Ames National (ATLO) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Presents unaudited consolidated financial statements for Q1 2023 and 2022, including balance sheets, income, equity, cash flows, and notes Consolidated Balance Sheets - Total assets increased by $54.7 million from December 31, 2022, to March 31, 2023, primarily driven by an increase in interest-bearing deposits and federal funds sold, funded by an increase in other borrowings[5][207] - Total cash and cash equivalents significantly increased from $27.88 million at December 31, 2022, to $87.19 million at March 31, 2023[5] Consolidated Balance Sheet Highlights (in thousands) | Item | March 31, 2023 (Unaudited) | December 31, 2022 (Audited) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | ASSETS | | | | Total cash and cash equivalents | $87,186 | $27,884 | | Securities available-for-sale | $788,910 | $786,438 | | Loans receivable, net | $1,224,045 | $1,226,011 | | Total assets | $2,189,651 | $2,134,926 | | LIABILITIES | | | | Total deposits | $1,896,793 | $1,897,957 | | Securities sold under agreements to repurchase | $46,202 | $40,676 | | Other borrowings | $78,550 | $39,120 | | Total liabilities | $2,030,569 | $1,985,828 | | STOCKHOLDERS' EQUITY | | | | Total stockholders' equity | $159,082 | $149,098 | | Total liabilities and stockholders' equity | $2,189,651 | $2,134,926 | Consolidated Statements of Income - Net income decreased by 37.8% from $5.145 million in Q1 2022 to $3.197 million in Q1 2023, primarily due to a significant increase in interest expense[8][156] - Total interest expense surged by 500% from $920 thousand in Q1 2022 to $5.527 million in Q1 2023, driven by higher market rates on deposits[8][202] Consolidated Statements of Income Highlights (in thousands, except per share data) | Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Total interest income | $17,196 | $14,072 | | Total interest expense | $5,527 | $920 | | Net interest income | $11,669 | $13,152 | | Credit loss expense (benefit) | $275 | ($127) | | Net interest income after credit loss expense (benefit) | $11,394 | $13,279 | | Total noninterest income | $2,254 | $2,553 | | Total noninterest expense | $9,780 | $9,379 | | Income before income taxes | $3,868 | $6,453 | | Provision for income taxes | $671 | $1,308 | | Net income | $3,197 | $5,145 | | Basic and diluted earnings per share | $0.36 | $0.57 | | Dividends declared per share | $0.27 | $0.27 | Consolidated Statements of Comprehensive Income (Loss) - The Company reported comprehensive income of $13.015 million in Q1 2023, a significant improvement from a comprehensive loss of $28.658 million in Q1 2022, primarily due to unrealized gains on securities before tax[10] Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $3,197 | $5,145 | | Other comprehensive income (loss), net of tax | $9,818 | ($33,803) | | Comprehensive income (loss) | $13,015 | ($28,658) | Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased by $9.984 million from $149.098 million at December 31, 2022, to $159.082 million at March 31, 2023, driven by net income and a decrease in accumulated other comprehensive loss[14][236] Consolidated Statements of Stockholders' Equity (in thousands) | Item | March 31, 2023 | December 31, 2022 | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Common stock | $17,984 | $17,984 | | Additional paid-in capital | $14,253 | $14,253 | | Retained earnings | $180,097 | $179,931 | | Accumulated other comprehensive (loss) | ($53,252) | ($63,070) | | Total stockholders' equity | $159,082 | $149,098 | Consolidated Statements of Cash Flows - Net cash provided by investing activities significantly improved from a net outflow of $24.342 million in Q1 2022 to a net inflow of $11.443 million in Q1 2023, primarily due to fewer purchases of investments[16][231] - Net cash provided by financing activities decreased by $35.2 million, from $76.561 million in Q1 2022 to $41.364 million in Q1 2023, mainly due to a decrease in the change in deposits[16][232] Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $6,495 | $6,984 | | Net cash provided by (used in) investing activities | $11,443 | ($24,342) | | Net cash provided by financing activities | $41,364 | $76,561 | | Net increase in cash and cash equivalents | $59,302 | $59,203 | | Cash and cash equivalents, Ending | $87,186 | $148,332 | Notes to Consolidated Financial Statements Note 1. Significant Accounting Policies - The Company adopted ASU 2016-13 (CECL) on January 1, 2023, resulting in a net decrease to retained earnings of $603 thousand, including a $518 thousand increase to the Allowance for Credit Losses on loans and a $273 thousand increase for off-balance sheet credit exposures[24][25] - Goodwill was assessed for impairment as of October 1, 2022, and again at March 31, 2023, with no impairment identified[22] - The Company utilizes a one-year initial forecast period for credit loss estimation, followed by a historical loss forecast covering the remaining contractual life, with a one-year reversion period[36][37] Impact of ASC 326 (CECL) Adoption (in thousands) | Item | As Reported Under ASC 326 | Pre-ASC 326 Adoption | Impact of ASC 326 Adoption | | :--------------------------------------- | :-------------------------- | :------------------- | :------------------------- | | Allowance for credit losses on loans | $16,215 | $15,697 | $518 | | Allowance for credit losses on off-balance sheet credit exposures | $1,071 | $798 | $273 | Note 2. Dividends - A cash dividend of $0.27 per share was declared on February 8, 2023, payable on May 15, 2023[55] Note 3. Earnings Per Share - The Company had no potentially dilutive securities outstanding during the periods presented[56] Earnings Per Share Data | Period | Weighted Average Shares Outstanding | | :--------------------------------------- | :-------------------------------- | | Three months ended March 31, 2023 | 8,992,167 | | Three months ended March 31, 2022 | 9,092,167 | Note 4. Off-Balance Sheet Arrangements - The Company is party to financial instruments with off-balance sheet risk, including commitments to extend credit and standby letters of credit, with no material changes since December 31, 2022[57] Note 5. Fair Value Measurements - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[58][59] - Securities available-for-sale are primarily valued using Level 1 (U.S. Treasury securities) and Level 2 inputs (U.S. government agencies, mortgage-backed securities, state and political subdivisions, corporate bonds)[60] Assets Measured at Fair Value on a Recurring Basis (in thousands) | Description | March 31, 2023 Total | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :------------------- | :------ | :------ | :------ | | U.S. government treasuries | $205,513 | $205,513 | $- | $- | | U.S. government agencies | $102,649 | $- | $102,649 | $- | | U.S. government mortgage-backed securities | $114,126 | $- | $114,126 | $- | | State and political subdivisions | $291,860 | $- | $291,860 | $- | | Corporate bonds | $74,762 | $- | $74,762 | $- | | Loans receivable | $8,596 | $- | $8,596 | $- | | Derivative financial instruments | $901 | $- | $901 | $- | | Description | December 31, 2022 Total | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :------------------- | :------ | :------ | :------ | | U.S. government treasuries | $207,597 | $207,597 | $- | $- | | U.S. government agencies | $100,933 | $- | $100,933 | $- | | U.S. government mortgage-backed securities | $116,741 | $- | $116,741 | $- | | State and political subdivisions | $286,003 | $- | $286,003 | $- | | Corporate bonds | $75,164 | $- | $75,164 | $- | | Loans receivable | $8,494 | $- | $8,494 | $- | | Derivative financial instruments | $1,096 | $- | $1,096 | $- | Assets Measured at Fair Value on a Nonrecurring Basis (in thousands) | Description | March 31, 2023 Total | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :------------------- | :------ | :------ | :------ | | Loans receivable | $323 | $- | $- | $323 | | Description | December 31, 2022 Total | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :------------------- | :------ | :------ | :------ | | Loans receivable | $304 | $- | $- | $304 | Note 6. Debt Securities - Gross unrealized losses on debt securities totaled $70.8 million as of March 31, 2023, primarily due to changes in interest rates, but management concluded these losses were temporary[83] Amortized Cost and Fair Value of Securities Available-for-Sale (in thousands) | Category | March 31, 2023 Amortized Cost | March 31, 2023 Estimated Fair Value | December 31, 2022 Amortized Cost | December 31, 2022 Estimated Fair Value | | :--------------------------------------- | :-------------------------- | :-------------------------------- | :-------------------------- | :-------------------------------- | | U.S. government treasuries | $222,059 | $205,513 | $227,065 | $207,597 | | U.S. government agencies | $110,426 | $102,649 | $110,370 | $100,933 | | U.S. government mortgage-backed securities | $128,941 | $114,126 | $133,205 | $116,741 | | State and political subdivisions | $317,306 | $291,860 | $317,179 | $286,003 | | Corporate bonds | $80,851 | $74,762 | $82,177 | $75,164 | | Total | $859,583 | $788,910 | $869,996 | $786,438 | Gross Unrealized Losses on Debt Securities (in thousands) | Category | March 31, 2023 Unrealized Losses | December 31, 2022 Unrealized Losses | | :--------------------------------------- | :-------------------------- | :-------------------------- | | U.S. government treasuries | ($16,546) | ($19,468) | | U.S. government agencies | ($7,780) | ($9,441) | | U.S. government mortgage-backed securities | ($14,817) | ($16,468) | | State and political subdivisions | ($25,587) | ($31,203) | | Corporate bonds | ($6,092) | ($7,020) | | Total | ($70,822) | ($83,600) | Note 7. Loans Receivable and Credit Disclosures - The allowance for credit losses increased to $16.269 million at March 31, 2023, from $15.697 million at December 31, 2022, primarily due to the adoption of ASC 326[88][224] - Nonaccrual loans decreased from $14.7 million at December 31, 2022, to $11.4 million at March 31, 2023, primarily due to payments received[99][221] - The Company made three loan modifications to borrowers experiencing financial difficulty in Q1 2023, specifically for agricultural loans, extending their terms by a weighted-average of 7.7 years[99][101][103] Composition of Loans Receivable (in thousands) | Loan Type | March 31, 2023 | December 31, 2022 | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Real estate - construction | $59,756 | $51,253 | | Real estate - 1 to 4 family residential | $286,418 | $285,107 | | Real estate - multi-family | $193,566 | $185,784 | | Real estate - commercial | $350,999 | $353,285 | | Real estate - agricultural | $158,337 | $159,448 | | Commercial | $82,345 | $77,265 | | Agricultural | $92,402 | $113,355 | | Consumer and other | $16,491 | $16,211 | | Less allowance for credit losses | ($16,269) | ($15,697) | | Loans receivable, net | $1,224,045 | $1,226,011 | Allowance for Credit Losses Activity (in thousands) | Item | Three Months Ended March 31, 2023 | | :--------------------------------------- | :-------------------------------- | | Balance, December 31, 2022 | $15,697 | | Impact of adopting ASC 326 | $518 | | Credit loss expense (benefit) | $212 | | Recoveries of loans charged-off | $10 | | Loans charged-off | ($168) | | Balance, March 31, 2023 | $16,269 | Note 8. Intangible assets - Net intangible assets decreased from $1.931 million at December 31, 2022, to $1.801 million at March 31, 2023, due to amortization expense of $130 thousand[132] - The weighted average remaining life of intangible assets is approximately 3 years[130] Intangible Assets (in thousands) | Item | March 31, 2023 Gross Amount | March 31, 2023 Accumulated Amortization | December 31, 2022 Gross Amount | December 31, 2022 Accumulated Amortization | | :--------------------------------------- | :-------------------------- | :-------------------------------------- | :-------------------------- | :-------------------------------------- | | Core deposit intangible asset | $6,411 | $4,654 | $6,411 | $4,539 | | Customer list | $535 | $491 | $535 | $476 | | Total | $6,946 | $5,145 | $6,946 | $5,015 | Note 9. Pledged Collateral Related to Securities Sold Under Repurchase Agreements - Total pledged collateral increased to $62.536 million at March 31, 2023, from $60.914 million at December 31, 2022[135] Pledged Collateral for Repurchase Agreements (in thousands) | Security Type | March 31, 2023 | December 31, 2022 | | :--------------------------------------- | :-------------------------- | :-------------------------- | | U.S. government treasuries | $14,506 | $12,555 | | U.S. government agencies | $39,229 | $39,226 | | U.S. government mortgage-backed securities | $8,801 | $9,133 | | Total pledged collateral | $62,536 | $60,914 | Note 10. Borrowings - The Company had no short-term FHLB advances as of March 31, 2023, compared to $35.4 million at December 31, 2022[136] - The Company borrowed $75 million under the new Bank Term Funding Program (BTFP) as of March 31, 2023, utilizing it due to favorable lending terms[137][229] Note 11. Derivative Financial Instruments - The Company uses interest rate swaps as fair value hedges to convert long-term fixed-rate loans to floating rates, mitigating interest rate risk[139] Interest Rate Swaps (in thousands) | Item | Notional Amount | Fair Value | Balance Sheet Category | | :--------------------------------------- | :---------------- | :--------- | :--------------------- | | March 31, 2023 Interest rate swaps | $9,218 | $901 | Other assets | | December 31, 2022 Interest rate swaps | $9,314 | $1,096 | Other assets | Note 12. Income Taxes - The change in deferred income taxes since December 31, 2022, is primarily due to a decrease in unrealized losses on investment securities[142] Note 13. Commitments, Contingencies and Concentrations of Credit Risk - The Company has $1.7 million remaining on a $4.0 million commitment for a branch remodel in Ames, Iowa, as of March 31, 2023[143] Note 14. Regulatory Matters - The Company and its Banks met all capital adequacy requirements and were considered 'well capitalized' as of March 31, 2023[144][169][236] - The Company's capital ratios were sufficient to meet the Basel III capital conservation buffer requirements as of March 31, 2023[149] Consolidated Capital Ratios (as of March 31, 2023, in thousands) | Capital Ratio | Actual Amount | Actual Ratio | For Capital Adequacy Purposes Amount | For Capital Adequacy Purposes Ratio | | :--------------------------------------- | :-------------------------- | :----------- | :----------------------------------- | :---------------------------------- | | Total capital (to risk-weighted assets) | $216,793 | 14.2% | $159,936 | 10.50% | | Tier 1 capital (to risk-weighted assets) | $199,391 | 13.1% | $129,472 | 8.50% | | Tier 1 capital (to average assets) | $199,391 | 9.1% | $87,463 | 4.00% | | Common equity tier 1 capital (to risk-weighted assets) | $199,391 | 13.1% | $106,624 | 7.00% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial condition and operational results, covering KPIs, accounting policies, and key financial statements Overview - Ames National Corporation is a bank holding company operating six bank subsidiaries in Iowa, offering commercial and consumer loans, deposits, and wealth management services[152][153] - The Company's primary strategy focuses on local decision-making and operational efficiency to gain a competitive advantage and maximize profitability[154] - Net income for Q1 2023 was $3.2 million ($0.36 per share), down from $5.1 million ($0.57 per share) in Q1 2022, primarily due to higher interest expense on deposits and other borrowed funds[156] Challenges - Management has identified potential future negative impacts from events or circumstances, which are detailed in the Company's most recent Annual Report on Form 10-K[159] Key Performance Indicators and Industry Results - Return on assets decreased to 0.60% in Q1 2023 from 0.96% in Q1 2022, and return on equity decreased to 8.36% from 10.28%, both primarily due to lower net income[164][165] - The net interest margin declined to 2.23% in Q1 2023 from 2.55% in Q1 2022, and the efficiency ratio increased to 70.70% from 59.72%, indicating reduced profitability and operational efficiency[166][167] Selected Key Performance Indicators (Company vs. Industry) | Indicator | 3 Months Ended March 31, 2023 (Company) | 3 Months Ended March 31, 2022 (Company) | Years Ended December 31, 2022 (Industry*) | | :--------------------------------------- | :-------------------------------------- | :-------------------------------------- | :---------------------------------------- | | Return on assets | 0.60% | 0.90% | 1.15% | | Return on equity | 8.36% | 11.43% | 12.01% | | Net interest margin | 2.23% | 2.55% | 3.45% | | Efficiency ratio | 70.70% | 61.41% | 61.36% | | Capital ratio | 7.21% | 7.90% | 10.51% | *Latest available data Critical Accounting Policies - The Company's critical accounting policies include the allowance for credit losses (now under CECL methodology), fair value assessment for investment securities, and goodwill impairment[171] - Under CECL, the allowance for credit losses is an estimate of all expected credit losses over the contractual life of the loan portfolio, determined through asset-specific and pooled components[172][176] - Fair value declines in available-for-sale securities are evaluated for credit losses, with management assessing intent and likelihood of selling before recovery[184] - Goodwill impairment is tested annually, with no impairment found as of March 31, 2023, but future economic conditions could impact this assessment[186] Non-GAAP Financial Measures - The report includes non-GAAP financial measures, such as net interest income and net interest margin on a fully taxable equivalent (FTE) basis, to provide additional insights into financial performance[188] Reconciliation of Net Interest Income and Annualized Net Interest Margin on an FTE Basis (in thousands) | Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net interest income (GAAP) | $11,669 | $13,152 | | Tax-equivalent adjustment | $163 | $180 | | Net interest income on an FTE basis (non-GAAP) | $11,832 | $13,332 | | Average interest-earning assets | $2,120,520 | $2,090,628 | | Net interest margin (FTE) | 2.23% | 2.55% | Income Statement Review - Net interest income (FTE) decreased to $11.832 million in Q1 2023 from $13.332 million in Q1 2022, with the net interest margin declining from 2.55% to 2.23%[199][200] - Interest income increased by 22% ($3.1 million) in Q1 2023 compared to Q1 2022, driven by higher average rates and growth in loan and investment portfolios[202] - Interest expense surged by 500% ($4.6 million) in Q1 2023 compared to Q1 2022, primarily due to increased market rates on deposits following Federal Open Market Committee rate hikes[202] - A credit loss expense of $212 thousand was recognized in Q1 2023 (vs. a $127 thousand benefit in Q1 2022), mainly due to a charge-off in the agriculture loan portfolio[203] - Noninterest income decreased by 12% to $2.3 million in Q1 2023, while noninterest expense increased by 5% to $9.8 million, leading to an increased efficiency ratio of 70.7%[204] Balance Sheet Review - Total assets increased by $54.7 million to $2.19 billion as of March 31, 2023, primarily due to an increase in interest-bearing deposits in financial institutions and federal funds sold, funded by an increase in other borrowings[207] - The investment portfolio increased by $2.5 million to $788.9 million, mainly due to a decline in unrealized losses, partially offset by maturities[207] - The loan portfolio, net of allowance for credit losses, slightly decreased to $1.22 billion at March 31, 2023, from $1.23 billion at December 31, 2022, driven by a decrease in agricultural operating loans[216] - Total deposits remained stable at $1.90 billion, with a shift from noninterest-bearing and savings accounts to higher-yielding interest-bearing checking and time deposits[217] - Uninsured deposits represented approximately 18% of total deposits as of March 31, 2023[217] Asset Quality Review and Credit Risk Management - The Company's problem loans (nonaccrual and 90+ days past due) as a percentage of total loans decreased to 0.95% at March 31, 2023, from 1.19% at December 31, 2022[219] - Substandard-Impaired loans decreased by $3.6 million to $10.8 million at March 31, 2023, primarily due to payments received[220] - Nonaccrual loans decreased to $11.4 million at March 31, 2023, from $14.7 million at December 31, 2022, also due to payments received[221] - The allowance for credit losses as a percentage of outstanding loans increased to 1.31% at March 31, 2023, from 1.26% at December 31, 2022, mainly due to ASC 326 implementation[224] Liquidity and Capital Resources - The Company maintains a satisfactory level of liquidity, with liquid assets totaling $87.2 million at March 31, 2023, up from $27.9 million at December 31, 2022[228] - Available liquidity sources include $314.4 million in FHLB lines of credit (no outstanding advances), $102.2 million in federal funds borrowing capacity, and $439.1 million in unpledged available-for-sale securities and interest-bearing deposits[228][230] - The Company utilized $75 million from the Bank Term Funding Program (BTFP) as of March 31, 2023, due to favorable lending terms[229] - Total stockholders' equity increased to $159.1 million at March 31, 2023, from $149.1 million at December 31, 2022, primarily due to decreased unrealized losses on the investment portfolio and retained net income[236] Forward-Looking Statements and Business Risks - The report contains forward-looking statements subject to numerous risks and uncertainties, including the impact of inflation, rising interest rates, competitive pressures, changes in credit risks, governmental regulations, and market conditions[237] - Investors are cautioned not to place undue reliance on forward-looking statements, which are qualified by inherent business risks and speak only as of their making date[237] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that quantitative and qualitative disclosures about market risk are not applicable for this quarterly report - The Company states that quantitative and qualitative disclosures about market risk are not applicable for this reporting period[239] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting - The Company's management concluded that disclosure controls and procedures were effective as of March 31, 2023[239] - No material changes in internal control over financial reporting occurred during the last fiscal quarter[240] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section indicates that there are no legal proceedings applicable to the Company for the reporting period - Legal proceedings are not applicable for this reporting period[241] Item 1.A. Risk Factors Management believes there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K - No material changes in risk factors have occurred since the Company's Form 10-K filing on March 10, 2023[241] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's stock repurchase plan, indicating no shares were repurchased during Q1 2023, with 100,000 shares remaining - The Company approved a Stock Repurchase Plan in November 2022 for up to 100,000 shares[242] - No shares were purchased under the plan during the three months ended March 31, 2023[243] - As of March 31, 2023, 100,000 shares remained available for purchase under the plan[242][243] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities applicable to the Company for the reporting period - Defaults upon senior securities are not applicable for this reporting period[242] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable for this reporting period[242] Item 5. Other Information This section states that there is no other information applicable to the Company for the reporting period - No other information is applicable for this reporting period[242] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications of executive officers and Inline XBRL documents - Exhibits include certifications of Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1, 32.2)[244] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) are also filed as exhibits[245] Signatures The report is duly signed on behalf of Ames National Corporation by its Chief Executive Officer and President, John P. Nelson, and Chief Financial Officer, John L. Pierschbacher - The report is signed by John P. Nelson, Chief Executive Officer and President, and John L. Pierschbacher, Chief Financial Officer[248]