Business Context and Reporting Period
Ames National Corporation is a bank holding company that owns five central Iowa banks offering commercial and consumer loans, deposits, trust services, and investment services. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the same period in 2013; balance-sheet comparisons are primarily with December 31, 2013.
Financial Performance and Position
| Metric | Q1 2014 | Comparable period or prior year-end |
|---|---|---|
| Net interest income | $8.734 million | $8.085 million in Q1 2013 |
| Net income | $4.526 million | $3.586 million in Q1 2013 |
| Basic and diluted EPS | $0.49 | $0.39 in Q1 2013 |
| Net interest margin | 3.24% | 3.13% in Q1 2013 |
| Total assets | $1.258 billion | $1.233 billion at December 31, 2013 |
| Net loans | $548.545 million | $564.502 million at December 31, 2013 |
| Deposits | $1.028 billion | $1.012 billion at December 31, 2013 |
| Stockholders’ equity | $147.188 million | $142.106 million at December 31, 2013 |
| Cash and interest-bearing deposits | $70.777 million | $47.898 million at December 31, 2013 |
Total interest income increased 5.8% to $9.920 million, while interest expense declined 8.2% to $1.186 million. The provision for loan losses was $39,000, compared with $14,000 in Q1 2013. Noninterest income was $2.946 million versus $1.843 million, and noninterest expense was $5.329 million versus $5.119 million. The effective tax rate was approximately 28%, compared with 25% in the prior-year quarter.
Operating cash flow was $6.507 million, compared with $6.177 million in Q1 2013. Investing activities used $17.382 million, primarily reflecting purchases of available-for-sale securities and increased interest-bearing deposits. Financing activities provided $17.014 million, largely from deposit growth and short-term FHLB borrowings. Cash and due from banks increased by $6.140 million during the quarter.
Debt and funding liabilities included $39.910 million of securities sold under agreements to repurchase and federal funds purchased, $16.723 million of FHLB advances, and $20.000 million of other long-term borrowings. Available liquidity included $124.886 million of unused FHLB borrowing capacity and $95.972 million of federal funds borrowing capacity. Management stated that liquidity and capital resources were satisfactory and sufficient for existing operations.
Material Changes Versus Prior Comparable Period
- Net income increased 26.2%, and EPS increased from $0.39 to $0.49.
- Net interest income increased approximately 8.0%, supported by higher average loan balances, higher securities yields, and lower funding costs.
- Noninterest income increased 59.8%, primarily because of a $1.257 million gain on the sale of the University office. Management identified the related after-tax benefit as approximately $788,000.
- Excluding the one-time property-sale gain, management estimated net income at $3.738 million, or $0.40 per share, compared with $3.586 million, or $0.39 per share, in Q1 2013.
- Available-for-sale securities increased 3.6% to $600.831 million, while net loans declined 2.8%, primarily because of seasonal reductions in agricultural operating loans.
- Deposits increased 1.6%, primarily through growth in money market accounts.
- Problem loans declined to 0.34% of total loans from 0.44% at December 31, 2013 and 1.08% at March 31, 2013. Impaired loans, net of specific reserves, declined to $1.434 million from $2.244 million at year-end 2013.
- Cash dividends declared increased to $0.18 per share from $0.16 per share.
Outlook, Risks, Contingencies, and Unusual Items
- On April 30, 2014, First National Bank entered into an agreement to acquire substantially all assets and assume substantially all liabilities, including deposits, of First Bank. The transaction is expected to close in the third quarter of 2014, subject to regulatory approval and customary conditions, for approximately $4.7 million, subject to adjustments. Management expects to fund the transaction from First National’s cash reserves without third-party financing.
- Management reported no material changes in off-balance-sheet arrangements. Commitments to extend credit and standby letters of credit remain subject to credit risk.
- Other real estate owned totaled $8.880 million and was actively marketed. Its valuation includes significant appraisal and market assumptions.
- Available-for-sale securities had gross unrealized losses of $6.049 million. Management considered the losses temporary, but changes in interest rates, market conditions, issuer credit quality, or the Company’s ability to hold the securities could affect reported values.
- Key risks include concentration in central Iowa, changes in interest rates, credit deterioration, real estate values, liquidity availability, regulatory and capital requirements, competitive pressures, and the ability to integrate the First Bank acquisition.
- Goodwill was $5.601 million and management concluded it was not impaired as of March 31, 2014. The next annual impairment test was expected in the fourth quarter of 2014.
- Management stated that disclosure controls were effective and that no material legal proceedings or reportable changes in internal control were identified.
Important Facts for Investors to Verify
- Whether the First Bank acquisition receives regulatory approval and closes on the expected terms and timetable.
- The sustainability of earnings excluding the nonrecurring University office-sale gain.
- Future net interest margin performance as loans reprice and market interest rates change.
- Trends in agricultural, commercial real estate, impaired, nonaccrual, and troubled debt-restructured loans.
- The adequacy of the $8.568 million allowance for loan losses and the potential effect of changes in collateral values or local economic conditions.
- The realization of the $8.880 million other real estate owned balance and the potential effect of further valuation adjustments.
- The effect of unrealized securities losses and interest-rate movements on accumulated other comprehensive income and capital.
- Liquidity after funding the approximately $4.7 million acquisition payment and any subsequent deposit or loan growth.