ATLO 10-Q Quarter ended Sept. 30, 2018

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		September 30,				December 31,
		2018				2017
ASSETS
Cash and due from banks		$	25,318,944			$	26,397,550
Interest bearing deposits in financial institutions			38,048,525				43,021,953
Securities available-for-sale			474,442,299				495,321,664
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost			2,946,100				3,021,200
Loans receivable, net			859,830,015				771,549,655
Loans held for sale			279,940				-
Bank premises and equipment, net			16,071,119				15,399,146
Accrued income receivable			9,485,035				8,382,391
Other real estate owned			729,795				385,509
Bank-owned life insurance			2,757,310				-
Deferred income taxes, net			4,803,300				2,542,533
Intangible assets, net			2,842,085				1,091,462
Goodwill			9,618,621				6,732,216
Other assets			1,079,179				1,214,371
Total assets		$	1,448,252,267			$	1,375,059,650
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand, noninterest bearing		$	220,806,001			$	227,332,347
NOW accounts			369,779,264				322,392,945
Savings and money market			414,057,574				389,630,180
Time, $250,000 and over			42,849,563				38,838,782
Other time			168,268,111				156,196,433
Total deposits			1,215,760,513				1,134,390,687
Securities sold under agreements to repurchase			48,858,900				37,424,619
Federal Home Loan Bank (FHLB) advances			8,400,000				13,500,000
Other borrowings			-				13,000,000
Dividends payable			2,141,510				2,048,401
Accrued expenses and other liabilities			4,461,535				3,942,801
Total liabilities			1,279,622,458				1,204,306,508
STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,310,913 shares as of September 30, 2018 and December 31, 2017			18,621,826				18,621,826
Additional paid-in capital			20,878,728				20,878,728
Retained earnings			135,828,253				131,684,961
Accumulated other comprehensive (loss) - net unrealized (loss) on securities available-for-sale			(6,698,998	)			(432,373	)
Total stockholders' equity			168,629,809				170,753,142
Total liabilities and stockholders' equity		$	1,448,252,267			$	1,375,059,650

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Interest income:
Loans, including fees		$	9,557,527			$	8,729,702			$	27,442,604			$	25,345,116
Securities:
Taxable			1,545,541				1,557,872				4,638,503				4,637,498
Tax-exempt			1,085,131				1,210,510				3,451,084				3,819,380
Interest bearing deposits and federal funds sold			272,358				114,820				721,417				365,346
Total interest income			12,460,557				11,612,904				36,253,608				34,167,340
Interest expense:
Deposits			1,740,579				1,169,296				4,736,455				3,204,115
Other borrowed funds			134,017				292,054				533,870				862,798
Total interest expense			1,874,596				1,461,350				5,270,325				4,066,913
Net interest income			10,585,961				10,151,554				30,983,283				30,100,427
Provision for loan losses			100,000				57,277				192,978				1,221,620
Net interest income after provision for loan losses			10,485,961				10,094,277				30,790,305				28,878,807
Noninterest income:
Wealth management income			877,146				747,634				2,534,510				2,180,941
Service fees			363,993				401,237				1,036,841				1,126,122
Securities gains, net			-				37,881				-				498,560
Gain on sale of loans held for sale			207,856				179,553				576,441				544,095
Merchant and card fees			358,816				348,847				1,035,338				1,017,362
Gain on foreclosure of other real estate owned			162,862				-				162,862				-
Other noninterest income			191,130				144,953				570,685				598,791
Total noninterest income			2,161,803				1,860,105				5,916,677				5,965,871
Noninterest expense:
Salaries and employee benefits			4,331,976				4,026,932				13,216,844				12,058,903
Data processing			838,414				807,419				2,506,804				2,481,331
Occupancy expenses, net			536,004				527,071				1,490,395				1,546,657
FDIC insurance assessments			99,934				111,987				308,002				326,958
Professional fees			423,172				307,484				1,123,577				919,157
Business development			327,985				262,408				821,344				722,869
Intangible asset amortization			94,883				89,861				266,337				280,837
Data conversion costs			167,815				-				167,815				-
Other operating expenses, net			167,649				162,826				664,914				835,414
Total noninterest expense			6,987,832				6,295,988				20,566,032				19,172,126
Income before income taxes			5,659,932				5,658,394				16,140,950				15,672,552
Provision for income taxes			1,201,100				1,729,987				3,328,100				4,661,687
Net income		$	4,458,832			$	3,928,407			$	12,812,850			$	11,010,865
Basic and diluted earnings per share		$	0.48			$	0.42			$	1.38			$	1.18
Dividends declared per share		$	0.23			$	0.22			$	0.94			$	0.66

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Net income		$	4,458,832			$	3,928,407			$	12,812,850			$	11,010,865
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities before tax:
Unrealized holding gains (losses) arising during the period			(2,171,391	)			(270,853	)			(8,245,692	)			5,828,684
Less: reclassification adjustment for gains realized in net income			-				37,881				-				498,560
Other comprehensive income (loss), before tax			(2,171,391	)			(308,734	)			(8,245,692	)			5,330,124
Tax effect related to other comprehensive income (loss)			542,848				114,233				2,061,767				(1,972,145	)
Other comprehensive income (loss), net of tax			(1,628,543	)			(194,501	)			(6,183,925	)			3,357,979
Comprehensive income		$	2,830,289			$	3,733,906			$	6,628,925			$	14,368,844

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		Common Stock				Additional Paid- in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss), Net of Taxes				Total Stockholders' Equity
Balance, June 30, 2017		$	18,621,826			$	20,878,728			$	129,167,032			$	2,975,793			$	171,643,379
Net income			-				-				3,928,407				-				3,928,407
Other comprehensive income			-				-				-				(194,501	)			(194,501	)
Cash dividends declared, $0.22 per share			-				-				(2,048,401	)			-				(2,048,401	)
Balance, September 30, 2017		$	18,621,826			$	20,878,728			$	131,047,038			$	2,781,292			$	173,328,884
Balance, June 30, 2018		$	18,621,826			$	20,878,728			$	133,510,931			$	(5,070,455	)		$	167,941,030
Net income			-				-				4,458,832				-				4,458,832
Other comprehensive (loss)			-				-				-				(1,628,543	)			(1,628,543	)
Cash dividends declared, $0.23 per share			-				-				(2,141,510	)			-				(2,141,510	)
Balance, September 30, 2018		$	18,621,826			$	20,878,728			$	135,828,253			$	(6,698,998	)		$	168,629,809

		Common Stock				Additional Paid- in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss), Net of Taxes				Total Stockholders' Equity
Balance, December 31, 2016		$	18,621,826			$	20,878,728			$	126,181,376			$	(576,687	)		$	165,105,243
Net income			-				-				11,010,865				-				11,010,865
Other comprehensive income			-				-				-				3,357,979				3,357,979
Cash dividends declared, $0.66 per share			-				-				(6,145,203	)			-				(6,145,203	)
Balance, September 30, 2017		$	18,621,826			$	20,878,728			$	131,047,038			$	2,781,292			$	173,328,884
Balance, December 31, 2017		$	18,621,826			$	20,878,728			$	131,684,961			$	(432,373	)		$	170,753,142
Net income			-				-				12,812,850				-				12,812,850
Other comprehensive (loss)			-				-				-				(6,183,925	)			(6,183,925	)
The cumulative effect from change in accounting policy (1)			-				-				82,700				(82,700	)			-
Cash dividends declared, $0.94 per share			-				-				(8,752,258	)			-				(8,752,258	)
Balance, September 30, 2018		$	18,621,826			$	20,878,728			$	135,828,253			$	(6,698,998	)		$	168,629,809

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		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	12,812,850			$	11,010,865
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			192,978				1,221,620
Provision for off-balance sheet commitments			9,000				4,000
Amortization, net			1,583,534				2,129,648
Amortization of intangible asset			266,337				280,837
Depreciation			845,163				861,700
Deferred income taxes			(24,000	)			(303,999	)
Securities gains, net			-				(498,560	)
(Gain) on sales of loans held for sale			(576,441	)			(544,095	)
Proceeds from loans held for sale			23,480,924				22,668,307
Originations of loans held for sale			(23,184,423	)			(22,161,394	)
Loss on sale of premises and equipment, net			11,479				56,168
(Gain) on sale and foreclosure of other real estate owned, net			(226,054	)			(14,648	)
Change in assets and liabilities:
(Increase) in accrued income receivable			(239,749	)			(654,349	)
(Increase) decrease in other assets			133,639				(377,095	)
Increase (decrease) in accrued expenses and other liabilities			385,983				(126,404	)
Net cash provided by operating activities			15,471,220				13,552,601
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale			(24,209,779	)			(46,766,543	)
Proceeds from sale of securities available-for-sale			-				11,756,963
Proceeds from maturities and calls of securities available-for-sale			52,143,244				48,326,502
Purchase of FHLB stock			(3,070,400	)			(4,505,400	)
Proceeds from the redemption of FHLB stock			3,275,100				4,261,600
Net (increase) decrease in interest bearing deposits in financial institutions			6,448,428				(3,749,025	)
Net (increase) in loans			(12,239,005	)			(13,190,423	)
Net proceeds from the sale of other real estate owned			117,905				191,564
Purchase of bank premises and equipment, net			(591,165	)			(447,039	)
Cash paid, net of cash acquired, for bank acquired			(13,443,219	)			-
Other			1,139,029				(61,761	)
Net cash provided by (used in) investing activities			9,570,138				(4,183,562	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits			(1,795,096	)			5,129,194
Increase (decrease) in securities sold under agreements to repurchase			2,434,281				(19,336,317	)
Payments on FHLB borrowings and other borrowings			(24,500,000	)			(1,000,000	)
Proceeds from short-term borrowings and other borrowings			6,400,000				5,500,000
Dividends paid			(8,659,149	)			(6,052,094	)
Net cash (used in) financing activities			(26,119,964	)			(15,759,217	)
Net (decrease) in cash and due from banks			(1,078,606	)			(6,390,178	)
CASH AND DUE FROM BANKS
Beginning			26,397,550				29,478,068
Ending		$	25,318,944			$	23,087,890

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		2018				2017
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest		$	5,039,767			$	4,027,782
Income taxes			3,484,746				5,050,220
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer of loans receivable to other real estate owned		$	116,137			$	16,668
Business Combination:
Fair value of interest bearing deposits in financial institutions acquired		$	1,475,000			$	-
Fair value of federal funds sold acquired			1,154,000
Fair value of securities available-for-sale acquired			17,196,715				-
Fair value of loans receivable acquired			76,041,470				-
Fair value of bank premises and equipment acquired			924,400				-
Fair value of accrued interst receivable acquired			862,895
Fair value of other real estate owned acquired			120,000				-
Fair value of other tangible assets acquired			318,596				-
Fair value of bank owned life insurance			2,754,798
Goodwill			2,886,405				-
Core deposit intangible			2,002,000				-
Deposits assumed			83,169,311				-
Federal funds purchased assumed			9,000,000
Other liabilities assumed			123,749				-

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1.     Significant Accounting Policies

The consolidated financial statements for the three and nine months ended September 30, 2018 and 2017 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, 2017 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.

Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The second step, if necessary, measures the amount of impairment, if any.

Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. At September 30, 2018, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.

New and Pending Accounting Pronouncements: In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update includes requiring changes in fair value of equity securities with readily determinable fair value to be recognized in net income and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entities' other deferred tax assets. Among other items the ASC requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The Company adopted this guidance effective January 1, 2018 and is to be applied on a modified retrospective basis. The fair value of the Company's loan portfolio is presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial instruments measured at amortized cost on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, which amends ASC 842, Leases. This update provides for an adoption option that will not require earlier periods to be restated at the adoption date. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company is currently planning for the implementation of this accounting standard. It is too early to assess the impact that the guidance will have on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40) . The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification. The Company adopted this guidance effective January 1, 2018. The guidance does not apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. The requirements of this update did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The guidance in this update eliminates the Step 2 from the goodwill impairment test. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment test with a measurement date after January 1, 2017. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU would require a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. The amendments in this update will be effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted. The Company adopted this ASU in the first quarter of 2018. The Company made an election to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated comprehensive income to retained earnings. This update did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption will not have a material effect on the Company’s consolidated financial statements.

Reclassifications : Certain amounts in prior year financial statements have been reclassified, with no effect on net income, comprehensive income or stockholder’s equity, to conform with current period presentation.

2.      Bank Acquisition

On September 14, 2018, First National Bank (FNB) completed the purchase and merger of Clarke County State Bank (CCSB) located in Osceola and Murray, Iowa (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. The acquired assets and liabilities are recorded at fair value at the date of acquisition and were reflected in the September 30, 2018 financial statements as such. 100% of the stock of CCSB was purchased for cash consideration of $14.8 million. As a result of this acquisition, the Company recorded a core deposit intangible asset of $2.0 million and goodwill of $2.9 million. The results of operations for this acquisition have been included since the transaction date of September 14, 2018. The fair value of purchased credit deteriorated loans related to the Acquisition is $386,000. These purchased loans are included in the impaired loan category in the financial statements. Non-routine expenses associated with this transaction were approximately $340,000 for the nine months ended September 30, 2018.

The following table summarizes the fair value of the total consideration transferred as a part of the Acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.

On September 14, 2018, the contractual balance of loans receivable acquired was $77.2 million and the contractual balance of deposits assumed was $83.1 million. Loans receivable acquired include commercial real estate, 1-4 family real estate agricultural real estate, commercial operating, agricultural operating and consumer loans.

The acquired loans at contractual values as of September 14, 2018 were determined to be risk rated as follows:

Loans acquired as deteriorated credit loans will be included with impaired loans.

The core deposit intangible asset is amortized to expense on a declining basis over a period of ten years. The loan market valuation is accreted to income on the effective yield method over a ten year period. The time deposits market valuation is amortized to expense on a declining basis over a two year period.

3.

Dividends

On August 8, 2018, the Company declared a cash dividend on its common stock, payable on November 15, 2018 to stockholders of record as of November 1, 2018, equal to $0.23 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 and nine months ended September 30, 2018 and 2017 were 9,310,913. 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, 2017.

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 September 30, 2018 and December 31, 2017. (in thousands)

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

The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 30, 2018.

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of September 30, 2018 and December 31, 2017. (in thousands)

Loans Receivable : Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans. Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation allowance is a component of the allowance for loan losses. The Company considers these fair value measurements as level 3.

Other Real Estate Owned: Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The valuation allowance was $239,000 and $287,000 as of September 30, 2018 and December 31, 2017, respectively. The Company considers these fair value measurements as level 3.

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017 are as follows: (in thousands)

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

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis.  The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above.  The methodologies for other financial assets and financial liabilities are discussed below.

Fair value of financial instruments:

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

The following disclosures represent financial instruments in which the ending balances at September 30, 2018 and December 31, 2017 are not carried at fair value in their entirety on the consolidated balance sheets.

Securities available-for-sale : Fair value measurement for Level 1 securities is based upon quoted prices. Fair value measurement for Level 2 securities are based upon quoted prices, if available. If quoted prices are not available, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. Level 1 securities include U.S. Treasury and other equity securities that are traded by dealers or brokers in active over-the-counter markets.  U.S government mortgage-backed securities, state and political subdivisions, and some corporate bonds are reported at fair value utilizing Level 2 inputs.

Loans held for sale : The fair value of loans held for sale is based on prevailing market prices.

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

The estimated fair values of the Company’s financial instruments as described above as of September 30, 2018 and December 31, 2017 are as follows: (in thousands)

The methodologies used to determine fair value as of September 30, 2018 did not change from the methodologies described in the December 31, 2017 Annual Financial Statements, except for loans receivables which are now presented using an exit price method.

7.     Debt and Equity Securities

The amortized cost of securities available-for-sale and their fair values as of September 30, 2018 and December 31, 2017 are summarized below: (in thousands)

The proceeds, gains and losses from securities available-for-sale are summarized as follows: (in thousands)

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 September 30, 2018 and December 31, 2017 are as follows: (in thousands)

Gross unrealized losses on debt securities totaled $9,345,000 as of September 30, 2018. 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

Activity in the allowance for loan losses, on a disaggregated basis, for the three and nine months ended September 30, 2018 and 2017 is as follows: (in thousands)

Allowance for loan losses disaggregated on the basis of impairment analysis method as of September 30, 2018 and December 31, 2017 is as follows: (in thousands )

Loans receivable disaggregated on the basis of impairment analysis method as of September 30, 2018 and December 31, 2017 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 September 30, 2018 and December 31, 2017: (in thousands)

Average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2018 and 2017: (in thousands)

The interest foregone on nonaccrual loans for the three months ended September 30, 2018 and 2017 was approximately $86,000 and $88,000, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2018 and 2017 was approximately $289,000.

Nonaccrual loans at September 30, 2018 and December 31, 2017 were $3,639,000 and $4,810,000 respectively.

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $2,716,000 as of September 30, 2018, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $2,984,000 as of December 31, 2017, all of which were included in impaired and nonaccrual loans.

The following table sets forth information on the Company’s TDRs, on a disaggregated basis, occurring in the three and six months ended September 30, 2018 and 2017: ( dollars in thousands)

During the nine months ended September 30, 2018, the Company granted concessions to one borrower facing financial difficulties. During the nine months ended September 30, 2017, the Company granted concessions to two borrowers that were experiencing financial difficulties. The loans were extended beyond their normal terms and on one loan the interest was capitalized.

The Company considers TDR loans to have payment default when it is past due 60 days or more.

No TDR modified during the twelve months ended September 30, 2018 and 2017 had payment defaults. There were no charge-offs related to TDRs for the three and nine months ended September 30, 2018. An $80,000 specific reserve was established in the nine months ended September 30, 2018. A $530,000 specific reserve was established in the nine months ended September 30, 2017 on two TDR loans. There was $12,000 and $257,000 of net charge-offs related to TDRs for the nine months ended September 30, 2018 and 2017, respectively.

An aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, 2018 and December 31, 2017, is as follows: (in thousands)

The credit risk profile by internally assigned grade, on a disaggregated basis, as of September 30, 2018 and December 31, 2017 is as follows: (in thousands)

The credit risk profile based on payment activity, on a disaggregated basis, as of September 30, 2018 and December 31, 2017 is as follows: