Ames National Corporation — Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating five central Iowa bank subsidiaries. Its primary businesses are commercial and consumer lending, deposits, wealth management, investment services, and merchant/card services. This unaudited filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods; balance-sheet comparisons are primarily with December 31, 2014.
First National Bank’s August 2014 acquisition of three First Bank branches in West Des Moines and Johnston, Iowa, continued to affect the 2015 results, including loan and deposit growth, higher operating expenses, and amortization of acquired core deposit intangibles.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total interest income | $10.9 million | $10.1 million | $21.4 million | $20.1 million |
| Net interest income | $9.8 million | $9.0 million | $19.2 million | $17.7 million |
| Provision for loan losses | $0.9 million | $0.04 million | $1.0 million | $0.07 million |
| Noninterest income | $2.4 million | $1.7 million | $4.2 million | $4.7 million |
| Noninterest expense | $6.7 million | $5.4 million | $12.8 million | $10.7 million |
| Net income | $3.36 million | $3.85 million | $7.00 million | $8.38 million |
| Diluted EPS | $0.36 | $0.41 | $0.75 | $0.90 |
- Net interest income increased 9.0% in the quarter and 8.6% for the six months, primarily from higher loan balances following the acquisition and stronger loan demand. The tax-equivalent net interest margin was 3.32% for the quarter and 3.30% year to date, compared with 3.30% and 3.27%, respectively.
- Quarterly net income declined approximately 13%, while six-month net income declined approximately 16.5%. Management attributed the declines primarily to substantially higher loan-loss provisions, higher other real estate owned expenses, and higher operating costs. The six-month comparison was also affected by a $1.24 million gain on the sale of premises and equipment in 2014.
- Quarterly return on assets was 1.01%, return on equity was 8.48%, and the efficiency ratio was 54.88%. The filing states that the efficiency ratio increased from 50.49% in the prior-year quarter, primarily because of acquisition-related costs and other real estate owned expenses.
Financial Position, Cash Flow, Debt, and Liquidity
- Total assets were $1.322 billion at June 30, 2015, up $21.1 million, or 1.6%, from December 31, 2014. Net loans were $677.6 million, up $19.1 million, or 3.0%; securities available-for-sale were $546.6 million, up $4.1 million.
- Total deposits were $1.079 billion, up $27.3 million, or 2.6%, from year-end. Growth was concentrated in public and retail money-market accounts and commercial money-market accounts, partly offset by lower time deposits.
- Borrowings included $43.5 million of securities sold under repurchase agreements, $20.0 million of FHLB advances, and $16.9 million of other borrowings at June 30, 2015. Management stated that the Company had no external debt financing, off-balance-sheet financing arrangements, or derivative instruments linked to its stock.
- Cash and due from banks plus interest-bearing deposits totaled $56.0 million. Available liquidity also included $138.5 million of unused FHLB lines and $115.7 million of federal funds borrowing capacity. All investment securities were classified as available-for-sale.
- Operating cash flow was $10.8 million for the first six months, compared with $10.1 million in 2014. Investing activities used $23.7 million, primarily reflecting loan growth and securities purchases, while financing activities provided $15.5 million, primarily from deposit growth. Cash and due from banks increased $2.6 million to $26.3 million.
- Stockholders’ equity was $156.6 million, or 11.84% of assets, compared with $154.7 million, or 11.89%, at year-end. The consolidated total capital ratio was 16.8%, Tier 1 risk-based capital ratio was 15.7%, common equity Tier 1 ratio was 15.7%, and Tier 1 leverage ratio was 11.1%; all exceeded applicable regulatory requirements.
Material Changes, Outlook, Risks, and Unusual Items
- Asset quality remained favorable, according to management. Problem loans were 0.30% of total loans versus 0.37% at December 31, 2014; nonaccrual loans were $2.0 million and loans 90 days or more past due and accruing were $37,000.
- The allowance for loan losses increased to $9.9 million from $8.8 million, and increased to 1.44% of loans from 1.32%. The higher provision reflected loan growth, although net recoveries were $34,000 for the six months.
- Impaired loans, net of specific reserves, declined to $1.7 million from $2.1 million at year-end but were above the $1.0 million reported at June 30, 2014. Troubled debt restructurings totaled $929,000, down from $1.1 million at year-end.
- Other real estate owned declined to $4.6 million from $8.4 million, but related expense increased materially because of a $590,000 impairment charge and other disposition costs. The properties were primarily located in the Ames and Des Moines metropolitan areas and were being actively marketed.
- Other comprehensive loss was $1.38 million for the six months, reflecting lower fair values on available-for-sale securities as market interest rates increased. Gross unrealized losses on securities were $2.57 million and management considered them temporary; future market changes could materially affect reported values.
- The Company declared a quarterly dividend of $0.20 per share, compared with $0.18 per share in the prior-year period. No shares were repurchased during the quarter, and 100,000 shares remained available under the repurchase plan.
- No formal earnings or financial guidance was provided. Management stated that liquidity was satisfactory and expected available sources to support existing operations for the foreseeable future. No significant subsequent events were reported through August 6, 2015.
- Key risks include Iowa and broader economic conditions, commercial and residential real estate values, credit losses, interest-rate movements and net interest margin pressure, deposit declines, competition, regulatory capital and dividend restrictions, liquidity costs, securities valuation changes, and integration of the acquired branches.
Important Facts for Investors to Verify
- Whether elevated loan-loss provisions and other real estate owned costs persist and how they affect future earnings.
- Loan growth, acquired-loan performance, allowance coverage, nonaccrual loans, past-due loans, impaired loans, and troubled debt restructurings.
- The duration and credit exposure of the $546.6 million available-for-sale securities portfolio, including the $2.57 million of unrealized losses and Iowa municipal concentration.
- Changes in deposit composition, repurchase agreements, FHLB advances, unused borrowing capacity, and liquidity if deposits decline.
- The effect of future interest-rate changes on net interest margin, securities values, capital, and dividend capacity.
- Capital ratios under the Basel III framework and the impact of the phased-in capital conservation buffer on future distributions.
- Whether acquisition-related revenue benefits exceed ongoing salaries, data processing, occupancy, and intangible-amortization expenses.