Ames National Corporation — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company that owns five central Iowa bank subsidiaries. The banks provide commercial and consumer loans, deposit products, trust services, and investment services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods, and the balance sheet is compared with December 31, 2012.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | Change |
|---|
| Net interest income | $8.5 million | $8.2 million | +$0.3 million |
| Provision for loan losses | $0.1 million | $0.04 million | Higher |
| Noninterest income | $1.8 million | $2.1 million | -$0.2 million |
| Noninterest expense | $5.2 million | $5.0 million | +$0.2 million |
| Net income | $3.7 million | $3.9 million | -$0.1 million |
| Diluted EPS | $0.40 | $0.41 | -$0.01 |
| Net interest margin | 3.28% | 3.34% | Down 6 basis points |
| Metric | Nine Months 2013 | Nine Months 2012 | Change |
|---|
| Net interest income | $24.7 million | $24.2 million | +$0.5 million |
| Noninterest income | $5.8 million | $5.7 million | +$0.1 million |
| Noninterest expense | $16.2 million | $15.4 million | +$0.8 million |
| Net income | $10.6 million | $10.7 million | -$0.1 million |
| Diluted EPS | $1.14 | $1.15 | -$0.01 |
| Net interest margin | 3.16% | 3.37% | Down 21 basis points |
| Operating cash flow | $18.0 million | $10.2 million | +$7.8 million |
- Total assets were $1.213 billion at September 30, 2013, down $4.5 million, or 0.4%, from December 31, 2012.
- Net loans were $528.7 million, up $18.6 million, or 3.6%, primarily from commercial real estate loan demand.
- Available-for-sale securities were $583.5 million, down $4.9 million, or 0.8%. Gross unrealized losses were $8.2 million and management considered them temporary.
- Deposits were $977.0 million, down $27.7 million, or 2.8%, principally in demand deposits and certificates of deposit.
- FHLB advances and other long-term borrowings totaled $57.6 million, up from $34.6 million at year-end 2012. The increase included $23.0 million of overnight FHLB borrowings and $2.0 million of fixed-term FHLB borrowings.
- Stockholders’ equity was $141.4 million, or 11.65% of assets, compared with $144.7 million, or 11.89%, at December 31, 2012. The decline primarily reflected lower accumulated unrealized gains on securities.
- Cash and due from banks plus interest-bearing deposits totaled $59.9 million at quarter-end, compared with $79.4 million at year-end.
- Net cash used in investing activities was $23.0 million, while net cash used in financing activities was $4.1 million. Ending cash and due from banks was $25.7 million.
Material Changes Versus Prior Comparable Period
- Quarterly earnings declined because lower gains on sales of loans held for sale and higher salaries and benefits more than offset stronger net interest income.
- Nine-month earnings declined modestly because higher noninterest expense, including increased other real estate owned costs, offset higher net interest income and slightly higher noninterest income.
- Interest expense declined 12.7% in the quarter and 12.9% year to date, primarily because of lower deposit rates.
- Quarterly noninterest income declined 11.6%, mainly because refinancing-related secondary-market volume and gains on loan sales decreased. Excluding securities gains, quarterly noninterest income increased 12.1%.
- Quarterly noninterest expense increased 3.7%, and nine-month expense increased 5.3%, primarily because of normal salary increases, increased staffing, the prior acquisition, and higher other real estate owned costs.
- Loan credit metrics improved: problem loans were 0.52% of total loans versus 1.27% at December 31, 2012; impaired loans, net of specific reserves, were $2.4 million versus $5.9 million; and troubled debt restructurings were $1.6 million versus $5.1 million.
- Other real estate owned declined to $9.0 million from $9.9 million, although related nine-month expense increased to $0.7 million from $0.5 million, including $0.7 million of impairment write-downs.
- The quarterly dividend increased to $0.16 per share from $0.15 per share. No shares were repurchased during the quarter, and 100,000 shares remained available under the repurchase plan.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management stated that liquidity and capital resources were satisfactory and expected to support existing operations for the foreseeable future.
- Management identified interest-rate risk as a key exposure. Rapidly rising rates could increase funding costs faster than asset yields, while prolonged low rates could compress spreads and net interest income.
- Management recognized $320,000 of interest income on several nonaccrual loans that were collected or returned to accrual during the quarter; absent that item, management stated that quarterly net interest margin would have been 3.17%.
- Other real estate owned valuations are judgmental and could require additional write-downs. Management stated that changes in fair values could materially affect earnings.
- Unrealized securities losses were attributed primarily to higher interest rates and market conditions. A change in management’s assessment could affect accumulated other comprehensive income or earnings.
- Credit risk remains concentrated in the loan portfolio and the central Iowa market. The allowance for loan losses was $7.9 million, or 1.47% of loans, compared with 1.50% at year-end 2012. Net loan charge-offs were $36,000 for the first nine months.
- Other risks include economic conditions, real estate values, competition, regulatory and compliance costs, Dodd-Frank implementation, Basel III capital requirements, and the availability and cost of liquidity.
- Off-balance-sheet arrangements consist principally of commitments to extend credit and standby letters of credit. Management reported no material changes since December 31, 2012.
- Management reported no significant subsequent events through November 8, 2013, no applicable legal proceedings, and no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether loan growth and improved problem-loan metrics persist without a material increase in credit losses or other real estate owned impairments.
- Whether the 3.16% year-to-date net interest margin stabilizes or continues to compress as loans and securities reprice.
- The sustainability of earnings given lower loan-sale gains, elevated operating expenses, and the unusual $320,000 nonaccrual interest recognition in Q3.
- Deposit trends and reliance on increased FHLB borrowings to fund assets and liquidity needs.
- Potential changes in the fair value of the $583.5 million securities portfolio and their effect on equity.
- The impact of Basel III implementation beginning January 1, 2015, including any effect on regulatory capital or dividend capacity.
- The filing text does not provide a clear consolidated regulatory capital ratio beyond stating that capital exceeded applicable regulatory guidelines; investors should verify the relevant bank-level and holding-company capital measures.
