Ames National Corporation 2021 Form 10-K Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating six wholly owned community banks. Operations are concentrated in central, north-central and south-central Iowa and include commercial, agricultural, residential and consumer lending, deposit services, mortgage sales and wealth management. This filing covers the fiscal year ended December 31, 2021, with comparative results for 2020. The filing was audited by CliftonLarsonAllen LLP, which issued an unqualified opinion.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net income | $23.9 million | $18.9 million | +26.9% |
| Basic and diluted EPS | $2.62 | $2.06 | +$0.56 |
| Net interest income | $56.0 million | $54.8 million | +2.1% |
| Net interest margin, FTE | 2.83% | 3.13% | -30 basis points |
| Noninterest income | $10.5 million | $10.6 million | Slight decrease |
| Noninterest expense | $36.6 million | $36.6 million | Approximately flat |
| Return on average assets | 1.15% | 1.01% | Improved |
| Return on average equity | 11.43% | 9.48% | Improved |
| Total assets | $2.14 billion | $1.98 billion | +8.2% |
| Net loans | $1.14 billion | $1.13 billion | +1.3% |
| Total deposits | $1.88 billion | $1.72 billion | +$161.6 million |
| Stockholders’ equity | $207.8 million | $209.5 million | Decrease |
Profitability benefited principally from a $6.4 million year-over-year improvement in the provision for loan losses, which changed from a $5.7 million provision in 2020 to a $757 thousand credit in 2021. Interest expense declined to $4.5 million from $8.1 million, offsetting lower loan yields and supporting higher net interest income.
Net cash provided by operating activities was $30.5 million, compared with $29.7 million in 2020. Investing activities used $268.6 million, primarily because of increased purchases of available-for-sale securities. Financing activities provided $154.1 million, mainly from $161.7 million of deposit growth. Cash and cash equivalents declined to $89.1 million from $173.1 million.
Available-for-sale securities totaled $831.0 million, up 39.2% from $597.0 million. The portfolio had $6.5 million of gross unrealized losses and $10.3 million of gross unrealized gains at year-end; no other-than-temporary impairment was recorded. Borrowings included $39.9 million of repurchase agreements and $3.0 million of FHLB advances. The Company also reported $309.4 million of available FHLB borrowing capacity, $107.8 million of correspondent-bank federal funds capacity and an undrawn $4.0 million line of credit.
The allowance for loan losses was $16.6 million, or 1.43% of loans net of deferred fees, compared with $17.2 million, or 1.50%, in 2020. Net recoveries were $163 thousand in 2021 versus $1.1 million of net charge-offs in 2020. Nonperforming assets declined 16% to $13.1 million, although nonperforming loans at 1.11% of loans remained above the Iowa peer average of 0.45% cited by management.
Material Changes Versus the Prior Comparable Period
- Net income increased $5.1 million, primarily because of the lower loan-loss provision and lower deposit funding costs.
- Net interest margin narrowed from 3.13% to 2.83% as earning-asset yields declined faster than funding costs.
- Deposits increased 9.4%, driven partly by government stimulus programs and growth in retail and commercial balances.
- Investment securities increased $234.0 million as deposit growth was deployed into U.S. Treasury, agency, mortgage-backed, municipal and corporate securities.
- PPP loans declined to $6.0 million from $50.9 million as loans were forgiven or otherwise resolved. The Banks originated 2,152 PPP loans totaling more than $123.3 million.
- Classified loans decreased $14.9 million to $61.4 million, and substantially all COVID-19-related loan modifications had returned to normal payment status by year-end.
- Accumulated other comprehensive income declined to $2.9 million from $16.0 million, largely reflecting lower unrealized gains on available-for-sale securities.
- Cash dividends declared increased to $11.8 million, or $1.29 per share, from $6.9 million, or $0.75 per share. The Company repurchased 30,580 shares in 2021.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal quantitative earnings guidance. Management expects interest rates to rise during 2022 in response to inflationary pressure and cautions that interest-bearing liabilities may reprice faster than loans and investments, placing downward pressure on net interest income and margin.
- Management believes liquidity and capital resources are satisfactory and sufficient for foreseeable operations. All six Banks were designated well capitalized at December 31, 2021.
- Inflation, reported at 7.0% at December 31, 2021, may increase wages, operating expenses, funding costs and borrower stress.
- Credit risk remains concentrated in commercial real estate, agricultural lending and Iowa-based borrowers. Commodity prices, weather, trade policy, agricultural conditions and local economic conditions may affect repayment and collateral values.
- Hospitality and fitness-related commercial real estate borrowers experienced heightened pandemic-related credit risk.
- COVID-19 could continue to affect loan performance, collateral values, staffing, vendors, operating costs, cybersecurity and financial markets.
- The $223.4 million of commitments to extend credit and $6.5 million of standby letters of credit create potential future funding and credit exposure, although management does not expect a significant liquidity or capital impact.
- The Company had approximately $386.1 million of uninsured deposits at year-end, creating potential deposit-retention and liquidity sensitivity.
- Goodwill of $12.4 million was not impaired, but future impairment could result from deterioration in earnings, market value or operating conditions.
- Current expected credit loss accounting under ASU 2016-13 becomes effective for the Company in periods beginning after December 15, 2022. Management expects the standard to affect the financial statements but has not quantified the impact.
- The Company committed to a $1.8 million West Des Moines branch project, with $1.0 million remaining at year-end.
Important Facts for Investors to Verify
- Whether the improvement in earnings remains sustainable after the unusually favorable 2021 loan-loss credit and lower funding costs.
- The effect of rising interest rates on deposit pricing, net interest margin and securities valuations.
- Trends in nonperforming loans, classified loans, commercial real estate exposure and agricultural credit quality.
- The adequacy of the $16.6 million allowance for loan losses and the eventual effect of CECL adoption.
- The magnitude and duration of unrealized losses in the $831.0 million available-for-sale securities portfolio.
- Deposit stability, uninsured deposits, certificate-of-deposit maturities and available borrowing capacity.
- The sustainability of the $1.29-per-share dividend given capital requirements and the holding company’s dependence on subsidiary-bank dividends.
- Potential exposure from $229.9 million of off-balance-sheet commitments and from PPP loan eligibility or servicing disputes with the SBA.