ATLO — Q2 2026 Financial Report Analysis

Ames National Corporation, which owns six community banks in central Iowa, earned $5.9 million, or $0.67 per share, in the second quarter of 2026, up 31.5% from $4.5 million ($0.51) a year earlier. Almost all of the improvement came from one line: net interest income, the difference between what the bank earns on loans and bonds and what it pays depositors, rose 21.7% to $16.4 million even though the loan book shrank. The bank reinvested maturing bonds at higher yields while its own deposit costs fell. The weak spot is credit. Loans the bank rates as "substandard" have more than doubled in a year.

At a glance

• Net interest margin 3.18% (FTE), up from 2.65%. The bank now keeps 53 basis points (0.53 percentage points) more of every dollar of earning assets than a year ago. That is the main reason profit rose by almost a third.
• Efficiency ratio 58.52%, down from 64.34%. It now spends about 59 cents of costs to earn each dollar of revenue, compared with 64 cents a year ago, even though expenses rose 7.8%.
• Substandard loans $50.7 million, up from $23.5 million a year ago. These are loans the bank itself grades as having a well-defined weakness. Very little has been written off so far, but this is the figure to watch.

Results

The net interest margin is shown on a "fully taxable equivalent" (FTE) basis. This non-GAAP measure grosses up tax-exempt bond income as if it were taxable, so it can be compared with taxable income. The adjustment here is small, $109 thousand in the quarter. The filing doesn't state a net charge-off ratio or a return on tangible equity, so neither is in the table. The 10-Q gives the CET1 ratio for June 30, 2026 and December 31, 2025 only.

For the first half, net income was $11.9 million ($1.34 per share) against $8.0 million ($0.89), up 49.5%. The net interest margin was 3.10% against 2.59%.

Why the margin widened: bonds, not loans

Net interest margin is the spread a bank earns between what it collects on loans and securities and what it pays for deposits and borrowings, measured against its earning assets. Ames's margin rose to 3.18%, up from 3.01% in the first quarter of 2026 and 2.65% a year ago. The 10-Q's average balance tables show where the gain came from:

• Investment securities did the heavy lifting. Taxable securities income rose 47%, from $3.1 million to $4.6 million. The average taxable bond balance grew to $629 million from $568 million, and its yield jumped to 2.92% from 2.19%. Management attributes this to "higher average balances and maturities reinvested at higher rates." Bonds bought when rates were near zero are maturing and being replaced with higher-yielding ones.
• Loans earned more on a smaller book. Average loans fell 1.2% to $1.27 billion, but the loan yield rose to 5.44% from 5.17%, so loan interest income still grew $664 thousand to $17.3 million.
• Funding got cheaper. The average rate paid on interest-bearing deposits fell to 1.71% from 1.94%. Deposit interest expense dropped $906 thousand. Other borrowed funds fell to an average of $52 million from $71 million, cutting that expense by $217 thousand. Total interest expense fell 14.0%.

The interest-bearing cash balance was the one drag. It earned $303 thousand less as average balances fell and the yield dropped to 3.88% from 4.60%, consistent with lower short-term market rates.

Costs rose, but revenue rose faster

Noninterest expense rose 7.8% to $11.2 million. Two lines explain almost all of the increase:

• Professional fees rose to $910 thousand from $540 thousand. Of that, $300 thousand was consultant fees "for certain contract negotiations." The filing doesn't say what the contract is. It does say these fees "are expected to continue throughout 2026 as negotiations are in process," so this cost will repeat for at least two more quarters.
• Salaries and benefits rose 8.2% to $7.0 million. The company attributes this to "anticipated bonus payouts as Company performance thresholds are met" as well as normal raises. Part of this cost rises and falls with profit.

The efficiency ratio is costs divided by revenue, so lower is better. It improved to 58.52% only because revenue grew 18.5%, well ahead of costs. Fee income barely moved: noninterest income rose 2.3% to $2.7 million. Wealth management, at $1.6 million, is the largest fee line, and it grew 4.5%.

What the headline numbers hide

• Credit quality is moving the wrong way, even though losses are small. Net charge-offs (loans written off as uncollectible, net of recoveries) were only $255 thousand this quarter, against $1.1 million a year ago. By our own calculation that is roughly 0.08% of loans annualized; the filing doesn't state a ratio. But the warning signs further back in the pipeline grew:
  • Substandard loans, which the bank rates as having a well-defined weakness, rose to $50.7 million from $23.5 million a year earlier and $42.2 million at year-end. Management cites "one large relationship secured by 1-4 family residential properties" and "weakening in the multi-family portfolio as some loans are experiencing a decline in occupancy rates."
  • Loans 30+ days past due rose to $22.5 million from $11.8 million a year earlier. The bank cites one commercial real estate loan "that matured and is being restructured" and one agricultural operating loan relationship.
  • Problem loans (nonaccrual plus 90+ days past due) were 1.55% of total loans. The 10-Q compares this with an Iowa peer-group average of 0.60%.
  • The allowance for credit losses (the reserve set aside for expected loan losses) is 1.36% of loans, $17.3 million, which barely covers the $19.6 million of nonaccrual loans. If any of these large relationships go bad, losses and provisions could rise quickly from today's low levels.
• Commercial real estate exposure is shrinking, mostly through payoffs. Commercial and multi-family real estate make up 38.9% of loans, down from 39.9% at year-end. Office loans total only $22.7 million, 1.8% of loans. Multi-family, at $195 million (15.4% of loans), is the segment management flags as weakening.
• The first-half comparison is flattered by provisions. For the six months, the bank booked a credit loss benefit of $139 thousand (a release of reserves as loans shrank), against a $1.07 million expense in the first half of 2025. That swing of about $1.2 million before tax explains part of the 49.5% first-half profit growth. The second quarter had no such help: its provision was slightly higher than a year ago.
• A higher tax rate held back EPS growth. Pre-tax income rose 36.8%, but the effective tax rate rose to 23% from 20%. Most of the company's New Markets Tax Credits ended in 2025. The related amortization expense also fell, from $191 thousand to $17 thousand, which partly offsets this. Net income therefore grew 31.5%, slower than pre-tax income.
• None of the EPS growth came from buybacks. Shares outstanding were flat at 8,857,220, and the company bought no shares in the quarter (165,053 remain under its 200,000-share authorization). All of the per-share growth came from higher earnings.
• Cash backs up the earnings. First-half operating cash flow was $11.8 million against net income of $11.9 million.
• Bond losses are still on the balance sheet. The securities portfolio carries $27.9 million of gross unrealized losses, which management attributes to interest rates rather than credit. The accumulated other comprehensive loss widened to $20.4 million from $17.9 million at year-end. These marks are excluded from regulatory capital, which is why CET1 (common equity tier 1, the core capital regulators measure against risk-weighted assets) stands at 15.4%, well above the 7.0% minimum including the buffer.

Takeaway: Ames is earning more because it is repricing its bond portfolio upward and paying less for deposits. Lending has not grown: loans are down 2.2% from a year ago. Profit is up about a third, but substandard loans have doubled to $50.7 million. A reserve of 1.36% of loans and very low current charge-offs leave little room if the large problem relationships turn into actual losses.

Outlook

Management gives no earnings guidance. The filing does point to three things that will shape the rest of 2026:

• More margin upside from repricing. The bank says about $102 million of investments mature within a year at an average yield of about 1.8%. Any reinvestment near the current 2.92% taxable portfolio yield adds income. It also has $361 million of loans maturing within a year at about 5.5%, and these will reprice at whatever rates prevail. About 14% of deposits are tied to external rate indexes, so further rate cuts would lower their cost quickly.
• Known cost pressure. The contract-negotiation consultant fees ($300 thousand a quarter) are expected to continue throughout 2026. Performance bonuses will also keep salaries elevated while results stay strong.
• Credit is the swing factor. The pipeline of problem loans (substandard, 30+ days past due, agricultural loans affected by "variable yields, weather impacts and commodity prices") grew in the first half. Losses on those loans would hit future provisions.

Our view: the margin story has more room to run, because low-yielding bonds still roll off at about 1.8% and the deposit base (with $365 million of noninterest-bearing checking) is cheap. Profit is likely to stay well above 2025 levels in the second half. The quality of that profit depends on the substandard book. Watch whether the large residential and agricultural relationships end up as charge-offs or are resolved, and whether the bank has to rebuild the allowance after releasing reserves in the first half. With capital at 15.4% CET1 and equity at 10.0% of assets, the bank can absorb a credit setback. The question is how much of this year's earnings gain it would cost.

This is the first Ames National report on this site, so there is no earlier outlook to check against. The second-quarter filing itself shows the margin rising each quarter: 2.65% a year ago, 3.01% in Q1 2026 and 3.18% now.