Ames National Corporation — Q1 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, deposit services, wealth management, mortgage lending and related banking services. This report covers the unaudited three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 or prior period |
|---|---|---|
| Total interest income | $17.2 million | $14.1 million |
| Interest expense | $5.5 million | $0.9 million |
| Net interest income | $11.7 million | $13.2 million |
| Net interest margin, FTE | 2.23% | 2.55% |
| Net income | $3.2 million | $5.1 million |
| Basic and diluted EPS | $0.36 | $0.57 |
| Noninterest income | $2.3 million | $2.6 million |
| Noninterest expense | $9.8 million | $9.4 million |
| Credit loss expense | $275 thousand | $127 thousand benefit |
| Net cash provided by operating activities | $6.5 million | $7.0 million |
| Total assets at March 31 | $2.19 billion | $2.13 billion at December 31, 2022 |
| Loans receivable, net | $1.22 billion | $1.23 billion at December 31, 2022 |
| Total deposits | $1.90 billion | $1.90 billion at December 31, 2022 |
| Stockholders’ equity | $159.1 million | $149.1 million at December 31, 2022 |
| Cash and cash equivalents | $87.2 million | $27.9 million at December 31, 2022 |
The quarterly dividend remained $0.27 per share. The company had 8,992,167 shares outstanding at March 31, 2023. Management reported a 70.7% efficiency ratio, compared with 59.7% in Q1 2022. The selected-indicator table reports a 0.60% return on assets and 8.36% return on equity; elsewhere in the MD&A, the filing states a 0.96% prior-year return on assets, creating an apparent internal inconsistency.
Material changes versus the prior comparable period
- Net income declined 38% because the $3.1 million increase in interest income was more than offset by a $4.6 million increase in interest expense, primarily reflecting higher deposit and borrowing rates following Federal Reserve rate increases.
- Average loans increased to $1.22 billion from $1.14 billion, while the average loan yield rose to 4.28% from 3.73%.
- Average interest-bearing deposit costs increased to 1.26% from 0.24%, and average other borrowing costs increased to 3.82% from 0.32%.
- Noninterest income decreased 12%, primarily because of lower residential loan-sale gains and lower wealth management income.
- Noninterest expense increased 5%, principally from higher salaries and employee benefits.
- The company adopted CECL on January 1, 2023. The adoption reduced retained earnings by $603 thousand and increased the allowance for loan losses by $518 thousand and the allowance for off-balance-sheet exposures by $273 thousand.
- Net loans declined modestly from year-end, primarily because of lower agricultural operating loans, partly offset by growth in construction, multifamily real estate and commercial operating loans.
- Total assets increased $54.7 million from year-end, mainly because interest-bearing deposits and federal funds sold increased, funded by additional borrowings.
Liquidity, debt, capital and asset quality
- Cash and cash equivalents were $87.2 million. The company reported $314.4 million of available FHLB lines, $102.2 million of federal funds borrowing capacity and $439.1 million of unpledged securities available-for-sale and interest-bearing deposits.
- The company had $75 million outstanding under the Federal Reserve Bank Term Funding Program, $78.6 million of other borrowings and $46.2 million of securities sold under repurchase agreements. It had no short-term FHLB advances at March 31, 2023.
- Gross unrealized losses on available-for-sale securities were $70.8 million. Management attributed the losses primarily to interest rates and general market conditions, concluded they were temporary, and recorded no credit-loss allowance on those securities.
- The allowance for credit losses was $16.3 million, or 1.31% of loans, compared with $15.7 million, or 1.26%, at year-end. Q1 net loan charge-offs were $158 thousand, primarily related to agriculture loans.
- Nonaccrual loans were $11.4 million, down from $14.7 million at year-end. Loans past due 90 days and still accruing were $305 thousand. Problem loans were 0.95% of total loans, compared with 1.19% at year-end.
- Commercial real estate watch and special-mention loans were $59.6 million, while agricultural real estate and operating watch and special-mention loans were $18.4 million.
- Consolidated total capital to risk-weighted assets was 14.2%, Tier 1 capital was 13.1%, and common equity Tier 1 capital was 13.1%. Management stated that the company and all six banks met applicable capital requirements and that the banks were well-capitalized.
- Estimated uninsured deposits represented approximately 18% of total deposits.
Outlook, risks, contingencies and unusual items
- Management stated that liquidity and capital resources remained satisfactory and should support existing operations for the foreseeable future. No specific earnings guidance was provided.
- Key risks include continued inflation and higher interest rates, deposit competition and potential deposit outflows, higher funding costs, declining commercial or residential real estate values, credit deterioration, changes in credit-loss estimates, regulatory changes and access to liquidity sources.
- The investment portfolio has substantial unrealized losses; a need to sell securities before recovery could result in additional earnings effects and capital pressure.
- The company had three loan modifications for borrowers experiencing financial difficulty during the quarter. One agricultural loan totaling $418 thousand received a term extension; no such modified loans experienced payment default within twelve months of modification during the quarter.
- A branch remodeling commitment had $1.7 million remaining at March 31, 2023, from an original $4.0 million commitment.
- Goodwill was assessed as not impaired at March 31, 2023. The company stated that no material changes occurred in legal proceedings, off-balance-sheet arrangements or previously disclosed risk factors.
Most important facts for investors to verify
- Whether higher deposit betas and continued rate competition will further compress the net interest margin.
- The liquidity and capital implications of the $75 million BTFP borrowing, other borrowings and the $70.8 million unrealized securities loss position.
- Trends in agricultural and commercial real estate credit quality, including watch, substandard, impaired and nonaccrual loans.
- The reason for the internal inconsistency between the 0.60% return-on-assets figure in the selected-indicator table and the 0.96% prior-year figure stated elsewhere in the MD&A.
- The effects of the new CECL methodology and future changes in economic forecasts on the allowance for credit losses and earnings.
- Actual deposit trends, uninsured deposit levels and the availability and terms of contingent liquidity sources.