Business Overview and History

Ames National Corporation (ATLO) is a bank holding company that has been serving the central, north-central, and south-central regions of Iowa for over four decades. With a strong focus on community banking, ATLO has built a reputation for providing personalized financial services and tailored solutions to its diverse customer base.

Ames National Corporation was established in 1975 as a bank holding company headquartered in Ames, Iowa. The company began by owning and operating a single bank subsidiary, First National Bank, Ames, Iowa. Over the following decades, Ames National expanded through acquiring additional bank subsidiaries in central, north-central and south-central Iowa, including State Bank & Trust Co., Boone Bank & Trust Co., Reliance State Bank, United Bank & Trust Co., and Iowa State Savings Bank.

Through these strategic acquisitions, Ames National grew to become a diversified financial services organization, offering commercial and consumer banking, wealth management, and other financial products and services to customers across its regional footprint. The company focused on empowering local decision-making at the bank level and maintaining a strong community banking model, which it viewed as a competitive advantage over larger financial institutions.

Ames National weathered various economic challenges over its history, including the Great Recession of the late 2000s. During this period, the company worked diligently to maintain asset quality and manage credit risk within its loan portfolio. Additionally, Ames National navigated changes in the regulatory environment, adapting its operations and compliance practices as needed to remain in good standing with state and federal banking authorities.

Despite these obstacles, Ames National continued to grow organically and through selective acquisitions, expanding its geographic reach and diversifying its revenue streams. The company's focus on relationship banking, conservative risk management, and ongoing investments in technology infrastructure helped position it as a trusted financial partner for individuals and businesses across its markets.

Financial Highlights

As of the most recent fiscal year ended December 31, 2023, ATLO reported total assets of $2.16 billion, representing a slight year-over-year increase. The company's loan portfolio stood at $1.28 billion, a 2.4% increase from the previous year, reflecting the ongoing demand for credit in the communities it serves.

ATLO's net interest income for the full year 2023 was $44.62 million, down 4.2% from the prior year, primarily due to higher market interest rates on deposits. The company's net income for the year reached $10.82 million, a 43.9% decrease compared to 2022, driven by the increase in interest expense and a rise in operating expenses.

The company's efficiency ratio, a measure of operating efficiency, increased to 75.59% in the fourth quarter of 2023, up from 65.04% in the same period of the prior year, indicating higher operating expenses relative to revenue. This was largely due to increased salaries and employee benefits, as well as higher professional fees related to contract negotiations.

Despite the challenges faced in 2023, ATLO maintained a strong capital position, with a total risk-based capital ratio of 14.00% as of December 31, 2023, well above the regulatory minimum of 10.50% required to be considered "well-capitalized."

For the full fiscal year 2023, ATLO reported revenue of $62.93 million, net income of $19.29 million, operating cash flow of $21.23 million, and free cash flow of $18.37 million.

Quarterly Performance

In the third quarter of 2024, ATLO reported net income of $2.2 million, or $0.25 per share, compared to $2.9 million, or $0.33 per share, in the same period of the prior year. The decrease in earnings was primarily due to an increase in credit loss expense and higher consultant fees related to the negotiation of long-term vendor contracts.

Net loan charge-offs for the third quarter of 2024 totaled $10,000, compared to net loan recoveries of $4,000 in the third quarter of 2023. A credit loss expense of $371,000 was recognized in the third quarter of 2024, as compared to a credit loss benefit of $274,000 in the same period of the prior year.

Noninterest income for the third quarter of 2024 totaled $2.41 million, an increase of 2.2% compared to the third quarter of 2023. Noninterest expense for the third quarter of 2024 was $10.5 million, up 7.2% from the same period in the prior year, primarily due to increases in salaries and benefits, as well as the consultant fees mentioned earlier.

Revenue for Q3 2024 was $23.125 million, up 10.0% year-over-year. Net income was $2.217 million, down 24.0% year-over-year. Operating cash flow was $3.099 million, down 6.0% year-over-year, and free cash flow was $3.032 million, down 5.0% year-over-year.

Financials

ATLO's financial performance in 2023 and the third quarter of 2024 reflected the challenges faced by the banking industry, including rising interest rates and increased competition for deposits. The company's net interest income and net income decreased year-over-year, while operating expenses increased. However, ATLO maintained a strong capital position and continued to grow its loan portfolio, demonstrating its resilience in a challenging economic environment.

As of September 30, 2024, ATLO's loan portfolio totaled $1.30 billion, up from $1.28 billion as of December 31, 2023. The increase was primarily driven by growth in the 1-4 family residential real estate, multi-family real estate, and agricultural operating loan portfolios. The loan portfolio constitutes the largest portion of the company's assets, comprising 61% of total assets as of September 30, 2024.

The loan portfolio is diversified across various segments, including commercial real estate (27.0% of total loans), 1-4 family residential real estate (22.7%), multi-family real estate (15.4%), agricultural real estate (12.1%), commercial operating (7.1%), agricultural operating (9.5%), and consumer and other (1.3%).

ATLO's investment portfolio totaled $688.60 million as of September 30, 2024, decreasing from $736.39 million at the end of 2023. The portfolio is primarily composed of U.S. government treasuries (25.9% of the portfolio), U.S. government agencies (13.6%), U.S. government mortgage-backed securities (13.6%), and state and political subdivisions (37.2%).

Liquidity

ATLO has maintained a strong liquidity position. As of September 30, 2024, the company reported cash and cash equivalents of $59.0 million. Additionally, ATLO had $201.0 million in available borrowing capacity with the Federal Home Loan Bank (FHLB) as of that date.

The company's debt-to-equity ratio stood at 0.45 as of September 30, 2024, indicating a conservative approach to leverage. Both the current ratio and quick ratio were 2.19 as of the same date, suggesting a strong ability to meet short-term obligations.

Total deposits stood at $1.80 billion as of September 30, 2024, down slightly from $1.81 billion at the end of 2023. The deposit base consists of noninterest-bearing checking accounts (18.6% of total deposits), interest-bearing checking accounts (34.0%), savings and money market accounts (29.7%), and time deposits (25.7%).

Challenges and Risks

ATLO, like many community banks, faces headwinds in the current economic environment. The ongoing rise in interest rates, combined with increased competition for deposits, has put pressure on the company's net interest margin. Additionally, the company has experienced an uptick in credit quality issues, particularly in its commercial real estate and multi-family real estate loan portfolios, which have been impacted by factors such as elevated interest rates and challenging market conditions.

To address these challenges, ATLO has implemented a rigorous approach to risk management, including regular loan reviews, stress testing, and sensitivity analyses to evaluate the risk level in its loan portfolio. The company has also strengthened its underwriting standards and updated its loan policies to align with strategic objectives and risk management priorities.

The company closely monitors the credit quality of its loan portfolio, with nonaccrual loans totaling $17.50 million and loans past due 90 days or more but still accruing interest at $0 as of September 30, 2024. The allowance for credit losses stood at $17.56 million, or 1.34% of outstanding loans, as of the same date.

Outlook and Guidance

Despite the challenges faced in 2023, ATLO remains cautiously optimistic about its future prospects. The company has provided guidance for the full year 2024, projecting an earnings per share (EPS) range of $1.45 to $1.55, which would represent a decline from the $1.20 EPS reported in 2023.

ATLO's management team is focused on diversifying the company's revenue streams, enhancing its digital capabilities, and maintaining a strong risk management framework to navigate the evolving financial landscape. The company's community-centric approach and commitment to serving its local markets continue to be key differentiators in a competitive industry.

Conclusion

Ames National Corporation has established itself as a formidable player in the community banking space, with a proven track record of growth and a steadfast dedication to its customers. Despite the challenges presented in 2023 and early 2024, the company remains well-positioned to navigate the current economic environment and capitalize on future opportunities.

ATLO's focus on serving central, north-central, and south-central Iowa through its six subsidiary banks provides a stable foundation for its operations. The company's diversified loan portfolio, conservative risk management practices, and strong liquidity position contribute to its resilience in the face of economic headwinds.

As ATLO continues to evolve and adapt to the changing needs of its communities, investors will undoubtedly keep a close eye on the company's progress and its ability to deliver sustainable long-term value. The company's commitment to maintaining a strong capital position and its ongoing efforts to enhance operational efficiency should help it weather the current challenges and emerge as a stronger institution in the years to come.