2024-01-03 10:30:00 ET
Summary
- Ames National's share price is outpacing its earnings per share growth.
- The bank's financial performance is heavily reliant on net interest income, with non-interest elements negatively impacting its consolidated result.
- The bank's loan portfolio is robust, with a sufficient loan loss allowance to cover potential losses. However, the stock is trading at a high valuation.
Introduction
While I still like regional banks, not every bank is trading at a valuation that’s sufficiently appealing to be added to my portfolio. It has been a while since I last looked at Ames National ( ATLO ) and a lot has happened in the US banking sector since so this creates an excellent opportunity to have another look at this Iowa-based regional bank.
The share price seems to be running ahead of EPS increases
During the third quarter of 2023, Ames National reported a total interest income of $18.8M, which is an increase of almost 20% compared to the third quarter of last year, when interest rates were lower. But as you can imagine, the interest expenses also increased and the income statement below clearly shows the total interest expenses almost quadrupled to $8.1M which resulted in a net interest income which was approximately a quarter lower than in the same quarter last year.
Unfortunately, the bank’s financial performance is still very much depending on the net interest income as its non-interest elements have a negative impact on the consolidated result. The income statement above shows the bank recorded a $2.4M non-interest income while the total non-interest expenses increased to $9.8M. This means there was a total net non-interest expense of $7.4M resulting in a pre-tax and pre-provision income of less than $3.3M. Fortunately the bank was able to reverse a portion of the provisions it previously recorded and thanks to its ability to add $274,000 in reverted provisions to the Q3 results, its pre-tax income was $3.5M resulting in a net profit of $2.9M or $0.33 per share.
This indeed means the quarterly dividend of $0.27 is still fully covered but as its Q3 result was just $0.33 (including a boost of a few cents per share thanks to the loan loss provision reversion), I fail to see why the stock is trading at in excess of $20/share right now. Even the 9M 2023 results were just ‘so-so’ with an EPS of $0.97 per share.
That being said, I was very pleased with the bank’s ability to reverse some of its previously recorded loan loss provisions and I was wondering if this could perhaps explain the strong share price performance.
Looking at the breakdown of the loan book, it stood at $1.23B including approximately $16.1M in loan loss allowances. As you can see below, residential real estate is an important element of the loan book although it will also be important to keep an eye on the $346M commercial real estate portfolio.
To ensure the bank’s loan portfolio is still robust, I wanted to check out the status of the payments. As you can see below, of the $1.248B loan book, only $4.15M of the loans are classified as past due, with approximately 20% of that amount classified as in excess of 90 days past due.
That indeed is good news as the total amount of loans past due as well as the total amount of loans that are past due by in excess of 90 days has decreased compared to the end of 2023. Based on this breakdown, I now fully understand why the bank was able to reverse some of the previously recorded loan losses. The current provision of $16.1M represents almost 400% of the current amount of loans past due. So even if you’d assume an extremely bearish (and virtually impossible) scenario where the bank doesn’t recoup a single dollar of the loans that are currently past due, the existing loan loss allowance is sufficient to cover all losses.
At the end of the third quarter, Ames National had a $146.6M equity position on the balance sheet. Divided over the 9M shares outstanding, this represents a book value of approximately $16.3M.
The balance sheet also contains approximately $14M in goodwill and intangible assets which means the tangible book value per share was just $14.75. Fortunately, the bank has no securities that are classified as ‘held to maturity’ which means there are no ‘hidden’ elements on the balance sheet. The substantial portfolio of securities held for sale to the tune of $737M are marked to market and lower interest rates in the future will have a positive impact on that securities portfolio. As you can see below, there is an unrealized loss of $87.8M which is almost $10/share.
Investment thesis
While I am impressed with the quality of the loan book as the default rates remain low, the bank is currently trading at approximately 16-17 times earnings. I do expect this to get better in the future as Ames will be able to benefit from the increasing interest rates on the income side. That being said, trading at approximately 1.5 times its tangible book value and a double digit earnings multiple, I am on the sidelines. Ames’ quarterly dividend of $0.27 currently represents a 5% dividend yield but this by itself is insufficient to get me interested in the stock.
For further details see:
Ames National: Trading At 16x Earnings And 1.5x TBV (Rating Downgrade)