An Iowa bank holding company cited ongoing struggles with high interest rates and funding costs as primary factors behind a decision to reduce its dividend 25%.
The $2.1 billion-asset Ames National Corp. in Ames, Iowa, parent to six Iowa-based community banks, announced the dividend cut — to 20 cents per share from 27 cents — late Friday. "This decision to reduce the dividend is not made lightly," President and CEO John Nelson wrote in a letter to shareholders.
Indeed, it came after months of grappling with increased competition for new deposits, as well as an ongoing migration of Ames' existing portfolio into higher-yielding accounts, Nelson said. The trends have impacted the company's net interest margin. Ames' NIM narrowed to 2.14% on June 30, a decline of 12 basis points over the past year, and 46 basis points from the level reported June 30, 2022, shortly after the Federal Reserve initiated a 16-month streak of rate hikes.
"We thought we would have seen some rebound by now," Nelson said Tuesday in an interview with American Banker. "Given that we haven't, we felt we ought to respond with our dividend policy."
"It doesn't make sense to pay out more than you earn," Nelson added. "You can't keep that up for long."
Ames had maintained a quarterly, 27-cent dividend since February 2022, when it announced a penny increase from the previous 26-cent rate.
The higher-for-longer rate cycle has also crimped Ames' earnings. Net income for the six months ending June 30 totaled $4.5 million, down 22% from the same period last year and down 52% from the first six months of 2022.
Ames reported deposits totaling $1.82 billion at June 30, down nearly 6% from the same period in 2022. The company has largely declined to enter bidding wars with credit unions and liquidity-starved banks, Nelson said. "There are a lot of institutions that have loaned out more than they have in deposits, so they have to have them," Nelson said.
Despite recent loan growth, Ames reported a 70% loan-to-deposit ratio on June 30. Liquidity and capital "are in pretty good shape," Nelson said. The dividend cut is aimed at keeping things that way. "It's a prudent decision," Nelson said.
Ames' caution came with a price. Its shares, which began the week trading at $19.23, closed down about 5%, to $18.31, Tuesday.
The drop-off should come as no surprise, New York University Stern School of Business Economics Professor Lawrence White said Tuesday in an interview. While investors may take a suspension of share buybacks in stride, the response to a dividend cut is typically more severe. "Shareholders are going to be seeing a change in the dividend as a more dramatic event, more of a statement," White said.
Ames' move may also result in heightened investor sensitivity to the possibility of similar steps by other banks, according to White. "Markets are always trying to anticipate. They look forward," White said. "Markets can say, `If Ames has had to cut its dividend, maybe there are other banks like Ames who haven't gotten there yet, but may be in the same position.'"
"Certainly for many decades dividend policy has mattered," White added. "There are, in the financial economics literature, studies that show that is so." In embarking on a dividend cut, Ames is countering the broader trend of dividend increases.
A 2015 study by three University of Chicago economists — Douglas Skinner, Eric Floyd and Nan Li — concluded a significant proportion of banks pay dividends and have proved hesitant to reduce them. That held true even during the financial crisis between 2007 and 2009. At the height of the crisis, in 2008, the Chicago study found aggregate bank dividends exceeded aggregate earnings by 30%. "The commitment inherent in dividends signals managers' confidence in their firms' underlying profitability and financial strength," Skinner, Floyd and Lee wrote. "Managers' reluctance to cut dividends is one of the strongest empirical regularities in corporate finance."
A handful of other banks have lowered dividends in 2024. The $119 billion-asset New York Community Bancorp in Hicksville, New York, announced a pair of cuts, in January and March. The $3.6 billion-asset First Guaranty Bancshares in Hammond, Louisiana,
For his part, Nelson is hopeful better times are around the corner. The company has $104 million in securities and $229 million in loans set to mature by June 2025, giving Ames the opportunity to reinvest the cash in higher-yielding instruments.
