Ames National Corporation 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating six community bank subsidiaries in central Iowa. The banks provide commercial and consumer loans, deposits, wealth management, and related services. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results include Iowa State Savings Bank from its October 25, 2019 acquisition.
Key Financial Metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Net interest income | $13.7 million | $10.9 million | $26.7 million | $21.9 million |
| Provision for loan losses | $1.6 million | $0.1 million | $3.9 million | $0.2 million |
| Noninterest income | $2.4 million | $2.2 million | $5.1 million | $4.1 million |
| Noninterest expense | $9.1 million | $7.2 million | $18.1 million | $14.7 million |
| Net income | $4.4 million | $4.6 million | $8.0 million | $8.9 million |
| Basic and diluted EPS | $0.49 | $0.50 | $0.87 | $0.96 |
| Net interest margin, FTE | 3.10% | 3.20% | 3.14% | 3.22% |
At June 30, 2020, total assets were $1.897 billion, including $1.146 billion of net loans and $513.6 million of available-for-sale securities. Deposits were $1.644 billion, stockholders’ equity was $201.1 million, and cash and interest-bearing deposits totaled $178.5 million. The allowance for loan losses was $16.0 million, or 1.37% of outstanding loans.
Six-month operating cash flow was $17.9 million. Investing activities used $157.0 million, primarily for loan growth and securities purchases, while financing activities provided $137.0 million, principally from a $150.6 million increase in deposits. Cash and due from banks ended at $32.5 million.
Funding liabilities included $36.9 million of securities sold under repurchase agreements and $3.0 million of FHLB advances. Management stated that the Company had no external debt financing, off-balance-sheet financing arrangements, or derivatives linked to its stock. Available liquidity included $213.9 million of unused FHLB lines and $110.1 million of federal funds borrowing capacity.
Material Changes Versus Prior Comparable Period
- Second-quarter net income declined approximately 4% year over year, and six-month net income declined approximately 10%, primarily because of higher credit-loss provisions.
- The provision for loan losses increased to $1.6 million in the second quarter and $3.9 million year to date, compared with $68,000 and $166,000, respectively, in 2019. Net charge-offs were $470,000 in the quarter and $497,000 year to date.
- Net interest income increased 25% in the quarter and 22% year to date, supported by loan growth and the ISSB acquisition, while the FTE net interest margin declined by 10 basis points in both comparable periods.
- Noninterest income increased 10% in the quarter and 22% year to date, including higher gains on loan sales and securities gains. Noninterest expense increased 26% in the quarter and 24% year to date, largely due to the acquisition and related operating costs.
- Total assets increased $159.8 million, or approximately 9%, from December 31, 2019. Net loans increased approximately 9%, including $78.3 million of Paycheck Protection Program loans, and deposits increased approximately 10%.
- Nonaccrual loans increased to $17.9 million from $4.8 million at year-end 2019. Problem loans were 1.63% of total loans versus 0.48% at December 31, 2019, primarily due to one hospitality loan relationship.
- The Company repurchased 100,000 shares under its approved plan, completing the program in April 2020 at an average price of $19.92 per share. No dividend was payable at June 30 because the quarterly dividend was declared on July 8.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects COVID-19-related economic weakness to continue affecting customers, loan performance, demand for banking products, deposits, liquidity, and earnings. Approximately 8.3% of the loan portfolio was associated with hospitality and entertainment industries at June 30, 2020. The Company reported $122.8 million of COVID-19-related loan modifications, generally involving payment deferrals or interest-only payments of up to six months.
- Management anticipates that further increases in the allowance for loan losses may be required if COVID-19 conditions worsen, unemployment remains elevated, or economic restrictions continue.
- Commercial real estate watch and special mention loans increased substantially, primarily because of hospitality exposure. Agricultural credit quality also remains pressured by low commodity prices and export concerns.
- Declining interest rates may compress net interest income and margins. Securities could incur other-than-temporary impairments, and unrealized gains could decline.
- Goodwill was not impaired at June 30, 2020, but management identified potential future impairment risk, particularly related to the most recent acquisition.
- Gross unrealized losses on available-for-sale securities were $162,000 and were considered temporary. Securities with a carrying value of $197.1 million were pledged as collateral.
- The banks elected the community bank leverage ratio framework. June 30, 2020 leverage ratios ranged from 8.7% to 9.8%, above the applicable 8.0% threshold.
- A $0.25 per-share dividend was declared July 8, 2020, payable August 14, 2020. Management stated that future dividends could be reduced or suspended if earnings, capital, or pandemic-related risks deteriorate.
Important Facts for Investors to Verify
- Track nonaccrual loans, past-due loans, hospitality and commercial real estate exposures, charge-offs, and any additional allowance provisions.
- Assess the performance and forgiveness timing of the $78.3 million PPP loan portfolio and related deferred fees.
- Monitor the $122.8 million of COVID-19-related loan modifications for subsequent delinquencies or restructurings.
- Review deposit stability, available borrowing capacity, pledged securities, and the potential effect of deposit outflows on liquidity.
- Evaluate the sustainability of earnings after acquisition-related costs, loan-sale gains, securities gains, and unusually low funding costs.
- Monitor interest-rate changes, securities valuation and impairment risk, goodwill impairment indicators, and future dividend decisions.