Ames National Corporation: 2019 Form 10-K Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company operating six wholly owned community banks in central, north-central and south-central Iowa. The Company provides commercial, agricultural, real estate and consumer lending, deposit services, mortgage sales, merchant and card services, and wealth management. This Form 10-K covers the fiscal year ended December 31, 2019, with comparisons to 2018.
On October 25, 2019, the Company acquired Iowa State Savings Bank for cash consideration of approximately $22.3 million. The acquisition added four branches and contributed approximately $215.4 million of assets at year-end, including approximately $137.8 million of acquired loans and $188.6 million of assumed deposits.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net interest income | $45.25 million | $42.12 million | +7.4% |
| Provision for loan losses | $1.31 million | $0.64 million | +105.6% |
| Noninterest income | $8.63 million | $7.90 million | +9.2% |
| Noninterest expense | $31.52 million | $27.97 million | +12.7% |
| Net income | $17.19 million | $17.01 million | +1.1% |
| Diluted EPS | $1.86 | $1.83 | +1.6% |
| Net interest margin, FTE | 3.21% | 3.23% | Down 2 bps |
| Return on average assets | 1.14% | 1.23% | Down 9 bps |
| Return on average equity | 9.48% | 10.09% | Down 61 bps |
| Efficiency ratio | 58.51% | 55.90% | Higher |
Net interest income benefited from loan growth, including the acquisitions, and higher loan yields. Deposit interest expense increased to $10.20 million from $6.84 million, limiting margin expansion. The effective income tax rate declined to 18.3% from 20.6%, helped by tax-exempt interest and $693,000 of new market tax credits.
Balance sheet, cash flow and liquidity
| Balance sheet item | December 31, 2019 | December 31, 2018 | Change |
|---|---|---|---|
| Total assets | $1.737 billion | $1.456 billion | +19.3% |
| Net loans | $1.048 billion | $890.5 million | +17.7% |
| Deposits | $1.493 billion | $1.221 billion | +22.3% |
| Available-for-sale securities | $479.8 million | $459.0 million | +4.5% |
| Stockholders’ equity | $187.6 million | $172.9 million | +8.5% |
- Cash and interest-bearing deposits in financial institutions totaled $143.6 million at year-end, compared with $56.4 million in 2018.
- Net cash provided by operating activities was $20.2 million, versus $20.7 million in 2018.
- Investing activities used $79.0 million, primarily because of securities purchases, increased interest-bearing deposits and the Iowa State Bank acquisition.
- Financing activities provided $63.0 million, primarily from deposit growth.
- Available borrowing capacity included $222.6 million from the Federal Home Loan Bank and $110.4 million of federal funds lines. Outstanding FHLB advances were $5.0 million, and repurchase agreements totaled $42.0 million.
- Management stated that liquidity was satisfactory and sufficient for foreseeable operations, while noting that a sudden deposit decline could require securities sales or additional borrowing.
Material changes versus the prior comparable period
- The Iowa State Bank acquisition materially increased assets, loans, deposits, goodwill and core deposit intangible assets and contributed to higher operating expenses.
- Loan-loss provision expense increased to $1.31 million from $639,000, while net charge-offs increased to $379,000 from $276,000.
- Nonperforming loans increased to $5.04 million from $3.38 million, and total nonperforming assets rose to $9.05 million from $4.21 million, primarily reflecting acquired and agricultural-related exposures.
- The allowance for loan losses increased to $12.62 million from $11.68 million, but declined as a percentage of total loans to 1.19% from 1.30% because of loan growth.
- Accumulated other comprehensive income improved to a gain of $4.1 million from a loss of $4.1 million, primarily due to unrealized gains on available-for-sale securities.
- The Company repurchased 70,558 shares in 2019 and declared $8.86 million of cash dividends, or $0.96 per share, compared with $10.89 million and $1.17 per share in 2018.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects continued competition for loans and deposits and continued pressure on the net interest margin. The Company’s earning assets generally reprice more slowly than interest-bearing liabilities, creating risk that rising rates could increase funding costs faster than asset yields. Persistently low intermediate-term rates could also pressure loan and investment yields.
- Agricultural weakness, including low grain prices, trade-policy uncertainty, weather, input costs and ethanol-related demand, could impair borrower cash flows and collateral values. Management stated that favorable 2019 yields generally provided break-even cash flows for most agricultural borrowers.
- Approximately 56% of the loan portfolio consisted of commercial and agricultural real estate loans, and the business is geographically concentrated in Iowa.
- The securities portfolio had a fair value of $479.8 million and net unrealized gains of $5.5 million at year-end. Management identified no other-than-temporary impairment, but future impairment remains possible.
- The Company recorded $2.4 million of goodwill and $1.9 million of core deposit intangibles from the Iowa State Bank acquisition. Goodwill was tested and was not impaired.
- Off-balance-sheet commitments totaled $214.8 million, including $207.2 million of commitments to extend credit and $7.6 million of standby letters of credit. Related liabilities for estimated credit losses were approximately $662,000.
- The Company expects the current expected credit loss standard to affect its financial statements when effective for the Company in 2023; the magnitude of the impact was not yet clear.
- All six banks were categorized as well-capitalized under prompt corrective action standards. The consolidated total capital ratio was 14.3%, Tier 1 risk-based capital ratio was 13.2%, and common equity Tier 1 ratio was 13.2% at December 31, 2019.
- Management and the independent auditor concluded that internal control over financial reporting was effective, and the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the Iowa State Bank acquisition produces the expected revenue growth, expense synergies and credit performance after full-year integration.
- Trends in nonperforming loans, classified loans, agricultural credit quality, other real estate owned and the adequacy of the $12.6 million allowance for loan losses.
- Net interest margin sensitivity to deposit repricing, future Federal Reserve actions and competitive loan and deposit pricing.
- Deposit retention and liquidity capacity relative to $149.3 million of time deposits, $214.8 million of off-balance-sheet commitments and available borrowing lines.
- Future fair-value changes or impairment in the $479.8 million securities portfolio and the $16.1 million of goodwill and intangible assets.
- The effect of adopting the current expected credit loss standard in 2023.
- The sustainability of the $0.96 per-share 2019 dividend, given that dividends depend substantially on distributions from regulated bank subsidiaries.