AMES NATIONAL CORP quarterly report, Q2 FY2012

Ames National Corporation — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2012. The unaudited filing covers Ames National Corporation and its five central Iowa bank subsidiaries. The Company is primarily a bank holding company providing commercial and consumer loans, deposit services, trust services, investment services and related banking products.

Financial Performance and Position

Metric	Three Months Ended June 30, 2012	Three Months Ended June 30, 2011	Six Months Ended June 30, 2012	Six Months Ended June 30, 2011
Net interest income	$8.2 million	$7.8 million	$15.9 million	$15.2 million
Provision for loan losses	$64 thousand	$405 thousand	$116 thousand	$405 thousand
Noninterest income	$1.7 million	$1.6 million	$3.6 million	$3.5 million
Noninterest expense	$5.5 million	$4.8 million	$10.3 million	$9.3 million
Net income	$3.3 million	$3.2 million	$6.9 million	$6.7 million
Basic and diluted EPS	$0.36	$0.34	$0.74	$0.71
Dividends declared per share	$0.15	$0.13	$0.30	$0.26

Margins and returns: Second-quarter net interest margin was 3.38%, compared with 3.63% in the prior-year quarter. Six-month net interest margin was 3.39%, compared with 3.58%. Second-quarter return on assets was 1.15% and return on equity was 9.52%.
Efficiency: The second-quarter efficiency ratio increased to 55.34% from 50.40%, primarily because of higher operating costs and acquisition-related expenses.
Assets: Total assets were $1.158 billion at June 30, 2012, up from $1.036 billion at December 31, 2011. Securities available-for-sale were $561.1 million and net loans were $487.4 million.
Deposits: Total deposits were $945.1 million, up 15.4% from $818.7 million at year-end 2011, primarily because of deposits assumed in the branch acquisition.
Capital: Stockholders’ equity was $140.0 million, or 12.1% of total assets. Tangible equity was $133.0 million, or 11.6% of tangible assets. Management stated that capital levels exceeded applicable regulatory guidelines.
Debt: Securities sold under repurchase agreements were $31.5 million. FHLB advances and other long-term borrowings totaled $34.6 million. The Company reported no external debt financing on an unconsolidated basis, off-balance-sheet financing arrangements or stock-linked derivatives.
Liquidity: Cash and interest-bearing deposits totaled $69.7 million. Additional available sources included $88.8 million of FHLB borrowing capacity and $102.6 million of federal funds borrowing capacity. Management considered liquidity satisfactory.
Cash flow: Six-month cash provided by operating activities was $9.9 million, compared with $10.1 million in 2011. Cash used in investing was $24.5 million, compared with $33.7 million. Financing activities provided $14.4 million, compared with $25.6 million. Cash and due from banks ended at $22.6 million.

Material Changes Versus Prior Comparable Period

Net income increased approximately 2% for the quarter and 2% for the six months; EPS increased to $0.36 and $0.74, respectively.
Net interest income increased because of higher average loan and investment balances and lower deposit funding costs, although asset yields and net interest margin declined.
Interest expense declined 15.2% in the quarter and 14.8% for the six months, principally because of lower deposit rates.
Noninterest income increased 5.5% in the quarter and 5.0% for the six months, led by higher gains on sales of loans and merchant and ATM fees. Securities gains were lower.
Noninterest expense increased 15.4% in the quarter and 10.6% for the six months. Increases reflected additional personnel, other real estate owned costs, professional fees and approximately $160 thousand to $200 thousand of acquisition-related costs.
The provision for loan losses declined materially, and net loan charge-offs were $9 thousand in the quarter and zero for the six months, compared with $56 thousand and $50 thousand, respectively, in the prior-year periods.
Loans increased 11.1% and deposits increased 15.4% from December 31, 2011, largely reflecting the April 27, 2012 acquisition of two Iowa bank branches.
Other real estate owned declined to $8.7 million from $9.5 million, but related expense increased to $441 thousand for the six months from $166 thousand.

Acquisition, Credit Quality and Unusual Items

Reliance State Bank acquired two Liberty Bank branches in Garner and Klemme, Iowa, for $5.4 million in cash on April 27, 2012. The transaction added approximately $98.8 million of deposits and $46.1 million of loans and resulted in $5.6 million of goodwill and $1.5 million of core deposit intangible assets.
The core deposit intangible is being amortized over seven years; acquisition-related expenses were approximately $200 thousand for the six months.
Problem loans were 1.56% of total loans at June 30, 2012, compared with 1.70% at December 31, 2011. Nonaccrual loans were $7.6 million and loans more than 90 days past due and still accruing were $155 thousand.
Impaired loans, net of specific reserves, were $6.7 million. Troubled debt restructurings totaled $6.4 million, up from $3.6 million at year-end 2011. Five loans were restructured during the second quarter; the filing reports no related charge-offs.
The allowance for loan losses was $8.0 million, or 1.62% of outstanding loans, compared with 1.77% at December 31, 2011.
Available-for-sale securities had gross unrealized losses of $716 thousand. Management considered the losses temporary and reported no other-than-temporary impairment.

Guidance, Outlook and Risks

The filing does not provide quantitative earnings or revenue guidance. Management expects liquidity sources to support existing operations for the foreseeable future and anticipates no material capital expenditures or changes in the capital resource mix.

Rising interest rates could compress net interest margin because interest-bearing liabilities may reprice faster than longer-maturity earning assets.
Continued competition in central Iowa could pressure loan and deposit pricing and margins.
Declines in commercial or residential real estate values could increase losses on impaired loans and other real estate owned. Other real estate owned valuations are subject to appraisal and market uncertainty.
Credit quality, allowance estimates, troubled debt restructurings and borrower performance remain important risks.
Regulatory changes, including implementation of the Dodd-Frank Act and Consumer Financial Protection Bureau requirements, could increase operating and compliance costs.
The Company is concentrated in central Iowa and is exposed to local economic conditions, interest rates, liquidity availability, securities markets and competition.
Off-balance-sheet exposure consists principally of commitments to extend credit and standby letters of credit. Management reported no material change from December 31, 2011.

Important Facts for Investors to Verify

Whether the acquired Garner and Klemme branches produce the expected deposit retention, loan growth and cost synergies.
Whether the lower net interest margin persists as rates, deposit pricing and investment yields change.
Trends in nonaccrual loans, troubled debt restructurings, impaired loans, other real estate owned and related valuation allowances.
Whether acquisition-related and other elevated noninterest expenses normalize.
The quality and duration of the $561.1 million available-for-sale securities portfolio and the potential effect of interest-rate changes on unrealized gains and losses.
Liquidity sensitivity to a sudden decline in deposits and continued access to FHLB and correspondent-bank funding.
Regulatory capital requirements and the sustainability of the increased $0.15 quarterly dividend.
The filing states that its interim results are unaudited and are not necessarily indicative of full-year results.