Ames National Corporation — 2015 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 business consists primarily of commercial, agricultural, real estate and consumer lending; deposit-taking; investment securities; mortgage loan sales; merchant and card services; and wealth management. The filing covers the fiscal year ended December 31, 2015, with comparative information for 2014 and 2013. Fourth-quarter 2015 net income was $3.9 million, compared with $3.1 million in fourth-quarter 2014.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Interest income | $43.15 million | $40.96 million | +5.3% |
| Net interest income | $38.97 million | $36.42 million | +7.0% |
| Provision for loan losses | $1.10 million | $0.43 million | +156% |
| Noninterest income | $8.27 million | $9.25 million | -10.6% |
| Noninterest expense | $25.31 million | $24.37 million | +3.9% |
| Net income | $15.01 million | $15.25 million | -1.5% |
| Basic and diluted EPS | $1.61 | $1.64 | -1.8% |
| Return on average assets | 1.13% | 1.21% | Down 8 basis points |
| Return on average equity | 9.44% | 10.09% | Down 65 basis points |
| Net interest margin | 3.33% | 3.31% | Up 2 basis points |
| Efficiency ratio | 53.59% | 53.37% | Up 22 basis points |
Total assets increased 2.0% to $1.327 billion. Net loans increased 6.5% to $701.3 million, while deposits increased 2.1% to $1.074 billion. Stockholders’ equity increased 4.3% to $161.3 million, or 12.15% of assets.
The loan portfolio was concentrated in real estate, commercial and agricultural lending. Gross loans totaled $711.4 million, including $251.9 million of commercial real estate loans, $127.1 million of one-to-four-family residential loans, $102.5 million of commercial loans and $79.5 million of agricultural loans.
The securities portfolio totaled $537.6 million, or approximately 41% of total assets, and consisted primarily of government agency, mortgage-backed, municipal and corporate securities. Pretax net unrealized gains were $5.5 million at year-end. No other-than-temporary impairment was recognized in 2015, 2014 or 2013.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $22.7 million, compared with $19.5 million in 2014.
- Investing activities used $34.5 million, primarily reflecting net loan growth and securities activity.
- Financing activities provided $12.0 million, principally from a $22.2 million increase in deposits.
- Liquid assets totaled approximately $51.0 million at December 31, 2015.
- Available borrowing capacity included $154.5 million from the Federal Home Loan Bank and $116.6 million of federal funds borrowing capacity at correspondent banks.
- Outstanding borrowings included $54.3 million of repurchase agreements, $18.5 million of FHLB advances and $13.0 million of other borrowings. Management stated that the Company had no external debt financing, off-balance-sheet financing arrangements or derivatives linked to its stock.
- Commitments to extend credit totaled $158.6 million and standby letters of credit totaled $6.1 million. The filing states that these commitments were not expected to have a significant impact on liquidity or capital resources.
Material changes versus the prior comparable period
- Net interest income rose 7.0%, primarily because of higher average real estate loan balances. The net interest margin improved modestly despite competitive pricing pressure.
- Net income declined 1.5% because 2014 included a $1.26 million gain on the sale of First National’s University office. The 2015 result was also affected by higher salaries, data-processing costs and loan-loss provision expense.
- Excluding securities gains and the premises-disposal gain, management reported that noninterest income increased 7.0%, supported by higher mortgage loan-sale gains and merchant and card fees.
- The loan-loss provision increased to $1.10 million as loan growth, particularly in construction and commercial operating portfolios, increased the general allowance. Net charge-offs were negative $51,000, reflecting net recoveries.
- Nonperforming assets declined 71% to approximately $3.14 million, or 0.24% of assets, from $10.88 million in 2014. Other real estate owned declined to $1.25 million from $8.44 million.
- The allowance for loan losses increased to $9.99 million, or 1.40% of loans net of deferred fees, from $8.84 million, or 1.32%, in 2014.
- The Company increased its annual dividend to $0.80 per share from $0.72 per share. A $0.21 per share dividend was declared in February 2016. No shares were repurchased in 2015 or 2014.
- The 2014 First Bank branch acquisition contributed to 2015 loan, fee and expense growth. No acquisition occurred in 2015.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects to continue emphasizing local decision-making, relationship banking, small-to-medium-sized business customers and operational efficiency. Management believes existing liquidity sources will support operations for the foreseeable future and that the allowance for loan losses is adequate.
- Interest-rate risk: The Company’s balance sheet is liability-sensitive in the near term because deposits reprice faster than earning assets. Modeling estimated that an immediate 100-basis-point rate increase would reduce 2016 net interest income by approximately $1.45 million, while a 300-basis-point increase would reduce it by approximately $4.41 million, or 11.25%. An immediate 100-basis-point decrease was estimated to reduce net interest income by approximately $1.22 million.
- Credit concentration: Lending is concentrated geographically in central Iowa and economically exposed to commercial real estate, agriculture, local employers and agricultural conditions, including weather and government programs.
- Liquidity: A material deposit decline could require the Company to borrow or sell securities, potentially at higher funding costs or realized losses.
- Investment securities: Changes in interest rates, credit quality, liquidity or issuer defaults could reduce fair value or result in future other-than-temporary impairment charges. At year-end, unrealized losses were $1.7 million, which management considered temporary.
- Regulatory capital: The Company and all five Banks exceeded applicable Basel III requirements. Each Bank was categorized as “well-capitalized” at December 31, 2015. Dividend payments remain subject to regulatory and capital restrictions.
- Unusual items: The prior-year premises-disposal gain, the 2015 decline in other real estate owned and the First Bank acquisition materially affect period comparisons.
- Other risks: Competition from larger banks and credit unions, regulatory changes, cybersecurity and information-security breaches, technology dependence, accounting estimates and limited trading volume in the Company’s stock.
Management reported effective disclosure controls and effective internal control over financial reporting. CliftonLarsonAllen LLP issued unqualified audit opinions on the consolidated financial statements and internal control over financial reporting.
Important facts investors should verify
- Whether loan growth, particularly in construction, commercial real estate and agricultural portfolios, produces commensurate risk-adjusted returns.
- Whether the higher 2015 loan-loss provision signals emerging credit deterioration despite lower nonperforming assets.
- The sensitivity of net interest income and securities valuations to the pace and direction of interest-rate changes.
- The stability and cost of deposits, including the maturity and renewal behavior of time deposits.
- The adequacy of liquidity capacity relative to $164.7 million of credit commitments and potential deposit outflows.
- The sustainability of dividends given the approximately 49.7% 2015 dividend payout ratio and regulatory restrictions on subsidiary-bank dividends.
- Future performance of the investment portfolio, including unrealized losses and potential other-than-temporary impairment.
- The effect of competitive, regulatory, agricultural and central-Iowa economic conditions on asset quality and earnings.