Ames National Corporation 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating five bank subsidiaries that provide commercial and consumer loans, deposit services and wealth management. This unaudited report covers the three and nine months ended September 30, 2019, compared primarily with the corresponding 2018 periods and December 31, 2018 balances.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net interest income | $10.8 million | $10.6 million | $32.7 million | $31.0 million |
| Net income | $4.0 million | $4.5 million | $12.9 million | $12.8 million |
| Basic and diluted EPS | $0.44 | $0.48 | $1.40 | $1.38 |
| Net interest margin | 3.15% | 3.28% | 3.20% | 3.21% |
| Return on assets | 1.10% | 1.31% | Not clearly provided | Not clearly provided |
| Return on equity | 8.74% | 10.54% | Not clearly provided | Not clearly provided |
| Efficiency ratio | 57.8% | 54.8% | 56.8% | 55.7% |
- Total assets were $1.500 billion at September 30, 2019, up $44.3 million, or approximately 3.0%, from year-end 2018.
- Loans receivable, net, were $882.1 million, down $8.3 million, or approximately 0.9%, from December 31, 2018.
- Deposits were $1.249 billion, up $28.0 million, or approximately 2.3%, from year-end 2018.
- Securities available-for-sale were $458.0 million, essentially unchanged from $459.0 million at year-end. The portfolio had $6.4 million of net unrealized gains at September 30, 2019, compared with a $5.4 million net unrealized loss at year-end 2018.
- Cash and due from banks plus interest-bearing deposits totaled $112.4 million, compared with $56.4 million at December 31, 2018.
- FHLB advances were $5.0 million, down from $14.6 million. Securities sold under repurchase agreements were $52.2 million, up from $40.7 million. Management stated that the company had no external debt financing at the holding-company level.
- Stockholders’ equity was $186.2 million, up from $172.9 million at year-end. The equity-to-assets ratio increased to 12.4% from 11.9%.
- Regulatory capital remained strong. Consolidated total capital and common equity tier 1 capital ratios were each 16.6% and 15.5%, respectively; all banking subsidiaries exceeded applicable well-capitalized thresholds.
- Net cash provided by operating activities was $14.3 million for the nine months, compared with $15.5 million in 2018. Investing activities used $32.9 million, while financing activities provided $21.6 million. Cash and due from banks increased by $3.1 million to $33.5 million.
Material Changes Versus Prior Comparable Period
- Third-quarter net income declined approximately 9% year over year, primarily because of higher deposit interest expense, increased salaries and benefits, and a larger loan-loss provision. Nine-month net income increased approximately 1%.
- Third-quarter interest income increased 9%, supported by higher loan volume, while interest expense increased 45% because of higher deposit rates and competitive funding pressures.
- Nine-month interest income increased 12%, but interest expense increased 53%. The nine-month net interest margin was broadly stable, although the third-quarter margin declined 13 basis points to 3.15%.
- The third-quarter provision for loan losses rose to $379,000 from $100,000; the nine-month provision rose to $545,000 from $193,000. Nine-month net charge-offs increased to $295,000 from $226,000.
- Noninterest income decreased 2% in the third quarter because the prior-year period included a $162,000 gain on foreclosure of other real estate, but increased 6% for the nine-month period. Noninterest expense increased 7% in the quarter and 8% year to date, driven primarily by personnel, data processing and acquisition-related costs.
- The company repurchased 9,375 shares during the quarter and 70,558 shares during the nine months. The November 2018 repurchase authorization had 11,834 shares remaining at September 30, 2019.
Outlook, Risks, Contingencies and Unusual Items
- Management characterized liquidity and capital resources as satisfactory and believed available liquidity would support existing operations for the foreseeable future. Liquid assets were supplemented by $182.1 million of FHLB borrowing capacity and $93.5 million of federal funds borrowing capacity.
- Credit quality weakened modestly. Problem loans were 0.58% of total loans versus 0.38% at year-end 2018, primarily because of two agricultural relationships. Nonaccrual loans increased to $5.2 million from $3.2 million, while loans past due 90 days or more and still accruing were $9,000.
- The allowance for loan losses was $11.9 million, or 1.33% of outstanding loans, compared with 1.30% at year-end. Management cited continued risks from low grain prices, variable crop yields and tariffs affecting Iowa agricultural borrowers. Commercial real estate classified loans also increased from year-end levels.
- Management reported $320,000 of gross unrealized losses on securities available-for-sale and concluded the losses were temporary. Changes in interest rates, market conditions or issuer credit could affect future valuations.
- The company was implementing the future expected-credit-loss standard, ASU 2016-13. Management expected the standard to affect the financial statements but had not determined the amount of the impact.
- On October 25, 2019, after the reporting date, the company acquired Iowa State Savings Bank for approximately $22.3 million in cash. Iowa State had approximately $210 million of assets, $138 million of loans and $187 million of deposits. The transaction was funded with existing cash and dividends from affiliate banks.
- The company declared a quarterly dividend of $0.24 per share, payable November 15, 2019. No material changes to off-balance-sheet arrangements were reported; these arrangements principally consisted of commitments to extend credit and standby letters of credit.
- Principal forward-looking risks include Iowa and broader economic conditions, agricultural and real estate credit exposure, interest-rate movements, deposit competition, liquidity availability, regulatory changes, securities valuations and the adequacy of the allowance for loan losses.
Important Facts for Investors to Verify
- Assess whether higher deposit funding costs continue to compress the net interest margin.
- Review agricultural and commercial real estate concentrations, past-due loans, nonaccrual loans, charge-offs and allowance coverage.
- Evaluate the financial and capital effects of the October 2019 Iowa State Savings Bank acquisition, including purchase accounting and integration costs.
- Monitor implementation of ASU 2016-13 and the eventual effect on credit-loss provisions and equity.
- Verify the sustainability of the $0.24 per-share dividend and remaining share-repurchase authorization in light of bank dividend restrictions and post-acquisition capital needs.
- Review the composition, duration and unrealized gains or losses of the available-for-sale securities portfolio, particularly its municipal exposure.