Ames National Corporation — Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company that owns five central Iowa banking subsidiaries. The filing covers the unaudited three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017, and balance-sheet changes from December 31, 2017.
Financial Results and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total interest income | $11.797 million | $11.084 million | Up 6% |
| Net interest income | $10.186 million | $9.883 million | Up $0.303 million |
| Provision for loan losses | $0.029 million | $0.398 million | Down $0.369 million |
| Noninterest income | $1.764 million | $2.064 million | Down $0.300 million |
| Noninterest expense | $6.865 million | $6.460 million | Up $0.405 million |
| Income before taxes | $5.056 million | $5.089 million | Down slightly |
| Net income | $4.037 million | $3.610 million | Up 12% |
| Basic and diluted EPS | $0.43 | $0.39 | Up $0.04 |
| Dividends declared per share | $0.48 | $0.22 | Includes a $0.25 one-time dividend |
- Annualized return on assets was 1.19%, versus 1.05% in the prior-year quarter; return on equity was 9.55%, versus 8.66%.
- Net interest margin was 3.19% on a fully taxable-equivalent basis, compared with 3.20%. GAAP net interest income increased despite the largely stable margin.
- The efficiency ratio worsened to 57.45% from 54.14%, primarily because of lower securities gains and higher salaries and benefits.
- Total assets were $1.392 billion at March 31, 2018, up $16.7 million from year-end 2017. Net loans were $772.5 million, and securities available-for-sale were $489.1 million.
- Total deposits increased to $1.170 billion from $1.134 billion at year-end 2017. FHLB advances declined to $2.0 million from $13.5 million, and other borrowings declined to $7.0 million from $13.0 million.
- Stockholders’ equity was $166.5 million, down $4.2 million from year-end, primarily because of accumulated unrealized securities losses and dividends.
- Gross unrealized losses on available-for-sale securities were $6.636 million. Management considered the losses temporary and reported no other-than-temporary impairment.
Cash Flow, Liquidity, Debt and Capital
- Operating activities provided $6.353 million of cash, compared with $6.242 million in Q1 2017.
- Investing activities used $25.859 million, primarily reflecting a $25.811 million increase in interest-bearing deposits at financial institutions.
- Financing activities provided $15.594 million, including $36.033 million of deposit growth, partly offset by $17.5 million of repayments on FHLB and other borrowings and $2.048 million of dividends paid.
- Cash and due from banks declined to $22.485 million from $26.398 million at year-end; cash and interest-bearing deposits together totaled $91.317 million.
- Additional liquidity included $184.934 million of FHLB borrowing capacity, $109.794 million of federal funds borrowing capacity, and available-for-sale securities of $489.091 million. Management stated that liquidity was satisfactory and sufficient for foreseeable operations.
- Consolidated regulatory capital ratios remained substantially above minimum requirements: total capital to risk-weighted assets was 17.6%, Tier 1 capital was 16.4%, common equity Tier 1 capital was 16.4%, and Tier 1 capital to average assets was 12.1%.
Material Changes Versus the Prior Comparable Period
- Net income rose $426,624, supported by higher loan interest income, a substantially lower loan-loss provision, and reduced income-tax expense following the Tax Cuts and Jobs Act.
- Loan interest income increased $773,170 as average loans and loan yields increased. Deposit interest expense increased $441,051 because of higher market rates and competitive pricing.
- Noninterest income declined because Q1 2017 included $365,035 of net securities gains; wealth management income increased, partly because of higher one-time estate fees.
- Noninterest expense increased 6%, primarily due to a one-time $1,000 employee bonus, higher benefit costs, additional personnel, and normal salary increases.
- Asset quality improved overall: problem loans were 0.55% of total loans versus 0.62% at December 31, 2017 and 0.70% at March 31, 2017. Nonaccrual loans declined to $4.279 million, and there were no loans 90 days or more past due and still accruing.
- Agricultural credit remains a concern. Agricultural watch and special-mention loans declined, but agricultural substandard loans increased to $7.602 million from $2.725 million at year-end, reflecting low grain prices and potential tariff impacts.
Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide quantitative earnings guidance. Management stated that no material liquidity concerns, capital-expenditure requirements, or known adverse trends were expected at March 31, 2018.
- Management identified risks from economic conditions in the concentrated central Iowa market, competition for loans and deposits, interest-rate changes, credit deterioration, real-estate values, agricultural conditions, regulatory changes, capital requirements, and the availability and cost of liquidity.
- The company adopted ASU 2016-01 and ASC Topic 606 effective January 1, 2018 without a material impact. It also early adopted ASU 2018-02 and reclassified tax effects from accumulated other comprehensive income to retained earnings; management stated the impact was not material.
- The company’s allowance for loan losses was $11.323 million, or 1.44% of outstanding loans, compared with 1.45% at year-end. Net charge-offs were $27,000, compared with $3,000 in Q1 2017.
- On April 19, 2018, First National Bank entered into an agreement to acquire Clarke County State Bank for approximately $15 million in cash, subject to adjustments, regulatory approval, and customary closing conditions. Closing was expected in the third quarter of 2018.
- The filing reports no material legal proceedings, no material changes in off-balance-sheet arrangements, and no changes to internal controls that materially affected financial reporting.
Important Facts for Investors to Verify
- Whether the planned Clarke County State Bank acquisition closes on schedule and at the expected adjusted purchase price.
- The effect of rising deposit costs and interest rates on future net interest margin and profitability.
- Trends in agricultural substandard loans, grain prices, tariffs, nonaccrual loans, and the allowance for loan losses.
- Whether unrealized losses in the available-for-sale securities portfolio remain temporary as interest rates and market conditions change.
- The sustainability of the $0.23 regular quarterly dividend and the $0.25 one-time dividend, given bank-subsidiary dividend limitations and capital needs.
- The impact of the forthcoming current expected credit loss standard, for which the filing states that the eventual effect could not yet be assessed.