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. Its principal activities are commercial and consumer lending, deposit-taking, wealth management, loan sales, and payment services. This report covers the three and six months ended June 30, 2021; interim financial statements are unaudited. The filing was signed August 5, 2021.
Financial results and key metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Net interest income | $14.2 million | $13.7 million | $27.8 million | $26.7 million |
| Net income | $5.9 million | $4.4 million | $11.9 million | $8.0 million |
| Basic and diluted EPS | $0.64 | $0.49 | $1.30 | $0.87 |
| Net interest margin, FTE | 2.84% | 3.10% | 2.85% | 3.14% |
| Provision/(credit) for loan losses | $(20) thousand | $1.6 million | $(446) thousand | $3.9 million |
| Noninterest income | $2.6 million | $2.4 million | $5.1 million | $5.1 million |
| Noninterest expense | $9.4 million | $9.1 million | $18.4 million | $18.1 million |
Net income increased 33% in the second quarter and 49% for the first six months, primarily because loan-loss provisions in 2020 reflected the initial COVID-19 impact and because lower market rates reduced deposit interest expense. Net interest income increased despite lower asset yields, supported by asset and deposit growth and $1.3 million of second-quarter and $2.2 million of year-to-date PPP loan fee recognition.
Reported annualized return on assets was 1.12% and return on equity was 11.39% for the second quarter. The efficiency ratio was 56.01% for the quarter and 55.86% for the six-month period. Management reported a 21% effective tax rate for both the quarter and six months.
Balance sheet, liquidity, debt, and capital
- Total assets were $2.085 billion at June 30, 2021, up from $1.976 billion at December 31, 2020, primarily due to investment securities.
- Available-for-sale securities increased to $740.1 million from $597.0 million. Gross unrealized losses were $2.9 million and were considered temporary by management.
- Net loans were $1.124 billion versus $1.130 billion at year-end. PPP loans declined to $37.6 million from $50.9 million; $2.3 million of related net fees remained unrecognized.
- Deposits increased to $1.831 billion from $1.716 billion, driven partly by government stimulus programs and customer activity.
- Cash and due from banks plus interest-bearing deposits and federal funds sold totaled $166.2 million, compared with $191.5 million at year-end. Available liquidity also included $244.0 million of FHLB lines, $107.9 million of federal funds borrowing capacity, and a new $4.0 million five-year line of credit with no borrowings outstanding.
- Debt was limited to $3.0 million of FHLB advances and $33.3 million of securities sold under repurchase agreements. Management stated that the Company had no external debt financing, off-balance-sheet financing arrangements, or derivatives linked to its stock.
- Stockholders’ equity was $210.1 million, or 10.1% of assets, versus $209.5 million, or 10.6%, at year-end. Cash dividends declared were $0.51 per share for the first six months, including $0.26 per share declared July 14, 2021.
- Six-month cash flow from operations was $17.4 million; investing activities used $123.7 million, mainly for securities purchases; financing activities provided $106.4 million, principally from deposit growth.
Material changes versus comparable periods
- Second-quarter net income rose from $4.4 million to $5.9 million, while six-month net income rose from $8.0 million to $11.9 million.
- Loan-loss expense shifted to credits of $20 thousand for the quarter and $446 thousand year-to-date, compared with provisions of $1.6 million and $3.9 million, respectively, in 2020.
- Interest expense declined 41% in the quarter and 48% year-to-date, although the net interest margin contracted from 3.10% to 2.84% for the quarter and from 3.14% to 2.85% year-to-date because of lower market rates and asset yields.
- Noninterest income increased 9% in the quarter, led by wealth management income, but was essentially unchanged year-to-date because higher wealth management income offset the absence of securities gains.
- Nonaccrual loans declined to $12.7 million from $15.3 million at year-end, and problem loans were 1.11% of total loans versus 1.33%. However, this remained above the Iowa peer average of 0.59% as of March 31, 2021.
- The allowance for loan losses declined to $16.9 million from $17.2 million, representing 1.48% of loans versus 1.50% at year-end.
- COVID-19-related loan modifications still in the modification period declined to four loans totaling $15.3 million from 24 loans totaling $45.9 million.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects liquidity sources to support existing operations for the foreseeable future and stated that no material liquidity or cash-flow trends were currently of concern.
- COVID-19 remains a principal uncertainty. Weakness among borrowers could increase delinquencies, charge-offs, allowance requirements, and other losses.
- Prolonged historically low interest rates could further pressure net interest income, net interest margin, and earnings.
- Commercial real estate, agricultural real estate, and agricultural operating loans remain important credit-risk areas. Watch and special-mention agricultural loans totaled $36.9 million; commercial real estate watch and special-mention loans totaled $100.1 million.
- The Company committed $1.7 million to construct a new West Des Moines branch; the full commitment remained outstanding at June 30, 2021.
- Two subsidiaries, State Bank & Trust and First National Bank, were below the 8.5% community bank leverage ratio threshold but above 8.0%. They had until September 30, 2021 and December 31, 2021, respectively, to return to compliance with the applicable qualifying criteria.
- The Company expects to adopt the current expected credit loss standard for periods beginning after December 15, 2022. Management’s preliminary evaluation indicates the standard will affect the financial statements, but the amount of the impact was not yet clear.
- Goodwill of $12.4 million was assessed as not impaired at June 30, 2021. Management noted that future economic deterioration could lead to impairment.
- The April 2021 stock repurchase authorization covered up to 100,000 shares; no shares had been repurchased through June 30, 2021.
- No material changes to previously disclosed risk factors or off-balance-sheet arrangements were reported. Legal proceedings were not applicable.
Investor verification items
- Verify the sustainability of earnings growth after the unusually favorable comparison with COVID-19-related provisions in 2020.
- Monitor net interest margin trends as low rates and elevated deposits continue to affect asset yields and funding costs.
- Review commercial real estate and agricultural loan classifications, nonaccrual trends, collateral values, and allowance adequacy.
- Assess the effect of PPP fee acceleration and the timing of SBA loan forgiveness on future interest income.
- Confirm the subsidiaries’ return to compliance with the 8.5% community bank leverage ratio requirements.
- Evaluate the eventual implementation impact of CECL, including any required adjustment to capital or retained earnings.
- Consider unrealized securities losses and interest-rate sensitivity, particularly given the expanded available-for-sale portfolio.