Ames National Corporation 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating five central Iowa banks. Its principal activities are commercial and consumer lending, deposits, wealth management, payment services and investment securities. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods, and the balance sheet is compared with December 31, 2018.
The September 2018 acquisition of Clarke County State Bank continued to affect year-over-year comparisons, increasing loan volumes, deposits, noninterest income and operating expenses.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income | $10.9 million, versus $10.2 million | $21.9 million, versus $20.4 million |
| Net income | $4.6 million, versus $4.3 million | $8.9 million, versus $8.4 million |
| Basic and diluted EPS | $0.50, versus $0.46 | $0.96, versus $0.90 |
| Net interest margin, FTE | 3.20%, versus 3.16% | 3.22%, versus 3.17% |
| Noninterest income | $2.2 million, versus $2.0 million | $4.1 million, versus $3.8 million |
| Noninterest expense | $7.2 million, versus $6.7 million | $14.7 million, versus $13.6 million |
| Provision for loan losses | $68,000, versus $64,000 | $166,000, versus $93,000 |
- Second-quarter net income increased approximately 7%; six-month net income increased approximately 6%.
- Return on assets was 1.27% and return on equity was 10.32% for the quarter. The efficiency ratio was 54.92%.
- Total assets were $1.469 billion at June 30, 2019, up $12.9 million from year-end 2018.
- Net loans were $873.6 million, down from $890.5 million at December 31, 2018, but up from $780.3 million at June 30, 2018.
- Total deposits were $1.244 billion, up $23.4 million from year-end 2018 and up from $1.152 billion at June 30, 2018.
- Available-for-sale securities were $458.8 million, essentially unchanged from year-end. Net unrealized gains increased accumulated other comprehensive income to $3.5 million from a $4.1 million loss at year-end.
- Stockholders’ equity was $183.3 million, or 12.5% of assets, compared with $172.9 million, or 11.9%, at December 31, 2018.
- FHLB advances declined to $2.0 million from $14.6 million. Repurchase agreement balances declined to $31.7 million from $40.7 million. Management reported no external debt financing as of June 30, 2019.
Cash Flow and Liquidity
- Six-month operating cash flow was $10.9 million, compared with $9.2 million in 2018.
- Investing activities used $14.6 million, primarily because of increased interest-bearing deposits and securities purchases, partially offset by securities maturities and lower loan balances.
- Financing activities used $4.1 million, compared with $16.9 million in 2018, reflecting deposit growth and lower repayment activity.
- Cash and due from banks declined to $22.6 million from $30.4 million, while interest-bearing deposits increased to $67.4 million. Total immediately liquid assets were $90.1 million versus $56.4 million at year-end.
- The Banks had $190.6 million of FHLB borrowing capacity, with $2.0 million outstanding, and $93.3 million of federal funds borrowing capacity with no outstanding federal funds purchases.
- Management stated that liquidity was satisfactory and sufficient for existing operations for the foreseeable future.
Material Changes Versus Prior Period
- Loan interest income increased 14% in the quarter and 15% for the six months, primarily from higher loan volumes related to the acquisition and, to a lesser extent, higher rates.
- Interest expense increased 56% in the quarter and 58% for the six months, driven mainly by higher deposit rates and competitive funding pressures.
- Noninterest income increased $222,000 in the quarter and $384,000 for the six months, supported by the acquisition and higher wealth management income.
- Noninterest expense increased 8% in both comparison periods, primarily from acquisition-related personnel and operating costs. Six-month expense also reflected normal compensation increases, partly offset by a one-time employee bonus in 2018.
- The provision for loan losses increased materially for the six months, to $166,000 from $93,000, although net charge-offs were low. The allowance for loan losses increased to $11.9 million from $11.7 million.
- Problem loans increased to 0.70% of total loans from 0.38% at year-end and 0.49% at June 30, 2018. Management attributed the increase primarily to two agricultural relationships.
- Nonaccrual loans increased to $5.1 million from $3.2 million at year-end, and loans 90 days or more past due and still accruing increased to $1.1 million from $150,000.
- The company repurchased 10,700 shares during the quarter for approximately $278,000. As of June 30, 2019, 21,209 shares remained available under the repurchase plan.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings guidance was provided. Management reported no liquidity or cash-flow trends of concern and no anticipated material capital expenditures other than the announced bank acquisition.
- On July 29, 2019, the company agreed to acquire Iowa State Savings Bank from Iowa Community Bancorp for approximately $22 million in cash, subject to adjustments. Closing was expected in the fourth quarter of 2019, subject to regulatory approval and customary conditions. Management expected to fund the transaction with company cash and dividends from affiliate banks.
- Management highlighted risks from Iowa agricultural conditions, including low grain prices, delayed planting, tariff-related export concerns and the potential effect of an early frost on borrowers.
- Other principal risks include interest-rate changes, deposit pricing competition, credit and real estate risk, liquidity availability, regulatory capital requirements and economic conditions in the company’s concentrated Iowa markets.
- The company’s regulatory capital ratios exceeded applicable requirements. Consolidated total capital to risk-weighted assets was 16.5%, Tier 1 capital was 15.3%, and common equity Tier 1 capital was 15.3% at June 30, 2019.
- Gross unrealized losses on available-for-sale securities were $455,000 and management considered them temporary. Changes in interest rates, credit conditions or management’s intent and ability to hold securities could affect future reported results.
- The company’s preliminary assessment indicated that adoption of the current expected credit loss standard, ASU 2016-13, is expected to affect the financial statements, but the amount of impact was not yet determined.
- Goodwill was assessed as not impaired at June 30, 2019. No material legal proceedings or material changes in off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether the Iowa State Savings Bank acquisition closes on schedule, receives regulatory approval and remains within the expected approximately $22 million cash consideration.
- Trends in agricultural and commercial real estate credit quality, including nonaccrual loans, past-due loans, TDRs, criticized loans and future charge-offs.
- The effect of deposit pricing competition and interest-rate changes on funding costs, net interest margin and earnings.
- The eventual quantitative impact and implementation timing of the expected credit loss accounting standard.
- Whether liquidity remains adequate after funding the planned acquisition and paying dividends, particularly if deposits decline.
- The sustainability of the improved unrealized gains on securities and the resulting effect on accumulated other comprehensive income and capital.
- Future stock repurchases, dividend capacity and the company’s ability to maintain capital ratios above regulatory thresholds.