Ames National Corporation — Form 10-K Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company operating six wholly owned community banks in central, north-central and south-central Iowa. Its principal activities are commercial, agricultural, residential and consumer lending; deposit services; investment securities; mortgage loan sales; and wealth management. This filing covers the fiscal year ended December 31, 2022, with comparisons primarily to 2021.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net income | $19.3 million | $23.9 million | Down 19.3% |
| Basic and diluted EPS | $2.14 | $2.62 | Down 18.3% |
| Interest income | $61.6 million | $60.5 million | Up 1.8% |
| Interest expense | $8.3 million | $4.5 million | Up 85.2% |
| Net interest income | $53.2 million | $56.0 million | Down 4.9% |
| Noninterest income | $9.7 million | $10.5 million | Down 8.1% |
| Noninterest expense | $38.6 million | $36.6 million | Up 5.5% |
| Net interest margin, FTE | 2.55% | 2.83% | Down 28 basis points |
| Return on average assets | 0.90% | 1.15% | Down 25 basis points |
| Return on average equity | 11.43% | 11.43% | Flat |
| Efficiency ratio | 61.41% | 55.04% | Higher |
| Total assets | $2.135 billion | $2.137 billion | Essentially flat |
| Net loans | $1.226 billion | $1.144 billion | Up 7.2% |
| Total deposits | $1.898 billion | $1.878 billion | Up 1.1% |
| Stockholders’ equity | $149.1 million | $207.8 million | Down 28.2% |
Cash flow from operating activities was $21.2 million, compared with $30.5 million in 2021. Investing activities used $127.4 million, primarily reflecting loan growth and securities activity. Financing activities provided $44.9 million, including deposit growth and additional borrowings. Cash and cash equivalents declined to $27.9 million from $89.1 million.
The investment securities portfolio had a fair value of $786.4 million and pretax unrealized losses of $83.6 million at year-end, compared with a fair value of $831.0 million and pretax unrealized gains of $3.8 million in 2021. The unrealized losses reduced GAAP equity through accumulated other comprehensive loss, but were excluded from regulatory capital.
Borrowed funds included $40.7 million of securities sold under repurchase agreements and $39.1 million of FHLB advances and other borrowings. Available liquidity included $285.3 million of FHLB borrowing capacity and $100.6 million of correspondent-bank federal funds capacity. The Company reported $389.0 million of uninsured deposits.
Material changes versus the prior comparable period
- Net income declined primarily because deposit interest expense increased and fewer PPP fees were recognized; PPP fees recognized in interest income fell to $218 thousand from $4.3 million.
- Net interest margin declined as interest-bearing liabilities repriced faster than loans and investment securities during the rising-rate environment.
- Loan balances increased $80.7 million, led by growth in 1-4 family residential and commercial real estate loans.
- Noninterest income declined because mortgage refinancing slowed and gains on loan sales fell to $606 thousand from $1.7 million. Wealth management income increased to $4.9 million from $4.4 million.
- Noninterest expense increased by $2.0 million, primarily because of higher data-processing costs and salaries and benefits.
- Nonperforming assets increased to $14.7 million from $13.1 million, primarily because of one commercial real estate relationship. Nonaccrual loans were 1.19% of loans versus 1.09% in 2021.
- The allowance for loan losses declined to $15.7 million from $16.6 million. The Company recorded a $874 thousand credit for loan losses in 2022 and net charge-offs were $50 thousand.
- Stockholders’ equity declined primarily because of securities-related unrealized losses. The Company repurchased 100,000 shares for approximately $2.3 million, compared with 30,580 shares for $710 thousand in 2021.
- Annual cash dividends declined to $1.08 per share from $1.29 per share.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide formal earnings or revenue guidance. It expects market interest rates to continue increasing during 2023 in response to inflation, which could further pressure net interest income and margins because deposits and other liabilities reprice faster than earning assets.
Management identified potential risks from recession, inflation, higher funding costs, weaker loan demand, borrower defaults, declining collateral values, agricultural commodity prices, weather, trade policy and the Company’s concentration in Iowa. Commercial real estate and agricultural lending are particularly important exposures.
The Company expects to adopt the CECL credit-loss model in the first quarter of 2023 and anticipates an initial increase of approximately $600 thousand to $1.0 million in the allowance for credit losses for loans and unfunded commitments. The adoption will produce a one-time adjustment to retained earnings and reduce regulatory capital amounts and ratios.
All six subsidiary banks were reported as well capitalized and in compliance with applicable capital requirements at December 31, 2022. Goodwill of $12.4 million was not impaired. The filing reports no material pending litigation, no significant subsequent events through March 10, 2023, and effective disclosure controls and internal control over financial reporting.
Most important facts for an investor to verify
- Whether the $83.6 million securities unrealized loss changes materially with interest rates or requires an impairment charge.
- The composition, collateral coverage and resolution status of the $14.7 million of nonperforming assets, including the commercial real estate relationship identified by management.
- The actual first-quarter 2023 CECL adjustment and its effect on retained earnings, allowance coverage and regulatory capital.
- Deposit retention, uninsured deposit levels and borrowing capacity if interest rates remain elevated or liquidity conditions deteriorate.
- Whether deposit repricing continues to outpace asset repricing and further reduces the net interest margin.
- Trends in Iowa commercial real estate, agricultural borrowers, commodity prices and collateral values.
- The sustainability of the quarterly dividend and share repurchase activity given lower earnings and reduced GAAP equity.