Ames National (ATLO) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) This section presents Ames National Corporation's unaudited consolidated financial statements for the three and six-month periods ended June 30, 2022, with comparative prior period data Consolidated Balance Sheets As of June 30, 2022, total assets slightly decreased to $2.131 billion from $2.137 billion at December 31, 2021, primarily due to a significant reduction in accumulated other comprehensive income, while total deposits increased Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 (unaudited) | December 31, 2021 (audited) | | :--- | :--- | :--- | | Total Assets | $2,130,973 | $2,137,041 | | Total cash and cash equivalents | $74,678 | $89,129 | | Securities available-for-sale | $828,389 | $831,003 | | Loans receivable, net | $1,140,609 | $1,144,108 | | Total Liabilities | $1,973,622 | $1,929,263 | | Total deposits | $1,926,140 | $1,878,019 | | Total Stockholders' Equity | $157,351 | $207,778 | | Accumulated other comprehensive income (loss) | $(49,718) | $2,864 | Consolidated Statements of Income Net income for Q2 2022 decreased to $4.2 million ($0.46 per share) from $5.9 million ($0.64 per share) in Q2 2021, primarily due to lower interest income from reduced PPP loan fees and higher income tax expense Income Statement Summary (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $13,636 | $14,172 | $26,788 | $27,836 | | Provision (credit) for loan losses | $(59) | $(20) | $(186) | $(446) | | Noninterest Income | $2,379 | $2,636 | $4,932 | $5,142 | | Noninterest Expense | $9,851 | $9,414 | $19,230 | $18,420 | | Net Income | $4,193 | $5,879 | $9,338 | $11,902 | | Basic and diluted EPS | $0.46 | $0.64 | $1.03 | $1.30 | | Dividends declared per share | $0.27 | $0.26 | $0.54 | $0.51 | Consolidated Statements of Comprehensive Income (Loss) The company reported a comprehensive loss of $14.6 million for Q2 2022 and $43.2 million for the first six months of 2022, driven by significant unrealized losses on available-for-sale securities due to rising interest rates Comprehensive Income (Loss) (in thousands) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $4,193 | $5,879 | $9,338 | $11,902 | | Other comprehensive income (loss), net of tax | $(18,779) | $2,262 | $(52,582) | $(6,614) | | Comprehensive income (loss) | $(14,586) | $8,141 | $(43,244) | $5,288 | Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased from $207.8 million at year-end 2021 to $157.4 million at June 30, 2022, primarily due to a $52.6 million other comprehensive loss from unrealized securities losses - Key changes in stockholders' equity for the six months ended June 30, 2022 include: net income of $9.3 million, other comprehensive loss of $52.6 million, cash dividends of $4.9 million, and stock repurchases of $2.3 million[19] - The company repurchased and retired 100,000 shares of common stock for $2.3 million during the second quarter of 2022[18][19] Consolidated Statements of Cash Flows For the six months ended June 30, 2022, net cash provided by operating activities was $11.3 million, net cash used in investing activities was $63.5 million, and net cash provided by financing activities was $37.8 million, resulting in a net decrease in cash of $14.5 million Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,260 | $17,397 | | Net cash (used in) investing activities | $(63,528) | $(146,855) | | Net cash provided by financing activities | $37,817 | $106,360 | | Net decrease in cash and cash equivalents | $(14,451) | $(23,098) | | Cash and cash equivalents, beginning | $89,129 | $173,097 | | Cash and cash equivalents, ending | $74,678 | $149,999 | Notes to Consolidated Financial Statements This section provides detailed disclosures supporting the consolidated financial statements, covering accounting policies, debt securities, loan portfolios, credit quality, regulatory capital, and commitments Note 1: Significant Accounting Policies The financial statements adhere to SEC rules and GAAP, with goodwill tested annually for impairment, and the company is preparing for the adoption of ASU No. 2016-13 (CECL) in December 2022 - The company will adopt ASU No. 2016-13 (CECL) for interim and annual periods beginning after December 15, 2022, with the impact on financial statements currently unknown[30] - A quantitative assessment of goodwill as of October 1, 2021, indicated no impairment, and no adverse changes were noted as of June 30, 2022[29] Note 6: Debt Securities As of June 30, 2022, the company held $828.4 million in available-for-sale debt securities with gross unrealized losses of $66.2 million, which management considers temporary due to rising interest rates Debt Securities Available-for-Sale (in thousands) | Category | Amortized Cost (June 30, 2022) | Estimated Fair Value (June 30, 2022) | Gross Unrealized Losses (June 30, 2022) | | :--- | :--- | :--- | :--- | | U.S. government treasuries | $224,177 | $208,130 | $(16,048) | | U.S. government agencies | $116,945 | $110,149 | $(6,809) | | U.S. government mortgage-backed | $144,619 | $130,907 | $(13,728) | | State and political subdivisions | $322,916 | $298,733 | $(24,303) | | Corporate bonds | $85,768 | $80,470 | $(5,322) | | Total | $894,425 | $828,389 | $(66,210) | - Securities with a carrying value of $216.3 million were pledged on public deposits and for other purposes as of June 30, 2022[55] Note 7: Loans Receivable and Credit Disclosures The net loan portfolio remained stable at $1.14 billion, with a slight decrease in the allowance for loan losses and an improvement in impaired and nonaccrual loans, indicating stable credit quality Loan Portfolio Composition (in thousands) | Loan Type | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Real estate - commercial | $515,250 | $515,367 | | Real estate - 1 to 4 family | $261,690 | $246,745 | | Real estate - agricultural | $158,897 | $153,457 | | Agricultural | $91,929 | $111,881 | | Commercial | $72,065 | $75,482 | | Total Loans | $1,156,678 | $1,160,667 | - The allowance for loan losses was $16.42 million as of June 30, 2022, compared to $16.62 million as of December 31, 2021[61][66] - Total impaired loans decreased from $12.3 million at year-end 2021 to $11.2 million at June 30, 2022, while nonaccrual loans also decreased from $12.3 million to $11.5 million[74][78] Note 12: Income Taxes A change in Iowa state law reducing the bank franchise tax rate resulted in a one-time, non-recurring increase in income tax expense of $780,000 for the three and six months ended June 30, 2022 - A newly enacted reduction in the Iowa bank franchise tax rate caused a non-recurring increase in income tax expense of $780,000 in Q2 2022 due to the revaluation of deferred tax assets[102] Note 14: Regulatory Matters As of June 30, 2022, the Company and its subsidiary banks met all regulatory capital requirements and were classified as well-capitalized, with consolidated Tier 1 capital to risk-weighted assets ratio at 13.5% Consolidated Capital Ratios (as of June 30, 2022) | Capital Ratio | Actual Ratio | Minimum for Adequacy | | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 14.7% | 10.50% | | Tier 1 capital (to risk-weighted assets) | 13.5% | 8.50% | | Common equity tier 1 capital | 13.5% | 7.00% | | Tier 1 capital (to average assets) | 8.7% | 4.00% | - The Company and its subsidiary banks were considered well-capitalized under the regulatory framework for prompt corrective action as of June 30, 2022[104][107] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a decrease in Q2 2022 net income due to lower PPP loan fees and a one-time tax expense, a reduction in stockholders' equity from unrealized securities losses, and stable asset quality Income Statement Review For the six months ended June 30, 2022, net interest income decreased due to reduced PPP loan fees, noninterest income slightly fell, noninterest expense increased from technology investments, and income tax expense rose due to a one-time adjustment - Net interest margin (FTE) decreased to 2.57% in Q2 2022 from 2.84% in Q2 2021[149] - Interest income for Q2 2022 declined, primarily because PPP loan fees recognized were only $15 thousand, compared to $1.4 million in Q2 2021[117][151] - The effective tax rate for Q2 2022 was 33%, up from 21% in Q2 2021, due to a $780,000 adjustment for a reduction in future Iowa bank franchise tax rates[154] Balance Sheet Review Total assets decreased by $6.1 million to $2.13 billion at June 30, 2022, with the investment portfolio holding $66.2 million in temporary unrealized losses, while the loan portfolio remained stable and total deposits grew - The investment portfolio had gross unrealized losses of $66.2 million as of June 30, 2022, which are considered temporary and caused by the rising interest rate environment[171] - The largest exposure to any single municipality is $6.0 million in Storm Lake, Iowa general obligation bonds[172] - Total deposits increased by $48.1 million since December 31, 2021, reaching $1.93 billion[179] Asset Quality Review and Credit Risk Management Asset quality remained stable, with problem loans as a percentage of total loans improving to 1.00% at June 30, 2022, impaired loans decreasing, and the allowance for loan losses at 1.42% of outstanding loans - The level of problem loans as a percentage of total loans was 1.00% at June 30, 2022, down from 1.11% at December 31, 2021[180] - Impaired loans decreased to $11.2 million from $12.3 million at year-end 2021, primarily due to payments on nonaccrual loans[181] - The allowance for loan losses as a percentage of outstanding loans was 1.42% as of June 30, 2022[186] Liquidity and Capital Resources Liquidity and capital are satisfactory, supported by core deposits and available FHLB advances and federal funds lines, despite a $50.4 million decrease in stockholders' equity due to unrealized investment losses, which do not impact regulatory capital - As of June 30, 2022, available liquidity sources included $302.1 million in FHLB borrowing capacity and $98.5 million in federal funds lines, with no outstanding balances on either[191] - Total stockholders' equity decreased by $50.4 million since Dec 31, 2021, to $157.4 million, primarily due to an increase in unrealized losses on the investment portfolio[199] - The parent company's liquidity is dependent on dividends from its subsidiary banks, which amounted to $5.1 million for the first six months of 2022[196] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with management's mitigation strategies remaining consistent from 2021, though high inflation or governmental actions could cause market interest rates to deviate from historical norms - The Company's main market risk is interest rate risk, and management's approach to managing this risk has not significantly changed from 2021[202] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the last fiscal quarter - Management concluded that the Company's disclosure controls and procedures are effective as of June 30, 2022[203] - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[204] PART II. OTHER INFORMATION Legal Proceedings Not applicable - There are no legal proceedings to report[204] Risk Factors Management does not believe there have been any material changes in the risk factors previously disclosed in the Company's Form 10-K filed on March 11, 2022 - No material changes in risk factors from the Annual Report on Form 10-K filed on March 11, 2022[204] Unregistered Sales of Equity Securities and Use of Proceeds The company completed its November 2021 stock repurchase plan during Q2 2022, repurchasing all 100,000 authorized shares by June 30, 2022 Common Stock Repurchases (Q2 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 1-30, 2022 | - | $- | | May 1-31, 2022 | 43,247 | $23.16 | | June 1-30, 2022 | 56,753 | $22.88 | | Total | 100,000 | | - The stock repurchase plan approved in November 2021 for up to 100,000 shares was completed as of June 30, 2022[206] Exhibits This section lists the exhibits filed with the report, including CEO and CFO certifications and Inline XBRL data files - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101, 104)[210][211][212]