Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-32637
AMES NATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
405 FIFTH STREET
AMES, IOWA 50010
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (515) 232-6251
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common stock
ATLO
NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2020, there were 9,122,747 shares of common stock, par value $2, outstanding.
INDEX
Part I.
Financial Information
Item 1.
Consolidated Financial Statements (Unaudited)
3
Consolidated Balance Sheets at March 31, 2020 and December 31, 2019
Consolidated Statements of Income for the three months ended March 31, 2020 and 2019
4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019
5
Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019
7
Notes to Consolidated Financial Statements
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
49
Item 4.
Part II.
Other Information
Legal Proceedings
Item 1.A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
50
Defaults Upon Senior Securities
51
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
52
Signatures
53
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31,
December 31,
2020
2019
Cash and due from banks
Interest bearing deposits in financial institutions and federal funds sold
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
Noninterest bearing checking
Interest bearing checking
Savings and money market
Time, $250,000 and over
Other time
Total deposits
Securities sold under agreements to repurchase
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 9,188,594 and 9,222,747 as of March 31, 2020 and December 31, 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
Interest and dividend income:
Loans, including fees
Securities:
Taxable
Tax-exempt
Other interest and dividend income
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
Securities gains, net
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
New market tax credit projects 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, before tax:
Unrealized gains on securities before tax:
Unrealized holding gains arising during the period
Less: reclassification adjustment for gains realized in net income
Other comprehensive income, before tax
Tax effect related to other comprehensive income
Other comprehensive income, net of tax
Comprehensive income
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2020 and 2019
Accumulated
Other
Comprehensive
Common Stock
Shares
Amount
Balance, December 31, 2018
Other comprehensive income
Retirement of stock
Cash dividends declared, $0.24 per share
Balance, March 31, 2019
Balance, December 31, 2019
Cash dividends declared, $0.25 per share
Balance, March 31, 2020
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 (accretion), net
Amortization of intangible asset
Depreciation
Deferred income taxes
Securities (gains), net
(Gain) on sales of loans held for sale
Proceeds from loans held for sale
Originations of loans held for sale
Amortization of investment in new market tax credit projects
(Gain) 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 sale 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
Cash paid for bank acquired
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
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, 2020 and 2019 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, 2019 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.
Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment with an estimation of the fair value of a reporting unit.
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, 2020, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.
New and Pending Accounting Pronouncements: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In October 2019, the FASB voted to approve amendments to the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The amendment delays the effective date for our Company until interim and annual periods beginning after December 15, 2022. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models, along with refining the implementation of the software and its approach for determining the expected credit losses under the new guidance. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s financial statements. The Company is continuing to evaluate the extent of the potential impact.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates Step 2 from the goodwill impairment test. For public companies, this update became effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment tests with a measurement date after January 1, 2017. ASU 2017-04 was adopted on January 1, 2020 and the adoption of this guidance did not 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 became 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 were adopted on a retrospective basis, and the new disclosures were adopted on a prospective basis. The adoption did not have a material effect on the Company’s consolidated financial statements.
2. Bank Acquisition
On October 25, 2019, the Company completed the purchase of Iowa State Savings Bank (“ISSB”), including its’ four branches in Creston, Diagonal, Lennox and Corning, Iowa (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. ISSB’s acquired assets and liabilities were recorded at fair value at the date of acquisition. This bank was purchased for cash consideration of $22.6 million. As a result of the acquisition, the Company recorded a core deposit intangible asset of $1,891,000 and goodwill of approximately $2,680,000. The results of operations for this acquisition have been included since the transaction date of October 25, 2019. Since the acquisition date, there has been no significant credit deterioration of the acquired loans.
The following table summarizes the fair value of the total consideration transferred as a part of the ISSB Acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transactions. (in thousands)
Cash consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed:
Federal funds sold
Interest bearing deposits in financial institutions
Federal Home Loan Bank stock at cost
Loans receivable
Accrued interest receivable
Bank premises and equipment
Bank owned life insurance
Core deposit intangible asset
Securities sold under repurchase agreements
Accrued interest payable and other liabilities
Total identifiable net assets
On October 25, 2019, associated with the ISSB Acquisition, the contractual balance of loans receivable acquired was $139,703,000 and the contractual balance of the deposits assumed was $188,068,000. Loans receivable acquired include commercial real estate, 1-4 family real estate, agricultural real estate, commercial operating, agricultural operating and consumer loans. During the first quarter of 2020, an additional $310,000 of goodwill was recorded due to an adjustment to the initial purchase price.
The acquired loans associated with the ISSB Acquisition at contractual values as of October 25, 2019 were determined to be risk rated as follows (in thousands):
Pass
Watch
Special Mention
Substandard
Total loans acquired at book value
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 12, 2020, the Company declared a cash dividend on its common stock, payable on May 15, 2020 to stockholders of record as of May 1, 2020, equal to $0.25 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, 2020 and 2019 was 9,219,195 and 9,258,047, 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, 2019.
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, 2020 and December 31, 2019. (in thousands)
Description
Total
Level 1
Level 2
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 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.
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment or a change in previously recognized impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of March 31, 2020 and December 31, 2019. (in thousands)
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, 2020 and December 31, 2019 are as follows: (in thousands)
Estimated
Valuation
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 collateral dependent impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.
GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis.
The following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of March 31, 2020 and December 31, 2019: (in thousands)
Hierarchy
Carrying
Fair
Level
Value
Financial assets:
Interest bearing deposits
See previous table
FHLB and FRB stock
Financial liabilities:
Accrued interest payable
The methodologies used to determine fair value as of March 31, 2020 did not change from the methodologies described in the December 31, 2019 Annual Financial Statements.
Commitments to extend credit and standby letters of credit: The fair values of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and credit worthiness of the counterparties. The carrying value and fair value of the commitments to extend credit and standby letters of credit are not considered significant.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
7. Debt and Equity Securities
The amortized cost of securities available-for-sale and their approximate fair values as of March 31, 2020 and December 31, 2019 are summarized below: (in thousands)
2020:
Gross
Amortized
Unrealized
Cost
Gains
Losses
2019:
The amortized cost and fair value of debt securities available-for-sale as of March 31, 2020, are shown below by expected maturity. Expected maturity will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. (in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Securities with a carrying value of $207.1 million and $180.0 million at March 31, 2020 and December 31, 2019, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
The proceeds, gains and losses for securities available-for-sale for the three months ended March 31, 2020 and 2019 are summarized below (in thousands):
Proceeds from sales of securities available-for-sale
Gross realized gains on securities available-for-sale
Gross realized losses on securities available-for-sale
Tax provision applicable to net realized gains on securities available-for-sale
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of March 31, 2020 and December 31, 2019 are as follows: (in thousands)
Less than 12 Months
12 Months or More
Estimated Fair
Securities available-for-sale:
Gross unrealized losses on debt securities totaled $3,321,000 as of March 31, 2020. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.
8.
Loans Receivable and Credit Disclosures
The composition of loans receivable as of March 31, 2020 and December 31, 2019 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, 2020 and 2019 is as follows: (in thousands)
Three Months Ended March 31, 2020
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, 2019
Allowance for loan losses disaggregated on the basis of impairment analysis method as of March 31, 2020 and December 31, 2019 is as follows: (in thousands)
Individually evaluated for impairment
Collectively evaluated for impairment
Balance March 31, 2020
Balance December 31, 2019
Loans receivable disaggregated on the basis of impairment analysis method as of March 31, 2020 and December 31, 2019 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, 2020 and December 31, 2019: (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, 2020 and 2019: (in thousands)
Three Months Ended March 31,
Average
Income
Recognized
The interest foregone on nonaccrual loans for the three months ended March 31, 2020 and 2019 was approximately $189,000 and $58,000, respectively.
Nonaccrual loans at March 31, 2020 and December 31, 2019 were $17,712,000 and $4,788,000 respectively.
The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $1,372,000 as of March 31, 2020, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $1,171,000 as of December 31, 2019, all of which were included in impaired and nonaccrual loans.
The Company’s TDR, on a disaggregated basis, occurring in the three months ended March 31, 2020 and 2019, is as follows: (dollars in thousands)
Pre-Modification
Post-Modification
Outstanding
Number of
Contracts
During the three months ended March 31, 2020, the Company granted concessions to two related borrowers in the hospitality industry that are facing financial difficulties. One loan was secured by commercial real estate and the second loan was secured by a commercial operating note. Payments on these loans were deferred for six months and the interest rate was reduced below the market interest rate. During the three months ended March 31, 2019, the Company did not grant concessions to any borrowers.
There were no TDR loans that were modified during the three months ended March 31, 2020 and twelve months ended March 31, 2019 that had payment defaults. The Company considers TDR loans to have payment default when it is past due 60 days or more.
There were $16,000 of net charge-offs related to TDRs for the three months ended March 31, 2020 and no charge-offs related to TDRs for the three months ended March 31, 2019. No additional specific reserve was provided for the three months ended March 31, 2020 and March 31, 2019.
An aging analysis of the recorded investments in loans, on a disaggregated basis, as of March 31, 2020 and December 31, 2019, is as follows: (in thousands)
90 Days
or Greater
Past Due
Current
Accruing
The increase in the 90 days or greater loans from December 31, 2019 is primarily due to agricultural loans that are well secured as of March 31, 2020.
The credit risk profile by internally assigned grade, on a disaggregated basis, as of March 31, 2020 and December 31, 2019 is as follows: (in thousands)
Substandard-Impaired
The credit risk profile based on payment activity, on a disaggregated basis, as of March 31, 2020 and December 31, 2019 is as follows:
Performing
Non-performing
9.
As a result of the acquisition of ISSB in 2019, goodwill of $2.7 million was recognized. Goodwill recognized in the Acquisition was primarily attributable to an expanded market share and economies of scale expected from combining the operations of ISSB. For income tax purposes, goodwill associated with ISSB is amortized over a fifteen year period. Goodwill for this acquisition and previous acquisitions is not amortized but is evaluated for impairment at least annually.
10.
Intangible assets
In conjunction with the acquisition of ISSB in 2019, the Company recorded $1.9 million in core deposit intangible assets. The following sets forth the carrying amounts and accumulated amortization of the intangible assets at March 31, 2020 and December 31, 2019: (in thousands)
Amortization
Customer list
The weighted average life of the intangible assets is 4.0 years as of March 31, 2020 and 4.2 years as of December 31, 2019.
The following sets forth the activity related to the intangible assets for the three months ended March 31, 2020 and 2019: (in thousands)
Beginning intangible assets, net
Purchase
Ending intangible assets, net
Estimated remaining amortization expense on intangible assets for the years ending December 31 is as follows: (in thousands)
2021
2022
2023
2024
2025
After
11.
Pledged Collateral Related to Securities Sold Under Repurchase Agreements
The repurchase agreements mature daily and the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements as of March 31, 2020 and December 31, 2019: (in thousands)
Remaining Contractual Maturity of the
Agreements
Overnight
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.
Income Taxes
The tax effects of temporary differences related to income taxes are included in deferred income taxes. The change in the deferred income taxes asset since December 31, 2019 is due primarily to the increase in the allowance for loan losses.
13.
Regulatory Matters
On March 31, 2020, the Banks qualified for and elected to use the community bank leverage ratio (CBLR) framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. The CARES ACT lowered the CBLR to 8% beginning in the second quarter of 2020 through the end of the year. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. The CBLR will increase to 9% beginning January 1, 2022. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.
The Company and the Banks capital amounts and ratios as of March 31, 2020 and December 31, 2019 are as follows: (dollars in thousands)
To Be Well
Capitalized Under
Prompt Corrective
Actual
Action Provisions
Ratio
As of March 31, 2020:
Community Bank Leverage Ratio:
(Tier 1 capital to average assets for leverage ratio):
Boone Bank & Trust
First National Bank
Iowa State Savings Bank
Reliance State Bank
State Bank & Trust
United Bank & Trust
For Capital
Adequacy Purposes
As of December 31, 2019:
Total capital (to risk-weighted assets):
Consolidated
Tier 1 capital (to risk-weighted assets):
Tier 1 capital (to average-assets):
Common equity tier 1 capital (to risk-weighted assets):
14.
Subsequent Events
Management evaluated subsequent events through the date the financial statements were issued. The Company has developed programs for assisting existing clients through this uncertain time by providing loan payment deferrals and interest-only modifications. As of April 29, 2020 the Company had approved loan modifications for 88 loans totaling approximately $60 million. In accordance with recent regulatory and accounting guidance, loans modified in response to the COVID-19 pandemic will not be considered troubled debt restructurings. In a further effort to assist both existing and new clients, the Company is participating in government loan programs through the Small Business Administration, primarily the Paycheck Protection Program. This program stemmed from the CARES, Act that was signed into law on March 27, 2020. As of April 29, 2020, the Company had funded nearly 627 loans, totaling approximately $72 million. The Company will continue to accept and process applications under the newly expanded program starting April 27, 2020. There were no other significant events or transactions occurring after March 31, 2020, but prior to May 6, 2020, that provided additional evidence about conditions that existed at March 31, 2020. There were no other significant events or transactions that provided evidence about conditions that did not exist at March 31, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates six bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), United Bank & Trust NA (United Bank) and Iowa State Savings Bank (Iowa State Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.
The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. Wealth management services includes financial planning and managing trust, agencies, estates and investment brokerage accounts. The Company employs sixteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training, real estate valuation services and the coordination of management activities, in addition to 269 full-time equivalent individuals employed by the Banks.
The Company’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.
The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks and (v) merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
The Company had net income of $3,555,000, or $0.39 per share, for the three months ended March 31, 2020, compared to net income of $4,237,000, or $0.46 per share, for the three months ended March 31, 2019.
The decrease in earnings is primarily due to the additional provision for loan losses in 2020. The increase in the provision for loan losses was primarily due to the economic slowdown associated with COVID-19 and to a lesser extent loan growth. The economic slowdown associated with COVID-19 will adversely affect our loan portfolios, but will more quickly affect the loans associated with hospitality and entertainment industries. 8.5% of our loan portfolio as of March 31, 2020 is associated with these industries. The federal government is providing numerous programs to lessen the effects of COVID-19 on the economy and on our loan portfolio. The severity of the effect of COVID-19 on our operations is difficult to determine at this time. The State of Iowa has significant restrictions on non-essential businesses as well as enforcing social distancing. The longer these restrictions are in place the more severe the effects of the economic slowdown will be and the greater the negative consequences for our loan customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.
Net loan charge-offs (recoveries) totaled $26,000 and $(30,000) for the three months ended March 31, 2020 and 2019, respectively. The provision for loan losses totaled $2,316,000 and $98,000 for the three months ended March 31, 2020 and 2019, respectively.
The following management discussion and analysis will provide a review of important items relating to:
● Challenges and COVID-19 Status, Risks and Uncertainties
● Key Performance Indicators and Industry Results
● Critical Accounting Policies
● Income Statement Review
● Balance Sheet Review
● Asset Quality Review and Credit Risk Management
● Liquidity and Capital Resources
● Forward-Looking Statements and Business Risks
● Non-GAAP Financial Measures
Challenges and COVID-19 Status, Risks and Uncertainties
Prior to the onset of the COVID-19 pandemic during the first quarter of 2020, management had identified certain events or circumstances that may negatively impact the Company’s financial condition and results of operations in the future and detailed its efforts to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 10, 2020.
The Company conducts business in the State of Iowa and Iowa began to place significant restrictions on companies and individuals on March 9, 2020 as a result of the COVID-19 pandemic. The State of Iowa continues to evaluate the need for additional restrictions it may consider necessary to stem the spread of infection. The Company, as a financial institution, is considered an essential business and therefore continues to operate on a modified basis to comply with governmental restrictions and public health authority guidelines. The Company’s bank lobbies are generally closed to the public, although business is still being transacted through drive-up facilities, online, telephone or by appointment. Although the Company anticipates these arrangements will remain in effect until the restrictions are lifted by governmental authorities, the Company continues to operate and maintain its customer relationships. The health and safety of the Company’s employees is a major concern to the Company and a significant effort is being made to have employees work from home or, if working from the Company’s locations are required, to maintain appropriate social distancing and observe other health precautions.
The onset of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing the Company and its operations, including the following:
●
As the economic slowdown continues to evolve due to the pandemic, some of the Company’s customers will experience decreased revenues, which may correlate to an inability to make timely loan payments or maintain payrolls. This, in turn, could adversely impact the revenues and earnings of the Company by, among other things, requiring further increases in the allowance for loan losses and increases in the level of charge-offs in the loan portfolio. Although the economic slowdown will adversely affect the loan portfolio in general, it will more quickly affect loans associated with the hospitality and entertainment industries which comprise approximately 8.5% of the loan portfolio as of March 31, 2020. As detailed herein, the Company recognized a significant increase in provision expense during the first quarter of 2020 to increase its allowance for loan losses due to the economic slowdown, and management anticipates additional increases in the allowance if the effects of the COVID-19 restrictions continue to negatively impact the loan portfolio.
Local and the State of Iowa’s increased unemployment may continue to cause economic challenges to our consumer and commercial customers due to the economic effects of the COVID-19 restrictions. This increase in unemployment may adversely impact the revenues and earnings of the Company.
The Company anticipates a slowdown in demand for its products and services, including in the demand for traditional loans, although the decline will likely be temporarily offset due to the new volume of governmental guaranteed loans under the CARES Act and other governmental programs established in response to the pandemic.
Goodwill is currently evaluated for impairment on a quarterly basis and may in the future become impaired if the effects of the COVID-19 restrictions negatively impact net income and fair value, particularly the fair value at which the most recent bank acquisition is carried on the financial statements. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.
The COVID-19 restrictions have created significant volatility and disruption in the financial markets, and these conditions may require the Company to recognize an elevated level of other than temporary impairments on securities held in the Company’s investment portfolio as issuers of these securities are negatively impacted by the economic slowdown. Declines in fair value of securities held in the portfolio could also reduce the unrealized gains reported as part of the Company’s other comprehensive income.
Market interest rates have declined significantly and these reductions, especially if prolonged, could adversely affect the Company’s net interest income, net interest margin and earnings.
Dividends in the future may be reduced or eliminated if the COVID-19 restrictions have an adverse effect on net income, an unanticipated increase in deposits or other unidentified risks that may negatively affect the Company’s capital ratios.
Key Performance Indicators and Industry Results
Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 5,177 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,
March, 31,
2018
Company
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 0.81% and 1.17% for the three months ended March 31, 2020 and 2019, respectively. This ratio declined primarily due to an increase in the provision for loan losses for the three months ended March 31, 2020 as compared to 2019.
● Return on Equity
This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 7.44% and 9.73% for the three months ended March 31, 2020 and 2019, respectively. This ratio declined primarily due to an increase in the provision for loan losses for the three months ended March 31, 2020 as compared to 2019.
● Net Interest Margin
The net interest margin for the three months ended March 31, 2020 and 2019 was 3.18% and 3.23%, respectively. The ratio is calculated by dividing tax equivalent net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings.
● Efficiency Ratio
This ratio is calculated by dividing noninterest expense by 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 57.73% and 57.82% for the three months ended March 31, 2020 and 2019, respectively. The efficiency ratio remains comparable to the prior quarter last year.
● Capital Ratio
The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 10.92% as of March 31, 2020 is higher than the industry average of 9.81% as of December 31, 2019.
Industry Results:
The FDIC Quarterly Banking Profile reported the following results for the fourth quarter of 2020
Full-Year 2019 Net Income Declines to $233.1 Billion
For the 5,177 FDIC-insured commercial banks and savings institutions, full-year 2019 net income totaled $233.1 billion, down $3.6 billion (1.5%) from 2018. The decline was primarily attributable to slower growth in net interest income (up $5.5 billion, or 1%) and higher loan-loss provisions (up $5 billion, or 9.9%). Average net interest margin (NIM) declined from 3.40% in 2018 to 3.36% in 2019, as average earning assets grew at a faster rate than net interest income. The average return on assets (ROA) fell from 1.35% in 2018 to 1.29% in 2019.
Quarterly Net Income Declines Almost 7% From a Year Ago to $55.2 Billion
Quarterly net income totaled $55.2 billion during fourth quarter 2019, down $4.1 billion (6.9%) from a year ago. The annual decline in quarterly net income was a result of lower net interest income and higher noninterest expenses. About half (45.6%) of all banks reported year-over-year declines in net income, and the percentage of unprofitable banks in the fourth quarter remained stable from a year ago at 7.2%. The average ROA was 1.20% in fourth quarter 2019, down 13 basis points from a year ago.
Net Interest Income Declines 2.4% From Fourth Quarter 2018
Net interest income declined by $3.4 billion (2.4%) from 12 months ago, marking the first annual decline since third quarter 2013. NIM for the banking industry fell by 20 basis points from a year ago to 3.28%, as average asset yields declined more rapidly than average funding costs. The annual decline in NIM occurred for all five asset size groups featured in the Quarterly Banking Profile but was especially pronounced among banks with total assets between $10 billion and $250 billion. Banks responded to the low interest-rate environment by growing longer-term assets, but these assets generated lower yields and contributed to the NIM decline.
Noninterest Expense Increases 3.2% From Fourth Quarter 2018
Noninterest expense was $121.5 billion in fourth quarter 2019, up $3.7 billion (3.2%) from fourth quarter 2018. About two out of every three banks (67.5%) reported annual increases in noninterest expense. Close to 80% of the aggregate increase was attributable to higher salary and employee benefits, which grew by $2.9 billion (5.4%). The average assets per employee increased from $8.7 million in fourth quarter 2018 to $9 million in fourth quarter 2019.
Noninterest Income Expands 2.5% From 12 Months Ago
Noninterest income totaled $66 billion during the fourth quarter, up $1.6 billion (2.5%) from 12 months ago. The increase was broad-based, as more than half (61.8%) of all banks reported higher annual noninterest income. The annual increase was driven by higher trading revenues (up $3.2 billion, or 76.4%) and net gains on loan sales (up $1.1 billion, or 41.6%).
Loan-Loss Provisions Increase Modestly From a Year Ago
In the fourth quarter, banks set aside $14.8 billion in loan-loss provisions, an increase of $779 million (5.5%) from a year ago. More than one-third (38.4%) of all banks reported year-over-year increases in loan-loss provisions. The increase was mostly concentrated at larger institutions. Loan-loss provisions as a share of net operating revenue increased to 7.3% during the fourth quarter, the highest level since year-end 2012.
Net Charge-Offs Rise by $1.3 Billion From a Year Ago
Net charge-offs totaled $13.9 billion during the fourth quarter, an increase of $1.3 billion (10.4%) from fourth quarter 2018. The largest contributor to the year-over-year increase in net charge-offs was the commercial and industrial (C&I) loan portfolio, which registered a charge-off increase of $591.2 million (34.3%), and the credit card portfolio, which registered a charge-off increase of $409.9 million (5%). The average net charge-off rate increased by 4 basis points from fourth quarter 2018 to 0.54%. The C&I net charge-off rate was 0.42% during fourth quarter 2019, up from 0.32% a year ago but below the recent high of 0.50% reported in fourth quarter 2016. The credit card net charge-off rate increased by 4 basis points from fourth quarter 2018 to 3.75%.
Noncurrent Loan Rate Remains Stable at 0.91%
Noncurrent loan balances (90 days or more past due or in nonaccrual status) remained relatively stable (down $46.4 million, or 0.05%) from the previous quarter. About half of all banks (51.2%) reported declines in noncurrent loan balances. All major loan categories experienced declining levels of noncurrent loans from the previous quarter, except for credit card balances, which increased by $1.3 billion (10.3%). The credit card loan portfolio also registered the largest quarterly increase in the noncurrent rate, up 7 basis points to 1.47%.
Loan-Loss Reserves Decline Modestly From Third Quarter 2019
Loan-loss reserves totaled $123.9 billion at the end of fourth quarter 2019, down $1.3 billion (1%) from the previous quarter. At banks that itemize their loan-loss reserves, those with total assets of $1 billion or more, residential real estate reserves declined by $831.4 million (8%) and commercial real estate reserves fell by $669.6 million (2%). Loan-loss reserves for credit card portfolios rose by $775.6 million (1.9%) from third quarter 2019.
Total Assets Increase From the Previous Quarter
Total assets increased by $163.4 billion (0.9%) from the previous quarter, primarily because of growth in loan and leases balances (up $117.9 billion). Banks increased their securities holdings by $45.5 billion (1.2%), as mortgage-backed securities rose by $24.4 billion (1%) and holdings of U.S. Treasury securities grew by $8.5 billion (1.4%). Cash and balances due from depository institutions rose by $40.6 billion (2.5%).
Loan Balances Expand From the Previous Quarter and a Year Ago
Total loan and lease balances rose by $117.9 billion (1.1%) from third quarter 2019. More than half (59.2%) of all banks grew their loan and lease balances from the third quarter. Almost all of the major loan categories registered quarterly increases, except for the C&I loan portfolio which registered the first quarterly decline since fourth quarter 2016 (down $11 billion, or 0.5%). Quarterly growth among major loan categories was led by consumer loans (up $58.2 billion, or 3.3%), nonfarm nonresidential loans (up $21.6 billion, or 1.4%), and residential mortgage loans (up $19.1 billion, or 0.9%). Over the past year, total loan and lease balances rose by $366.3 billion (3.6%), slightly below the annual growth rate reported in third quarter 2019. The slowdown in annual growth of total loan and lease balances was led by the C&I loan portfolio, which expanded at its slowest rate since 2010 (1.9%).
Deposits Rise 1.8% From the Previous Quarter
Total deposit balances increased by $258.4 billion (1.8%) from the previous quarter, as interest-bearing accounts rose by $216.3 billion (2.2%) and noninterest-bearing accounts grew by $22.6 billion (0.7%). Deposits held in foreign offices increased by $19.5 billion (1.5%). Nondeposit liabilities, which include fed funds purchased, repurchase agreements, Federal Home Loan Bank (FHLB) advances, and secured and unsecured borrowings, fell by $69 billion (5%) from the previous quarter. The change in nondeposit liabilities was led by a decline in securities sold under agreements to repurchase (down $30 billion, or 13.3%), the largest quarterly dollar decline since fourth quarter 2013. FHLB advances were lower by $16.3 billion (3.3%).
Equity Capital Increases From Third Quarter 2019
Equity capital rose by $12.8 billion (0.6%) from third quarter 2019. Fourth quarter 2019 declared dividends of $49.1 billion were below quarterly net income of $55.2 billion. Common equity tier 1 ratio increased by 5 basis points from a year ago to 13.21%. Fourteen insured institutions with $1.8 billion in total assets were below the requirements for the well-capitalized category as defined for Prompt Corrective Action purposes.
Three New Banks Are Added in Fourth Quarter 2019
The number of FDIC-insured commercial banks and savings institutions declined from 5,258 to 5,177 during fourth quarter 2019. Three new banks were added, 77 institutions were absorbed by mergers, and three banks failed. For full-year 2019, 13 new banks were added, 226 institutions were absorbed by mergers, and four banks failed. The number of institutions on the FDIC’s “Problem Bank List” fell from 55 at the end of third quarter to 51 at the end of fourth quarter, the lowest level since fourth quarter 2006. Aggregate total assets of problem banks declined from $48.8 billion in third quarter 2019 to $46.2 billion in fourth quarter 2019.
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, 2019 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, including the recent onset of the COVID-19 pandemic, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of the Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.
Fair Value and Other-Than-Temporary Impairment of Investment Securities
The Company’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, including the recent onset of the COVID-19 pandemic, it is at least reasonably possible that changes in management’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.
Goodwill 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, 2020, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation. Goodwill may be impaired in the future if the effects of the COVID-19 restrictions negatively impacts our net income and fair value, particularly of our most recent acquisition. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.
Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures are widely used in the financial institutions industry and provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP. (dollars in thousands)
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 for the three months ended March 31, 2020 and 2019, 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, 2020 and 2019
The following highlights a comparative discussion of the major components of net income and their impact for the three months ended March 31, 2020 and 2019:
AVERAGE BALANCES AND INTEREST RATES
The following two tables are used to calculate the Company’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.
AVERAGE BALANCE SHEETS AND INTEREST RATES
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
Interest bearing deposits with banks and federal funds sold
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 of 21%.
Interest-bearing liabilities
Interest bearing checking, savings accounts and money markets
Time deposits
Total Interest-bearing liabilities
Noninterest-bearing liabilities
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, 2020 and 2019, the Company's net interest margin adjusted for tax exempt income was 3.18% and 3.23%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended March 31, 2020 totaled $13,046,000 compared to $10,970,000 for the three months ended March 31, 2019.
For the three months ended March 31, 2020, interest income increased $2,307,000, or 17%, when compared to the same period in 2019. The increase from 2020 was primarily attributable to increased loan volume, related to the Acquisition. The increase in loan interest income due to loan volume was offset in part by an increase in foregone interest on nonaccrual loans of $131,000.
Interest expense increased $231,000, or 9%, for the three months ended March 31, 2020 when compared to the same period in 2019. The higher interest expense for the period is primarily attributable to an increase in deposits related to the Acquisition, offset in part by lower rates on deposits due to market interest rates.
Provision for Loan Losses
A provision for loan losses of $2,316,000 was recognized in the first quarter of 2020 as compared to $98,000 in the first quarter of 2019. Net loan charge offs (recoveries) totaled $26,000 for the quarter ended March 31, 2020 compared to $(30,000) for the quarter ended March 31, 2019. The increase in the provision for loan losses was primarily due to the economic slowdown associated with COVID-19 and to a lesser extent loan growth. The economic slowdown associated with COVID-19 will adversely affect our loan portfolios, but will more quickly affect the loans associated with hospitality and entertainment industries. Approximately 8.5% of our loan portfolio as of March 31, 2020 is associated with these industries. We are anticipating requests for loan payment deferrals and have had a significant number of requests for the Paycheck Protection Program loans in April, 2020. The federal government is providing numerous programs to lessen the effects of COVID-19 on the economy and on our loan portfolio. The severity of the effect of COVID-19 on our operations is difficult to determine at this time. The State of Iowa has significant restrictions on non-essential businesses as well as enforcing social distancing. The longer these restrictions are in place the more severe the effects of the economic slowdown will be and the greater the negative consequences for our loan customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.
Noninterest Income and Expense
Noninterest income for the first quarter of 2020 totaled $2,631,000 as compared to $1,926,000 in the first quarter of 2019, an increase of 37%. The increase in noninterest income was primarily due to a security gain of $386,000 in 2020 and to a lesser extent the Acquisition.
Noninterest expense for the first quarter of 2020 totaled $9,050,000 compared to $7,457,000 recorded in the first quarter of 2019, an increase of 21%. Most of the increase was related to the Acquisition, salary and employee benefits and the amortization of Federal new market tax credit projects, offset in part by a decrease in the FDIC insurance assessments. Salaries and employee benefits, excluding the Acquisition, increased 7% primarily due to normal salary increases, increases in health insurance costs and additional personnel. The decrease in FDIC insurance assessments was due to the receipt of a small bank credit as the deposit insurance reserve ratio exceeded 1.35%. The efficiency ratio was 57.7% for the first quarter of 2020 as compared to 57.8% in the first quarter of 2019.
Income tax expense for the first quarter of 2020 totaled $756,000 compared to $1,104,000 recorded in the first quarter of 2019. The effective tax rate was 17.5% and 20.7% for the quarters ended March 31, 2020 and 2019, respectively. The lower than expected tax rate in 2020 and 2019 was due primarily to tax-exempt interest income and new market tax credits recognized in 2020.
Balance Sheet Review
As of March 31, 2020, total assets were $1,797,746,000, a $60,564,000 increase compared to December 31, 2019. The increase in assets, primarily interest bearing deposits and loans, was funded primarily by deposits.
Investment Portfolio
The investment portfolio totaled $489,304,000 as of March 31, 2020, an increase of $9,461,000 from the December 31, 2019 balance of $479,843,000. The increase in securities available-for-sale is primarily due to purchases of municipal and corporate bonds, offset in part by maturities in the U.S. Government Agency portfolio.
On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of March 31, 2020, gross unrealized losses of $3,321,000, are considered to be temporary in nature due to the interest rate environment of 2020 and other general economic factors. As a result of the economic slowdown resulting from the COVID-19 pandemic, certain bonds in the investment portfolio may become other-than-temporarily impaired and could negatively affect the Company’s net income. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.
At March 31, 2020, the Company’s investment securities portfolio included securities issued by 268 government municipalities and agencies located within 20 states with a fair value of $205.8 million. At December 31, 2019, the Company’s investment securities portfolio included securities issued by 251 government municipalities and agencies located within 18 states with a fair value of $195.3 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of March 31, 2020 was $3.6 million (approximately 1.7% 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, 2020 and December 31, 2019 identifying the state in which the issuing government municipality or agency operates. (in thousands)
Obligations of states and political subdivisions:
General Obligation bonds:
Iowa
Texas
Pennsylvania
Washington
Other (2020: 14 states; 2019: 12 states)
Total general obligation bonds
Revenue bonds:
Other (2020: 12 states; 2019: 12 states)
Total revenue bonds
Total obligations of states and political subdivisions
As of March 31, 2020 and December 31, 2019, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 6 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
Electric power & light revenues
Sewer
Total revenue bonds by revenue source
Loan Portfolio
The loan portfolio, net of the allowance for loan losses, totaled $1,079,657,000 and $1,048,147,000 as of March 31, 2020 and December 31, 2019, respectively. Loan demand has softened since March 31, 2020, with the exception of the Payroll Protection Program (“PPP”) loans. The PPP loans bear an interest rate of 1.0% with a two year maturity. The Small Business Administration is providing fees to financial institutions to originate the PPP loans. Under certain conditions these loans may be forgiven and the fees associated with these loans will be accelerated into interest income. Through April 25, 2020, prior to the second allocation, the Company has originated approximately $70 million of the PPP loans.
Deposits totaled $1,552,425,000 and $1,493,175,000 as of March 31, 2020 and December 31, 2019, respectively. The increase in deposits since December 31, 2019 was primarily due to account balances in interest bearing checking accounts, money market and certificate of deposit public funds and retail interest bearing checking accounts, offset in part by a decline in account balances of retail money market and certificate of deposits.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase totaled $41,618,000 as of March 31, 2020, a decrease of $416,000, or 1%, from the December 31, 2019 balance of $42,034,000.
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, 2019.
Asset Quality Review and Credit Risk Management
The Company’s credit risk is historically centered in the loan portfolio, which on March 31, 2020 totaled $1,079,657,000 compared to $1,048,147,000 as of December 31, 2019. Net loans comprise 60% of total assets as of March 31, 2020. The objective in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 1.69% at March 31, 2020, as compared to 0.48% at December 31, 2019. The increase in the level of problem loans is due primarily to the deterioration of one loan relationship in the hospitality portfolio. The Company’s level of problem loans as a percentage of total loans at March 31, 2020 of 1.69% is higher as compared to the Iowa State Average peer group of FDIC insured institutions as of December 31, 2019, of 0.63%.
Impaired loans, net of specific reserves, totaled $16,991,000 as of March 31, 2020 and have increased $12,203,000 as compared to the impaired loans of $4,788,000 as of December 31, 2019. The increase is primarily due to one hospitality loan relationship.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.
The Company had TDRs of $1,372,000 as of March 31, 2020, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $1,171,000 as of December 31, 2019, all of which were included in impaired and nonaccrual loans.
TDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the Coronavirus Disease 2019 (COVID-19) pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. No additional specific reserves were provided for the three months ended March 31, 2020 and 2019. The Company had $16,000 of charge-offs for TDR’s for the three months ended March 31, 2020. There were no charge-offs related to TDRs for the three months ended March 31, 2019. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.
Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on non-accrual. As of March 31, 2020, non-accrual loans totaled $17,712,000 and there were $838,000 of loans past due 90 days and still accruing. This compares to non-accrual loans of $4,788,000 and loans past due 90 days and still accruing totaled $255,000 as of December 31, 2019. The increase in non-accrual loans are due primarily to a hospitality loan and an agricultural loan relationship. The increase in loans 90 days past due and still accruing is primarily due to an agricultural relationship well secured and in the process of collection. Real estate owned totaled $1,713,000 and $4,004,000 as of March 31, 2020 and December 31, 2019, respectively.
The agricultural real estate and agricultural operating loan portfolio classifications remain elevated as a result of lower grain prices. The watch and special mention loans in these categories totaled $51,520,000 as of March 31, 2020 as compared to $48,028,000 as of December 31, 2019. The substandard loans in these categories totaled $16,030,000 as of March 31, 2020 as compared to $15,913,000 as of December 31, 2019. The Iowa agricultural economy remains challenged as the result of the price of commodities, including corn, soybeans, cattle, hogs and ethanol, along with export concerns. The effects of the COVID-19 pandemic could exacerbate these challenges.
The watch and special mention loans classified as commercial real estate totaled $80,929,000 as of March 31, 2020 as compared to $33,790,000 as of December 31, 2019. This increase in commercial real estate loans was due primarily to the hospitality loan portfolio. The substandard commercial real estate loans totaled $16,163,000 as of March 31, 2020 as compared to $14,786,000 as of December 31, 2019.
The allowance for loan losses as a percentage of outstanding loans as of March 31, 2020 was 1.36%, as compared to 1.19% at December 31, 2019. The allowance for loan losses totaled $14,909,000 and $12,619,000 as of March 31, 2020 and December 31, 2019, respectively. Net charge-offs (recoveries) of loans totaled $26,000 and $(30,000) for the three months ended March 31, 2020 and 2019, respectively.
The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans. The qualitative factors considered as a part of our allowance for loan loss calculation may deteriorate if the economic effects of COVID-19 are not eased by the State of Iowa in a timely manner and a resumption to typical social and economic activity.
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, 2020, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.
The liquidity and capital resources discussion will cover the following topics:
Review of the Company’s Current Liquidity Sources
Review of Statements of Cash Flows
Company Only Cash Flows
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs
Capital Resources
Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of March 31, 2020 and December 31, 2019 totaled $168,523,000 and $143,565,000, respectively, and management believes these sources provide an adequate level of liquidity given current economic conditions.
Other sources of liquidity available to the Banks as of March 31, 2020 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $216,888,000, with $3,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $109,481,000, with no outstanding federal fund purchase balances as of March 31, 2020. The Company had securities sold under agreements to repurchase totaling $41,618,000 as of March 31, 2020.
Total investments as of March 31, 2020 were $489,304,000 compared to $479,843,000 as of December 31, 2019. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of March 31, 2020.
The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.
Review of the Consolidated Statements of Cash Flows
Net cash provided by operating activities for the three months ended March 31, 2020 totaled $11,686,000 compared to $6,284,000 for the three months ended March 31, 2019. The increase in cash provided by operating activities was $5,402,000. This increase was primarily due to the proceeds from loans held for sale, a decrease in the balance of accrued interest receivable and an increase in accrued expenses and other liabilities, offset in part by the increase in originations from loans held for sale.
Net cash used in investing activities for the three months ended March 31, 2020 was $68,297,000 compared to $19,679,000 for the three months ended March 31, 2019. The increase of $48,618,000 in cash used in investing activities was primarily due to a higher level of loans and purchases of investments, offset in part by proceeds from the maturities of investments.
Net cash provided by financing activities for the three months ended March 31, 2020 totaled $54,051,000 compared to $7,144,000 for the three months ended March 31, 2019. The increase in cash provided by financing activities was $46,907,000. The increase was primarily due to an increase in deposits and a lower amount of repayments of FHLB advances in 2020 as compared to 2019. As of March 31, 2020, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.
Review of Company Only Cash Flows
The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $2,330,000 and $3,198,000 for the three months ended March 31, 2020 and 2019, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.25 per share in 2020 from $0.24 per share in 2019.
The Company, on an unconsolidated basis, has interest bearing deposits totaling $4,043,000 as of March 31, 2020 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, 2020 that are of concern to management.
The Company’s total stockholders’ equity as of March 31, 2020 totaled $188,493,000 and was $914,000 higher than the $187,579,000 recorded as of December 31, 2019. The increase in stockholders’ equity was primarily due to net income and an increase in other comprehensive income, offset in part by dividends declared and stock repurchases. The increase in other comprehensive income is created by lower market interest rates compared to December 31, 2019, which resulted in higher fair values in the securities available-for-sale portfolio. At March 31, 2020 and December 31, 2019, stockholders’ equity as a percentage of total assets was 10.5% and 10.8% respectively. The capital levels of the Company exceed applicable regulatory guidelines as of March 31, 2020.
Forward-Looking Statements and Business Risks
The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: the substantial negative impact of the COVID-19 restrictions on national, regional and local economies in general and on our customers in particular; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses resulting from the COVID-19 restrictions or as dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s annual report on Form 10-K. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should”, “forecasting” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2020 changed significantly when compared to 2019. Uncertainty due to the federal governmental actions stemming from reactions to the COVID-19 pandemic, may cause market interest rates to deviate from historical norms.
Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II.
OTHER INFORMATION
Not applicable
The COVID-19 pandemic has adversely impacted, and is expected to continue adversely impacting, our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted at this time given the evolving nature of the pandemic, including the scope and duration of the pandemic, the short and long term effects on national, state and local economies and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has negatively impacted the national, Iowa and local economies in which the Company conducts business, created significant volatility and disruption in financial markets, and substantially increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and significant restrictions on companies and individuals beginning in Iowa on March 9, 2020. As a result, the demand for our products and services may be significantly impacted, including the demand for new loans and a decrease in deposits. Furthermore, the pandemic will likely result the recognition of an elevated level of credit losses in our loan portfolios and continued increases in our allowance for loan losses, particularly if businesses remain closed, the impact on the Iowa and local economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold in our investment portfolio, as well as reductions in the unrealized gains component of other comprehensive income. Additionally, goodwill arising from recent bank acquisitions could become impaired if our net income and the fair value of the acquired assets decline due to the economic slowdown. Each of the foregoing events could negatively impact our revenues, earnings or both, as well as our financial condition.
Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The Company, as a financial institution, is considered an essential business and, therefore, continues to operate and maintain our customer relationships. While we have already temporarily limited access to our bank lobbies, our business is still being transacted through our drive up facilities, online, by telephone or by appointment. Current and future governmental actions may temporarily require the Company to conduct business related to foreclosures, repossessions, payments deferrals and other customer-related transactions differently. The Company could also take actions to preserve its capital levels, such as lowering or suspending dividends, in response to the COVID-19 pandemic.
The extent to which the COVID-19 pandemic impacts our business, prospects, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted at this time due to the evolving nature of the pandemic, including the scope and duration of the pandemic, the short and long term effects on national, state and local economies and actions taken by governmental authorities and other third parties in response to the pandemic.
In November, 2019, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of March 31, 2020, there were 65,847 shares remaining to be purchased under the plan. Ames National Corporation completed the stock repurchase program in April, 2020 and the price per share averaged $20.09.
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended March 31, 2020.
Number
Maximum
of Shares
Purchased as
Shares that
Part of
May Yet Be
Publicly
Purchased
Price Paid
Announced
Under
Period
Per Share
Plans
The Plan
January 1, 2020 to January 31, 2020
February 1, 2020 to February 28, 2020
March 1, 2020 to March 31, 2020
Other information
2.1
Stock purchase agreement (incorporated by reference to Exhibit 2.1 to the Form 10-Q filed on August 7, 2019).
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS
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.
DATE: May 6, 2020
By: /s/ John P. Nelson
John P. Nelson, Chief Executive Officer and President