Ames National Corporation — 2011 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is a bank holding company owning five central Iowa banks that provide commercial and consumer loans, deposits, trust services, and investment services. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the same periods in 2010, and the balance sheet compared with December 31, 2010.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net income | $3.24 million, versus $3.13 million | $6.72 million, versus $6.40 million |
| Basic and diluted EPS | $0.34, versus $0.33 | $0.71, versus $0.68 |
| Net interest income | $7.81 million, versus $7.39 million | $15.20 million, versus $14.74 million |
| Provision for loan losses | $405,000, versus $170,000 | $405,000, versus $494,000 |
| Total noninterest income | $1.73 million, versus $1.61 million | $3.58 million, versus $3.57 million |
| Total noninterest expense | $4.85 million, versus $4.64 million | $9.46 million, versus $9.17 million |
| Net interest margin | 3.63%, versus 3.73% | 3.58%, versus 3.76% |
| Return on assets | 1.28%, versus 1.35% | 1.40%, versus 1.40% |
| Return on equity | 10.20%, versus 10.73% | 11.31%, versus 10.91% |
Total assets increased to $1.001 billion at June 30, 2011, from $962.975 million at December 31, 2010. Net loans increased 1.6% to $424.979 million, securities available-for-sale increased 5.7% to $496.471 million, and deposits increased 5.1% to $781.775 million. Stockholders’ equity increased to $130.277 million, or 13.02% of assets, from $121.363 million, or 12.60%.
Six-month operating cash flow was $10.076 million, compared with $7.249 million in 2010. Investing activities used $33.717 million, primarily reflecting securities purchases, while financing activities provided $25.572 million, primarily from deposit growth. Cash and due from banks increased to $17.410 million from $15.478 million.
Total borrowings at June 30, 2011 included $46.820 million of federal funds purchased and repurchase agreements, $16.213 million of FHLB advances, and $20.000 million of other long-term borrowings. Management reported satisfactory liquidity and capital resources. Liquid cash and interest-bearing deposits totaled $45.715 million, and available borrowing capacity included $73.250 million of FHLB lines and $109.780 million of correspondent-bank federal funds capacity.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 3.8%; six-month net income increased 5.0%.
- Net interest income increased 5.7% in the quarter and 3.1% year to date, despite lower net interest margins. Lower deposit and borrowing costs more than offset lower asset yields.
- Second-quarter loan-loss provision increased $235,000 because of higher specific reserves for an impaired credit. Year-to-date provision declined $89,000.
- Net charge-offs increased to $56,000 in the quarter from $2,000, but declined to $50,000 year to date from $296,000.
- Trust department income increased, while service-fee income declined, partly because of lower overdraft fees associated with regulatory changes.
- Noninterest expense increased 4.7% in the quarter and 3.2% year to date, primarily from salaries, incentive compensation, and other real estate owned costs.
- The allowance for loan losses increased to $7.876 million, or 1.82% of loans, from $7.521 million, or 1.77%. Problem loans declined to 1.48% of total loans from 1.79% at year-end 2010.
Guidance, Outlook, Risks, and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expected existing liquidity sources to support operations for the foreseeable future and anticipated no material capital expenditures or material changes in the capital resource mix.
- Management identified rising interest rates as a risk because interest-bearing liabilities reprice faster than loans and investments, potentially compressing net interest margins. Competition in central Iowa may also pressure pricing and profitability.
- Impaired loans totaled $6.329 million gross, with $748,000 of related allowance; impaired loans net of specific reserves were reported at $5.581 million. Management highlighted exposure to Des Moines-area real estate developers.
- Other real estate owned totaled $10.159 million. Related costs were $286,730 in the first six months, including impairment write-downs. Changes in property values could reduce earnings.
- Available-for-sale securities had $877,694 of gross unrealized losses at June 30, 2011. Management considered the losses temporary, but acknowledged that changes in market conditions could result in future impairment charges.
- The Company faces regulatory, FDIC assessment, economic, credit, liquidity, interest-rate, and compliance risks, including uncertainties associated with implementation of the Dodd-Frank Act.
- First National Bank’s previously imposed individual minimum capital requirements were lifted by the OCC on June 22, 2011. The Company stated that capital levels exceeded applicable regulatory guidelines.
- The Company declared a quarterly dividend of $0.13 per share, up from $0.11 in the prior-year period, and repurchased 22,033 shares at an average price of $17.00 under a 100,000-share authorization.
- No significant subsequent events were reported through August 9, 2011, and management reported effective disclosure controls.
Important Facts for Investors to Verify
- Whether loan growth and deposit growth are sustainable without further compression in the net interest margin.
- Trends in impaired, nonaccrual, past-due, and real estate-related loans, particularly developer exposures in the Des Moines area.
- Adequacy of the $7.876 million allowance for loan losses and the potential effect of future provisions or charge-offs.
- Valuation and disposition timing for the $10.159 million of other real estate owned.
- Potential impairment of securities with unrealized losses and sensitivity to changing interest rates.
- Availability and cost of FHLB, correspondent-bank, repurchase-agreement, and other liquidity sources if deposits decline.
- Regulatory developments, FDIC assessments, dividend restrictions, and the continuing effects of Dodd-Frank implementation.