ATLO 10-Q Quarterly Report June 30, 2020

AMES NATIONAL CORP

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

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

For the quarterly period ended June 30, 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)

Iowa		42-1039071
(State of Incorporation)		(I. R. S. Employer Identification Number)

405 Fifth Street

Ames , Iowa 50010

(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: ( 515 ) 232-6251

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	ATLO	NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 31, 2020, there were 9,122,747 shares of common stock, par value $2, outstanding.

Table of Contents

AMES NATIONAL CORPORATION

INDEX

		Page
Part I.	Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at June 30, 2020 and December 31, 2019	3

	Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019	4

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019	5

	Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	48

Part II.	Other Information

Item 1.	Legal Proceedings	48

Item 1.A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	49

	Signatures	50

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

	June 30,		December 31,
ASSETS	2020		2019

Cash and due from banks	$	32,528,234	$	34,616,880
Interest-bearing deposits in financial institutions and federal funds sold		145,990,834		108,947,624
Securities available-for-sale		513,615,814		479,843,448
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost		3,154,800		3,138,900
Loans receivable, net		1,146,046,388		1,048,147,496
Loans held for sale		2,033,360		2,776,785
Bank premises and equipment, net		17,628,860		17,810,605
Accrued income receivable		10,801,448		11,788,409
Other real estate owned		631,647		4,003,684
Bank-owned life insurance		2,878,838		2,842,713
Deferred income taxes, net		-		1,151,016
Intangible assets, net		3,524,814		3,959,260
Goodwill		12,424,434		12,114,559
Other assets		5,712,963		6,041,126

Total assets	$	1,896,972,434	$	1,737,182,505

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Noninterest-bearing checking	$	332,285,659	$	267,441,988
Interest-bearing checking		483,065,694		461,857,728
Savings and money market		553,546,573		481,642,221
Time, $250,000 and over		69,189,546		74,206,421
Other time		205,455,750		208,026,740
Total deposits		1,643,543,222		1,493,175,098

Securities sold under agreements to repurchase		36,892,657		42,033,570
FHLB advances		3,000,000		5,000,000
Dividends payable		-		2,213,459
Deferred income taxes, net		1,194,894		-
Accrued expenses and other liabilities		11,191,759		7,180,906
Total liabilities		1,695,822,532		1,549,603,033

STOCKHOLDERS' EQUITY
Common stock, $ 2 par value, authorized 18,000,000 shares; issued and outstanding 9,122,747 and 9,222,747 as of June 30, 2020 and December 31, 2019, respectively		18,245,494		18,445,494
Additional paid-in capital		17,001,736		18,794,141
Retained earnings		151,910,115		146,225,085
Accumulated other comprehensive income		13,992,557		4,114,752
Total stockholders' equity		201,149,902		187,579,472

Total liabilities and stockholders' equity	$	1,896,972,434	$	1,737,182,505

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019

Interest and dividend income:
Loans, including fees	$	12,569,869	$	10,808,142	$	25,156,883	$	21,509,571
Securities:
Taxable		1,917,332		1,554,713		3,738,572		3,043,565
Tax-exempt		954,525		1,067,955		1,864,422		2,168,529
Other interest and dividend income		195,703		290,465		713,015		528,033
Total interest income		15,637,429		13,721,275		31,472,892		27,249,698

Interest expense:
Deposits		1,898,046		2,606,384		4,548,412		4,965,216
Other borrowed funds		59,355		184,634		198,527		383,848
Total interest expense		1,957,401		2,791,018		4,746,939		5,349,064

Net interest income		13,680,028		10,930,257		26,725,953		21,900,634

Provision for loan losses		1,566,476		68,320		3,882,631		166,414

Net interest income after provision for loan losses		12,113,552		10,861,937		22,843,322		21,734,220

Noninterest income:
Wealth management income		909,728		1,019,143		1,771,461		1,803,757
Service fees		305,544		387,133		746,237		757,429
Securities gains, net		43,910		1,890		429,925		1,890
Gain on sale of loans held for sale		572,718		224,031		839,458		396,757
Merchant and card fees		410,414		386,384		836,254		747,525
Other noninterest income		185,910		194,358		436,081		431,289
Total noninterest income		2,428,224		2,212,939		5,059,416		4,138,647

Noninterest expense:
Salaries and employee benefits		5,812,449		4,797,497		11,587,645		9,513,325
Data processing		1,336,401		872,064		2,527,453		1,763,445
Occupancy expenses, net		656,752		518,559		1,347,938		1,117,564
FDIC insurance assessments		49,857		91,666		49,857		191,895
Professional fees		397,755		382,983		741,479		771,829
Business development		181,546		248,178		445,689		516,775
Intangible asset amortization		217,223		139,314		434,446		302,978
New market tax credit projects amortization		145,390		-		290,771		-
Other operating expenses, net		302,138		167,717		724,282		496,923
Total noninterest expense		9,099,511		7,217,978		18,149,560		14,674,734

Income before income taxes		5,442,265		5,856,898		9,753,178		11,198,133

Provision for income taxes		1,014,600		1,239,305		1,771,000		2,343,105

Net income	$	4,427,665	$	4,617,593	$	7,982,178	$	8,855,028

Basic and diluted earnings per share	$	0.49	$	0.50	$	0.87	$	0.96

Dividends declared per share	$	-	$	0.24	$	0.25	$	0.48

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019


Net income	$	4,427,665		$	4,617,593		$	7,982,178		$	8,855,028
Unrealized gains on securities before tax:
Unrealized holding gains arising during the period		12,729,731			4,469,777			13,600,333			10,041,561
Less: reclassification adjustment for gains realized in net income		43,910			1,890			429,925			1,890
Other comprehensive income, before tax		12,685,821			4,467,887			13,170,408			10,039,671
Tax effect related to other comprehensive income		( 3,171,456	)		( 1,116,972	)		( 3,292,603	)		( 2,509,918	)
Other comprehensive income, net of tax		9,514,365			3,350,915			9,877,805			7,529,753
Comprehensive income	$	13,942,030		$	7,968,508		$	17,859,983		$	16,384,781

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

Three and Six Months Ended June 30, 2020 and 2019

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

Balance, March 31, 2019		9,242,822		$	18,485,644		$	19,276,388		$	139,910,979		$	103,747	$	177,776,758
Net income		-			-			-			4,617,593			-		4,617,593
Other comprehensive income		-			-			-			-			3,350,915		3,350,915
Retirement of stock		( 10,700	)		( 21,400	)		( 256,621	)		-			-		( 278,021	)
Cash dividends declared, $0.24 per share		-			-			-			( 2,215,709	)		-		( 2,215,709	)
Balance, June 30, 2019		9,232,122		$	18,464,244		$	19,019,767		$	142,312,863		$	3,454,662	$	183,251,536


Balance, March 31, 2020		9,188,594		$	18,377,188		$	18,155,547		$	147,482,450		$	4,478,192	$	188,493,377
Net income		-			-			-			4,427,665			-		4,427,665
Other comprehensive income		-			-			-			-			9,514,365		9,514,365
Retirement of stock		( 65,847	)		( 131,694	)		( 1,153,811	)		-			-		( 1,285,505	)
Balance, June 30, 2020		9,122,747		$	18,245,494		$	17,001,736		$	151,910,115		$	13,992,557	$	201,149,902

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

Balance, December 31, 2018		9,293,305		$	18,586,610		$	20,461,724		$	137,891,821		$	( 4,075,091	)	$	172,865,064
Net income		-			-			-			8,855,028			-			8,855,028
Other comprehensive income		-			-			-			-			7,529,753			7,529,753
Retirement of stock		( 61,183	)		( 122,366	)		( 1,441,957	)		-			-			( 1,564,323	)
Cash dividends declared, $0.48 per share		-			-			-			( 4,433,986	)		-			( 4,433,986	)
Balance, June 30, 2019		9,232,122		$	18,464,244		$	19,019,767		$	142,312,863		$	3,454,662		$	183,251,536


Balance, December 31, 2019		9,222,747		$	18,445,494		$	18,794,141		$	146,225,085		$	4,114,752		$	187,579,472
Net income		-			-			-			7,982,178			-			7,982,178
Other comprehensive income		-			-			-			-			9,877,805			9,877,805
Retirement of stock		( 100,000	)		( 200,000	)		( 1,792,405	)								( 1,992,405	)
Cash dividends declared, $0.25 per share		-			-			-			( 2,297,148	)		-			( 2,297,148	)
Balance, June 30, 2020		9,122,747		$	18,245,494		$	17,001,736		$	151,910,115		$	13,992,557		$	201,149,902

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Six Months Ended June 30, 2020 and 2019

	2020			2019

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	7,982,178		$	8,855,028
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,882,631			166,414
Provision for off-balance sheet commitments		41,000			-
Amortization of securities, available-for-sale, loans and deposits, net		252,269			739,633
Amortization of intangible asset		434,446			302,978
Depreciation		711,942			576,757
Deferred income taxes		( 946,692	)		125,049
Securities (gains), net		( 429,925	)		( 1,890	)
(Gain) on sales of loans held for sale		( 839,458	)		( 396,757	)
Proceeds from loans held for sale		41,226,181			17,485,451
Originations of loans held for sale		( 39,643,298	)		( 17,454,352	)
Loss on sale of premises and equipment, net		-			500
Amortization of investment in new market tax credit projects		290,771			-
(Gain) on sale of other real estate owned, net		( 21,958	)		( 43,414	)
Change in assets and liabilities:
Decrease in accrued income receivable		986,961			417,561
(Increase) decrease in other assets		28,462			( 523,361	)
Increase in accrued expenses and other liabilities		3,969,853			651,186
Net cash provided by operating activities		17,925,363			10,900,783

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		( 102,224,803	)		( 35,113,621	)
Proceeds from sale of securities available-for-sale		5,462,657			5,973,154
Proceeds from maturities and calls of securities available-for-sale		75,571,989			38,381,532
Purchase of FHLB stock		( 116,500	)		( 3,912,500	)
Proceeds from the redemption of FHLB stock		100,600			4,448,000
Net (increase) in interest bearing deposits in financial institutions and federal funds sold		( 37,043,210	)		( 41,377,929	)
Net (increase) decrease in loans		( 101,265,019	)		16,896,403
Net proceeds from the sale of other real estate owned		3,404,733			655,161
Purchase of bank premises and equipment		( 528,647	)		( 492,149	)
Cash paid for bank acquired		( 309,875	)		-
Other		( 36,125	)		( 28,300	)
Net cash (used in) investing activities		( 156,984,200	)		( 14,570,249	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		150,614,117			23,402,168
Decrease in securities sold under agreements to repurchase		( 5,140,913	)		( 8,981,386	)
Payments on FHLB borrowings		( 2,000,000	)		( 12,600,000	)
Dividends paid		( 4,510,608	)		( 4,355,737	)
Stock repurchases		( 1,992,405	)		( 1,564,323	)
Net cash provided by (used in) financing activities		136,970,191			( 4,099,278	)

Net (decrease) in cash and due from banks		( 2,088,646	)		( 7,768,744	)

CASH AND DUE FROM BANKS
Beginning		34,616,880			30,384,066
Ending	$	32,528,234		$	22,615,322

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Six Months Ended June 30, 2020 and 2019

	2020		2019

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	5,259,558	$	5,148,519
Income taxes		675,614		2,248,474

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer of loans receivable to other real estate owned	$	10,738	$	-

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements ( u naudited)

1.	Significant Accounting Policies

The consolidated financial statements for the three and six months ended June 30, 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 adjustments, 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 June 30, 2020, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.

Reclassifications: Certain reclassifications have been made to the prior consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on stockholders’ equity and net income of the prior periods.

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.

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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 transaction ( in thousands ):

Cash consideration transferred	$	22,643

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and due from banks	$	3,188
Federal funds sold		2,792
Interest bearing deposits in financial institutions		21,035
Securities available-for-sale		33,615
Federal Home Loan Bank stock at cost		365
Loans receivable		137,776
Accrued interest receivable		2,888
Bank premises and equipment		2,452
Other real estate owned		3,582
Bank owned life insurance		2,499
Core deposit intangible asset		1,891
Other assets		204
Deposits		( 188,631	)
Securities sold under repurchase agreements		( 1,747	)
Accrued interest payable and other liabilities		( 1,946	)

Total identifiable net assets		19,963

Goodwill	$	2,680

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	$	121,346
Watch		12,333
Special Mention		-
Substandard		6,024

Total loans acquired at book value	$	139,703

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.

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Dividends

On July 8, 2020, the Company declared a cash dividend on its common stock, payable on August 14, 2020 to stockholders of record as of July 31, 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 June 30, 2020 and 2019 was 9,128,848 and 9,239,969 , respectively. The weighted average outstanding shares for the six months ended June 30, 2020 and 2019 were 9,174,021 and 9,250,392 , 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.

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 June 30, 2020 and December 31, 2019 (in thousands) :

Description	Total		Level 1		Level 2		Level 3

2020

U.S. government treasuries	$	9,280	$	9,280	$	-	$	-
U.S. government agencies		104,288		-		104,288		-
U.S. government mortgage-backed securities		107,150		-		107,150		-
State and political subdivisions		216,797		-		216,797		-
Corporate bonds		76,101		-		76,101		-

	$	513,616	$	9,280	$	504,336	$	-

2019

U.S. government treasuries	$	9,452	$	9,452	$	-	$	-
U.S. government agencies		126,433		-		126,433		-
U.S. government mortgage-backed securities		81,128		-		81,128		-
State and political subdivisions		195,302		-		195,302		-
Corporate bonds		67,528		-		67,528		-

	$	479,843	$	9,452	$	470,391	$	-

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.

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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 June 30, 2020 and December 31, 2019 (in thousands) :

Description	Total		Level 1		Level 2		Level 3

2020

Loans receivable	$	2,017	$	-	$	-	$	2,017
Other real estate owned		632		-		-		632

Total	$	2,649	$	-	$	-	$	2,649

2019

Loans receivable	$	535	$	-	$	-	$	535
Other real estate owned		4,004		-		-		4,004

Total	$	4,539	$	-	$	-	$	4,539

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019 are as follows (in thousands) :

2020

Estimated

Valuation

Range

Fair Value

Techniques

Unobservable Inputs

(Average)

Impaired Loans

2,017

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

632

Appraisal

Appraisal adjustment

6 %

8 %

( 7 %)

2019

Estimated

Valuation

Range

Fair Value

Techniques

Unobservable Inputs

(Average)

Impaired Loans

535

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

4,004

Appraisal

Appraisal adjustment

6 %

8 %

( 7 %)

* 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.

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The following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of June 30, 2020 and December 31, 2019 (in thousands) :

		2020				2019
	Fair Value			Estimated				Estimated
	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value

Financial assets:
Cash and due from banks	Level 1	$	32,528	$	32,528	$	34,617	$	34,617
Interest-bearing deposits	Level 1		145,991		145,991		108,948		108,948
Securities available-for-sale	See previous table		513,616		513,616		479,843		479,843
FHLB and FRB stock	Level 2		3,155		3,155		3,139		3,139
Loans receivable, net	Level 2		1,146,046		1,106,246		1,048,147		1,025,032
Loans held for sale	Level 2		2,033		2,033		2,777		2,777
Accrued income receivable	Level 1		10,801		10,801		11,788		11,788
Financial liabilities:
Deposits	Level 2	$	1,643,543	$	1,646,977	$	1,493,175	$	1,495,155
Securities sold under agreements to repurchase	Level 1		36,893		36,893		42,034		42,034
FHLB advances	Level 2		3,000		3,110		5,000		4,935
Accrued interest payable	Level 1		966		966		1,163		1,163

The methodologies used to determine fair value as of June 30, 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.

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7.	Debt Securities

The amortized cost of securities available-for-sale and their approximate fair values as of June 30, 2020 and December 31, 2019 are summarized below (in thousands) :

2020:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	8,893	$	387	$	-		$	9,280
U.S. government agencies		99,091		5,203		( 6	)		104,288
U.S. government mortgage-backed securities		104,063		3,114		( 27	)		107,150
State and political subdivisions		211,593		5,322		( 118	)		216,797
Corporate bonds		71,319		4,793		( 11	)		76,101
	$	494,959	$	18,819	$	( 162	)	$	513,616

2019:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	9,392	$	64	$	( 4	)	$	9,452
U.S. government agencies		124,913		1,609		( 89	)		126,433
U.S. government mortgage-backed securities		80,295		867		( 34	)		81,128
State and political subdivisions		193,745		1,852		( 295	)		195,302
Corporate bonds		66,012		1,542		( 26	)		67,528
	$	474,357	$	5,934	$	( 448	)	$	479,843

The amortized cost and fair value of debt securities available-for-sale as of June 30, 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 ).

	Amortized		Estimated
	Cost		Fair Value

Due in one year or less	$	48,856	$	49,216
Due after one year through five years		234,542		243,595
Due after five years through ten years		181,220		189,531
Due after ten years		30,341		31,274
Total	$	494,959	$	513,616

Securities with a carrying value of $ 197.1 million and $ 180.0 million at June 30, 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.

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The proceeds, gains and losses for securities available-for-sale for the three and six months ended June 30, 2020 and 2019 are summarized below ( in thousands ):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2020		2019			2020		2019
Proceeds from sales of securities available-for-sale	$	2,078	$	5,973		$	5,463	$	5,973
Gross realized gains on securities available-for-sale		44		21			430		21
Gross realized losses on securities available-for-sale		-		( 19	)		-		( 19	)
Tax provision applicable to net realized gains on securities available-for-sale		11		-			108		-

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 June 30, 2020 and December 31, 2019 are as follows (in thousands) :

	Less than 12 Months					12 Months or More					Total
2020:	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries	$	-	$	-		$	-	$	-		$	-	$	-
U.S. government agencies		938		( 6	)		-		-			938		( 6	)
U.S. government mortgage-backed securities		11,784		( 25	)		1,712		( 2	)		13,496		( 27	)
State and political subdivisions		6,697		( 114	)		180		( 4	)		6,877		( 118	)
Corporate bonds		493		( 11	)		-		-			493		( 11	)
	$	19,912	$	( 156	)	$	1,892	$	( 6	)	$	21,804	$	( 162	)

	Less than 12 Months					12 Months or More					Total
2019:	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries	$	3,023	$	( 4	)	$	-	$	-		$	3,023	$	( 4	)
U.S. government agencies		23,827		( 85	)		2,520		( 4	)		26,347		( 89	)
U.S. government mortgage-backed securities		14,885		( 28	)		1,934		( 6	)		16,819		( 34	)
State and political subdivisions		17,512		( 125	)		5,954		( 170	)		23,466		( 295	)
Corporate bonds		4,129		( 26	)		-		-			4,129		( 26	)
	$	63,376	$	( 268	)	$	10,408	$	( 180	)	$	73,784	$	( 448	)

Gross unrealized losses on debt securities totaled $ 162,000 as of June 30, 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.

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8.	Loans Receivable and Credit Disclosures

The composition of loans receivable as of June 30, 2020 and December 31, 2019 is as follows ( in thousands ):

	2020			2019

Real estate - construction	$	51,045		$	47,895
Real estate - 1 to 4 family residential		205,254			201,510
Real estate - commercial		463,077			435,850
Real estate - agricultural		160,286			160,771
Commercial ¹		158,217			84,084
Agricultural		109,066			111,945
Consumer and other		17,704			18,791
		1,164,649			1,060,846
Less:
Allowance for loan losses		( 16,005	)		( 12,619	)
Deferred loan fees ²		( 2,598	)		( 80	)
Loans receivable, net	$	1,146,046		$	1,048,147

¹ Commercial loan portfolio as of June 30, 2020 includes $ 78.3 million Payroll Protection Program ("PPP") loans

² Deferred loan fees as of June 30, 2020 includes $ 2.5 million of fees related to the PPP loans.

Activity in the allowance for loan losses, on a disaggregated basis, for the three and six months ended June 30, 2020 and 2019 is as follows (in thousands) :

	Three Months Ended June 30, 2020
			1-4 Family
	Construction		Residential			Commercial			Agricultural							Consumer
	Real Estate		Real Estate			Real Estate			Real Estate		Commercial			Agricultural		and Other			Total
Balance, March 31, 2020	$	753	$	2,336		$	6,552		$	1,563	$	1,672		$	1,815	$	218		$	14,909
Provision (credit) for loan losses		96		183			724			150		366			15		32			1,566
Recoveries of loans charged-off		-		3			1			-		2			-		2			8
Loans charged-off		-		( 17	)		( 413	)		-		( 46	)		-		( 2	)		( 478	)
Balance, June 30, 2020	$	849	$	2,505		$	6,864		$	1,713	$	1,994		$	1,830	$	250		$	16,005

	Six Months Ended June 30, 2020
			1-4 Family
	Construction		Residential			Commercial			Agricultural							Consumer
	Real Estate		Real Estate			Real Estate			Real Estate		Commercial			Agricultural		and Other			Total
Balance, December 31, 2019	$	672	$	2,122		$	5,362		$	1,326	$	1,458		$	1,478	$	201		$	12,619
Provision (credit) for loan losses		176		397			1,944			387		578			352		49			3,883
Recoveries of loans charged-off		1		3			2			-		4			-		4			14
Loans charged-off		-		( 17	)		( 444	)		-		( 46	)		-		( 4	)		( 511	)
Balance, June 30, 2020	$	849	$	2,505		$	6,864		$	1,713	$	1,994		$	1,830	$	250		$	16,005

	Three Months Ended June 30, 2019
				1-4 Family
	Construction			Residential			Commercial		Agricultural								Consumer
	Real Estate			Real Estate			Real Estate		Real Estate		Commercial			Agricultural			and Other			Total
Balance, March 31, 2019	$	736		$	1,850		$	4,770	$	1,258	$	1,610		$	1,392		$	196		$	11,812
Provision (credit) for loan losses		( 15	)		( 1	)		136		43		( 21	)		( 61	)		( 13	)		68
Recoveries of loans charged-off		-			1			-		-		1			1			4			7
Loans charged-off		-			( 3	)		-		-		-			-			( 15	)		( 18	)
Balance, June 30, 2019	$	721		$	1,847		$	4,906	$	1,301	$	1,590		$	1,332		$	172		$	11,869

	Six Months Ended June 30, 2019
			1-4 Family
	Construction		Residential			Commercial		Agricultural								Consumer
	Real Estate		Real Estate			Real Estate		Real Estate		Commercial			Agricultural			and Other			Total
Balance, December 31, 2018	$	699	$	1,820		$	4,615	$	1,198	$	1,777		$	1,384		$	191		$	11,684
Provision (credit) for loan losses		11		27			291		103		( 211	)		( 53	)		( 2	)		166
Recoveries of loans charged-off		11		3			-		-		29			1			4			48
Loans charged-off		-		( 3	)		-		-		( 5	)		-			( 21	)		( 29	)
Balance, June 30, 2019	$	721	$	1,847		$	4,906	$	1,301	$	1,590		$	1,332		$	172		$	11,869

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Allowance for loan losses disaggregated on the basis of impairment analysis method as of June 30, 2020 and December 31, 2019 is as follows (in thousands ) :

2020			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	150	$	-	$	-	$	558	$	40	$	6	$	754
Collectively evaluated for impairment		849		2,355		6,864		1,713		1,436		1,790		244		15,251
Balance June 30, 2020	$	849	$	2,505	$	6,864	$	1,713	$	1,994	$	1,830	$	250	$	16,005

2019			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	209	$	-	$	-	$	-	$	-	$	-	$	209
Collectively evaluated for impairment		672		1,913		5,362		1,326		1,458		1,478		201		12,410
Balance December 31, 2019	$	672	$	2,122	$	5,362	$	1,326	$	1,458	$	1,478	$	201	$	12,619

Loans receivable disaggregated on the basis of impairment analysis method as of June 30, 2020 and December 31, 2019 is as follows (in thousands) :

2020			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	1,192	$	11,136	$	2,063	$	1,775	$	1,711	$	24	$	17,901
Collectively evaluated for impairment		51,045		204,062		451,941		158,223		156,442		107,355		17,680		1,146,748

Balance June 30, 2020	$	51,045	$	205,254	$	463,077	$	160,286	$	158,217	$	109,066	$	17,704	$	1,164,649

2019			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	1,204	$	83	$	84	$	462	$	2,951	$	4	$	4,788
Collectively evaluated for impairment		47,895		200,306		435,767		160,687		83,622		108,994		18,787		1,056,058

Balance December 31, 2019	$	47,895	$	201,510	$	435,850	$	160,771	$	84,084	$	111,945	$	18,791	$	1,060,846

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

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Impaired loans, on a disaggregated basis, as of June 30, 2020 and December 31, 2019 (in thousands) :

	2020						2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-	$	-	$	-
Real estate - 1 to 4 family residential		224		269		-		460		796		-
Real estate - commercial		11,136		11,907		-		83		435		-
Real estate - agricultural		2,063		2,079		-		84		97		-
Commercial		523		568		-		462		517		-
Agricultural		1,178		1,335		-		2,951		3,071		-
Consumer and other		6		6		-		4		4		-
Total loans with no specific reserve:		15,130		16,164		-		4,044		4,920		-

With an allowance recorded:
Real estate - construction		-		-		-		-		-		-
Real estate - 1 to 4 family residential		968		1,293		150		744		755		209
Real estate - commercial		-		-		-		-		-		-
Real estate - agricultural		-		-		-		-		-		-
Commercial		1,252		1,252		558		-		-		-
Agricultural		533		535		40		-		-		-
Consumer and other		18		18		6		-		-		-
Total loans with specific reserve:		2,771		3,098		754		744		755		209

Total
Real estate - construction		-		-		-		-		-		-
Real estate - 1 to 4 family residential		1,192		1,562		150		1,204		1,551		209
Real estate - commercial		11,136		11,907		-		83		435		-
Real estate - agricultural		2,063		2,079		-		84		97		-
Commercial		1,775		1,820		558		462		517		-
Agricultural		1,711		1,870		40		2,951		3,071		-
Consumer and other		24		24		6		4		4		-

	$	17,901	$	19,262	$	754	$	4,788	$	5,675	$	209

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Average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2020 and 2019 (in thousands) :

	Three Months Ended June 30,
	*2020*				*2019*
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-
Real estate - 1 to 4 family residential		164		-		209		6
Real estate - commercial		10,877		-		135		29
Real estate - agricultural		1,429		-		78		-
Commercial		468		2		235		-
Agricultural		2,092		-		943		-
Consumer and other		45		-		-		-
Total loans with no specific reserve:		15,075		2		1,600		35

With an allowance recorded:
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		1,031		-		89		-
Real estate - commercial		488		-		-		-
Real estate - agricultural		-		-		-		-
Commercial		710		-		2,535		-
Agricultural		495		-		-		-
Consumer and other		9		-		7		-
Total loans with specific reserve:		2,733		-		2,631		-

Total
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		1,195		-		298		6
Real estate - commercial		11,365		-		135		29
Real estate - agricultural		1,429		-		78		-
Commercial		1,178		2		2,770		-
Agricultural		2,587		-		943		-
Consumer and other		54		-		7		-

	$	17,808	$	2	$	4,231	$	35

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	Six Months Ended June 30,
	2020				2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-
Real estate - 1 to 4 family residential		263		-		223		26
Real estate - commercial		7,279		-		133		60
Real estate - agricultural		980		6		76		-
Commercial		466		2		239		-
Agricultural		2,378		-		629		-
Consumer and other		31		-		-		-
Total loans with no specific reserve:		11,397		8		1,300		86

With an allowance recorded:
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		935		-		97		-
Real estate - commercial		325		-		-		-
Real estate - agricultural		-		-		-		-
Commercial		473		-		2,490		-
Agricultural		330		-		-		-
Consumer and other		6		-		10		1
Total loans with specific reserve:		2,069		-		2,597		1

Total
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		1,198		-		320		26
Real estate - commercial		7,604		-		133		60
Real estate - agricultural		980		6		76		-
Commercial		939		2		2,729		-
Agricultural		2,708		-		629		-
Consumer and other		37		-		10		1

	$	13,466	$	8	$	3,897	$	87

The interest foregone on nonaccrual loans for the three months ended June 30, 2020 and 2019 was approximately $ 312,000 and $ 59,000 , respectively. The interest foregone on nonaccrual loans for the six months ended June 30, 2020 and 2019 was approximately $ 501,000 and $ 117,000 , respectively.

Nonaccrual loans at June 30, 2020 and December 31, 2019 were $ 17,901,000 and $ 4,788,000 respectively.

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $ 1,276,000 as of June 30, 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.

During the three months ended June 30, 2020 and 2019, the Company did not grant any concessions to borrowers that are facing financial difficulties. During the six months ended June 30, 2020, the Company granted concessions to two borrowers 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 six months ended June 30, 2019, the Company did not grant concessions to any borrowers facing financial difficulty. COVID- 19 related loan modifications are not reported as TDR’s.

There were no TDR loans that were modified during the six months ended June 30, 2020 and twelve months ended June 30, 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 June 30, 2020 and $ 31,000 of net charge-offs related to TDRs for the six months ended June 30, 2020. There were no charge-offs related to TDRs for the three and six months ended June 30, 2019.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the FDIC, (the "agencies") issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID- 19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310 - 40, “Receivables – Troubled Debt Restructurings by Creditors,” a restructuring of debt constitutes a TDR if the creditor grants a concession and the debtor is experiencing financial difficulties. The agencies confirmed 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 to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The Company is applying this guidance to qualifying loan modifications. There were $ 122,778,000 of loans modified under these rules during the six months ended June 30, 2020. These loans did not have financial difficulty prior to the COVID- 19 pandemic and were generally modified for principal and interest payment deferral or interest only payments for up to six months.

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An aging analysis of the recorded investments in loans, on a disaggregated basis, as of June 30, 2020 and December 31, 2019, is as follows (in thousands) :

2020			90 Days								90 Days
	30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	429	$	-	$	429	$	50,616	$	51,045	$	-
Real estate - 1 to 4 family residential		749		233		982		204,272		205,254		109
Real estate - commercial		4,940		10,325		15,265		447,812		463,077		-
Real estate - agricultural		586		2,004		2,590		157,696		160,286		-
Commercial		268		1,572		1,840		156,377		158,217		-
Agricultural		149		1,747		1,896		107,170		109,066		532
Consumer and other		30		20		50		17,654		17,704		-

	$	7,151	$	15,901	$	23,052	$	1,141,597	$	1,164,649	$	641

2019			90 Days								90 Days
	30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	1,796	$	-	$	1,796	$	46,099	$	47,895	$	-
Real estate - 1 to 4 family residential		811		290		1,101		200,409		201,510		188
Real estate - commercial		387		-		387		435,463		435,850		-
Real estate - agricultural		422		-		422		160,349		160,771		-
Commercial		518		237		755		83,329		84,084		-
Agricultural		666		2,587		3,253		108,692		111,945		62
Consumer and other		146		6		152		18,639		18,791		5

	$	4,746	$	3,120	$	7,866	$	1,052,980	$	1,060,846	$	255

The increase in the 90 days or greater loans from December 31, 2019 is primarily due to one hospitality loan as of June 30, 2020.

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The credit risk profile by internally assigned grade, on a disaggregated basis, as of June 30, 2020 and December 31, 2019 is as follows (in thousands) :

2020	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	38,995	$	352,549	$	115,509	$	135,955	$	79,597	$	722,605
Watch		12,050		90,122		33,718		16,302		24,570		176,762
Special Mention		-		5,015		-		1,057		-		6,072
Substandard		-		4,255		8,996		3,128		3,188		19,567
Substandard-Impaired		-		11,136		2,063		1,775		1,711		16,685

	$	51,045	$	463,077	$	160,286	$	158,217	$	109,066	$	941,691

2019	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	41,073	$	387,274	$	118,692	$	62,655	$	90,083	$	699,777
Watch		6,822		29,209		32,780		16,147		15,248		100,206
Special Mention		-		4,581		-		-		-		4,581
Substandard		-		14,703		9,215		4,820		3,663		32,401
Substandard-Impaired		-		83		84		462		2,951		3,580

	$	47,895	$	435,850	$	160,771	$	84,084	$	111,945	$	840,545

The credit risk profile based on payment activity, on a disaggregated basis, as of June 30, 2020 and December 31, 2019 is as follows (in thousands ) :

2020	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	203,953	$	17,684	$	221,637
Non-performing		1,301		20		1,321

	$	205,254	$	17,704	$	222,958

2019	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	200,117	$	18,782	$	218,899
Non-performing		1,393		9		1,402

	$	201,510	$	18,791	$	220,301

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Goodwill

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 June 30, 2020 and December 31, 2019 (in thousands) :

	2020				2019
	Gross		Accumulated		Gross		Accumulated
	Amount		Amortization		Amount		Amortization

Core deposit intangible asset	$	6,411	$	3,140	$	6,411	$	2,745
Customer list		535		281		535		242

Total	$	6,946	$	3,421	$	6,946	$	2,987

The weighted average life of the intangible assets is 4.0 years as of June 30, 2020 and 4.2 years as of December 31, 2019.

The following sets forth the activity related to the intangible assets for the three and six months ended June 30, 2020 and 2019 (in thousands) :

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019

Beginning intangible assets, net	$	3,742		$	2,514		$	3,959		$	2,678
Amortization		( 217	)		( 139	)		( 434	)		( 303	)

Ending intangible assets, net	$	3,525		$	2,375		$	3,525		$	2,375

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

2020	$	392
2021		628
2022		574
2023		502
2024		337
2025		301
After		791

Total	$	3,525

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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 June 30, 2020 and December 31, 2019 (in thousands) :

	2020		2019
Securities sold under agreements to repurchase:
U.S. government treasuries	$	2,486	$	3,528
U.S. government agencies		39,793		35,557
U.S. government mortgage-backed securities		14,495		19,614

Total pledged collateral	$	56,774	$	58,699

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 deferred income taxes since December 31, 2019 is due primarily to the increase in the net unrealized gains on investment securities.

13.

Regulatory Matters

On June 30, 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 8%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. 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 June 30, 2020 and December 31, 2019 are as follows ( dollars in thousands ):

						To Be Well
						Capitalized Under
						Prompt Corrective
	Actual					Action Provisions
	Amount		Ratio			Amount		Ratio

As of June 30, 2020:
Community Bank Leverage Ratio:
(Tier 1 capital to average assets for leverage ratio):
Boone Bank & Trust	$	13,508		9.3	%	$	11,658		8.0	%
First National Bank		84,372		8.7			78,018		8.0
Iowa State Savings Bank		20,913		9.4			17,873		8.0
Reliance State Bank		22,330		9.8			18,283		8.0
State Bank & Trust		15,881		8.8			14,403		8.0
United Bank & Trust		10,204		9.6			8,537		8.0

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

As of December 31, 2019:
Total capital (to risk- weighted assets):
Consolidated	$	180,834		14.3	%	$	132,878		10.50	%		N/A		N/A
Boone Bank & Trust		14,205		14.1			10,610		10.50		$	10,105		10.0	%
First National Bank		87,375		13.9			66,180		10.50			63,028		10.0
Iowa State Savings Bank		20,610		14.2			15,208		10.50			14,483		10.0
Reliance State Bank		24,487		13.0			19,778		10.50			18,836		10.0
State Bank & Trust		16,800		13.5			13,115		10.50			12,490		10.0
United Bank & Trust		10,775		14.3			7,910		10.50			7,534		10.0

Tier 1 capital (to risk- weighted assets):
Consolidated	$	167,514		13.2	%	$	107,568		8.50	%		N/A		N/A
Boone Bank & Trust		13,274		13.1			8,589		8.50		$	8,084		8.0	%
First National Bank		80,665		12.8			53,574		8.50			50,423		8.0
Iowa State Savings Bank		20,151		13.9			12,311		8.50			11,587		8.0
Reliance State Bank		22,166		11.8			16,010		8.50			15,069		8.0
State Bank & Trust		15,233		12.2			10,617		8.50			9,992		8.0
United Bank & Trust		9,955		13.2			6,403		8.50			6,027		8.0

Tier 1 capital (to average- assets):
Consolidated	$	167,544		10.1	%	$	66,234		4.00	%		N/A		N/A
Boone Bank & Trust		13,274		9.5			5,604		4.00		$	7,005		5.0	%
First National Bank		80,665		9.3			34,702		4.00			43,378		5.0
Iowa State Savings Bank		20,151		9.5			8,453		4.00			10,567		5.0
Reliance State Bank		22,166		10.0			8,886		4.00			11,108		5.0
State Bank & Trust		15,233		9.5			6,384		4.00			7,980		5.0
United Bank & Trust		9,955		9.8			4,073		4.00			5,091		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	167,544		13.2	%	$	88,585		7.00	%		N/A		N/A
Boone Bank & Trust		13,274		13.1			7,074		7.00		$	6,568		6.5	%
First National Bank		80,665		12.8			44,120		7.00			40,968		6.5
Iowa State Savings Bank		20,151		13.9			10,138		7.00			9,414		6.5
Reliance State Bank		22,166		11.8			13,185		7.00			12,243		6.5
State Bank & Trust		15,233		12.2			8,743		7.00			8,119		6.5
United Bank & Trust		9,955		13.2			5,273		7.00			4,897		6.5

14.

Subsequent Events

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after June 30, 2020, but prior to August 6, 2020, that provided additional evidence about conditions that existed at June 30, 2020. Except for dividends declared on July 8, 2020, there were no other significant events or transactions that provided evidence about conditions that did not exist at June 30, 2020.

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

Overview

Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates six bank subsidiaries in central 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 Company announced the closing of two branches of Iowa State Bank located in Diagonal and Corning, Iowa and the closing of one branch of First National located in Murray, Iowa as a result of limited customer activity. We expect to serve these customers at other branches.

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 $4,428,000, or $0.49 per share, for the three months ended June 30, 2020, compared to net income of $4,618,000, or $0.50 per share, for the three months ended June 30, 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 the increase in net charge-offs. 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. As of June 30, 2020 approximately 8.3% of our loan portfolio is associated with these industries. There have been requests for loan payment modifications across all loan portfolios. These modifications were primarily related to payment deferrals or interest only payments for up to six months. The total loans modified was approximately $122,778,000 as of June 30, 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 been easing restrictions on non-essential businesses. 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.

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Net loan charge-offs totaled $470,000 and $11,000 for the three months ended June 30, 2020 and 2019, respectively. The provision for loan losses totaled $1,566,000 and $68,000 for the three months ended June 30, 2020 and 2019, respectively.

The Company had net income of $7,982,000, or $0.87 per share, for the six months ended June 30, 2020, compared to net income of $8,855,000, or $0.96 per share, for the six months ended June 30, 2019.

The decrease in earnings is primarily the result of 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 and the increase in net charge-offs.

Net loan charge-offs (recoveries) totaled $497,000 and ($19,000) for the six months ended June 30, 2020 and 2019, respectively. The provision for loan losses totaled $3,883,000 and $166,000 for the six months ended June 30, 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 has eased many of the restrictions related to the COVID-19 pandemic. As an organization that focuses on community banking, we are concerned about the health of our customers, employees and local communities and keep that thought at the forefront of our decisions. The Company, as a financial institution, is considered an essential business and therefore continues to operate. The Company’s bank lobbies are generally open to the public, with business also being transacted through our drive up facilities, online, telephone or by appointment. Some of the mitigations in place at our offices related to COVID-19 include face coverings, social distancing, frequent hand washing, and protective shields. Although the Company anticipates moving toward normalized operations, changes in restrictions by governmental authorities may change these plans.

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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 may 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 8.3% of the loan portfolio as of June 30, 2020. As detailed herein, the Company recognized a significant increase in provision expense during the six months ended June 30, 2020. The increase was due in part to the economic slowdown, and management anticipates additional increases in the allowance if the effects of COVID-19 restrictions continue to negatively impact the loan portfolio.

●

Local and the State of Iowa’s elevated unemployment may continue to cause economic challenges to our consumer and commercial customers due to the economic effects of COVID-19 restrictions. Higher levels of 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 timing of the recovery is uncertain.

●

Goodwill is currently evaluated for impairment quarterly and goodwill has been determined to not be impaired as of June 30, 2020. In the future goodwill may be impaired if the effects of 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.

●

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.

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K ey 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 5,116 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			6 Months									Years Ended December 31,
	Ended			Ended			3 Months Ended
	June 30, 2020						March 31, 2020						2019						2018
	Company						Company			Industry*			Company			Industry*			Company			Industry*

Return on assets		0.94	%		0.88	%		0.81	%		0.38	%		1.14	%		1.29	%		1.23	%		1.35	%

Return on equity		9.09	%		8.27	%		7.44	%		3.50	%		9.48	%		11.40	%		10.09	%		11.98	%

Net interest margin		3.10	%		3.14	%		3.18	%		3.13	%		3.21	%		3.36	%		3.23	%		3.40	%

Efficiency ratio		56.49	%		57.10	%		57.73	%		58.50	%		58.51	%		56.63	%		55.90	%		56.27	%

Capital ratio		10.35	%		10.63	%		10.92	%		10.44	%		12.05	%		9.66	%		12.18	%		9.70	%

*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 0.94% and 1.27% for the three months ended June 30, 2020 and 2019, respectively. This ratio declined primarily due to an increase in the provision for loan losses for the three months ended June 30, 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 9.09% and 10.32% for the three months ended June 30, 2020 and 2019, respectively. This ratio declined primarily due to an increase in the provision for loan losses for the three months ended June 30, 2020 as compared to 2019.

●	Net Interest Margin

The net interest margin for the three months ended June 30, 2020 and 2019 was 3.10% and 3.20%, 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.

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●	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 56.49% and 54.92% for the three months ended June 30, 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 10.35% as of June 30, 2020 is comparable to the industry average of 10.44% as of March 31, 2020.

Industry Results:

The FDIC Quarterly Banking Profile reported the following results for the first quarter of 2020

Quarterly Net Income Falls by 69.6% From First Quarter 2019

Aggregate net income for the 5,116 FDIC-insured commercial banks and savings institutions totaled $18.5 billion during first quarter 2020, a decline of $42.2 billion (69.6%) from a year ago. The decline in net income is a reflection of deteriorating economic activity, which resulted in an increase in provision expenses and goodwill impairment charges. The decline was broad-based, as slightly more than half (55.9%) of all banks reported annual declines in net income. The share of unprofitable banks increased from a year ago to 7.3%. The average return on assets ratio declined from 1.35% in first quarter 2019 to 0.38% in the current quarter.

Net Interest Income Declines 1.4% From 12 Months Ago

On an annual basis, net interest income declined for the second consecutive quarter, falling by $2 billion (1.4%) from a year ago. Less than half (44.6%) of all banks reported annual declines in net interest income. The average net interest margin (NIM) for the banking industry was down 29 basis points from a year ago to 3.13%, as the decline in average earning asset yields outpaced the decline in average funding costs. The year over-year compression of the NIM was broad-based, as it declined for all five asset size groups featured in the Quarterly Banking Profile.

Noninterest Income Increases 2.3% From a Year Ago

Noninterest income of $66.9 billion increased by $1.5 billion (2.3%) from 12 months ago. The annual increase was broad-based, as almost two-thirds (64.7%) of all banks reported higher noninterest income. The year-over-year increase in noninterest income was led by the all other noninterest income category, which includes merchant credit card fees, annual credit card fees, and credit card interchange fees. This category of income rose by $6.6 billion (22.7%), but was partially offset by declines in trading revenue on equity contracts (down $3.9 billion, or 136%) and servicing fee income (down $3.3 billion, or 215.3%).

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Noninterest Expense Increases Almost 12% From First Quarter 2019

Noninterest expense increased by $13.6 billion (11.8%) from a year ago. Goodwill impairment charges, driven by a few institutions, rose by $8.4 billion. Approximately three out of every four banks (72.2%) reported annual increases in noninterest expense. All other noninterest expense rose by $3.4 billion (7.3%), and salary and employee benefits grew by $1.4 billion (2.5%). The average assets per employee increased from $8.8 million in first quarter 2019 to $9.8 million in first quarter 2020.

Provisions for Credit Losses Increase From a Year Ago

Due to deteriorating economic conditions and the implementation of the current expected credit losses (CECL) accounting methodology, which requires banks to allocate for expected losses over the life of the loan, provisions for credit losses increased by $38.8 billion (279.9%) from a year ago to $52.7 billion. Two hundred forty three banks adopted the CECL accounting standards in the first quarter. These institutions reported an aggregate $47.6 billion in provisions for credit losses. Almost half (49.9%) of all banks reported year-over-year increases in provisions for credit losses.

Net Charge-Offs Rise Almost 15% From a Year Ago

Net charge-offs totaled $14.6 billion in the first quarter, an increase of $1.9 billion (14.9%) from a year ago. Slightly more than two-thirds (68%) of the increase in total net charge-offs was in the commercial and industrial (C&I) loan portfolio. C&I loan portfolio net charge-offs increased by $1.3 billion (86.9%). Credit card portfolio net charge-offs increased by $387.3 million (4.4%). The average net charge-off rate rose by 5 basis points from a year ago to 0.55%. The C&I net charge-off rate rose by 20 basis points from a year ago to 0.47% but remains below a recent high of 0.50%.

Noncurrent Loan Rate Remains Stable at 0.93%

Noncurrent loan balances (90 days or more past due or in nonaccrual status) increased by $7 billion (7.3%) from the previous quarter, the highest quarterly dollar increase since first quarter 2010. Slightly less than half (46%) of all banks reported quarterly increases in noncurrent loan balances. Noncurrent loan balances in all major loan categories increased from the previous quarter. C&I noncurrent loan balances increased by $3.6 billion (20.7%) and nonfarm nonresidential noncurrent loan balances increased by $2 billion (25.3%). The average noncurrent loan rate rose just 2 basis points from the previous quarter to 0.93%, because of an increase in total loans and leases that also occurred in the quarter. The C&I noncurrent rate increased by 4 basis points from the previous quarter to 0.83%.

Total Assets Rise 8.6% From Fourth Quarter 2019

Total assets rose by $1.6 trillion (8.6%) from the previous quarter, driven by increases in cash and balances due from depository institutions (up $740.4 billion, or 44.4%) and loan and lease balances (up $442.9 billion, or 4.2%). Banks increased their securities holdings by $226.9 billion (5.7%) during the first quarter, with most of the growth led by mortgage-backed securities (up $152.6 billion, or 6.4%). With recent short term rate reductions in the first quarter, unrealized gains on available-for-sale securities rose by $41.8 billion (151.7%) and unrealized gains on held-to-maturity securities grew by $18.4 billion (110.2%).

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Loan Balances Register Strong Growth From the Previous Quarter and a Year Ago

Total loan and lease balances expanded by $442.9 billion (4.2%) from the previous quarter. Slightly more than half (58.7%) of all banks increased their loan and lease balances from fourth quarter 2019. Almost all of the major loan categories reported quarterly increases. The C&I loan portfolio increased by $339.4 billion (15.4%), with most of the growth concentrated at the largest banks. Unfunded C&I loan commitments declined by $269 billion (12.7%), the largest quarterly dollar decrease in the ten years for which data are available. Loans to nondepository institutions grew by $87.0 billion (17.8%), while credit card balances declined by $68.6 billion (7.3%). Over the past 12 months, total loan and lease balances rose by $813.7 billion (8%), the highest annual growth rate since first quarter 2008.

Deposits Increase $1.2 Trillion From the Previous Quarter

Total deposit balances grew by $1.2 trillion (8.5%) from fourth quarter 2019. Interest-bearing accounts increased by $639.6 billion (6.4%) and noninterest-bearing accounts expanded by $446.3 billion (14.1%). Domestic deposits in accounts larger than $250,000 increased by $761.4 billion (10.8%) from fourth quarter 2019. Deposits held in foreign offices rose by $155.9 billion (11.8%). Nondeposit liabilities, which includes fed funds purchased, repurchase agreements, Federal Home Loan Bank (FHLB) advances, and secured and unsecured borrowings, increased by $147.1 billion (11.3%) from the previous quarter. The rise in nondeposit liabilities was primarily attributable to FHLB advances, which increased by $130.2 billion (27%). On an annual basis, total deposits increased by $1.9 trillion (13.3%), the largest year-over-year growth rate ever reported by the Quarterly Banking Profile.

Equity Capital Increases From the Previous Quarter

Equity capital increased by $4.2 billion (0.2%) from the previous quarter. Declared dividends of $32.7 billion exceeded the quarterly net income of $18.5 billion, resulting in a $14.2 billion reduction of retained earnings. Twelve insured institutions with $2 billion in total assets were below the requirements for the well-capitalized category as defined for Prompt Corrective Action purposes.

Two New Banks Open in First Quarter 2020

The number of FDIC-insured commercial banks and savings institutions declined from 5,177 to 5,116 during first quarter 2020. Two new banks were added, 57 institutions were absorbed by mergers, and one bank failed. The number of institutions on the FDIC’s “Problem Bank List” increased from 51 in fourth quarter 2019 to 54. Total assets of problem banks declined from $46.2 billion to $44.5 billion.

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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.

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Goodwill

Goodwill arose in connection with four acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. At June 30, 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) .

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
Net interest income (GAAP)	$	13,680		$	10,930		$	26,726		$	21,901
Tax-equivalent adjustment ⁽¹⁾		255			284			496			576
Net interest income on an FTE basis (non-GAAP)		13,935			11,214			27,222			22,477
Average interest-earning assets	$	1,797,290		$	1,400,685		$	1,733,323		$	1,397,269
Net interest margin on an FTE basis (non-GAAP)		3.10	%		3.20	%		3.14	%		3.22	%

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

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Income Statement Review for the Three Months ended June 30 , 20 20 and 201 9

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended June 30, 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 interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended June 30,

	2020							2019

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	145,337	$	1,642		4.52	%	$	82,133	$	1,119		5.45	%
Agricultural		111,289		1,322		4.75	%		81,803		1,304		6.37	%
Real estate		881,437		9,371		4.25	%		712,534		8,174		4.59	%
Consumer and other		18,195		235		5.16	%		16,694		211		5.06	%

Total loans (including fees)		1,156,258		12,570		4.35	%		893,164		10,808		4.84	%

Investment securities
Taxable		317,447		1,948		2.45	%		255,671		1,555		2.43	%
Tax-exempt ⁽²⁾		176,812		1,208		2.73	%		202,232		1,352		2.67	%
Total investment securities		494,259		3,156		2.55	%		457,903		2,907		2.54	%

Interest-bearing deposits with banks and federal funds sold		146,773		166		0.45	%		49,618		290		2.34	%

Total interest-earning assets		1,797,290	$	15,892		3.54	%		1,400,685	$	14,005		4.00	%

Noninterest-earning assets		83,938							53,992

TOTAL ASSETS	$	1,881,228						$	1,454,677

(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%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended June 30,

	2020								2019

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Interest-bearing checking, savings accounts and money markets	$	1,026,705	$	699			0.27	%	$	790,872	$	1,616			0.82	%
Time deposits		277,939		1,199			1.73	%		222,740		990			1.78	%
Total deposits		1,304,644		1,898			0.58	%		1,013,612		2,606			1.03	%
Other borrowed funds		50,800		59			0.47	%		40,930		185			1.80	%

Total interest-bearing liabilities		1,355,444		1,957			0.58	%		1,054,542		2,791			1.06	%

Noninterest-bearing liabilities
Noninterest-bearing checking		318,609								212,929
Other liabilities		12,412								8,315

Stockholders' equity		194,763								178,890

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,881,228							$	1,454,676


Net interest income			$	13,935			3.10	%			$	11,214			3.20	%

Spread Analysis
Interest income/average assets	$	15,892		3.38	%				$	14,005		3.85	%
Interest expense/average assets	$	1,957		0.42	%				$	2,791		0.77	%
Net interest income/average assets	$	13,935		2.96	%				$	11,214		3.08	%

Net Interest Income

For the three months ended June 30, 2020 and 2019, the Company's net interest margin adjusted for tax exempt income was 3.10% and 3.20%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended June 30, 2020 totaled $13,680,000 compared to $10,930,000 for the three months ended June 30, 2019.

For the three months ended June 30, 2020, interest income increased $1,916,000, or 14%, when compared to the same period in 2019. The increase from 2019 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 $253,000.

Interest expense decreased $834,000, or 30%, for the three months ended June 30, 2020 when compared to the same period in 2019. The lower interest expense for the period is primarily attributable to a decrease in rates on deposits due to market interest rates.

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Provision for Loan Losses

A provision for loan losses of $1,566,000 was recognized for the three months ended June 30, 2020 as compared to $68,000 for the three months ended June 30, 2019. Net loan charge offs totaled $470,000 for the three months ended June 30, 2020 compared to $11,000 for the three months ended June 30, 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 the increase in net charge-offs. The economic slowdown associated with COVID-19 will adversely affect our loan portfolios, but will more quickly affect loans associated with the hospitality and entertainment industries. As of June 30, 2020 approximately 8.3% of our loan portfolio is associated with these industries. There have been requests for loan payment modifications across all loan portfolios. These modifications were primarily related to payment deferrals or interest only payments for up to six months. The total loans modified was approximately $122,778,000 as of June 30, 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 been easing restrictions on non-essential businesses. 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 three months ended June 30, 2020 totaled $2,428,000 as compared to $2,213,000 for the three months ended June 30, 2019, an increase of 10%. The increase in noninterest income was primarily due to gain on sale of loans held for sale from increased refinancing in a low interest rate environment and to a lesser extent the Acquisition.

Noninterest expense for the three months ended June 30, 2020 totaled $9,100,000 compared to $7,218,000 recorded for the three months ended June 30, 2019, an increase of 26%. Most of the increase was related to the Acquisition. Excluding the Acquisition, the increases were related to salaries and employee benefits, data processing and the amortization of the investment in Federal New Market Tax Credit projects, offset in part by a decrease in FDIC insurance assessments. Salaries and employee benefits, excluding the Acquisition, increased 6% primarily due to normal increases in salaries, other employee benefits including health insurance costs and additional personnel. Data processing costs, excluding the Acquisition, increased primarily to facilitate remote access for customers and employees. 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 remaining credit was fully utilized in the second quarter. The efficiency ratio was 56.5% for the second quarter of 2020 as compared to 54.9% in the second quarter of 2019.

Income Taxes

Income tax expense for the three months ended June 30, 2020 totaled $1,015,000 compared to $1,239,000 recorded for the three months ended June 30, 2019. The effective tax rate was 19% and 21% for the three months ended June 30, 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 further lowered the tax rate in 2020.

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Income Statement Review for the Six Months ended June 30, 2020 and 2019

The following highlights a comparative discussion of the major components of net income and their impact for the six months ended June 30, 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 interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Six Months Ended June 30,

	2020							2019

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	115,369	$	2,723		4.72	%	$	83,164	$	2,239		5.38	%
Agricultural		110,792		3,021		5.45	%		81,511		2,587		6.35	%
Real estate		872,044		18,928		4.34	%		713,274		16,267		4.56	%
Consumer and other		18,339		485		5.29	%		16,678		416		4.99	%

Total loans (including fees)		1,116,544		25,157		4.51	%		894,627		21,509		4.81	%

Investment securities
Taxable		310,656		3,802		2.45	%		253,421		3,044		2.40	%
Tax-exempt ⁽²⁾		173,649		2,360		2.72	%		205,633		2,745		2.67	%
Total investment securities		484,305		6,162		2.54	%		459,054		5,789		2.52	%

Interest-bearing deposits with banks and federal funds sold		132,474		650		0.98	%		43,588		528		2.42	%

Total interest-earning assets		1,733,323	$	31,969		3.69	%		1,397,269	$	27,826		3.98	%

Noninterest-earning assets		82,742							53,300

TOTAL ASSETS	$	1,816,065						$	1,450,569

(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%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Six Months Ended June 30,

	2020								2019

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Interest-bearing checking, savings accounts and money markets	$	991,298	$	2,083			0.42	%	$	788,786	$	3,133			0.79	%
Time deposits		280,386		2,465			1.76	%		218,380		1,832			1.68	%
Total deposits		1,271,684		4,548			0.72	%		1,007,166		4,965			0.99	%
Other borrowed funds		50,495		199			0.79	%		42,188		384			1.82	%

Total interest-bearing liabilities		1,322,179		4,747			0.72	%		1,049,354		5,349			1.02	%

Noninterest-bearing liabilities
Noninterest-bearing checking		289,350								216,522
Other liabilities		11,561								8,090

Stockholders' equity		192,975								176,603

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,816,065							$	1,450,569


Net interest income			$	27,222			3.14	%			$	22,477			3.22	%

Spread Analysis
Interest income/average assets	$	31,969		3.52	%				$	27,826		3.84	%
Interest expense/average assets	$	4,747		0.52	%				$	5,349		0.74	%
Net interest income/average assets	$	27,222		3.00	%				$	22,477		3.10	%

Net Interest Income

For the six months ended June 30, 2020 and 2019, the Company's net interest margin adjusted for tax exempt income was 3.14% and 3.22%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the six months ended June 30, 2020 totaled $26,726,000 compared to $21,901,000 for the six months ended June 30, 2019.

For the six months ended June 30, 2020, interest income increased $4,223,000, or 15%, when compared to the same period in 2019. The increase from 2019 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 $384,000.

Interest expense decreased $602,000, or 11%, for the six months ended June 30, 2020 when compared to the same period in 2019. The lower interest expense for the period is primarily attributable to a decrease in rates on deposits due to market interest rates.

Provision for Loan Losses

A provision for loan losses of $3,883,000 was recognized for the six months ended June 30, 2020 as compared to $166,000 for the six months ended June 30, 2019. Net loan charge offs totaled $497,000 for the six months ended June 30, 2020 compared to net loan recoveries of $19,000 for the six months ended June 30, 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 and the increase in net charge-offs.

Noninterest Income and Expense

Noninterest income for the six months ended June 30, 2020 totaled $5,059,000 as compared to $4,139,000 for the six months ended June 30, 2019, an increase of 22%. The increase in noninterest income was primarily due to an increase in security gains, gain on sale of loans held for sale due to increased refinancing in a low interest rate environment, and the Acquisition.

Noninterest expense for the six months ended June 30, 2020 totaled $18,150,000 compared to $14,675,000 for the six months ended June 30, 2019, an increase of 24%. Most of the increase was related to the Acquisition. Excluding the Acquisition, the increases were related to salaries and employee benefits, data processing and the amortization of the investment in Federal New Market Tax Credit projects, offset in part by a decrease in FDIC insurance assessments. Salaries and benefits was the largest component of the increase in noninterest expense which includes normal increases in salaries, other employee benefits including health insurance costs and additional personnel. Data processing costs, excluding the Acquisition, increased primarily to facilitate remote access for customers and employees. The efficiency ratio was 57.1% and 56.4% for the six months ended June 30, 2020 and 2019, respectively.

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Income Taxes

Income tax expense for the six months ended June 30, 2020 and 2019 totaled $1,771,000 and $2,343,000, respectively. The effective tax rate was 18% and 21% for the six months ended June 30, 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 further lowered the tax rate in 2020.

Balance Sheet Review

As of June 30, 2020, total assets were $1,896,972,000, a $159,790,000 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 $513,616,000 as of June 30, 2020, an increase of $33,773,000 from the December 31, 2019 balance of $479,843,000. The increase in securities available-for-sale is primarily due to purchases of municipal, mortgage-backed securities, 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 June 30, 2020, gross unrealized losses of $162,000, 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 June 30, 2020, the Company’s investment securities portfolio included securities issued by 267 government municipalities and agencies located within 22 states with a fair value of $216.8 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 June 30, 2020 was $3.1 million (approximately 1.4% 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.

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The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of June 30, 2020 and December 31, 2019 identifying the state in which the issuing government municipality or agency operates ( i n thousands) :

	2020				2019
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Obligations of states and political subdivisions:
General Obligation bonds:
Iowa	$	55,991	$	57,557	$	58,457	$	59,072
Texas		10,802		11,216		11,243		11,382
Washington		8,385		8,698		6,530		6,629
Pennsylvania		7,805		7,949		7,895		7,989
Oregon		6,269		6,492		3,441		3,505
Other (2020: 13 states; 2019: 12 states)		21,962		22,480		14,727		14,870

Total general obligation bonds	$	111,214	$	114,392	$	102,293	$	103,447

Revenue bonds:
Iowa	$	71,086	$	72,040	$	78,281	$	78,624
Texas		8,634		9,094		480		476
Other (2020: 15 states; 2019: 12 states)		20,659		21,271		12,691		12,755

Total revenue bonds	$	100,379	$	102,405	$	91,452	$	91,855

Total obligations of states and political subdivisions	$	211,593	$	216,797	$	193,745	$	195,302

As of June 30, 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 th ousands) :

	2020				2019
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Revenue bonds by revenue source
Sales tax	$	37,679	$	38,064	$	37,928	$	38,173
Water		19,411		19,969		7,271		7,272
College and universities, primarily dormitory revenues		12,207		12,621		14,016		14,103
Leases		7,493		7,680		7,291		7,351
Electric power & light revenues		6,133		6,283		4,370		4,405
Sewer		5,404		5,644		4,612		4,645
Other		12,052		12,144		15,964		15,906

Total revenue bonds by revenue source	$	100,379	$	102,405	$	91,452	$	91,855

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Loan Portfolio

The loan portfolio, net of the allowance for loan losses, totaled $1,146,046,000 and $1,048,147,000 as of June 30, 2020 and December 31, 2019, respectively. The increase in loans was primarily due to government guaranteed loans under the Paycheck Protection Program (“PPP”). The PPP loans totaled $78.3 million as of June 30, 2020. The PPP loans bear an interest rate of 1.0% and primarily have a two year maturity. The Small Business Administration is providing fees to financial institutions to originate the PPP loans with recognition of the fees over the life of the loans. Under certain conditions these loans may be forgiven and the fees associated with these loans will be accelerated into interest income.

Deposits

Deposits totaled $1,643,543,000 and $1,493,175,000 as of June 30, 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. Balance fluctuations were primarily due to normal customer activity, as corporate customers’ liquidity needs vary at any given time. In addition, funds disbursed under the PPP program were deposited into customer accounts and will impact overall deposit fluctuations as customers spend those funds according to the PPP rules. We believe that deposit levels could decrease in future periods as a result of the distressed economic conditions in our market areas related to the COVID-19 pandemic and the low interest rates.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase totaled $36,893,000 as of June 30, 2020, a decrease of $5,141,000, or 12%, from the December 31, 2019 balance of $42,034,000. The decrease was primarily due to account balances that transferred to interest bearing checking, offset in part by increased balances in existing accounts.

Dividends Payable

There was no dividends payable as of June 30, 2020 as compared to $2,213,000 as of December 31, 2019. In the past, dividends were declared in one quarter and then paid in the subsequent quarter. For the quarter ended June 30, 2020 the dividend was not declared until July 8, 2020 and will be paid in the third quarter of 2020.

Accrued Expense and Other Liabilities

Accrued expenses and other liabilities totaled $11,192,000 as of June 30, 2020, an increase of $4,010,000 or 56% from the December 31, 2019 balance of $7,181,000. The increase in mainly due to an increase in accrued federal income taxes due to the deferral of federal income tax estimates payments.

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.

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Asset Quality Review and Credit Risk Management

The Company’s credit risk is historically centered in the loan portfolio, which on June 30, 2020 totaled $1,146,046,000 compared to $1,048,147,000 as of December 31, 2019. Net loans comprise 60% of total assets as of June 30, 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 1.63% at June 30, 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 June 30, 2020 of 1.63% is higher as compared to the Iowa State Average peer group of FDIC insured institutions as of March 31, 2020, of 0.82%, most recent available.

Impaired loans totaled $17,901,000 as of June 30, 2020 and have increased $13,113,000 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.

The Company had TDRs of $1,276,000 as of June 30, 2020 and $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 financial institutions may presume that borrowers are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program. These modifications may include 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.

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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 and six months ended June 30, 2020 and 2019. The Company had $16,000 and $31,000 of charge-offs for TDR’s for the three and six months ended June 30, 2020, respectively. There were no charge-offs related to TDRs for the three and six months ended June 30, 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 June 30, 2020, non-accrual loans totaled $17,901,000 and there were $641,000 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 is due primarily to a hospitality loan. Real estate owned totaled $632,000 and $4,004,000 as of June 30, 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 $58,288,000 as of June 30, 2020 as compared to $48,028,000 as of December 31, 2019. This increase is primarily due to one agricultural customer relationship. The substandard loans in these categories totaled $15,957,000 as of June 30, 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 $95,137,000 as of June 30, 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 $15,391,000 as of June 30, 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 June 30, 2020 was 1.37%, as compared to 1.19% at December 31, 2019. The allowance for loan losses totaled $16,005,000 and $12,619,000 as of June 30, 2020 and December 31, 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 increase in the allowance for loan losses is mainly due to increased risk associated with the loan portfolio due to the economic slowdown associated with COVID-19 and to a lesser extent organic growth in the loan portfolio. Additional increases in the allowance for loan losses are anticipated if the effects of the COVID-19 conditions negatively impacts our loan portfolio. These increases may be due to increased charge-offs or an increase in the qualitative factors. The qualitative factors are considered as a part of our allowance for loan loss calculation and may deteriorate if the economic effects of COVID-19 continue in the State of Iowa and a resumption to typical social and economic activity is delayed.

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Liquidity and Capital Resources

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

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

As of June 30, 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

Review of the Company’s Current Liquidity Sources

Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of June 30, 2020 and December 31, 2019 totaled $178,519,000 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 June 30, 2020 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $213,884,000, with $3,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $110,102,000, with no outstanding federal fund purchase balances as of June 30, 2020. The Company had securities sold under agreements to repurchase totaling $36,893,000 as of June 30, 2020.

Total investments as of June 30, 2020 were $513,616,000 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 June 30, 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.

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Review of the Consolidated Statements of Cash Flows

Net cash provided by operating activities for the six months ended June 30, 2020 totaled $17,925,000 compared to $10,901,000 for the six months ended June 30, 2019, an increase of $7,024,000. This increase was primarily due to the proceeds from loans held for sale, a decrease in the balance of accrued income 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 six months ended June 30, 2020 was $156,984,000 compared to $14,570,000 for the six months ended June 30, 2019. The increase of $142,414,000 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 and calls of investments.

Net cash provided by financing activities for the six months ended June 30, 2020 totaled $136,970,000 compared to $4,099,000 used in financing activities for the six months ended June 30, 2019. The increase in cash provided by financing activities of $141,069,000 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 June 30, 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 $4,859,000 and $6,368,000 for the six months ended June 30, 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 Company, on an unconsolidated basis, has interest-bearing deposits totaling $2,867,000 as of June 30, 2020 that are presently available to provide additional liquidity to the Banks.

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

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 June 30, 2020 that are of concern to management.

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Capital Resources

The Company’s total stockholders’ equity as of June 30, 2020 totaled $201,150,000 and was $13,571,000 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 June 30, 2020 and December 31, 2019, stockholders’ equity as a percentage of total assets was 10.6% and 10.8% respectively. The capital levels of the Company exceed applicable regulatory guidelines as of June 30, 2020.

Forward-Looking Statements and Business Risks

Th e 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 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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. 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.

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Item 4.

Controls and Procedures

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

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

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable

Item 1.A.

Risk Factors

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. The State of Iowa has eased many of these restrictions related to the COVID-19 pandemic. 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 in 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 or not fully operational, 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. The Company’s bank lobbies are generally open to the public, with business also being transacted through our drive up facilities, online, telephone or by appointment. Some of the mitigations in place at our offices related to COVID-19 include face coverings, social distancing, frequent hand washing, and protective shields. Although the Company anticipates moving toward normalized operations, changes in restrictions by governmental authorities may change these plans. 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.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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 June 30, 2020, there were no 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 $19.92.

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 June 30, 2020.

Total

Number

Maximum

of Shares

Number of

Purchased as

Shares that

Total

Part of

May Yet Be

Number

Average

Publicly

Purchased

of Shares

Price Paid

Announced

Under

Period

Purchased

Per Share

Plans

The Plan

April 1, 2020 to April 30, 2020

65,847

19.52

65,847

May 1, 2020 to May 31, 2020

June 1, 2020 to June 30, 2020

Total

65,847

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other information

Not applicable

Item 6.

Exhibits

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	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL (1)
101.SCH	Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.1)

(1) These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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SIGNATURES

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

	AMES NATIONAL CORPORATION

DATE: August 6, 2020	By:	/s/ John P. Nelson

	John P. Nelson, Chief Executive Officer and President


	By:	/s/ John L. Pierschbacher

	John L. Pierschbacher. Chief Financial Officer

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Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Part Of

Exhibits

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.

ATLO 10-Q Quarter ended June 30, 2020

Exhibits