Ames National Corporation — 2014 Form 10-K Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company that owns five wholly owned community banks operating primarily in central and north-central Iowa. The Company reports one operating segment: banking. Principal activities include commercial, agricultural, residential and consumer lending; deposit services; investment securities; mortgage loan sales; merchant and card processing; and wealth management.
This filing covers the fiscal year ended December 31, 2014, with comparisons primarily to 2013 and 2012. The consolidated financial statements received an unqualified audit opinion from CliftonLarsonAllen LLP, and management and the auditors concluded that internal control over financial reporting was effective as of December 31, 2014.
First National completed the acquisition of three bank offices from First Bank on August 29, 2014 for approximately $4.1 million in cash. The transaction added approximately $44.6 million of loans, $82.0 million of deposits, $1.0 million of core deposit intangibles and $1.1 million of goodwill.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income | $36.4 million | $33.4 million | +9.2% |
| Provision for loan losses | $0.43 million | $0.79 million | Lower |
| Noninterest income | $9.3 million | $7.7 million | +19.9% |
| Noninterest expense | $24.4 million | $21.7 million | +12.4% |
| Net income | $15.25 million | $13.95 million | +9.3% |
| Basic and diluted EPS | $1.64 | $1.50 | +9.3% |
| Net interest margin | 3.31% | 3.18% | +13 basis points |
| Return on average assets | 1.21% | 1.14% | Improved |
| Return on average equity | 10.09% | 9.76% | Improved |
| Efficiency ratio | 53.37% | 52.78% | Higher |
Interest income rose to $41.0 million from $38.4 million, while interest expense declined to $4.5 million from $5.1 million. Growth in average real estate loans and higher yields on taxable investment securities were the primary drivers of higher net interest income. The effective income tax rate increased to approximately 27% from 25%, primarily because tax-exempt interest represented a smaller proportion of pretax income.
Total assets increased 5.5% to $1.301 billion. Net loans rose 16.7% to $658.4 million, while gross loans reached approximately $667.4 million. Deposits increased 4.0% to $1.052 billion. Securities available for sale declined 6.5% to $542.5 million but remained a substantial source of liquidity. Stockholders’ equity increased 8.8% to $154.7 million, and the equity-to-assets ratio increased to 11.9% from 11.5%.
The loan portfolio was concentrated in commercial real estate, agricultural real estate, residential real estate, commercial and agricultural operating loans. Commercial real estate represented approximately $257.1 million of loans at year-end, and agricultural loans represented approximately $143.1 million across agricultural real estate and agricultural operating categories.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $19.5 million, compared with $23.5 million in 2013.
- Net cash provided by investing activities was $16.2 million, compared with $47.9 million of cash used in 2013. The change primarily reflected the First Bank acquisition, securities activity and loan growth.
- Net cash used in financing activities was $36.2 million, primarily reflecting a decrease in deposits and dividends paid.
- Liquid assets, including cash, balances due from other banks, federal funds sold and interest-bearing deposits, totaled $55.2 million at year-end.
- Available borrowing capacity included approximately $137.4 million from the Federal Home Loan Bank and $115.5 million in federal funds lines at correspondent banks.
- Year-end borrowings included $51.3 million of securities sold under repurchase agreements, $14.5 million of FHLB advances and $23.0 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 were $159.5 million, and standby letters of credit were $6.5 million. The Company recorded $481,000 of liabilities for estimated losses on these off-balance-sheet commitments.
Management considered liquidity satisfactory and believed available sources were sufficient for foreseeable operations. The Parent Company’s liquidity depends substantially on dividends from the subsidiary banks; bank dividends totaled $7.6 million in 2014. Regulatory restrictions could limit those dividends.
Material changes versus prior comparable periods
- Net income increased 9.3% in 2014, reversing the 1.6% decline reported in 2013 versus 2012.
- Net interest income increased 9.2%, supported by loan growth, particularly real estate lending, and lower funding costs.
- Noninterest income increased primarily because of a $1.26 million gain on the sale of First National’s University office and higher wealth management income. Gains on mortgage loan sales declined to $704,000 from $1.2 million.
- Noninterest expense increased $2.7 million, driven by acquisition-related payroll and operating costs, normal salary increases, incentive compensation and higher other-real-estate-owned expenses.
- The provision for loan losses declined to $429,000 from $786,000, reflecting improved credit indicators, although the loan portfolio expanded substantially.
- Other real estate owned declined modestly to $8.4 million from $8.9 million, but related costs increased to $1.5 million from $651,000, including $1.7 million of impairment charges.
- Nonperforming assets declined 4.5% to $10.9 million, or 0.84% of assets, from $11.4 million, or 0.92% of assets.
- The allowance for loan losses increased to $8.84 million from $8.57 million, but declined as a percentage of loans to 1.32% from 1.50%.
- Annual cash dividends increased to $0.72 per share from $0.64 per share. No shares were repurchased in 2014 or 2013.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects competition for loans and deposits to remain intense and continues to emphasize local decision-making, relationship banking, operational efficiency and selective market expansion.
Interest-rate exposure is material. The Company’s liabilities generally reprice faster than its earning assets. Its model estimated that an immediate 100-basis-point increase in rates would reduce 2015 net interest income by approximately $1.6 million, or 4.28%, while a 300-basis-point increase would reduce it by approximately $5.3 million, or 13.97%. Management stated that it models interest-rate scenarios quarterly.
Key risks include concentration in central and north-central Iowa; exposure to commercial real estate and agriculture; changes in real estate values and agricultural conditions; credit losses and the subjectivity of the allowance for loan losses; liquidity and deposit runoff; securities-market losses or other-than-temporary impairment; regulatory and compliance costs; competition from larger banks and credit unions; cybersecurity and technology risks; and limited trading volume in the Company’s common stock.
Unusual or potentially nonrecurring items in 2014 included the First Bank acquisition, the $1.26 million gain on the sale of premises and equipment, $1.7 million of other-real-estate-owned impairment, and a significant increase in unrealized securities gains recorded in other comprehensive income. Management concluded that goodwill was not impaired and that securities with unrealized losses did not have other-than-temporary impairment.
All five subsidiary banks were categorized as well capitalized under prompt corrective action requirements. The consolidated total risk-based capital ratio was 16.6%, the Tier 1 risk-based ratio was 15.6%, and the Tier 1 leverage ratio was 11.0% at December 31, 2014. Basel III rules became effective for the Company and Banks on January 1, 2015; management expected the organization to meet the revised requirements.
Important facts for investors to verify
- Whether the First Bank acquisition produces sustained loan, deposit and fee-income growth after integration costs and acquisition-related accounting effects.
- The quality and performance of the 16.7% increase in net loans, particularly commercial real estate and agricultural exposures.
- Trends in nonperforming assets, other real estate owned, loan charge-offs and the adequacy of the $8.84 million allowance.
- The effect of higher interest rates on net interest margin, funding costs and the projected 2015 sensitivity disclosed by management.
- The composition, duration, unrealized gains and losses, and potential impairment risk of the $542.5 million securities portfolio.
- The stability of the $1.052 billion deposit base, including the renewal of time deposits and reliance on repurchase agreements and other borrowings.
- The availability of subsidiary-bank dividends to fund Parent Company expenses and the $0.72-per-share dividend policy under regulatory capital constraints.
- The $166.1 million of off-balance-sheet commitments, including $159.5 million of unfunded loan commitments and $6.5 million of standby letters of credit.
- The Company’s transition to Basel III capital requirements and any subsequent changes in regulatory capital ratios or dividend restrictions.