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 bank subsidiaries. The company provides commercial and consumer lending, deposit, wealth management, investment, merchant and card services. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods, and the balance sheet is compared with December 31, 2017.
Financial results and key metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net interest income | $10.2 million | $10.1 million | $20.4 million | $19.9 million |
| Net income | $4.3 million | $3.5 million | $8.4 million | $7.1 million |
| Basic and diluted EPS | $0.46 | $0.37 | $0.90 | $0.76 |
| Provision for loan losses | $64 thousand | $767 thousand | $93 thousand | $1.2 million |
| Noninterest income | $2.0 million | $2.0 million | $3.8 million | $4.1 million |
| Noninterest expense | $6.7 million | $6.4 million | $13.6 million | $12.9 million |
- Second-quarter net income increased approximately 24% year over year; first-half net income increased approximately 18%.
- Net interest income increased 1% in the second quarter and 2% for the first half. On a fully taxable-equivalent basis, net interest margin was 3.16% for the quarter and 3.17% for the first half, versus 3.25% and 3.22%, respectively, in the comparable 2017 periods.
- Return on assets was 1.26% and return on equity was 10.35% for the second quarter. The efficiency ratio was 55.0%, compared with 52.9% in the prior-year quarter.
- Total assets were $1.362 billion at June 30, 2018, down from $1.375 billion at December 31, 2017. Net loans were $780.3 million, up from $771.5 million; deposits were $1.152 billion, up from $1.134 billion.
- Available-for-sale securities were $478.7 million, down from $495.3 million. The portfolio had $7.5 million of gross unrealized losses, which management considered temporary.
- Stockholders’ equity was $167.9 million, or 12.33% of assets, compared with $170.8 million, or 12.42%, at year-end. Accumulated other comprehensive loss increased to $5.1 million from $0.4 million, primarily reflecting lower securities values as interest rates increased.
- Six-month operating cash flow was $9.2 million, compared with $9.4 million in 2017. Investing activities provided $1.9 million, compared with $12.0 million used in 2017. Financing activities used $16.9 million, including $24.5 million of repayments on FHLB and other borrowings and $6.5 million of dividends.
- Cash and due from banks ended at $20.6 million. Cash and interest-bearing deposits totaled $62.4 million, compared with $69.4 million at December 31, 2017.
- FHLB advances were $2.0 million at June 30, 2018, compared with $13.5 million at year-end, and other borrowings declined to zero from $13.0 million.
Material changes versus prior comparable periods
- Higher loan interest income and lower loan-loss provisions were the principal drivers of earnings growth. Loan interest income rose 6% in the second quarter and 8% for the first half.
- Interest expense increased 27% in the second quarter and 30% for the first half, primarily because of higher deposit rates and competitive pricing pressures.
- Noninterest income declined because the company recorded no securities gains in 2018, compared with $96 thousand in the second quarter and $461 thousand in the first half of 2017. Wealth management income increased, partly due to one-time estate fees.
- Noninterest expense rose 5% in both the quarter and first half, primarily from higher salaries and benefits. First-half expense included a one-time $1,000 bonus paid to full-time employees.
- The effective tax rate declined to approximately 20% from 29%, reflecting the Tax Cuts and Jobs Act and the lower federal corporate tax rate.
- Net loan charge-offs fell to $4 thousand in the second quarter and $31 thousand in the first half, compared with $481 thousand and $483 thousand, respectively, in 2017.
- The allowance for loan losses was $11.4 million, or 1.44% of loans, compared with $11.3 million, or 1.45%, at December 31, 2017.
- Nonaccrual loans declined to $3.8 million from $4.8 million at year-end. Problem loans were 0.49% of total loans, compared with 0.62% at December 31, 2017.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management stated that liquidity sources should support existing operations for the foreseeable future and that no material capital expenditures or liquidity trends were expected to create concern.
- Management identified the Iowa agricultural economy as a continuing risk because of low grain prices, potential tariffs affecting exports and excessive rainfall. Agricultural watch and special-mention loans declined, but agricultural substandard loans increased materially to $9.3 million from $2.7 million at year-end.
- Interest-rate risk remains the company’s primary market risk. Rising rates increased loan yields but also raised deposit costs and reduced the fair value of available-for-sale securities.
- Management determined that goodwill was not impaired and that securities unrealized losses were temporary. These assessments depend on market conditions, issuer credit quality, interest rates and the company’s intent and ability to hold securities to recovery.
- Troubled debt restructurings totaled $2.8 million, down from $3.0 million at year-end. The company established an $80 thousand specific reserve related to a TDR during the period.
- Off-balance-sheet arrangements consist principally of commitments to extend credit and standby letters of credit. Management reported no material changes since December 31, 2017, but these arrangements involve credit risk beyond recorded balance-sheet amounts.
- The company adopted accounting updates for financial instruments, revenue recognition and reclassification of tax effects in accumulated other comprehensive income. Management reported no material impact from these adoptions.
- All banks exceeded applicable regulatory capital requirements. Consolidated total capital to risk-weighted assets was 17.8%, Tier 1 risk-based capital was 16.6%, common equity Tier 1 capital was 16.6% and Tier 1 leverage capital was 12.2%.
- The company declared a quarterly dividend of $0.23 per share, payable August 15, 2018. No shares were repurchased during the quarter, and 100,000 shares remained available under the repurchase plan.
- The filing reported no legal proceedings, no defaults on senior securities and no material control deficiencies. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether deposit pricing and continued Federal Reserve rate increases further compress the net interest margin.
- Whether agricultural credit quality deteriorates given low commodity prices, tariff uncertainty and weather conditions, and whether the allowance remains adequate.
- Whether unrealized securities losses remain temporary and whether accumulated other comprehensive losses affect reported equity or capital management.
- The sustainability of earnings growth after the benefit from lower tax rates, reduced loan-loss provisions and one-time wealth management fees.
- Future deposit trends, available borrowing capacity and the company’s ability to maintain liquidity while funding loan demand and dividends.
- The impact of the planned current expected credit loss accounting standard, for which management had not yet determined the financial statement impact.