AMES NATIONAL CORP quarterly report, Q3 FY2021

Ames National Corporation: Q3 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. The filing covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods and balance-sheet comparisons to December 31, 2020.

Financial performance and condition

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Net income	$6.7 million	$5.7 million	$18.6 million	$13.7 million
Basic and diluted EPS	$0.74	$0.62	$2.04	$1.49
Net interest income	$14.7 million	$14.2 million	$42.5 million	$40.9 million
Provision/(credit) for loan losses	$(94) thousand	$541 thousand	$(540) thousand	$4.4 million
Noninterest income	$2.7 million	$2.8 million	$7.8 million	$7.9 million
Noninterest expense	$8.9 million	$9.3 million	$27.3 million	$27.4 million

Net interest margin on a fully taxable equivalent basis was 2.97% in Q3 2021 versus 3.21% in Q3 2020, and 2.89% for the first nine months versus 3.16% in the prior-year period.
Return on assets was 1.29% and return on equity was 12.60% for Q3 2021. The efficiency ratio improved to 51.35% from 54.80%.
Total assets were $2.096 billion at September 30, 2021, up from $1.976 billion at December 31, 2020. Securities available-for-sale increased to $765.4 million from $597.0 million.
Net loans were $1.126 billion, modestly below $1.130 billion at year-end. PPP loans declined to $14.8 million from $50.9 million; 227 PPP loans remained outstanding.
Deposits increased to $1.837 billion from $1.716 billion. Securities sold under repurchase agreements were $36.3 million, and FHLB advances were $3.0 million.
Cash and due from banks totaled $25.6 million. Cash, interest-bearing deposits and federal funds sold totaled $148.4 million. Management described liquidity as satisfactory and sufficient for foreseeable operations.
Nine-month operating cash flow was $23.7 million, compared with $21.3 million in 2020. Investing activities used $134.7 million, primarily reflecting securities purchases, while financing activities provided $111.7 million, primarily from deposit growth.
Stockholders’ equity was $210.4 million, or 10.0% of total assets. Consolidated total capital and Tier 1 capital ratios were 15.3% and 14.0%, respectively; management stated that all applicable capital requirements were met.

Material changes versus comparable periods

Q3 net income increased approximately 18% year over year, while nine-month net income increased approximately 36%, principally due to lower interest expense and the shift from loan-loss provision expense to a credit.
Interest expense declined 42% in Q3 and 46% for the first nine months, reflecting lower market rates despite higher average deposit balances.
Interest income declined because of lower yields, but PPP fee recognition partially offset the decline. PPP fees recognized in commercial loan interest income were $1.7 million in Q3 and $3.9 million for the first nine months.
The allowance for loan losses declined to $16.8 million from $17.2 million at year-end, and the allowance ratio decreased to 1.47% from 1.50%.
Nonaccrual loans declined to $12.5 million from $15.3 million, and problem loans as a percentage of total loans declined to 1.11% from 1.33%. However, the company’s problem-loan ratio remained above the Iowa peer average cited in the filing.
Accumulated other comprehensive income declined to $8.3 million from $16.0 million, primarily because higher market interest rates reduced the fair value of available-for-sale securities.
The company repurchased and retired 24,603 shares during the nine months at an aggregate cost of $571 thousand. The April 2021 repurchase authorization had 75,397 shares remaining at September 30, 2021.
Quarterly dividends declared increased to $0.52 per share from $0.25 per share in the prior-year quarter. Management stated that future dividends could be reduced or suspended to preserve capital and liquidity.

Outlook, commentary, risks and unusual items

The filing provides no formal earnings or revenue guidance. Management expects liquidity sources to support existing operations for the foreseeable future.
COVID-19-related modifications had substantially returned to normal payment status by September 30, 2021. Management nevertheless identified risks from customer revenue declines, labor and goods shortages, loan delinquencies, defaults, foreclosures and declining collateral values.
Prolonged historically low interest rates could pressure net interest income, net interest margin and earnings. The company’s principal market risk is interest-rate risk.
Available-for-sale securities had $3.1 million of gross unrealized losses at September 30, 2021. Management considered the losses temporary and did not identify other-than-temporary impairment, but noted that changes in market conditions could materially affect reported values.
The company had a five-year, $4.0 million line of credit established in June 2021, with no borrowings outstanding at quarter-end. Banks also had $306.6 million of FHLB borrowing capacity and $107.9 million of federal-funds borrowing capacity.
A $1.7 million commitment was entered into to build a new West Des Moines branch; $1.5 million remained outstanding at September 30, 2021.
Implementation of the current expected credit loss standard for this smaller reporting company was deferred until periods beginning after December 15, 2022. The eventual impact remained unknown.
Goodwill was not impaired as of September 30, 2021. Management stated that future impairment remains possible if economic conditions or company performance deteriorate.
Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no material changes to previously disclosed risk factors. Legal proceedings were not applicable.

Important facts for investors to verify

Whether the decline in PPP balances and related fee income will reduce future net interest income.
Whether low interest rates, deposit repricing and securities duration will cause further margin compression.
Trends in commercial real estate, agricultural and other criticized loans, including nonaccrual loans, TDRs and charge-offs.
Whether COVID-19-related borrower performance remains stable as relief programs and modifications expire.
The future effect of adopting CECL on the allowance for loan losses, capital and earnings.
Changes in the fair value of the large available-for-sale securities portfolio and related effects on accumulated other comprehensive income and capital.
The sustainability of the increased dividend and share-repurchase activity relative to earnings, regulatory capital and liquidity needs.