Ames National Corporation — Form 10-Q Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company operating five community bank subsidiaries in central Iowa. The banks provide commercial and consumer loans, deposits, wealth management, investment services, and card-related services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the comparable 2015 periods, and presents consolidated results.
Financial position and key metrics
| Metric | September 30, 2016 | December 31, 2015 or 2015 period |
|---|---|---|
| Total assets | $1.340 billion | $1.327 billion |
| Net loans receivable | $740.3 million | $701.3 million |
| Securities available-for-sale | $517.6 million | $537.6 million |
| Total deposits | $1.062 billion | $1.074 billion |
| Stockholders’ equity | $170.7 million | $161.3 million |
| Cash and interest-bearing deposits | $47.3 million | $51.0 million |
| FHLB advances | $38.0 million | $18.5 million |
| Income statement metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $10.050 million vs. $9.840 million | $29.877 million vs. $29.073 million |
| Net income | $3.804 million vs. $4.100 million | $11.710 million vs. $11.100 million |
| Basic and diluted EPS | $0.41 vs. $0.44 | $1.26 vs. $1.19 |
| Provision for loan losses | $235,000 vs. $38,000 | $441,000 vs. $1.037 million |
| Noninterest income | $2.004 million vs. $1.950 million | $6.029 million vs. $6.123 million |
| Noninterest expense | $6.112 million vs. $5.982 million | $18.668 million vs. $18.813 million |
| Dividends declared per share | $0.21 vs. $0.20 | $0.63 vs. $0.60 |
The reported quarterly net interest margin was 3.38%, compared with 3.36% in the 2015 quarter. The nine-month margin was 3.37%, compared with 3.32%. Third-quarter return on assets was 1.15%, return on equity was 8.91%, and the efficiency ratio was 50.71%. Stockholders’ equity represented 12.74% of total assets at September 30, 2016.
Net cash provided by operating activities was $14.6 million for the nine months ended September 30, 2016, compared with $15.9 million in 2015. Investing activities used $14.2 million, versus $44.0 million in 2015, primarily reflecting lower securities purchases. Financing activities used $3.1 million, versus $30.5 million provided in 2015. Cash and due from banks declined to $21.3 million from $24.0 million at year-end.
Total borrowings included $49.9 million of securities sold under repurchase agreements, $38.0 million of FHLB advances, and $13.0 million of other borrowings. Management reported FHLB borrowing capacity of $188.7 million, with $38.0 million outstanding, and federal funds borrowing capacity of $107.2 million with no outstanding federal funds purchases.
Material changes versus the prior comparable period
- Third-quarter net income decreased 7.2%, while nine-month net income increased 5.5%.
- Quarterly earnings were pressured by a higher loan-loss provision, higher income-tax expense, increased data-processing costs, and lower securities gains. A $226,000 valuation allowance was recorded against a state alternative minimum tax credit carryforward.
- Nine-month earnings benefited from higher loan interest income, a lower loan-loss provision, and substantially lower other-real-estate-owned expenses, partially offset by lower securities gains and higher salaries and benefits.
- Loans increased 6% from year-end, supported in part by expansion into the Des Moines metropolitan market. Securities declined 4%, and deposits declined 1%.
- Problem loans were 0.40% of total loans, up from 0.24% at December 31, 2015 but below the cited peer-group level of 0.84%. Nonaccrual loans increased to $3.0 million from $1.8 million at year-end, while there were no loans 90 days or more past due and still accruing.
- Impaired loans, net of specific reserves, increased to $2.264 million from $1.379 million. Troubled debt restructurings increased to $1.388 million from $780,000.
- The allowance for loan losses increased to $10.451 million, although the allowance-to-loans ratio declined slightly to 1.39% from 1.40%.
- Accumulated other comprehensive income increased to $7.1 million from $3.5 million, primarily due to higher fair values of available-for-sale securities as market interest rates declined.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide quantitative earnings guidance. 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.
Management identified agricultural credit quality as an area of concern because low grain prices reduced borrower profitability. Watch and special-mention agricultural loans increased to $36.7 million from $14.1 million at year-end, although favorable yields partly offset the pressure.
The principal business risks include economic conditions in the company’s concentrated central Iowa market, competition and pricing, credit deterioration, commercial and residential real-estate values, agricultural conditions, interest-rate movements, liquidity availability and cost, regulatory changes, capital requirements, and securities-market conditions. Interest-rate risk is the company’s primary market risk.
Available-for-sale securities had gross unrealized losses of $363,000 at September 30, 2016. Management considered these losses temporary and stated it did not intend to sell the affected securities before recovery. The portfolio included $266.5 million of obligations of states and political subdivisions; the largest individual municipal exposure was approximately $5.1 million.
Off-balance-sheet arrangements consisted principally of commitments to extend credit and standby letters of credit. The filing reported no material changes from December 31, 2015. Management stated there were no significant subsequent events through November 8, 2016. Goodwill of $6.7 million was assessed and was not impaired.
All company and bank subsidiaries exceeded applicable regulatory capital requirements. Consolidated September 30, 2016 ratios included total capital to risk-weighted assets of 17.4%, Tier 1 capital to risk-weighted assets of 16.3%, common equity Tier 1 capital to risk-weighted assets of 16.3%, and Tier 1 capital to average assets of 12.0%.
Important facts for investors to verify
- Whether agricultural weakness and the increase in watch and special-mention agricultural loans lead to higher provisions, charge-offs, or allowance requirements.
- The performance and collateral coverage of the two commercial relationships associated with the increase in impaired loans.
- Whether loan growth can continue if deposits decline and reliance on FHLB advances or other wholesale funding increases.
- The effect of interest-rate changes on net interest margin, securities valuations, deposit costs, and borrowing costs.
- Whether the $226,000 state AMT credit valuation allowance or other tax-position changes affect future effective tax rates.
- The sustainability of dividend payments given regulatory limits, capital requirements, earnings retention, and the company’s 100,000-share repurchase authorization, under which no shares had been repurchased as of September 30, 2016.
- The impact of adopting pending accounting standards for financial instruments, leases, and credit losses; the filing states that the effect of the credit-loss standard had not yet been determined.