Ames National Corporation: Q1 2021 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 activities are commercial and consumer lending, deposits, wealth management, loan sales, and payment services. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company had 9,122,747 common shares outstanding as of April 30, 2021.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 / Dec. 31, 2020 |
|---|---|---|
| Net income | $6.0 million | $3.6 million |
| Basic and diluted EPS | $0.66 | $0.39 |
| Net interest income | $13.7 million | $13.0 million |
| Net interest margin, FTE | 2.86% | 3.18% in Q1 2020 |
| Provision/(credit) for loan losses | $(426) thousand credit | $2.3 million provision |
| Noninterest income | $2.5 million | $2.6 million |
| Noninterest expense | $9.0 million | $9.1 million |
| Efficiency ratio | 55.7% | 57.7% |
| Total assets | $2.10 billion | $1.98 billion at Dec. 31, 2020 |
| Net loans | $1.12 billion | $1.13 billion at Dec. 31, 2020 |
| Available-for-sale securities | $672.3 million | $597.0 million at Dec. 31, 2020 |
| Total deposits | $1.84 billion | $1.72 billion at Dec. 31, 2020 |
| Stockholders’ equity | $204.4 million | $209.5 million at Dec. 31, 2020 |
| Operating cash flow | $9.4 million | $11.7 million |
Material changes versus comparable periods
- Net income increased 69% year over year, primarily because the prior-year period included a $2.3 million COVID-19-related loan-loss provision and because interest expense declined with lower market rates.
- Interest income declined 5% to $15.0 million as asset yields fell, partly offset by higher average earning assets, $840 thousand of recognized PPP loan fees, and $335 thousand of income from nonaccrual loan payoffs.
- Interest expense fell 52% to $1.3 million, despite higher average deposit balances.
- The company recorded net loan recoveries of $118 thousand, compared with $26 thousand of net charge-offs in Q1 2020. The allowance for loan losses declined to $16.9 million from $17.2 million at year-end, or 1.48% of loans versus 1.50%.
- Noninterest income decreased 5%, principally because Q1 2020 included $386 thousand of securities gains. Gains on residential loan sales increased to $504 thousand from $267 thousand.
- Total assets increased $124.2 million, funded primarily by $126.4 million of deposit growth. Securities increased $75.3 million, while net loans decreased $9.3 million.
- Accumulated other comprehensive income declined $8.9 million because higher interest rates reduced the fair value of available-for-sale securities. Consequently, total equity declined $5.1 million despite reported net income.
- Net cash used in investing activities increased to $138.9 million, largely because of purchases of securities and increased interest-bearing deposits. Financing cash flow increased to $128.2 million, mainly from deposit growth.
Guidance, outlook, risks, contingencies, and unusual items
- No formal earnings or financial guidance was provided. Management stated that liquidity sources should be sufficient to support existing operations for the foreseeable future.
- COVID-19 remains a material uncertainty. Customers may experience reduced revenue and repayment capacity, potentially increasing delinquencies, charge-offs, and the allowance for loan losses.
- Five COVID-19-related loan modifications totaling $15.4 million remained in the modification period at March 31, 2021. The company also reported $59.2 million of PPP loans across 1,117 loans, generally guaranteed by the SBA.
- Problem loans were 1.18% of total loans, down from 1.33% at year-end, but above the most recent Iowa peer average of 0.66%. Nonaccrual loans were $13.4 million, and troubled debt restructurings were $10.5 million.
- Commercial real estate and agricultural exposures remain key credit-risk areas. Watch and special-mention commercial real estate loans totaled $107.0 million; comparable agricultural loans totaled $41.9 million.
- Available-for-sale securities had $4.1 million of gross unrealized losses. Management considered the losses temporary and did not identify other-than-temporary impairment, but changes in interest rates, economic conditions, or issuer credit quality could affect future results.
- State Bank & Trust reported an 8.4% community bank leverage ratio, below the 8.5% requirement effective in 2021 but above 8%, giving it a two-quarter grace period to regain compliance.
- Management determined that goodwill was not impaired as of March 31, 2021. Future deterioration in earnings or fair value could result in an impairment charge.
- On April 14, 2021, the company declared a $0.26 per-share dividend and authorized repurchases of up to 100,000 shares. On April 16, 2021, it committed $1.7 million to construct a new West Des Moines branch.
- The company entered into no material litigation disclosed in the filing, and management reported no material changes to previously disclosed risk factors or internal controls.
Important facts for investors to verify
- Whether the improvement in earnings is sustained after the unusually favorable comparison from the prior-year COVID-19 provision reversal and lower funding costs.
- Future trends in net interest margin as market rates remain low and the securities portfolio expands.
- Credit performance in commercial real estate and agricultural portfolios, including nonaccrual loans, criticized loans, modifications, and allowance adequacy.
- The pace and ultimate forgiveness of PPP loans and acceleration of the related $2.9 million of deferred fees and costs.
- The effect of interest-rate movements on the $672.3 million available-for-sale securities portfolio and accumulated other comprehensive income.
- State Bank & Trust’s progress toward restoring an 8.5% community bank leverage ratio within its grace period.
- The effect of the planned branch construction and authorized stock repurchases on capital and liquidity.