Ames National Corporation 10-Q Summary
Business Context and Reporting Period
Ames National Corporation is an Iowa bank holding company operating six bank subsidiaries providing commercial and consumer loans, deposits, wealth management, trust, service, merchant and card services. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the same period in 2019, and balance-sheet comparisons are to December 31, 2019.
The October 2019 acquisition of Iowa State Savings Bank, including four Iowa branches, contributed materially to year-over-year balance-sheet and operating growth. Cash consideration was approximately $22.6 million; the Company recorded approximately $2.7 million of goodwill and $1.9 million of core deposit intangible assets.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total interest income | $15.8 million | $13.5 million | +17% |
| Net interest income | $13.0 million | $11.0 million | +19% |
| Provision for loan losses | $2.3 million | $0.1 million | Significant increase |
| Noninterest income | $2.6 million | $1.9 million | +37% |
| Noninterest expense | $9.1 million | $7.5 million | +21% |
| Income before taxes | $4.3 million | $5.3 million | -19% |
| Net income | $3.6 million | $4.2 million | -16% |
| Diluted EPS | $0.39 | $0.46 | -15% |
| Net interest margin, FTE | 3.18% | 3.23% | -5 basis points |
| Return on average equity | 7.44% | 9.73% | Declined |
| Efficiency ratio | 57.7% | 57.8% | Broadly stable |
Net interest income benefited from loan growth and the acquisition, although the net interest margin declined modestly. Noninterest income included a $386,000 net securities gain, compared with no securities gains in the prior-year quarter. Higher salaries, data processing costs, occupancy costs and acquisition-related expenses increased noninterest expense.
Total assets increased to $1.798 billion from $1.737 billion at year-end 2019. Net loans rose to $1.080 billion from $1.048 billion, while available-for-sale securities increased to $489.3 million from $479.8 million. Total deposits increased to $1.552 billion from $1.493 billion, primarily funding asset growth.
Stockholders’ equity was $188.5 million, compared with $187.6 million at December 31, 2019. The Company declared a quarterly dividend of $0.25 per share, up from $0.24 in the prior-year period, and repurchased 34,153 shares during the quarter.
Cash Flow, Debt and Liquidity
- Operating activities provided $11.7 million of cash, compared with $6.3 million in Q1 2019.
- Investing activities used $68.3 million, principally for loan growth, purchases of securities and increased interest-bearing deposits.
- Financing activities provided $54.1 million, primarily from a $59.4 million increase in deposits.
- Cash and due from banks ended at $32.1 million, compared with $34.6 million at December 31, 2019.
- Liquid assets, including cash and interest-bearing deposits, totaled $168.5 million.
- FHLB advances were $3.0 million, down from $5.0 million; securities sold under repurchase agreements were $41.6 million.
- Additional disclosed liquidity included $216.9 million of FHLB borrowing capacity and $109.5 million of federal-funds borrowing capacity, with no outstanding federal-funds purchases.
- Management stated that liquidity was satisfactory and sufficient for foreseeable operations. The Company reported no external debt financing, off-balance-sheet financing arrangements or derivative instruments linked to its stock.
Material Changes Versus the Prior Comparable Period
- Net income declined 16% despite higher revenue, primarily because the loan-loss provision increased by $2.2 million.
- The allowance for loan losses increased to $14.9 million, or 1.36% of outstanding loans, from $12.6 million, or 1.19%, at year-end 2019.
- Nonaccrual loans increased to $17.7 million from $4.8 million, and loans 90 days or more past due and still accruing increased to $838,000 from $255,000.
- Problem loans increased to 1.69% of total loans from 0.48%, primarily due to deterioration in one hospitality relationship. Impaired loans increased to approximately $17.0 million from $4.8 million.
- Hospitality and entertainment loans represented approximately 8.5% of the loan portfolio and were identified as particularly vulnerable to COVID-19-related disruption.
- Loan balances grew substantially following the ISSB acquisition, while average interest-earning assets increased to $1.669 billion from $1.394 billion.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal earnings guidance. Management stated that the COVID-19 pandemic and related Iowa restrictions could adversely affect borrowers, loan demand, credit losses, liquidity, net interest income, securities valuations, goodwill and future dividends. Additional increases in the allowance for loan losses were anticipated if economic restrictions continued to impair customers, particularly in hospitality, entertainment and agriculture.
As of April 29, 2020, the Company had approved approximately $60 million of loan modifications covering 88 loans. As of the same date, it had funded approximately 627 Small Business Administration loans totaling approximately $72 million, primarily under the Paycheck Protection Program. Management reported approximately $70 million of PPP originations through April 25, 2020.
Management considered $3.3 million of unrealized securities losses temporary as of March 31, 2020 and stated that it did not intend to sell the affected securities. However, further market deterioration could result in other-than-temporary impairment or lower accumulated other comprehensive income. Goodwill was not impaired at March 31, 2020, but management identified future impairment as a risk.
The Company elected the community bank leverage ratio framework. All six bank subsidiaries reported March 31, 2020 leverage ratios between 9.1% and 10.1%, above the then-applicable 9.0% well-capitalized threshold. The CARES Act lowered the applicable CBLR threshold to 8.0% beginning in the second quarter of 2020.
The filing identifies allowance-for-loan-loss estimates, securities impairment assessments and goodwill impairment testing as critical accounting areas. The delayed effective date for the current expected credit loss standard is after December 15, 2022 for the Company; management expects adoption to affect the financial statements but had not determined the magnitude.
Most Important Facts for Investors to Verify
- Whether COVID-19-related deferrals, PPP loan performance and hospitality exposure lead to additional provisions, charge-offs or nonaccrual loans.
- The trend in nonaccrual, impaired, past-due and classified agricultural and commercial real estate loans.
- The adequacy of the $14.9 million allowance for loan losses under evolving economic conditions and eventual CECL implementation.
- Whether the 3.18% net interest margin declines further as market rates remain low and PPP loans carry a 1.0% rate.
- The sustainability of the $0.25 quarterly dividend and future stock repurchases given earnings, capital and regulatory conditions.
- Potential impairment of goodwill, securities and other assets if the pandemic produces prolonged economic or market deterioration.
- Liquidity trends, deposit stability, borrowing capacity and the Company’s ability to fund loan commitments and customer withdrawals.
- The impact of the ISSB acquisition, including integration costs, deposit retention, loan credit quality and acquisition-related amortization.