Business Overview and History
Ames National Corporation (ATLO) is a bank holding company headquartered in Ames, Iowa, that owns and operates six community bank subsidiaries across central, north-central, and south-central Iowa. With a history dating back to 1975, the company has established itself as a reliable financial institution serving the needs of local businesses and residents in its core Midwest markets.
Ames National Corporation was established in 1975 as a bank holding company headquartered in Ames, Iowa. The company owns and operates six bank subsidiaries located in central, north-central, and south-central Iowa - First National Bank, State Bank Trust Co., Boone Bank Trust Co., Reliance State Bank, United Bank Trust Co., and Iowa State Savings Bank. These subsidiaries operate a total of 23 locations across their respective regions.
The company's primary business activities involve offering commercial and consumer banking products and services, including loans, deposits, and wealth management services through its bank subsidiaries. Wealth management services include financial planning, trust and agency account management, estate management, and investment brokerage. Ames National Corporation has focused on leveraging the local expertise and decision-making authority of its seasoned bank management teams to provide customers with faster response times and more flexible products and services compared to larger financial institutions.
In the early years after its founding, Ames National Corporation methodically grew its bank franchise by acquiring and integrating additional community banks in its target markets. This allowed the company to expand its geographic footprint and customer base in central Iowa. The company faced challenges during this period related to integrating new bank operations, retaining talent, and maintaining strong asset quality across the growing loan portfolio.
By the early 2000s, Ames National Corporation had established itself as a leading community banking organization in Iowa. The company navigated the 2008 financial crisis relatively well compared to many of its peers, thanks to its conservative underwriting practices and diverse revenue streams. This allowed Ames National Corporation to continue expanding organically and through selective acquisitions in the following years, further solidifying its market position.
Today, Ames National Corporation is a respected regional banking franchise serving customers across central Iowa. The company has weathered various economic cycles and banking industry challenges over its nearly 50-year history through a focus on operational efficiency, risk management, and meeting the unique needs of its local communities.
Ames National's banking subsidiaries offer a comprehensive suite of commercial and consumer financial services, including commercial and agricultural lending, residential mortgages, wealth management, and traditional deposit products. The company's diversified loan portfolio consists of real estate loans (representing 67.8% of total loans as of September 30, 2024), commercial and agricultural loans (23.2%), and consumer loans (9.0%). This balanced mix of lending activities has helped the company navigate various economic cycles.
Financial Performance and Ratios
Over the past three years, Ames National has demonstrated consistent financial performance, with annual net income ranging from $18.85 million in 2020 to $23.91 million in 2021 and $10.82 million in 2023. The company's annual revenue has also remained relatively stable, varying between $62.93 million in 2022 and $53.84 million in 2023. Ames National's annual operating cash flow has ranged from $29.71 million in 2020 to $30.47 million in 2021 and $19.21 million in 2023, while its annual free cash flow has fluctuated between $28.46 million in 2020 and $28.60 million in 2021, before declining to $14.31 million in 2023.
The company's financial ratios have remained within healthy ranges, reflecting its prudent risk management practices. As of September 30, 2024, Ames National's return on assets (ROA) was 0.41%, return on equity (ROE) was 5.19%, and its Tier 1 capital ratio was 12.80%, well above the regulatory minimum of 8.50% required to be considered a "well-capitalized" institution.
For the third quarter of 2024, Ames National reported net income of $2.22 million, or $0.25 per share, compared to $2.92 million, or $0.33 per share, for the same period in 2023. The decrease was primarily due to an increase in credit loss expense and higher consultant fees related to negotiating long-term vendor contracts. Net loan charge-offs for the third quarter of 2024 were $10,000 compared to net recoveries of $4,000 in the prior year period. The company recorded a credit loss expense of $371,000 for the third quarter of 2024 versus a credit loss benefit of $274,000 in the third quarter of 2023.
Financials
Ames National Corporation has maintained a stable financial position over the past few years. The company's consistent net income, revenue, and cash flow figures demonstrate its ability to generate steady returns in a challenging banking environment. The company's focus on operational efficiency and risk management has contributed to its solid financial performance.
For the most recent fiscal year (2023), Ames National reported revenue of $53.84 million, net income of $10.82 million, operating cash flow of $19.21 million, and free cash flow of $14.31 million. In the most recent quarter (Q3 2024), the company recorded revenue of $23.13 million and net income of $2.22 million. Year-over-year, the company saw a decrease in quarterly revenue and net income compared to the prior year period.
The major revenue and cash flow sources for the company include interest and fees earned on loans, interest on fixed-income investments held by the banks, fees from wealth management services, service fees on deposit accounts, gains on sale of loans, and merchant and card fees. The principal expenses are interest expense on deposits and other borrowings, credit loss expense, salaries and employee benefits, data processing costs, occupancy expenses, and professional fees.
Net interest income, which is the difference between interest earned on loans and investments versus interest paid on deposits and borrowings, is the largest component contributing to Ames National Corporation's net income. Management's key function is to effectively manage the spread between interest earned and interest paid in order to maximize net interest income while maintaining appropriate interest rate risk.
Liquidity
Ames National Corporation maintains a strong liquidity position, as evidenced by its healthy cash flow figures and robust capital ratios. The company's Tier 1 capital ratio of 12.80% indicates a solid capital base, providing a buffer against potential economic downturns and allowing for future growth opportunities.
As of September 30, 2024, Ames National's debt-to-equity ratio stood at 0.45, reflecting a conservative capital structure. The company held $58.97 million in cash, cash equivalents, and federal funds sold, providing ample liquidity for its operations. Additionally, Ames National has access to a $5 million line of credit facility, with no outstanding borrowings as of September 30, 2024.
The company's current ratio and quick ratio both stood at 2.19, indicating a strong ability to meet short-term obligations. Ames National's total stockholders' equity increased to $183.40 million at September 30, 2024, from $165.80 million at the end of 2023, primarily due to a decrease in unrealized losses on the investment portfolio.
Loan Portfolio and Deposits
As of September 30, 2024, Ames National's loan portfolio, net of the allowance for credit losses, totaled $1.30 billion, an increase from $1.28 billion at December 31, 2023. The growth was mainly in the 1-4 family residential real estate, multi-family real estate, and agricultural operating loan segments. Total deposits decreased slightly to $1.80 billion at September 30, 2024, from $1.81 billion at the end of 2023, as customers shifted funds to higher-yielding deposit products.
Other borrowings declined to $83.10 million at the end of the third quarter of 2024 from $110.60 million at December 31, 2023, as the company paid down some of its outstanding debt. The company maintains additional liquidity sources, including available borrowing capacity with the Federal Home Loan Bank and correspondent banks, as well as an investment portfolio of $688.60 million in securities classified as available-for-sale.
Challenges and Risks
Despite its strong financial performance, Ames National faces several challenges and risks that could impact its future outlook. The company operates in a highly competitive regional banking environment, competing with larger national banks as well as other community financial institutions for deposits and loan originations. Additionally, the company's reliance on interest income exposes it to the risks of rising interest rates and potential yield curve inversions, which could compress its net interest margins.
Moreover, the company's loan portfolio is concentrated in commercial real estate and agricultural lending, making it vulnerable to downturns in these sectors. The COVID-19 pandemic's impact on commercial real estate and the ongoing challenges in the agricultural industry due to trade tensions and extreme weather events have highlighted the need for Ames National to closely monitor these lending segments.
Regulatory changes and compliance requirements in the banking industry also pose ongoing risks for the company, as it must allocate resources to ensure adherence to evolving rules and regulations.
Outlook and Guidance
In its most recent financial reporting, Ames National provided limited forward-looking guidance, cautioning investors about the potential headwinds facing the banking industry, such as rising interest rates and persistent economic uncertainty. The company has not provided specific revenue or earnings targets for the upcoming fiscal year.
However, Ames National's management has expressed confidence in the company's ability to navigate these challenges by leveraging its strong capital position, diversified loan portfolio, and deep understanding of its local markets. The company's focus on maintaining disciplined underwriting standards and robust risk management practices is expected to support its long-term resilience.
Conclusion
Ames National Corporation has established itself as a reliable community banking player in the Midwest, navigating the evolving financial landscape with a focus on serving the needs of its local customers. While the company faces various challenges, including interest rate risk and concentration in commercial real estate and agricultural lending, its consistent financial performance, healthy balance sheet, and prudent risk management practices position it well to continue generating shareholder value over the long term.
The company's strategy of leveraging experienced local bank management teams to provide faster response times and more flexible product offerings has created a competitive advantage in its core markets. By maintaining operational efficiency and focusing on key revenue drivers such as net interest income and wealth management services, Ames National Corporation aims to improve profitability and enhance its competitive position in the regional banking landscape.
As Ames National Corporation moves forward, its ability to adapt to changing market conditions, manage credit quality, and capitalize on growth opportunities in its local markets will be crucial in determining its long-term success and ability to deliver value to shareholders.