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Analyzing Small Cap Stocks: Ames National Corporation (NASDAQ: ATLO)

The TDR Three Key Takeaways regarding Ames National Corporation and Small Cap Stock:

  • Ames National Corporation (NASDAQ: ATLO) is a community bank based in Ames, Iowa, focusing on conservative lending and local decision-making.
  • Ames National’s low default rate is complemented by a strong dividend yield of 5.35%, supported by strong free cash flow in the 2023 report.
  • Ames National distributed $9.7 million in dividends from a free cash flow of $10.6 million, indicating a well-covered dividend payout.

Ames National Corporation (NASDAQ: ATLO) is a community bank headquartered in Ames, Iowa, which was highlighted in our recent Small Cap Sunday Episode. Trading at $20.16 per share and with a market cap of $181 million, Ames National presents an intriguing investment opportunity for those interested in the stability of community banking. The bank’s focus on conservative lending and localized decision-making sets it apart from larger national conglomerates, making it an attractive option for risk-averse investors.

Ames National Corporation operates six brands across 11 communities with 18 branches, emphasizing its deep integration into the local economy. The bank’s operations are characterized by a traditional spread business model—collecting deposits and lending them out conservatively. This approach ensures a steady revenue stream, although it can fluctuate with changes in deposit and lending rates. Importantly, the bank does not engage in riskier activities like investment banking or proprietary trading, which are common among larger national banks.

In 2023, the bank’s concern about 1.3% of its assets resulted in actual losses of only 0.02%, demonstrating prudent asset management. This low default rate is complemented by a strong dividend yield of 5.35%, supported by strong free cash flow. In the same year, Ames National distributed $9.7 million in dividends from a free cash flow of $10.6 million, indicating a well-covered dividend payout.

However, it’s important to recognize the inherent risks in banking. A key risk factor is the potential for bad investments, which can lead to a loss of confidence and a run on deposits. This scenario was famously depicted in the classic film “A Wonderful Life,” where a bank’s poor investment decisions triggered a panic among depositors. More recently, we’ve seen similar issues with Silicon Valley Bank, where concerns about investments led to a significant withdrawal of funds. Thus, assessing the conservativeness of a bank’s asset management is a key focus for investors.

Investors should know that earnings for community banks like Ames National can fluctuate due to the changing spread between deposit and lending rates. However, the underlying stability provided by conservative asset management and low default rates makes them attractive for those seeking steady dividend income.

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