Ames National Corporation — 2017 First-Quarter 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating five banking subsidiaries in central Iowa. The company provides commercial and consumer loans, deposit products, wealth management, investment services, and merchant and card services. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to the three months ended March 31, 2016. The filing was signed May 9, 2017.
Financial Highlights
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total interest income | $11.084 million | $10.849 million | Up 2% |
| Net interest income | $9.883 million | $9.836 million | Up $48 thousand |
| Provision for loan losses | $398 thousand | $192 thousand | Up $206 thousand |
| Noninterest income | $2.081 million | $2.099 million | Down $19 thousand |
| Noninterest expense | $6.477 million | $6.435 million | Up $42 thousand |
| Net income | $3.610 million | $3.807 million | Down 5% |
| Diluted EPS | $0.39 | $0.41 | Down $0.02 |
| Net interest margin | 3.20% | 3.36% | Down 16 basis points |
| Return on average assets | 1.05% | 1.16% | Down 11 basis points |
| Return on average equity | 8.66% | 9.28% | Down 62 basis points |
| Efficiency ratio | 54.14% | 53.91% | Slightly higher |
The decline in earnings primarily reflected the higher loan-loss provision and increased interest expense, partially offset by higher loan interest income. The effective tax rate was approximately 29%, compared with 28% in the prior-year quarter.
Balance Sheet, Liquidity, Debt, and Capital
- Total assets were $1.395 billion at March 31, 2017, up $28.9 million, or 2%, from December 31, 2016.
- Net loans were $759.8 million, up $7.6 million, or 1%, from year-end. Loan growth was attributed primarily to steady demand and expansion into the Des Moines metropolitan market.
- Deposits were $1.142 billion, up $32.3 million, or 3%, primarily from growth in NOW, savings, and money market accounts.
- Available-for-sale securities totaled $516.4 million, essentially unchanged from year-end. The portfolio had $2.5 million of gross unrealized losses, which management considered temporary.
- Cash and due from banks plus interest-bearing deposits totaled $74.2 million, compared with $61.2 million at December 31, 2016. Management considered liquidity satisfactory.
- Borrowings included $50.4 million of securities sold under repurchase agreements, $14.5 million of FHLB advances, and $13.0 million of other borrowings. Management stated that the company had no external debt financing, off-balance-sheet financing arrangements, or stock-linked derivatives.
- Total stockholders’ equity was $168.1 million, or approximately 12.0% of total assets, up $3.0 million from year-end. Consolidated total capital and Tier 1 capital ratios were 17.0% and 15.9%, respectively, and all banking subsidiaries exceeded applicable “well-capitalized” thresholds.
- Net cash provided by operating activities was $6.2 million. Investing activities used $33.2 million, primarily for purchases of available-for-sale securities, growth in loans, and interest-bearing deposits. Financing activities provided $22.3 million, mainly from deposit growth. Cash and due from banks ended at $24.8 million.
Material Changes Versus the Prior Comparable Period
- Net income decreased $197 thousand, while EPS declined from $0.41 to $0.39.
- Interest income increased $235 thousand as average loan balances grew, but loan yields declined.
- Interest expense increased $187 thousand, or 18%, primarily because of higher rates paid on core deposits amid competitive pressures.
- The loan-loss provision more than doubled to $398 thousand, mainly reflecting loan portfolio growth. Net charge-offs remained low at $3 thousand versus $78 thousand in Q1 2016.
- Noninterest income declined slightly. Excluding realized securities gains, management stated that noninterest income was 10% lower, primarily because of lower wealth management income, lower loan-sale gains, service fees, and merchant and card fees.
- Noninterest expense rose 1%, driven mainly by higher data processing, professional fees, and deposit account costs. Lower FDIC assessments and occupancy costs partially offset these increases.
- The allowance for loan losses increased to $10.9 million from $10.5 million, or 1.41% of outstanding loans versus 1.38% at year-end.
- Problem loans were 0.70% of total loans, compared with 0.67% at year-end and 0.35% at March 31, 2016. Nonaccrual loans rose to $5.4 million from $5.1 million at year-end.
- Accumulated other comprehensive income improved from a $577 thousand loss at year-end to an $883 thousand gain, primarily because of higher fair values for available-for-sale securities as market interest rates declined.
- The quarterly dividend increased to $0.22 per share from $0.21 per share. No shares were repurchased during the quarter, leaving 100,000 shares available under the repurchase plan.
Guidance, Outlook, Commentary, Risks, and Unusual Items
No quantitative earnings or revenue guidance was provided. Management stated that liquidity and capital resources were satisfactory and expected available liquidity sources to support existing operations for the foreseeable future. No material capital expenditures or changes in the capital resource mix were anticipated.
- Management identified the Iowa agricultural economy as a credit concern because of low grain prices, although favorable 2016 crop yields supported better-than-break-even cash flows for most farm customers.
- Watch and special-mention agricultural loans increased to $42.5 million from $38.5 million at year-end, while agricultural substandard loans increased to $4.2 million from $2.4 million.
- Interest-rate risk remains the principal market risk. Management said its exposure and management practices had not changed significantly from 2016.
- Key risks include economic conditions in the company’s concentrated geographic market, competitive pricing, changes in interest rates, credit deterioration, real estate values, agricultural conditions, regulatory changes, capital requirements, and the availability and cost of liquidity.
- Management determined that goodwill was not impaired. It also concluded that unrealized losses on available-for-sale securities were temporary, but acknowledged that changes in market conditions or management estimates could materially affect reported amounts.
- The company had $189.3 million of FHLB borrowing capacity, with $14.5 million outstanding, and $109.3 million of federal funds borrowing capacity with no outstanding balance.
- No material changes occurred in off-balance-sheet arrangements. These arrangements consist primarily of commitments to extend credit and standby letters of credit.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Legal proceedings and risk factors were reported as not applicable or none.
Important Facts for Investors to Verify
- Whether continued loan growth and deposit competition further compress the net interest margin.
- Whether agricultural weakness, low grain prices, and rising classified loans lead to higher provisions or charge-offs.
- The composition, duration, unrealized-loss exposure, and credit quality of the $516.4 million available-for-sale securities portfolio.
- Whether nonaccrual loans, impaired loans, and troubled debt restructurings stabilize or increase.
- The sustainability of the $0.22 quarterly dividend in light of earnings retention, regulatory capital requirements, and bank-subsidiary dividend limitations.
- Whether liquidity remains adequate if deposits decline or securities must be sold before recovery of unrealized losses.
- The eventual effect of pending accounting standards, especially the current expected credit loss standard, which the filing states could not yet be assessed.