Ames National Corporation — Q3 2020 Form 10-Q Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company operating six community bank subsidiaries in central Iowa. Its principal activities are commercial and consumer lending, deposits, wealth management, and related banking services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the same periods in 2019 and the December 31, 2019 balance sheet. The Iowa State Savings Bank acquisition completed October 25, 2019 affects year-over-year comparability.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|
| Net income | $5.67 million | $4.04 million | $13.65 million | $12.90 million |
| Diluted EPS | $0.62 | $0.44 | $1.49 | $1.40 |
| Net interest income | $14.16 million | $10.81 million | $40.89 million | $32.71 million |
| Provision for loan losses | $0.54 million | $0.38 million | $4.42 million | $0.55 million |
| Noninterest income | $2.79 million | $2.12 million | $7.85 million | $6.26 million |
| Noninterest expense | $9.29 million | $7.48 million | $27.44 million | $22.15 million |
| Net interest margin, FTE | 3.21% | 3.15% | 3.16% | 3.20% |
- Q3 net income increased 40% year over year; nine-month net income increased 6%.
- Q3 return on assets was 1.21%, return on equity was 11.18%, and the efficiency ratio was 54.8%.
- Net interest income benefited from the acquisition, loan growth, PPP lending, and lower deposit funding costs. The nine-month margin declined from 3.20% to 3.16% as asset yields fell.
- Q3 gain on sale of loans held for sale was $0.65 million, compared with $0.29 million in 2019, reflecting refinancing activity in the low-rate environment.
Balance sheet, liquidity, debt, and capital
| Balance sheet item | September 30, 2020 | December 31, 2019 | Change |
|---|
| Total assets | $1.910 billion | $1.737 billion | +$173.2 million |
| Loans receivable, net | $1.159 billion | $1.048 billion | +$110.9 million |
| Available-for-sale securities | $548.8 million | $479.8 million | +$69.0 million |
| Total deposits | $1.660 billion | $1.493 billion | +$167.0 million |
| Stockholders’ equity | $206.0 million | $187.6 million | +$18.5 million |
- Cash and due from banks plus interest-bearing deposits and federal funds sold totaled $142.4 million, compared with $143.6 million at year-end 2019.
- Liquidity sources included $214.6 million of FHLB borrowing capacity, $106.3 million of federal funds borrowing capacity, available-for-sale securities, and core deposits. FHLB advances outstanding were $3.0 million; repurchase agreements were $30.5 million.
- The company reported no external debt financing, off-balance-sheet financing arrangements, or stock-linked derivatives.
- Net cash provided by operating activities was $21.3 million; investing activities used $178.2 million, primarily for loan growth and securities purchases; financing activities provided $145.0 million, mainly from deposit growth. Cash and due from banks declined $11.9 million to $22.8 million.
- All six banks elected the community bank leverage ratio framework and reported leverage ratios of 8.8% to 9.9%, above the 8.0% qualifying threshold at September 30, 2020. The company’s equity-to-assets ratio was 10.8%.
Material changes versus prior comparable periods
- The October 2019 Iowa State Savings Bank acquisition increased earning assets, deposits, interest income, and operating expenses. The acquisition added approximately $2.7 million of goodwill and $1.9 million of core deposit intangibles.
- Loans increased substantially, including $79.6 million of SBA-guaranteed PPP loans across 942 loans. PPP loans generally bear 1% interest and are expected to be forgiven in many cases, which would accelerate related fees into interest income.
- Credit costs increased materially. The nine-month provision for loan losses rose to $4.42 million from $0.55 million, while nine-month net charge-offs rose to $1.11 million from $0.30 million.
- The allowance for loan losses increased to $15.9 million, or 1.35% of loans, from $12.6 million, or 1.19%, at year-end 2019.
- Nonaccrual loans increased to $16.4 million from $4.8 million, and problem loans as a percentage of total loans increased to 1.44% from 0.48%. Management attributed much of the increase to one hospitality loan relationship.
- Troubled debt restructurings increased to $11.5 million from $1.2 million. Separately, 199 COVID-19-related modifications covered $127.5 million of principal; $94.8 million remained on payment deferral at September 30, 2020.
- Unrealized gains on available-for-sale securities increased accumulated other comprehensive income to $15.5 million from $4.1 million. Gross unrealized securities losses were $91,000 and were considered temporary.
- The company repurchased and retired 100,000 shares during the first four months of 2020 at an average price of $19.92. The repurchase plan was completed, and no shares remained available under the plan at quarter-end.
Outlook, management commentary, risks, and unusual items
- Management stated that liquidity and capital remained satisfactory and that available liquidity should support existing operations for the foreseeable future. No material capital expenditures or liquidity trends were identified as concerns.
- The COVID-19 pandemic remains the principal uncertainty. Potential effects include higher delinquencies, charge-offs, allowance requirements, reduced loan and service demand, deposit volatility, operational disruption, and pressure on earnings and capital.
- Approximately 8.4% of the loan portfolio was associated with hospitality and entertainment industries, which management identified as particularly exposed to pandemic-related restrictions.
- Management anticipates additional allowance increases if COVID-19 continues to negatively affect the loan portfolio or economic recovery is delayed.
- Low interest rates may pressure future loan yields, net interest margin, and earnings. The company also warned that securities could incur other-than-temporary impairments and that goodwill could become impaired, particularly from the recent acquisition.
- Management received SBA forgiveness payments beginning in October 2020 and expected the PPP forgiveness process to extend into 2021.
- The company declared a $0.25 per share dividend on October 14, 2020, payable November 13, 2020. Management noted that future dividends could be reduced or suspended if pandemic effects weaken earnings, liquidity, or capital ratios.
- CECL adoption for the smaller reporting company is delayed until periods beginning after December 15, 2022. Management expects the standard to affect the financial statements but had not determined the magnitude.
- Goodwill impairment testing at September 30, 2020 indicated no impairment. Disclosure controls and procedures were considered effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the elevated nonaccrual, TDR, classified, and hospitality-related loans lead to additional charge-offs or allowance increases.
- The pace and ultimate amount of PPP loan forgiveness, including the timing of fee acceleration and any borrower or SBA processing issues.
- Changes in deposits, liquidity usage, FHLB borrowing capacity, and repurchase funding if pandemic conditions worsen.
- The sustainability of refinancing-related loan-sale gains and the effect of prolonged low interest rates on net interest margin.
- Whether available-for-sale securities incur other-than-temporary impairment or lose accumulated unrealized gains.
- Potential goodwill impairment related to the Iowa State Savings Bank acquisition and the eventual financial statement impact of CECL adoption.
- Regulatory capital ratios and the company’s ability to maintain the $0.25 quarterly dividend under changing credit and economic conditions.
