Ames National Corporation 2023 Form 10-K Summary
Business context and reporting period
Ames National Corporation is an Iowa bank holding company operating six wholly owned community banks. Its business is concentrated in central, north-central and south-central Iowa and includes commercial, agricultural, real estate and consumer lending, deposit services, mortgage loan sales and wealth management. This Form 10-K covers the fiscal year ended December 31, 2023, with comparisons primarily to 2022; it is an annual filing rather than a quarterly report.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total interest income | $74.3 million | $61.6 million | Up 20.7% |
| Interest expense | $29.7 million | $8.3 million | Up $21.4 million |
| Net interest income | $44.6 million | $53.2 million | Down 15.9% |
| Credit loss expense | $789 thousand | $(874) thousand benefit | Unfavorable $1.7 million swing |
| Noninterest income | $9.2 million | $9.7 million | Down 4.9% |
| Noninterest expense | $40.2 million | $38.6 million | Up 3.9% |
| Net income | $10.8 million | $19.3 million | Down 44.0% |
| Diluted EPS | $1.20 | $2.14 | Down 43.9% |
| Return on average assets | 0.51% | 0.90% | Down 39 basis points |
| Return on average equity | 7.05% | 11.43% | Down 438 basis points |
| Net interest margin, FTE | 2.20% | 2.62% | Down 42 basis points |
| Efficiency ratio | 74.60% | 61.41% | Higher, indicating reduced efficiency |
Total assets increased 1.0% to $2.16 billion. Net loans increased 4.2% to $1.28 billion, while deposits decreased 4.5% to $1.81 billion. Stockholders’ equity increased 11.2% to $165.8 million, or 7.69% of assets, primarily because of improved accumulated other comprehensive income and retained earnings.
Cash and cash equivalents increased to $55.1 million from $27.9 million. Net cash provided by operating activities was $19.2 million, compared with $21.2 million in 2022. Investing activities provided $19.1 million, compared with $127.4 million used in 2022, primarily because securities purchases declined materially. Financing activities used $11.1 million, reflecting deposit outflows and dividends, partly offset by borrowings.
The securities available-for-sale portfolio totaled $736.4 million and had gross unrealized losses of $62.4 million at year-end, primarily attributable to higher interest rates. Other borrowings totaled $110.6 million and repurchase agreements totaled $54.0 million. The Company reported available FHLB borrowing capacity of $280.9 million and federal funds borrowing capacity of $101.5 million.
Material changes versus the prior comparable period
- Net income declined 44% as higher deposit and borrowing costs more than offset stronger loan and investment yields.
- Average deposit cost rose to 1.67% from 0.49%, while the average rate on total interest-bearing liabilities rose to 1.85% from 0.53%.
- Average loan yields increased to 4.57% from 3.93%, but the benefit was insufficient to offset funding-cost increases.
- Deposits fell by $86.1 million, primarily from lower savings and money-market balances as customers sought higher rates. Time deposits increased.
- Credit loss expense changed from an $874 thousand benefit to $789 thousand expense. Net loan charge-offs increased to $213 thousand from $50 thousand, driven primarily by agricultural loans and loan growth.
- Noninterest income decreased because of lower mortgage loan-sale gains and lower wealth management income. Noninterest expense increased due in part to a $523 thousand wire-fraud loss, higher FDIC assessments and normal salary and benefit increases.
- The Company adopted CECL on January 1, 2023, recording a $603 thousand reduction to retained earnings, including a $518 thousand increase in the loan allowance and a $273 thousand increase in the off-balance-sheet credit exposure allowance.
- Nonperforming loans decreased to $13.9 million from $14.7 million, but the nonperforming-loan ratio of 1.08% remained above the Iowa peer average of 0.39% cited by management.
- The Company did not repurchase shares in 2023; it repurchased 100,000 shares in 2022. The Board authorized a new plan for up to 100,000 shares through November 13, 2024.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects elevated short-term interest rates, deposit repricing, competition for funding and potential rate increases to pressure net interest income and margins. Management also identifies possible slower loan demand, higher delinquencies, declining collateral values and additional credit losses if economic activity weakens.
The loan portfolio is concentrated in Iowa and includes substantial commercial real estate and agricultural exposure. Key risks include commercial real estate values, agricultural commodity prices, weather, input costs, trade policy, government programs and the performance of the Iowa economy. The Company is also exposed to liquidity risk from deposit runoff, interest-rate risk from liabilities repricing faster than earning assets, and valuation risk in its securities portfolio.
Management believes liquidity and capital resources are satisfactory and sufficient for foreseeable operations. The Company and each subsidiary bank exceeded applicable regulatory capital requirements and were classified as well capitalized at December 31, 2023. Management also concluded that goodwill was not impaired and that securities unrealized losses were not credit related.
Unusual or notable items included the $523 thousand wire-fraud loss, the CECL transition adjustment, significant securities unrealized losses and the use of $83.1 million of BTFP borrowings maturing in 2024. The filing states that no cybersecurity threats or prior incidents have materially affected the Company to date. Management reported effective disclosure controls and effective internal control over financial reporting.
The annual cash dividend remained $1.08 per share, representing a 90% payout ratio based on 2023 EPS. A quarterly dividend of $0.27 per share was declared in February 2024. Future dividends remain subject to earnings, capital needs, liquidity and regulatory restrictions.
Most important facts for investors to verify
- Whether deposit costs and other funding costs stabilize or continue to compress the 2.20% net interest margin.
- The sustainability of deposit balances, the renewal rate and pricing of the $276.7 million time-deposit portfolio, and the level of uninsured deposits estimated at approximately $590 million.
- Credit performance in commercial real estate and agricultural lending, including nonperforming loans, classified loans, charge-offs and the $16.8 million allowance for credit losses.
- Liquidity availability and repayment or refinancing requirements for $110.6 million of other borrowings, including $83.1 million of BTFP borrowings and $24 million of FHLB advances maturing in 2024.
- The potential effect of the $62.4 million gross unrealized securities loss on capital and liquidity if securities must be sold before maturity.
- Whether the unusually high 90% dividend payout ratio can be maintained if earnings remain below historical levels.
- The effect of the wire-fraud loss, FDIC assessment increases, cybersecurity events and other operational risks on future expenses.
- The assumptions and sensitivity of the CECL allowance, goodwill impairment analysis and securities credit-loss assessments.