Ames National Corporation — 2017 Form 10-K Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company operating five wholly owned community banks in central and north-central Iowa. Its activities are concentrated in commercial, agricultural, real estate and consumer lending; deposits; investment securities; mortgage loan sales; and wealth management. The filing covers the fiscal year ended December 31, 2017, with comparative information for 2016 and 2015. The filing was signed March 12, 2018.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets | $1.375 billion | $1.366 billion | +0.6% |
| Net loans | $771.5 million | $752.2 million | +2.6% |
| Deposits | $1.134 billion | $1.109 billion | +2.3% |
| Stockholders’ equity | $170.8 million | $165.1 million | +3.4% |
| Net interest income | $40.2 million | $39.9 million | +0.8% |
| Net income | $13.7 million | $15.7 million | -12.9% |
| Basic and diluted EPS | $1.47 | $1.69 | -13.0% |
| Net interest margin, FTE | 3.25% | 3.36% | -11 basis points |
| Return on average assets | 1.00% | 1.18% | Down 18 basis points |
| Return on average equity | 8.02% | 9.38% | Down 136 basis points |
Interest income increased to $45.8 million from $44.0 million, principally reflecting growth in loan balances, especially commercial real estate loans. Interest expense rose to $5.6 million from $4.1 million as deposit costs increased following higher short-term interest rates. Noninterest income was $8.0 million, down slightly from $8.1 million, while noninterest expense rose 1.9% to $25.4 million.
The provision for loan losses increased to $1.5 million from $0.5 million. Net charge-offs were $706,000, compared with $5,000 in 2016, and the allowance for loan losses increased to $11.3 million, or 1.45% of loans net of deferred fees. Nonperforming assets totaled approximately $5.2 million, or 0.38% of assets, compared with $5.6 million at year-end 2016.
Net cash provided by operating activities was $18.8 million. Investing activities used $16.9 million, primarily reflecting loan growth and changes in investment securities and interest-bearing deposits. Financing activities used $5.0 million, mainly because of a $20.9 million reduction in repurchase agreement funding, partly offset by $25.0 million of deposit growth. Cash and due from banks totaled $26.4 million, while cash and interest-bearing deposits available for liquidity totaled approximately $69.4 million.
The investment securities portfolio was $498.3 million, or approximately 36% of total assets, and had pretax net unrealized losses of $687,000. No other-than-temporary impairment was recognized in 2017. Borrowings at year-end included $37.4 million of repurchase agreements, $13.5 million of FHLB advances and $13.0 million of other borrowings.
Material changes versus the prior comparable period
- Net income declined $2.0 million, primarily because of higher loan-loss provisions, higher deposit interest expense and higher income tax expense.
- The effective tax rate increased to approximately 36% from 30%, including a $1.19 million write-down of deferred tax assets following enactment of the 21% federal corporate tax rate.
- Net interest income increased modestly, but the FTE net interest margin declined from 3.36% to 3.25% as funding costs rose faster than asset yields.
- Net loans increased $19.4 million, driven primarily by commercial real estate growth. Investments declined $17.7 million, or 3.4%.
- Deposits increased $25.0 million, while securities sold under repurchase agreements declined $20.9 million, or approximately 36%.
- Nonperforming assets decreased approximately 7%, and other real estate owned declined to $386,000 from $546,000.
- Annual cash dividends increased to $0.88 per share from $0.84. A $0.23 quarterly dividend and a one-time $0.25 special dividend were declared in February 2018. No shares were repurchased during 2017.
- Fourth-quarter 2017 net income was $2.7 million, or $0.29 per share, compared with $4.0 million, or $0.43 per share, in fourth-quarter 2016, primarily reflecting the tax-related deferred tax asset write-down.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects liquidity sources to support existing operations for the foreseeable future and considers liquidity and capital resources satisfactory. All five subsidiary banks were categorized as well capitalized under applicable regulatory standards.
Management identified a liability-sensitive interest-rate position. Modeling indicated that an immediate 400-basis-point increase in rates could reduce estimated 2018 net interest income by approximately $6.7 million, or 16.6%; a 200-basis-point decline could reduce it by approximately $1.8 million, or 4.5%. The company’s cumulative repricing gap was negative 43% within three months and negative 42% within one year.
- Credit risk is concentrated in central and north-central Iowa, with significant exposure to commercial real estate and agriculture. Commercial real estate represented approximately $350.6 million of loans at year-end, and agricultural loans totaled approximately $151.6 million across real estate and operating categories.
- Management reported weakness in Iowa agriculture from low grain prices, although favorable 2017 yields generally produced break-even cash flows for agricultural borrowers.
- Higher interest rates may compress margins because liabilities reprice faster than loans and investments.
- Potential losses may arise from deterioration in commercial real estate values, agricultural conditions, collateral values or borrower cash flows.
- The $498.3 million available-for-sale securities portfolio remains exposed to interest-rate, market-value, liquidity and issuer-credit risk. Management judged unrealized losses to be temporary.
- Liquidity depends primarily on deposits, securities cash flows and borrowing capacity. Available FHLB capacity was $185.4 million and correspondent-bank federal funds capacity was $110.1 million at year-end.
- Off-balance-sheet commitments included $153.3 million of commitments to extend credit and $3.8 million of standby letters of credit. The related credit-loss liability was approximately $507,000.
- The company adopted revenue recognition guidance effective January 1, 2018 and expected no material impact. The current expected credit loss standard was scheduled to become effective in 2020; the filing states that its impact could not yet be assessed.
- Goodwill was $6.7 million and total goodwill and intangible assets were approximately $7.8 million at year-end. The 2017 goodwill impairment test identified no impairment.
Most important facts for an investor to verify
- Reconcile the 2017 earnings decline to the higher loan-loss provision, rising deposit costs and the $1.19 million deferred tax asset write-down.
- Review commercial real estate and agricultural loan concentrations, criticized loan trends, nonaccrual loans, TDRs and allowance coverage.
- Assess the sensitivity of future net interest income to further Federal Reserve rate increases and deposit repricing.
- Evaluate the fair value and unrealized-loss profile of the available-for-sale securities portfolio, including municipal and agency exposures.
- Confirm liquidity availability and the maturity, collateral and callable features of repurchase agreements, FHLB advances and other borrowings.
- Review dividend sustainability against holding-company cash, subsidiary-bank dividend restrictions and regulatory capital requirements.
- Confirm the implementation effects of the current expected credit loss standard and other pending accounting changes.
- Note that the independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of December 31, 2017.