Ames National Corporation: 2011 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 Iowa. Its activities are concentrated in commercial, agricultural, residential real estate and consumer lending, deposits, trust services, mortgage loan sales and investment securities. The filing covers the fiscal year ended December 31, 2011; fourth-quarter data are presented on an unaudited basis.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total interest income | $37.6 million | $37.3 million | Up 0.9% |
| Net interest income | $30.9 million | $29.5 million | Up 4.6% |
| Provision for loan losses | $0.5 million | $0.7 million | Down 19.7% |
| Noninterest income | $7.0 million | $6.8 million | Up 2.0% |
| Noninterest expense | $18.9 million | $18.2 million | Up 3.5% |
| Net income | $13.9 million | $13.0 million | Up 7.4% |
| Diluted EPS | $1.48 | $1.37 | Up 8.0% |
| Net interest margin | 3.60% | 3.74% | Down 14 basis points |
| Return on assets | 1.38% | 1.40% | Down 2 basis points |
| Return on equity | 10.82% | 10.91% | Down 9 basis points |
| Efficiency ratio | 49.80% | 50.12% | Improved |
Fourth-quarter 2011 net income was $3.6 million, or $0.39 per share, compared with $3.0 million, or $0.32 per share, in the fourth quarter of 2010. Fourth-quarter net interest income was $7.8 million versus $7.3 million in the prior-year quarter.
Balance sheet, liquidity and capital
- Total assets increased 7.5% to $1.04 billion, primarily from higher securities and loans.
- Net loans increased 4.9% to $438.7 million. Gross loans were $446.8 million, with commercial real estate and agricultural exposure representing important portfolio concentrations.
- Deposits increased 10.1% to $818.7 million, supported by growth in commercial, retail and public funds and a shift toward demand, NOW and money-market accounts.
- Investment securities increased 8.2% to $508.6 million and represented approximately 49% of total assets. The portfolio generated significant liquidity and had pretax net unrealized gains of $15.1 million.
- Stockholders’ equity increased to $134.6 million from $121.4 million, and equity-to-assets increased to 13.0% from 12.6%.
- Cash and liquid assets totaled $56.6 million. Available borrowing capacity included approximately $76.6 million from the Federal Home Loan Bank and $110.3 million in correspondent-bank federal-funds lines.
- Outstanding borrowings included $41.7 million of federal funds purchased and repurchase agreements, $15.2 million of FHLB advances and $20.0 million of other long-term borrowings.
- Net cash provided by operating activities was $21.3 million. Investing activities used $65.3 million, while financing activities provided $51.3 million, resulting in a $7.4 million increase in cash and cash equivalents.
- All subsidiary banks were reported as well capitalized. Consolidated total risk-based capital was 18.0%, Tier 1 risk-based capital was 16.9% and Tier 1 leverage capital was 12.2%.
Material changes versus the prior comparable period
- Profitability improved because of higher net interest income, lower FDIC insurance assessments and a lower loan-loss provision. These benefits were partly offset by higher salaries, incentive compensation and other real estate owned costs.
- Net interest margin declined as loan and investment yields fell, although lower deposit and borrowing costs and growth in earning assets increased net interest income.
- Nonperforming assets increased to $17.6 million from $17.2 million. Nonperforming loans increased to $8.1 million from $6.3 million, while other real estate owned declined to $9.5 million from $10.5 million.
- Impaired loans increased to $7.8 million from $6.4 million, and specific reserves increased to $0.9 million from $0.4 million.
- The allowance for loan losses increased to $7.9 million from $7.5 million, while net charge-offs fell to $0.1 million from $0.8 million.
- Other real estate owned costs increased to $0.4 million from $0.1 million, but remained substantially below the $4.0 million recorded in 2009.
- The Company repurchased 122,002 shares during 2011 and increased the annual dividend to $0.52 per share from $0.44 per share.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects competition to continue pressuring loan pricing and net interest margins and identifies a rising-rate environment as a key challenge because liabilities reprice faster than earning assets. The Company’s interest-rate simulation estimated that an immediate 300-basis-point increase could reduce 2012 net interest income by approximately $4.8 million, or 15.15%.
- Credit risk remains concentrated in central Iowa, including commercial real estate, agriculture and borrowers dependent on local economic conditions, weather and government programs.
- Management identified $2.2 million of impaired loans involving two Des Moines-area development companies, supported by $165,000 of specific reserves. Additional developer relationships could become impaired if conditions deteriorate.
- Other real estate owned and impaired-loan valuations depend on appraisals, collateral values and economic assumptions and could require future write-downs.
- FDIC assessments, regulatory requirements and implementation of the Dodd-Frank Act could increase operating costs or restrict activities and dividends.
- Liquidity could be affected by a sudden decline in deposits, although management stated that available securities and borrowing capacity were sufficient for existing operations.
- Off-balance-sheet commitments included $94.5 million of commitments to extend credit and $3.0 million of standby letters of credit. Reserves for these exposures totaled $0.25 million.
- On February 16, 2012, Randall-Story State Bank agreed to acquire certain assets and deposits of two Liberty Bank branches for a payment expected to be approximately $5.4 million. Closing was expected in the second quarter of 2012, subject to regulatory approval and other conditions.
- The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2011.
Most important facts for investors to verify
- Whether impaired and nonperforming loans, particularly central Iowa commercial real estate exposures, continue to rise and whether the $7.9 million allowance remains adequate.
- Whether deposit growth is sustained and whether the large volume of time deposits maturing in 2012 is renewed at acceptable costs.
- The sensitivity of net interest income and the investment portfolio to rising interest rates and changing municipal, mortgage-backed and corporate security valuations.
- The timing, regulatory approval and financial impact of the planned Liberty branch acquisition.
- Whether future FDIC assessments, Dodd-Frank compliance costs or other regulatory changes affect expense levels, capital or dividend capacity.
- The continuation of the $0.52 annual dividend and remaining share-repurchase authorization, subject to earnings, capital requirements and regulatory restrictions.