Ames National Corporation — 2Q 2014 Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating five central Iowa banks. The filing covers the unaudited three and six months ended June 30, 2014, compared with the corresponding 2013 periods, and the balance sheet compared with December 31, 2013.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|
| Net interest income | $8.98 million | $8.11 million | $17.71 million | $16.19 million |
| Net income | $3.85 million | $3.28 million | $8.38 million | $6.86 million |
| Basic and diluted EPS | $0.41 | $0.35 | $0.90 | $0.74 |
| Net interest margin | 3.30% | 3.07% | 3.27% | 3.10% |
| Return on assets | 1.23% | 1.05% | Not clearly provided for the six-month period | Not clearly provided for the six-month period |
| Return on equity | 10.27% | 8.98% | Not clearly provided for the six-month period | Not clearly provided for the six-month period |
| Efficiency ratio | 50.49% | 57.26% | Not clearly provided for the six-month period | Not clearly provided for the six-month period |
- Quarterly net income increased 17.6%; six-month net income increased 22.1%.
- Quarterly net interest income increased 10.8%; six-month net interest income increased 9.4%.
- Interest income benefited from higher average loan balances, higher taxable securities yields, and recognition of interest income on loans returned to accrual status. Interest expense declined as deposit rates and time-deposit balances decreased.
- Quarterly noninterest income decreased 17.0% to $1.73 million, primarily because 2014 had no securities gains compared with $364,000 in 2013. Six-month noninterest income increased 19.0% to $4.68 million, substantially reflecting a $1.24 million gain on the sale of premises and equipment.
- Quarterly noninterest expense decreased 7.4% to $5.41 million, and six-month expense decreased 2.0% to $10.74 million, primarily because 2014 had no other-real-estate-owned impairment write-down compared with $670,000 in 2013.
Balance Sheet, Capital, Debt, and Liquidity
| Balance Sheet Item | June 30, 2014 | December 31, 2013 | Change |
|---|
| Total assets | $1.236 billion | $1.233 billion | +$2.6 million, +0.2% |
| Securities available-for-sale | $599.2 million | $580.0 million | +$19.2 million, +3.3% |
| Loans receivable, net | $550.0 million | $564.5 million | -$14.5 million, -2.6% |
| Total deposits | $982.6 million | $1.012 billion | -$29.2 million, -2.9% |
| Stockholders’ equity | $152.3 million | $142.1 million | +$10.2 million, +7.2% |
- Liquid assets, consisting of cash and due from banks plus interest-bearing deposits, totaled $50.1 million at June 30, 2014.
- Available funding included $120.7 million of FHLB borrowing capacity, $109.8 million of federal funds borrowing capacity, and the available-for-sale securities portfolio. FHLB advances outstanding were $14.5 million.
- Borrowings included $61.2 million of repurchase agreements and federal funds purchased, $14.5 million of FHLB advances, and $20.0 million of other borrowings.
- Six-month operating cash flow was $10.1 million, compared with $12.4 million in 2013. Investing activities provided $204,000, versus $24.2 million used in 2013. Financing activities used $10.8 million, mainly because of lower deposits and dividend payments.
- Management stated that liquidity and capital resources were satisfactory and sufficient for existing operations for the foreseeable future. Equity represented 12.33% of total assets, compared with 11.52% at year-end 2013.
- Cash dividends declared were $0.18 per share in the second quarter and $0.36 per share for the first six months, compared with $0.16 and $0.32, respectively, in 2013.
Material Changes, Asset Quality, and Unusual Items
- Net loan charge-offs were $87,000 in the second quarter and $130,000 for the first six months, compared with $27,000 and $28,000 in the comparable 2013 periods. The allowance for loan losses was $8.5 million, or 1.52% of loans, at June 30, 2014.
- Problem loans were 0.23% of total loans, down from 0.44% at December 31, 2013 and 0.99% at June 30, 2013. Nonaccrual loans totaled $1.3 million, with no loans 90 days or more past due and still accruing.
- Impaired loans, net of specific reserves, declined to $967,000 from $2.2 million at year-end 2013 and $4.8 million at June 30, 2013. Troubled debt restructurings totaled $733,000, down from $1.4 million at year-end 2013.
- Other real estate owned was $8.9 million, substantially unchanged from year-end. The assets were primarily located in the Ames and Des Moines, Iowa markets and were being actively marketed.
- Accumulated other comprehensive income increased to $5.6 million from $451,000 at year-end, primarily because of higher unrealized gains on available-for-sale securities. Gross unrealized losses of $3.1 million were considered temporary by management.
- The six-month results included a $1.24 million pretax, approximately $788,000 after-tax, gain on the sale of the University office location. Excluding this gain, management stated that six-month net income would have been approximately $7.6 million, or $0.82 per share.
Guidance, Outlook, Commentary, and Risks
- First National Bank entered into an agreement to acquire substantially all assets and assume substantially all liabilities of First Bank, including three offices in West Des Moines and Johnston, Iowa. Closing was expected in the third quarter of 2014, subject to regulatory approval and customary conditions.
- The expected purchase price was approximately $4.7 million, subject to closing adjustments. Management expected to fund the transaction from First National’s cash reserves without third-party financing; $1.0 million was to be placed in escrow for seller indemnification obligations.
- Management identified the principal risks as local economic conditions, competition and pricing, credit and real-estate risk, interest-rate changes, regulatory requirements, liquidity costs and availability, securities-market conditions, and successful integration of the First Bank transaction.
- The Company’s primary market risk is interest-rate risk affecting net interest income. Management stated that its exposure and risk-management approach had not changed significantly from 2013.
- Management’s goodwill review found no impairment as of June 30, 2014. The filing notes that changes in interest rates, collateral values, economic conditions, or management estimates could materially affect reported results.
- The filing reports no material legal proceedings, no material changes in off-balance-sheet arrangements, and no material changes in internal control over financial reporting.
Important Investor Verification Items
- Verify the timing, regulatory approval, final consideration, purchase accounting, and integration costs associated with the First Bank acquisition.
- Assess whether the improvement in earnings persists after removing the one-time premises-sale gain and considering the decline in securities gains and mortgage-related loan-sale activity.
- Monitor deposit trends, repurchase funding, available borrowing capacity, and liquidity following the decline in deposits.
- Review the concentration and valuation sensitivity of the $599.2 million securities portfolio, including municipal exposures and unrealized losses.
- Track credit quality, other real estate owned, impaired loans, charge-offs, and the adequacy of the $8.5 million loan-loss allowance.
- Evaluate the effect of changing interest rates and the implementation of Basel III capital requirements beginning in 2015.
