Ames National Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Ames National is a bank holding company operating six Iowa bank subsidiaries, with commercial and consumer lending, deposits, and wealth management services. The financial statements are unaudited.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net interest income | $13.7 million | $14.7 million | $40.5 million | $42.5 million |
| Net interest income, FTE | $13.8 million | $14.8 million | $41.0 million | $43.1 million |
| Net interest margin, FTE | 2.63% | 2.97% | 2.58% | 2.89% |
| Provision for loan losses | ($0.5 million) credit | ($0.1 million) credit | ($0.7 million) credit | ($0.5 million) credit |
| Noninterest income | $2.3 million | $2.7 million | $7.2 million | $7.8 million |
| Noninterest expense | $9.5 million | $8.9 million | $28.7 million | $27.3 million |
| Net income | $5.5 million | $6.7 million | $14.9 million | $18.6 million |
| Diluted EPS | $0.62 | $0.74 | $1.64 | $2.04 |
All dollar amounts in the table are presented as reported; financial statement amounts are generally in thousands.
- Profitability: Q3 net income declined approximately 17% and nine-month net income declined approximately 20%. The nine-month effective tax rate increased to 24% from 21%, including a $780 thousand nonrecurring deferred-tax expense from Iowa’s enacted bank-franchise-tax rate reduction.
- Margins and operating efficiency: The FTE net interest margin fell to 2.63% in Q3 and 2.58% for nine months, primarily because deposit funding costs increased faster than asset yields. The reported efficiency ratio increased to 59.5% in Q3 from 51.4% and to 60.2% for nine months from 54.3%.
- Balance sheet: Total assets were $2.09 billion at September 30, down from $2.14 billion at December 31, 2021. Net loans increased to $1.18 billion from $1.14 billion, while securities available-for-sale declined to $784.0 million from $831.0 million. Deposits were $1.87 billion, broadly unchanged from $1.88 billion.
- Liquidity and debt: Cash and cash equivalents fell to $29.3 million from $89.1 million. The company had $23.6 million of short-term FHLB advances, $3.9 million outstanding under a five-year promissory note, and $41.1 million of repurchase-agreement financing. Management stated that liquidity remained satisfactory and that available sources should support operations.
- Capital: Stockholders’ equity declined to $137.3 million from $207.8 million, primarily because of unrealized securities losses and stock repurchases. Equity as a percentage of assets was 6.6%, compared with 9.7% at year-end. Management stated that the company and its banks met applicable capital requirements; consolidated total risk-based capital was 14.6%.
- Cash flow: Nine-month operating cash flow was $15.0 million, investing cash flow was $(86.0) million, and financing cash flow was $11.1 million. Cash and cash equivalents decreased $59.9 million during the period.
Material changes versus prior comparable periods
- Loan interest income decreased as PPP fee recognition fell to $2 thousand in Q3 and $217 thousand for nine months, versus $1.7 million and $3.9 million, respectively, in 2021.
- Interest expense increased 109% in Q3 and 22% for nine months because of higher market rates on deposits and increased borrowing costs.
- Taxable securities income increased as the investment portfolio grew, partially offsetting lower loan income.
- Noninterest income decreased primarily because higher mortgage rates reduced residential loan refinancing and gains on loan sales.
- Noninterest expense increased because of technology-related data-processing costs and normal salary and benefit increases.
- Loans grew approximately $30.1 million from year-end, led by 1-to-4-family residential lending, partially offset by lower agricultural operating loans.
- Stockholders’ equity was reduced by $75.8 million of after-tax unrealized securities losses and a $2.3 million stock repurchase. The company repurchased 100,000 shares during the first nine months, exhausting the authorized repurchase plan.
Outlook, risks, contingencies, and unusual items
- Interest-rate risk: Management identified rising short-term rates and an inverted Treasury yield curve as increasing market risk. Further rate increases could pressure margins, deposit costs, liquidity, and securities valuations.
- Securities portfolio: Gross unrealized losses on available-for-sale securities were $96.5 million at September 30, 2022, compared with $6.5 million at year-end 2021. Management considered the losses temporary and stated it did not intend, and was not likely, to sell the affected securities before recovery; future changes could materially affect reported results.
- Credit quality: Nonaccrual loans increased to $15.2 million from $12.7 million. Problem loans were 1.28% of total loans versus 1.11% at year-end, and impaired loans increased to $15.0 million from $12.3 million. Management cited one borrower as the primary driver of the increase. The allowance for loan losses declined to $15.9 million, or 1.33% of loans, from $16.6 million, or 1.43%.
- CECL adoption: The company expects the forthcoming current expected credit loss standard to affect its financial statements, but the amount of the impact was not yet clear. Adoption was expected for interim and annual periods beginning after December 15, 2022.
- Commitments: A $3.7 million branch-remodeling commitment was entered into in June 2022, with $3.2 million remaining at September 30. Off-balance-sheet commitments to extend credit and standby letters of credit had no material changes from year-end.
- Dividend: A quarterly cash dividend of $0.27 per share was declared on August 10, 2022, payable November 15, 2022.
- Other matters: Management reported no material changes in previously disclosed risk factors, no applicable legal proceedings, no significant subsequent events through November 8, 2022, and effective disclosure controls.
Investor verification checklist
- Reconcile the $96.5 million unrealized securities loss with tangible capital, regulatory capital, liquidity, and the company’s ability to hold securities through maturity or recovery.
- Assess sensitivity of net interest margin and earnings to additional deposit repricing, FHLB borrowing costs, and further Federal Reserve rate increases.
- Review the increase in nonaccrual, impaired, and problem loans, particularly commercial real estate and the identified borrower exposure.
- Verify the amount and timing of the CECL adoption adjustment and its effect on the allowance, retained earnings, and regulatory capital.
- Evaluate whether liquidity sources remain adequate if deposits decline or securities must be sold at losses.
- Confirm the sustainability of dividends given lower earnings, reduced equity, capital requirements, and dividend restrictions applicable to bank holding companies.