Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the quarterly period ended March 31, 2019
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Commission File Number 0-32637
AMES NATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
405 FIFTH STREET
AMES, IOWA 50010
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (515) 232-6251
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “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 X Non-accelerated filer____ Smaller reporting company X 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 X
As of April 26, 2019 there were 9,241,916 shares of common stock, $2 par value, outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
ATLO
NASDAQ
INDEX
Part I.
Financial Information
Item 1.
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2019 and December 31, 2018
Consolidated Statements of Income for the three months ended March 31, 2019 and 2018
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018
Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
Notes to Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
Item 1.A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31,
December 31,
2019
2018
Cash and due from banks
Interest bearing deposits in financial institutions
Securities available-for-sale
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost
Loans receivable, net
Loans held for sale
Bank premises and equipment, net
Accrued income receivable
Other real estate owned
Bank-owned life insurance
Deferred income taxes, net
Intangible assets, net
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand, noninterest bearing
NOW accounts
Savings and money market
Time, $250,000 and over
Other time
Total deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank (FHLB) advances
Dividends payable
Accrued expenses and other liabilities
Total liabilities
STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,242,822 and 9,293,305 shares as of March 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss) - net unrealized income (loss) on securities available-for-sale
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
Interest income:
Loans, including fees
Securities:
Taxable
Tax-exempt
Interest bearing deposits and federal funds sold
Total interest income
Interest expense:
Other borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Wealth management income
Service fees
Gain on sale of loans held for sale
Merchant and card fees
Other noninterest income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Data processing
Occupancy expenses, net
FDIC insurance assessments
Professional fees
Business development
Intangible asset amortization
Other operating expenses, net
Total noninterest expense
Income before income taxes
Provision for income taxes
Net income
Basic and diluted earnings per share
Dividends declared per share
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities before tax:
Unrealized holding gains (losses) arising during the period
Less: reclassification adjustment for gains realized in net income
Other comprehensive income (loss), before tax
Tax effect related to other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Comprehensive income
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2019 and 2018
Common Stock
Additional Paid-
in Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
Net of Taxes
Total
Stockholders'
Equity
Balance, December 31, 2017
Other comprehensive income
The cumulative effect from change in accounting policy (1)
Cash dividends declared, $0.48 per share
Balance, March 31, 2018
Balance, December 31, 2018
Retirement of 50,483 shares of stock
Cash dividends declared, $0.24 per share
Balance, March 31, 2019
(1) The cumulative effect for the year ended December 31, 2018, reflects adoption in first quarter 2018 of ASU 2018-02.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for off-balance sheet commitments
Amortization, net
Amortization of intangible asset
Depreciation
Deferred income taxes
(Gain) on sales of loans held for sale
Proceeds from loans held for sale
Originations of loans held for sale
Loss on sale of premises and equipment, net
Loss on sale and foreclosure of other real estate owned, net
Change in assets and liabilities:
Decrease in accrued income receivable
(Increase) decrease in other assets
Increase in accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale
Proceeds from maturities and calls of securities available-for-sale
Purchase of FHLB stock
Proceeds from the redemption of FHLB stock
Net (increase) in interest bearing deposits in financial institutions
Net (increase) decrease in loans
Net proceeds from the sale of other real estate owned
Purchase of bank premises and equipment, net
Net cash (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits
(Decrease) in securities sold under agreements to repurchase
Payments on FHLB borrowings and other borrowings
Payments on short-term borrowings
Dividends paid
Stock repurchases
Net cash provided by financing activities
Net (decrease) in cash and due from banks
CASH AND DUE FROM BANKS
Beginning
Ending
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest
Income taxes
Notes to Consolidated Financial Statements (unaudited)
1. Significant Accounting Policies
The consolidated financial statements for the three months ended March 31, 2019 and 2018 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.
Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The second step, if necessary, measures the amount of impairment, if any.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. At March 31, 2019, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.
New and Pending Accounting Pronouncements: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, which amends ASC 842, Leases. This update provides for an adoption option that will not require earlier periods to be restated at the adoption date. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
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. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company is currently planning for the implementation of this accounting standard and has chosen a vendor for a software solution and has begun implementation of the software. It is too early to assess the impact that the guidance will have on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates the Step 2 from the goodwill impairment test. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment test with a measurement date after January 1, 2017. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption will not have a material effect on the Company’s consolidated financial statements.
Reclassifications: Certain amounts in prior year financial statements have been reclassified, with no effect on net income, comprehensive income or stockholder’s equity, to conform to current period presentation.
2. Bank Acquisition
On September 14, 2018, First National Bank (FNB) completed the purchase and merger of Clarke County State Bank (CCSB) located in Osceola and Murray, Iowa (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. The acquired assets and liabilities are recorded at fair value at the date of acquisition and were reflected in the September 30, 2018 financial statements as such. 100% of the stock of CCSB was purchased for cash consideration of $14.8 million. As a result of this acquisition, the Company recorded a core deposit intangible asset of $2.0 million and goodwill of $3.0 million. The results of operations for this acquisition have been included since the transaction date of September 14, 2018. The fair value of purchased credit deteriorated loans related to the Acquisition is $386,000. These purchased loans are included in the impaired loan category in the financial statements.
The following table summarizes the fair value of the total consideration transferred as a part of the Acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.
Cash consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed:
Federal funds sold
Federal Home Loan Bank stock
Loans receivable
Accrued interest receivable
Bank premises and equipment
Bank owned life insurance
Core deposit intangible asset
Federal funds purchased
Accrued interest payable and other liabilities
Total identifiable net assets
On September 14, 2018, the contractual balance of loans receivable acquired was $77.2 million and the contractual balance of deposits assumed was $83.1 million. Loans receivable acquired include commercial real estate, 1-4 family real estate agricultural real estate, commercial operating, agricultural operating and consumer loans.
The acquired loans at contractual values as of September 14, 2018 were determined to be risk rated as follows:
Pass
Watch
Special Mention
Substandard
Deteriorated credit
Total loans acquired at book value
Loans acquired as deteriorated credit loans will be included with impaired loans.
The core deposit intangible asset is amortized to expense on a declining basis over a period of ten years. The loan market valuation is accreted to income on the effective yield method over a ten year period. The time deposits market valuation is amortized to expense on a declining basis over a two year period.
3. Dividends
On February 13, 2019, the Company declared a cash dividend on its common stock, payable on May 15, 2019 to stockholders of record as of May 1, 2019, equal to $0.24 per share
4. Earnings Per Share
Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended March 31, 2019 and 2018 were 9,258,047 and 9,310,913, respectively. The Company had no potentially dilutive securities outstanding during the periods presented.
5. Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2018.
6. 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. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The following table presents the balances of assets measured at fair value on a recurring basis by level as of March 31, 2019 and December 31, 2018. (in thousands)
Description
Level 1
Level 2
Level 3
U.S. government treasuries
U.S. government agencies
U.S. government mortgage-backed securities
State and political subdivisions
Corporate bonds
Level 1 securities include U.S. Treasury securities and other equity securities that are traded by dealers or brokers in active over-the-counter markets. U.S government agencies, mortgage-backed securities, state and political subdivisions, and most corporate bonds are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.
The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2019.
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). 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 March 31, 2019 and December 31, 2018. (in thousands)
Loans Receivable: Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans. Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation allowance is a component of the allowance for loan losses. The Company considers these fair value measurements as level 3.
Other Real Estate Owned: Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The Company considers these fair value measurements as level 3.
The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2019 and December 31, 2018 are as follows: (in thousands)
Estimated
Valuation
Unobservable
Range
Fair Value
Techniques
(Average)
Impaired Loans
Evaluation of collateral
Estimation of value
Appraisal
Appraisal adjustment
* Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.
GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
Fair value of financial instruments:
Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.
The following disclosures represent financial instruments in which the ending balances at March 31, 2019 and December 31, 2018 are not carried at fair value in their entirety on the consolidated balance sheets.
Securities available-for-sale: Fair value measurement for Level 1 securities is based upon quoted prices. Fair value measurement for Level 2 securities are based upon quoted prices, if available. If quoted prices are not available, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. Level 1 securities include U.S. Treasury and other equity securities that are traded by dealers or brokers in active over-the-counter markets. U.S government mortgage-backed securities, state and political subdivisions, and some corporate bonds are reported at fair value utilizing Level 2 inputs.
Loans held for sale: The fair value of loans held for sale is based on prevailing market prices.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The estimated fair values of the Company’s financial instruments as described above as of March 31, 2019 and December 31, 2018 are as follows: (in thousands)
Hierarchy
Carrying
Fair
Level
Amount
Value
Financial assets:
Interest bearing deposits
See previous table
FHLB and FRB stock
Financial liabilities:
FHLB advances
Accrued interest payable
The methodologies used to determine fair value as of March 31, 2019 did not change from the methodologies described in the December 31, 2018 Annual Financial Statements.
7. Debt and Equity Securities
The amortized cost of securities available-for-sale and their fair values as of March 31, 2019 and December 31, 2018 are summarized below: (in thousands)
2019:
Gross
Amortized
Unrealized
Cost
Gains
Losses
2018:
There were no proceeds, gains and losses from securities available-for-sale for the quarter ended March 31, 2019 and 2018.
Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of March 31, 2019 and December 31, 2018 are as follows: (in thousands)
Less than 12 Months
12 Months or More
Securities available-for-sale:
Unrealized Losses
Gross unrealized losses on debt securities totaled $1,802,000 as of March 31, 2019. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.
8.
Loans Receivable and Credit Disclosures
The composition of loans receivable as of March 31, 2019 and December 31, 2018 is as follows (in thousands):
Real estate - construction
Real estate - 1 to 4 family residential
Real estate - commercial
Real estate - agricultural
Commercial
Agricultural
Consumer and other
Less:
Allowance for loan losses
Deferred loan fees
Activity in the allowance for loan losses, on a disaggregated basis, for the three months ended March 31, 2019 and 2018 is as follows: (in thousands)
Three Months Ended March 31, 2019
1-4 Family
Construction
Residential
Consumer
Real Estate
and Other
Provision (credit) for loan losses
Recoveries of loans charged-off
Loans charged-off
Three Months Ended March 31, 2018
Allowance for loan losses disaggregated on the basis of impairment analysis method as of March 31, 2019 and December 31, 2018 is as follows: (in thousands)
Individually evaluated for impairment
Collectively evaluated for impairment
Balance March 31, 2019
Balance December 31, 2018
Loans receivable disaggregated on the basis of impairment analysis method as of March 31, 2019 and December 31, 2018 is as follows (in thousands):
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company will apply its normal loan review procedures to identify loans that should be evaluated for impairment.
Impaired loans, on a disaggregated basis, as of March 31, 2019 and December 31, 2018: (in thousands)
Unpaid
Recorded
Principal
Related
Investment
Balance
Allowance
With no specific reserve recorded:
Total loans with no specific reserve:
With an allowance recorded:
Total loans with specific reserve:
Average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2019 and 2018: (in thousands)
Three Months Ended March 31,
Average
Income
Recognized
The interest foregone on nonaccrual loans for the three months ended March 31, 2019 and 2018 was approximately $58,000 and $83,000, respectively.
Nonaccrual loans at March 31, 2019 and December 31, 2018 were $3,339,000 and $3,234,000 respectively.
The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $2,662,000 as of March 31, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $2,350,000 as of December 31, 2018, all of which were included in impaired and nonaccrual loans.
During the three months ended March 31, 2019 and 2018, the Company did not grant concessions to any borrowers.
The Company considers TDR loans to have payment default when it is past due 60 days or more.
No TDR modified during the three months ended March 31, 2019 had payment defaults. One TDR modified during the twelve months ended March 31, 2018 had payment defaults. There were no charge-offs related to TDRs for the three months ended March 31, 2019 and 2018. No additional specific reserve were provided for the three months ended March 31, 2019. A $12,000 specific reserve was established in the three months ended March 31, 2018.
An aging analysis of the recorded investments in loans, on a disaggregated basis, as of March 31, 2019 and December 31, 2018, is as follows: (in thousands)
90 Days
or Greater
Past Due
Current
Accruing
The credit risk profile by internally assigned grade, on a disaggregated basis, as of March 31, 2019 and December 31, 2018 is as follows: (in thousands)
Substandard-Impaired
The credit risk profile based on payment activity, on a disaggregated basis, as of March 31, 2019 and December 31, 2018 is as follows:
Performing
Non-performing
9.
As of September 14, 2018, as a result of the acquisition of CCSB, FNB recognized $3.0 million of goodwill. Goodwill recognized in the Acquisition was primarily attributable to an expanded market share and economies of scale expected from combining the operations of CCSB branches with FNB. Goodwill is not amortized but is evaluated for impairment at least annually. For income tax purposes, goodwill associated with CCSB is not amortized and goodwill associated with previous acquisition is amortized over fifteen years.
10.
Intangible assets
In conjunction with the acquisition of CCSB in 2018, the Company recorded $2.0 million in core deposit intangible assets. The following sets forth the carrying amounts and accumulated amortization of the intangible assets at March 31, 2019 and December 31, 2018: (in thousands)
Amortization
Customer list
The weighted average life of the intangible assets is 3.4 years as of March 31, 2019 and 3.5 years as of December 31, 2018.
The following sets forth the activity related to the intangible assets for the three months ended March 31, 2019 and 2018: (in thousands)
Beginning intangible asset, net
Adjustment to intangible asset
Ending intangible asset, net
Estimated remaining amortization expense on core deposit intangible for the years ending December 31 is as follows: (in thousands)
2020
2021
2022
2023
2024
After
Intangible asset, net
11.
Pledged Collateral Related to Securities Sold Under Repurchase Agreements
The repurchase agreements mature daily and the following sets forth the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements as of March 31, 2019 and December 31, 2018: (in thousands)
Securities sold under agreements to repurchase:
Total pledged collateral
In the event the repurchase agreements exceed the estimated fair value of the pledged securities available-for-sale, the Company has unpledged securities available-for-sale that may be pledged on the repurchase agreements.
12.
Regulatory Matters
The Company and the Banks capital amounts and ratios are as follows: (dollars in thousands)
To Be Well
Capitalized Under
For Capital
Prompt Corrective
Actual
Adequacy Purposes *
Action Provisions
Ratio
As of March 31, 2019:
Total capital (to risk-weighted assets):
Consolidated
Boone Bank & Trust
First National Bank
Reliance State Bank
State Bank & Trust
United Bank & Trust
Tier 1 capital (to risk-weighted assets):
Tier 1 capital (to average-weighted assets):
Common equity tier 1 capital (to risk-weighted assets):
* These ratios for March 31, 2019 include a capital conservation buffer of 2.5%, except for the Tier 1 capital to average weighted assets ratios.
As of December 31, 2018:
* These ratios for December 31, 2018 include a capital conservation buffer of 1.875%, except for the Tier 1 capital to average weighted assets ratios.
The Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes in July 2013. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirements and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income (loss). The Company and the Banks have made the election to retain the existing treatment for accumulated other comprehensive income (loss). The final rules took effect for the Company and the Banks on January 1, 2015, subject to a transition period for certain parts of the rules.
Beginning in 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At the present time, the ratios for the Company and the Banks are sufficient to meet the fully phased-in conservation buffer.
13. Subsequent Events
Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after March 31, 2019, but prior to May 7, 2019, that provided additional evidence about conditions that existed at March 31, 2019. There were no other significant events or transactions that provided evidence about conditions that did not exist at March 31, 2019.
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 five bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), and United Bank & Trust NA (United Bank). 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 thirteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training and the coordination of management activities, in addition to 230 full-time equivalent individuals employed by the Banks, including employees from the Acquisition.
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 and (v) Merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
On September 14, 2018, FNB purchased the stock of CCSB for approximately $14.8 million. First National will operate all three bank offices previously owned by Clarke County as branches of First National.
The Company had net income of $4,237,000, or $0.46 per share, for the three months ended March 31, 2019, compared to net income of $4,037,000, or $0.43 per share, for the three months ended March 31, 2018.
The increase in quarterly earnings can be primarily attributed to improved loan interest income, offset in part by elevated deposit interest expense, higher salary and employee benefits, data processing and occupancy expenses.
Net loan charge-offs (recoveries) totaled $(30,000) and $27,000 for the three months ended March 31, 2019 and 2018, respectively. The provision for loan losses totaled $98,000 and $29,000 for the three months ended March 31, 2019 and 2018, respectively.
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
● Income Statement Review
● Balance Sheet Review
● Asset Quality Review and Credit Risk Management
● Liquidity and Capital Resources
● Forward-Looking Statements and Business Risks
● Non-GAAP Financial Measures
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 12, 2019.
Key Performance Indicators and Industry Results
Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 5,406 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.
Selected Indicators for the Company and the Industry
3 Months
Ended
Years Ended December 31,
2017
Company
Industry*
Industry
Return on assets
Return on equity
Net interest margin
Efficiency ratio
Capital ratio
*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 1.17% and 1.19% for the three months ended March 31, 2019 and 2018, respectively. This ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in average assets.
● 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 9.73% and 9.55% for the three months ended March 31, 2019 and 2018, respectively. This ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in average equity.
● Net Interest Margin
The net interest margin for the three months ended March 31, 2019 and 2018 was 3.23% and 3.19%, respectively. The ratio is calculated by dividing 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 net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 57.82% and 57.45% for the three months ended March 31, 2019 and 2018, respectively. This ratio remained consistent when comparing 2019 to 2018.
● Capital Ratio
The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 12.05% as of March 31, 2019 is significantly higher than the industry average of 9.70% as of December 31, 2018.
Industry Results
The FDIC Quarterly Banking Profile reported the following results for the fourth quarter of 2018:
Net Income Rises $33.8 Billion Over Fourth Quarter 2017 to $59.1 Billion
The 5,406 FDIC-insured commercial banks and savings institutions reported quarterly net income of $59.1 billion in the fourth quarter, an increase of $33.8 billion (133.4%) from a year earlier. Improvement in quarterly net income was attributable to higher net operating revenue (the sum of net interest income and noninterest income) and lower income tax expenses. Assuming the effective tax rate before the new tax law, quarterly net income would have totaled an estimated $50.3 billion, up $7.9 billion (18.5%) from 12 months ago. The average return on assets was 1.33% for the quarter, up from 0.58% in fourth quarter 2017. The percentage of unprofitable banks in the fourth quarter declined to 6.5% from 16.6% a year ago.
Full-Year 2018 Net Income Grows to $236.7 Billion
Growth in net operating revenue (up $53.1 billion, or 7%), coupled with lower income tax expenses (down $36.9 billion, or 37.7%) and loan-loss provisions (down $1.1 billion, or 2.2%), lifted full-year 2018 net income to $236.7 billion, an improvement of $72.4 billion (44.1%) from 2017. Assuming the effective tax rate before the new tax law, full-year 2018 net income would have totaled an estimated $207.9 billion, compared with $183.1 billion in 2017. The average net interest margin (NIM) rose from 3.25% in 2017 to 3.40%, as average asset yields (up 43 basis points) exceeded average funding costs (up 28 basis points). The average return on assets for 2018 was 1.35%, up from 0.97% for 2017.
Net Interest Income Increases 8.1% From a Year Earlier
Quarterly net interest income rose to $140.2 billion, up $10.5 billion (8.1%) from a year earlier, owing to growth in interest-bearing assets and wider net interest margins (NIM). More than four out of five banks (82.6%) reported year-over-year increases in net interest income. NIM was 3.48% for the quarter, an improvement from the 3.31% margin reported a year ago, as average asset yields grew more rapidly than average funding costs. Banks with assets of $10 billion to $250 billion reported the largest annual increases in average asset yields (up 58 basis points) and average funding costs (up 40 basis points).
Loan-Loss Provisions Increase Modestly
Banks set aside $14 billion in loan-loss provisions during the fourth quarter, the highest level since fourth quarter 2012. Loan-loss provisions rose by $397.3 million (2.9%) from fourth quarter 2017, with close to 40% of all banks reporting increases. Loan-loss provisions as a percent of net operating revenue declined from 8.3% at year-end 2017 to 8.2%.
Noninterest Income Expands From a Year Earlier
Noninterest income increased $1.6 billion (2.6%) from a year earlier, as all other noninterest income grew by $3.5 billion (11.9%) and net gains on sales of other assets rose by $393 million (120.3%). Despite the overall increase in noninterest income, trading revenue declined by $1.5 billion (25.9%) and servicing fees fell by $850.9 million (36.1%). Slightly more than half of all banks (53.6%) reported increases in noninterest income compared with the year-ago quarter.
Noninterest Expense Increases From Fourth Quarter 2017
Noninterest expense posted a modest increase of $194.9 million (0.2%) over the past 12 months. Increases in other noninterest expense (up $2.6 billion, or 5%) and salary and employee benefits (up $717 million, or 1.3%) were partially offset by a decline in premises and fixed asset expense (down $2.7 billion, or 22.5%). The average assets per employee increased from $8.4 million in fourth quarter 2017 to $8.7 million.
Net Charge-Offs Decline 4.6% From a Year Ago
Banks charged off $12.6 billion in uncollectable loans during the quarter, a decline of $ 605.9 million (4.6%) from a year ago. This marks the first time since third quarter 2015 that net charge-offs registered a year-over-year decline. Credit card balances registered the largest annual dollar increase in net-charge offs (up $347.7 million, or 4.4%), while commercial and industrial loans had the largest annual dollar decline (down $522.6 million, or 23.4%). The average net charge-off rate declined from 0.55% in fourth quarter 2017 to 0.50%.
Noncurrent Loan Rate Falls Below 1%
Noncurrent loan balances (90 days or more past due or in nonaccrual status) were $1 billion (1%) lower than the previous quarter. More than half of all banks (53.3%) reported lower noncurrent loan balances. The quarter-over-quarter decline was reflected in residential mortgages balances, which declined by $2 billion (4.4%), and commercial and industrial loan balances, which fell by $554.3 million (3.6%). Credit card balances continued to register the largest quarterly dollar increase, growing by $1.6 billion (13.8%). The average noncurrent rate was 0.99% during the current quarter, down 3 basis points from the previous quarter. This is the first time since second quarter 2007 that the noncurrent rate was below 1%.
Loan-Loss Reserves Increase From Third Quarter 2018
Loan-loss reserves totaled $124.7 billion at the end of the fourth quarter, an increase of $1 billion (0.8%) from third quarter 2018. The banking industry continued to build reserves, as loan-loss provisions of $14 billion exceeded net charge-offs of $12.6 billion. More than half of all banks (57.8%) reported a quarterly increase in loan-loss reserves. Banks that itemize their loan-loss reserves (banks with assets greater than $1 billion and representing 93% of total industry assets) reported higher reserves for credit card losses (up $997.4 million, or 2.5%) and lower reserves for residential real estate losses (down $556 million, or 4.4%). After declining for the past nine consecutive quarters, itemized reserves for losses on commercial loans reported quarterly growth of $409 million (1.3%).
Equity Capital Increases From the Third Quarter
Equity capital increased by $25.3 billion (1.3%) during the fourth quarter, led by accumulated other comprehensive income. Retained earnings rose by $70.8 billion (10.3%) from a year ago. Declared dividends in the fourth quarter totaled $52.7 billion, the highest level ever reported by the banking industry. At year-end 2018, 99.6% of all insured institutions, which account for 99.98% of total industry assets, met or exceeded the requirements for the well-capitalized category, as defined for Prompt Corrective Action purposes.
Total Assets Increase 1.5% During the Fourth Quarter
Total assets rose by $270.4 billion (1.5%) during the fourth quarter. Cash and balances due from depository institutions declined by $144.4 billion (7.9%) and total securities holdings grew by $93 billion (2.6%). U.S. Treasury securities increased $55.4 billion (11.2%) during the quarter, the largest quarterly dollar increase since fourth quarter 2014.
Total Loan and Lease Balances Rise 4.4% Over 12 Months
Total loan and lease balances were $213 billion (2.1%) higher compared with the previous quarter. All major loan categories registered quarterly increases. Commercial and industrial loans increased by $80.7 billion (3.9%), and consumer loans (including credit card balances) rose by $52.2 billion (3.1%). During the 12 months ended December 31, total loan and lease balances rose by $431.2 billion (4.4%), a slight increase from the 4% annual grow rate reported last quarter. All major loan categories reported year-over-year increases, led by commercial and industrial loans, which increased by $156.2 billion (7.8%), and consumer loans (including credit card balances), which rose by $64.9 billion (3.9%).
Deposits Increase 2.2% From the Previous Quarter
Total deposits increased by $292.6 billion (2.2%) from the third quarter, the largest quarterly dollar increase since fourth quarter 2012. Interest-bearing deposits grew by $296.5 billion (3.2%), while noninterest-bearing deposits fell by $ 5.4 billion (0.2%). Reliance on nondeposit liabilities declined by $47.5 billion (2.3%) from the previous quarter, as trade liabilities were reduced by $23.1 billion (8.9%) and other liabilities fell by $24.4 billion (6%).
The Number of Banks on the “Problem Bank List” Declines to 60
The number of banks on the FDIC’s “Problem Bank List” declined from 71 to 60 at year-end 2018, the fewest since first quarter 2007. Total assets of problem banks fell from $53.3 billion to $48.5 billion. During the fourth quarter, two new charters were added, 70 institutions were absorbed by mergers, and there were no bank failures. For full-year 2018, eight new charters were added, 259 institutions were absorbed by mergers, and there were no bank failures.
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, 2018 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of the Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.
Fair Value and Other-Than-Temporary Impairment of Investment Securities
The Company’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, 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 arose in connection with three 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 March 31, 2019, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation.
Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures 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)
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
Net interest income (GAAP)
Tax-equivalent adjustment (1)
Net interest income on an FTE basis (non-GAAP)
Average interest-earning assets
Net interest margin on an FTE basis (non-GAAP)
(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.
Income Statement Review for the Three Months ended March 31, 2019 and 2018
The following highlights a comparative discussion of the major components of net income and their impact for the three months ended March 31, 2019 and 2018:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.
AVERAGE BALANCE SHEETS AND INTEREST RATES
Revenue/
Yield/
balance
expense
rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans 1
Real estate
Total loans (including fees)
Investment securities
Tax-exempt 2
Total investment securities
Other interest-earning assets
Total interest-earning assets
Noninterest-earning assets
TOTAL ASSETS
1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate 21%.
Interest-bearing liabilities
NOW, savings accounts and money markets
Time deposits
Total Interest-bearing liabilities
Noninterest-bearing liabilities
Demand deposits
Other liabilities
Stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
Spread Analysis
Interest income/average assets
Interest expense/average assets
Net interest income/average assets
Net Interest Income
For the three months ended March 31, 2019 and 2018, the Company's net interest margin adjusted for tax exempt income was 3.23% and 3.19%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended March 31, 2019 totaled $10,970,000 compared to $10,186,000 for the three months ended March 31, 2018.
For the three months ended March 31, 2019, interest income increased $1,731,000, or 15%, when compared to the same period in 2018. The increase from 2018 was primarily attributable to increased loan volume and rates, offset in part by recognition of nonaccrual interest income in 2018. The increase in loan volume was due to the Acquisition and a favorable lending environment in our market areas since March 31, 2018. Nonaccrual interest income recognized in the three months ended March 31, 2019 was $52,000 as compared to $282,000 for the same period in 2018. Loan interest rates increased in conjunction with general market interest rates, as the Federal Reserve Bank increased short term interest rate targets by 1.00% since March 31, 2018.
Interest expense increased $947,000, or 59%, for the three months ended March 31, 2019 when compared to the same period in 2018. The higher interest expense for the period is primarily attributable to higher rates on deposits due to market interest rates and competitive pressures.
Provision for Loan Losses
The Company’s provision for loan losses was $98,000 and $29,000 for the three months ended March 31, 2019 and 2018, respectively. Net loan charge-offs (recoveries) were $(30,000) and $27,000 for the three months ended March 31, 2019 and 2018, respectively. While the current provision for loan losses are not related to agricultural loans, the Iowa agricultural economy remains challenged as the result of the current low grain prices and potential tariff concerns on Iowa exports.
Noninterest Income and Expense
Noninterest income increased $162,000 for the three months ended March 31, 2019 compared to the same period in 2018. The increase in noninterest income is primarily due to the Acquisition and higher wealth management income. The increase in wealth management income was primarily related to growth in the assets under management, fueled by a growing equity market and new account relationships.
Noninterest expense increased $592,000 or 9% for the three months ended March 31, 2019 compared to the same period in 2018 primarily as a result of the Acquisition. Salaries and benefits was the largest component of the increase in noninterest expense which also includes normal salary and employee benefit increases, offset in part by a one-time $1,000 bonus paid to full-time employees in 2018. The efficiency ratio was 57.8% for the first quarter of 2019 as compared to 57.4% in 2018.
Income Taxes
The provision for income taxes expense for the three months ended March 31, 2019 and 2018 was $1,104,000 and $1,020,000, respectively, representing an effective tax rate of 21% and 20%, respectively. The lower than expected effective tax rate for both periods is primarily due to tax-exempt interest income.
Balance Sheet Review
As of March 31, 2019, total assets were $1,472,317,000, a $16,630,000 increase compared to December 31, 2018. The increase in assets, primarily interest bearing deposits, was funded primarily by deposits.
Investment Portfolio
The investment portfolio totaled $455,554,000 as of March 31, 2019, a decrease of $3,418,000 from the December 31, 2018 balance of $458,971,000. The decrease in securities available-for-sale is primarily due to payments and maturities on the entire portfolio, offset in part by increases in the unrealized gain on the investment portfolio as market interest rates caused an increase in the fair value of the investment portfolio.
On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of March 31, 2019, gross unrealized losses of $1,802,000, are considered to be temporary in nature due to the interest rate environment of 2019 and other general economic factors. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.
At March 31, 2019, the Company’s investment securities portfolio included securities issued by 249 government municipalities and agencies located within 17 states with a fair value of $214.6 million. At December 31, 2018, the Company’s investment securities portfolio included securities issued by 263 government municipalities and agencies located within 16 states with a fair value of $216.0 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of March 31, 2019 was $3.9 million (approximately 2.0% of the fair value of the governmental municipalities and agencies) represented by the West Des Moines, Iowa Community School District to be repaid by sales tax revenues and property taxes.
The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.
The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of March 31, 2019 and December 31, 2018 identifying the state in which the issuing government municipality or agency operates. (Dollars in thousands)
Obligations of states and political subdivisions:
General Obligation bonds:
Iowa
Texas
Pennsylvania
Washington
Other (2019: 12 states; 2018: 12 states)
Total general obligation bonds
Revenue bonds:
Other (2019: 6 states; 2018: 7 states)
Total revenue bonds
Total obligations of states and political subdivisions
As of March 31, 2019 and December 31, 2018, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 5 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)
Revenue bonds by revenue source
Sales tax
Water
College and universities, primarily dormitory revenues
Leases
Total revenue bonds by revenue source
Loan Portfolio
The loan portfolio, net of the allowance for loan losses, totaled $886,557,000, $890,461,000 and $772,495,000 as of March 31, 2019, December 31, 2018 and March 31, 2018, respectively. Loan demand has moderated since year end. The increase in the loan portfolio since March 31, 2018 is primarily due to the Acquisition.
Deposits totaled $1,252,514,000, $1,221,084,000 and $1,170,424,000 as of March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The increase in deposits since December 31, 2018 was primarily due to public fund balances in NOW accounts. The increase in deposits since March 31, 2018 is primarily due to the Acquisition.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase totaled $32,397,000 as of March 31, 2019, a decrease of $8,278,000, or 20%, from the December 31, 2018 balance of $40,674,000. The decrease was due primarily to a decrease in the balances of one existing customer.
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2018.
Asset Quality Review and Credit Risk Management
The Company’s credit risk is historically centered in the loan portfolio, which on March 31, 2019 totaled $886,557,000 compared to $890,461,000 as of December 31, 2018. Net loans comprise 60% of total assets as of March 31, 2019. The object in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 0.38% at March 31, 2019, as compared to 0.38% at December 31, 2018 and 0.55% at March 31, 2018. The Company’s level of problem loans as a percentage of total loans at March 31, 2019 of 0.38% is lower than the Iowa State Average peer group of FDIC insured institutions as of December 31, 2018, of 0.58%.
Impaired loans, net of specific reserves, totaled $2,980,000 as of March 31, 2019 and have increased $247,000 as compared to the impaired loans of $2,733,000 as of December 31, 2018.
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 $2,662,000 as of March 31, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $2,350,000 as of December 31, 2018, all of which were included in impaired and nonaccrual loans.
TDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.
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. There were no charge-offs related to TDRs for the three months ended March 31, 2019 and 2018. No additional specific reserves were provided for the three months ended March 31, 2019. A $12,000 specific reserve was established in the three months ended March 31, 2018.
Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on non-accrual. As of March 31, 2019, non-accrual loans totaled $3,339,000 and there were $50,000 of loans past due 90 days and still accruing. This compares to non-accrual loans of $3,234,000 and loans past due 90 days and still accruing totaled $150,000 as of December 31, 2018. Other real estate owned totaled $565,000 and $830,000 as of March 31, 2019 and December 31, 2018, respectively.
The agricultural real estate and agricultural operating loan portfolio classifications remain elevated as a result of lower grain prices. The watch and special mention loans in these categories totaled $51,422,000 as of March 31, 2019 as compared to $47,808,000 as of December 31, 2018. The substandard loans in these categories totaled $10,633,000 as of March 31, 2019 as compared to $9,592,000 as of December 31, 2018. The Iowa agricultural economy remains challenged as the result of the current low grain prices and tariff concerns on Iowa exports.
The allowance for loan losses as a percentage of outstanding loans as of March 31, 2019 was 1.31%, as compared to 1.30% at December 31, 2018. The allowance for loan losses totaled $11,812,000 and $11,684,000 as of March 31, 2019 and December 31, 2018, respectively. Net charge-offs (recoveries) of loans totaled $(30,000) and $27,000 for the three months ended March 31, 2019 and 2018, respectively.
The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans.
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 March 31, 2019, 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
Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of March 31, 2019 and December 31, 2018 totaled $82,871,000 and $56,442,000, respectively, and provide an adequate level of liquidity given current economic conditions.
Other sources of liquidity available to the Banks as of March 31, 2019 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $197,066,000, with $2,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,739,000, with no outstanding federal fund purchase balances as of March 31, 2019. The Company had securities sold under agreements to repurchase totaling $32,397,000 as of March 31, 2019.
Total investments as of March 31, 2019 were $455,554,000 compared to $458,971,000 as of December 31, 2018. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of March 31, 2019.
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.
Net cash provided by operating activities for the three months ended March 31, 2019 totaled $6,284,000 compared to $6,353,000 for the three months ended March 31, 2018. The cash flow from operations in 2019 is comparable to the same period in 2018.
Net cash used in investing activities for the three months ended March 31, 2019 was $19,679,000 compared to $25,859,000 for the three months ended March 31, 2018. The decrease of $6,180,000 in cash used in investing activities was primarily due to a lower level of purchases of investments; greater maturities and calls of investments; and a decrease in loan balances; offset in part by higher balances in interest bearing deposits in financial institutions.
Net cash provided by financing activities for the three months ended March 31, 2019 totaled $7,144,000 compared to $15,594,000 for the three months ended March 31, 2018. The decrease in cash provided by financing activities was $8,450,000. The decrease was primarily due to smaller increases in deposit balances and larger decreases in repurchase balances; offset in part by a lessor amount of repayments on FHLB advances. As of March 31, 2019, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.
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 $3,198,000 and $2,570,000 for the three months ended March 31, 2019 and 2018, 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 quarterly dividend declared by the Company increased to $0.24 per share in 2019 from $0.23 per share in 2018.
The Company, on an unconsolidated basis, has interest bearing deposits totaling $14,671,000 as of March 31, 2019 that are presently available to provide additional liquidity to the Banks.
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 March 31, 2019 that are of concern to management.
The Company’s total stockholders’ equity as of March 31, 2019 totaled $177,777,000 and was $4,912,000 higher than the $172,865,000 recorded as of December 31, 2018. The increase in stockholders’ equity was primarily due to net income and an increase in other comprehensive income, offset in part by dividends declared. The increase in other comprehensive income is created by lower market interest rates compared to December 31, 2018, which resulted in higher fair values in the securities available-for-sale portfolio. At March 31, 2019 and December 31, 2018, stockholders’ equity as a percentage of total assets was 12.07% and 11.88%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of March 31, 2019.
Forward-Looking Statements and Business Risks
The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: economic conditions, particularly in the concentrated geographic area in which the Company and its affiliate banks operate; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements and Business Risks” in the Company’s Annual Report. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2019 changed significantly when compared to 2018.
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
In November, 2018, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of March 31, 2019, there were 31,909 shares remaining to be purchased under the plan.
The following table provides information with respect to purchase 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 March 31, 2019.
Number
Maximum
of Shares
Number of
Purchased as
Shares that
Part of
May Yet Be
Publicly
Purchased
Price Paid
Announced
Under
Period
Per Share
Plans
The Plan
January 1, 2019 to January 31, 2019
February 1, 2019 to February 28, 2019
March 1, 2019 to March 31, 2019
Other information
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.
101.INS
XBRL Instance Document (1)
101.SCH
XBRL Taxonomy Extension Schema Document (1)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (1)
(1) These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
John P. Nelson, Chief Executive Officer and President
By: /s/ John L. Pierschbacher
John L. Pierschbacher. Chief Financial Officer
47