Ames National Corporation — 2016 Q2 Form 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 banks provide commercial and consumer lending, deposit, wealth management, investment, merchant and card services. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the same periods in 2015 and to December 31, 2015 where applicable.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total interest income | $11.0 million | $10.9 million | $21.9 million | $21.4 million |
| Net interest income | $10.0 million | $9.8 million | $19.8 million | $19.2 million |
| Total noninterest income | $1.9 million | $2.4 million | $4.0 million | $4.2 million |
| Total noninterest expense | $6.1 million | $6.7 million | $12.6 million | $12.8 million |
| Net income | $4.1 million | $3.4 million | $7.9 million | $7.0 million |
| Diluted EPS | $0.44 | $0.36 | $0.85 | $0.75 |
| Dividends declared per share | $0.21 | $0.20 | $0.42 | $0.40 |
- Second-quarter net income increased approximately 22% year over year; year-to-date net income increased approximately 13%.
- Net interest margin was 3.36% for the quarter and 3.36% year to date, compared with 3.32% and 3.30%, respectively, on a tax-equivalent basis.
- Second-quarter return on assets was 1.23%, return on equity was 9.82%, and the efficiency ratio was 51.36%. Management reported year-to-date efficiency of 52.64%.
- Total assets were $1.329 billion at June 30, 2016, compared with $1.327 billion at December 31, 2015.
- Net loans were $712.9 million, up $11.6 million, or 1.7%, from year-end. Securities available-for-sale were $528.8 million, down $8.8 million.
- Deposits were $1.065 billion, down $8.8 million, or 0.8%, from year-end. Securities sold under repurchase agreements declined 23% to $41.9 million.
- Stockholders’ equity was $170.1 million, or 12.8% of assets, versus $161.3 million, or 12.15%, at year-end. The increase reflected net income and higher unrealized securities gains, partly offset by dividends.
- Six-month operating cash flow was $9.9 million, compared with $10.8 million in 2015. Investing cash use was $0.8 million versus $23.7 million in 2015, while financing cash use was $12.8 million versus $15.5 million of financing cash provided in 2015. Cash and due from banks ended at $20.3 million.
- Borrowings at June 30 included $29.8 million of FHLB advances, $13.0 million of other borrowings, $41.9 million of repurchase agreements and $0.96 million of federal funds purchased.
Material changes versus the prior comparable period
- Net interest income increased due primarily to loan growth and lower borrowing costs. Average loan balances increased, while average investment securities balances declined.
- The provision for loan losses fell to $14,000 in the second quarter from $922,000 and to $206,000 year to date from $999,000. Six-month net charge-offs were $59,000, compared with $34,000 of net recoveries in 2015.
- Noninterest income declined because securities gains were lower: $29,500 in the second quarter and $231,000 year to date, compared with $492,000 and $497,000, respectively. Wealth management income increased.
- Noninterest expense declined primarily because 2015 included a significant other-real-estate-owned impairment. Salaries and employee benefits increased 5% year to date, partly reflecting additional lending and support staff.
- The effective tax rate increased to approximately 29% from 27%, primarily because of lower tax-exempt interest income.
- Problem loans were 0.35% of total loans, up from 0.24% at December 31, 2015 and 0.30% at June 30, 2015, but below the cited peer level of 0.85%. Nonaccrual loans increased to $2.47 million from $1.82 million at year-end.
- Impaired loans net of specific reserves increased to $2.1 million from $1.4 million, primarily because of deterioration in one commercial operating credit relationship. Troubled debt restructurings increased to $1.42 million from $0.78 million.
Guidance, outlook, commentary, risks and unusual items
- Management stated that liquidity and capital resources remained satisfactory and were expected to support existing operations for the foreseeable future. No material capital expenditures or material changes in the capital resource mix were anticipated.
- Available liquidity included $51.5 million of cash and interest-bearing deposits, $151.5 million of FHLB borrowing capacity with $29.8 million outstanding, and $106.9 million of federal funds borrowing capacity with $0.96 million outstanding.
- Management identified a sudden decline in deposits requiring securities liquidation as the primary liquidity uncertainty.
- The allowance for loan losses was $10.1 million, or 1.40% of outstanding loans, unchanged as a percentage from year-end. Management noted weakness in the agricultural economy caused by declining grain prices.
- The securities portfolio had $374,000 of gross unrealized losses, which management considered temporary. The portfolio included $268.0 million of municipal and agency securities across 24 states; the largest single exposure was approximately $5.1 million.
- Goodwill was assessed for impairment at June 30 and was not impaired. Other real estate owned declined to $1.05 million, but management cautioned that changes in real estate markets could affect valuations.
- The company and its banks exceeded applicable regulatory capital requirements. Consolidated total risk-based capital was 17.4%, Tier 1 risk-based capital was 16.3%, common equity Tier 1 capital was 16.3%, and Tier 1 leverage was 11.7%.
- The company declared a $0.21 per-share dividend payable August 15, 2016. No shares were repurchased during the quarter, and 100,000 shares remained available under the repurchase plan.
- Key risks include local economic and agricultural conditions, credit and real-estate values, interest-rate changes, securities-market conditions, liquidity availability and cost, competition, regulatory changes and capital requirements. The filing reports no material legal proceedings and no material changes in off-balance-sheet arrangements.
- New accounting standards on leases, financial-instrument measurement and expected credit losses were discussed. The effects of the financial-instrument standards had not yet been determined; the lease standard was not expected to have a material impact.
Important facts for investors to verify
- Whether loan growth and the higher net interest margin are sustainable in a low-rate environment.
- Whether the increase in nonaccrual loans, impaired loans and troubled debt restructurings develops into higher charge-offs or provisions.
- The sensitivity of agricultural and commercial real-estate borrowers to local economic conditions, commodity prices and collateral values.
- The valuation and concentration risks in the $528.8 million available-for-sale securities portfolio, including municipal exposures and accumulated unrealized gains.
- The stability of deposits and the continued availability of FHLB, federal funds and repurchase-agreement funding.
- The effect of the expected-credit-loss standard and other pending accounting changes on reserves, capital and earnings.
- The filing’s interim results are unaudited and are not necessarily indicative of full-year results.