Ames National Corp.
Ames National Corp. details
Ames National Corporation is listed on the NASDAQ Capital Market under the ticker symbol, ATLO. The Corporation affiliate banks, all located in central Iowa, include: First National Bank, Ames, Boone Bank & Trust Co., Boone, Iowa State Savings Bank, Creston, State Bank & Trust Co., Nevada, Reliance State Bank, Story City, and United Bank & Trust, Marshalltown. Information regarding the process for purchasing stock can be obtained through Richard Nelson at First Point Wealth Management, (515) 663-3074.
Ticker:ATLO
Employees: 281
Filing
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
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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.
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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.
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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 ) $ 137,27 1
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 $ 4,55 3 $ 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 6% - 8% (7%)
* Not Meaningful.
Evaluations of the underlying assets are completed for each collateral dependent impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.
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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
Estimated Unrealized Estimated Unrealized Estimated Unrealized
2022:
Fair Value Losses Fair Value Losses Fair Value 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
Estimated Unrealized Estimated Unrealized Estimated Unrealized
2021:
Fair Value Losses Fair Value Losses Fair Value 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
The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest-bearing liabilities. The net interest margin is equal to interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.
AVERAGE BALANCE SHEETS AND INTEREST RATES
Nine Months Ended September 30,
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 $ 2,065,66 0
(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 .
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.
The Company had TDRs of $10.8 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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