Ames National Corporation — Form 10-Q Summary
Business context and reporting period
Ames National Corporation is a bank holding company operating five community banks in central Iowa. Its principal activities are commercial and consumer lending, deposit gathering, wealth management, investment services, and related banking fees. The filing covers the unaudited three and six months ended June 30, 2017, compared with the same periods in 2016; balance-sheet comparisons are primarily with December 31, 2016.
Financial performance and condition
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net interest income | $10.066 million | $9.992 million | $19.949 million | $19.827 million |
| Provision for loan losses | $0.767 million | $0.014 million | $1.164 million | $0.206 million |
| Noninterest income | $2.025 million | $1.926 million | $4.106 million | $4.025 million |
| Noninterest expense | $6.399 million | $6.121 million | $12.876 million | $12.555 million |
| Net income | $3.472 million | $4.099 million | $7.082 million | $7.906 million |
| Diluted EPS | $0.37 | $0.44 | $0.76 | $0.85 |
| Dividend per share | $0.22 | $0.21 | $0.44 | $0.42 |
- Net income declined approximately 15% year over year in the second quarter and 10% for the first six months. Management attributed the declines primarily to higher loan-loss provisions and interest expense, partly offset by higher loan interest income.
- Second-quarter net interest margin was 3.25%, versus 3.36% in the prior-year quarter; the six-month margin was 3.22%, versus 3.36%. Higher loan balances increased interest income, but loan yields declined and deposit costs increased.
- Second-quarter annualized return on assets was 1.01%, return on equity was 8.17%, and the efficiency ratio was 52.93%. The filing reports a 12.37% average capital ratio.
- Total assets were $1.370 billion at June 30, 2017, up $3.2 million from year-end 2016. Net loans increased 2% to $768.2 million, while available-for-sale securities were $518.9 million.
- Deposits increased 2% to $1.127 billion. Securities sold under repurchase agreements declined 34% to $38.7 million. FHLB advances were $13.5 million and other borrowings were $13.0 million.
- Stockholders’ equity increased to $171.6 million, or 12.53% of assets, from $165.1 million, or 12.08%, at December 31, 2016. The increase reflected net income and higher unrealized securities gains, partly offset by dividends.
Cash flow and liquidity
- Six-month operating cash flow was $9.434 million, compared with $9.866 million in 2016.
- Investing activities used $12.042 million, primarily because of securities purchases and loan growth, compared with $0.817 million used in the prior-year period.
- Financing activities used $7.296 million, reflecting repurchase-agreement reductions and dividends, partly offset by deposit growth.
- Cash and due from banks declined to $19.6 million from $29.5 million at year-end; cash and interest-bearing deposits totaled $47.7 million versus $61.2 million.
- Management stated that liquidity remained satisfactory and sufficient for foreseeable operations. Available sources included $191.6 million of FHLB borrowing capacity, $109.0 million of federal-funds borrowing capacity, available-for-sale securities, and core deposits.
Material changes versus prior comparable periods
- Loan-loss provision increased sharply, driven primarily by a specific reserve for a commercial credit and, to a lesser extent, loan growth. Six-month net charge-offs increased to approximately $0.483 million from $0.059 million.
- Interest expense increased 39% in the second quarter and 29% for the six months, primarily because of higher rates paid on core deposits amid competitive pressures.
- Noninterest expense increased 5% in the second quarter and 3% for the six months. The filing cites normal compensation increases, higher technology costs, and a $91,000 fraud loss tied to a customer’s commercial deposit account.
- Noninterest income benefited from a $73,000 collection of a previously uncollectible court judgment and higher securities gains; six-month wealth management income declined because of lower one-time estate fees.
- Asset quality was mixed: problem loans were 0.66% of total loans, down from 0.67% at year-end but up from 0.35% a year earlier. Agricultural watch and special-mention loans increased because of low grain prices.
Outlook, risks, contingencies, and unusual items
- No formal financial guidance was provided. Management expects existing liquidity sources to support operations and reported no known liquidity or cash-flow trends of concern.
- Key risks include interest-rate changes, deposit pricing competition, credit deterioration, commercial and agricultural loan losses, weakness in Iowa agriculture, real-estate values, regulatory changes, and the availability and cost of funding.
- The allowance for loan losses was $11.2 million, or 1.44% of loans, compared with $10.5 million, or 1.38%, at year-end 2016.
- Nonaccrual loans were $5.1 million, and one $80,000 loan was 90 days or more past due and still accruing. Troubled debt restructurings totaled $3.3 million, including $3.2 million in nonaccrual status.
- The Company established a $500,000 specific reserve on a troubled debt restructuring during the quarter and recorded $257,000 of net charge-offs related to TDRs during the six months.
- Available-for-sale securities had $845,000 of gross unrealized losses, which management considered temporary. Accumulated other comprehensive income improved to a $3.0 million gain from a $0.6 million loss at year-end.
- Goodwill of $6.7 million was assessed and was not impaired. No material changes in off-balance-sheet arrangements were reported; commitments primarily comprise loan commitments and standby letters of credit.
- All company and bank capital ratios exceeded applicable regulatory requirements, and management stated that the ratios were sufficient for the fully phased-in capital conservation buffer.
- The company declared a $0.22 per-share dividend payable August 15, 2017. No shares were repurchased during the quarter; 100,000 shares remained authorized for repurchase.
Important facts for investors to verify
- Whether the elevated loan-loss provision and commercial-credit reserve represent an isolated event or a broader deterioration in commercial and construction-related credit quality.
- Trends in agricultural loan classifications, nonaccrual loans, TDRs, charge-offs, and allowance coverage.
- Whether deposit-rate competition continues to compress the net interest margin and increase funding costs.
- The liquidity effect of declining cash balances and repurchase-agreement funding, including utilization of FHLB and correspondent borrowing capacity.
- The sensitivity of accumulated other comprehensive income and regulatory capital to changes in market interest rates and securities valuations.
- Future implementation effects of the expected-credit-loss standard, ASU 2016-13, which the filing states could not yet be assessed.