Ames National Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company operating six community banks in central, north-central and south-central Iowa. Its principal activities are commercial and consumer lending, deposits, investment securities and wealth management. This Form 10-Q covers the three and six months ended June 30, 2023; financial statements are unaudited. The filing was signed August 8, 2023.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Total interest income | $18.5 million | $14.9 million | $35.7 million | $29.0 million |
| Net interest income | $11.3 million | $13.6 million | $23.0 million | $26.8 million |
| Net interest margin, FTE | 2.20% | 2.63% | 2.26% | 2.60% |
| Net income | $2.6 million | $4.2 million | $5.8 million | $9.3 million |
| Basic and diluted EPS | $0.28 | $0.46 | $0.64 | $1.03 |
| Noninterest income | $2.3 million | $2.4 million | $4.6 million | $4.9 million |
| Noninterest expense | $10.6 million | $9.9 million | $20.3 million | $19.2 million |
| Efficiency ratio | 77.6% | 61.5% | 73.9% | 60.6% |
Net income declined approximately 39% in the second quarter and 38% for the first six months. Interest income increased 24% in the quarter and 23% year to date, but interest expense increased 479% and 488%, respectively, as deposit and borrowing costs rose following higher market interest rates.
- Total assets were $2.174 billion at June 30, 2023, up $39.3 million from December 31, 2022.
- Net loans were $1.233 billion, compared with $1.226 billion at year-end 2022. Construction and commercial operating loans increased, while agricultural operating loans declined.
- Deposits were $1.863 billion, down from $1.898 billion at year-end. Estimated uninsured deposits were approximately 16% of total deposits.
- Available-for-sale securities were $758.5 million, down from $786.4 million. Gross unrealized losses were $75.7 million, primarily attributable to interest-rate and market conditions; management concluded the losses were temporary.
- Allowance for credit losses was $16.3 million, or 1.31% of loans, versus $15.7 million, or 1.26%, at December 31, 2022.
- Stockholders’ equity was $155.4 million, or 7.1% of assets, versus $149.1 million, or 7.0%, at year-end.
- Return on assets was 0.47% and return on equity was 6.45% for the quarter, compared with 0.77% and 9.78%, respectively, in the prior-year quarter.
- The quarterly dividend remained $0.27 per share; $0.54 per share was declared for the first six months.
Cash flow, debt and liquidity
- Cash and cash equivalents increased to $93.3 million from $27.9 million at December 31, 2022.
- Six-month operating cash flow was $10.5 million, compared with $11.3 million in 2022.
- Investing activities provided $28.8 million, compared with $63.5 million used in the prior-year period, primarily because securities purchases were substantially lower.
- Financing activities provided $26.1 million, including $150.0 million of borrowing proceeds, partly offset by $75.3 million of repayments, $16.4 million of net FHLB short-term borrowing repayments and $34.7 million of deposit reductions.
- Other borrowings totaled $97.4 million, including $75.0 million borrowed under the Federal Reserve Bank Term Funding Program and $19.0 million of short-term FHLB advances. The filing also reports a $3.4 million fixed-rate commercial bank note.
- The banks had $301.7 million of FHLB borrowing capacity, $111.2 million of federal funds borrowing capacity and $415.3 million of unpledged available-for-sale securities and interest-bearing deposits.
- Management stated that liquidity was satisfactory and sufficient for foreseeable operations. A $4.0 million branch-remodeling commitment had $1.2 million remaining at June 30, 2023.
Material changes versus prior comparable periods
- Net interest income and margins contracted because the increase in asset yields did not offset the sharp rise in deposit and borrowing costs.
- Noninterest income declined due mainly to lower gains on residential loan sales as refinancing volume slowed; year-to-date wealth management income also declined because of lower estate fees.
- Noninterest expense increased 7% in the quarter and 6% year to date. The principal unusual item was a $523 thousand wire-fraud loss recorded in the second quarter.
- Income tax expense decreased to $464 thousand from $2.0 million in the quarter and to $1.1 million from $3.3 million year to date. The 2022 comparison included a $780 thousand deferred-tax adjustment related to Iowa bank franchise tax rates; the 2023 effective tax rate benefited from tax-exempt income and New Markets Tax Credits.
- The company adopted CECL on January 1, 2023, reducing retained earnings by $603 thousand and increasing the loan allowance by $518 thousand and the off-balance-sheet credit-exposure allowance by $273 thousand.
- Problem loans declined to 0.93% of total loans from 1.19% at year-end. Nonaccrual loans decreased to $11.3 million from $14.7 million, while $318 thousand of loans were 90 days or more past due and accruing.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management expects liquidity sources to support existing operations and reported no known liquidity or cash-flow trends of concern. Management also concluded that goodwill was not impaired as of June 30, 2023 and that regulatory capital exceeded well-capitalized thresholds.
- Primary risks include inflation, rising interest rates, deposit competition and funding costs, liquidity availability, commercial and residential real-estate values, agricultural and commercial borrower performance, credit-loss estimate changes, regulatory capital requirements and general economic conditions.
- Management identified the allowance for credit losses, investment-security fair values and goodwill impairment as critical accounting areas requiring significant judgment.
- The investment portfolio remains exposed to interest-rate-driven fair-value volatility. Management expects full principal and interest collection, but stated that future changes in conditions could materially affect reported values.
- Off-balance-sheet arrangements consist principally of commitments to extend credit and standby letters of credit; management reported no material change since December 31, 2022.
- The company reported no material changes to previously disclosed risk factors, no applicable legal proceedings and effective disclosure controls.
Most important facts for investors to verify
- Whether deposit repricing and additional borrowings continue to pressure net interest margin and earnings.
- The sustainability of the 2.20% quarterly net interest margin and the elevated 77.6% efficiency ratio.
- Credit performance in commercial real estate, agricultural and commercial operating portfolios, including trends in watch, substandard and impaired loans.
- Whether the $75.7 million of unrealized securities losses remain temporary and whether securities can be held to recovery without liquidity pressure.
- Reliance on the Federal Reserve Bank Term Funding Program and other wholesale funding sources as deposits decline.
- The effect of CECL assumptions, economic forecasts and future charge-offs on the $16.3 million allowance for credit losses.
- Completion and remaining cost of the branch remodel, and controls implemented following the $523 thousand wire-fraud loss.