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 that provide commercial and consumer lending, deposit, trust and related financial services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods, and the balance sheet is compared with December 31, 2011.
Financial performance and condition
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net income | $3.861 million vs. $3.590 million | $10.714 million vs. $10.306 million |
| Basic and diluted EPS | $0.41 vs. $0.38 | $1.15 vs. $1.09 |
| Net interest income | $8.246 million vs. $7.873 million | $24.157 million vs. $23.078 million |
| Provision for loan losses | $36 thousand vs. $5 thousand | $151 thousand vs. $410 thousand |
| Noninterest income | $2.059 million vs. $1.899 million | $5.690 million vs. $5.358 million |
| Noninterest expense | $5.043 million vs. $4.872 million | $15.376 million vs. $14.213 million |
| Net interest margin | 3.34% vs. 3.67% | 3.37% vs. 3.61% |
- Total assets were $1.168 billion at September 30, 2012, up $132.3 million, or 12.8%, from December 31, 2011.
- Net loans were $488.4 million, up $49.8 million, or 11.3%. Securities available-for-sale were $573.6 million, up $64.9 million, or 12.8%.
- Total deposits were $942.2 million, up $123.5 million, or 15.1%, primarily reflecting deposits assumed in the branch acquisition.
- FHLB advances and other long-term borrowings totaled $34.6 million, compared with $35.2 million at year-end. Securities sold under repurchase agreements totaled $39.0 million.
- Stockholders’ equity was $144.1 million, or 12.3% of total assets. Tangible equity was $137.1 million, or 11.8% of tangible assets. Management stated that capital exceeded applicable regulatory guidelines.
- Net cash provided by operating activities was $10.2 million for the nine months, compared with $14.6 million in 2011. Investing activities used $27.1 million, while financing activities provided $17.6 million. Cash and due from banks ended at $23.5 million.
- Liquid assets, consisting of cash and interest-bearing deposits, totaled $59.3 million. Available liquidity included $92.6 million of unused FHLB lines and $102.5 million of federal funds borrowing capacity, subject to applicable conditions.
Material changes versus prior comparable periods
- Quarterly net income increased 7.6%, while nine-month net income increased 4.0%. EPS increased because earnings rose and average shares outstanding declined.
- Net interest income increased despite margin compression because average loan and investment balances grew. Interest expense declined 15.3% for the quarter and 14.9% for the nine months, primarily due to lower deposit rates.
- Noninterest income increased 8.4% for the quarter and 6.2% for the nine months, led by higher gains on sales of loans and merchant and ATM fees. Securities gains were lower than in 2011.
- Noninterest expense increased 3.5% for the quarter and 8.2% for the nine months, reflecting higher salaries, data processing, incentive compensation and acquisition-related costs. Approximately $232 thousand of nine-month expenses were associated with the acquisition.
- On April 27, 2012, Reliance State Bank acquired two Liberty Bank offices in Garner and Klemme, Iowa, for $5.4 million in cash. The transaction added approximately $98.8 million of deposits and resulted in $5.6 million of goodwill and $1.5 million of core deposit intangible assets.
- Asset quality improved in several respects: problem loans were 1.22% of total loans versus 1.70% at December 31, 2011; impaired loans net of specific reserves were $4.9 million versus $6.9 million; and net loan charge-offs were $47 thousand versus $66 thousand.
- Other real estate owned increased to $9.9 million from $9.5 million. The allowance for loan losses increased to $8.0 million, but declined to 1.61% of loans from 1.77%.
- The quarterly dividend increased to $0.15 per share from $0.13 per share in the 2011 comparable period. No shares were repurchased during the quarter; 56,220 shares remained available under the repurchase plan.
Outlook, risks, contingencies and unusual items
- The filing provides no quantitative 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 rising interest rates as a risk because interest-bearing liabilities may reprice faster than longer-maturity earning assets. Competitive pressure may also continue to compress net interest margins.
- Other key risks include economic conditions in central Iowa, commercial and residential real estate values, loan losses, securities impairment, liquidity availability, regulatory changes and compliance costs.
- Goodwill and the core deposit intangible arose from the branch acquisition. Management identified no impairment indicators through September 30, 2012; the first annual goodwill impairment test was scheduled for the fourth quarter of 2012.
- Loans meeting the definition of troubled debt restructurings totaled $6.1 million at September 30, 2012, compared with $3.6 million at December 31, 2011. Nine months of 2012 included nine restructured loans totaling $3.4 million post-modification.
- Gross unrealized losses on available-for-sale securities totaled $510 thousand and were considered temporary by management. Changes in market conditions could affect future fair values and earnings.
- Off-balance-sheet arrangements consisted primarily of commitments to extend credit and standby letters of credit. Management reported no material change since December 31, 2011.
- No material legal proceedings, subsequent events, internal-control changes or risk-factor updates were reported. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Assess whether continued net interest margin compression offsets loan and deposit growth.
- Review the performance and integration of the Garner and Klemme branch acquisition, including goodwill and core deposit intangible impairment testing.
- Monitor troubled debt restructurings, nonaccrual loans, other real estate owned and the adequacy of the $8.0 million loan-loss allowance.
- Evaluate the concentration of securities, loans and deposits in central Iowa and the sensitivity of earnings to interest-rate changes.
- Confirm liquidity availability, borrowing capacity and any restrictions on subsidiary dividends supporting the holding company’s dividends.
- Reconcile management’s reported performance ratios and margin figures to the detailed financial statements, as certain ratio presentations vary within the filing.