Ames National Corporation: Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating six community banks in central Iowa. Its principal businesses are commercial and consumer lending, deposits, wealth management, deposit services, loan sales, and merchant and card services. This unaudited Form 10-Q covers the three months ended March 31, 2022; the comparable period is the three months ended March 31, 2021.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 or prior period |
|---|---|---|
| Net income | $5.1 million | $6.0 million |
| Basic and diluted EPS | $0.57 | $0.66 |
| Total interest income | $14.1 million | $15.0 million |
| Net interest income | $13.2 million | $13.7 million |
| Net interest margin, FTE | 2.55% | 2.86% |
| Noninterest income | $2.6 million | $2.5 million |
| Noninterest expense | $9.4 million | $9.0 million |
| Efficiency ratio | 59.72% | 55.70% |
| Return on assets | 0.96% | 1.19% per MD&A |
| Return on equity | 10.28% | 11.52% per MD&A |
| Net cash provided by operating activities | $7.0 million | $9.4 million |
| Cash and cash equivalents at period-end | $148.3 million | $232.8 million at March 31, 2021 |
At March 31, 2022, total assets were $2.18 billion, up $47.7 million from December 31, 2021. Net loans were $1.13 billion, down from $1.14 billion, while securities available-for-sale were $823.9 million, down from $831.0 million. Deposits increased to $1.96 billion from $1.88 billion.
The company recorded a $127 thousand credit for loan losses, compared with a $426 thousand credit in Q1 2021. Net loan charge-offs were $10 thousand, compared with $118 thousand of net recoveries in the prior-year quarter. The allowance for loan losses was $16.5 million, or 1.44% of outstanding loans.
Stockholders’ equity was $176.7 million, down from $207.8 million at December 31, 2021, primarily because of $33.8 million of after-tax unrealized losses on available-for-sale securities. The company declared a quarterly dividend of $0.27 per share, compared with $0.25 per share in Q1 2021.
Material Changes Versus the Prior Comparable Period
- Net income declined 15%, mainly because loan interest income and PPP fee recognition decreased.
- Loan interest income fell to $10.6 million from $12.0 million. PPP fee income was $200 thousand versus $840 thousand.
- Interest expense declined 31% to $920 thousand, primarily due to lower deposit rates and reduced time-deposit balances.
- Taxable securities interest income increased by $599 thousand because of higher average balances.
- Wealth management income increased to $1.3 million from $932 thousand, partially offsetting lower gains on sales of loans held for sale.
- Noninterest expense increased 4%, reflecting higher salaries and benefits, professional fees, and business development costs.
- Cash provided by investing activities improved to a net use of $24.3 million from $77.9 million, primarily because purchases of securities were lower.
- Cash provided by financing activities decreased to $76.6 million from $128.2 million, primarily because deposit growth was lower than in the prior-year quarter.
Liquidity, Debt, Capital, and Asset Quality
Management described liquidity as satisfactory and believes available sources will support operations for the foreseeable future. Liquid cash and interest-bearing deposits totaled $148.3 million. Additional sources included $301.0 million of FHLB borrowing capacity, $102.2 million of federal funds borrowing capacity, and a $4.0 million bank line of credit; none of these facilities had outstanding borrowings at March 31, 2022. Securities sold under repurchase agreements totaled $39.9 million.
The company had no FHLB advances at March 31, 2022, compared with $3.0 million at December 31, 2021, and no borrowings under its $4.0 million line of credit. Management stated that the company had no external debt financing, off-balance-sheet financing arrangements, or derivative instruments linked to its stock.
Consolidated regulatory capital ratios exceeded applicable requirements. Total capital to risk-weighted assets was 14.9%, Tier 1 capital was 13.7%, common equity Tier 1 capital was 13.7%, and Tier 1 capital to average assets was 9.1% at March 31, 2022.
Problem loans were reported at 1.09% of total loans, compared with 1.11% at December 31, 2021, but remained above the Iowa peer average of 0.45% as of December 31, 2021. Nonaccrual loans decreased from $12.7 million to approximately $12.2 million in the financial statement note; MD&A separately states $12.5 million, so the filing does not provide a fully consistent value. Troubled debt restructurings totaled $11.27 million, and no new concessions were granted during the quarter.
Outlook, Commentary, Risks, and Unusual Items
- No formal quantitative earnings or revenue guidance was provided.
- Management expects liquidity sources to remain sufficient, but identifies a sudden decline in deposits as the principal cash-flow uncertainty.
- The company has $406 thousand remaining under a $1.7 million commitment to construct a new branch in West Des Moines, Iowa.
- Available-for-sale securities had $42.0 million of gross unrealized losses at March 31, 2022, compared with $6.5 million at December 31, 2021. Management considered the losses temporary and did not recognize an impairment charge, but stated that changes in market conditions could materially affect reported amounts.
- Interest-rate risk is the company’s primary market risk. Rising rates contributed to securities losses and lower investment fair values, while also creating potential future pressure on funding costs and net interest income.
- Management continues to evaluate the expected-credit-loss standard under ASU 2016-13, which becomes effective for the company after December 15, 2022. The financial statement impact was unknown as of the filing date.
- Other cited risks include COVID-19 and inflationary effects, credit deterioration, real estate values, changing interest rates, regulatory capital requirements, competition, and the availability and cost of liquidity.
- Goodwill was assessed as not impaired as of March 31, 2022. No significant subsequent events were reported through May 6, 2022.
- The company repurchased no shares during the quarter; 100,000 shares remained available under its repurchase plan.
Important Facts for Investors to Verify
- Reconcile the filing’s differing nonaccrual-loan amounts of approximately $12.2 million and $12.5 million.
- Monitor the $42.0 million unrealized loss position in the securities portfolio and its effect on tangible equity, capital ratios, and future impairment risk.
- Assess whether declining loan yields, lower PPP fees, and potential deposit-cost increases will continue to pressure net interest margin.
- Review commercial real estate and agricultural credit concentrations, including classified, impaired, and nonaccrual exposures.
- Evaluate the effect of the expected-credit-loss standard upon adoption after December 15, 2022.
- Confirm the company’s ability to maintain its $0.27 quarterly dividend while preserving capital and liquidity.
- Track deposit trends and the remaining West Des Moines branch construction commitment.