trust

    10,539       9.2       9,180       8.0  

 

The Company and the Banks are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules include the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a capital 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, 2021, the capital ratios for the Company and the Banks were sufficient to meet the conservation buffer.

 

The Banks elected to stop reporting their capital ratios under the Community Bank Leverage Ratio as of September 30, 2021.

 

 

14.

 Subsequent Events

 

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after September 30, 2021, but prior to November 8, 2021, that provided additional evidence about conditions that existed at September 30, 2021. There were no other significant events or transactions that provided evidence about conditions that did not exist at September 30, 2021.

 

29

 
 

 

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates six bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), United Bank & Trust 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 sixteen 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 249 full-time equivalent individuals employed by the Banks.

 

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

 

The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks; (v) gain on sale of loans; and (vi) merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.

 

The Company had net income of $6.7 million, or $0.74 per share, for the three months ended September 30, 2021, compared to net income of $5.7 million, or $0.62 per share, for the three months ended September 30, 2020. The increase in earnings is primarily the result of a reduction in interest expense due to declines in market interest rates and a decrease in provision for loan losses due to a higher level of provision in 2020 as a result of uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

 

Net loan recoveries totaled $31 thousand for the three months ended September 30, 2021 compared to net loan charge offs of $614 thousand for the three months ended September 30, 2020. A (credit) for loan losses of ($94) thousand was recognized for the three months ended September 30, 2021 as compared to a $541 thousand provision for loan loss for the three months ended September 30, 2020. The credit for loan losses was primarily due to improving economic conditions. The provision for loan losses in 2020 was primarily due to uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

 

 

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

Non-GAAP Financial Measures

Income Statement Review

Balance Sheet Review

Asset Quality Review and Credit Risk Management

Liquidity and Capital Resources

Forward-Looking Statements and Business Risks

 

Challenges and COVID-19 Status, Risks and Uncertainties

 

Management has identified certain events or circumstances that may negatively impact the Company’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 12, 2021.

 

The continuation of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our business and continuation of operations, including the following:

 

 

Although the economy continues to rebound from the depths of the economic slowdown associated with the pandemic, some of the Company’s customers may continue to experience decreased revenues, shortage of labor or shortage of goods, 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. Management may increase the allowance if the effects of the COVID-19 pandemic negatively impact the loan portfolio;

 

 

Market interest rates remain at historic lows and if prolonged, could adversely affect our net interest income, net interest margin and earnings;

 

 

We may experience a slowdown in demand for our products and services as the effects of the pandemic continue to linger, including the demand for traditional loans, although we believe any decline experienced to date has largely been offset by the new volume of PPP loans under the CARES Act and other governmental programs established in response to the pandemic. We had 227 PPP loans with an aggregate outstanding balance of $14.8 million as of September 30, 2021;

 

 

As evidenced by the level of loans classified as substandard and watch as of September 30, 2021, we continue to experience a higher risk of delinquencies, defaults and foreclosures, as well as declining collateral values and further impairment of the ability of our borrowers to repay their loans, all of which may result in additional credit charges and other losses in our loan portfolio;

 

 

 

Throughout the COVID-19 pandemic we actively worked with loan customers to evaluate prudent loan modification terms. As of September 30, 2021, substantially all COVID-19 related loan modifications have returned to normal payment status; and

 

 

In meeting our objective to maintain our capital levels and liquidity position through the COVID-19 pandemic, our Board of Directors may reduce or determine to altogether forego payment of future dividends in order to maintain and/or strengthen our capital and liquidity position.

 

Key Performance Indicators and Industry Results

 

Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 4,951 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

                   

Years Ended December 31,

 
   

Ended

   

Ended

   

3 Months Ended

                                 
   

September 30, 2021

   

June 30, 2021

   

2020

   

2019

 
   

Company

   

Company

   

Industry*

   

Company

   

Industry*

   

Company

   

Industry*

 
                                                                 

Return on assets

    1.29 %     1.20 %     1.12 %     1.24 %     1.01 %     0.72 %     1.14 %     1.29 %
                                                                 

Return on equity

    12.60 %     11.85 %     11.39 %     12.37 %     9.48 %     6.88 %     9.48 %     11.38 %
                                                                 

Net interest margin

    2.97 %     2.89 %     2.84 %     2.50 %     3.13 %     2.82 %     3.21 %     3.36 %
                                                                 

Efficiency ratio

    51.35 %     54.30 %     56.01 %     61.01 %     55.83 %     59.78 %     58.51 %     56.63 %
                                                                 

Capital ratio

    10.27 %     10.14 %     9.84 %     10.12 %     10.66 %     8.81 %     12.05 %     9.66 %

 

*Latest available data

 

Key performances indicators include:

 

Return on Assets

 

This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on average assets was 1.29% and 1.21% for the three months ended September 30, 2021 and 2020, respectively. This ratio increase was primarily the result of a decrease in the provision for loan loss and a reduction in interest expense due to market rate decreases.

 

Return on Equity

 

This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 12.60% and 11.18% for the three months ended September 30, 2021 and 2020, respectively. This ratio increase was primarily the result of a decrease in the provision for loan loss and a reduction in interest expense due to market rate decreases.

 

 

Net Interest Margin

 

The net interest margin for the three months ended September 30, 2021 and 2020 was 2.97% and 3.21%, respectively. The ratio is calculated by dividing tax equivalent net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings.

 

Efficiency Ratio

 

This ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 51.35% and 54.80% for the three months ended September 30, 2021 and 2020, respectively. The efficiency ratio has improved compared to the same quarter last year primarily due to a reduction in market interest rates on deposits and a decline in the number of employees.

 

Capital Ratio

 

The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 10.27% as of September 30, 2021 is similar to the industry average of 10.12% as of June 30, 2021.

 

Industry Results:

 

The FDIC Quarterly Banking Profile reported the following results for the second quarter of 2021:

 

Quarterly Net Income Continued to Increase Year Over Year, Driven by a Second Consecutive Quarter of Negative Provision Expense

 

Net income totaled $70.4 billion in second quarter 2021, an increase of $51.9 billion (281%) from the same quarter a year ago, driven by a $73 billion (117.3%) decline in provision expense. Two-thirds of all banks (66.4 %) reported year-over-year improvement in quarterly net income. The share of profitable institutions increased slightly, up 1.4% year over year to 95.8%. However, net income declined $6.4 billion (8.3%) from first quarter 2021, driven by an increase in provision expense from first quarter 2021 (up $3.7 billion to negative $10.8 billion). The aggregate return on average assets ratio of 1.24% rose 89 basis points from a year ago but fell 14 basis points from first quarter 2021.

 

Net Interest Margin Contracted Further to a New Record Low

 

The average net interest margin contracted 31 basis points from a year ago to 2.50%—the lowest level on record. The contraction is due to the year-over-year reduction in earning asset yields (down 53 basis points to 2.68%) outpacing the decline in average funding costs (down 22 basis points to 0.18%). Both ratios declined from first quarter 2021 to record lows. Aggregate net interest income declined $2.2 billion (1.7%) from second quarter 2020. Reductions in net interest income at the largest institutions drove the aggregate decline in net interest income, as more than three-fifths of all banks (64.1%) reported higher net interest income compared with a year ago.

 

 

Noninterest Income Continued to Increase Despite Lower Trading Revenue

 

Noninterest income increased (up $5 billion, or 7.1%) from second quarter 2020 due to improvement in several categories. During the year ending second quarter 2021, “all other noninterest income” rose $7.9 billion (27.5%), offsetting both a $5.9 billion (42.1%) decline in trading revenue and a reduction in net gains on loan sales of $1.5 billion (19.7 %). Increased income from service charges on deposit accounts (up $1.5 billion, or 21.5%) and fiduciary activities (up $1.2 billion, or 13.1%) from second quarter 2020 also supported the year-over-year improvement in noninterest income. More than two-thirds of all institutions (69.6%) reported higher noninterest income compared with the year-ago quarter.

 

Noninterest Expense Relative to Average Assets Declined to a Record Low

 

Noninterest expense rose $3.7 billion (3%) year over year, led by an increase in salary and benefit expense and “all other noninterest expense.” Nearly three-fourths of all banks (74.5%) reported higher noninterest expense year over year. Higher average assets per employee (up $0.9 million) also increased from a year ago to $11.1 million. However, noninterest expense as a percentage of average assets continued to decline, reaching a record low of 2.23%, down 14 basis points from the year-ago quarter.

 

Net Operating Revenue to Average Assets Continued to Decline

 

Net operating revenue (net interest income plus noninterest income) increased $2.8 billion (1.4%) from the year-ago quarter as improvement in noninterest income offset the decline in net interest income. However, growth in average assets and declining net interest income contributed to a 29 basis point decline in the ratio of quarterly net operating revenue to average assets. The ratio stood at 3.62% for the quarter—the lowest level since third quarter 1984.

 

Provision Expense Was Negative for the Second Consecutive Quarter

 

Provisions for credit losses (provisions) increased $3.7 billion from first quarter 2021 but declined $73 billion (117.3%) from the year-ago quarter to negative $10.8 billion. More than three-fifths of all institutions (63.3%) reported lower provisions compared with the year-ago quarter. Nearly 14% of institutions reported an increase in provisions during the same period, while the remaining institutions reported no material change.

 

The net number of banks that have adopted current expected credit loss (CECL) accounting fell by 1 to 319 from first quarter 2021. CECL adopters reported aggregate negative provisions of $10.7 billion in second quarter, an increase of $4.3 billion from the previous quarter and a reduction of $67.6 billion from one year ago. Provisions for banks that have not adopted CECL accounting totaled negative $128.1 million (a reduction of $530.6 million from a quarter ago and $5.2 billion from one year ago).

 

Allowance for Loan and Lease Losses to Total Loans Remained Higher Than Pre-Pandemic Level

 

The allowance for loan and lease losses (ALLL) as a percentage of total loans and leases declined 41 basis points to 1.80% from the year-ago quarter due to negative provisions, but ALLL remains higher than the level of 1.18% reported in fourth quarter 2019. Similarly, the ALLL as a percentage of loans that are 90 days or more past due or in nonaccrual status (coverage ratio) declined 27 percentage points from the year-ago quarter to 178% but continued to exceed the financial crisis average of 79.1%. All insured institutions except the largest Quarterly Banking Profile asset size group (greater than $250 billion) reported higher aggregate coverage ratios compared with first quarter 2021.

 

 

Noncurrent Loans Continued to Decline Quarter Over Quarter

 

Loans that were 90 days or more past due or in nonaccrual status (noncurrent loans) continued to decline (down $13.2 billion, or 10.8%) from first quarter 2021, supporting a 12 basis point reduction in the noncurrent rate to 1.01%. Noncurrent 1–4 family residential loans declined most among loan categories from the previous quarter (down $5.9 billion, or 10.9%), followed by noncurrent commercial and industrial (C&I) loans (down $3.1 billion, or 13.9%). Three-fifths of all banks reported a reduction in noncurrent loans compared with first quarter 2021.

 

The Net Charge-Off Rate Declined Further to a Record Low

 

Net charge-offs continued to decline for the fourth consecutive quarter (down $8.3 billion, or 53.2%). In second quarter, the net charge-off rate fell 30 basis points to 0.27%, a record low. A decline in net charge-offs of credit card loans (down $3.3 billion, or 39.8 %) and C&I loans (down $2.9 billion, or 69.7%) drove three-fourths (75.5%) of the reduction in net charge-offs from the year-ago quarter. More than half of all banks (51.6%) reported a decline in net charge-offs from a year ago.

 

Total Assets Increased, Especially Those With Maturities of More Than Five Years

 

Total assets increased $224.8 billion (1%) from first quarter 2021 to $22.8 trillion. More than four-fifths (86.1%) of all banks reported an increase in assets with contractual maturities greater than five years compared with a quarter ago. Cash and balances due from depository institutions declined $108 billion (3%), while securities rose $248.9 billion (4.5%). Growth in mortgage-backed securities (up $122.7 billion, or 3.8%) and U.S. Treasury securities (up $91.2 billion, or 8.5%) continued to spur quarterly increases in total securities. Growth in held-to-maturity securities from first quarter 2021 (up $273.6 billion, or 16.8%) outpaced that of available-for-sale (AFS) securities (down $27.3 billion, or 0.7%).

 

Quarterly Loan Balances Grew for the First Time Since Second Quarter 2020

 

Loan and lease balances increased $33.2 billion (0.3%) from the previous quarter, the first quarterly increase in loan balances since second quarter 2020. An increase in credit card loan balances (up $30.9 billion, or 4.1%) and an increase in auto loan balances (up $18.9 billion, or 3.8%) drove this growth. Half (50.3%) of all institutions reported a quarterly increase in total loans.

 

Compared with second quarter 2020, loan and lease balances contracted slightly (down $133.9 billion, or 1.2%), driven by a reduction in C&I loans (down $360.4 billion, or 13.4%). An increase in “all other loans” (up $182.8 billion, or 18.2%) mitigated the annual contraction in total loan balances. Compared with the year-ago quarter, more than half (52.8%) of all institutions reported a decline in total loans, but more than three-quarters (76.4%) of all institutions reported an increase in unused commitments to lend.

 

Deposits Continued to Grow but at a Moderated Pace in Second Quarter 2021

 

Deposits grew $271.9 billion (1.5%) in second quarter, down from the growth rate of 3.6% reported in first quarter 2021. The deposit growth rate in second quarter is near the long-run average growth rate of 1.2%. Deposits above $250,000 continued to drive the quarterly increase (up $297.8 billion, or 3.1%) and offset a decline in deposits below $250,000 (down $53.6 billion, or 0.7%). Noninterest-bearing deposit growth (up $175 billion, or 3.5%) continued to outpace that of interest-bearing deposits (up $53.3 billion, or 0.4 %), with more than half of banks (57.3%) reporting higher noninterest-bearing deposit balances compared with the previous quarter.

 

 

Equity Capital Growth Remained Strong

 

Equity capital rose $55.3 billion (2.5%) from first quarter 2021. Retained earnings contributed $33.9 billion to equity formation despite a decline in retained earnings from first quarter (down $19.1 billion, or 36%). Banks distributed 51.9% of second quarter earnings as dividends, which were up $12.7 billion (53%) from a quarter ago. Nearly one-third (32%) of banks reported higher dividends compared with the year-ago quarter. The number of institutions with capital ratios that did not meet Prompt Corrective Action requirements for the well-capitalized category increased by three to nine from first quarter 2021.

 

Three New Banks Opened in Second Quarter 2021

 

The number of FDIC-insured institutions declined from 4,978 in first quarter 2021 to 4,951. During second quarter 2021, three new banks opened, 28 institutions merged with other FDIC-insured institutions, two banks ceased operations, and no banks failed. The number of banks on the FDIC’s “Problem Bank List” declined by four from first quarter to 51. Total assets of problem banks declined $8.4 billion (15.4%) from first quarter to $45.8 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, 2020 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

 

The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill impairment to be the Company’s most critical accounting policies.

 

Allowance for Loan Losses

 

The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, including the economic disruption and uncertainties resulting from 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 economic disruption and uncertainties resulting from 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 four acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment.  For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions.   Impairment would arise if the fair value of a reporting unit is less than its carrying value. At September 30, 2021, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation. Goodwill may be impaired in the future if the effects of the COVID-19 pandemic negatively impacts our net income and fair value. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.

 

 

Non-GAAP Financial Measures

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

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

                 

Net interest income (GAAP)

  $ 14,652     $ 14,160     $ 42,488     $ 40,886  

Tax-equivalent adjustment (1)

    193       237       636       732  

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

    14,845       14,397       43,124       41,618  

Average interest-earning assets

  $ 1,999,147     $ 1,796,452     $ 1,989,226     $ 1,754,518  

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

    2.97 %     3.21 %     2.89 %     3.16 %

 

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

 

 

Income Statement Review for the Three Months ended September 30, 2021 and 2020

 

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended September 30, 2021 and 2020:

 

AVERAGE BALANCES AND INTEREST RATES

 

The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest-bearing liabilities. The net interest margin is equal to interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                 
   

Three Months Ended September 30,

 
                                                 
   

2021

   

2020

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

ASSETS

                                               

(dollars in thousands)

                                               

Interest-earning assets

                                               

Loans (1)

                                               

Commercial

  $ 96,436     $ 2,411       10.00 %   $ 154,887     $ 1,732       4.47 %

Agricultural

    98,942       1,014       4.10 %     105,568       1,580       5.99 %

Real estate

    934,427       8,936       3.83 %     890,097       9,324       4.19 %

Consumer and other

    15,167       169       4.46 %     17,667       229       5.18 %
                                                 

Total loans (including fees)

    1,144,972       12,530       4.38 %     1,168,219       12,865       4.41 %
                                                 

Investment securities

                                               

Taxable

    598,634       2,256       1.51 %     362,553       1,987       2.19 %

Tax-exempt (2)

    146,805       918       2.50 %     164,010       1,128       2.75 %

Total investment securities

    745,439       3,174       1.70 %     526,563       3,115       2.37 %
                                                 

Interest-bearing deposits with banks and federal funds sold

    108,736       168       0.62 %     101,670       176       0.69 %
                                                 

Total interest-earning assets

    1,999,147     $ 15,872       3.18 %     1,796,452     $ 16,156       3.60 %
                                                 

Noninterest-earning assets

    76,490                       81,654                  
                                                 

TOTAL ASSETS

  $ 2,075,637                     $ 1,878,106                  

 

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

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

 

 

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                 
   

Three Months Ended September 30,

 
                                                 
   

2021

   

2020

 
                                                 
   

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

  $ 1,212,084     $ 467       0.15 %   $ 1,027,277     $ 586       0.23 %

Time deposits

    227,760       526       0.92 %     272,361       1,133       1.66 %

Total deposits

    1,439,844       993       0.28 %     1,299,638       1,719       0.53 %

Other borrowed funds

    38,863       34       0.35 %     37,597       40       0.42 %
                                                 

Total interest-bearing liabilities

    1,478,707       1,027       0.28 %     1,337,235       1,759       0.53 %
                                                 

Noninterest-bearing liabilities

                                               

Noninterest-bearing checking

    373,973                       325,339                  

Other liabilities

    9,786                       12,689                  
                                                 

Stockholders' equity

    213,171                       202,843                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 2,075,637                     $ 1,878,106                  
                                                 
                                                 

Net interest income (FTE)(3)

          $ 14,845       2.97 %           $ 14,397       3.21 %
                                                 

Spread Analysis (FTE)

                                               

Interest income/average assets

  $ 15,872       3.06 %           $ 16,156       3.44 %        

Interest expense/average assets

  $ 1,027       0.20 %           $ 1,759       0.37 %        

Net interest income/average assets

  $ 14,845       2.86 %           $ 14,397       3.07 %        

 

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

 

Net Interest Income

 

For the three months ended September 30, 2021 and 2020, the Company's net interest margin adjusted for tax exempt income was 2.97% and 3.21%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, 2021 totaled $14.7 million compared to $14.2 million for the three months ended September 30, 2020.

 

 

For the three months ended September 30, 2021, interest income declined $239 thousand, or 2%, when compared to the same period in 2020. The reduction is primarily due to lower market interest rates, offset in part by an increase in the average balance of interest-earning assets and $1.7 million of fees recognized in commercial loan interest income from Paycheck Protection Program (PPP) loans as compared to $615 thousand of fees during the same period of 2020. The increase in average balances of interest-earning assets was primarily driven by the deployment of increased deposits.

 

Interest expense declined $731 thousand, or 42%, for the three months ended September 30, 2021 when compared to the same period in 2020. The lower interest expense for the period is primarily attributable to a decline in market interest rates and was offset in part by increases in average deposit balances. The increase in deposit balances was due primarily to government stimulus programs.

 

Provision (Credit) for Loan Losses

 

A (credit) for loan losses of ($94) thousand was recognized for the three months ended September 30, 2021 as compared to a provision for loan losses of $541 thousand for the three months ended September 30, 2020. Net loan recoveries totaled $31 thousand for the three months ended September 30, 2021 compared to net loan charge offs of $614 thousand for the three months ended September 30, 2020. The (credit) for loan losses was primarily due to improving economic conditions. The provision for loan losses in 2020 was primarily due to uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

 

Noninterest Income and Expense

 

Noninterest income for the three months ended September 30, 2021 totaled $2.7 million as compared to $2.8 million for the three months ended September 30, 2020, a decrease of 4%. The decrease in noninterest income was primarily due to a decrease in gains on sale of residential loans held for sale as refinancing has slowed.

 

Noninterest expense for the three months ended September 30, 2021 totaled $8.9 million compared to $9.3 million recorded for the three months ended September 30, 2020, a decrease of 4%. The decrease is primarily due to a reduction in salaries and benefits primarily due to a decline in the number of employees, offset in part by normal increases in salaries and other benefits, including health insurance. The efficiency ratio was 51.4% for the third quarter of 2021 as compared to 54.8% in the third quarter of 2020.

 

Income Taxes

 

Income tax expense for the three months ended September 30, 2021 totaled $1.8 million compared to $1.5 million recorded for the three months ended September 30, 2020. The effective tax rate was 21% and 20% for the three months ended September 30, 2021 and 2020, respectively. The lower than expected tax rate in 2021 and 2020 was due primarily to tax-exempt interest income and New Markets Tax Credits.

 

 

Income Statement Review for the Nine Months ended September 30, 2021 and 2020

 

The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 2021 and 2020:

 

AVERAGE BALANCES AND INTEREST RATES

 

The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest-bearing liabilities. The net interest margin is equal to interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                 
   

Nine Months Ended September 30,

 
                                                 
   

2021

   

2020

 
                                                 
   

Average

   

Revenue/

   

Yield/

   

Average

   

Revenue/

   

Yield/

 
   

balance

   

expense

   

rate

   

balance

   

expense

   

rate

 

ASSETS

                                               

(dollars in thousands)

                                               

Interest-earning assets

                                               

Loans (1)

                                               

Commercial

  $ 113,448     $ 6,281       7.38 %   $ 128,638     $ 4,455       4.62 %

Agricultural

    96,173       2,999       4.16 %     109,038       4,601       5.63 %

Real estate

    918,384       26,845       3.90 %     878,105       28,252       4.29 %

Consumer and other

    14,768       516       4.66 %     18,113       713       5.25 %
                                                 

Total loans (including fees)

    1,142,773       36,641       4.28 %     1,133,894       38,021       4.47 %
                                                 

Investment securities

                                               

Taxable

    533,161       6,457       1.61 %     328,081       5,725       2.33 %

Tax-exempt (2)

    156,969       3,028       2.57 %     170,413       3,488       2.73 %

Total investment securities

    690,130       9,485       1.83 %     498,494       9,213       2.46 %
                                                 

Interest-bearing deposits with banks and federal funds sold

    156,323       515       0.44 %     122,131       889       0.97 %
                                                 

Total interest-earning assets

    1,989,226     $ 46,641       3.13 %     1,754,519     $ 48,123       3.66 %
                                                 

Noninterest-earning assets

    76,434                       82,377                  
                                                 

TOTAL ASSETS

  $ 2,065,660                     $ 1,836,896                  

 

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

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

 

 

AVERAGE BALANCE SHEETS AND INTEREST RATES

 
                                                 
   

Nine Months Ended September 30,

 
                                                 
   

2021

   

2020

 
                                                 
   

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

  $ 1,198,914     $ 1,435       0.16 %   $ 1,003,378     $ 2,668       0.35 %

Time deposits

    239,691       1,976       1.10 %     277,691       3,599       1.73 %

Total deposits

    1,438,605       3,411       0.32 %     1,281,069       6,267       0.65 %

Other borrowed funds

    39,927       106       0.35 %     46,164       238       0.69 %
                                                 

Total interest-bearing liabilities

    1,478,532       3,517       0.32 %     1,327,233       6,505       0.65 %
                                                 

Noninterest-bearing liabilities

                                               

Noninterest-bearing checking

    367,698                       301,434                  

Other liabilities

    9,880                       11,941                  
                                                 

Stockholders' equity

    209,550                       196,288                  
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 2,065,660                     $ 1,836,896                  
                                                 
                                                 

Net interest income (FTE)(3)

          $ 43,124       2.89 %           $ 41,618       3.16 %
                                                 

Spread Analysis (FTE)

                                               

Interest income/average assets

  $ 46,641       3.01 %           $ 48,123       3.49 %        

Interest expense/average assets

  $ 3,517       0.23 %           $ 6,505       0.47 %        

Net interest income/average assets

  $ 43,124       2.78 %           $ 41,618       3.02 %        

 

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

 

Net Interest Income

 

For the nine months ended September 30, 2021 and 2020, the Company's net interest margin adjusted for tax exempt income was 2.89% and 3.16%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2021 totaled $42.5 million compared to $40.9 million for the nine months ended September 30, 2020.

 

 

For the nine months ended September 30, 2021, interest income declined $1.4 million, or 3%, when compared to the same period in 2020. The decrease is primarily due to a reduction in interest rates, offset in part by $3.9 million of fees recognized in commercial loan interest income from PPP loans during the nine months ended September 30, 2021 as compared to $1.2 million of fees recognized during the same period of 2020.

 

Interest expense declined $3.0 million, or 46%, for the nine months ended September 30, 2021 when compared to the same period in 2020. The lower interest expense for the period is primarily attributable to a decline in market interest rates and offset in part by increases in average deposit balances.

 

Provision (credit) for Loan Losses

 

A (credit) for loan losses of ($540) thousand was recognized for the nine months ended September 30, 2021 as compared to a provision for loan losses of $4.4 million for the nine months ended September 30, 2020. Net loan recoveries totaled $155 thousand for the nine months ended September 30, 2021 compared to net loan charge offs of $1.1 million for the nine months ended September 30, 2020. The (credit) for loan losses in 2021 was primarily due to loan recoveries and a reduction in a specific reserve. The provision for loan losses in 2020 was primarily due to uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

 

Noninterest Income and Expense

 

Noninterest income for the nine months ended September 30, 2021 totaled $7.8 million as compared to $7.9 million for the nine months ended September 30, 2020, a decrease of 1%. Wealth management income increased, but was offset by a decrease in securities gains when comparing periods. 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, 2021 totaled $27.3 million compared to $27.4 million recorded for the nine months ended September 30, 2020. Most of the decrease was related to salaries and employee benefits primarily due to a reduction in the number of employees and increased deferred loan costs associated with PPP loan volume, offset in part by normal increases in salaries and other benefits, including health insurance. This decrease was offset by an increase in FDIC insurance assessments and data processing costs. The efficiency ratio was 54.3% and 56.3% for the nine months ended September 30, 2021 and 2020, respectively.

 

Income Taxes

 

Income tax expense for the nine months ended September 30, 2021 totaled $4.9 million compared to $3.2 million recorded for the nine months ended September 30, 2020. The effective tax rate was 21% and 19% for the nine months ended September 30, 2021 and 2020, respectively. The lower than expected tax rate in 2021 and 2020 was due primarily to tax-exempt interest income and New Markets Tax Credits.

 

 

Balance Sheet Review

 

As of September 30, 2021, total assets were $2.1 billion, a $120.7 million increase compared to December 31, 2020. This increase in assets is primarily due to investment securities and was funded by growth in our deposits due in part to federal government stimulus programs and a lack of other desirable fixed income alternatives for our customers.

 

Investment Portfolio

 

The investment portfolio totaled $765.4 million as of September 30, 2021, an increase of $168.4 million from the December 31, 2020 balance of $597.0 million. The increase in securities available-for-sale is primarily due to purchases of treasuries and municipals as deposit growth exceeded loan growth.

 

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, 2021, gross unrealized losses of $3.1 million, are considered to be temporary in nature due to the interest rate environment 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 expects full principal and interest to be collected. Therefore, the Company does not consider these investments to have other-than-temporary impairment as of September 30, 2021.

 

At September 30, 2021, the Company’s investment securities portfolio included securities issued by 287 government municipalities and agencies located within 27 states with a fair value of $276.7 million. At December 31, 2020, the Company’s investment securities portfolio included securities issued by 279 government municipalities and agencies located within 24 states with a fair value of $251.6 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. Storm Lake, Iowa, general obligation bonds with a fair value of $7.8 million (approximately 2.8% of the fair value of the government municipalities and agencies) represent the largest exposure to any one municipality or agency for the Company as of September 30, 2021; the bonds are repayable from the levy of continuing annual tax on all the taxable property within the territory of the city of Storm Lake.

 

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

 

 

The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of September 30, 2021 and December 31, 2020 identifying the state in which the issuing government municipality or agency operates (in thousands):

 

   

2021

   

2020

 
           

Estimated

           

Estimated

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
                                 

Obligations of states and political subdivisions:

                               

General Obligation bonds:

                               

Iowa

  $ 71,457     $ 73,002     $ 69,943     $ 72,442  

Nebraska

    19,635       19,671       15,019       15,446  

Texas

    14,810       15,196       11,253       11,927  

Washington

    11,038       11,293       7,329       7,702  

Other (2021: 16 states; 2020: 14 states)

    41,670       42,217       32,014       32,989  
                                 

Total general obligation bonds

  $ 158,610     $ 161,379     $ 135,558     $ 140,506  
                                 

Revenue bonds:

                               

Iowa

  $ 63,282     $ 64,240     $ 65,461     $ 67,048  

Texas

    11,910       12,260       8,625       9,189  

Nebraska

    8,537       8,507       6,588       6,753  

Other (2021: 19 states; 2020: 17 states)

    29,580       30,266       27,206       28,088  
                                 

Total revenue bonds

  $ 113,309     $ 115,273     $ 107,880     $ 111,078  
                                 

Total obligations of states and political subdivisions

  $ 271,919     $ 276,652     $ 243,438     $ 251,584  

 

 

As of September 30, 2021 and December 31, 2020, 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 6 primary revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table (in thousands):

 

   

2021

   

2020

 
           

Estimated

           

Estimated

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

Cost

   

Value

   

Cost

   

Value

 
                                 

Revenue bonds by revenue source

                               

Sales tax

  $ 31,282     $ 31,826     $ 32,654     $ 33,380  

Water

    20,677       21,143       21,934       22,660  

College and universities, primarily dormitory revenues

    15,013       15,347       11,332       11,810  

Sewer

    14,258       14,435       11,302       11,724  

Leases

    7,788       7,944       7,050       7,253  

Electric power & light revenues

    6,134       6,305       7,075       7,279  

Other

    18,157       18,273       16,533       16,972  
                                 

Total revenue bonds by revenue source

  $ 113,309     $ 115,273     $ 107,880     $ 111,078  

 

Loan Portfolio

 

The loan portfolio, net of the allowance for loan losses, totaled $1.126 billion and $1.130 billion as of September 30, 2021 and December 31, 2020, respectively. The decrease was primarily due to a reduction in PPP and construction loans, offset in part by an increase in the commercial real estate and 1-4 family residential loan portfolio. The PPP loans totaled $14.8 million and $50.9 million as of September 30, 2021 and December 31, 2020, respectively. The PPP loans bear an interest rate of 1.0% and generally have a two to five year maturity. The Small Business Administration has provided fees to financial institutions to originate the PPP loans with recognition of the fees over the life of the loans. The Company has $652 thousand of unrecognized net PPP loan fees as of September 30, 2021. Management expects these loans to be forgiven and the net fees associated with these loans will be accelerated into interest income.

 

Deposits

 

Deposits totaled $1.84 billion and $1.72 billion as of September 30, 2021 and December 31, 2020, respectively. The change in deposits since December 31, 2020 was due to increases across all types except certificates of deposits which continue to decline due to the current rate environment. Balance fluctuations were primarily due to government stimulus programs and normal customer activity, as customers’ liquidity needs vary at any given time. Funds disbursed under the PPP program were deposited into customer accounts and may impact overall deposit fluctuations as customers spend those funds according to the PPP guidelines. Deposit levels may be impacted in future periods by additional government stimulus or distressed economic conditions.

 

Dividends Payable

 

There was $2.4 million of dividends payable as of September 30, 2021 as compared to no dividends payable as of September 30, 2020. For the quarter ended September 30, 2021 the dividend was declared on August 17, 2021 and will be paid in the fourth quarter of 2021. For the quarter ended September 30, 2020 the dividend was not declared until October 14, 2020 and was paid in the fourth quarter of 2020. In the past, dividends were declared in one quarter and then paid in the subsequent quarter, we returned to this practice in the third quarter of 2021.

 

 

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, 2020.

 

Asset Quality Review and Credit Risk Management

 

The Company’s credit risk is historically centered in the loan portfolio, which on September 30, 2021 totaled $1.126 billion compared to $1.130 billion as of December 31, 2020. Net loans comprise 54% of total assets as of September 30, 2021. The objective in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 1.11% at September 30, 2021, as compared to 1.33% at December 31, 2020. The decrease in the level of problem loans is due primarily to payoffs of nonaccrual loans. The Company’s level of problem loans as a percentage of total loans at September 30, 2021 of 1.11% is higher as compared to the Iowa State Average peer group of FDIC insured institutions as of June 30, 2021, of 0.60%, most recent available.

 

Impaired loans totaled $12.5 million as of September 30, 2021 and have decreased $2.8 million as compared to the impaired loans of $15.3 million as of December 31, 2020. The decrease is primarily due to payoffs of nonaccrual loans.

 

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

 

The Company had TDRs of $10.6 million as of September 30, 2021 and $11.3 million as of December 31, 2020, all of which were included in impaired and nonaccrual loans.

 

TDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least nine months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.

 

Section 4013 of the CARES Act, “Temporary Relief From TDRs,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, extended to January 1, 2022 under the Coronavirus Response and Relief Supplemental Appropriations Act, or 60 days after the termination of the COVID-19 national emergency. In March 2020, federal banking regulators in consultation with the FASB issued interagency statements that include similar guidance on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement provided 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.

 

 

For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. No additional specific reserve was provided for the three and nine months ended September 30, 2021 and 2020. The Company had no charge-offs and $262 thousand of recoveries for TDR’s for the three and nine months ended September 30, 2021, respectively. The Company had $15 thousand and $31 thousand of charge-offs for TDR’s for the three and nine months ended September 30, 2020, respectively. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.

 

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on nonaccrual. As of September 30, 2021, nonaccrual loans totaled $12.5 million and there were $84 thousand of loans past due 90 days and still accruing. This compares to nonaccrual loans of $15.3 million and loans past due 90 days and still accruing totaled $39 thousand as of December 31, 2020. The decrease in nonaccrual loans is due primarily to payoffs of nonaccrual loans. Real estate owned totaled $768 thousand and $218 thousand as of September 30, 2021 and December 31, 2020, respectively.

 

The agricultural real estate and agricultural operating loan portfolio classifications remain elevated. The watch and special mention loans in these categories totaled $35.9 million as of September 30, 2021 as compared to $54.1 million as of December 31, 2020. This decrease is generally due to payments received from various agricultural customers. The substandard and impaired loans in these categories totaled $7.3 million and $9.5 million as of September 30, 2021 and December 31, 2020, respectively.

 

The watch and special mention loans classified as commercial real estate totaled $103.9 million as of September 30, 2021 as compared to $111.9 million as of December 31, 2020. The substandard and impaired commercial real estate loans totaled $34.2 million and $37.9 million as of September 30, 2021 and December 31, 2020, respectively.

 

The allowance for loan losses as a percentage of outstanding loans as of September 30, 2021 was 1.47%, as compared to 1.50% at December 31, 2020. The allowance for loan losses totaled $16.8 million and $17.2 million as of September 30, 2021 and December 31, 2020, respectively. PPP loans are government guaranteed and the impact on the allowance for loan loss was not significant.

 

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 decrease in the allowance for loan losses is mainly due to net loan recoveries and a reduction in a specific reserve, offset in part by higher loan balances from year-end excluding PPP loans. Additional increases in the allowance for loan losses are possible 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 worsen 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 September 30, 2021, 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 and federal funds sold as of September 30, 2021 and December 31, 2020 totaled $148.4 million and $191.5 million, respectively, and management believes these sources provide an adequate level of liquidity given current economic conditions.

 

Other sources of liquidity available to the Banks as of September 30, 2021 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $306.6 million, with $3.0 million of outstanding FHLB advances. The Company also has a $4 million line of credit with an unaffiliated bank, with no outstanding borrowings as of September 30, 2021. Federal funds borrowing capacity at correspondent banks was $107.9 million, with no outstanding federal fund purchase balances as of September 30, 2021. The Company had securities sold under agreements to repurchase totaling $36.3 million as of September 30, 2021.

 

Total investments as of September 30, 2021 were $765.4 million compared to $597.0 million as of December 31, 2020. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of September 30, 2021.

 

The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.

 

 

Review of the Consolidated Statements of Cash Flows

 

Net cash provided by operating activities for the nine months ended September 30, 2021 totaled $23.7 million compared to $21.3 million for the nine months ended September 30, 2020. The increase of $2.4 million in cash provided by operating activities was primarily due to an increase in net income.

 

Net cash used in investing activities for the nine months ended September 30, 2021 was $134.7 million compared to $178.2 million for the nine months ended September 30, 2020. The decrease of $43.5 million in cash used in investing activities was primarily due to a decrease in interest-bearing deposits in financial institutions and loans, offset in part by an increase in purchases of investments.

 

Net cash provided by financing activities for the nine months ended September 30, 2021 totaled $111.7 million compared to $145.0 million for the nine months ended September 30, 2020. The decrease in cash provided by financing activities of $33.3 million was primarily due to a lower increase in deposits between periods. As of September 30, 2021, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

 

Review of Company Only Cash Flows

 

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7.1 million and $7.2 million for the nine months ended September 30, 2021 and 2020, 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 $2.1 million as of September 30, 2021.

 

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

 

On April 16, 2021, the Company entered into a commitment with a contractor to build a new branch in West Des Moines, Iowa for $1.7 million. No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of September 30, 2021 that are of concern to management.

 

 

Capital Resources

 

The Company’s total stockholders’ equity as of September 30, 2021 totaled $210.4 million and was $893 thousand more than the $209.5 million recorded as of December 31, 2020. The increase in stockholders’ equity was primarily the result of the retention of net income in excess of dividends, offset in part by a reduction in accumulated other comprehensive income. The decrease in other comprehensive income is created by higher market interest rates compared to December 31, 2020, which resulted in lower fair values in the securities available-for-sale portfolio. At September 30, 2021 and December 31, 2020, stockholders’ equity as a percentage of total assets was 10.0% and 10.6%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2021.

 

Forward-Looking Statements and Business Risks

 

The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality.  Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management.  These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management.  If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements.  The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following:  the substantial negative impact of the COVID-19 pandemic on national, regional and local economies in general and on our customers in particular; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses resulting from the COVID-19 pandemic or as dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s annual report on Form 10-K.  Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should”, “forecasting” or similar expressions.  Undue reliance should not be placed on these forward-looking statements.  The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Item 3.                  Quantitative and Qualitative Disclosures About Market Risk

 

The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2021 changed significantly when compared to 2020. 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.

 

 

Item 4.                  Controls and Procedures

 

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

PART II. OTHER INFORMATION
   
Item 1. Legal Proceedings
   
  Not applicable
   
Item 1.A.  Risk Factors
   
  Management does not believe there have been any material changes in the risk factors that were disclosed in the Company's Form 10-K filed with the SEC on March 12, 2021.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
  In April, 2021, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2021, there were 75,397 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, 2021.

 

                   

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, 2021 to July 31, 2021

    -     $ -       -       100,000  
                                 

August 1, 2021 to August 31, 2021

    -     $ -       -       100,000  
                                 

September 1, 2021 to September 30, 2021

    24,603     $ 23.19       24,603       75,397  
                                 

Total

    24,603               24,603          

 

 

Item 3. Defaults Upon Senior Securities
   
  Not applicable
   
Item 4. Mine Safety Disclosures
   
  Not applicable
   
Item 5. Other information
   
  Not applicable

 

 

Item 6. Exhibits
   
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
   
101.INS Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (1)
101.SCH Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)
   
104 Cover page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101.1)

 

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

 

 

SIGNATURES

 

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

 

 

  AMES NATIONAL CORPORATION
   
DATE:         November 8, 2021 By:  /s/ John P. Nelson
   
  John P. Nelson, Chief Executive Officer and President
   
  By:  /s/ John L. Pierschbacher
   
  John L. Pierschbacher, Chief Financial Officer

 

56
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