Ames National Corporation — 2016 Q1 Form 10-Q Summary
Business context and reporting period
Ames National Corporation is a bank holding company that owns five community banks operating primarily in central Iowa. The banks provide commercial and consumer loans, deposit services, wealth management, investment services, and merchant and card services. The filing presents unaudited results for the three months ended March 31, 2016, compared with the three months ended March 31, 2015, and balance-sheet data as of March 31, 2016 versus December 31, 2015.
Key financial metrics
| Metric | Q1 2016 | Comparable period or prior date |
|---|---|---|
| Total assets | $1.335 billion | $1.327 billion at December 31, 2015 |
| Total revenue, interest and noninterest income | $12.948 million | $12.312 million in Q1 2015 |
| Net interest income | $9.836 million | $9.445 million in Q1 2015 |
| Net interest margin | 3.36% | 3.27% in Q1 2015 |
| Provision for loan losses | $192,000 | $77,000 in Q1 2015 |
| Net income | $3.807 million | $3.635 million in Q1 2015 |
| Basic and diluted EPS | $0.41 | $0.39 in Q1 2015 |
| Return on assets | 1.16% | 1.10% in Q1 2015, annualized |
| Return on equity | 9.28% | 9.25% in Q1 2015 |
| Efficiency ratio | 53.91% | 54.76% in Q1 2015 |
| Net cash from operating activities | $6.342 million | $6.581 million in Q1 2015 |
Net income increased approximately 4.7% year over year. The effective tax rate was approximately 28%, compared with 27% in the prior-year quarter. Comprehensive income was $6.177 million, including $2.370 million of after-tax unrealized gains on available-for-sale securities.
Balance sheet, debt and liquidity
- Net loans were $695.6 million, down 0.8% from December 31, 2015. The allowance for loan losses was $10.1 million, or 1.43% of loans, versus 1.40% at year-end.
- Available-for-sale securities were $523.3 million, down 2.7% from year-end. The portfolio had $9.953 million of gross unrealized gains and $664,000 of unrealized losses; management considered the losses temporary.
- Deposits were $1.084 billion, up 0.9% from year-end, primarily due to increases in public funds.
- Consolidated borrowings included $50.4 million of securities sold under repurchase agreements, $15.5 million of FHLB advances, and $13.0 million of other borrowings.
- Cash and due from banks plus interest-bearing deposits totaled $81.4 million at March 31, 2016, compared with $51.0 million at year-end. Additional stated funding capacity included $177.4 million of FHLB lines and $106.8 million of federal funds borrowing capacity.
- Net cash used in investing activities was $9.6 million, while net cash provided by financing activities was $856,000. Cash and due from banks declined to $21.6 million from $24.0 million at year-end.
- Stockholders’ equity was $165.5 million, or 12.4% of total assets, compared with $161.3 million, or 12.15%, at year-end. Consolidated total capital, Tier 1 capital, and common equity Tier 1 ratios were 16.62%, 15.49%, and 15.49%, respectively, well above stated regulatory minimums.
Material changes versus comparable periods
- Interest income increased 2.9%, primarily from higher average loan balances, while interest expense declined 7.9% due mainly to lower average borrowed-funds and time-deposit balances.
- Noninterest income rose 18.8% to $2.099 million, driven by higher securities gains and wealth management income. Securities gains increased to $202,000 from $5,000.
- Noninterest expense increased 4.8% to $6.435 million, primarily from salaries, benefits, data processing, and occupancy costs. Other real estate owned expense improved from a $148,000 expense to a $20,000 net benefit.
- The loan-loss provision increased to $192,000 from $77,000. Net charge-offs were $78,000, compared with $10,000 of net recoveries in Q1 2015.
- Problem loans were 0.35% of total loans, compared with 0.24% at December 31, 2015 and 0.36% at March 31, 2015. Nonaccrual loans increased to $2.486 million from $1.815 million at year-end, and impaired loans net of specific reserves increased to $2.116 million from $1.379 million.
- Quarterly dividends increased to $0.21 per share from $0.20. No shares were repurchased during the quarter; 100,000 shares remained authorized for repurchase.
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 formal earnings or financial guidance was provided. Management also reported no material changes in off-balance-sheet arrangements, no significant subsequent events through May 6, 2016, and no material changes in interest-rate risk management compared with 2015.
- Management identified weakening agricultural conditions, including lower grain prices and reduced profitability for agricultural borrowers, as a credit risk.
- The company is concentrated in central Iowa, exposing results to local economic conditions, competition, real estate values, interest rates, regulatory changes, credit quality, and liquidity costs.
- The available-for-sale securities portfolio is exposed to interest-rate and market-value changes. Management’s conclusion that unrealized losses were temporary could change if market or issuer conditions deteriorate.
- Allowance-for-loan-loss, investment impairment, goodwill, collateral valuation, and other fair-value estimates involve significant judgment and could change materially.
- Three consumer loans totaling $70,000 were modified as troubled debt restructurings during the quarter. Total TDRs were $806,000 at March 31, 2016.
- Goodwill was assessed for impairment and management concluded that no impairment existed at March 31, 2016.
- The company adopted no material new accounting change during the quarter; the filing discusses future lease and financial-instrument standards, with the impact of the latter not yet determined.
Most important facts for investors to verify
- Whether the increase in nonaccrual and impaired loans, particularly one deteriorated commercial relationship, leads to higher provisions or charge-offs.
- Whether agricultural weakness affects borrowers, collateral values, and future credit losses.
- Whether securities unrealized gains and losses remain temporary as interest rates and municipal-credit conditions change.
- Whether loan growth, deposit trends, and the mix of low-cost deposits sustain the 3.36% net interest margin.
- Whether higher operating expenses, especially compensation and technology costs, pressure the efficiency ratio.
- The sustainability of the $0.21-per-share dividend in light of bank-level dividend restrictions, capital needs, and earnings retention.