Quarterly Report (10-q)

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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, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934

	For the transition period from ____________ to ____________

Commission File Number 0-32637

AMES NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

Table of Contents

AMES NATIONAL CORPORATION

INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at September 30, 2022 and December 31, 2021	3

	Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021	4

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021	5

	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	51

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	51

Item 1.A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	53

	Signatures	54

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	September 30,			December 31,
	2022			2021
	(unaudited)			(audited)
ASSETS
Cash and due from banks	$	22,944		$	19,590
Interest-bearing deposits in financial institutions and federal funds sold		6,311			69,539
Total cash and cash equivalents		29,255			89,129
Interest-bearing time deposits		15,410			16,922
Securities available-for-sale		783,967			831,003
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost		4,141			3,422
Loans receivable, net		1,175,247			1,144,108
Loans held for sale		467			-
Bank premises and equipment, net		18,155			17,512
Accrued income receivable		12,073			10,124
Bank-owned life insurance		3,036			2,985
Deferred income taxes, net		25,453			1,922
Intangible assets, net		2,067			2,505
Goodwill		12,424			12,424
Other assets		5,244			4,985

Total assets	$	2,086,939		$	2,137,041

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Noninterest-bearing checking	$	381,137		$	411,585
Interest-bearing checking		621,082			575,997
Savings and money market		675,826			674,975
Time, $250 and over		34,955			40,793
Other time		160,011			174,669
Total deposits		1,873,011			1,878,019

Securities sold under agreements to repurchase		41,069			39,851
FHLB advances and other borrowings		27,450			3,000
Dividends payable		2,428			2,364
Accrued expenses and other liabilities		5,710			6,029
Total liabilities		1,949,668			1,929,263

STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 8,992,167 shares and 9,092,167 shares as of September 30, 2022 and December 31, 2021, respectively		17,984			18,184
Additional paid-in capital		14,253			16,353
Retained earnings		177,947			170,377
Accumulated other comprehensive income (loss)		(72,913	)		2,864
Total stockholders' equity		137,271			207,778

Total liabilities and stockholders' equity	$	2,086,939		$	2,137,041

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021

Interest and dividend income:
Loans, including fees	$	11,688		$	12,530		$	33,229		$	36,641
Securities:
Taxable		3,226			2,256			8,861			6,457
Tax-exempt		641			725			1,990			2,392
Other interest and dividend income		250			168			675			515
Total interest income		15,805			15,679			44,755			46,005

Interest expense:
Deposits		1,847			993			3,921			3,411
Other borrowed funds		295			34			383			106
Total interest expense		2,142			1,027			4,304			3,517

Net interest income		13,663			14,652			40,451			42,488

Provision (credit) for loan losses		(520	)		(94	)		(706	)		(540	)

Net interest income after provision (credit) for loan losses		14,183			14,746			41,157			43,028

Noninterest income:
Wealth management income		1,063			1,147			3,589			3,224
Service fees		348			385			1,013			1,065
Securities gains, net		2			24			37			24
Gain on sale of loans held for sale		137			429			501			1,313
Merchant and card fees		462			488			1,362			1,508
Other noninterest income		274			200			716			681
Total noninterest income		2,286			2,673			7,218			7,815

Noninterest expense:
Salaries and employee benefits		5,731			5,487			17,092			16,766
Data processing		1,494			1,307			4,594			3,989
Occupancy expenses, net		674			632			2,097			1,999
FDIC insurance assessments		155			154			450			441
Professional fees		431			396			1,407			1,307
Business development		346			344			981			835
Intangible asset amortization		145			159			438			479
New market tax credit projects amortization		189			160			567			479
Other operating expenses, net		322			258			1,091			1,022
Total noninterest expense		9,487			8,897			28,717			27,317

Income before income taxes		6,982			8,522			19,658			23,526

Provision for income taxes		1,439			1,808			4,777			4,910

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

Basic and diluted earnings per share	$	0.62		$	0.74		$	1.64		$	2.04

Dividends declared per share	$	0.27		$	0.52		$	0.81		$	1.03

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021


Net income	$	5,543		$	6,714		$	14,881		$	18,616
Unrealized gains (losses) on securities before tax:
Unrealized holding (losses) arising during the period		(30,439	)		(1,507	)		(100,257	)		(10,325	)
Less: reclassification adjustment for gains realized in net income		2			24			37			24
Other comprehensive (loss), before tax		(30,441	)		(1,531	)		(100,294	)		(10,349	)
Tax effect related to other comprehensive (loss)		7,246			383			24,517			2,587
Other comprehensive (loss), net of tax		(23,195	)		(1,148	)		(75,777	)		(7,762	)
Comprehensive income (loss)	$	(17,652	)	$	5,566		$	(60,896	)	$	10,854

See Notes to Consolidated Financial Statements

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except share and per share data)

Three and Nine Months Ended September 30, 2022 and 2021

													Accumulated
													Other
													Comprehensive			Total
	Common Stock						Additional Paid-			Retained			Income (Loss),			Stockholders'
	Shares			Amount			in Capital			Earnings			Net of Taxes			Equity

Balance, June 30, 2021		9,122,747		$	18,245		$	17,002		$	165,466		$	9,409		$	210,122
Net income		-			-			-			6,714			-			6,714
Other comprehensive (loss)		-			-			-			-			(1,148	)		(1,148	)
Repurchase and retirement of stock		(24,603	)		(49	)		(522	)		-			-			(571	)
Cash dividends declared, $0.52 per share		-			-			-			(4,737	)		-			(4,737	)
Balance, September 30, 2021		9,098,144		$	18,196		$	16,480		$	167,443		$	8,261		$	210,380


Balance, June 30, 2022		8,992,167		$	17,984		$	14,253		$	174,832		$	(49,718	)	$	157,351
Net income		-			-			-			5,543			-			5,543
Other comprehensive (loss)		-			-			-			-			(23,195	)		(23,195	)
Cash dividends declared, $0.27 per share		-			-			-			(2,428	)		-			(2,428	)
Balance, September 30, 2022		8,992,167		$	17,984		$	14,253		$	177,947		$	(72,913	)	$	137,271

													Accumulated
													Other
													Comprehensive			Total
	Common Stock						Additional Paid			Retained			Income (Loss),			Stockholders'
	Shares			Amount			in Capital			Earnings			Net of Taxes			Equity

Balance, December 31, 2020		9,122,747		$	18,245		$	17,002		$	158,217		$	16,023		$	209,487
Net income		-			-			-			18,616			-			18,616
Other comprehensive (loss)		-			-			-			-			(7,762	)		(7,762	)
Repurchase and retirement of stock		(24,603	)		(49	)		(522	)		-			-			(571	)
Cash dividends declared, $1.03 per share		-			-			-			(9,390	)		-			(9,390	)
Balance, September 30, 2021		9,098,144		$	18,196		$	16,480		$	167,443		$	8,261		$	210,380


Balance, December 31, 2021		9,092,167		$	18,184		$	16,353		$	170,377		$	2,864		$	207,778
Net income		-			-			-			14,881			-			14,881
Other comprehensive (loss)		-			-			-			-			(75,777	)		(75,777	)
Repurchase and retirement of stock		(100,000	)		(200	)		(2,100	)		-			-			(2,300	)
Cash dividends declared, $0.81 per share		-			-			-			(7,311	)		-			(7,311	)
Balance, September 30, 2022		8,992,167		$	17,984		$	14,253		$	177,947		$	(72,913	)	$	137,271

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

Nine Months Ended September 30, 2022 and 2021

	2022			2021

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	14,881		$	18,616
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		(706	)		(540	)
Provision (credit) for off-balance sheet commitments		131			(2	)
Amortization of securities available-for-sale, loans and deposits, net		1,729			1,909
Amortization of intangible assets		438			479
Depreciation		1,064			1,032
Deferred income taxes		985			131
Securities (gains), net		(37	)		(24	)
Increase in cash value of bank-owned life insurance		(51	)		(52	)
(Gain) on sales of loans held for sale		(501	)		(1,313	)
Proceeds from loans held for sale		22,904			55,004
Originations of loans held for sale		(22,870	)		(52,448	)
(Gain) loss on sale and disposal of premises and equipment, net		(76	)		13
Amortization of investment in New Markets Tax Credit projects		567			479
Impairment of other real estate owned		-			83
Loss on sale of other real estate owned, net		-			1
Change in assets and liabilities:
(Increase) in accrued income receivable		(1,949	)		(35	)
(Increase) decrease in other assets		(1,059	)		377
(Decrease) in accrued expenses and other liabilities		(450	)		(24	)
Net cash provided by operating activities		15,000			23,686

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing time deposits		1,512			1,261
Purchase of securities available-for-sale		(138,006	)		(282,379	)
Proceeds from sale of securities available-for-sale		10,548			622
Proceeds from maturities and calls of securities available-for-sale		72,304			100,573
Purchase of FHLB stock		(5,946	)		(286	)
Proceeds from the redemption of FHLB and FRB stock		5,227			10
Net (increase) decrease in loans		(29,997	)		3,822
Net proceeds from the sale of other real estate owned		-			7
Purchase of premises and equipment		(1,754	)		(927	)
Proceeds from the sale of premises and equipment		125			-
Net cash (used in) investing activities		(85,987	)		(177,297	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits		(5,008	)		120,353
Increase (decrease) in securities sold under agreements to repurchase		1,218			(1,016	)
Payments on FHLB and other borrowings		(3,150	)		-
Proceeds from other borrowings		4,000			-
Net proceeds from FHLB short-term borrowings		23,600			-
Dividends paid		(7,247	)		(7,024	)
Stock repurchases		(2,300	)		(571	)
Net cash provided by financing activities		11,113			111,742

Net decrease in cash and cash equivalents		(59,874	)		(41,869	)

CASH AND CASH EQUIVALENTS
Beginning		89,129			173,097
Ending	$	29,255		$	131,228

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)

(in thousands)

Nine Months Ended September 30, 2022 and 2021

	2022		2021

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	4,553	$	3,987
Income taxes		3,603		4,327

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer of loans receivable to other real estate owned	$	-	$	560

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

1. Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared by Ames National Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these interim financial statements be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”). In the opinion of management, the accompanying consolidated financial statements of the Company contain all adjustments necessary to fairly present the financial results for the interim periods reported. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.

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

Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment with an estimation of the fair value of a reporting unit.

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Company’s stock price. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. The Company completed a quantitative assessment of goodwill as of October 1, 2021 which indicated that goodwill was not impaired. Subsequently, the Company determined there were no adverse changes in criteria and key considerations to the previous assessment. Accordingly, the Company concluded there is no impairment of goodwill as of September 30, 2022.

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

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

2. Dividends

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

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

3. Earnings Per Share

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended September 30, 2022 and 2021 was 8,992,167 and 9,119,871, respectively. The weighted average outstanding shares for the nine months ended September 30, 2022 and 2021 were 9,047,308 and 9,121,778, respectively. The Company had no potentially dilutive securities outstanding during the periods presented.

4. Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2021.

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5. Fair Value Measurements

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

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

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

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

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

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

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

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

Description	Total		Level 1		Level 2		Level 3

2022
Assets
Securities available-for-sale
U.S. government treasuries	$	208,086	$	208,086	$	-	$	-
U.S. government agencies		103,643		-		103,643		-
U.S. government mortgage-backed securities		118,357		-		118,357		-
State and political subdivisions		280,489		-		280,489		-
Corporate bonds		73,392		-		73,392		-
Derivative financial instruments		1,165		-		1,165		-

2021
Assets
Securities available-for-sale
U.S. government treasuries	$	190,479	$	190,479	$	-	$	-
U.S. government agencies		116,014		-		116,014		-
U.S. government mortgage-backed securities		149,601		-		149,601		-
State and political subdivisions		292,859		-		292,859		-
Corporate bonds		82,050		-		82,050		-

Liabilities
Derivative financial instruments	$	527	$	-	$	527	$	-

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment or a change in previously recognized impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of September 30, 2022 and December 31, 2021 (in thousands):

Description	Total		Level 1		Level 2		Level 3

2022

Loans receivable	$	8,885	$	-	$	-	$	8,885

2021

Loans receivable	$	9,012	$	-	$	-	$	9,012
Other real estate owned		218		-		-		218

Total	$	9,230	$	-	$	-	$	9,230

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The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021 are as follows (in thousands):

	2022
	Estimated		Valuation		Range
	Fair Value		Techniques	Unobservable Inputs	(Average)

Loans receivable	$	8,885	Evaluation of collateral	Estimation of value	NM*

2021

Estimated

Valuation

Range

Fair Value

Techniques

Unobservable Inputs

(Average)

Loans receivable

9,012

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

218

Appraisal

Appraisal adjustment

(7%)

* Not Meaningful.

Evaluations of the underlying assets are completed for each collateral dependent impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

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GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of September 30, 2022 and December 31, 2021 (in thousands):

		2022				2021
	Fair Value			Estimated				Estimated
	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	Level 1	$	29,255	$	29,255	$	89,129	$	89,129
Interest-bearing time deposits	Level 1		15,410		15,410		16,922		16,922
Securities available-for-sale	See previous table		783,967		783,967		831,003		831,003
FHLB and FRB stock	Level 2		4,141		4,141		3,422		3,422
Loans receivable, net	Level 2		1,175,247		1,120,219		1,144,108		1,112,684
Loans held for sale	Level 2		467		467		-		-
Accrued income receivable	Level 1		12,073		12,073		10,124		10,124
Derivative financial instruments	Level 2		1,165		1,165		-		-
Financial liabilities:
Deposits	Level 2	$	1,873,011	$	1,871,699	$	1,878,019	$	1,880,137
Securities sold under agreements to repurchase	Level 1		41,069		41,069		39,851		39,851
FHLB advances and other borrowings	Level 2		27,450		27,310		3,000		3,071
Accrued interest payable	Level 1		319		319		353		353
Derivative financial instruments	Level 2		-		-		527		527

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

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

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

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6. Debt Securities

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

2022:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	230,063	$	-	$	(21,977	)	$	208,086
U.S. government agencies		114,018		5		(10,380	)		103,643
U.S. government mortgage-backed securities		138,117		6		(19,766	)		118,357
State and political subdivisions		316,532		5		(36,048	)		280,489
Corporate bonds		81,713		-		(8,321	)		73,392
	$	880,443	$	16	$	(96,492	)	$	783,967

2021:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	192,323	$	239	$	(2,083	)	$	190,479
U.S. government agencies		114,531		2,235		(752	)		116,014
U.S. government mortgage-backed securities		149,896		1,375		(1,670	)		149,601
State and political subdivisions		290,548		4,035		(1,724	)		292,859
Corporate bonds		79,887		2,437		(274	)		82,050
	$	827,185	$	10,321	$	(6,503	)	$	831,003

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

	Amortized		Estimated
	Cost		Fair Value

Due in one year or less	$	32,318	$	32,029
Due after one year through five years		452,629		414,093
Due after five years through ten years		382,700		326,965
Due after ten years		12,796		10,880
Total	$	880,443	$	783,967

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

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2022			2021		2022			2021
Proceeds from sales of securities available-for-sale	$	10,013		$	622	$	10,548		$	622
Gross realized gains on securities available-for-sale		25			24		60			24
Gross realized losses on securities available-for-sale		(23	)		-		(23	)		-

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

	Less than 12 Months					12 Months or More					Total
2022:	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries	$	119,179	$	(10,309	)	$	88,907	$	(11,668	)	$	208,086	$	(21,977	)
U.S. government agencies		76,888		(6,433	)		26,095		(3,947	)		102,983		(10,380	)
U.S. government mortgage-backed securities		47,837		(5,541	)		69,785		(14,225	)		117,622		(19,766	)
State and political subdivisions		218,288		(23,921	)		59,639		(12,127	)		277,927		(36,048	)
Corporate bonds		63,812		(6,032	)		9,580		(2,289	)		73,392		(8,321	)
	$	526,004	$	(52,236	)	$	254,006	$	(44,256	)	$	780,010	$	(96,492	)

	Less than 12 Months					12 Months or More					Total
2021:	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries	$	163,206	$	(2,083	)	$	-	$	-		$	163,206	$	(2,083	)
U.S. government agencies		30,647		(570	)		5,836		(182	)		36,483		(752	)
U.S. government mortgage-backed securities		92,192		(1,580	)		2,524		(90	)		94,716		(1,670	)
State and political subdivisions		115,204		(1,667	)		1,725		(57	)		116,929		(1,724	)
Corporate bonds		16,484		(274	)		-		-			16,484		(274	)
	$	417,733	$	(6,174	)	$	10,085	$	(329	)	$	427,818	$	(6,503	)

Gross unrealized losses on debt securities totaled $96.5 million as of September 30, 2022. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

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7. Loans Receivable and Credit Disclosures

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

	2022			2021

Real estate - construction	$	42,816		$	42,638
Real estate - 1 to 4 family residential		281,046			246,745
Real estate - commercial		519,345			515,367
Real estate - agricultural		159,099			153,457
Commercial ¹		73,554			75,482
Agricultural		98,914			111,881
Consumer and other		15,994			15,097
		1,190,768			1,160,667
Less:
Allowance for loan losses		(15,897	)		(16,621	)
Deferred loan costs, net		376			62
Loans receivable, net	$	1,175,247		$	1,144,108

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

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

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

	Three Months Ended September 30, 2022
				1-4 Family
	Construction			Residential		Commercial			Agricultural									Consumer
	Real Estate			Real Estate		Real Estate			Real Estate			Commercial			Agricultural			and Other			Total
Balance, June 30, 2022	$	606		$	2,920	$	8,360		$	1,692		$	1,125		$	1,484		$	233		$	16,420
Provision (credit) for loan losses		(2	)		83		(492	)		(94	)		(25	)		24			(14	)		(520	)
Recoveries of loans charged-off		-			4		1			-			1			-			-			6
Loans charged-off		-			-		-			-			(2	)		(7	)		-			(9	)
Balance, September 30, 2022	$	604		$	3,007	$	7,869		$	1,598		$	1,099		$	1,501		$	219		$	15,897

	Nine Months Ended September 30, 2022
				1-4 Family
	Construction			Residential			Commercial			Agricultural								Consumer
	Real Estate			Real Estate			Real Estate			Real Estate		Commercial			Agricultural			and Other			Total
Balance, December 31, 2021	$	675		$	2,752		$	8,406		$	1,584	$	1,170		$	1,836		$	198		$	16,621
Provision (credit) for loan losses		(71	)		257			(539	)		14		(72	)		(328	)		33			(706	)
Recoveries of loans charged-off		-			8			2			-		3			-			4			17
Loans charged-off		-			(10	)		-			-		(2	)		(7	)		(16	)		(35	)
Balance, September 30, 2022	$	604		$	3,007		$	7,869		$	1,598	$	1,099		$	1,501		$	219		$	15,897

	Three Months Ended September 30, 2021
				1-4 Family
	Construction			Residential			Commercial		Agricultural								Consumer
	Real Estate			Real Estate			Real Estate		Real Estate			Commercial		Agricultural			and Other			Total
Balance, June 30, 2021	$	738		$	2,603		$	8,889	$	1,614		$	1,140	$	1,675		$	234		$	16,893
Provision (credit) for loan losses		(156	)		59			33		(36	)		64		(59	)		1			(94	)
Recoveries of loans charged-off		-			1			1		-			1		43			1			47
Loans charged-off		-			(4	)		-		-			-		-			(12	)		(16	)
Balance, September 30, 2021	$	582		$	2,659		$	8,923	$	1,578		$	1,205	$	1,659		$	224		$	16,830

	Nine Months Ended September 30, 2021
				1-4 Family
	Construction			Residential			Commercial			Agricultural									Consumer
	Real Estate			Real Estate			Real Estate			Real Estate			Commercial			Agricultural			and Other			Total
Balance, December 31, 2020	$	725		$	2,581		$	8,930		$	1,595		$	1,453		$	1,696		$	235		$	17,215
Provision (credit) for loan losses		(143	)		(155	)		(10	)		(17	)		(138	)		(85	)		8			(540	)
Recoveries of loans charged-off		-			267			3			-			3			48			8			329
Loans charged-off		-			(34	)		-			-			(113	)		-			(27	)		(174	)
Balance, September 30, 2021	$	582		$	2,659		$	8,923		$	1,578		$	1,205		$	1,659		$	224		$	16,830

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

2022			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	30	$	874	$	-	$	-	$	83	$	18	$	1,005
Collectively evaluated for impairment		604		2,977		6,995		1,598		1,099		1,418		201		14,892
Balance September 30, 2022	$	604	$	3,007	$	7,869	$	1,598	$	1,099	$	1,501	$	219	$	15,897

2021			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	40	$	1,139	$	-	$	60	$	132	$	21	$	1,392
Collectively evaluated for impairment		675		2,712		7,267		1,584		1,110		1,704		177		15,229
Balance December 31, 2021	$	675	$	2,752	$	8,406	$	1,584	$	1,170	$	1,836	$	198	$	16,621

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

2022			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	1,035	$	13,144	$	169	$	276	$	319	$	26	$	14,969
Collectively evaluated for impairment		42,816		280,011		506,201		158,930		73,278		98,595		15,968		1,175,799

Balance September 30, 2022	$	42,816	$	281,046	$	519,345	$	159,099	$	73,554	$	98,914	$	15,994	$	1,190,768

2021			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	980	$	9,792	$	546	$	330	$	637	$	27	$	12,312
Collectively evaluated for impairment		42,638		245,765		505,575		152,911		75,152		111,244		15,070		1,148,355

Balance December 31, 2021	$	42,638	$	246,745	$	515,367	$	153,457	$	75,482	$	111,881	$	15,097	$	1,160,667

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

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

	2022						2021
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-	$	-	$	-
Real estate - 1 to 4 family residential		839		879		-		677		739		-
Real estate - commercial		3,739		3,774		-		124		142		-
Real estate - agricultural		169		194		-		546		1,001		-
Commercial		276		320		-		233		269		-
Agricultural		48		58		-		322		521		-
Consumer and other		8		10		-		6		8		-
Total loans with no specific reserve:		5,079		5,235		-		1,908		2,680		-

With an allowance recorded:
Real estate - construction		-		-		-		-		-		-
Real estate - 1 to 4 family residential		196		187		30		303		314		40
Real estate - commercial		9,405		9,944		874		9,668		10,001		1,139
Real estate - agricultural		-		-		-		-		-		-
Commercial		-		-		-		97		98		60
Agricultural		271		294		83		315		315		132
Consumer and other		18		20		18		21		23		21
Total loans with specific reserve:		9,890		10,445		1,005		10,404		10,751		1,392

Total
Real estate - construction		-		-		-		-		-		-
Real estate - 1 to 4 family residential		1,035		1,066		30		980		1,053		40
Real estate - commercial		13,144		13,718		874		9,792		10,143		1,139
Real estate - agricultural		169		194		-		546		1,001		-
Commercial		276		320		-		330		367		60
Agricultural		319		352		83		637		836		132
Consumer and other		26		30		18		27		31		21

	$	14,969	$	15,680	$	1,005	$	12,312	$	13,431	$	1,392

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

	Three Months Ended September 30,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-
Real estate - 1 to 4 family residential		781		39		813		8
Real estate - commercial		1,929		-		132		-
Real estate - agricultural		170		-		602		-
Commercial		242		-		255		-
Agricultural		39		-		318		-
Consumer and other		6		-		6		-
Total loans with no specific reserve:		3,167		39		2,126		8

With an allowance recorded:
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		98		-		164		-
Real estate - commercial		9,500		-		9,922		-
Real estate - agricultural		-		-		-		-
Commercial		17		1		29		-
Agricultural		286		-		327		-
Consumer and other		19		-		30		-
Total loans with specific reserve:		9,920		1		10,472		-

Total
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		879		39		977		8
Real estate - commercial		11,429		-		10,054		-
Real estate - agricultural		170		-		602		-
Commercial		259		1		284		-
Agricultural		325		-		645		-
Consumer and other		25		-		36		-

	$	13,087	$	40	$	12,598	$	8

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	Nine Months Ended September 30,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	84	$	-
Real estate - 1 to 4 family residential		722		55		587		19
Real estate - commercial		1,026		-		162		297
Real estate - agricultural		357		14		990		25
Commercial		234		5		400		-
Agricultural		164		-		339		14
Consumer and other		5		-		6		-
Total loans with no specific reserve:		2,508		74		2,568		355

With an allowance recorded:
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		206		1		336		-
Real estate - commercial		9,584		-		9,969		-
Real estate - agricultural		-		-		-		-
Commercial		43		1		181		-
Agricultural		299		-		385		-
Consumer and other		20		-		35		-
Total loans with specific reserve:		10,152		2		10,906		-

Total
Real estate - construction		-		-		84		-
Real estate - 1 to 4 family residential		928		56		923		19
Real estate - commercial		10,610		-		10,131		297
Real estate - agricultural		357		14		990		25
Commercial		277		6		581		-
Agricultural		463		-		724		14
Consumer and other		25		-		41		-

	$	12,660	$	76	$	13,474	$	355

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

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

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

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

	Three Months Ended September 30,
	2022						2021
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		-	$	-	$	-		-	$	-	$	-
Real estate - 1 to 4 family residential		-		-		-		-		-		-
Real estate - commercial		-		-		-		-		-		-
Real estate - agricultural		-		-		-		-		-		-
Commercial		-		-		-		1		6		6
Agricultural		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-

		-	$	-	$	-		1	$	6	$	6

	Nine Months Ended September 30,
	2022						2021
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		-	$	-	$	-		-	$	-	$	-
Real estate - 1 to 4 family residential		-		-		-		3		578		578
Real estate - commercial		-		-		-		-		-		-
Real estate - agricultural		-		-		-		-		-		-
Commercial		-		-		-		2		64		64
Agricultural		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-

		-	$	-	$	-		5	$	642	$	642

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

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

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

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

2022			90 Days								90 Days
	30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	305	$	-	$	305	$	42,511	$	42,816	$	-
Real estate - 1 to 4 family residential		701		72		773		280,273		281,046		7
Real estate - commercial		512		1,483		1,995		517,350		519,345		-
Real estate - agricultural		-		-		-		159,099		159,099		-
Commercial		276		75		351		73,203		73,554		-
Agricultural		67		12		79		98,835		98,914		-
Consumer and other		38		10		48		15,946		15,994		5

	$	1,899	$	1,652	$	3,551	$	1,187,217	$	1,190,768	$	12

2021			90 Days								90 Days
	300899		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	-	$	-	$	-	$	42,638	$	42,638	$	-
Real estate - 1 to 4 family residential		1,198		482		1,680		245,065		246,745		169
Real estate - commercial		24		-		24		515,343		515,367		-
Real estate - agricultural		30		-		30		153,427		153,457		-
Commercial		251		15		266		75,216		75,482		-
Agricultural		172		-		172		111,709		111,881		-
Consumer and other		49		-		49		15,048		15,097		-

	$	1,724	$	497	$	2,221	$	1,158,446	$	1,160,667	$	169

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

2022	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	42,588	$	413,090	$	134,873	$	65,221	$	81,530	$	737,302
Watch		228		71,674		19,105		6,452		16,556		114,015
Special Mention		-		-		-		-		-		-
Substandard		-		21,437		4,952		1,605		509		28,503
Substandard-Impaired		-		13,144		169		276		319		13,908

	$	42,816	$	519,345	$	159,099	$	73,554	$	98,914	$	893,728

2021	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	38,753	$	381,346	$	126,157	$	63,141	$	95,289	$	704,686
Watch		239		99,127		17,853		8,132		7,421		132,772
Special Mention		-		3,085		3,519		762		7,664		15,030
Substandard		3,646		22,017		5,382		3,117		870		35,032
Substandard-Impaired		-		9,792		546		330		637		11,305

	$	42,638	$	515,367	$	153,457	$	75,482	$	111,881	$	898,825

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

2022	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	280,011	$	15,964	$	295,975
Non-performing		1,035		30		1,065

	$	281,046	$	15,994	$	297,040

2021	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	245,598	$	15,067	$	260,665
Non-performing		1,147		30		1,177

	$	246,745	$	15,097	$	261,842

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8. Intangible assets

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

	2022				2021
	Gross		Accumulated		Gross		Accumulated
	Amount		Amortization		Amount		Amortization

Core deposit intangible asset	$	6,411	$	4,422	$	6,411	$	4,043
Customer list		535		457		535		398

Total	$	6,946	$	4,879	$	6,946	$	4,441

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

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021

Beginning intangible assets, net	$	2,212		$	2,813		$	2,505		$	3,133
Amortization		(145	)		(159	)		(438	)		(479	)

Ending intangible assets, net	$	2,067		$	2,654		$	2,067		$	2,654

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

2022		136
2023		502
2024		337
2025		300
2026		268
2027		240
After		284

Total	$	2,067

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9. Pledged Collateral Related to Securities Sold Under Repurchase Agreements

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

	2022		2021
Securities sold under agreements to repurchase:
U.S. government treasuries	$	6,467	$	4,971
U.S. government agencies		35,966		38,045
U.S. government mortgage-backed securities		8,645		11,127

Total pledged collateral	$	51,078	$	54,143

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

10. Borrowings

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

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

11. Derivative Financial Instruments

Fair Value Hedges

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

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

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

	Notional Amount		Fair Value			Balance Sheet Category
September 30, 2022
Fair value hedges	$	9,408	$	1,165		Other assets
December 31, 2021
Fair value hedges	$	20,399	$	(527	)	Other liabilities

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12. Income Taxes

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

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

13. Commitments, Contingencies and Concentrations of Credit Risk

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

14. Regulatory Matters

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

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

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of September 30, 2022:
Total capital (to risk- weighted assets):
Consolidated	$	213,649		14.6	%	$	153,337		10.50	%		N/A		N/A
Boone Bank & Trust		15,864		12.7			13,148		10.50			12,522		10.0	%
First National Bank		109,914		14.8			78,045		10.50			74,328		10.0
Iowa State Savings Bank		24,918		15.6			16,784		10.50			15,985		10.0
Reliance State Bank		28,124		13.5			21,898		10.50			20,855		10.0
State Bank & Trust		21,793		14.9			15,349		10.50			14,618		10.0
United Bank & Trust		12,450		15.1			8,663		10.50			8,250		10.0

Tier 1 capital (to risk- weighted assets):
Consolidated	$	196,922		13.5	%	$	124,130		8.50	%		N/A		N/A
Boone Bank & Trust		14,932		11.9			10,644		8.50			10,018		8.0	%
First National Bank		100,627		13.5			63,179		8.50			59,463		8.0
Iowa State Savings Bank		23,735		14.8			13,587		8.50			12,788		8.0
Reliance State Bank		25,544		12.2			17,727		8.50			16,684		8.0
State Bank & Trust		20,181		13.8			12,425		8.50			11,694		8.0
United Bank & Trust		11,418		13.8			7,013		8.50			6,600		8.0

Tier 1 capital (to average- assets):
Consolidated	$	196,922		9.1	%	$	86,685		4.00	%		N/A		N/A
Boone Bank & Trust		14,932		9.0			6,654		4.00			8,318		5.0	%
First National Bank		100,627		9.0			44,824		4.00			56,030		5.0
Iowa State Savings Bank		23,735		9.1			10,411		4.00			13,014		5.0
Reliance State Bank		25,544		8.7			11,782		4.00			14,728		5.0
State Bank & Trust		20,181		8.8			9,132		4.00			11,415		5.0
United Bank & Trust		11,418		8.5			5,370		4.00			6,713		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	196,922		13.5	%	$	102,225		7.00	%		N/A		N/A
Boone Bank & Trust		14,932		11.9			8,766		7.00			8,139		6.5	%
First National Bank		100,627		13.5			52,030		7.00			48,313		6.5
Iowa State Savings Bank		23,735		14.8			11,189		7.00			10,390		6.5
Reliance State Bank		25,544		12.2			14,599		7.00			13,556		6.5
State Bank & Trust		20,181		13.8			10,233		7.00			9,502		6.5
United Bank & Trust		11,418		13.8			5,775		7.00			5,363		6.5

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											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2021:
Total capital (to risk- weighted assets):
Consolidated	$	208,480		14.8	%	$	146,881		10.50	%		N/A		N/A
Boone Bank & Trust		15,603		14.2			11,562		10.50			11,012		10.0	%
First National Bank		104,608		14.5			75,832		10.50			72,221		10.0
Iowa State Savings Bank		24,008		15.9			15,895		10.50			15,138		10.0
Reliance State Bank		27,292		13.6			21,136		10.50			20,129		10.0
State Bank & Trust		20,885		15.2			14,416		10.50			13,730		10.0
United Bank & Trust		12,001		15.7			8,039		10.50			7,657		10.0

Tier 1 capital (to risk- weighted assets):
Consolidated	$	191,161		13.7	%	$	118,904		8.50	%		N/A		N/A
Boone Bank & Trust		14,652		13.3			9,360		8.50			8,809		8.0	%
First National Bank		95,573		13.2			61,388		8.50			57,777		8.0
Iowa State Savings Bank		22,747		15.0			12,868		8.50			12,111		8.0
Reliance State Bank		24,774		12.3			17,110		8.50			16,103		8.0
State Bank & Trust		19,231		14.0			11,670		8.50			10,984		8.0
United Bank & Trust		11,042		14.4			6,508		8.50			6,125		8.0

Tier 1 capital (to average- assets):
Consolidated	$	191,161		9.0	%	$	84,585		4.00	%		N/A		N/A
Boone Bank & Trust		14,652		9.0			6,525		4.00			8,157		5.0	%
First National Bank		95,573		8.7			44,333		4.00			55,416		5.0
Iowa State Savings Bank		22,747		9.1			10,102		4.00			12,628		5.0
Reliance State Bank		24,774		8.8			11,396		4.00			14,245		5.0
State Bank & Trust		19,231		9.1			8,469		4.00			10,586		5.0
United Bank & Trust		11,042		8.9			4,955		4.00			6,193		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	191,161		13.7	%	$	97,921		7.00	%		N/A		N/A
Boone Bank & Trust		14,652		13.3			7,708		7.00			7,158		6.5	%
First National Bank		95,573		13.2			50,555		7.00			46,944		6.5
Iowa State Savings Bank		22,747		15.0			10,597		7.00			9,840		6.5
Reliance State Bank		24,774		12.3			14,091		7.00			13,084		6.5
State Bank & Trust		19,231		14.0			9,611		7.00			8,924		6.5
United Bank & Trust		11,042		14.4			5,360		7.00			4,977		6.5

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

15. Subsequent Events

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

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

Overview

Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates six bank subsidiaries in central, north-central and south-central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), United Bank & Trust Co. (United Bank) and Iowa State Savings Bank (Iowa State Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. Wealth management services includes financial planning and managing trust, agencies, estates and investment brokerage accounts. The Company employs nineteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training, real estate valuation services and the coordination of management activities, in addition to 247 full-time equivalent individuals employed by the Banks.

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

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

The Company had net income of $5.5 million, or $0.62 per share, for the three months ended September 30, 2022, compared to net income of $6.7 million, or $0.74 per share, for the three months ended September 30, 2021. The decrease in earnings is primarily the result of lower interest income on loans and higher interest expense on deposits, offset in part by an increase in interest income on taxable securities. The reduction in interest income on loans was primarily due to fewer Paycheck Protection Program (“PPP”) fees and interest recognized into income compared to the same period in 2021. Fees recognized from PPP loans during the three months ended September 30, 2022 were $2 thousand as compared to $1.7 million of fees during the three months ended September 30, 2021. The higher interest expense on deposits is due to an increase in market rates in 2022. The increase in interest income on taxable securities was primarily due to growth in the portfolio.

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

The following management discussion and analysis will provide a review of important items relating to:

●	Challenges

●	Key Performance Indicators and Industry Results

●	Critical Accounting Policies

●	Non-GAAP Financial Measures

●	Income Statement Review

●	Balance Sheet Review

●	Asset Quality Review and Credit Risk Management

●	Liquidity and Capital Resources

●	Forward-Looking Statements and Business Risks

Challenges

Management has identified certain events or circumstances that may negatively impact the Company’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 11, 2022.

Key Performance Indicators and Industry Results

Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 4,333 community banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.

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Selected Indicators for the Company and the Industry

	3 Months			9 Months									Years Ended December 31,
	Ended			Ended			3 Months Ended
	September 30, 2022						June 30, 2022						2021						2020
	Company						Company			Industry*			Company			Industry*			Company			Industry*

Return on assets		1.05	%		0.93	%		0.77	%		1.10	%		1.15	%		1.25	%		1.01	%		1.09	%

Return on equity		13.65	%		11.15	%		9.78	%		11.49	%		11.43	%		11.61	%		9.48	%		9.72	%

Net interest margin		2.63	%		2.58	%		2.57	%		3.33	%		2.83	%		3.27	%		3.13	%		3.39	%

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

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

*Latest available data

Key performances indicators include:

●	Return on Assets

This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on average assets was 1.05% and 1.29% for the three months ended September 30, 2022 and 2021, respectively. This ratio decrease was primarily the result of lower net income.

●	Return on Equity

This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 13.65% and 12.60% for the three months ended September 30, 2022 and 2021, respectively. This ratio increase was primarily the result of a decrease in the average balance of stockholders’ equity due an increase in unrealized losses on securities.

●	Net Interest Margin

The net interest margin for the three months ended September 30, 2022 and 2021 was 2.63% and 2.97%, respectively. The ratio is calculated by dividing tax equivalent net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings.

●	Efficiency Ratio

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

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●	Capital Ratio

The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 7.67% as of September 30, 2022 is lower than the industry average of 10.31% as of June 30, 2022 primarily due an increase in accumulated other comprehensive losses as interest rates have risen during the third quarter of 2022.

Critical Accounting Policies

The discussion contained in this Item 2 and other disclosures included within this report are based, in part, on the Company’s audited December 31, 2021 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

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

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, including economic disruption, high inflation levels, and rising interest rates, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of the Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.

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Fair Value and Other-Than-Temporary Impairment of Investment Securities

The Company’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, including economic disruption, high inflation levels, and rising interest rates, it is at least reasonably possible that changes in management’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

Goodwill

Goodwill arose in connection with four acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. At September 30, 2022, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation. The effects of economic disruption, high inflation levels, and rising interest rates may negatively impact our net income, fair value and correspondingly goodwill. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.

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Non-GAAP Financial Measures

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
Net interest income (GAAP)	$	13,663		$	14,652		$	40,451		$	42,488
Tax-equivalent adjustment ⁽¹⁾		170			193			529			636
Net interest income on an FTE basis (non-GAAP)		13,833			14,845			40,980			43,124
Average interest-earning assets	$	2,105,313		$	1,999,147		$	2,114,305		$	1,989,226
Net interest margin on an FTE basis (non-GAAP)		2.63	%		2.97	%		2.58	%		2.89	%

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

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

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

AVERAGE BALANCES AND INTEREST RATES

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

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended September 30,

	2022							2021

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	72,356	$	815		4.51	%	$	96,436	$	2,411		10.00	%
Agricultural		92,853		1,210		5.21	%		98,942		1,014		4.10	%
Real estate		991,574		9,503		3.83	%		934,427		8,936		3.83	%
Consumer and other		16,147		160		3.96	%		15,167		169		4.46	%

Total loans (including fees)		1,172,930		11,688		3.99	%		1,144,972		12,530		4.38	%

Investment securities
Taxable		762,535		3,226		1.69	%		598,634		2,256		1.51	%
Tax-exempt ⁽²⁾		132,064		811		2.46	%		146,805		918		2.50	%
Total investment securities		894,599		4,037		1.81	%		745,439		3,174		1.70	%

Interest-bearing deposits with banks and federal funds sold		37,784		250		2.65	%		108,736		168		0.62	%

Total interest-earning assets		2,105,313	$	15,975		3.04	%		1,999,147	$	15,872		3.18	%

Noninterest-earning assets		13,016							76,490

TOTAL ASSETS	$	2,118,329						$	2,075,637

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

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

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended September 30,

	2022								2021

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Interest-bearing checking, savings accounts and money markets	$	1,290,911	$	1,461			0.45	%	$	1,212,084	$	467			0.15	%
Time deposits		197,731		386			0.78	%		227,760		526			0.92	%
Total deposits		1,488,642		1,847			0.50	%		1,439,844		993			0.28	%
Other borrowed funds		63,660		295			1.85	%		38,863		34			0.35	%

Total interest-bearing liabilities		1,552,302		2,142			0.55	%		1,478,707		1,027			0.28	%

Noninterest-bearing liabilities
Noninterest-bearing checking		394,845								373,973
Other liabilities		8,687								9,786

Stockholders' equity		162,495								213,171

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,118,329							$	2,075,637


Net interest income (FTE)⁽³⁾			$	13,833			2.63	%			$	14,845			2.97	%

Spread Analysis (FTE)
Interest income/average assets	$	15,975		3.02	%				$	15,872		3.06	%
Interest expense/average assets	$	2,142		0.40	%				$	1,027		0.20	%
Net interest income/average assets	$	13,833		2.61	%				$	14,845		2.86	%

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

Net Interest Income

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

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

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

Provision (Credit) for Loan Losses

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

Noninterest Income and Expense

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

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

Income Taxes

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

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

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

AVERAGE BALANCES AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Nine Months Ended September 30,

	2022							2021

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	71,700	$	2,438		4.53	%	$	113,448	$	6,281		7.38	%
Agricultural		93,832		3,141		4.46	%		96,173		2,999		4.16	%
Real estate		973,314		27,173		3.72	%		918,384		26,845		3.90	%
Consumer and other		16,210		477		3.92	%		14,768		516		4.66	%

Total loans (including fees)		1,155,056		33,229		3.84	%		1,142,773		36,641		4.28	%

Investment securities
Taxable		739,206		8,861		1.60	%		533,161		6,457		1.61	%
Tax-exempt ⁽²⁾		137,375		2,519		2.45	%		156,969		3,028		2.57	%
Total investment securities		876,581		11,380		1.73	%		690,130		9,485		1.83	%

Interest-bearing deposits with banks and federal funds sold		82,668		675		1.09	%		156,323		515		0.44	%

Total interest-earning assets		2,114,305	$	45,284		2.86	%		1,989,226	$	46,641		3.13	%

Noninterest-earning assets		30,398							76,434

TOTAL ASSETS	$	2,144,703						$	2,065,660

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

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

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Nine Months Ended September 30,

	2022								2021

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND
STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Interest-bearing checking, savings accounts and money markets	$	1,303,599	$	2,768			0.28	%	$	1,198,914	$	1,435			0.16	%
Time deposits		206,672		1,153			0.74	%		239,691		1,976			1.10	%
Total deposits		1,510,271		3,921			0.35	%		1,438,605		3,411			0.32	%
Other borrowed funds		47,412		383			1.08	%		39,927		106			0.35	%

Total interest-bearing liabilities		1,557,683		4,304			0.37	%		1,478,532		3,517			0.32	%

Noninterest-bearing liabilities
Noninterest-bearing checking		400,393								367,698
Other liabilities		8,697								9,880

Stockholders' equity		177,930								209,550

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,144,703							$	2,065,660


Net interest income (FTE)⁽³⁾			$	40,980			2.58	%			$	43,124			2.89	%

Spread Analysis (FTE)
Interest income/average assets	$	45,284		2.82	%				$	46,641		3.01	%
Interest expense/average assets	$	4,304		0.27	%				$	3,517		0.23	%
Net interest income/average assets	$	40,980		2.55	%				$	43,124		2.78	%

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

Net Interest Income

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

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

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

Provision (Credit) for Loan Losses

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

Noninterest Income and Expense

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

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

Income Taxes

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

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Balance Sheet Review

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

Investment Portfolio

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

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, 2022, gross unrealized losses of $96.5 million, are considered to be temporary in nature due to the interest rate environment and other general economic factors. Certain bonds in the investment portfolio may become other-than-temporarily impaired and could negatively affect the Company’s net income. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and expects full principal and interest to be collected. Therefore, the Company does not consider these investments to have other-than-temporary impairment as of September 30, 2022.

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

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

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

	2022				2021
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Obligations of states and political subdivisions:
General Obligation bonds:
Iowa	$	66,206	$	59,761	$	72,128	$	72,830
Texas		29,788		25,963		24,742		24,953
Nebraska		20,166		16,813		19,546		19,486
Oregon		11,064		10,014		4,757		4,864
Washington		10,936		9,767		11,013		11,241
Other (2022: 15 states; 2021: 15 states)		41,361		36,461		36,614		36,753

Total general obligation bonds	$	179,521	$	158,779	$	168,800	$	170,127

Revenue bonds:
Iowa	$	57,301	$	52,057	$	61,718	$	62,181
Texas		14,832		12,544		11,898		12,090
Nebraska		9,947		8,344		9,727		9,636
Other (2022: 23 states; 2021: 21 states)		54,931		48,765		38,405		38,825

Total revenue bonds	$	137,011	$	121,710	$	121,748	$	122,732

Total obligations of states and political subdivisions	$	316,532	$	280,489	$	290,548	$	292,859

As of September 30, 2022 and December 31, 2021, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from 5 primary revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table (in thousands):

	2022				2021
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Revenue bonds by revenue source
Sales tax	$	31,297	$	27,883	$	31,632	$	31,896
Water		21,884		19,416		22,611		22,924
College and universities, primarily dormitory revenues		19,400		17,028		17,169		17,353
Sewer		13,339		11,484		14,248		14,327
Leases		11,199		10,217		8,788		8,894
Other		39,892		35,682		27,300		27,338

Total revenue bonds by revenue source	$	137,011	$	121,710	$	121,748	$	122,732

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Loan Portfolio

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

Deposits

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

Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2021.

Asset Quality Review and Credit Risk Management

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

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

The Company had TDRs of $10.8 million as of September 30, 2022 and $11.3 million as of December 31, 2021, all of which were included in impaired and nonaccrual loans.

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

For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. No additional specific reserve was provided for the three and nine months ended September 30, 2022 and 2021. The Company had no charge-offs for TDRs for the three and nine months ended September 30, 2022, respectively. The Company had no charge-offs and $262 thousand of recoveries for TDR’s for the three and nine months ended September 30, 2021, respectively. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.

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

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

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

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

The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans. Due to potential changes in conditions, including economic disruption, high inflation levels, and rising interest rates, additional increases in the allowance for loan losses are possible.

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Liquidity and Capital Resources

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

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

As of September 30, 2022, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.

The liquidity and capital resources discussion will cover the following topics:

●	Review of the Company’s Current Liquidity Sources

●	Review of Statements of Cash Flows

●	Company Only Cash Flows

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

●	Capital Resources

Review of the Company’s Current Liquidity Sources

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

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

Total investments as of September 30, 2022 were $784.0 million compared to $831.0 million as of December 31, 2021. These investments provide the Company with liquidity since all of the investments are classified as available-for-sale as of September 30, 2022. The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.

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Review of the Consolidated Statements of Cash Flows

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

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

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

Review of Company Only Cash Flows

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7.6 million and $7.1 million for the nine months ended September 30, 2022 and 2021, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order.

The Company, on an unconsolidated basis, has interest-bearing deposits totaling $3.9 million as of September 30, 2022.

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

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

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Capital Resources

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

Forward-Looking Statements and Business Risks

The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s financial performance and asset quality. Forward-looking statements contained in this Quarterly Report are not historical facts and are based on management’s current beliefs, assumptions, predictions and expectations of future events, including the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions, predictions and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to management and many of which are beyond management’s control. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on such forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “forecasts”, “continuing,” “ongoing,” “expects,” “views,” “intends” and similar words or phrases. The risks and uncertainties that may affect the Company’s future performance and asset quality include, but are not limited to, the following: the substantial negative impact of the continuing COVID-19 pandemic on national, regional and local economies in general and on the Company’s customers in particular; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses resulting from the COVID-19 pandemic or as dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings Forward-Looking Statements and Business Risks” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2021. Any forward-looking statements are qualified in their entirety by the foregoing risks and uncertainties and speak only as of the date on which such statements are made. The Company undertakes no obligation to revise or update such forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities. Management continually develops and applies strategies to mitigate this risk. The Company’s primary market risk exposure has increased in 2022 due to rising short-term interest rates and an inversion of the treasury yield curve. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of the bank subsidiaries. Economic uncertainty and high inflation levels may cause market rates to continue to deviate from historical norms.

Item 4. Controls and Procedures

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

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

PART II.	OTHER INFORMATION

Item 1.	Legal Proceeding

	Not applicable

Item 1.A.	Risk Factors

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

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Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

	In November, 2021, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2022, there were no shares remaining to be purchased under the plan.

	The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2022.

Total

Number

Maximum

of Shares

Number of

Purchased as

Shares that

Total

Part of

May Yet Be

Number

Average

Publicly

Purchased

of Shares

Price Paid

Announced

Under

Period

Purchased

Per Share

Plans

The Plan

July 1, 2022 to July 31, 2022

August 1, 2022 to August 31, 2022

September 1, 2022 to September 30, 2022

Total

Item 3.	Defaults Upon Senior Securities

	Not applicable

Item 4.	Mine Safety Disclosures

	Not applicable

Item 5.	Other information

	Not applicable

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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.

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SIGNATURES

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

	AMES NATIONAL CORPORATION

DATE: November 8, 2022	By:	/s/ John P. Nelson

	John P. Nelson, Chief Executive Officer and President
	(Principal Executive Officer)

	By:	/s/ John L. Pierschbacher

	John L. Pierschbacher, Chief Financial Officer
	(Principal Financial and Accounting Officer)

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