Ames National Corporation 10-Q Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company operating five bank subsidiaries in central Iowa. The unaudited filing covers the three and nine months ended September 30, 2018, compared with the same periods in 2017, and the balance sheet is compared with December 31, 2017.
On September 14, 2018, First National Bank acquired Clarke County State Bank for approximately $14.8 million in cash, adding three Iowa offices. The acquisition contributed approximately $76.0 million of loans, $83.2 million of deposits, $2.0 million of core deposit intangibles and $2.9 million of goodwill.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net income | $4.46 million | $3.93 million | $12.81 million | $11.01 million |
| Diluted EPS | $0.48 | $0.42 | $1.38 | $1.18 |
| Net interest income | $10.59 million | $10.15 million | $30.98 million | $30.10 million |
| Provision for loan losses | $0.10 million | $0.06 million | $0.19 million | $1.22 million |
| Noninterest income | $2.16 million | $1.86 million | $5.92 million | $5.97 million |
| Noninterest expense | $6.99 million | $6.30 million | $20.57 million | $19.17 million |
| Effective tax rate | 21% | 31% | 21% | 30% |
- Q3 net income increased 13.5%; nine-month net income increased 16.4%. EPS increased 14.3% for both periods.
- Net interest margin on a fully taxable equivalent basis was 3.28% in Q3, compared with 3.29% in Q3 2017, and 3.21% for nine months, compared with 3.25% in 2017.
- Q3 interest income increased 7%, primarily from higher loan volume, higher rates and $143,000 of nonaccrual interest income. Interest expense increased 28% because of higher deposit rates and competition.
- Return on assets was 1.31% and return on equity was 10.54% for Q3. The efficiency ratio was 54.82%, compared with 52.42% in the prior-year quarter.
- Total assets were $1.448 billion at September 30, up $73.2 million from year-end 2017. Net loans were $859.8 million, up $88.3 million, and deposits were $1.216 billion, up $81.4 million, primarily because of the acquisition.
- Available-for-sale securities were $474.4 million, down $20.9 million from year-end. Gross unrealized losses were $9.3 million and were considered temporary by management.
- Stockholders’ equity was $168.6 million, down $2.1 million from year-end, primarily because of accumulated other comprehensive losses on securities and dividends.
- Cash and due from banks plus interest-bearing deposits totaled $63.4 million. The banks had $187.6 million of available FHLB lines, $108.9 million of federal funds borrowing capacity and $8.4 million of outstanding FHLB advances.
- Net cash provided by operating activities was $15.5 million. Investing activities provided $9.6 million, including the effect of securities activity and the acquisition. Financing activities used $26.1 million, including debt repayments and $8.7 million of dividends paid.
- Securities sold under repurchase agreements were $48.9 million, up from $37.4 million at year-end. Management stated that the holding company had no external debt financing, off-balance-sheet financing arrangements or stock-linked derivatives.
Material changes versus comparable periods
- The CCSB acquisition materially increased loans, deposits, assets, goodwill and intangible assets and generated approximately $340,000 of non-routine costs during the first nine months.
- The lower federal corporate tax rate under the Tax Cuts and Jobs Act reduced the effective tax rate from approximately 30% to 31% in 2017 to 21% in 2018, supporting earnings growth.
- Nine-month provision expense declined by approximately $1.0 million, and net charge-offs declined to $226,000 from $589,000.
- Deposit interest expense rose substantially, and salaries and benefits increased. Nine-month noninterest expense also included a one-time $1,000 bonus paid to full-time employees.
- Accumulated other comprehensive loss increased to $6.7 million from $0.4 million at year-end, primarily because higher market interest rates reduced the fair value of available-for-sale securities.
- The quarterly dividend increased to $0.23 per share from $0.22. The company declared $0.94 per share in dividends for the first nine months of 2018.
Outlook, risks, contingencies and unusual items
- Management said liquidity and capital resources remained satisfactory and expected available liquidity to support operations for the foreseeable future. No material capital expenditures or concerning liquidity trends were anticipated.
- Management identified interest-rate risk, deposit competition, economic conditions, credit quality, real estate values, regulatory changes, funding costs and market conditions as significant risks.
- The Iowa agricultural economy remained challenged by low grain prices, potential export tariffs and excessive rainfall. Agricultural watch and special-mention loans totaled $44.4 million, while agricultural substandard loans increased to $9.8 million from $2.7 million at year-end.
- Problem loans were 0.42% of total loans, down from 0.62% at year-end. Nonaccrual loans were $3.6 million; there were no loans 90 days or more past due and still accruing. Troubled debt restructurings totaled $2.7 million.
- The allowance for loan losses was $11.3 million, or 1.30% of loans, down from 1.45% at year-end, partly because acquired loans were initially recorded at fair value without an allowance.
- Management concluded that unrealized securities losses were temporary and that goodwill was not impaired. These assessments depend on interest rates, issuer credit quality, collateral values, forecasts and other management judgments.
- The company adopted ASU 2018-02, reclassifying tax effects from accumulated other comprehensive income to retained earnings, and adopted revenue and financial-instrument guidance without a material reported impact. The current expected credit loss standard is scheduled for adoption after December 15, 2019; the eventual impact was not yet determinable.
- No material changes occurred in off-balance-sheet arrangements. The filing reported no legal proceedings, no risk-factor updates and effective disclosure controls.
Most important facts for investors to verify
- Whether the CCSB acquisition produces the expected loan growth, deposit retention, expense synergies and earnings contribution.
- The sustainability of the 21% effective tax rate and the effect of future tax or regulatory changes.
- Deposit pricing pressure, funding costs and the effect of further interest-rate changes on net interest margin.
- Credit quality in agricultural, commercial real estate and commercial loan portfolios, including substandard loans, nonaccruals and allowance adequacy.
- The potential effect of additional declines in available-for-sale securities on accumulated other comprehensive loss and reported equity.
- Future implementation effects of the expected credit loss standard and the related change in loan-loss provisioning.
- Regulatory capital levels and dividend capacity; all reported bank capital ratios exceeded applicable requirements at September 30, 2018.