Ames National Corporation: 2023 Third-Quarter 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. The filing covers the quarter and nine months ended September 30, 2023, with comparisons primarily to the same periods in 2022 and to December 31, 2022. The financial statements are unaudited.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2023 | Prior Comparable Period | Nine Months Ended September 30, 2023 | Prior Comparable Period |
|---|---|---|---|---|
| Net interest income | $10.7 million | $13.7 million | $33.7 million | $40.5 million |
| Net income | $2.9 million | $5.5 million | $8.7 million | $14.9 million |
| Diluted EPS | $0.33 | $0.62 | $0.97 | $1.64 |
| Net interest margin, FTE | 2.11% | 2.71% | 2.21% | 2.63% |
| Noninterest income | $2.4 million | $2.3 million | $6.9 million | $7.2 million |
| Noninterest expense | $9.8 million | $9.5 million | $30.1 million | $28.7 million |
- Total assets were $2.154 billion at September 30, 2023, compared with $2.135 billion at December 31, 2022.
- Net loans were $1.232 billion, up from $1.226 billion; gross loans increased primarily in construction and commercial lending, partly offset by lower agricultural operating loans.
- Available-for-sale securities were $736.9 million, down from $786.4 million. The portfolio had $87.8 million of gross unrealized losses, primarily attributed to interest-rate and market conditions and recorded in accumulated other comprehensive loss rather than earnings.
- Deposits declined to $1.829 billion from $1.898 billion. Savings and money-market balances decreased while time deposits increased as customers moved toward higher-yielding accounts. Estimated uninsured deposits were approximately $583 million, of which approximately $147 million were collateralized.
- Cash and cash equivalents increased to $90.1 million from $27.9 million. The company reported $12.8 million of operating cash flow, $38.8 million of investing cash flow and $10.5 million of financing cash flow for the nine months.
- Other borrowings were $105.9 million, including $83.3 million borrowed under the Federal Reserve Bank Term Funding Program and $19.0 million of short-term FHLB advances. Securities sold under repurchase agreements totaled $60.9 million.
- Stockholders’ equity was $146.6 million versus $149.1 million at year-end 2022, with the decrease primarily reflecting unrealized investment-portfolio losses, partly offset by retained earnings.
- The allowance for credit losses was $16.1 million, or 1.29% of loans, compared with $15.7 million, or 1.26%, at December 31, 2022. Regulatory capital ratios exceeded applicable minimums, and management stated that the company and its banks were well capitalized.
Material Changes Versus Prior Comparable Period
- Net income decreased 47% in the third quarter and 42% for the first nine months. Management attributed the decline primarily to sharply higher deposit and borrowing costs, which more than offset higher loan interest income.
- Third-quarter interest income increased 19%, while interest expense increased 277%. For the nine months, interest income increased 22% and interest expense increased 383%.
- The FTE net interest margin fell to 2.11% from 2.71% in the third quarter and to 2.21% from 2.63% for the nine months.
- The efficiency ratio increased to 75.1% from 59.5% in the third quarter and to 74.3% from 60.2% for the nine months, reflecting lower net interest income and higher operating expenses.
- Nine-month noninterest income decreased 4%, primarily because of fewer gains on residential loan sales as refinancing volume slowed. Noninterest expense increased 5%, including a $523 thousand wire-fraud loss recorded in the second quarter and higher salaries and benefits.
- The company adopted CECL on January 1, 2023, recording a $603 thousand decrease to retained earnings, including a $518 thousand increase in the loan allowance and a $273 thousand increase in the allowance for off-balance-sheet credit exposures.
- Problem loans were 1.23% of total loans, compared with 1.19% at year-end 2022. Nonaccrual loans were $14.6 million, and $734 thousand of loans were at least 90 days past due and still accruing.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management said liquidity sources should be sufficient to support existing operations for the foreseeable future and identified no liquidity or cash-flow trends of concern.
- Key risks include continued inflation and high interest rates, deposit competition and pricing pressure, availability and cost of liquidity, changes in regulation and capital requirements, commercial and residential real-estate values, agricultural and commercial credit quality, and potential changes in credit-loss estimates.
- Management concluded that unrealized losses on available-for-sale securities were temporary and stated that it did not intend, and believed it was not more likely than not, to sell the securities before recovery. Future changes in rates, liquidity needs or credit conditions could nevertheless affect fair values and capital.
- The company had $379.8 million of unpledged available-for-sale securities and interest-bearing deposits, $281.6 million of FHLB borrowing capacity, and $111.0 million of federal-funds borrowing capacity at September 30, 2023.
- Approximately $0.5 million remained on a $4.0 million branch-remodeling commitment. Three loan modifications involving borrowers experiencing financial difficulty were made during the first nine months; the disclosed agricultural modification totaled $415 thousand.
- A $25.0 million interest-rate swap was executed during the third quarter as a fair-value hedge. Goodwill was assessed as not impaired as of September 30, 2023.
- The company declared a quarterly cash dividend of $0.27 per share. No shares were repurchased during the quarter, and 100,000 shares remained available under the repurchase plan.
Important Facts for Investors to Verify
- Whether deposit repricing and reliance on higher-cost borrowings continue to compress net interest margin and earnings.
- The composition, duration and liquidity value of the $736.9 million securities portfolio, including the $87.8 million of unrealized losses.
- Trends in uninsured deposits, deposit outflows, pledged collateral and continued use of the BTFP and FHLB facilities.
- Changes in commercial real-estate, agricultural and other criticized loans, nonaccrual balances, past-due loans and the CECL allowance.
- Whether the $523 thousand wire-fraud loss was isolated and whether other unusual operating losses or control issues arise.
- The company’s ability to sustain its $0.27 quarterly dividend while equity remains affected by accumulated other comprehensive losses.
- Regulatory capital levels and the impact of any future changes to capital rules, interest rates or unrealized securities losses.