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 banks offering commercial and consumer lending, deposit, wealth management, investment, merchant and card services. This unaudited filing covers the three and nine months ended September 30, 2015, compared primarily with the same periods in 2014 and with December 31, 2014 balance-sheet data. The company had 9,310,913 common shares outstanding as of October 30, 2015.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net income | $4.100 million | $3.731 million | $11.100 million | $12.113 million |
| Basic and diluted EPS | $0.44 | $0.40 | $1.19 | $1.30 |
| Net interest income | $9.840 million | $9.018 million | $29.073 million | $26.731 million |
| Provision for loan losses | $0.038 million | $0.055 million | $1.037 million | $0.130 million |
| Noninterest income | $1.950 million | $1.829 million | $6.123 million | $6.508 million |
| Noninterest expense | $5.982 million | $5.666 million | $18.813 million | $16.405 million |
- Q3 net interest margin was 3.36%, compared with 3.32% in Q3 2014; nine-month margin was 3.32%, compared with 3.29%.
- Q3 return on assets was 1.24% and return on equity was 10.35%. The efficiency ratio was 50.74%.
- Total assets were $1.343 billion at September 30, 2015, up $42.3 million from December 31, 2014. Net loans were $690.3 million, up 5%, and securities available-for-sale were $546.0 million, up 1%.
- Deposits were $1.061 billion, up 1% from year-end. Stockholders’ equity was $160.4 million, or 11.94% of assets, compared with $154.7 million and 11.89% at December 31, 2014.
- Nine-month operating cash flow was $15.9 million, compared with $13.9 million in 2014. Investing activities used $44.0 million, primarily reflecting securities purchases and loan growth. Financing activities provided $30.5 million, principally from deposits and FHLB borrowings. Cash and due from banks ended at $26.1 million.
- At September 30, debt and similar funding included $50.3 million of FHLB advances, $52.1 million of securities sold under repurchase agreements and $13.0 million of other borrowings.
- Liquid assets comprising cash, due from banks and interest-bearing deposits totaled $66.3 million. Available funding included $113.9 million of FHLB lines, with $50.3 million outstanding, and $115.2 million of federal-funds borrowing capacity, with no federal-funds purchases outstanding.
- All banks exceeded applicable capital requirements. Consolidated total capital to risk-weighted assets was 16.8%, Tier 1 capital was 15.7%, and common equity Tier 1 capital was 15.7%.
Material changes versus comparable periods
- Q3 net income increased 9.9%, primarily because higher average loan balances increased interest income and reduced interest expense supported net interest income.
- Nine-month net income declined 8.4%, principally because 2014 included a $1.242 million one-time gain on the sale of premises and equipment. The 2015 period also included materially higher loan-loss provision, noninterest expense and other-real-estate-owned impairment expense.
- Average loans increased to $676.2 million for the nine months from $567.0 million, while average investment securities declined to $540.9 million from $587.0 million.
- Nine-month provision for loan losses rose to $1.037 million from $0.130 million, although net loan recoveries were $51,000 in 2015 versus $172,000 of net charge-offs in 2014.
- Noninterest expense rose 14.7% for the nine months, primarily due to salaries and benefits, data processing, occupancy and other-real-estate-owned costs associated with the 2014 branch acquisition and related impairment write-downs.
- Other real estate owned declined to $3.4 million from $8.4 million at year-end, reflecting property sales and impairment write-downs.
Outlook, commentary, risks and unusual items
- Management stated that liquidity and capital resources remained satisfactory and expected available liquidity sources to support existing operations for the foreseeable future. No material capital expenditures or concerning liquidity trends were anticipated.
- The company declared a quarterly dividend of $0.20 per share, up from $0.18 in the comparable 2014 period. Bank subsidiary dividends to the holding company totaled $6.2 million during the first nine months.
- Management identified interest-rate risk, credit and real-estate exposure, economic conditions in its concentrated Iowa markets, competition, regulatory changes, liquidity costs and securities-market conditions as key risks.
- Problem loans were 0.28% of total loans at September 30, 2015, down from 0.37% at December 31, 2014. Nonaccrual loans were $1.897 million and loans 90 days or more past due and accruing were $84,000.
- The allowance for loan losses was $9.927 million, or 1.42% of loans, compared with $8.838 million, or 1.32%, at year-end. Management noted that changes in economic conditions, collateral values and estimates could materially affect provisions and carrying values.
- Securities available-for-sale had $1.279 million of gross unrealized losses, which management considered temporary. The portfolio included $278.0 million of municipal and agency securities across 25 states; the largest individual exposure was approximately $5.1 million.
- Goodwill of $6.7 million was not impaired as of September 30, 2015. The next annual goodwill impairment test was expected in the fourth quarter of 2015.
- No material changes occurred in off-balance-sheet commitments to extend credit or standby letters of credit. The filing reported no legal proceedings, no risk-factor changes, no defaults and no significant subsequent events through November 6, 2015.
Important facts for investors to verify
- Assess whether loan growth and the acquired branch balances can continue to offset pressure from lower securities yields and potential changes in interest rates.
- Monitor the elevated year-to-date loan-loss provision, allowance coverage, classified loans, nonaccrual loans and other real estate owned for further deterioration or write-downs.
- Review the sustainability of the $0.20 per-share dividend against holding-company liquidity, subsidiary dividend capacity and regulatory capital requirements.
- Confirm the effect of the 2014 branch acquisition on recurring revenue, personnel costs, data-processing expense and future core-deposit-intangible amortization.
- Reconcile the filing’s differing TDR amounts: the notes report approximately $801,000 at September 30, while the MD&A reports $794,000.
- Evaluate sensitivity to interest-rate movements, municipal securities valuations, Iowa real-estate conditions and reliance on FHLB and other secured funding sources.