Ames National Corporation — 2018 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, north-central and south-central Iowa. Its principal activities are commercial, agricultural, real estate and consumer lending; deposit gathering; investment securities management; mortgage loan sales; and wealth management.
The filing covers the fiscal year ended December 31, 2018, with comparative information for 2017. It is an annual Form 10-K rather than a standalone fourth-quarter filing.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net income | $17.0 million | $13.7 million | +24.2% |
| Basic and diluted EPS | $1.83 | $1.47 | +24.5% |
| Net interest income | $42.1 million | $40.2 million | +4.8% |
| Provision for loan losses | $0.6 million | $1.5 million | -$0.9 million |
| Noninterest income | $7.9 million | $8.0 million | -1.1% |
| Noninterest expense | $28.0 million | $25.4 million | +10.1% |
| Return on average assets | 1.23% | 1.00% | +23 basis points |
| Return on average equity | 10.09% | 8.02% | +207 basis points |
| Net interest margin, FTE | 3.23% | 3.25% | -2 basis points |
| Efficiency ratio | 55.90% | 52.70% | Higher expense burden |
Net income benefited primarily from higher loan interest income, lower loan-loss provision expense and substantially lower income taxes. The effective tax rate was approximately 21% in 2018 versus 36% in 2017, when the Company recorded a $1.2 million deferred tax asset write-down related to federal tax reform.
| Balance-sheet metric | December 31, 2018 | December 31, 2017 | Change |
|---|---|---|---|
| Total assets | $1.456 billion | $1.375 billion | +5.9% |
| Net loans | $890.5 million | $771.5 million | +15.4% |
| Deposits | $1.221 billion | $1.134 billion | +7.6% |
| Available-for-sale securities | $459.0 million | $495.3 million | -7.3% |
| Stockholders’ equity | $172.9 million | $170.8 million | +1.2% |
| Equity-to-assets ratio | 11.88% | 12.42% | Lower |
Loan growth was concentrated in real estate and agricultural lending and was driven principally by the Clarke County Acquisition completed in September 2018. Commercial real estate represented approximately $389.5 million of loans, and total real estate loans comprised the largest portfolio category.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $20.7 million, compared with $18.8 million in 2017.
- Investing activities provided $8.6 million, compared with $16.9 million used in 2017. The change reflected fewer securities purchases and higher loan balances, partly offset by $13.4 million of cash paid for the Clarke County Acquisition.
- Financing activities used $25.4 million, primarily because of debt repayments, dividends and share repurchases.
- Cash and due from banks totaled $30.4 million; total immediately liquid assets, including interest-bearing deposits, were approximately $56.4 million.
- Outstanding FHLB advances were $14.6 million and repurchase agreements were $40.7 million. The Company reported no other borrowings at year-end.
- Available borrowing capacity included approximately $171.6 million from the FHLB and $108.6 million of federal funds capacity at correspondent banks.
- Commitments to extend credit were $158.8 million and standby letters of credit were $6.4 million. Management stated that liquidity was sufficient to fund these commitments and existing operations.
Material Changes Compared with 2017
- Clarke County Acquisition: First National acquired Clarke County State Bank and its Osceola and Murray, Iowa branches for approximately $14.8 million in cash. The transaction added approximately $76.0 million of loans, $83.2 million of deposits, $3.0 million of goodwill and $2.0 million of core deposit intangible assets.
- Credit quality: Nonperforming loans declined to $3.4 million from $4.8 million, while total nonperforming assets declined to $4.2 million from $5.2 million. Net charge-offs declined to $0.3 million from $0.7 million.
- Allowance for loan losses: The allowance increased to $11.7 million from $11.3 million, while the allowance-to-loans ratio declined to 1.30% from 1.45% because of substantial loan growth.
- Interest-rate pressure: Deposit interest expense increased to $6.8 million from $4.4 million. Management stated that rising short-term rates caused funding costs to increase faster than asset yields, contributing to the slight decline in net interest margin.
- Noninterest income mix: Wealth management income increased, but total noninterest income declined slightly because the Company recorded no securities gains in 2018 versus $0.5 million in 2017. A $0.2 million gain related to foreclosure of other real estate owned partly offset the difference.
- Operating expenses: Salaries and benefits, professional fees and data conversion costs increased, partly because of the acquisition, employee bonuses and changes in time-off benefits.
- Capital returns: Cash dividends increased to $1.17 per share from $0.88 per share. The Company repurchased 17,608 shares for approximately $0.5 million.
- Accumulated other comprehensive loss: The balance declined to a loss of $4.1 million from a loss of $0.4 million, primarily because of increased unrealized losses on available-for-sale securities.
Outlook, Risks, Contingencies and Unusual Items
Management did not provide quantitative earnings or revenue guidance. It stated that liquidity sources should support existing operations for the foreseeable future and that all banks remained well-capitalized under regulatory standards.
- The Iowa agricultural economy remained pressured by low grain prices, trade-policy uncertainty and commodity-price volatility. Management reported that favorable 2018 yields generally provided break-even cash flows for most agricultural borrowers.
- The Company is exposed to rising interest rates because interest-bearing liabilities generally reprice faster than loans and investment securities, potentially compressing net interest margin.
- Credit risk is concentrated in Iowa, commercial real estate, agricultural lending and local economies dependent on governmental entities and agriculture. Classified assets increased by $26.2 million, partly because of agricultural credits and a large hospitality credit, despite lower nonperforming loans.
- The securities portfolio had approximately $6.1 million of gross unrealized losses at year-end, compared with $2.7 million in 2017. Management considered the losses temporary and recorded no other-than-temporary impairment.
- Goodwill and other intangible assets totaled approximately $12.4 million. Management concluded that goodwill was not impaired at December 31, 2018.
- The Company identified allowance for loan losses, securities impairment and goodwill valuation as critical accounting estimates. The current expected credit loss standard was scheduled to become effective for the Company on January 1, 2020; the filing stated that the impact could not yet be assessed.
- The Company is subject to extensive banking regulation, including restrictions on subsidiary-bank dividends, capital distributions, acquisitions and activities. The banks exceeded applicable capital requirements and were classified as well-capitalized.
- Management reported no material pending legal proceedings, no unresolved SEC staff comments and no material subsequent events through March 12, 2019.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2018. The auditor issued unqualified opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Assess the sustainability of 2018 earnings growth after separating the benefit of the lower tax rate, reduced loan-loss provision and acquisition-related effects from recurring operating performance.
- Monitor deposit pricing, funding costs and net interest margin as higher-rate conditions continue.
- Review commercial real estate and agricultural credit concentrations, classified assets and the adequacy of the $11.7 million allowance for loan losses.
- Evaluate the integration, profitability and credit performance of the Clarke County branches and acquired loan portfolio.
- Review unrealized securities losses, accumulated other comprehensive loss and the potential effect of further interest-rate changes on capital.
- Assess liquidity coverage against deposit runoff, $158.8 million of unfunded loan commitments and $6.4 million of standby letters of credit.
- Consider the effect of the expected-loss accounting standard and ongoing regulatory requirements on future earnings, capital and dividends.