Ames National Corporation 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating five banking subsidiaries in central Iowa. Its principal activities are commercial and consumer lending, deposit-taking, wealth management, and related banking services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, filed November 7, 2014.
On August 29, 2014, First National Bank acquired three First Bank branches in West Des Moines and Johnston, Iowa, for cash consideration of approximately $4.1 million. The acquisition added approximately $44.6 million of loans and $82.0 million of deposits at fair value and generated $1.1 million of goodwill and $1.0 million of core deposit intangibles.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 |
|---|---|---|---|---|
| Total interest income | $10.1 million | $9.8 million | $30.2 million | $28.5 million |
| Net interest income | $9.0 million | $8.5 million | $26.7 million | $24.7 million |
| Noninterest income | $1.8 million | $1.8 million | $6.5 million | $5.8 million |
| Net income | $3.7 million | $3.7 million | $12.1 million | $10.6 million |
| Diluted earnings per share | $0.40 | $0.40 | $1.30 | $1.14 |
| Net interest margin | 3.32% | 3.28% | 3.29% | 3.16% |
- Quarterly net income increased modestly, while year-to-date net income increased approximately 14.5%. Management reported adjusted year-to-date net income of $11.3 million, or $1.22 per share, excluding the after-tax gain on the sale of premises and equipment; this represented approximately 7% growth versus the prior-year period.
- Total assets were $1.298 billion at September 30, 2014, up $65.1 million, or 5.3%, from December 31, 2013. Net loans were $615.7 million, up 9.1%, and deposits were $1.040 billion, up 2.8%.
- Stockholders’ equity was $154.0 million, or 11.9% of total assets, compared with $142.1 million, or 11.5%, at year-end 2013. Accumulated other comprehensive income rose primarily because of higher fair values of available-for-sale securities.
- Loan-loss provision was $55,000 for the quarter and $130,000 year to date. The allowance for loan losses was $8.5 million, or 1.37% of loans, at September 30, 2014.
- Problem loans were 0.41% of total loans, compared with 0.44% at December 31, 2013 and 0.52% at September 30, 2013. Nonaccrual loans were $2.5 million, with no loans 90 days or more past due and still accruing.
- Other real estate owned was $10.2 million, compared with $8.9 million at year-end 2013. The carrying value included a $4.6 million valuation allowance.
Cash Flow, Debt, and Liquidity
| Cash Flow or Funding Metric | Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 |
|---|---|---|
| Cash provided by operating activities | $13.9 million | $18.0 million |
| Cash provided by (used in) investing activities | $25.0 million | $(23.0) million |
| Cash used in financing activities | $(37.5) million | $(4.1) million |
| Ending cash and due from banks | $25.7 million | $25.7 million |
- Cash and interest-bearing deposits totaled $67.2 million at September 30, 2014, compared with $47.9 million at December 31, 2013.
- Available-for-sale securities totaled $568.1 million and provided a substantial source of liquidity. Gross unrealized losses were $2.7 million and management considered them temporary.
- Funding liabilities included $68.2 million of securities sold under repurchase agreements and federal funds purchased, $17.0 million of FHLB advances, and $13.0 million of other borrowings.
- The Banks had unused FHLB lines of approximately $104.0 million and federal funds borrowing capacity of approximately $106.2 million, based on reported capacity and outstanding balances.
- Management stated that liquidity and capital resources were satisfactory and sufficient to support existing operations for the foreseeable future. The Company had no external debt financing, off-balance-sheet financing arrangements, or derivative instruments linked to its stock.
Material Changes Versus Prior Comparable Period
- Net interest income increased 5.9% for the quarter and 8.2% year to date, supported by loan growth, higher taxable securities yields, and lower deposit funding costs.
- Year-to-date noninterest income increased 13.2%, primarily because of a $1.2 million gain on the sale of premises and equipment and higher wealth management income. Gains on loan sales and securities were lower.
- Noninterest expense increased 8.3% for the quarter and 1.3% year to date. Acquisition-related salaries, data processing, and other operating costs increased, partly offset by the absence of the $670,000 other-real-estate-owned impairment charge recorded in 2013.
- Net loan charge-offs increased to $172,000 year to date from $36,000 in the prior-year period, although the provision for loan losses declined.
- Repurchase agreements and federal funds purchased increased 72.1% from year-end 2013 to $68.2 million, primarily because commercial customers shifted balances into repurchase accounts.
- Quarterly dividends increased to $0.18 per share from $0.16 per share. No shares were repurchased during the quarter, and 100,000 shares remained available under the repurchase plan.
Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expects existing liquidity to support operations and stated that no material capital expenditures or concerning liquidity trends were anticipated.
- Management’s principal risks include economic conditions in central Iowa, competition, credit quality and real estate values, interest-rate changes, securities-market conditions, regulatory capital and other banking regulation, funding availability and cost, and successful integration of the acquired branches.
- Critical accounting estimates concern the allowance for loan losses, valuation of other real estate owned, other-than-temporary impairment of securities, and goodwill impairment. Management found no goodwill impairment through September 30, 2014; the next annual test was scheduled for the fourth quarter of 2014.
- The Company had $723,000 of troubled debt restructurings at September 30, 2014, down from $1.4 million at December 31, 2013. All were included in impaired and nonaccrual loans.
- Management reported no material changes in off-balance-sheet arrangements, no legal proceedings, and no significant subsequent events through November 7, 2014.
- Interest-rate risk is the primary market risk. Management stated that the nature and management of this exposure had not changed significantly from 2013.
Important Facts for Investors to Verify
- Assess whether the acquired branches generate the expected loan, deposit, fee-income, and cost synergies and whether acquisition-related expenses persist.
- Monitor loan growth, the allowance ratio, net charge-offs, nonaccrual loans, troubled debt restructurings, and the increased balance of other real estate owned.
- Evaluate sensitivity of net interest margin to changes in market interest rates, deposit pricing, securities prepayments, and the mix of taxable versus tax-exempt assets.
- Review the sustainability of earnings excluding the $1.2 million premises-sale gain and the benefit from the absence of the prior-year OREO impairment charge.
- Track unrealized gains and losses in the securities portfolio, particularly the $288.0 million municipal securities portfolio and the $2.7 million of unrealized losses deemed temporary.
- Confirm the effect of Basel III implementation, dividend restrictions, capital requirements, and the Company’s continued access to FHLB and other borrowing capacity.