Ames National Corporation 2016 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 principal activities are commercial, agricultural, real estate and consumer lending; deposit gathering; investment securities management; mortgage loan sales; merchant and card processing; and wealth management.
The filing covers the fiscal year ended December 31, 2016, with comparisons primarily to 2015 and 2014. The company reported one operating segment: banking.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total assets | $1.366 billion | $1.327 billion | +3.0% |
| Net loans | $752.2 million | $701.3 million | +7.3% |
| Deposits | $1.109 billion | $1.074 billion | +3.3% |
| Stockholders’ equity | $165.1 million | $161.3 million | +2.4% |
| Net interest income | $39.9 million | $39.0 million | +2.4% |
| Net income | $15.735 million | $15.015 million | +4.8% |
| Basic and diluted EPS | $1.69 | $1.61 | +5.0% |
| Net interest margin | 3.36% | 3.33% | +3 basis points |
| Return on assets | 1.18% | 1.13% | +5 basis points |
| Return on equity | 9.38% | 9.44% | -6 basis points |
| Efficiency ratio | 51.95% | 53.59% | Improved |
Net cash provided by operating activities was $21.4 million, compared with $22.6 million in 2015. Investing activities used $43.5 million, primarily reflecting loan growth and investment activity, while financing activities provided $27.5 million, primarily from deposit growth. Cash and due from banks ended at $29.5 million; total liquid assets, including interest-bearing deposits, were $61.2 million.
Borrowings included $58.3 million of securities sold under repurchase agreements, $14.5 million of FHLB advances and $13.0 million of other borrowings. The company reported FHLB borrowing capacity of $177.9 million and correspondent federal funds capacity of $107.1 million.
The available-for-sale securities portfolio was $516.1 million, down 4.0% from 2015, with pretax net unrealized losses of $0.9 million at year-end compared with net unrealized gains of $5.5 million in 2015. No other-than-temporary impairment was recognized.
The allowance for loan losses was $10.5 million, or 1.38% of loans net of deferred fees. Provision expense declined to $0.5 million from $1.1 million, while net charge-offs were approximately $5,000.
Material changes versus prior comparable periods
- Net income increased $0.7 million, driven principally by higher loan interest income, lower provision expense and lower other real estate owned expense.
- Average real estate loan balances increased materially and were the primary contributor to net interest income growth. Loan yields declined modestly, but lower funding costs and higher loan volume supported the margin.
- Noninterest income declined to $8.1 million from $8.3 million, primarily because of lower securities gains. Wealth management income, loan-sale gains and merchant/card fees increased.
- Noninterest expense declined 1.5% to $24.9 million. Lower other real estate owned costs and FDIC assessments more than offset higher salaries, benefits and data-processing costs.
- Nonperforming assets increased 80% to $5.6 million, primarily because of two commercial operating loan relationships, but remained 0.41% of assets and below the cited peer level of 0.80%.
- Nonaccrual loans increased to $5.1 million from $1.8 million. Troubled debt restructurings increased to $3.7 million from $0.8 million.
- Other real estate owned declined to $0.5 million from $1.2 million, reflecting sales and lower impairment expense.
- Accumulated other comprehensive income declined from a $3.5 million gain to a $0.6 million loss, mainly due to lower fair values of available-for-sale securities as interest rates increased.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects liquidity sources to support existing operations for the foreseeable future and states that capital and liquidity levels were satisfactory. The company continued to emphasize local decision-making, relationship banking, loan and deposit growth, and operating efficiency.
Management identifies interest-rate exposure as a principal challenge. The company is liability-sensitive in the near term because more liabilities than assets reprice within three months and one year. Modeling indicated that an immediate 100-basis-point rate increase could reduce 2017 net interest income by approximately $1.4 million, or 3.52%, while a 300-basis-point increase could reduce it by approximately $4.6 million, or 11.57%.
- Credit risk is concentrated in central Iowa, including commercial real estate, agricultural lending and local borrowers dependent on the Iowa economy.
- Lower agricultural commodity prices, adverse weather, higher input costs or reduced government support could weaken agricultural borrowers and collateral values.
- Commercial real estate values and borrower cash flows could deteriorate, increasing provisions and charge-offs.
- Investment securities are sensitive to interest rates, market liquidity, issuer credit quality and potential impairment.
- Liquidity depends primarily on deposits, securities, loan cash flows and borrowing capacity. Significant deposit outflows could require asset sales at losses.
- Competition from larger banks, credit unions and other financial providers may pressure loan yields, deposit costs and market share.
- Cybersecurity incidents, data-processing failures, fraud, regulatory changes and compliance costs could adversely affect results and reputation.
- Goodwill and intangible assets totaled approximately $8.1 million; management concluded goodwill was not impaired at December 31, 2016.
- The company recorded a $226,000 valuation allowance against a state alternative minimum tax credit carryforward, contributing to a higher 2016 effective tax rate of approximately 30%.
- Accounting changes, including the future current expected credit loss standard, could materially affect credit-loss provisions and capital.
Cash dividends declared increased to $0.84 per share from $0.80 per share. A $0.22 per-share dividend was declared in February 2017. No shares were repurchased under the authorized 100,000-share repurchase plan during 2016.
Commitments to extend credit totaled $164.1 million and standby letters of credit totaled $5.3 million. Management stated that legal proceedings were routine and not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in nonperforming loans, impaired loans and troubled debt restructurings is temporary or signals broader deterioration in commercial credit quality.
- The adequacy of the $10.5 million allowance for loan losses relative to commercial real estate, agricultural and commercial operating exposures.
- The effect of rising interest rates on net interest margin, funding costs and the modeled 2017 sensitivity results.
- The fair value, duration, unrealized losses and credit quality of the $516.1 million securities portfolio.
- The stability and cost of the $1.109 billion deposit base, including $7.1 million of brokered deposits and certificate maturities.
- The company’s ability to continue funding dividends from bank subsidiary earnings while maintaining regulatory capital.
- Implementation effects of the current expected credit loss standard and other pending accounting requirements.
- Regulatory capital ratios, which were substantially above required minimums and supported well-capitalized classifications for all five banks at year-end 2016.