Ames National Corporation — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating five central Iowa banking subsidiaries. The filing covers the unaudited three months ended March 31, 2015, with comparison to the three months ended March 31, 2014 and the December 31, 2014 balance sheet. The company provides commercial and consumer lending, deposit, wealth management, investment, merchant and card services. The August 2014 acquisition of three Iowa bank branches continued to affect loan, deposit, fee and operating expense levels.
Financial Results and Key Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total interest income | $10.546 million | $9.920 million | 6.3% increase |
| Net interest income | $9.445 million | $8.734 million | 8.1% increase |
| Provision for loan losses | $77,300 | $39,231 | Increase |
| Total noninterest income | $1.766 million | $2.946 million | 40.1% decrease |
| Total noninterest expense | $6.139 million | $5.329 million | 15.2% increase |
| Net income | $3.635 million | $4.526 million | 19.7% decrease |
| Diluted EPS | $0.39 | $0.49 | Decrease |
| Net interest margin | 3.27% | 3.24% | 3 basis-point increase |
| Dividends declared per share | $0.20 | $0.18 | Increase |
Management reported annualized return on average assets of 1.10% and return on average equity of 9.25% for Q1 2015. The filing contains differing comparative ROA and ROE figures in portions of the MD&A; investors should verify the applicable calculation and presentation.
- Total assets were $1.345 billion at March 31, 2015, up $43.7 million, or 3.4%, from year-end 2014.
- Net loans were $660.8 million, up $2.3 million, or 0.4%, from December 31, 2014.
- Deposits were $1.083 billion, up $30.7 million, or 2.9%, from year-end 2014.
- Securities available-for-sale totaled $554.6 million, up $12.1 million, or 2.2%, from year-end 2014.
- Total stockholders’ equity was $158.6 million, representing 11.8% of total assets, compared with $154.7 million and 11.9% at year-end 2014.
- The allowance for loan losses was $8.9 million, or 1.33% of loans, compared with 1.32% at year-end 2014.
- Comprehensive income was $5.834 million, including $2.199 million of after-tax unrealized gains on available-for-sale securities.
Cash Flow, Debt and Liquidity
- Operating cash flow was $6.6 million, compared with $6.5 million in Q1 2014.
- Investing activities used $41.8 million, principally reflecting a $30.7 million increase in interest-bearing deposits and purchases of available-for-sale securities.
- Financing activities provided $36.5 million, primarily from deposit growth and increased repurchase agreements.
- Cash and due from banks ended at $24.9 million, compared with $30.4 million at March 31, 2014.
- Reported borrowings included $58.8 million of securities sold under repurchase agreements, $14.4 million of FHLB advances and $22.9 million of other borrowings at March 31, 2015. Management stated that the company had no external debt financing on a holding-company basis.
- Liquid cash and interest-bearing deposits totaled $87.2 million. Available funding included $149.3 million of FHLB lines, $115.5 million of federal funds borrowing capacity and available-for-sale securities of $554.6 million.
- All banks exceeded applicable regulatory capital requirements. Consolidated total capital to risk-weighted assets was 16.9%, Tier 1 capital was 15.8%, and common equity Tier 1 capital was 15.8% at March 31, 2015.
Material Changes Versus the Prior Comparable Period
- Net interest income increased as average loan balances grew to $660.8 million from $559.2 million, primarily due to loan demand and the branch acquisition. Lower deposit pricing also reduced interest expense.
- Noninterest income declined because Q1 2014 included a $1.257 million gain on the sale of premises and equipment. Excluding that gain, Q1 2015 noninterest income increased approximately 4.6%, supported by loan-sale gains and merchant and card fees.
- Noninterest expense increased $810,000, mainly from higher salaries and benefits, data processing costs and other real estate owned expenses associated with the acquisition and property maintenance.
- Credit metrics remained generally stable or improved: problem loans were 0.36% of total loans versus 0.37% at year-end 2014; nonaccrual loans declined to $2.381 million from $2.407 million; and other real estate owned declined to $7.366 million from $8.436 million.
- Net recoveries were $10,000 in Q1 2015 versus $43,000 of net charge-offs in Q1 2014, although the provision for loan losses increased to $77,300.
Outlook, Risks, Contingencies and Unusual Items
The filing provides no specific earnings or revenue guidance. Management stated that liquidity and capital resources were satisfactory, existing liquidity sources were expected to support operations for the foreseeable future, and no material capital expenditures or concerning liquidity trends were anticipated.
- Key risks include economic weakness in the company’s concentrated Iowa markets, changes in interest rates and net interest margin, competition for loans and deposits, credit deterioration, declining real estate values, changes in loan-loss estimates, regulatory capital and dividend restrictions, and the availability and cost of liquidity.
- Available-for-sale securities had $715,000 of gross unrealized losses, which management considered temporary. Changes in interest rates, credit conditions or the company’s intent or ability to hold securities could affect future earnings and equity.
- Other real estate owned was primarily concentrated in the Des Moines and Ames metropolitan areas and carried a $6.392 million valuation allowance at March 31, 2015.
- Goodwill was $6.732 million and management concluded it was not impaired as of March 31, 2015. The next annual impairment test was expected in the fourth quarter of 2015.
- Off-balance-sheet arrangements consisted primarily of commitments to extend credit and standby letters of credit; management reported no material changes since December 31, 2014.
- The company declared a $0.20 per-share dividend payable May 15, 2015. No shares were repurchased during the quarter, and 100,000 shares remained available under the repurchase plan.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No legal proceedings or additional risk factors were reported in Part II.
Important Facts for Investors to Verify
- Reconcile the differing comparative ROA, ROE and efficiency-ratio figures presented in the MD&A and performance-indicator table.
- Assess whether loan growth, deposit growth and the 2014 branch acquisition can offset pressure from low interest rates and deposit pricing.
- Monitor problem loans, nonaccrual loans, TDRs, other real estate owned and the adequacy of the $8.9 million allowance.
- Evaluate sensitivity of accumulated other comprehensive income and capital to changes in the fair value of the securities portfolio.
- Review the concentration of municipal securities, Iowa real estate exposure and the collateral-dependent valuation of other real estate owned.
- Confirm the sustainability of the increased $0.20 quarterly dividend against bank-level earnings, capital requirements and regulatory dividend limitations.