Ames National Corporation — 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 six months ended June 30, 2022, compared with the corresponding 2021 periods, and balance-sheet changes from December 31, 2021. The financial statements are unaudited.
Financial performance and condition
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total interest income | $14.9 million | $15.3 million | $29.0 million | $30.3 million |
| Net interest income | $13.6 million | $14.2 million | $26.8 million | $27.8 million |
| Net interest margin, FTE | 2.57% | 2.84% | 2.56% | 2.85% |
| Noninterest income | $2.4 million | $2.6 million | $4.9 million | $5.1 million |
| Noninterest expense | $9.9 million | $9.4 million | $19.2 million | $18.4 million |
| Net income | $4.2 million | $5.9 million | $9.3 million | $11.9 million |
| Diluted EPS | $0.46 | $0.64 | $1.03 | $1.30 |
| Dividends declared per share | $0.27 | $0.26 | $0.54 | $0.51 |
- Second-quarter net income declined approximately 29%; first-half net income declined approximately 22%.
- Second-quarter annualized return on assets was 0.77%, return on equity was 9.78%, and the efficiency ratio was 61.51%. The filing reports a 7.90% capital ratio based on average total equity to average total assets.
- At June 30, 2022, total assets were $2.131 billion, including $1.141 billion of net loans and $828.4 million of available-for-sale securities. Total deposits were $1.926 billion.
- Cash and cash equivalents were $74.7 million, compared with $89.1 million at December 31, 2021. Management stated that liquidity was satisfactory and expected to support existing operations for the foreseeable future.
- Borrowings included $35.7 million of securities sold under repurchase agreements and $4.0 million of other borrowings. The company reported no FHLB advances at June 30, 2022, compared with $3.0 million at year-end.
- Six-month cash flow from operations was $11.3 million; investing activities used $63.5 million and financing activities provided $37.8 million. Cash and cash equivalents decreased by $14.5 million during the six months.
- Stockholders’ equity was $157.4 million, or 7.4% of assets, versus $207.8 million, or 9.7%, at December 31, 2021. The decline primarily reflected $52.6 million of after-tax unrealized investment-security losses and $2.3 million of stock repurchases, partly offset by retained earnings.
- All company and bank subsidiaries exceeded applicable regulatory capital requirements and met the capital conservation buffer as of June 30, 2022.
Material changes versus prior comparable periods
- Interest income decreased primarily because PPP fee and interest recognition fell sharply. PPP fees recognized were $15 thousand in the second quarter and $215 thousand in the first six months of 2022, versus $1.4 million and $2.2 million, respectively, in 2021.
- Taxable securities interest income increased as the investment portfolio grew, partly offsetting lower loan income. Interest expense increased 7% in the second quarter because of higher deposit market rates, but declined 13% for the six-month period due mainly to lower time-deposit balances and rates.
- Noninterest income declined as residential-loan refinancing slowed and gains on loan sales decreased. Wealth-management income increased because of new relationships and growth in assets under management.
- Noninterest expense increased 5% in the quarter and 4% year to date, primarily because of additional technology-related data-processing costs.
- The provision for loan losses was a credit of $59 thousand in the second quarter and $186 thousand year to date, compared with credits of $20 thousand and $446 thousand in the prior-year periods.
- The Iowa bank franchise-tax rate change enacted in June 2022 caused a nonrecurring $780 thousand increase in income-tax expense and raised the second-quarter effective tax rate to 33%, compared with 21% in the prior-year quarter. Management expects eventual annual tax savings of approximately $120 thousand for each $10 million of taxable income once the rate reduction is fully implemented in 2027.
- The company repurchased and retired 100,000 shares for $2.3 million during the second quarter, completing the authorized 100,000-share repurchase plan.
Asset quality, outlook, risks and unusual items
- The allowance for loan losses was $16.4 million, or 1.42% of outstanding loans, versus $16.6 million, or 1.43%, at December 31, 2021.
- Nonaccrual loans were $11.5 million, impaired loans were $11.2 million, and troubled debt restructurings were $11.1 million at June 30, 2022. Problem loans were 1.00% of total loans, above the cited Iowa peer-group level of 0.46% as of March 31, 2022.
- There were $1.5 million of loans past due, including $46 thousand past due 90 days or more; no loans past due 90 days or more were still accruing interest. Net charge-offs were $5 thousand for the quarter and $15 thousand year to date.
- Available-for-sale securities had $66.2 million of gross unrealized losses at June 30, 2022, compared with $6.5 million at year-end. Management considered the losses temporary, attributed them primarily to higher interest rates, and stated that it did not intend or expect to be required to sell the securities before recovery.
- Management cautioned that further interest-rate increases, inflation, COVID-19-related economic disruption, deterioration in commercial or residential real-estate values, credit losses, liquidity constraints, regulatory changes, and competitive pricing could materially affect results.
- The company entered into a $3.7 million branch-remodeling commitment in June 2022, all of which remained outstanding at quarter-end. A prior West Des Moines branch construction commitment had $96 thousand remaining.
- Management determined that goodwill was not impaired as of June 30, 2022. The filing does not provide formal earnings or revenue guidance.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting or risk factors from the 2021 Form 10-K.
Important facts for investors to verify
- Whether unrealized securities losses increase or reverse as interest rates and liquidity conditions change, and whether any securities later become other-than-temporarily impaired.
- Future trends in net interest margin, deposit pricing, loan yields, PPP-related income, and residential-loan sale volume.
- Commercial real-estate and agricultural credit quality, nonaccrual loans, impaired loans, classified loans, and the adequacy of the allowance for loan losses.
- The effect of the phased Iowa bank franchise-tax reduction on future tax expense and cash taxes.
- Liquidity capacity relative to deposit outflows, securities collateral requirements, repurchase agreements, and the remaining branch-remodeling commitment.
- The impact of stock repurchases, dividends, accumulated other comprehensive losses, and regulatory capital requirements on future capital flexibility.
- The adoption impact of the current expected credit-loss accounting standard, which management stated was not yet determinable and was expected to apply to the company after December 15, 2022.