AMES NATIONAL CORP annual report, FY2020

Ames National Corporation — Form 10-K Summary

Business Context and Reporting Period

Ames National Corporation is an Iowa bank holding company operating six wholly owned community banks in central, north-central and south-central Iowa. Its principal activities are commercial, agricultural, residential and consumer lending; deposit-taking; investment securities management; mortgage loan sales; and wealth management. The filing covers the fiscal year ended December 31, 2020, with comparison to December 31, 2019. Although the request identifies 2020 Q4, this filing is an annual report rather than a quarterly filing.

Financial Performance and Key Metrics

Metric	2020	2019	Change
Net income	$18.85 million	$17.19 million	+9.6%
Basic and diluted EPS	$2.06	$1.86	+10.8%
Net interest income	$54.84 million	$45.25 million	+21.2%
Provision for loan losses	$5.68 million	$1.31 million	+332.2%
Noninterest income	$10.62 million	$8.63 million	+23.1%
Noninterest expense	$36.55 million	$31.52 million	+16.0%
Net interest margin, FTE	3.13%	3.21%	-8 basis points
Return on average assets	1.01%	1.14%	Down
Return on average equity	9.48%	9.48%	Flat
Efficiency ratio	55.83%	58.51%	Improved

Total assets increased 13.7% to $1.976 billion, driven by deposit growth, securities purchases, PPP loans and organic loan growth.
Net loans increased 7.8% to $1.130 billion. Gross loans totaled $1.148 billion, including approximately $50.9 million of PPP loans.
Total deposits increased 15.0% to $1.716 billion, primarily reflecting government stimulus-related balances and growth in core deposits.
Investment securities increased 24.4% to $597.0 million, representing approximately 30% of total assets. The portfolio had $21.4 million of pretax unrealized gains and no other-than-temporary impairment recognized in 2020.
Stockholders’ equity increased to $209.5 million from $187.6 million, while equity to total assets declined to 10.6% from 10.8%.
Net cash provided by operating activities was $29.7 million, compared with $20.2 million in 2019. Investing activities used $245.3 million, principally for securities purchases and loan growth, while financing activities provided $205.8 million, primarily from deposit growth.
Average interest-bearing liability costs declined materially, with total interest expense decreasing to $8.1 million from $10.9 million.
Annual cash dividends were $0.75 per share in 2020 versus $0.96 per share in 2019. The company declared a $0.25 per share quarterly dividend in January 2021.
The company repurchased 100,000 shares in 2020. No stock repurchase plan was in effect after the prior plan expired in November 2020.

Material Changes Versus the Prior Comparable Period

The 2020 earnings increase was attributed primarily to the full-year contribution from the October 2019 Iowa State Savings Bank acquisition, lower deposit and borrowing costs, and PPP-related interest and fee income.
PPP loans generated approximately $2.3 million of fee income recognized in interest income during 2020.
Provision expense rose sharply because of COVID-19-related economic uncertainty, loan growth and deterioration in selected commercial real estate exposures.
Nonperforming assets increased 72% to $15.5 million. Nonperforming loans increased to $15.3 million from $5.0 million, primarily due to one hospitality-related commercial real estate relationship.
Classified loans, excluding 1-4 family and consumer loans, increased $35.7 million to $79.2 million, mainly in commercial real estate, hospitality and entertainment exposures.
The allowance for loan losses increased to $17.2 million from $12.6 million, and the allowance-to-loans ratio increased to 1.50% from 1.19%. Net charge-offs increased to $1.1 million from $0.4 million.
Twenty-four COVID-19-related loan modifications remained in the modification period at year-end, representing $45.9 million of principal. An additional $572,000 of modified loans were more than 30 days past due after the modification period.

Liquidity, Debt and Capital

Liquid assets totaled $191.5 million at year-end, including cash, balances due from other banks and interest-bearing deposits.
Available borrowing capacity included $208.0 million from the Federal Home Loan Bank and $107.8 million of federal funds capacity at correspondent banks.
Outstanding borrowings consisted of $37.3 million of securities sold under repurchase agreements and $3.0 million of FHLB advances. The FHLB advance matures in 2024 and carries a 1.57% weighted-average rate.
Commitments to extend credit totaled $222.7 million, and standby letters of credit totaled $7.2 million.
All six subsidiary banks exceeded applicable regulatory capital requirements and were categorized as well capitalized. Their December 31, 2020 community bank leverage ratios ranged from 8.5% to 9.4%, compared with an 8.0% well-capitalized threshold under the temporary 2020 framework.
Management stated that liquidity and capital resources were satisfactory and expected to support existing operations for the foreseeable future, subject to deposit stability, credit performance and regulatory restrictions.

Outlook, Management Commentary, Risks and Unusual Items

Management did not provide formal quantitative earnings or revenue guidance. It expects continued pressure from historically low interest rates, competitive loan and deposit markets, and potential repricing mismatches.
COVID-19 remains the principal uncertainty. Potential effects include additional loan payment deferrals, defaults, foreclosures, collateral-value declines, higher provisions and charge-offs, lower demand for banking products, and pressure on capital and dividends.
The loan portfolio is concentrated in Iowa and has significant commercial real estate and agricultural exposure. Agricultural borrowers remain sensitive to commodity prices, weather, trade policy, government programs and input costs.
Management identified the allowance for loan losses, securities fair values and goodwill impairment as critical accounting estimates. Goodwill of approximately $12.4 million was not impaired at December 31, 2020, but future impairment remains possible.
The company operates with a duration and repricing mismatch: earning assets generally reprice more slowly than deposits and other funding. Rapidly rising rates or prolonged low rates could compress net interest income and margin.
The company concluded that its securities portfolio had no other-than-temporary impairment at year-end, but future market or credit deterioration could produce impairment charges.
The company expects to adopt the current expected credit loss standard for periods beginning after December 15, 2022. Management expects the standard to affect the financial statements but had not quantified the impact.
Management reported no material pending legal proceedings, no unresolved SEC staff comments, effective disclosure controls and effective internal control over financial reporting. The independent auditor issued an unqualified opinion.

Important Facts for Investors to Verify

Whether COVID-19-related loan modifications transition successfully to regular repayment and whether nonperforming commercial real estate loans continue to increase.
Whether the $17.2 million allowance for loan losses is adequate relative to classified loans, hospitality exposure, agricultural conditions and future charge-offs.
The sustainability of deposit growth driven partly by government stimulus and the potential effect of deposit runoff on liquidity and securities holdings.
Future net interest margin performance as interest rates, PPP fee accretion and asset-liability repricing evolve.
Whether the company maintains well-capitalized status as the community bank leverage ratio threshold increases to 8.5% in 2021 and 9.0% beginning in 2022.
The future level and affordability of dividends, given lower 2020 dividends, reliance on subsidiary-bank dividends and regulatory capital constraints.
The eventual balance-sheet and earnings impact of adopting the current expected credit loss accounting standard.