Ames National (ATLO) - 2023 Q4 - Annual Report

Financial Performance and Key Metrics - Net income for 2023 was $10.8 million, a 44$19.3 million in 2022, primarily due to higher interest expenses and increased credit loss expenses[165] - Earnings per share for 2023 were $1.20, down from$2.14 in 2022[165] - Return on average equity for 2023 was 7.05%, compared to 11.43% in 2022[165] - Return on average assets for 2023 was 0.51%, compared to 0.90% in 2022[165] - Net interest income for 2023 was $44.6 million, down from$53.2 million in 2022[160] - Total assets for 2023 were $2.16 billion, slightly up from$2.13 billion in 2022[160] - Net loans for 2023 were $1.28 billion, up from$1.23 billion in 2022[160] - Deposits for 2023 were $1.81 billion, down from$1.90 billion in 2022[160] - Equity to assets ratio for 2023 was 7.69%, up from 6.98% in 2022[160] - Net interest income (FTE) decreased to $45,234 million in 2023 from$53,934 million in 2022, with a net interest margin (FTE) of 2.20% compared to 2.62% in 2022[193] - Net interest income decreased by 15.9% to $44.6 million in 2023 compared to$53.2 million in 2022, primarily due to higher market interest rates on deposits[198] - Noninterest income decreased to $9.2 million in 2023 from$9.7 million in 2022, mainly due to fewer gains on residential loan sales and lower wealth management income[199] - Noninterest expense increased to $40.2 million in 2023 from$38.6 million in 2022, driven by a $523 thousand wire fraud loss, higher FDIC assessments, and salary increases[200] - Total assets grew by 1.0$2.16 billion in 2023, primarily due to interest-bearing deposit and loan growth[201] - Net loans increased by 4.2% to $1.28 billion in 2023, driven by growth in commercial, construction, and multi-family loan portfolios[202] - Gross loans totaled$1.29 billion in 2023, representing 71.4% of total deposits and 60.0% of total assets[203] - Total investments decreased by 6.4% to $736.4 million in 2023, primarily due to maturities exceeding purchases[215] - Loans held for sale decreased to$124 thousand in 2023 from $154 thousand in 2022, with no significant impact expected on total assets[214] - The investment portfolio comprised 34$86.1 million to $1.81 billion as of December 31, 2023, primarily due to decreases in savings and money market accounts[223] - Total borrowed funds increased to$164.6 million in 2023, up 106.2% from $79.8 million in 2022, with an average rate of 4.04$1.28 billion in 2023, representing 59% of total assets[237] - Non-performing assets decreased by 5% to $13.9 million in 2023, with non-performing loans representing 1.08$118 thousand in 2023, up 24.2% from $95 thousand in 2022[241] - Net charge-offs to average loans ratio increased to 0.02$213 thousand[246] - The ratio of allowance for credit losses to nonaccrual loans improved to 121.47% in 2023 from 106.62% in 2022[240] - Interest income on nonaccrual loans under original terms was $768 thousand in 2023, up 4.8$733 thousand in 2022[241] - The average balance of impaired loans decreased to $12.7 million in 2023 from$13.0 million in 2022[241] - Specific reserve on loans individually evaluated for credit losses increased by 24% to $118 million in 2023 compared to$95 million in 2022[249] - Loans individually evaluated for credit losses decreased by 4% to $13,794 million in 2023 from$14,386 million in 2022[249] - The allowance for credit losses allocated to 1-4 family residential loans increased to 22% ($3,333 million) in 2023 from 21$2,752 million) in 2021[250] - Liquid assets increased to $55.1 million in 2023 from$27.9 million in 2022, primarily due to increased deposits at the Federal Reserve Bank[252] - Total investments decreased to $736.4 million in 2023 from$786.4 million in 2022, with pretax net unrealized losses of $62.3 million in 2023[253] - Net cash provided by operating activities decreased to$19.5 million in 2023 from $21.2 million in 2022, primarily due to higher interest expense on deposits[254] - The company's total stockholders' equity increased to$165.8 million in 2023 from $149.1 million in 2022, representing 7.7$262.7 million as of December 31, 2023, compared to $262.9 million at the end of 2022[258] - The company's investment portfolio has pretax net unrealized losses of$62.3 million as of December 31, 2023, compared to $83.6 million in 2022[253] - Dividends from the banks amounted to$10.0 million in 2023, slightly down from $10.2 million in 2022[256] - The company's allowance for credit losses on loans (ACL) was$16.78 million as of December 31, 2023[280] - Total assets increased to $2,155.481 million in 2023 from$2,134.926 million in 2022[287] - Net interest income decreased to $44.625 million in 2023 from$53.244 million in 2022[290] - Net income declined to $10.817 million in 2023 compared to$19.293 million in 2022[290] - Total deposits decreased to $1,811.831 million in 2023 from$1,897.957 million in 2022[287] - Interest expense on deposits rose significantly to $24.471 million in 2023 from$7.316 million in 2022[290] - Noninterest income slightly decreased to $9.215 million in 2023 from$9.687 million in 2022[290] - Total noninterest expense increased to $40.162 million in 2023 from$38.644 million in 2022[290] - Comprehensive income improved to $27.000 million in 2023 from a loss of$46.641 million in 2022[292] - Loans receivable, net increased to $1,277.812 million in 2023 from$1,226.011 million in 2022[287] - Securities available-for-sale decreased to $736.389 million in 2023 from$786.438 million in 2022[287] Interest Rates and Inflation Impact - Consumer inflation increased by 3.4% and 6.5% for the years ended December 31, 2023, and 2022, respectively, creating upward pressure on operating expenses and interest rates[98] - The FOMC raised the federal funds rate to a target range of 5.25% to 5.5% in 2022 and 2023 to curb inflation, which may decrease the company's net interest income[108] - Approximately 12% of deposits are tied to external indexes, with deposit interest expense increasing more quickly in a rising interest rate environment[223] - Net interest margin on an FTE basis (non-GAAP) decreased to 2.20% in 2023 from 2.62% in 2022[188] - The company's average interest-earning assets in 2023 were $2,059,506 thousand, slightly lower than$2,060,959 thousand in 2022[188] - Real estate loan interest income increased by $7.4 million in 2023, driven by a$2.4 million increase due to volume and a $5.0 million increase due to higher interest rates[194] - Total deposits decreased to$1,468,064 million in 2023 from $1,503,904 million in 2022, with a yield increase from 0.49$132,918 million in 2023 from $55,874 million in 2022, with a yield increase from 1.78$1,600,982 million in 2023 from $1,559,778 million in 2022, with a yield increase from 0.53$8,700 million in 2023, with a $839 million decrease due to volume and a$7,861 million decrease due to yield/rate[195] - The company's non-GAAP net interest margin was 2.20% in 2023, down from 2.62% in 2022[197] - Credit loss expense was $789 thousand in 2023, compared to a credit loss benefit of ($874) thousand in 2022, driven by loan portfolio growth and agricultural loan charge-offs[198] - The company's securities portfolio had a fair value of $736.4 million as of December 31, 2023, with an unrealized loss of$62.3 million primarily due to increased interest rates[106] Loan Portfolio and Credit Risk - Commercial real estate loans constituted a significant portion of the company's total loan portfolio as of December 31, 2023, with risks tied to fluctuating collateral values[100] - The company's agricultural loan portfolio is exposed to risks from low commodity and livestock prices, poor weather conditions, and changes in government trade policies[105] - The company's allowance for credit losses reflects management's estimate of expected credit losses over the contractual life of the loan portfolio, subject to economic and regulatory conditions[102] - The company adopted the CECL methodology for credit loss estimation starting January 1, 2023, which requires estimating expected credit losses over the life of the loan portfolio[174] - The allowance for credit losses is adjusted by a credit loss expense recognized in earnings and reduced by charge-offs, net of recoveries[180] - The company uses a model to estimate credit loss assumptions for loan pools based on loan type and purpose, calculating an expected life-of-loan loss percentage for each category[177] - The allowance for credit losses considers factors such as economic conditions, lending policies, and collateral value to adjust historical loss rates[178] - The company employs a two-component methodology for establishing the allowance for credit losses: asset-specific and pooled components[175] - Total loans increased to $1,243,239 million in 2023, up from$1,169,157 million in 2022, with a yield of 4.57% compared to 3.93% in 2022[191] - Real estate loans contributed $44,792 million in revenue in 2023, up from$37,342 million in 2022, with a yield increase from 3.79% to 4.28%[191] - Total interest-earning assets generated $74,910 million in revenue in 2023, up from$62,243 million in 2022, with a yield increase from 3.02% to 3.64%[191] - Commercial real estate loans have the largest pooled reserve at 1.50% of outstanding balances as of December 31, 2023[246] - The company's ACL estimation process involves qualitative factor adjustments based on management's expectation of future conditions[280] - The company's ACL estimation process includes evaluating loans that do not share similar risk characteristics on an individual basis[280] - The company's ACL estimation process considers historical loss rates of similar peers for loans that share similar risk characteristics[280] - The company's ACL estimation process reduces adjustments on a straight-line basis over one year for loans extending beyond the forecast period[280] - The company's ACL estimation process involves significant judgment and subjectivity in identifying and measuring qualitative factor adjustments[281] Cybersecurity and Operational Risks - The company faces operational risks, including data processing system failures, data security breaches, and employee or customer fraud[112] - Cybersecurity risks have increased due to greater reliance on remote working and are expected to remain high due to evolving threats[117] - A breach of information security or compliance by third-party vendors could negatively affect the company's reputation and business[130] - The company's information security program is designed to continuously adapt to emerging threats, with regular testing through internal and external audits, penetration tests, and disaster recovery tests[143][144] - The company's cybersecurity strategy is integrated within its overall risk management strategy, with regular oversight by the Board of Directors and executive officers[147][148] - The company maintains insurance coverage for cybersecurity risks, but there is no assurance that liabilities or losses will be fully covered[144] - The company's cybersecurity program is designed to be consistent with the FFIEC Information Security IT Examination Handbook and other regulatory frameworks[145] Regulatory and Compliance Risks - The company relies on dividends and payments from its banks for substantially all of its revenue, which could be limited by federal and state regulations[110] - Compliance with the Dodd-Frank Act and other regulations has resulted in additional costs, with potential future regulatory changes impacting earnings[138] - The company's ability to pay dividends is subject to federal regulatory considerations, including capital adequacy guidelines, and may be reduced or eliminated in the future[140] - The company adopted Topic 326 effective January 1, 2023, changing its method of accounting for the allowance for credit losses[276] - The company's financial statements for 2023 were audited and found to be in conformity with accounting principles generally accepted in the United States[275] - The company's financial statements for 2022 were audited and found to be in conformity with accounting principles generally accepted in the United States[283] Market and Economic Risks - The company's earnings are highly dependent on the business environment, including economic growth, low inflation, and strong business earnings[96] - The company's operations are concentrated in central, north-central, and south-central Iowa, making it vulnerable to local economic conditions[125] - The company faces competition from larger financial institutions and non-bank financial services providers with greater resources[133] - Federal government spending and increases in monetary supply could strain the company's capital ratios and contribute to inflation[134] - Severe weather, natural disasters, pandemics, or acts of terrorism could significantly impact the company's business and financial condition[139] - Acquisitions involve risks such as integration difficulties, unexpected liabilities, and potential loss of key employees or customers[136] Dividends and Shareholder Information - The company declared aggregate annual cash dividends of approximately $9.7 million or$1.08 per share in 2023 and 2022, with a quarterly cash dividend of approximately $2.4 million or$0.27 per share declared in February 2024[153] - The company's common stock closed at $18.46 on February 28, 2024, with approximately 249 shareholders of record and 3,298 beneficial owners[153] - The company approved a Stock Repurchase Plan in November 2023, authorizing the purchase of up to 100,000 shares, with no shares purchased under this plan during November or December 2023[155][156] - The company's stock trading volume on the NASDAQ Capital Market is relatively limited, making it more susceptible to price volatility compared to more actively traded companies[141] Investment Portfolio and Securities - The company's securities portfolio had a fair value of$736.4 million as of December 31, 2023, with an unrealized loss of $62.3 million primarily due to increased interest rates[106] - The company's securities available-for-sale portfolio is carried at fair value, with declines below cost evaluated for credit losses and reflected in earnings[183][184] - The company's total investment portfolio amounted to$736.4 million, with U.S. government treasuries making up $200.1 million, U.S. government agencies$92.6 million, and U.S. government mortgage-backed securities $101.9 million[217] - The weighted average yield for the total investment portfolio was 1.87$269.9 million as of December 31, 2023[218] Liquidity and Funding - The company's liquidity is primarily maintained through customer deposits and short-term funding sources, with potential risks from changes in governmental programs or economic conditions[109] - The company had $6.9 million of brokered deposits and approximately$590 million of estimated uninsured deposits as of December 31, 2023[224] - The average balance for non-interest bearing checking deposits was $373.7 million with a 0.00$610.0 million with a 1.61% interest rate in 2023[226] - Time certificates of deposit with balances exceeding the FDIC insurance limit of $250,000 totaled$68.2 million as of December 31, 2023, up from $42.9 million in 2022[228] - Uninsured time certificates of deposit totaled$59.2 million as of December 31, 2023, an increase of 93.4% from $30.6 million in 2022[230] Accounting Policies and Good