Ames National Corporation — Q3 2017 Form 10-Q Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company that owns five central Iowa banks. The banks provide commercial and consumer loans, deposit services, wealth management, investment services, and card and merchant services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods; the balance sheet comparison is primarily with December 31, 2016.
Financial condition and key metrics
| Metric | Q3 2017 | 9M 2017 | Comparison |
|---|---|---|---|
| Net income | $3.93 million | $11.01 million | Q3 2016: $3.80 million; 9M 2016: $11.71 million |
| EPS | $0.42 | $1.18 | Q3 2016: $0.41; 9M 2016: $1.26 |
| Net interest income | $10.15 million | $30.10 million | Q3 2016: $10.05 million; 9M 2016: $29.88 million |
| Net interest margin | 3.29% | 3.25% | Q3 2016: 3.38%; 9M 2016: 3.37% |
| Total assets | $1.365 billion | — | Down $1.5 million from December 31, 2016 |
| Net loans | $764.2 million | — | Up $12.0 million from December 31, 2016 |
| Total deposits | $1.115 billion | — | Up $5.1 million from December 31, 2016 |
| Stockholders’ equity | $173.3 million | — | Up $8.2 million from December 31, 2016 |
- Q3 income before taxes was $5.66 million and the effective tax rate was approximately 31%. Nine-month income before taxes was $15.67 million and the effective tax rate was approximately 30%.
- Noninterest income was $1.86 million in Q3 and $5.97 million for nine months. Noninterest expense was $6.30 million in Q3 and $19.17 million for nine months.
- Reported Q3 return on assets was 1.15%, return on equity was 9.08%, and the efficiency ratio was 52.42%. The capital ratio was 12.70%.
- Allowance for loan losses was $11.14 million, or 1.44% of outstanding loans, versus $10.51 million, or 1.38%, at December 31, 2016.
- Problem loans were 0.62% of total loans, compared with 0.67% at December 31, 2016 and 0.40% at September 30, 2016. Nonaccrual loans were $4.73 million; loans 90 days or more past due and still accruing were $81,000.
- Net cash provided by operating activities was $13.55 million. Investing activities used $4.18 million and financing activities used $15.76 million, resulting in a $6.39 million decrease in cash and due from banks to $23.09 million.
- Liquid assets, consisting of cash, due from banks, and interest-bearing deposits, totaled $58.57 million. Available liquidity included $183.8 million of unused FHLB capacity and $108.6 million of federal funds borrowing capacity.
- Borrowings included $19.0 million of FHLB advances, $39.0 million of repurchase agreements, and $13.0 million of other borrowings. Management stated that the Company had no external debt financing on an unconsolidated basis.
- All five banking subsidiaries exceeded applicable regulatory capital requirements and were well capitalized under prompt corrective action standards.
Material changes versus prior comparable periods
- Q3 net income increased 3.3% year over year, primarily because of higher loan interest income and a lower loan-loss provision. Nine-month net income declined 6.0%, primarily because the loan-loss provision increased to $1.22 million from $441,000 and interest expense increased.
- Interest income increased 5% in Q3 and 4% for nine months, driven mainly by higher average loan balances. Interest expense increased 42% in Q3 and 33% for nine months because of higher deposit rates and competitive funding pressures.
- Net interest margin declined to 3.29% in Q3 and 3.25% for nine months, reflecting higher deposit costs and competitive pressure on loan yields.
- Noninterest income declined 7% in Q3 and 1% for nine months. Lower mortgage refinancing activity reduced gains on sales of loans. Nine-month results benefited from a $73,000 collection on a court judgment previously considered uncollectible.
- Noninterest expense increased 3% in both Q3 and the nine-month period, due mainly to higher occupancy costs, salaries and benefits, and data-processing costs.
- Net loan charge-offs were $105,000 in Q3 and $589,000 for nine months, compared with net recoveries of $81,000 and $22,000, respectively, in the prior-year periods.
- Securities available for sale declined to $506.6 million from $516.1 million at year-end. Accumulated other comprehensive income improved from a $577,000 loss to a $2.78 million gain, primarily because of higher securities fair values.
- Repurchase agreements declined 33% from year-end, primarily because of withdrawals from three commercial accounts. Loan demand softened during the third quarter after steady growth earlier in the year.
Outlook, risks, contingencies, and unusual items
- Management provided no quantitative earnings or revenue guidance. It stated that liquidity and capital resources were satisfactory and expected to support existing operations for the foreseeable future.
- Management identified weakness in the Iowa agricultural economy from low grain prices. Agricultural watch and special-mention loans increased to $44.0 million from $38.5 million at year-end, although management noted favorable initial crop yields in its market area.
- The Company had $3.10 million of troubled debt restructurings at September 30, 2017, down from $3.67 million at year-end. Two borrowers received concessions during the nine-month period; a $530,000 specific reserve was established on a TDR loan and TDR-related net charge-offs were $257,000.
- Gross unrealized losses on available-for-sale securities were $783,000. Management considered the losses temporary and stated that it did not intend, and was not more likely than not required, to sell the affected securities before recovery.
- Off-balance-sheet arrangements consisted primarily of commitments to extend credit and standby letters of credit. Management reported no material changes since December 31, 2016.
- Key risks include interest-rate and margin pressure, deposit competition and liquidity availability, credit deterioration, agricultural and real-estate conditions, concentration in central Iowa, regulatory capital and dividend restrictions, and changes in economic, fiscal, monetary, and regulatory conditions.
- Management determined that goodwill was not impaired. Pending accounting standards for financial instruments, leases, credit losses, revenue, and goodwill were not expected to have a material impact where the filing provided an expectation.
Important facts for investors to verify
- Whether higher deposit costs continue to compress net interest margin and offset loan growth.
- Whether agricultural weakness, commercial construction exposure, and higher charge-offs require additional loan-loss provisions.
- The quality and valuation sensitivity of the $506.6 million available-for-sale securities portfolio, including municipal concentration and unrealized gains or losses.
- The sustainability of deposit levels and the availability and cost of FHLB, repurchase, and correspondent-bank funding.
- Whether the $0.22 quarterly dividend remains supported by holding-company earnings, bank subsidiary dividends, capital needs, and regulatory limits.
- The timing and eventual effect of the expected credit-loss accounting standard, which the Company stated was too early to assess.