Ames National Corporation — Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating five central Iowa banking subsidiaries offering commercial and consumer lending, deposits, wealth management, trust, brokerage, service-fee, and merchant-card services. This unaudited report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018, and balance-sheet changes from December 31, 2018.
The results include First National Bank’s acquisition of Clarke County State Bank, completed September 14, 2018, for approximately $14.8 million. The acquisition added branches, loans, deposits, a $2.0 million core deposit intangible, and $3.0 million of goodwill.
Financial Performance and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total interest income | $13.528 million | $11.797 million | 15% |
| Net interest income | $10.970 million | $10.186 million | 8% |
| Provision for loan losses | $98 thousand | $29 thousand | Higher |
| Noninterest income | $1.926 million | $1.764 million | 9% |
| Noninterest expense | $7.457 million | $6.865 million | 9% |
| Income before taxes | $5.341 million | $5.056 million | 6% |
| Net income | $4.237 million | $4.037 million | 5% |
| Basic and diluted EPS | $0.46 | $0.43 | 7% |
| Dividend declared per share | $0.24 | $0.48 | Lower reported quarterly amount |
- Net interest margin was 3.23% on a tax-equivalent basis, compared with 3.19% in the prior-year quarter. Management attributed the improvement to higher loan volume and rates, partly offset by higher deposit funding costs.
- Return on assets was 1.17% and return on equity was 9.73%. The efficiency ratio was 57.82%.
- Loan interest income increased primarily because of the acquisition, favorable lending conditions, and higher rates. Deposit interest expense increased 73% to $2.359 million, reflecting higher market rates and competitive deposit pricing.
- Noninterest income benefited from the acquisition, higher wealth management income, service fees, and merchant and card fees. Noninterest expense increased primarily from acquisition-related costs, salaries and benefits, data processing, occupancy, and intangible amortization.
Balance Sheet, Liquidity, Debt, and Capital
- Total assets were $1.472 billion at March 31, 2019, up from $1.456 billion at December 31, 2018. Stockholders’ equity was $177.8 million, up from $172.9 million, with the increase driven by net income and favorable securities-market valuations.
- Net loans were $886.6 million, down from $890.5 million at year-end but up substantially from $772.5 million at March 31, 2018, primarily because of the acquisition. Loans represented approximately 60% of total assets.
- Total deposits were $1.253 billion, up from $1.221 billion at year-end and $1.170 billion at March 31, 2018. The quarterly increase was primarily attributable to public-fund balances in NOW accounts.
- Securities available for sale totaled $455.6 million. Gross unrealized losses were $1.8 million and management considered them temporary; accumulated other comprehensive income improved to a $104 thousand gain from a $4.1 million loss at December 31, 2018.
- Cash and due from banks plus interest-bearing deposits totaled $82.9 million, compared with $56.4 million at December 31, 2018. Available liquidity also included approximately $197.1 million of FHLB borrowing capacity, $108.7 million of federal-funds borrowing capacity, and the available-for-sale securities portfolio.
- FHLB advances declined to $2.0 million from $14.6 million. Securities sold under repurchase agreements declined to $32.4 million from $40.7 million. Management reported no external debt financing, off-balance-sheet financing arrangements, or derivatives linked to the company’s stock.
- Net cash provided by operating activities was $6.3 million. Investing activities used $19.7 million, while financing activities provided $7.1 million. Cash and due from banks declined by $6.3 million during the quarter.
- Consolidated regulatory capital ratios exceeded applicable requirements, including a 16.3% total risk-based capital ratio, 15.1% Tier 1 risk-based ratio, 11.5% Tier 1 leverage ratio, and 15.1% common equity Tier 1 ratio.
Material Changes Versus Comparable Periods
- Net income increased $201 thousand, or approximately 5%, year over year.
- Average interest-earning assets increased to $1.394 billion from $1.319 billion, while average total assets increased to $1.446 billion from $1.360 billion.
- Loan balances and loan yields increased, but funding costs rose materially. The average rate on total deposits increased to 0.94% from 0.59%.
- Net loan recoveries were $30 thousand in Q1 2019, compared with $27 thousand of net charge-offs in Q1 2018. The allowance for loan losses increased to $11.8 million from $11.7 million.
- Problem loans were 0.38% of total loans, compared with 0.55% at March 31, 2018. Nonaccrual loans increased modestly to $3.339 million from $3.234 million at December 31, 2018, while other real estate owned declined to $565 thousand from $830 thousand.
- The company repurchased 50,483 shares for approximately $1.286 million under its stock repurchase plan. As of March 31, 2019, 31,909 shares remained authorized for repurchase.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that liquidity and capital resources remained satisfactory and that available liquidity sources should support existing operations for the foreseeable future. No material capital expenditures or material changes in the capital-resource mix were anticipated.
- The principal credit concern identified was Iowa’s agricultural economy, including low grain prices and potential tariff-related effects on exports. Agricultural watch and special-mention loans increased to $51.4 million from $47.8 million at year-end, and agricultural substandard loans increased to $10.6 million from $9.6 million.
- Management identified allowance for loan losses, investment-security impairment, and goodwill impairment as critical accounting estimates. Goodwill was assessed as not impaired at March 31, 2019.
- The company is implementing the expected-credit-loss standard, ASU 2016-13, which was scheduled to become effective for the company after December 15, 2019. Management stated that the eventual impact could not yet be assessed.
- Interest-rate risk is the company’s principal market risk. Management indicated that the nature and management of this exposure had not changed significantly from 2018.
- Other risks include local economic conditions, real estate values, credit quality, competition and deposit pricing, regulatory changes and capital requirements, interest-rate movements, securities-market conditions, and the availability and cost of liquidity.
- No material changes were reported in off-balance-sheet arrangements, and no material legal proceedings or subsequent events were disclosed.
Important Facts for Investors to Verify
- Whether higher loan yields and acquisition-related asset growth can continue to offset rising deposit costs and pressure on the net interest margin.
- The performance of agricultural, commercial real estate, and commercial loan portfolios, including watch, substandard, nonaccrual, and troubled-debt-restructuring balances.
- The eventual balance-sheet and earnings impact of adopting the expected-credit-loss accounting standard.
- The sustainability of deposit growth, public-fund balances, and the company’s current liquidity and borrowing capacity.
- The effect of the Clarke County State Bank acquisition on revenue growth, operating expenses, intangible amortization, goodwill, and capital.
- The company’s dividend and share-repurchase policy, including the lower reported quarterly dividend and remaining repurchase authorization.