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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002. Commission File Number 0-32637.
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AMES NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
IOWA 42-1039071
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
405 FIFTH STREET, AMES, IOWA 50010
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(Address of principal executive offices) (Zip Code)
(515) 232-6251
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section
12(g) of the Act:
COMMON STOCK, $5.00 PAR VALUE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Act") during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __X__ - No _____
As of June 28, 2002, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the closing sale price for the
registrant's common stock in the over the counter market, was $81,522,926.
Shares of common stock beneficially owned by each executive officer and director
of the Company and by each person who owns 5% or more of the outstanding common
stock have been excluded on the basis that such persons may be deemed to be an
affiliate of the registrant. This determination of affiliate status is not
necessarily a conclusive determination for any other purpose.
The number of shares outstanding of the registrant's common stock on February
28, 2003, was 3,128,982.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, as filed with the
Securities and Exchange Commission on March 25, 2003, are incorporated by
reference into Part III of this Form 10-K.
1
TABLE OF CONTENTS
PAGE
Part I
Item 1. Business........................................... 3
Item 2. Properties......................................... 13
Item 3. Legal Proceedings.................................. 13
Item 4. Submission of Matters to a Vote of Shareholders.... 13
Part II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters............................. 14
Item 6. Selected Financial Data........................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results Of Operations............. 16
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk..................................... 27
Item 8. Financial Statements and Supplementary Data....... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 47
Part III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation............................. 47
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters .. 48
Item 13. Certain Relationships and Related Transactions..... 48
Item 14. Controls and Procedures ........................... 48
Part IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................. 48
2
PART I
ITEM 1. BUSINESS
General
Ames National Corporation (the "Company") is an Iowa corporation and bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company owns 100% of the stock of five banking subsidiaries
consisting of two national banks and three state-chartered banks, as described
below. All of the Company's operations are conducted in the State of Iowa and
primarily within the central Iowa counties of Boone, Story and Marshall where
the Company's banking subsidiaries are located. The Company does not engage in
any material business activities apart from its ownership of its banking
subsidiaries. The principal executive offices of the Company are located at 405
Fifth Street, Ames, Iowa 50010 and its telephone number is (515) 232-6251.
The Company was organized and incorporated on January 21, 1975 under the laws of
the State of Iowa to serve as a holding company for its principal banking
subsidiary, First National Bank, Ames, Iowa ("First National") located in Ames,
Iowa. In 1983, the Company acquired the stock of the State Bank & Trust Co.
("State Bank") located in Nevada, Iowa; in 1991, the Company, through a
newly-chartered state bank known as Boone Bank & Trust Co. ("Boone Bank"),
acquired certain assets and assumed certain liabilities of the former Boone
State Bank & Trust Company located in Boone, Iowa; in 1995, the Company acquired
the stock of the Randall-Story State Bank ("Randall-Story Bank") located in
Story City, Iowa; and in 2002, the Company chartered and commenced operations of
a new national banking organization, United Bank & Trust NA ("United Bank"),
located in Marshalltown, Iowa. First National, State Bank, Boone Bank,
Randall-Story Bank and United Bank are each operated as a wholly owned
subsidiary of the Company. These five financial institutions are referred to in
this Form 10-K collectively as the "Banks" and individually as a "Bank".
The principal sources of Company revenue are: (i) interest and fees earned on
loans made by the Banks; (ii) service charges on deposit accounts maintained at
the Banks; (iii) interest on fixed income investments held by the Banks; (iv)
fees on trust services provided by those Banks exercising trust powers; and (v)
securities gains and dividends on equity investments held by the Company and the
Banks.
The Banks' lending activities consist primarily of short-term and medium-term
commercial and residential real estate loans, agricultural and business
operating loans and lines of credit, equipment loans, vehicle loans, personal
loans and lines of credit, home improvement loans and secondary mortgage loan
origination. The Banks also offer a variety of demand, savings and time
deposits, cash management services, merchant credit card processing, safe
deposit boxes, wire transfers, direct deposit of payroll and social security
checks and automated teller machine access. Four of the five Banks also offer
trust services.
The Company provides various services to the Banks which include, but are not
limited to, management assistance, auditing services, human resources services
and administration, compliance management, marketing assistance and
coordination, loan review and assistance with respect to computer systems and
procedures.
Banking Subsidiaries
First National Bank, Ames, Iowa. First National is a nationally chartered,
commercial bank insured by the Federal Deposit Insurance Corporation (the
"FDIC"). It was organized in 1903 and became a wholly owned subsidiary of the
Company in 1975 through a bank holding company reorganization whereby the then
shareholders of First National exchanged all of their First National stock for
stock in the Company. First National provides full-service banking to businesses
and residents within the Ames community and surrounding area. It provides a
variety of products and services designed to meet the needs of the market it
serves. It has an experienced staff of bank officers who have spent the majority
of their banking careers with First National and who emphasize long-term
customer relationships. First National conducts business out of three
full-service offices and one super market location, all located in the city of
Ames.
3
As of December 31, 2002, First National had capital of $38,789,000 and 88
full-time equivalent employees. Full-time equivalents represent the number of
people a business would employ if all its employees were employed on a full-time
basis. It is calculated by dividing the total number of hours worked by all full
and part-time employees by the number of hours a full-time individual would work
for a given period of time. First National had net income of $6,294,000 in 2002,
$5,834,000 in 2001 and $4,800,000 in 2000. Total assets as of December 31, 2002,
2001 and 2000 were $375,341,000, $349,702,000 and $341,864,000, respectively.
State Bank & Trust Co., Nevada, Iowa. State Bank is an Iowa, state-chartered,
FDIC insured commercial bank. State Bank was acquired by the Company in 1983
through a stock transaction whereby the then shareholders of State Bank
exchanged all their State Bank stock for stock in the Company. State Bank was
organized in 1939 and provides full-serve banking to businesses and residents
within the Nevada area from its main Nevada location and two offices; one in
McCallsburg, Iowa and the other in Colo, Iowa. It is strong in agricultural,
commercial and residential real estate lending. State Bank also provides
insurance services offering a broad line of insurance products to customers.
As of December 31, 2002, State Bank had capital of $11,147,000 and 26 full-time
equivalent employees. It had net income of $1,501,000 in 2002, $1,294,000 in
2001 and $1,134,000 in 2000. Total assets as of December 31, 2002, 2001 and 2000
were $104,079,000, $94,004,000 and $97,285,000, respectively.
Boone Bank & Trust Co., Boone, Iowa. Boone Bank is an Iowa, state-chartered,
FDIC insured commercial bank. Boone Bank was organized in 1992 by the Company
under a new state charter in connection with a purchase and assumption
transaction whereby Boone Bank purchased certain assets and assumed certain
liabilities of the former Boone State Bank & Trust Company in exchange for a
cash payment. It provides full service banking to businesses and residents
within the Boone community and surrounding area. It is actively engaged in
agricultural, consumer and commercial lending, including real estate, operating
and equipment loans. It conducts business from its main office and a full
service branch office, both located in Boone.
As of December 31, 2002, Boone Bank had capital of $11,511,000 and 26 full-time
equivalent employees. It had net income of $1,827,000 in 2002, $1,302,000 in
2001 and $1,178,000 in 2000. Total assets as of December 31, 2002, 2001 and 2000
were $96,829,000, $94,356,000 and $99,867,000, respectively.
Randall-Story State Bank, Story City, Iowa. Randall-Story Bank is an Iowa,
state-chartered, FDIC insured commercial bank. Randall-Story Bank was acquired
by the Company in 1995 through a stock transaction whereby the then shareholders
of Randall-Story Bank exchanged all their Randall-Story Bank stock for stock in
the Company. Randall-Story Bank was organized in 1928 and provides full-service
banking to Story City and the surrounding area from its main location in Story
City and a full service office in Randall, Iowa. While its primary emphasis is
in agricultural lending, Randall-Story Bank also provides the traditional
lending services typically offered by community banks. It also owns a small
insurance agency which operates out of the Randall office.
As of December 31, 2002, Randall-Story Bank had capital of $7,680,000 and 15
full-time equivalent employees. It had net income of $1,009,000 in 2002,
$692,000 in 2001 and $744,000 in 2000. Total assets as of December 31, 2002,
2001 and 2000 were $64,946,000, $63,680,000 and $60,312,000, respectively.
United Bank & Trust NA, Marshalltown, Iowa. United Bank is a nationally
chartered, commercial bank insured by the FDIC. It was newly chartered in June
of 2002 and offers a broad range of deposit and loan products, as well as
Internet banking and trust services to customers located in the Marshalltown and
surrounding Marshall County area.
As of December 31, 2002, United Bank had capital of $4,519,000 and 10 full-time
equivalent employees. It had a net loss for the six and one-half month period
ended December 31, 2002 of $524,000. The bank was capitalized by a $5,000,000
equity contribution by the Company. Total assets as of December 31, 2002 were
$30,355,000.
Business Strategy and Operations
As a locally owned, multi-bank holding company, the Company emphasizes strong
personal relationships to provide products and services that meet the needs of
the Banks' customers. The Company seeks to achieve growth and maintain a strong
return on equity. To accomplish these goals, the Banks focus on small to medium
size businesses that traditionally wish to develop an exclusive relationship
with a single bank. The Banks, individually and collectively, have the size to
give the personal attention required by business owners, in addition to the
credit expertise to help businesses meet their goals.
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The Banks offer a full range of deposit services that are typically available in
most financial institutions, including checking accounts, savings accounts and
other time deposits of various types, ranging from money market accounts to
longer term certificates of deposit. One major goal in developing the Banks'
product mix is to keep the product offerings as simple as possible, both in
terms of the number of products and the features and benefits of the individual
services. The transaction accounts and time certificates are tailored to each
Bank's principal market area at rates competitive in that Bank's market. In
addition, retirement accounts such as IRAs (Individual Retirement Accounts) are
available. The FDIC insures all deposit accounts up to the maximum amount. The
Banks solicit these accounts from small-to-medium sized businesses in their
respective primary trade areas, and from individuals who live and/or work within
these areas. No material portion of the Banks' deposits has been obtained from a
single person or from a few persons. Therefore, the Company does not believe
that the loss of the deposits of any person or of a few persons would have an
adverse effect on the Banks' operations or erode their deposit base.
Loans are provided to creditworthy borrowers regardless of their race, color,
national origin, religion, sex, age, marital status, disability, receipt of
public assistance or any other basis prohibited by law. The Banks intend to
fulfill this commitment while maintaining prudent credit standards. In the
course of fulfilling this obligation to meet the credit needs of the communities
which they serve, the Banks give consideration to each credit application
regardless of the fact that the applicant may reside in a low to moderate income
neighborhood, and without regard to the geographic location of the residence,
property or business within their market areas.
The Banks provide innovative, quality financial products, such as Internet
banking and trust services that meet the banking needs of their customers and
communities. The loan programs and acceptance of certain loans may vary from
time-to-time depending on the funds available and regulations governing the
banking industry. The Banks offer all basic types of credit to their local
communities and surrounding rural areas, including commercial, agricultural and
consumer loans. The types of loans within these categories are as follows:
Commercial Loans. Commercial loans are typically made to sole proprietors,
partnerships, corporations and other business entities such as municipalities
and individuals where the loan is to be used primarily for business purposes.
These loans are typically secured by assets owned by the borrower and often
times involve personal guarantees given by the owners of the business. The types
of loans the Banks offer include:
- financing guaranteed under Small Business Administration programs
- operating and working capital loans
- loans to finance equipment and other capital purchases
- commercial real estate loans
- business lines of credit
- term loans
- loans to professionals
- letters of credit
Agricultural Loans. The Banks by nature of their location in central Iowa are
directly and indirectly involved in agriculture and agri-business lending. This
includes short-term seasonal lending associated with cyclical crop and livestock
production, intermediate term lending for machinery, equipment and breeding
stock acquisition and long-term real estate lending. These loans are typically
secured by the crops, livestock, equipment or real estate being financed. The
basic tenet of the Banks' agricultural lending philosophy is a blending of
strong, positive cash flow supported by an adequate collateral position, along
with a demonstrated capacity to withstand short-term negative impact if
necessary. Applicable governmental subsidies and affiliated programs are
utilized if warranted to accomplish these parameters. Approximately 14% of the
Banks' loans have been made for agricultural purposes. The Banks have not
experienced a material adverse effect on their business as a result of defaults
on agricultural loans and do not anticipate at the present time experiencing any
such effect in the future.
Consumer Loans. Consumer loans are typically available to finance home
improvements and consumer purchases, such as automobiles, household furnishings,
boats and education. These loans are made on both a secured and an unsecured
basis. The following types of consumer loans are available:
- automobiles and trucks
- boats and recreational vehicles
- personal loans and lines of credit
- home equity lines of credit
- home improvement and rehabilitation loans
- consumer real estate loans
5
Other types of credit programs, such as loans to nonprofit organizations, to
public entities, for community development and to other governmental offered
programs also are available.
First National, Boone Bank, State Bank and United Bank offer trust services
typically found in a commercial bank with trust powers, including the
administration of estates, conservatorships, personal and corporate trusts and
agency accounts. The Banks also provide farm management, investment and
custodial services for individuals, businesses and non-profit organizations.
The Banks earn fees from the origination of residential mortgages that are sold
in the secondary real estate market without retaining the mortgage servicing
rights.
The Banks offer traditional banking services, such as safe deposit boxes, wire
transfers, direct deposit of payroll and social security checks, automated
teller machine access and automatic drafts (ACH) for various accounts.
Credit Management
The Company strives to achieve sound credit risk management. In order to achieve
this goal, the Company has established uniform credit policies and underwriting
criteria for the Banks' loan portfolios. The Banks diversify in the types of
loans offered and are subject to regular credit examinations, annual internal
and external loan audits and annual review of large loans, as well as quarterly
reviews of loans experiencing deterioration in credit quality. The Company
attempts to identify potential problem loans early, charge off loans promptly
and maintain an adequate allowance for loan losses. The Company has established
credit guidelines for the Banks' lending portfolios which include guidelines
relating to the more commonly requested loan types, as follows:
Commercial Real Estate Loans - Commercial real estate loans, including
agricultural real estate loans, are normally based on loan to appraisal value
ratios of 75% and secured by a first priority lien position. Loans are typically
subject to interest rate adjustments no less frequently than 5 years from
origination. Fully amortized monthly repayment terms normally do not exceed
twenty years. Projections and cash flows that show ability to service debt
within the amortization period are required. Property and casualty insurance is
required to protect the Banks' collateral interests. Commercial and agricultural
real estate loans represent approximately 42% of the loan portfolio. Major risk
factors for commercial real estate loans, as well as the other loan types
described below, include a geographic concentration in central Iowa; the
dependence of the local economy upon several large governmental entities,
including Iowa State University and the Iowa Department of Transportation; and
the health of Iowa's agricultural sector that is dependent on weather conditions
and government programs.
Commercial and Agricultural Operating Lines - These loans are made to businesses
and farm operations with terms up to twelve months. The credit needs are
generally seasonal with the source of repayment coming from the entity's normal
business cycle. Cash flow reviews are completed to establish the ability to
service the debt within the terms of the loan. A first priority lien on the
general assets of the business normally secures these types of loans. Loan to
value limits vary and are dependent upon the nature and type of the underlying
collateral and the financial strength of the borrower. Crop and hail insurance
is required for most agricultural borrowers. Loans are generally guaranteed by
the principal(s).
Commercial and Agricultural Term Loans - These loans are made to businesses and
farm operations to finance equipment, breeding stock and other capital
expenditures. Terms are generally the lesser of five years or the useful life of
the asset. Term loans are normally secured by the asset being financed and are
often additionally secured with the general assets of the business. Loan to
value is generally 75% of the cost or value of the assets. Loans are normally
guaranteed by the principal(s). Commercial and agricultural operating and term
loans represent approximately 20% of the loan portfolio.
Residential First Mortgage Loans - Proceeds of these loans are used to buy or
refinance the purchase of residential real estate with the loan secured by a
first lien on the real estate. Most of the residential mortgage loans originated
by the Banks (including servicing rights) are sold in the secondary mortgage
market due to the higher interest rate risk inherent in the 15 and 30 year fixed
rate terms consumers prefer. Loans that are originated and not sold in the
secondary market generally have higher interest rates and have rate adjustment
periods of no longer than seven years. The maximum amortization of first
residential real estate is 30 years. The loan-to-value ratios normally do not
exceed 80% without credit enhancements such as mortgage insurance. Property
insurance is required on all loans to protect the Banks' collateral position.
Loans secured by one to four family residential properties represent
approximately 24% of the loan portfolio.
6
Home Equity Term Loans - These loans are normally for the purpose of home
improvement or other consumer purposes and are secured by a junior mortgage on
residential real estate. Loan-to-value ratios normally do not exceed 90% of
market value.
Home Equity Lines of Credit - The Banks offer a home equity line of credit with
a maximum term of 60 months. These loans are secured by a junior mortgage on the
residential real estate and normally do not exceed a loan-to-market value ratio
of 90% with the interest adjusted quarterly.
Consumer Loans - Consumer loans are normally made to consumers under the
following guidelines. Automobiles - loans on new and used automobiles will not
exceed 80% and 75% of the value, respectively. Recreational vehicles and boats -
66% of the value. Mobile home - maximum term on these loans is 180 months with
the loan-to-value ratio generally not exceeding 66%. Each of these loans is
secured by a first priority lien on the assets and requires insurance to protect
the Banks' collateral position. Unsecured - The term for unsecured loans
generally does not exceed 12 months. Consumer and other loans represent
approximately 6% of the loan portfolio.
Employees
At December 31, 2002, the Banks had a total of 165 full-time equivalent
employees and the Company had an additional 8 full-time employees. The Company
and Banks provide their employees with a comprehensive program of benefits,
including comprehensive medical and dental plans, long-term and short-term
disability coverage, and a 401(k) profit sharing plan. Management considers its
relations with employees to be satisfactory. Unions represent none of the
employees.
Market Area
The Company operates five commercial banks with locations in Story, Boone and
Marshall Counties in central Iowa.
First National is located in Ames, Iowa with a population of 50,731. The major
employers are Iowa State University, Ames Laboratories, Iowa Department of
Transportation, Mary Greeley Medical Center, National Veterinary Services
Laboratory, Ames Community Schools, City of Ames, Barilla, Sauer-Danfoss and
McFarland Clinic. First National's primary business includes providing retail
banking services and business and consumer lending. First National has a minimum
exposure to agricultural lending.
Boone Bank is located in Boone, Iowa with a population of 12,800. Boone is the
county seat of Boone County. The major employers are Fareway Stores, Inc.,
Patterson Dental Supply Co., Union Pacific Railroad, and Communication Data
Services. Boone Bank provides lending services to the agriculture, commercial
and real estate markets.
State Bank is located in Nevada, Iowa with a population of 6,658. Nevada is the
county seat of Story County. The major employers are Print Graphics, General
Financial Supply, Central Iowa Printing, Burke Corporation and Almaco. State
Bank provides various types of loans with a major agricultural presence. It
provides a wide variety of banking services and products including insurance
services to its customers.
Randall-Story Bank is located in Story City, Iowa with a population of 3,228.
The major employers are Pella Corporation, Bethany Manor, American Packaging,
Precision Machine and Record Printing. Located in a major agricultural area, it
has a strong presence in this type of lending. As a full service commercial bank
it provides a full line of products and services including insurance services.
United Bank is located in Marshalltown, Iowa with a population of 26,123. The
major employers are Swift & Co., Fisher Controls International, Lenox Industries
and Marshalltown Medical & Surgical Center. The newly chartered bank offers a
full line of loan, deposit, and trust services.
Competition
The geographic market area served by the Banks is highly competitive with
respect to both loans and deposits. The Banks compete principally with other
commercial banks, savings and loan associations, credit unions, mortgage
companies, finance divisions of auto and farm equipment companies, agricultural
suppliers and other financial service providers. Some of these competitors are
local, while others are statewide or nationwide. The major commercial bank
competitors include F & M Bank, U.S. Bank National Association and Wells Fargo
Bank, each of which have a branch office or offices within the Banks' primary
trade areas. Among the advantages such larger banks have are their ability to
finance extensive advertising campaigns and to allocate their investment assets
to geographic regions of higher yield and demand. These larger banking
organizations have much higher legal lending limits than the Banks and thus are
better able to finance large regional, national and global commercial customers.
7
In order to compete with the other financial institutions in their primary trade
areas, the Banks use, to the fullest extent possible, the flexibility which is
accorded by independent status. This includes an emphasis on specialized
services, local promotional activity and personal contacts by the Banks'
officers, directors and employees. In particular, the Banks compete for deposits
principally by offering depositors a wide variety of deposit programs,
convenient office locations, hours and other services. The Banks compete for
loans primarily by offering competitive interest rates, experienced lending
personnel and quality products and services.
As of December 31, 2002, there were 25 FDIC insured institutions having
approximately 55 offices or branch offices within Boone, Story and Marshall
County, Iowa where the Banks' offices are located. First National, State Bank
and Randall-Story Bank together have the largest percentage of deposits in Story
County and Boone Bank has the highest percentage of deposits in Boone County.
The Banks also compete with the financial markets for funds. Yields on corporate
and government debt securities and commercial paper affect the ability of
commercial banks to attract and hold deposits. Commercial banks also compete for
funds with money market instruments and similar investment vehicles offered by
competitors including brokerage firms, insurance companies, credit card issuers
and retailers such as Sears. Money market funds offered by these types of
organizations have provided substantial competition for deposits. This trend
will likely continue in the future.
The Company anticipates bank competition will continue to change materially over
the next several years as more financial institutions, including the major
regional and national banks, continue to consolidate. The larger financial
institutions will continue to consolidate their branch systems by providing
incentives to their customers to use electronic banking instead of brick and
mortar branches. Credit unions, because of their income tax benefits, will
continue to show substantial growth.
Supervision and Regulation
The following discussion generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries and
therefore do not purport to be complete and are qualified in their entirety by
reference to those statutes and regulations. In addition, due to the numerous
statutes and regulations that apply to and regulate the operation of the banking
industry, many are not referenced below.
The Company and the Banks are subject to extensive federal and state regulation
and supervision. Regulation and supervision of financial institutions is
primarily intended to protect depositors and the FDIC rather than shareholders
of the Company. The laws and regulations affecting banks and bank holding
companies have changed significantly over recent years, particularly with the
passage of the Financial Services Modernization Act. There is reason to expect
that similar changes will continue in the future. Any change in applicable laws,
regulations or regulatory policies may have a material effect on the business,
operations and prospects of the Company. The Company is unable to predict the
nature or the extent of the effects on its business and earnings that any fiscal
or monetary policies or new federal or state legislation may have in the future.
The Company
The Company is a bank holding company by virtue of its ownership of the Banks,
and is registered as such with the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). The Company is subject to regulation under the
Bank Holding Company Act of 1956, as amended (the "BHCA"), which subjects the
Company and the Banks to supervision and examination by the Federal Reserve.
Under the BHCA, the Company files with the Federal Reserve annual reports of its
operations and such additional information as the Federal Reserve may require.
Source of Strength to the Banks. The Federal Reserve takes the position that a
bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the Federal Reserve's
position that in serving as a source of strength to its subsidiary banks, bank
holding companies should use available resources to provide adequate capital
funds to its subsidiary banks during periods of financial stress or adversity.
It should also maintain the financial flexibility and capital raising capacity
to obtain additional resources for providing assistance to its subsidiary banks.
A bank holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve to be an unsafe and unsound banking practice or a violation of the
Federal Reserve's regulations or both.
8
Federal Reserve Approval. Bank holding companies must obtain the approval of the
Federal Reserve before they: (i) acquire direct or indirect ownership or control
of any voting stock of any bank if, after such acquisition, they would own or
control, directly or indirectly, more than 5% of the voting stock of such bank;
(ii) merge or consolidate with another bank holding company; or (iii) acquire
substantially all of the assets of any additional banks.
Non-Banking Activities. With certain exceptions, the BHCA also prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting stock in any company other than a bank or a bank holding company unless
the Federal Reserve finds the company's business to be incidental to the
business of banking. When making this determination, the Federal Reserve in part
considers whether allowing a bank holding company to engage in those activities
would offer advantages to the public that would outweigh possible adverse
effects. A bank holding company may engage in permissible non-banking activities
on a de novo basis, if the holding company meets certain criteria and notifies
the Federal Reserve within ten (10) business days after the activity has
commenced.
Under the Financial Services Modernization Act, eligible bank holding companies
may elect (with the approval of the Federal Reserve) to become a "financial
holding company." Financial holding companies are permitted to engage in certain
financial activities through affiliates which had previously been prohibited
activities for bank holding companies. Such financial activities include
securities and insurance underwriting and merchant banking. At this time, the
Company has not elected to become a financial holding company, but may choose to
do so at some time in the future.
Control Transactions. The Change in Bank Control Act of 1978, as amended,
requires a person or group of persons acquiring "control" of a bank holding
company to provide the Federal Reserve with at least 60 days prior written
notice of the proposed acquisition. Following receipt of this notice, the
Federal Reserve has 60 days to issue a notice disapproving the proposed
acquisition, but the Federal Reserve may extend this time period for up to
another 30 days. An acquisition may be completed before the disapproval period
expires if the Federal Reserve issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended, would constitute the acquisition of
control. In addition, any "company" would be required to obtain the approval of
the Federal Reserve under the BHCA before acquiring 25% (or 5% if the "company"
is a bank holding company) or more of the outstanding shares of the Company, or
otherwise obtain control over the Company.
Affiliate Transactions. The Company and the Banks are deemed affiliates within
the meaning of the Federal Reserve Act, and transactions between affiliates are
subject to certain restrictions. Generally, the Federal Reserve Act: (i) limits
the extent to which the financial institution or its subsidiaries may engage in
"covered transactions" with an affiliate; and (ii) requires all transactions
with an affiliate, whether or not "covered transactions," to be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar transactions.
State Law on Acquisitions. Iowa law permits bank holding companies to make
acquisitions throughout the state. However, Iowa currently has a deposit
concentration limit of 15% on the amount of deposits in the state that any one
banking organization can control and continue to acquire banks or bank deposits
(by acquisitions), which applies to all depository institutions doing business
in Iowa.
Banking Subsidiaries
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital adequacy requirements,
required reserves against deposits, investments, loans, legal lending limits,
certain interest rates payable, mergers and consolidations, borrowings, issuance
of securities, payment of dividends, establishment of branches and dealings with
affiliated persons.
9
First National and United Bank are national banks subject to primary federal
regulation and supervision by the Office of the Comptroller of the Currency (the
"OCC"). The FDIC, as an insurer of the deposits, also has some limited
regulatory authority over First National and United Bank. State Bank, Boone Bank
and Randall-Story Bank are state banks subject to regulation and supervision by
the Iowa Division of Banking. The three state Banks are also subject to
regulation and examination by the FDIC, which insures their respective deposits
to the maximum extent permitted by law. The federal laws that apply to the Banks
regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for loans. The laws and
regulations governing the Banks generally have been promulgated to protect
depositors and the deposit insurance fund of the FDIC and not to protect
stockholders of such institutions or their holding companies.
The OCC and FDIC each has authority to prohibit banks under their supervision
from engaging in what it considers to be an unsafe and unsound practice in
conducting their business. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") requires federal banking regulators to adopt regulations
or guidelines in a number of areas to ensure bank safety and soundness,
including internal controls, credit underwriting, asset growth, management
compensation, ratios of classified assets to capital and earnings. FDICIA also
contains provisions which are intended to change independent auditing
requirements, restrict the activities of state-chartered insured banks, amend
various consumer banking laws, limit the ability of "undercapitalized banks" to
borrow from the Federal Reserve's discount window, require regulators to perform
periodic on-site bank examinations and set standards for real estate lending.
Borrowing Limitations. Each of the Banks is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Subject to numerous exceptions based on the type of loans and
collateral, applicable statutes and regulations generally limit loans to one
borrower of 15% of total equity and reserves. Each of the Banks is in compliance
with applicable loans to one borrower requirements.
FDIC Insurance. Generally, customer deposit accounts in banks are insured by the
FDIC for up to a maximum amount of $100,000. The FDIC has adopted a risk-based
insurance assessment system under which depository institutions contribute funds
to the FDIC insurance fund based on their risk classification. The FDIC may
terminate the deposit insurance of any insured depository institution if it
determines after an administrative hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law.
Capital Adequacy Requirements. The Federal Reserve, the FDIC and the OCC
(collectively, the "Agencies") have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. Failure to achieve
and maintain adequate capital levels may give rise to supervisory action through
the issuance of a capital directive to ensure the maintenance of required
capital levels. Each of the Banks is in compliance with applicable capital level
requirements.
The current guidelines require all federally regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying
perpetual preferred stock and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles and
the allowance for loan and lease losses. Tier 2 capital includes the excess of
any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate term
preferred stock, 45% of unrealized gain of equity securities and general reserve
for loan and lease losses up to 1.25% of risk weighted assets. None of the Banks
has received any notice indicating that it will be subject to higher capital
requirements.
Under these guidelines, banks' assets are given risk weights of 0%, 20%, 50% or
100%. Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property and, under certain
circumstances, residential construction loans (both carry a 50% rating). Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds (which have a 50% rating) and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
Agencies (which have a 0% rating).
10
The Agencies have also implemented a leverage ratio, which is equal to Tier 1
capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points. Any institution operating at or
near the 3% level is expected to be a strong banking organization without any
supervisory, financial or operational weaknesses or deficiencies. Any
institutions experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions, well above the
minimum levels.
Prompt Corrective Action. Regulations adopted by the Agencies impose even more
stringent capital requirements. The FDIC and other Agencies must take certain
"prompt corrective action" when a bank fails to meet capital requirements. The
regulations establish and define five capital levels: (i) "well-capitalized,"
(ii) "adequately capitalized," (iii) "undercapitalized," (iv) "significantly
undercapitalized" and (v) "critically undercapitalized." Increasingly severe
restrictions are imposed on the payment of dividends and management fees, asset
growth and other aspects of the operations of institutions that fall below the
category of being "adequately capitalized". Undercapitalized institutions are
required to develop and implement capital plans acceptable to the appropriate
federal regulatory agency. Such plans must require that any company that
controls the undercapitalized institution must provide certain guarantees that
the institution will comply with the plan until it is adequately capitalized. As
of February 28, 2003, neither the Company nor any of the Banks were subject to
any regulatory order, agreement or directive to meet and maintain a specific
capital level for any capital measure. Furthermore, as of that same date, each
of the Banks was categorized as "well capitalized" under regulatory prompt
corrective action provisions.
Restrictions on Dividends. Dividends paid to the Company by the Banks is the
major source of Company cash flow. Various federal and state statutory
provisions limit the amount of dividends banking subsidiaries are permitted to
pay to their holding companies without regulatory approval. Federal Reserve
policy further limits the circumstances under which bank holding companies may
declare dividends. For example, a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition. In addition, the Federal Reserve and the FDIC have issued
policy statements which provide that insured banks and bank holding companies
should generally pay dividends only out of current operating earnings. Federal
and state banking regulators may also restrict the payment of dividends by
order.
First National, as a national bank, generally may pay dividends from undivided
profits without restriction, provided that its surplus fund is at least equal to
its common stock capital fund. Boone Bank, Randall-Story Bank and State Bank are
also restricted under Iowa law to paying dividends only out of their undivided
profits. Additionally, the payment of dividends by the Banks is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and the Banks generally are prohibited from paying
any dividends if, following payment thereof, the Bank would be undercapitalized.
Reserves Against Deposits. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts (primarily
checking accounts) and non-personal time deposits. Generally, reserves of 3%
must be maintained against total transaction accounts of $36,100,000 or less
(subject to an exemption not in excess of the first $6,000,000 of transaction
accounts). A reserve of $1,083,000 plus 10% of amounts in excess of $36,100,000
must be maintained in the event total transaction accounts exceed $36,100,000.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve may be used to satisfy applicable liquidity requirements. Because
required reserves must be maintained in the form of vault cash or a non-interest
bearing account at a Federal Reserve Bank, the effect of this reserve
requirement is to reduce the earning assets of the Banks.
Bank Offices. Iowa law regulates the establishment of bank offices and thus may
affect the Company's future plans to establish additional offices of its Banks.
Pursuant to amendments to Iowa law effective February 21, 2002, current Iowa law
permits a state bank to establish up to three (3) offices anywhere in the state.
Until July 1, 2004, and in addition to the three offices which may be
established anywhere in the state, a bank may only establish a bank office
inside the boundaries of the county in which the principal place of business of
the state bank is located and those counties contiguous to or cornering upon
such county. The number of offices a state bank may establish in a particular
municipality or urban complex may also be limited depending upon the population.
Effective July 1, 2004, the geographical restrictions on bank office locations
will be repealed. Finally, until July 1, 2004, Iowa law restricts the ability of
a bank to establish a de novo office within the limits of a municipal
corporation where there is an already established state or national bank or bank
office.
11
Regulatory Developments
In 2000, the Financial Services Modernization Act was enacted which: (i)
repealed historical restrictions on preventing banks from affiliating with
securities firms; (ii) broadens the activities that may be conducted by national
banks and banking subsidiaries of holding companies; and (iii) provides an
enhanced framework for protecting the privacy of consumers' information. In
addition, bank holding companies may be owned, controlled or acquired by any
company engaged in financially related activities, as long as such company meets
regulatory requirements. To the extent that this legislation permits banks to
affiliate with financial services companies, the banking industry may experience
further consolidation.
Regulatory Enforcement Authority
The enforcement powers available to federal and state banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, enforcement actions must be initiated for violations of
laws and regulations and unsafe or unsound practices. Other actions, or
inactions, may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities. Applicable law also requires
public disclosure of final enforcement actions by the federal banking agencies.
National Monetary Policies
In addition to being affected by general economic conditions, the earnings and
growth of the Banks are affected by the regulatory authorities' policies,
including the Federal Reserve. An important function of the Federal Reserve is
to regulate the money supply, credit conditions and interest rates. Among the
instruments used to implement these objectives are open market operations in
U.S. Government securities, changes in reserve requirements against bank
deposits and the Federal Reserve Discount Rate, which is the rate charged member
banks to borrow from the Federal Reserve Bank. These instruments are used in
varying combinations to influence overall growth and distribution of credit,
bank loans, investments and deposits, and their use may also affect interest
rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve have had a material impact on the
operating results of commercial banks in the past and are expected to have a
similar impact in the future. Also important in terms of effect on banks are
controls on interest rates paid by banks on deposits and types of deposits that
may be offered by banks. The Depository Institutions Deregulation Committee,
created by Congress in 1980, phased out ceilings on the rate of interest that
may be paid on deposits by commercial banks and savings and loan associations,
with the result that the differentials between the maximum rates banks and
savings and loans can pay on deposit accounts have been eliminated. The effect
of deregulation of deposit interest rates has been to increase banks' cost of
funds and to make banks more sensitive to fluctuation in market rates.
Availability of Information on Company Website
The Company files periodic reports with the Securities and Exchange Commission
("SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K. The Company does not currently provide access
to such reports on or through its Internet website, as its website is not
currently configured for this purpose. The Company is, however, in the process
of restructuring its website to enable the Company to provide access to these
reports on or through its website. Upon completion of this process, the Company
expects to make available on or through its website free of charge all periodic
reports filed by the Company with the SEC, including any amendments to such
reports, as soon as reasonably practicable after such reports have been
electronically filed with the SEC. The address of the Company's website on the
Internet is: www.amesnational.com.
Until such time as these reports are available on or through the Company's
website, the Company will provide electronic or paper copies of these reports
free of charge upon written or telephonic request directed to John P. Nelson,
Vice President and Secretary, 405 Fifth Street, Ames, Iowa 50010 or (515)
232-6251.
12
ITEM 2. PROPERTIES
The Company's office is housed in the main office of First National located at
405 Fifth Street, Ames, Iowa and occupies approximately 3,357 square feet. A
lease agreement between the Company and First National provides the Company will
make available for use by First National an equal amount of interior space at
the Company's building located at 2330 Lincoln Way in lieu of rental payments.
The main office is owned by First National free of any mortgage and consists of
approximately 45,000 square feet and includes a drive through banking facility.
In addition to its main office, First National conducts its business through two
full-service offices, the University office and the North Grand office, and one
super-market location, the Cub Food office. All offices are located within the
city of Ames. The North Grand office is owned by First National free of any
mortgage. The University office is located in a 16,000 square foot multi-tenant
property owned by the Company. A 24-year lease agreement with the Company has
been modified in 2002 to provide that an equal amount of interior space will be
made available to the Company at First National's main office at 405 Fifth
Street in lieu of rental payments. First National will continue to rent the
drive-up facilities of approximately 1,850 square feet at this location for
$1,200 per month. The Cub Foods office is leased by First National from Super
Valu Stores under a 20 year lease with a five year initial term and three, five
year renewal options. The current annual rental payment is $19,000.
State Bank conducts its business from its main office located at 1025 Sixth
Street, Nevada, Iowa and from two additional full-service offices located in
McCallsburg and Colo, Iowa. All of these properties are owned by State Bank free
of any mortgage.
Boone Bank conducts its business from its main office located at 716 Eighth
Street, Boone, Iowa and from one additional full-service office also located in
Boone, Iowa. All properties are owned by Boone Bank free of any mortgage.
Randall-Story Bank conducts its business from its main office located at 606
Broad Street, Story City, Iowa and from one additional full-service office
located in Randall, Iowa. All of these properties are owned by Randall-Story
Bank free of any mortgage.
United Bank conducts its business from its main office located at 2101 South
Center Street, Marshalltown, Iowa. The 5,200 square foot premise was constructed
in 2002. The property is owned by United Bank free of any mortgage.
The only property the Company owns is located at 2330 Lincoln Way, Ames, Iowa
consisting of a multi tenant building of approximately 16,000 square feet. First
National leases 5,422 square feet of this building to serve as its University
office. The remaining space is currently leased to four other tenants who occupy
the space for business purposes.
ITEM 3. LEGAL PROCEEDINGS
The Banks are from time to time parties to various legal actions arising in the
normal course of business. The Company believes that there is no threatened or
pending proceeding against the Company or the Banks, which, if determined
adversely, would have a material adverse effect on the business or financial
condition of the Company or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted to a vote of the shareholders of the Company
during the fourth quarter of 2002.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
On February 28, 2003, the Company had approximately 613 shareholders of record.
The Company's common stock is traded in the over-the-counter market under the
symbol "ATLO". Trading in the Company's common stock is, however, relatively
limited. Market makers in the stock include US Bancorp Piper Jaffray, 402 Main
Street, Ames, Iowa 50010 (515-233-4064); Howe Barnes Investments, Inc., 135 So.
LaSalle, Chicago, IL 60603 (312-655-3000); and Monroe Securities, Inc., 47 State
St., Rochester, NY 14614 (800-766-5560). Based on information provided to and
gathered by the Company on an informal basis, the Company believes that the high
and low sales price for the common stock on a per share basis during the last
two years is as follows:
2002 2001
--------------- ---------------
Market Price Market Price
--------------- ---------------
Quarter High Low Quarter High Low
- ---------------------------------------- -------------------------------------
1st ............ $40.00 $39.00 1st ............ $55.00 $40.00
2nd ............ 45.00 40.00 2nd ............ 44.50 36.25
3rd ............ 46.75 43.00 3rd ............ 41.50 36.55
4th ............ 47.50 45.90 4th ............ 40.00 35.75
The Company declared aggregate annual cash dividends in 2002 and 2001 of
$6,820,000 and $5,187,000, respectively, or $2.18 per share in 2002 and $1.66
per share in 2001. In February 2003, the Company declared an aggregate cash
dividend of $1,377,000 or $.44 per share. Quarterly dividends declared during
the last two years were as follows:
2002 2001
------------------ ------------------
Cash dividends Cash dividends
Quarter declared per share declared per share
- --------------------------------------------------------------------------------
1st .................................. $0.42 $ 0.40
2nd .................................. 0.88 0.42
3rd .................................. 0.44 0.42
4th .................................. 0.44 0.42
The decision to declare any such cash dividends in the future and the amount
thereof rests within the discretion of the Board of Directors of the Company and
will be subject to, among other things, the future earnings, capital
requirements and financial condition of the Company and certain regulatory
restrictions imposed on the payment of dividends by the Banks. Such restrictions
are discussed in greater detail in Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources.
14
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company for the five years ended December
31, 2002 through 1998 is derived from the Company's historical audited financial
statements and related footnotes. The information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and the consolidated financial statements and related
notes contained elsewhere in this Annual Report.
Year Ended December 31
(dollars in thousands, except per share amounts)
------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------
STATEMENT OF INCOME DATA
Interest income ....................... $ 36,270 $ 41,474 $ 44,018 $ 40,361 $ 39,439
Interest expense ...................... 11,663 18,883 24,261 19,981 19,668
------------------------------------------------------------------
Net interest income ................... 24,607 22,591 19,757 20,380 19,771
Provision for loan losses ............. 688 898 460 166 437
------------------------------------------------------------------
Net interest income after provision for
loan losses ........................... 23,919 21,693 19,297 20,214 19,334
Noninterest income .................... 5,135 5,080 4,130 5,750 4,835
Noninterest expense ................... 13,276 11,587 10,712 11,208 10,264
------------------------------------------------------------------
Income before provision for income tax 15,778 15,186 12,715 14,756 13,905
Provision for income tax .............. 4,438 4,639 3,596 4,429 4,279
------------------------------------------------------------------
Net Income ............................ $ 11,340 $ 10,547 $ 9,119 $ 10,327 $ 9,626
==================================================================
DIVIDENDS AND EARNINGS PER SHARE DATA
Cash dividends declared ............... $ 6,820 $ 5,187 $ 4,932 $ 4,664 $ 4,355
Cash dividends declared per share ..... $ 2.18 $ 1.66 $ 1.58 $ 1.50 $ 1.39
Basic and diluted earnings per share .. $ 3.63 $ 3.38 $ 2.92 $ 3.31 $ 3.07
Weighted average shares outstanding ... 3,127,285 3,123,885 3,120,375 3,118,427 3,138,939
BALANCE SHEET DATA
Total assets .......................... $ 677,229 $ 622,280 $ 619,385 $ 605,881 $ 579,956
Net loans ............................. 332,306 323,043 344,015 309,652 287,713
Deposits .............................. 550,622 511,509 493,429 484,620 482,513
Stockholders' equity .................. 101,523 93,622 86,177 76,073 79,109
Equity to assets ratio ................ 14.99% 15.04% 13.91% 12.56% 13.64%
Year Ended December 31
(dollars in thousands, except per share amounts)
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------------------
FIVE YEAR FINANCIAL PERFORMANCE
Net income ............................................. $ 11,340 $ 10,547 $ 9,119 $ 10,327 $ 9,626
Average assets ......................................... 635,816 616,971 626,560 594,441 560,524
Average stockholders' equity ........................... 98,282 91,373 80,081 80,074 77,445
Return on assets (net income divided by average assets) 1.78% 1.71% 1.46% 1.74% 1.72%
Return on equity (net income divided by average equity) 11.54% 11.54% 11.39% 12.90% 12.43%
Efficiency ratio (noninterest expense divided by
noninterest income plus net interest income) .......... 44.64% 41.87% 44.84% 42.89% 41.71%
Dividend payout ratio (dividends per share
divided by net income per share) ....................... 60.05% 49.11% 54.11% 45.32% 45.28%
Dividend yield (dividends per share divided by closing
market price) ....................................... 4.69% 4.15% 2.87% 2.73% 2.78%
Equity to assets ratio (average equity divided
by average assets) ..................................... 15.46% 14.81% 12.78% 13.47% 13.82%
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is provided for the consolidated operations of the
Company, which includes its wholly owned banking subsidiaries, First National,
State Bank, Boone Bank, Randall-Story Bank and United Bank. The purpose of this
discussion is to focus on significant factors affecting the Company's financial
condition and results of operations.
Forward-Looking Statements
The discussion herein may contain forward-looking statements about the Company,
its business and its prospects. Forward-looking statements can be identified by
the fact that they do not relate strictly to historical or current facts. They
often include use of the words "believe", "expect", "anticipate", "intend",
"plan", "estimate" or words of similar meaning, or future or conditional verbs
such as "will", "would", "should", "could" or "may". Forward-looking statements,
by their nature, are subject to risks and uncertainties. A number of factors,
many of which are beyond the Company's control, could cause actual conditions,
events or results to differ significantly from those described in the
forward-looking statements. Such risks and uncertainties with respect to the
Company include those related to the economic environment, particularly in the
areas in which the Company and the Banks operate, competitive products and
pricing, fiscal and monetary policies of the U.S. government, changes in
governmental regulations affecting financial institutions, including regulatory
fees and capital requirements, changes in prevailing interest rates, credit risk
management and asset/liability management, the financial and securities markets
and the availability of and costs associated with sources of liquidity.
Critical Accounting Policies
The discussion contained in this Item 7 and other disclosures included within
this report, are based on the Company's audited consolidated financial
statements. These statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained in these statements is, for the most part, based on
approximate measures of the financial effects of transactions and events that
have already occurred. However, the preparation of these statements requires
management to make certain estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses.
The Company's significant accounting policies are described in the "Notes to
Consolidated Financial Statements". Based on its consideration of accounting
policies that involve the most complex and subjective estimates and judgements,
management has identified its most critical accounting policy to be that related
to the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
Company has policies and procedures for evaluating the overall credit quality of
its loan portfolio including timely identification of potential problem credits.
On a quarterly basis, management reviews the appropriate level for the allowance
for loan losses incorporating a variety of risk considerations, both
quantitative and qualitative. Quantitative factors include the Company's
historical loss experience, delinquency and charge-off trends, collateral
values, known information about individual loans and other factors. Qualitative
factors include the general economic environment in the Company's market area
and the expected trend of the economic conditions. To the extent actual results
differ from forecasts and management's judgment, the allowance for loan losses
may be greater or less than future charge-offs.
General
The Company earned net income of $11,340,000 in 2002, compared to net income of
$10,547,000 in 2001 and net income of $9,119,000 in 2000. The higher level of
net income in 2002 as compared to 2001 and 2001 versus 2000 is attributable to
an improved net interest margin as interest expense declined on deposits and
other borrowings at a faster pace than the decline in interest income on loans
and investment securities. The Company's net income is derived principally from
the operating results of the Banks. Boone Bank, First National, Randall-Story
Bank and State Bank are well-established financial institutions that have a
record of profitable operations. As a newly chartered bank, United Bank was not
profitable in 2002, and it is not expected to be profitable in 2003.
16
Financial Condition
Net loans for the year ended December 31, 2002, increased to $332,306,000 from
$323,043,000 for the same period in 2001. The increase in loan volume can be
primarily attributed to growth in the 1-4 family and commercial real estate
portfolios at United Bank. For the year 2001, net loans declined $20,972,000 as
the result of a slowdown in local, state, and national economic activity and
aggressive competition for loans. While the net interest margin shows a
favorable trend for the past two years as the result of declining interest
rates, the average yield on assets will likely fall given the current interest
rate environment and competition will continue to create downward pressure on
the net interest margins of the Company's Banks into the foreseeable future.
Currently, the Company's largest market, Ames, Iowa, has competitors consisting
of seven banks, three thrifts, five credit unions and several other financial
investment companies. Multiple banks are also located in the Company's other
communities creating similarly competitive environments. The increase in
investment securities to $244,575,000 on December 31, 2002 compared to
$213,778,000 on December 31, 2001 resulted primarily from the purchase of U.S.
government agency securities during 2002.
Total assets increased $54,949,000 or 8.83% as of December 31, 2002 versus the
same date one year earlier as the result of deposit growth at United Bank and
State Bank. In 2002, the rates paid on deposits were lower than in 2001 as a
result of decreases in market interest rates. Deposits increased 7.65% in 2002
compared to an increase of 3.66% in 2001. The Banks continue to compete for
deposits in market areas where the total deposit growth continues to be weak as
a result of significant bank and non-bank competition. Other borrowings,
including Federal Home Loan Bank advances, federal funds purchased, and
securities sold under agreements to repurchase, totaled $18,326,000 in 2002
compared to $11,596,000 in 2001. Other borrowings increased at year end 2002
compared to one year prior as the result of customers maintaining higher
balances relating to securities sold under agreement to repurchase.
Average Balance Sheet and Interest Rates
The following tables show average balances and interest income or interest
expense, with the resulting average yield or rate by category of average earning
asset or interest bearing liability.
ASSETS
2002 2001 2000
---------------------------- ---------------------------- -----------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(dollars in thousands) ------------------------------------------------------------------------------------------
Interest-earning assets
Loans
Commercial .......................... $ 42,948 $ 3,042 7.08% $ 49,081 $ 4,107 8.37% $ 52,764 $ 4,378 8.30%
Agricultural ........................ 25,274 1,895 7.50% 28,302 2,492 8.81% 26,328 2,465 9.36%
Real estate ......................... 229,805 16,929 7.37% 240,382 19,458 8.09% 232,823 18,963 8.14%
Consumer and other .................. 19,494 1,341 6.88% 23,675 1,834 7.75% 27,200 2,500 9.19%
------------------------------------------------------------------------------------------
Total loans (including fees) ........ $317,521 $ 23,207 7.31% $341,440 $ 27,891 8.17% $339,115 $ 28,306 8.35%
Investment securities
Taxable ............................. $142,089 $ 8,414 5.92% $146,213 $ 9,303 6.36% $179,858 $ 11,644 6.47%
Tax-exempt .......................... 78,171 5,797 7.42% 68,001 5,210 7.66% 72,521 5,442 7.50%
------------------------------------------------------------------------------------------
Total investment securities ......... $220,260 $ 14,211 6.45% $214,214 $ 14,513 6.78% $252,379 $ 17,086 6.77%
Interest bearing deposits with banks $ 534 $ 14 2.62% $ 251 $ 13 5.18% $ 1,718 $ 99 5.76%
Federal funds sold .................. 51,206 810 1.58% 25,953 829 3.19% 5,602 377 6.73%
------------------------------------------------------------------------------------------
Total Interest-earning assets ....... $589,521 $ 38,242 6.49% $581,858 $ 43,246 7.43% $598,814 $ 45,868 7.66%
Noninterest-earning assets
Cash and due from banks ............. $ 28,206 $ 21,040 $ 19,324
Premises and equipment, net ......... 7,912 5,892 5,285
Other, less allowance for loan losses 10,177 8,181 3,137
-------- --------
Total noninterest-earning assets .... $ 46,295 $ 35,113 $ 27,746
-------- -------- --------
TOTAL ASSETS ........................ $635,816 $616,971 $626,560
======== ======== ========
1 Average loan balance includes nonaccrual loans, if any. Interest income
collected on nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental tax rate of 34%.
17
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001 2000
---------------------------- ---------------------------- ----------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(dollars in thousands) ------------------------------------------------------------------------------------------
Interest-bearing liabilities
Deposits
Savings, NOW accounts,
and money markets ................ $260,426 $ 3,393 1.30% $228,908 $ 5,727 2.50% $218,795 $ 8,144 3.72%
Time deposits < $100,000 ......... 152,703 6,107 4.00% 158,625 8,736 5.51% 159,035 8,972 5.64%
Time deposits > $100,000 ......... 51,428 1,898 3.69% 58,253 3,329 5.71% 62,052 3,823 6.16%
-------------------------------------------------------------------------------------------
Total deposits ................... $464,557 $ 11,398 2.45% $445,786 $ 17,792 3.99% $439,882 $ 20,939 4.76%
Other borrowed funds ............. 13,887 265 1.91% 23,008 1,091 4.74% 52,749 3,322 6.30%
-------------------------------------------------------------------------------------------
Total Interest-bearing liabilities $478,444 $ 11,663 2.44% $468,794 $ 18,883 4.03% $492,631 $ 24,261 4.92%
-------------------------------------------------------------------------------------------
Noninterest-bearing liabilities
Demand deposits .................. $ 53,318 $ 51,113 $ 47,590
Other liabilities ................ 5,772 5,691 6,258
-------- -------- --------
Stockholders' equity ............. $ 98,282 $ 91,373 $ 80,081
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ............. $635,816 $616,971 $626,560
======== ======== ========
Net interest income .............. $ 26,579 4.51% $ 24,363 4.19% $ 21,607 3.61%
======== ======== ========
Spread Analysis
Interest income/average assets ... $ 38,242 6.01% $ 43,246 7.01% $ 45,868 7.32%
Interest expense/average assets .. 11,663 1.83% 18,883 3.06% 24,261 3.87%
Net interest income/average assets 26,579 4.18% 24,363 3.95% 21,607 3.45%
Rate and Volume Analysis
The following table sets forth, on a tax-equivalent basis, a summary of the
changes in net interest income resulting from changes in volume and rates.
2002 Compared to 2001 2001 Compared to 2000
(dollars in thousands) ------------------------------ -----------------------------
Volume Rate Total Volume Rate Total
---------------------------------------------------------------
Interest income
Loans
Commercial ............................. $ (477) $ (588) $(1,065) $ (308) $ 37 $ (271)
Agricultural ........................... (250) (347) $ (597) 179 (152) 27
Real estate ............................ (836) (1,693) $(2,529) 613 (118) 495
Consumer and other ..................... (301) (192) $ (493) (301) (365) (666)
--------------------------------------------------------------
Total loans (including fees) ........... $(1,864) $(2,820) $(4,684) $ 183 $ (598) $ (415)
Investment securities
Taxable ................................ $ (257) $ (632) $ (889) $(2,144) $ (197) $(2,341)
Tax-exempt ............................. 755 (168) $ 587 (344) 112 (232)
--------------------------------------------------------------
Total investment
securities ............................. $ 498 $ (800) $ (302) $(2,488) $ (85) $(2,573)
Interest bearing deposits with banks ... $ 10 $ (9) $ 1 $ (77) $ (9) $ (86)
Federal funds sold ..................... 538 (557) $ (19) 741 (289) 452
--------------------------------------------------------------
Total Interest-earning assets .......... $ (818) $(4,186) $(5,004) $(1,641) $ (981) $(2,622)
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and money markets $ 704 $(3,038) $(2,334) $ 361 $(2,778) $(2,417)
Time deposits < $100,000 ............... (314) (2,315) $(2,629) (23) (213) (236)
Time deposits > $100,000 ............... (431) (1,000) $(1,431) (226) (268) (494)
--------------------------------------------------------------
Total deposits ......................... $ (41) $(6,353) $(6,394) $ 112 $(3,259) $(3,147)
Other borrowed funds ................... (330) (496) (826) (1,551) (680) (2,231)
--------------------------------------------------------------
Total Interest-bearing liabilities ..... $ (371) $(6,849) $(7,220) $(1,439) $(3,939) $(5,378)
--------------------------------------------------------------
Net interest income/earning assets ..... $ (447) $ 2,663 $ 2,216 $ (202) $ 2,958 $ 2,756
1 The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of the change in each.
18
Net Interest Income
The Company's largest component contributing to net income is net interest
income, which is the difference between interest earned on earning assets which
are primarily loans and investments and interest paid on interest bearing
liabilities which are primarily deposits and borrowings. The volume of and
yields earned on earning assets and the volume of and the rates paid on interest
bearing liabilities determine net interest income. Interest earned and interest
paid is also affected by general economic conditions, particularly changes in
market interest rates, and by government policies and the action of regulatory
authorities. Net interest income divided by average earning assets is referred
to as net interest margin. For the years December 31, 2002, 2001 and 2000, the
Company's net interest margin was 4.51%, 4.19% and 3.61%, respectively. The
improved net interest margin in 2002 and 2001 is attributable to lower interest
expense as the Company was able to lower deposit and other borrowings rates more
quickly than loans and investment rates declined.
While the trend of the net interest margin is favorable for the past two years,
the average yield on assets will likely fall given the current interest rate
environment and the high level of competition in the local markets will likely
cause downward pressure on the net interest margin of the Company into the
foreseeable future. Currently, the Company's largest market, Ames, Iowa, has
seven banks, three thrifts, five credit unions and several other financial
investment companies. Multiple banks are also located in the Company's other
communities creating similarly competitive environments.
Net interest income during 2002, 2001 and 2000 totaled $24,608,000, $22,591,000
and $19,757,000, respectively, representing an 8.93% increase in 2002 from 2001
and a 14.34% increase in 2001 compared to 2000. The higher net interest income
in both periods resulted from lower interest expense as the Company was able to
lower deposit and other borrowings rates more quickly than loans and investment
rates declined.
Provision for Loan Losses
The provision for loan losses reflects management's judgment of the expense to
be recognized in order to maintain an adequate allowance for loan losses. The
Company provided $688,000 for loan losses during 2002 compared to $898,000 in
2001 and $460,000 in 2000. Provision expense was higher in 2001 versus 2002 and
2000 as the result of deterioration in the commercial lease portfolio in 2001.
Management believes the allowance for loan losses to be adequate to absorb
probable losses in the current portfolio. This statement is based upon
management's continuing evaluation of inherent risks in the current loan
portfolio, current levels of classified assets and general economic factors. The
Company will continue to monitor the allowance and make future adjustments to
the allowance as conditions dictate.
Noninterest Income and Expense
Non-interest income during 2002, 2001 and 2000 totaled $5,135,000, $5,080,000
and $4,130,000, respectively, representing a 1.08% increase in 2002 from 2001
and a 23.00% increase in 2001 compared 2000. The increase in 2002 is the result
of improved profitability of trust, secondary market, and automated teller
machine business offset by lower security gains. The increase in 2001 can be
attributed to higher security gains and increased revenues from deposit, trust
and secondary market lending services.
Non-interest expense during 2002, 2001 and 2000 totaled $13,276,000, $11,587,000
and $10,712,000, respectively, representing an 14.57% increase in 2002 versus
2001 and a 8.17% increase in 2001 compared to 2000. The higher noninterest
expense in 2002 is the result of overhead expenses in chartering United Bank and
increased salary and benefit expenses related to profit sharing and retirement
plans. The higher noninterest expense in 2001 is primarily attributable to
higher salary and benefits expenses, data processing costs, and professional
fees associated with filings with the Securities and Exchange Commission. The
percentage of non-interest expense to average assets was 2.09% in 2002, compared
to 1.88% and 1.71% during 2001 and 2000, respectively.
Provision for Income Taxes
The provision for income taxes for 2002, 2001 and 2000 was $4,438,000,
$4,639,000 and $3,596,000, respectively. This amount represents an effective tax
rate of 28.13% during 2002, compared to 30.54% and 28.28% for 2001 and 2000,
respectively. The Company's marginal federal tax rate is currently 35%. The
difference between the Company's effective and marginal tax rate is primarily
related to investments made in tax exempt securities.
19
Investment Portfolio
The following table presents the market values, which represent the carrying
values due to the available-for-sale classification, of the Company's investment
portfolio as of December 31, 2002, 2001 and 2000, respectively.
----------------------------------
2002 2001 2000
(dollars in thousands) ----------------------------------
U.S. treasury securities ................ $ 4,208 $ 12,548 $ 23,150
U.S. government agencies ................ 85,780 60,858 85,864
State and political subdivisions ........ 70,516 63,109 61,411
Corporate bonds ......................... 56,357 51,106 43,167
Equity securities ....................... 27,714 26,157 19,114
----------------------------------
Total ................................... $244,575 $213,778 $232,706
Investments in states and political subdivisions represent purchases of
municipal bonds located primarily in the state of Iowa and contiguous states.
Investment in other securities includes corporate debt obligations of companies
located and doing business throughout the United States. The debt obligations
were all within the credit ratings acceptable under the Banks' investment
policies with the exception of one corporate bond with an amortized cost of
$498,000 and a market value of $485,000. The bond was rated by Moody's and
Standard & Poor's rating service publications as B1 and B+, respectively, as of
December 31, 2002 falling outside the Bank's acceptable rating standards
subsequent to its purchase date of November 16, 1998. As of December 31, 2002,
the Company did not have securities from a single issuer, except for the United
States Government or its agencies, which exceeded 10% of consolidated
stockholders' equity. The equity securities portfolio consists primarily of
financial and utility stocks as of December 31, 2002, 2001, and 2000.
Investment Maturities as of December 31, 2002
The investments in the following table are reported by contractual maturity.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties.
After One After Five
Year But Years But
Within Within Within After
One Year Five Years Ten Years Ten Years Total
(dollars in thousands) -------------------------------------------------------------------
U.S. treasury .................... $ 1,915 $ 1,749 $ 544 $ -- $ 4,208
U.S. government agencies ......... 14,953 45,223 22,754 2,850 85,780
States and political subdivisions 4,165 20,430 30,163 15,758 70,516
Corporate bonds .................. 7,044 19,526 29,262 525 56,357
-------------------------------------------------------------------
Total ............................ $ 28,077 $ 86,928 $ 82,723 $ 19,133 $ 216,861
Weighted average yield
U.S. treasury .................... 5.40% 4.22% 5.20% 4.89%
U.S. government agencies ......... 5.75% 4.57% 5.03% 4.42% 4.90%
States and political subdivisions* 6.45% 7.19% 7.45% 7.41% 7.30%
Corporate bonds .................. 6.18% 6.59% 6.33% 6.41% 6.40%
-------------------------------------------------------------------
Total ............................ 5.94% 5.63% 6.37% 6.94% 6.07%
* Yields on tax-exempt obligations of states and political subdivisions have
been computed on a tax-equivalent basis.
20
Loan Portfolio
Types of Loans
The following table sets forth the composition of the Company's loan portfolio
for the past five years ending at December 31, 2002.
----------------------------------------------------
2002 2001 2000 1999 1998
(dollars in thousands) ----------------------------------------------------
Real Estate
Construction ................ $ 13,518 $ 12,677 $ 12,221 $ 9,062 $ 7,641
1-4 family residential ...... 81,239 84,379 97,663 89,171 84,767
Commercial .................. 136,351 117,211 112,415 98,840 83,115
Agricultural ................ 21,693 21,029 21,095 19,999 18,336
Commercial ..................... 40,097 45,631 53,955 48,920 52,458
Agricultural ................... 26,022 27,367 28,199 25,575 23,882
Consumer and other ............. 19,921 20,920 24,576 23,897 23,263
----------------------------------------------------
Total loans .................... 338,841 329,214 350,124 315,464 293,462
Deferred loan fees, net ........ 777 725 736 826 903
----------------------------------------------------
Total loans net of deferred fees $338,064 $328,489 $349,388 $314,638 $292,559
The Company's loan portfolio consists of commercial loans, agricultural loans,
commercial real estate and residential real estate loans and consumer loans. As
of December 31, 2002, gross loans totaled approximately $339 million, which
equals approximately 62% of total deposits and 50% of total assets. As of
December 31, 2002, the majority of the loans were originated directly by the
Banks to borrowers within the Banks' principal market areas. There are no
foreign loans outstanding during the years presented.
Commercial loans consist primarily of loans to businesses for various purposes
including revolving lines to finance current operations, floor-plans, inventory
and accounts receivable; capital expenditure loans to finance equipment and
other fixed assets; and letters of credit. These loans generally have short
maturities, have either adjustable or fixed rates and are unsecured or secured
by inventory, accounts receivable, equipment and/or real estate.
Agricultural loans play an important part in the Banks' loan portfolios. Iowa is
a major agricultural state and is a national leader in both grain and livestock
production. The Banks play a significant role in their communities in financing
operating, livestock and real estate activities.
All lending is done on a personal basis using cash flow as the most important
criterion after assessing the borrower's character. Government programs are
utilized where the benefit to both borrower and lender is evident.
Real estate loans include various types of loans for which the Banks hold real
property as collateral and consist of loans primarily on commercial properties
and single family residences. Real estate loans typically have fixed rates for
up to five years with the Company's loan policy having a maximum fixed rate
maturity of up to 15 years. The majority of construction loan volume is to
contractors to construct commercial buildings and generally have maturities of
up to 12 months. The Banks originate residential real estate loans for sale to
the secondary market for a fee.
Consumer loans include loans extended to individuals for household, family and
other personal expenditures not secured by real estate. The majority of the
Banks' consumer lending is for vehicles, consolidation of personal debts,
household appliances and improvements.
The interest rates charged on loans vary with the degree of risk, the amount of
the loan and the maturity of the loan. Competitive pressures, market interest
rates, the availability of funds and government regulation further influence the
rate charged on a loan. The Banks follow a loan policy, which has been approved
by both the Company and Banks' Boards of Directors and are overseen by both
Company and Bank management. These policies establish lending limits, review and
grading criteria and other guidelines such as loan administration and allowance
for loan losses. Loans are approved by the Banks' Board of Directors and/or
designated officers in accordance with respective guidelines and underwriting
policies of the Company. Loans to one borrower are limited by applicable state
and federal banking laws. Credit limits generally vary according to the type of
loan and the individual loan officer's experience.
21
Maturities and Sensitivities of Loans to Changes in Interest Rates as of
December 31, 2002.
The contractual maturities of the Company's loan portfolio are as shown below.
Actual maturities may differ from contractual maturities because individual
borrowers may have the right to prepay loans with or without prepayment
penalties.
After One
Year But
Within Within After
One Year five years Five Years Total
(dollars in thousands) --------------------------------------------
Real Estate
Construction ................ $ 10,175 $ 2,578 $ 765 $ 13,518
1-4 family residential ...... 5,004 33,403 42,832 81,239
Commercial .................. 9,371 94,643 32,337 136,351
Agricultural ................ 1,486 4,394 15,813 21,693
Commercial ..................... 25,064 11,444 3,589 40,097
Agricultural ................... 18,580 4,058 3,384 26,022
Consumer and other ............. 5,113 10,335 4,473 19,921
--------------------------------------------
Total loans .................... $ 74,793 $160,855 $103,193 $338,841
After One
Year But
Within After
Five Years Five Years
------------------------
Loan maturities after one year with:
Fixed rates ...................................... $146,405 $ 63,056
Variable rates ................................... 14,450 40,137
-----------------------
$160,855 $103,193
Non-performing Assets
The following table sets forth information concerning the Company's
non-performing assets for the past five years ending December 31, 2002.
------------------------------------------
2002 2001 2000 1999 1998
(dollars in thousands) ------------------------------------------
Non-performing assets:
Nonaccrual loans .................. $2,015 $2,692 $2,663 $ 405 $ 80
Loans 90 days or more past due .... 394 797 242 723 581
Restructured loans ................ -- -- -- -- --
------------------------------------------
2,409 3,489 2,905 1,128 661
Other real estate owned ........... 295 159 75 41 43
------------------------------------------
Total non-performing assets ....... $2,704 $3,648 $2,980 $1,169 $ 704
The accrual of interest on non-accrual and other impaired loans is discontinued
at 90 days or when, in the opinion of management, the borrower may be unable to
meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received. Interest income on restructured
loans is recognized pursuant to the terms of the new loan agreement. Interest
income on other impaired loans is monitored and based upon the terms of the
underlying loan agreement. However, the recorded net investment in impaired
loans, including accrued interest, is limited to the present value of the
expected cash flows of the impaired loan or the observable fair market value of
the loan's collateral.
Outstanding loans of $383,000 were placed on non-accrual status in 2002 with
total non-accrual loans equaling $2,015,000 as of December 31, 2002. Outstanding
loans of $886,000 were placed on non-accrual status in 2001 with total
non-accrual loans equaling $2,692,000 as of December 31, 2001. Outstanding loans
of $2,578,000 were placed on non-accrual status in 2000 with total non-accrual
loans equaling $2,663,000 as of December 31, 2000. A real estate loan at First
National with a December 31, 2002 and 2001 balance of $1,305,000 is the largest
non-performing asset. For the years ended December 31, 2002, 2001 and 2000,
interest income, which would have been recorded under the original terms of such
loans was approximately $160,000, $243,000 and $254,000, respectively, with
$17,000, $114,000 and $101,000, respectively, recorded.
22
Summary of the Allowance for Loan Losses
The provision for loan losses represents charges made to earnings to maintain an
adequate allowance for loan losses. The allowance for loan losses is
management's best estimate of probable losses inherent in the loan portfolio as
of the balance sheet date. Factors considered in establishing an appropriate
allowance include: an assessment of the financial condition of the borrower; a
realistic determination of value and adequacy of underlying collateral; the
condition of the local economy and the condition of the specific industry of the
borrower; an analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans.
The adequacy of allowance for loan losses is evaluated quarterly by management
and the respective Bank boards. This evaluation focuses on specific loan
reviews, changes in the type and volume of the loan portfolio given the current
and forecasted economic conditions and historical loss experience. Any one of
the following conditions may result in the review of a specific loan: concern
about whether the customer's cash flow or net worth are sufficient to repay the
loan; delinquent status; the loan has been criticized in a regulatory
examination; the accrual of interest has been suspended; or other reasons
including when the loan has other special or unusual characteristics which
suggest special monitoring is warranted.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
Analysis of the Allowance for Loan Losses
The Company's policy is to charge-off loans when, in management's opinion, the
loan is deemed uncollectible, although concerted efforts are made to maximize
future recoveries. The following table sets forth information regarding changes
in the Company's Allowance for Loan Losses For The Most Recent Five Years.
--------------------------------------------------------
2002 2001 2000 1999 1998
(dollars in thousands) --------------------------------------------------------
Balance at beginning of period .... $ 5,446 $ 5,373 $ 4,986 $ 4,846 $ 4,459
Charge-offs:
Real Estate
Construction ................... -- -- -- -- --
1-4 Family Residential ......... -- 1 -- -- --
Commercial ..................... 40 -- -- 18 --
Agricultural ................... -- -- -- -- --
Commercial ........................ 235 768 55 -- 118
Agricultural ...................... -- -- -- -- --
Consumer and other ................ 155 83 96 41 26
--------------------------------------------------------
430 852 151 59 144
Recoveries:
Real Estate
Construction ................... -- -- -- -- --
1-4 Family Residential ......... 20 -- -- -- --
Commercial ..................... -- -- -- 16 --
Agricultural ................... -- -- -- -- --
Commercial ........................ 14 8 66 -- 79
Agricultural ...................... -- -- -- -- --
Consumer and other ................ 20 19 12 17 15
--------------------------------------------------------
54 27 78 33 94
Net charge-offs (recoveries) ...... $ 376 $ 825 $ 73 $ 26 $ 50
Additions charged to
operations ........................ 688 898 460 166 437
--------------------------------------------------------
Balance at end of period .......... $ 5,758 $ 5,446 $ 5,373 $ 4,986 $ 4,846
Average Loans Outstanding ......... $317,521 $341,440 $339,115 $299,064 $279,054
Ratio of net charge-offs during the
period to average loans
outstanding ....................... 0.12% 0.24% 0.02% 0.01% 0.02%
Ratio of allowance for loan losses
to total loans net of deferred fees 1.70% 1.65% 1.54% 1.58% 1.66%
23
Reserve levels increased to 1.70% of total loans outstanding as of December 31,
2002 compared to 1.65% as of December 31, 2001. The increase in reserve levels
relates primarily to First National as the result of higher specific reserves
for two problem credits identified by management prior to 2002 and large
specific reserve for a newly downgraded problem loan in 2002. Problem commercial
leases identified in 2001 led to higher provision expense, net charge-offs and
specific reserves as credit weaknesses were identified in 2001. General reserve
allocations remained consistent in 2002 with prior years.
General reserves for loan categories normally range from 1.00 to 2.00% of the
outstanding loan balances. As loan volume increases, the general reserve levels
increase with that growth. As the previous table indicates, loan provisions have
increased in 2001 and 2002 as the result of higher level of net charge-offs and
specific reserves. The general reserve loss factors have remained consistent
over the five-year period presented. The allowance relating to commercial real
estate and commercial loans are the largest reserve components. Commercial real
estate loans have higher general reserve levels than other real estate loans as
management perceives more risk in this type of lending. Elements contributing to
the higher risk level include susceptibility of businesses to changing
environmental factors such as the economic business cycle, the larger individual
loan amounts, a limited number of buyers and the specialized uses for some
properties. As of December 31, 2002, commercial real estate loans have general
reserves of 1.30% and 1-4 family residential loans, which management generally
considers lower risk, have general reserves of 1.00%. The estimation methods and
assumptions used in determining the allowance for the five years presented have
remained consistent.
Loans that the Banks have identified as having higher risk levels are reviewed
individually in an effort to establish adequate loss reserves. These reserves
are considered specific reserves and are directly impacted by the credit quality
of the underlying loans. Normally, as the actual or expected level of
non-performing loans increase, the specific reserves also increase. For December
31, 2002 and 2001, specific reserves increased $386,000 or 29.65% and $142,000
or 12.24%, respectively. Specific allocations for commercial real estate loans
triggered the increase in 2002 while commercial leases contributed to the
increase in total reserve levels in 2001. The specific reserves are dependent
upon assumptions regarding the liquidation value of collateral and the cost of
recovering collateral including legal fees. Changing the amount of specific
reserves on individual loans has had the largest impact on the reallocation of
the reserve among different parts of the portfolio.
Other factors that are considered when determining the adequacy of the reserve
include loan concentrations, loan growth, the economic outlook and historical
losses. The Company's concentration risks include geographic concentration in
central Iowa; the local economy's dependence upon several large governmental
entities, including Iowa State University and the Iowa Department of
Transportation; and the health of Iowa's agricultural sector that is dependent
on weather conditions and government programs. Additional reserves have not been
established for local and national economic conditions over the last five-year
period. Historical losses reflect good credit quality over the past five years,
as net losses have not exceeded .24% which compares favorably to the Company's
reserve of 1.70% as of December 31, 2002. However, no assurances can be made
that losses will remain at the favorable levels experienced over the past five
years.
Allocation of the Allowance for Loan Losses
The following table sets forth information concerning the Company's allocation
of the allowance for loan losses.
----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
(dollars in thousands) ----------------------------------------------------------------------------------------
Amount % * Amount % * Amount % * Amount % * Amount % *
Balance at end of period
applicable to:
Real Estate
Construction ......... 210 3.99% 178 3.85% 163 3.49% 91 2.87% 80 2.60%
1-4 family residential 892 23.98% 980 25.63% 1,088 27.89% 899 28.27% 809 28.89%
Commercial ........... 2,453 40.24% 1,704 35.60% 1,619 32.11% 1,536 31.33% 1,330 28.32%
Agricultural ......... 302 6.40% 279 6.39% 315 6.03% 237 6.34% 194 6.25%
Commercial .............. 910 11.83% 938 13.86% 754 15.41% 573 15.51% 828 17.88%
Agricultural ............ 504 7.68% 457 8.31% 421 8.05% 541 8.11% 517 8.14%
Consumer and other ...... 235 5.88% 258 6.35% 538 7.02% 560 7.58% 604 7.93%
Unallocated ............. 252 652 475 549 484
----------------------------------------------------------------------------------------
$5,758 100% $5,446 100% $5,373 100% $4,986 100% $4,846 100%
* Percent of loans in each category to total loans.
24
Deposits
Types of Deposits
The Company's primary source of funds is customer deposits. The Company attempts
to attract non-interest-bearing deposits, which are a low cost funding source.
In addition, the Banks offer a variety of interest-bearing accounts designed to
attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank management
based on competitive market factors and the Company's need for funds. While
nearly 61% of the Banks' certificates of deposit mature in the next year, it is
anticipated that a majority of these certificates will be renewed. Rate
sensitive certificates of deposits in excess of $100,000 are subject to somewhat
higher volatility with regard to renewal volume as the Banks adjust rates based
upon funding needs. In the event a substantial volume of certificates are not
renewed, the Company has sufficient liquid assets and borrowing lines to fund
significant runoff. A sustained reduction in deposit volume would have a
significant negative impact on the Company's operation and liquidity. The
Company traditionally has not relied upon brokered deposits and does not
anticipate utilizing such funds at the present time.
Average Deposits by Type
The following table sets forth the average balances for each major category of
deposit and the weighted average interest rate paid for deposits during the
years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
-----------------------------------------------------------
Amount Rate Amount Rate Amount Rate
(dollars in thousands) -----------------------------------------------------------
Noninterest bearing demand deposits $ 53,318 $ 51,113 $ 47,590
Interest bearing demand deposits .. 115,494 1.00% 103,529 2.01% 98,105 3.17%
Money market deposits ............. 120,446 1.71% 101,267 3.23% 93,583 4.67%
Savings deposits .................. 24,486 0.71% 24,112 1.56% 27,107 2.39%
Time certificates < $100,000 ...... 152,703 4.00% 158,625 5.51% 159,035 5.64%
Time certificates > $100,000 ...... 51,428 3.69% 58,253 5.71% 62,052 6.16%
-------- -------- --------
$517,875 $496,899 $487,472
Deposit Maturity
The following table shows the amounts and remaining maturities of time
certificates of deposit that had balances of $100,000 and over as of December
31, 2002, 2001 and 2000.
2002 2001 2000
(dollars in thousands) -----------------------------------
3 months or less ..................... $15,162 $16,771 $21,665
Over 3 through 12 months ............. 25,939 24,590 34,901
Over 12 through 36 months ............ 9,281 4,765 6,996
Over 36 months ....................... 4,182 1,590 333
-----------------------------------
Total ................................ $54,564 $47,716 $63,895
Borrowed Funds
The following table summarizes the outstanding amount of and the average rate on
borrowed funds as of December 31, 2002, 2001 and 2000.
2002 2001 2000
--------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
(dollars in thousands) --------------------------------------------------
FHLB advances ............. $ 0 0.00%$ 1,000 5.21% $16,000 6.59%
Federal funds purchased and
repurchase agreements ..... 18,326 1.50% 10,596 2.54% 19,007 6.19%
--------------------------------------------------
Total ..................... $18,326 1.50% $11,596 2.77% $35,007 6.37%
25
Average Annual Borrowed Funds
The following table sets forth the average amount of, the average rate paid and
maximum outstanding balance on borrowed funds for the years ended December 31,
2002, 2001 and 2000.
2002 2001 2000
----------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(dollars in thousands) ----------------------------------------------------------
FHLB advances ............................ $ 47 4.26% $ 8,791 6.29% $20,973 6.99%
Federal funds purchased
& repurchase agreements .................. 13,840 1.91% 14,217 3.78% 31,776 5.84%
--------------------------------------------------------
Total .................................... $13,887 1.91% $23,008 4.74% $52,749 6.30%
Maximum Amount Outstanding during the year
FHLB advances .......................... $ 1,000 $16,000 $50,300
Federal funds purchased
and repurchase agreements .............. 18,326 25,400 36,362
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for profitable business expansion. The Company's principal source
of funds is deposits including demand, money market, savings and certificates of
deposit. Other sources include principal repayments on loans, proceeds from the
maturity and sale of investment securities, federal fund purchased, repurchase
agreements, advances from the Federal Home Loan Bank (FHLB) and funds provided
by operations. Net cash from operating activities contributed $11,221,000,
$12,253,000 and $8,212,000 to liquidity for years 2002, 2001 and 2000,
respectively. Liquid assets of cash on hand, balances due from other banks,
federal funds sold and interest-bearing deposits in financial institutions
increased from $72,059,000 in 2001 to $85,189,000 in 2002 and from $29,368,000
in 2000 to $72,059,000 in 2001. The increase in liquidity in 2002 is the result
of diminished loan demand, increased deposit levels, and historically low
investment yields. Federal funds sold are expected to be invested in longer-term
assets as loan demand increases or investment yields become more favorable. To
provide additional external liquidity, the Banks have outstanding lines of
credit with the FHLB of Des Moines, Iowa of $30,732,000 and federal funds
borrowing capacity at correspondent banks of $46,000,000. The Company did not
have any outstanding FHLB advances as of December 31,2002 and other borrowed
funds for the Company totaled $18,326,000. Management believes that the
Company's liquidity sources will be sufficient to support its existing
operations for the foreseeable future.
The Company's liquidity on an unconsolidated basis is heavily dependent upon
dividends paid to the Company by the Banks. Various federal and state statutory
provisions limit the amount of dividends banking subsidiaries are permitted to
pay to their holding companies without regulatory approval. Federal Reserve
policy further limits the circumstances under which bank holding companies may
declare dividends. For example, a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition. In addition, the Federal Reserve and the FDIC have issued
policy statements which provide that insured banks and bank holding companies
should generally pay dividends only out of current operating earnings. Federal
and state banking regulators may also restrict the payment of dividends by
order.
First National, as a national bank, generally may pay dividends from undivided
profits without restriction, provided that its surplus fund is at least equal to
its common stock capital fund. Boone Bank, Randall-Story Bank and State Bank are
also restricted under Iowa law to paying dividends only out of their undivided
profits. As United Bank is not expected to be profitable in 2003, payments of
dividends from this subsidiary are not anticipated for the upcoming year.
Additionally, the payment of dividends by the Banks is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and the Banks generally are prohibited from paying
any dividends if, following payment thereof, the Bank would be undercapitalized.
The Company has unconsolidated interest bearing deposits and marketable
investment securities totaling $29,271,000 that are presently available to
provide additional liquidity to the Banks.
The Company's total stockholders' equity increased to $101,523,000 at December
31, 2002, from $93,622,000 at December 31, 2001. At December 31, 2002 and 2001,
stockholders' equity was 15.0% of total assets. Total equity increased due to
retention of earnings and from appreciation in the Company and Banks' stock and
bond portfolios. No material capital expenditures or material changes in the
capital resource mix are anticipated at this time. The capital levels of the
Company currently exceed applicable regulatory guidelines as of December 31,
2002.
26
Interest Rate Risk
Interest rate risk refers to the exposure of earnings and capital arising from
changes in interest rates. Management's objectives are to control interest rate
risk and to ensure predictable and consistent growth of earnings and capital.
Interest rate risk management focuses on fluctuations in net interest income
identified through computer simulations to evaluate volatility, varying interest
rate, spread and volume assumptions. The risk is quantified and compared against
tolerance levels.
The Company uses a third-party computer software simulation modeling program to
measure its exposure to potential interest rate changes. For various assumed
hypothetical changes in market interest rates, numerous other assumptions are
made such as prepayment speeds on loans, the slope of the Treasury yield curve,
the rates and volumes of the Company's deposits and the rates and volumes of the
Company's loans. This analysis measures the estimated change in net interest
income in the event of hypothetical changes in interest rates.
Another measure of interest rate sensitivity is the gap ratio. This ratio
indicates the amount of interest-earning assets repricing within a given period
in comparison to the amount of interest-bearing liabilities repricing within the
same period of time. A gap ratio of 1.0 indicates a matched position, in which
case the effect on net interest income due to interest rate movements will be
minimal. A gap ratio of less than 1.0 indicates that more liabilities than
assets reprice within the time period and a ratio greater than 1.0 indicates
that more assets reprice than liabilities.
The simulation model process provides a dynamic assessment of interest rate
sensitivity, whereas a static interest rate gap table is compiled as of a point
in time. The model simulations differ from a traditional gap analysis because a
traditional gap analysis does not reflect the multiple effects of interest rate
movement on the entire range of assets, liabilities and ignores the future
impact of new business strategies.
Inflation
The primary impact of inflation on the Company's operations is increased asset
yields, deposit costs and operating overhead. Unlike most industries, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than they would on non-financial
companies. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. The effects of
inflation can magnify the growth of assets and if significant, require that
equity capital increase at a faster rate than would be otherwise necessary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is comprised primarily of interest rate risk arising
from its core banking activities of lending and deposit taking. Interest rate
risk is the risk that changes in market interest rates may adversely affect the
Company's net interest income. Management continually develops and applies
strategies to mitigate this risk. Management does not believe that the Company's
primary market risk exposure and how that exposure was managed in 2002 changed
when compared to 2001.
Based on a simulation modeling analysis performed as of December 31, 2002, the
following table presents the estimated change in net interest income in the
event of hypothetical changes in interest rates for the various rate shock
levels:
Net Interest Income at Risk
Estimated Change in Net Interest Income for Year Ending December 31, 2003
$ Change % Change
(dollars in thousands) ---------------------------
+200 Basis Points ........................ $ 972 3.9%
+100 Basis Points ........................ 575 2.3%
- -100 Basis Points ........................ (769) -3.1%
- -200 Basis Points ........................ (2,366) -9.5%
27
As shown above, at December 31, 2002, the estimated effect of an immediate 200
basis point increase in interest rates would increase the Company's net interest
income by 3.9% or approximately $972,000 in 2003. The estimated effect of an
immediate 200 basis point decrease in rates would decrease the Company's net
interest income by 9.5% or approximately $2,366,000 in 2003. The Company's Asset
Liability Management Policy establishes parameters for a 200 basis point change
in interest rates. Under this policy, the Company and the Banks' objective is to
properly structure the balance sheet to prevent a 200 basis point change in
interest rates from causing a decline in net interest income by more than 15% in
one year compared to the base year that hypothetically assumes no change in
interest rates.
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions. Actual values may differ from those
projections set forth above. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.
Current interest rates on certain liabilities are at a level that does not allow
for significant repricing should market interest rates decline considerably.
Contractual Maturity or Repricing
The following table sets forth the estimated maturity or re-pricing and the
resulting interest sensitivity gap, of the Company's interest-earning assets and
interest-bearing liabilities and the cumulative interest sensitivity gap at
December 31, 2002. The expected maturities are presented on a contractual basis.
Actual maturities may differ from contractual maturities because of prepayment
assumptions, early withdrawal of deposits and competition.
Less Than Three One to Over
Three Months to Five Five Cumulative
Months One Year Years Years Total
(dollars in thousands) -------------------------------------------------------------
Interest - earning assets
Interest-bearing deposits with banks $ 1,000 $ -- $ -- $ -- $ 1,000
Federal funds sold ................. 32,500 32,500
Investments * ...................... 8,195 19,882 86,928 129,570 244,575
Loans .............................. 65,455 27,801 174,092 71,493 338,841
-------------------------------------------------------------
Total interest - earning
assets ............................. $ 107,150 $ 47,683 $ 261,020 $ 201,064 $ 616,917
=============================================================
Interest - bearing liabilities
Interest bearing demand deposits ... $ 121,325 $ -- $ -- $ -- $ 121,325
Money market and savings deposits .. 153,296 -- -- -- 153,296
Time certificates < $100,000 ....... 24,751 65,107 68,979 42 158,879
Time certificates > $100,000 ....... 15,162 25,939 13,463 -- 54,564
Other borrowed funds ............... 18,326 -- -- -- 18,326
-------------------------------------------------------------
Total interest - bearing liabilities $ 332,860 $ 91,046 $ 82,442 $ 42 $ 506,390
Interest sensitivity gap ........... ($225,710) ($ 43,363) $ 178,578 $ 201,022 $ 110,527
=============================================================
Cumulative interest sensitivity gap ($225,710) ($269,073) ($ 90,495) $ 110,527 $ 110,527
=============================================================
Cumulative interest sensitivity
gap as a percent of total assets ... -33.33% -39.73% -13.36% 16.32%
================================================
* Investments with maturities over 5 years include the market value of equity
securities of $27,714.
As of December 31, 2002, the Company's cumulative gap ratios for assets and
liabilities repricing within three months and within one year were .33 and .40
respectively, meaning more liabilities than assets are scheduled to reprice
within these periods. This situation suggests that a decrease in market interest
rates may benefit net interest income and that an increase in interest rates may
negatively impact the Company. The liability sensitive gap position is largely
the result of classifying the interest bearing NOW accounts, money market
accounts and savings accounts as immediately repriceable. Certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities and
periods to repricing, they may react differently to changes in market interest
rates. Also, interest rates on assets and liabilities may fluctuate in advance
of changes in market interest rates, while interest rates on other assets and
liabilities may follow changes in market interest rates. Additionally, certain
assets have features that restrict changes in the interest rates of such assets,
both on a short-term basis and over the lives of such assets.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditor's Report
The Board of Directors
Ames National Corporation
Ames, Iowa
We have audited the accompanying consolidated balance sheets of Ames National
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of Ames National Corporation and subsidiaries for the year ended December 31,
2000 were audited by other auditors whose report, dated March 2, 2001 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ames National
Corporation and subsidiaries as of December 31, 2002 and 2001 and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP.
- ---------------------------
Des Moines, Iowa
January 24, 2003
29
Independent Auditors' Report
The Board of Directors
Ames National Corporation:
We have audited the accompanying consolidated balance sheet of Ames National
Corporation and subsidiaries (the Company) as of December 31, 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Ames National Corporation and subsidiaries as of December
31, 2000, and the consolidated results of their operations and their cash flows
for each of the years in the two-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG, LLP
- -----------------
Des Moines, Iowa
March 2, 2001
30
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS 2002 2001
- ---------------------------------------------------------------------------------------------
Cash and due from banks (Note 2) ........................... $ 51,688,784 $ 42,459,156
Federal funds sold (Note 9) ................................ 32,500,000 29,350,000
Interest bearing deposits in financial institutions ........ 1,000,000 250,000
Securities available-for-sale (Note 3) ..................... 244,575,026 213,778,175
Loans receivable, net (Note 4) ............................. 332,306,497 323,043,166
Bank premises and equipment, net (Note 5) .................. 8,726,397 7,183,655
Accrued income receivable .................................. 5,849,017 5,977,353
Other assets ............................................... 582,849 238,477
------------------------------
Total assets ....................................... $ 677,228,570 $ 622,279,982
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6)
Demand ................................................. $ 62,557,937 $ 62,796,265
NOW accounts ........................................... 121,325,104 108,509,319
Savings and money market ............................... 153,296,259 138,342,052
Time, $100,000 and over ................................ 54,564,283 47,716,458
Other time ............................................. 158,878,796 154,145,161
------------------------------
Total deposits ..................................... 550,622,379 511,509,255
FHLB advances .............................................. -- 1,000,000
Federal funds purchased and securities sold under agreements
to repurchase ............................................ 18,325,574 10,596,174
Dividend payable ........................................... 1,376,752 1,312,596
Deferred taxes (Note 8) .................................... 2,879,057 1,188,670
Accrued expenses and other liabilities ..................... 2,501,952 3,051,289
------------------------------
Total liabilities .................................. 575,705,714 528,657,984
------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 10)
Common stock, $5 par value, authorized 6,000,000 shares;
issued 2002 and 2001 3,153,230 shares; outstanding 2002
3,128,982 shares, 2001 3,125,229 shares ................ 15,766,150 15,766,150
Additional paid-in capital ............................... 25,354,014 25,393,028
Retained earnings ........................................ 53,917,544 49,397,011
Treasury stock, at cost; 2002 24,248 shares,
2001 28,001 shares ..................................... (1,333,640) (1,530,805)
Accumulated other comprehensive income, net unrealized
gain on securities available-for-sale .................. 7,818,788 4,596,614
------------------------------
Total stockholders' equity ......................... 101,522,856 93,621,998
------------------------------
Total liabilities and stockholders' equity ......... $ 677,228,570 $ 622,279,982
==============================
See Notes to Consolidated Financial Statements.
31
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
- -----------------------------------------------------------------------------------------
Interest and dividend income:
Loans ......................................... $23,207,184 $27,891,379 $28,306,128
Securities:
Taxable ................................... 7,931,041 8,714,486 11,277,141
Tax-exempt ................................ 2,938,423 2,876,432 3,036,610
Federal funds sold ............................ 810,675 829,083 376,851
Dividends ..................................... 1,383,350 1,162,176 1,020,822
---------------------------------------
36,270,673 41,473,556 44,017,552
----------------------------------------
Interest expense:
Deposits .................................... 11,397,125 17,791,314 20,937,730
Other borrowed funds ........................ 265,845 1,091,319 3,322,924
---------------------------------------
11,662,970 18,882,633 24,260,654
---------------------------------------
Net interest income ................... 24,607,703 22,590,923 19,756,898
Provision for loan losses (Note 4) ............ 688,431 897,540 460,049
---------------------------------------
Net interest income after provision for
loan losses ........................... 23,919,272 21,693,383 19,296,849
---------------------------------------
Noninterest income:
Trust department income ..................... 1,032,500 948,499 879,686
Service fees ................................ 1,492,344 1,585,036 1,454,528
Securities gains, net (Note 3) .............. 889,923 1,197,050 715,929
Loan and secondary market fees .............. 739,907 589,215 245,656
Other ....................................... 980,140 760,244 834,165
---------------------------------------
Total noninterest income .............. 5,134,814 5,080,044 4,129,964
---------------------------------------
Noninterest expense:
Salaries and employee benefits (Note 7) ..... 8,074,181 6,834,588 6,347,357
Data processing ............................. 1,934,006 1,772,726 1,557,875
Occupancy expenses .......................... 927,287 726,049 708,188
Other operating expenses .................... 2,340,098 2,253,920 2,098,580
---------------------------------------
Total noninterest expense ............. 13,275,572 11,587,283 10,712,000
---------------------------------------
Income before income taxes ............ 15,778,514 15,186,144 12,714,813
Provision for income taxes (Note 9) ........... 4,438,376 4,638,806 3,595,951
---------------------------------------
Net income ............................ $11,340,138 $10,547,338 $ 9,118,862
=======================================
Basic earnings per share (Note 1) ............. $ 3.63 $ 3.38 $ 2.92
=======================================
See Notes to Consolidated Financial Statements.
32
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Accumulated
Additional Other Total
Comprehensive Common Paid-in Retained Treasury Comprehensive Stockholders'
Income Stock Capital Earnings Stock Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 .... $15,766,150 $25,307,051 $39,849,354 $(2,824,155) $(2,025,691) $ 76,072,709
Comprehensive income:
Net income ................ $ 9,118,862 -- -- 9,118,862 -- -- 9,118,862
Other comprehensive income,
unrealized gains on
securities, net of
reclassification
adjustment, net of tax
(Note 3) ................ 4,649,235 -- -- -- -- 4,649,235 4,649,235
-----------
Total comprehensive
income ................ $13,768,097
===========
Cash dividends declared, $1.58
per share ................. -- -- (4,931,838) -- -- (4,931,838)
Sale of 22,931 shares of
treasury stock ............ -- 121,943 -- 1,146,550 -- 1,268,493
--------------------------------------------------------------------------------------
Balance, December 31, 2000 .... 15,766,150 25,428,994 44,036,378 (1,677,605) 2,623,544 86,177,461
Comprehensive income:
Net income ................ $10,547,338 -- -- 10,547,338 -- -- 10,547,338
Other comprehensive income,
unrealized gains on
securities, net of
reclassification
adjustment, net of tax
(Note 3) ................ 1,973,070 -- -- -- -- 1,973,070 1,973,070
-----------
Total comprehensive
income ................ $12,520,408
===========
Cash dividends declared, $1.66
per share ................. -- -- (5,186,705) -- -- (5,186,705)
Sale of 2,936 shares of
treasury stock ............ -- (35,966) -- 146,800 -- 110,834
--------------------------------------------------------------------------------------
Balance, December 31, 2001 .... 15,766,150 25,393,028 49,397,011 (1,530,805) 4,596,614 93,621,998
Comprehensive income:
Net income ................ $11,340,138 -- -- 11,340,138 -- -- 11,340,138
Other comprehensive income,
unrealized gains on
securities, net of
reclassification
adjustment, net of tax
(Note 3) ................ 3,222,174 -- -- -- -- 3,222,174 3,222,174
-----------
Total comprehensive
income ................ $14,562,312
===========
Cash dividends declared, $2.18
per share ................. -- -- 6,819,605) -- -- (6,819,605)
Sale of 3,753 shares of
treasury stock ............ -- (39,014) -- 197,165 -- 158,151
------------------------------------------------------------------------------------
Balance, December 31, 2002 ..... $15,766,150 $25,354,014 $53,917,544 $(1,333,640) $ 7,818,788 $101,522,856
====================================================================================
See Notes to Consolidated Financial Statements.
33
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................... $ 11,340,138 $ 10,547,338 $ 9,118,862
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses .................................................. 688,431 897,540 460,049
Amortization and accretion ................................................. 51,495 (58,859) (9,227)
Depreciation ............................................................... 996,180 642,835 731,370
Provision for deferred taxes ............................................... (200,013) (129,614) (137,000)
Securities gains, net ...................................................... (889,923) (1,197,050) (715,929)
Gain on sale of bank premises and equipment ................................ -- -- (94,135)
Change in assets and liabilities:
(Increase) decrease in accrued income receivable ........................... 128,336 1,043,261 (405,350)
(Increase) decrease in other assets ........................................ (344,372) 820,285 (382,484)
(Decrease) in accrued interest and other liabilities ....................... (549,337) (312,376) (354,516)
--------------------------------------------
Net cash provided by operating activities .............................. 11,220,935 12,253,360 8,211,640
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale .................................... (86,337,490) (47,350,981) (28,065,802)
Proceeds from sale of securities available-for-sale .......................... 26,635,715 23,282,181 30,835,280
Proceeds from maturities and calls of securities available-for-sale .......... 34,855,926 47,385,595 26,795,364
Proceeds from sale of bank premises and equipment ............................ -- -- 146,152
Net decrease (increase) in interest bearing deposits in financial institutions (750,000) 98,174 378,222
Net (increase) in federal funds sold ......................................... (3,150,000) (29,105,000) (160,000)
Net decrease (increase) in loans ............................................. (9,951,762) 20,074,021 (34,822,664)
Purchase of bank premises and equipment ...................................... (2,538,922) (2,610,189) (617,332)
--------------------------------------------
Net cash provided by (used in) investing activities .................... (41,236,533) 11,773,801 (5,510,780)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits ......................................................... 39,113,124 18,080,400 8,809,148
Increase (decrease) in FHLB advances, federal funds purchased
and securities sold under agreements to repurchase ......................... 6,729,400 (23,411,245) (5,277,893)
Dividends paid ............................................................... (6,755,449) (5,123,026) (4,867,972)
Proceeds from issuance of treasury stock ..................................... 158,151 110,834 1,268,493
--------------------------------------------
Net cash provided by (used in) financing activities .................... 39,245,226 (10,343,037) (68,224)
--------------------------------------------
Net increase in cash and cash equivalents .............................. 9,229,628 13,684,124 2,632,636
CASH AND CASH EQUIVALENTS
Beginning .................................................................... 42,459,156 28,775,032 26,142,396
--------------------------------------------
Ending ....................................................................... $ 51,688,784 $ 42,459,156 $ 28,775,032
============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION Cash payments for:
Interest ..................................................................... $ 12,211,439 $ 19,749,270 $ 24,720,709
Income taxes ................................................................. 4,725,572 4,321,320 3,681,134
34
Note 1. Summary of Significant Accounting Policies
Description of business: Ames National Corporation and subsidiaries (the
Company) operates in the commercial banking industry through its subsidiaries in
Ames, Boone, Story City, Nevada and Marshalltown, Iowa. Loan and deposit
customers are located primarily in Story, Boone, Hamilton, Marshall and adjacent
counties in Iowa.
Segment information: The Company uses the "management approach" for reporting
information about segments in annual and interim financial statements. The
management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Based on the "management approach" model, the Company has
determined that its business is comprised of one operating segment: banking. The
banking segment generates revenues through personal, business, agricultural and
commercial lending, management of the investment securities portfolio, providing
deposit account services and providing trust services.
Consolidation: The consolidated financial statements include the accounts of
Ames National Corporation (the Parent Company) and its wholly-owned
subsidiaries, First National Bank, Ames, Iowa; State Bank & Trust Co., Nevada,
Iowa; Boone Bank & Trust Co., Boone, Iowa; Randall-Story State Bank, Story City,
Iowa; and United Bank & Trust NA, Marshalltown, Iowa (collectively, the Banks).
All significant intercompany transactions and balances have been eliminated in
consolidation.
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses and fair value of financial instruments.
Cash and cash equivalents: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand and amounts due from banks. Cashflows from
loans and deposits are reported net.
Securities available-for-sale: Securities available-for-sale consist of equity
securities and debt securities not classified as trading or held-to-maturity and
are carried at fair value. Unrealized holding gains and losses, net of deferred
income taxes, are reported in a separate component of accumulated other
comprehensive income until realized. Realized gains and losses on the sale of
such securities are determined using the specific identification method and are
reflected in the consolidated statements of income. Premiums and discounts are
recognized in interest income using the interest method over the period to
maturity or call date of the related security.
Unrealized losses judged to be other than temporary are charged to operations.
Loans: Loans are stated at the principal amount outstanding, net of deferred
loan fees and the allowance for loan losses. Interest on loans is credited to
income as earned based on the principal amount outstanding. The Banks' policy is
to discontinue the accrual of interest income on any loan 90 days or more past
due unless the loans are well collateralized and in the process of collection.
Nonaccrual loans are returned to an accrual status when, in the opinion of
management, the financial position of the borrower indicates there is no longer
any reasonable doubt as to timely payment of principal or interest.
Allowance for loan losses: The allowance for loan losses is maintained at a
level deemed appropriate by management to provide for known and inherent risks
in the loan portfolio. The allowance is based upon a continuing review of past
loan loss experience, current economic conditions, and the underlying collateral
value securing the loans. Loans which are deemed to be uncollectible are charged
off and deducted from the allowance. Recoveries on loans charged-off and the
provision for loan losses are added to the allowance.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Impairment is measured on a loan by
loan basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
35
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.
Bank premises and equipment: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed using straight-line
and accelerated methods over the estimated useful lives of the respective
assets. Depreciable lives range from 3 to 7 years for equipment and 15 to 39
years for premises.
Trust department assets: Property held for customers in fiduciary or agency
capacities is not included in the accompanying consolidated balance sheets, as
such items are not assets of the Banks.
Income taxes: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
The Company files a consolidated federal income tax return, with each entity
computing its taxes on a separate company basis. For state tax purposes, the
Banks file franchise tax returns, while the Parent Company files a corporate
income tax return.
Comprehensive income: Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. Gains and losses on available-for-sale
securities are reclassified to net income as the gains or losses are realized
upon sale of the securities. Other-than-temporary impairment charges are
reclassified to net income at the time of the charge.
Fair value of financial instruments: The following methods and assumptions were
used by the Company in estimating fair value disclosures:
Cash and due from banks, federal funds sold and interest-bearing deposits in
financial institutions: The recorded amount of these assets approximates fair
value.
Securities available-for-sale: Fair values of securities available-for-sale are
based on bid prices published in financial newspapers, bid quotations received
from securities dealers, or quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued.
Loans: The fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates, which
reflect the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the historical experience, with repayments for each loan
classification modified, as required, by an estimate of the effect of current
economic and lending conditions. The effect of nonperforming loans is considered
in assessing the credit risk inherent in the fair value estimate.
Deposit liabilities: Fair values of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money market
accounts, are equal to the amount payable on demand as of the respective balance
sheet date. Fair values of certificates of deposit are based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
FHLB advances: The recorded amount of FHLB advances approximates fair value
because of the short-term nature of the instrument.
Other borrowings: The carrying amounts of federal funds purchased and securities
sold under agreements to repurchase approximate fair value because of the
short-term nature of the instruments.
36
Accrued income receivable and accrued interest payable: The carrying amounts of
accrued income receivable and interest payable approximate fair value.
Limitations: Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Earnings per share: Basic earnings per share computations for the years ended
December 31, 2002, 2001 and 2000, were determined by dividing net income by the
weighted-average number of common shares outstanding during the years then
ended. The Company had no potentially dilutive securities outstanding during the
periods presented.
The following information was used in the computation of basic earnings per
share for the years ended December 31, 2002, 2001, and 2000.
2002 2001 2000
-----------------------------------------------
Basic EPS computation:
Net income ................... $ 11,340,138 $ 10,547,338 $ 9,118,862
Weighted average common
shares outstanding ........... 3,127,285 3,123,885 3,120,375
-----------------------------------------------
Basic EPS .................... $ 3.63 $ 3.38$ $ 2.92
===============================================
Current accounting developments: The Financial Accounting Standards Board has
issued Interpretation No. 45, Guarantor's Accounting and Disclosures
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others - an interpretation of FASB Statements No. 5, 57 and 107 and rescission
of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. Implementation of these provisions of the Interpretation is not
expected to have a material impact on the Company's financial statements.
Note 2. Restrictions on Cash and Due from Banks
The Federal Reserve Bank requires member banks to maintain certain cash and due
from bank reserves. The subsidiary banks' reserve requirements totaled
approximately $7,418,000 and $6,699,000 at December 31, 2002 and 2001,
respectively.
37
Note 3. Securities
The amortized cost of securities available-for-sale and their approximate fair
values at December 31, 2002 and 2001, are summarized below:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------------------------------------------------------
2002:
- --------------------------------
U.S. treasury .................. $ 4,058,028 $ 150,313 $ -- $ 4,208,341
U.S. government agencies ....... 82,797,531 2,982,650 -- 85,780,181
State and political subdivisions 67,711,678 2,899,680 (95,702) 70,515,656
Corporate bonds ................ 53,041,832 3,439,554 (124,469) 56,356,917
Equity securities .............. 24,555,182 4,429,505 (1,270,756) 27,713,931
---------------------------------------------------------------
$ 232,164,251 $ 13,901,702 $ (1,490,927) $ 244,575,026
===============================================================
2001:
- --------------------------------
U.S. treasury .................. $ 12,237,419 $ 310,957 $ -- $ 12,548,376
U.S. government agencies ....... 59,085,647 1,789,720 (17,706) 60,857,661
State and political subdivisions 62,114,862 1,149,176 (154,659) 63,109,379
Corporate bonds ................ 50,241,082 1,167,157 (302,700) 51,105,539
Equity securities .............. 22,800,966 3,532,047 (175,793) 26,157,220
---------------------------------------------------------------
$ 206,479,976 $ 7,949,057 $ (650,858) $ 213,778,175
===============================================================
The amortized cost and estimated fair value of debt securities
available-for-sale as of December 31, 2002, are shown below by contractual
maturity. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Estimated
Cost Fair Value
-----------------------------
Due in one year or less ...................... $ 27,596,953 $ 28,076,510
Due after one year through five years ........ 82,969,847 86,928,283
Due after five years through ten years ....... 78,456,771 82,723,367
Due after ten years .......................... 18,585,498 19,132,935
-----------------------------
207,609,069 216,861,095
Equity securities ............................ 24,555,182 27,713,931
-----------------------------
$232,164,251 $244,575,026
=============================
At December 31, 2002 and 2001, securities with a carrying value of approximately
$39,076,000 and $31,360,000, respectively, were pledged as collateral on public
deposits, securities sold under agreement to repurchase, and for other purposes
as required or permitted by law.
Gross realized gains and gross realized losses on sales of available-for-sale
securities were $1,087,290 and $197,367, respectively, in 2002, $1,200,323 and
$3,273, respectively, in 2001, and $790,793 and $74,864 respectively, in 2000.
The components of other comprehensive income - net unrealized gains on
securities available-for-sale for the years ended December 31, 2002, 2001, and
2000, were as follows:
2002 2001 2000
-----------------------------------------
Unrealized holding gains arising
during the period ..................... $ 6,002,497 $ 4,329,954 $ 8,095,667
Reclassification adjustment for net gains
realized in net income ................ (889,923) (1,197,050) (715,929)
----------------------------------------
Net unrealized gains
before tax effect ............... 5,112,574 3,132,904 7,379,738
Tax effect .............................. (1,890,400) (1,159,834) (2,730,503)
-----------------------------------------
Other comprehensive income
net unrealized gains
on securities .................... $ 3,222,174 $ 1,973,070 $ 4,649,235
=========================================
38
Note 4. Loans Receivable
The composition of loans receivable at December 31, 2002 and 2001, is as
follows:
2002 2001
----------------------------------
Commercial and agricultural .......... $ 66,119,092 $ 72,997,606
Real estate .......................... 252,800,600 235,295,873
Consumer ............................. 11,061,689 12,363,604
Other ................................ 8,859,704 8,556,838
----------------------------------
338,841,085 329,213,921
Less:
Allowance for loan losses ............ (5,757,694) (5,445,671)
Deferred loan fees ................... (776,894) (725,084)
----------------------------------
$ 332,306,497 $ 323,043,166
==================================
Changes in the allowance for loan losses for the year ended December 31, 2002,
2001 and 2000 are as follows:
2002 2001 2000
-----------------------------------------
Balance, beginning ................ $ 5,445,671 $ 5,373,167 $ 4,986,474
Provision for loan losses ......... 688,431 897,540 460,049
Recoveries of loans charged-off ... 53,805 27,131 77,669
Loans charged-off ................. (430,213) (852,167) (151,025)
-----------------------------------------
Balance, ending ................... $ 5,757,694 $ 5,445,671 $ 5,373,167
=========================================
Loans are made in the normal course of business to directors and executive
officers of the Company and to their affiliates. The terms of these loans,
including interest rates and collateral, are similar to those prevailing for
comparable transactions with others and do not involve more than a normal risk
of collectibility.
Loan transactions with related parties were as follows for the years ended
December 31, 2002 and 2001:
2002 2001
--------------------------------
Balance, beginning of year ............. $ 4,755,229 $ 5,235,102
New loans ............................ 11,533,030 8,535,527
Repayments ........................... (8,365,219) (9,015,400)
Change in status ..................... (131,372) --
--------------------------------
Balance, end of year ................... $ 7,791,668 $ 4,755,229
================================
At December 31, 2002 and 2001, the Company had impaired loans of approximately
$2,409,000 and $2,692,000, respectively. The allowance for loan losses related
to these impaired loans was approximately $212,000 and $207,000 at December 31,
2002 and 2001, respectively. The average balances of impaired loans for the
years ended December 31, 2002 and 2001, were $2,532,000 and $2,837,000,
respectively. For the years ended December 31, 2002 and 2001, interest income
which would have been recorded under the original terms of such loans was
approximately $160,000 and $243,000, respectively, with $17,000 and $114,000,
respectively, recorded. Loans greater than 90 days past due and still accruing
interest were approximately $394,000 and $797,000 at December 31, 2002 and 2001,
respectively.
The amount the Company will ultimately realize from these loans could differ
materially from their carrying value because of future developments affecting
the underlying collateral or the borrowers' ability to repay the loans. As of
December 31, 2002, there were no material commitments to lend additional funds
to customers whose loans were classified as impaired.
39
Note 5. Bank Premises and Equipment
The major classes of bank premises and equipment and the total accumulated
depreciation as of December 31, 2002 and 2001, are as follows:
2002 2001
-----------------------------
Land ....................................... $ 1,284,771 $ 1,042,869
Buildings and improvements ................. 9,178,368 5,648,698
Furniture and equipment .................... 5,945,231 5,509,082
Construction in process .................... -- 2,240,129
-----------------------------
16,408,370 14,440,778
Less accumulated depreciation .............. 7,681,973 7,257,123
-----------------------------
$ 8,726,397 $ 7,183,655
=============================
Note 6. Deposits
At December 31, 2002, the maturities of time deposits are as follows:
Years ended December 31,
2003 $ 130,958,148
2004 41,879,256
2005 21,465,236
2006 3,671,195
2007 15,426,428
Thereafter 42,816
-------------
$ 213,443,079
=============
Interest expense on deposits is summarized as follows:
2002 2001 2000
-------------------------------------------
NOW accounts ................... $ 1,155,459 $ 2,060,963 $ 3,112,960
Savings and money market ....... 2,237,034 3,665,428 5,030,644
Time, $100,000 and over ........ 1,897,855 3,329,175 3,823,665
Other time ..................... 6,106,777 8,735,748 8,970,461
-------------------------------------------
$11,397,125 $17,791,314 $20,937,730
===========================================
Note 7. Employee Benefit Plans
The Company has a stock purchase plan with the objective of encouraging equity
interests by officers, employees, and directors of the Company and its
subsidiaries to provide additional incentive to improve banking performance and
retain qualified individuals. The 2002 and 2001 purchase price was $42.14 and
$37.75 per share, respectively and approximated the fair market value of the
stock based upon current market trading activity. The terms of the plan provide
for the issuance of up to 14,000 shares of common stock per year for a ten-year
period commencing in 1999 and continuing through 2008.
Prior to 2002, the Company had a qualified 401(k) profit-sharing plan and a
qualified money purchase pension plan. The qualified money purchase pension plan
was merged into the 401(k) profit-sharing plan beginning January 1, 2002 with
the merged plans covering substantially all employees. The Company matches
employee contributions up to a maximum of 2% of qualified compensation and also
contributes an amount equal to 5% of the participating employee's compensation.
In addition, contributions can be made on a discretionary basis by the Company
on behalf of the employees. For the years ended December 31, 2002, 2001 and
2000, Company contributions to the plans were approximately $607,000, $473,000,
and $376,000, respectively.
40
Note 8. Income Taxes
The components of income tax expense for the year ended December 31, 2002, 2001
and 2000 are as follows:
Current Deferred Total
---------------------------------------------------
2002:
- ---------------------
Federal ............. $ 3,819,350 $ (184,965) $ 3,634,385
State ............... 819,039 (15,048) 803,991
---------------------------------------------------
$ 4,638,389 $ (200,013) $ 4,438,376
===================================================
2001:
- ---------------------
Federal ............. $ 4,028,481 $ (110,851) $ 3,917,630
State ............... 739,939 (18,763) 721,176
---------------------------------------------------
$ 4,768,420 $ (129,614) $ 4,638,806
===================================================
2000:
- ---------------------
Federal ............. $ 3,121,724 $ (118,000) $ 3,003,724
State ............... 611,227 (19,000) 592,227
---------------------------------------------------
$ 3,732,951 $ (137,000) $ 3,595,951
===================================================
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income taxes and is a result of
the following for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
-----------------------------------------
Computed "expected" tax expense ... $ 5,364,695 $ 5,163,289 $ 4,323,036
Tax exempt interest and dividends . (1,356,187) (1,222,985) (1,180,343)
State taxes and other ............. -----------------------------------------
$ 4,438,376 $ 4,638,806 $ 3,595,951
=========================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred liabilities at December 31, 2002 and
2001, are as follows:
2002 2001
----------------------------
Deferred tax assets:
Allowance for loan losses .................... $ 1,636,575 $ 1,523,580
Other ........................................ 161,867 45,619
----------------------------
Total gross deferred tax assets .............. 1,798,442 1,569,199
----------------------------
Deferred tax liabilities:
Unrealized gain on securities ................ (4,591,984) 2,701,584
Other ........................................ (85,515) 56,285
----------------------------
Total gross deferred tax liabilities ......... (4,677,499) 2,757,869
----------------------------
Net deferred tax liabilities ................. $(2,879,057) $(1,188,670)
============================
At December 31, 2002 and 2001, income taxes currently payable of approximately
$338,000 and $469,000, respectively, are included in accrued interest and other
liabilities.
41
Note 9. Commitments, Contingencies and Concentrations of Credit Risk
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. A summary
of the Company's commitments at December 31, 2002 and 2001, is as follows:
2002 2001
------------------------------
Commitments to extend credit ............. $59,410,000 $51,636,000
Standby letters of credit ................ 1,490,000 1,231,000
------------------------------
$60,900,000 $52,867,000
==============================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third-party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
and is required in instances which the Banks deem necessary. In the event the
customer does not perform in accordance with the terms of the agreement with the
third party, the Banks would be required to fund the commitment. The maximum
potential amount of future payments the Banks could be required to make is
represented by the contractual amount shown in the summary above. If the
commitment were funded, the Banks would be entitled to seek recovery from the
customer. At December 31, 2002 and 2001 no amounts have been recorded as
liabilities for the Banks' potential obligations under these guarantees.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Company's financial
statements.
Concentrations of credit risk: The Banks originate real estate, consumer, and
commercial loans, primarily in Story, Boone, Hamilton and Marshall Counties,
Iowa, and adjacent counties. Although the Banks have diversified loan
portfolios, a substantial portion of their borrowers' ability to repay loans is
dependent upon economic conditions in the Banks' market areas.
At December 31, 2002, the Company has a concentration of federal funds sold in
the amount of $18,500,000 with one institution.
Note 10. Regulatory Matters
The Company and its subsidiary banks (Entities) are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possible additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Entities' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Entities must meet specific capital guidelines
that involve quantitative measures of the Entities' assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Entities' capital amounts and classification are also subject to
regulatory accounting practices. The Entities' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
42
Quantitative measures established by regulation to ensure capital adequacy
require the Company and each subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002 and 2001, that the Company and each subsidiary bank met all capital
adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the federal banking
regulators categorized the subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. Management
believes there are no conditions or events since that notification that have
changed the institution's category. The Company's and each of the subsidiary
bank's actual capital amounts and ratios as of December 31, 2002 and 2001 are
also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------
As of December 31, 2002:
Total capital (to risk- weighted assets):
Consolidated ................................. $99,398 21.8% $36,439 8.0% -- --
Boone Bank & Trust ........................... 11,516 15.3 6,006 8.0 $ 7,508 10.0%
First National Bank .......................... 38,650 16.4 18,878 8.0 23,598 10.0
Randall-Story State Bank ..................... 7,684 15.9 3,855 8.0 4,819 10.0
State Bank & Trust ........................... 11,087 17.1 5,181 8.0 6,476 10.0
United Bank & Trust .......................... 4,642 31.0 1,198 8.0 1,497 10.0
Tier 1 capital ( to risk- weighted assets):
Consolidated ................................. $93,704 20.6% $18,220 4.0% -- --
Boone Bank & Trust ........................... 10,577 14.1 3,003 4.0 $ 4,504 6.0%
First National Bank .......................... 35,700 15.1 9,439 4.0 14,159 6.0
Randall-Story State Bank ..................... 7,081 14.7 1,927 4.0 2,891 6.0
State Bank & Trust ........................... 10,276 15.9 2,590 4.0 3,886 6.0
United Bank & Trust .......................... 4,476 29.9 599 4.0 898 6.0
Tier 1 capital ( to average- weighted assets):
Consolidated ................................. $93,704 14.1% $26,669 4.0% -- --
Boone Bank & Trust ........................... 10,577 10.6 3,995 4.0 $ 4,993 5.0%
First National Bank .......................... 35,700 9.8 14,565 4.0 18,206 5.0
Randall-Story State Bank ..................... 7,081 11.0 2,585 4.0 3,231 5.0
State Bank & Trust ........................... 10,276 10.0 4,126 4.0 5,157 5.0
United Bank & Trust .......................... 4,476 18.1 990 4.0 1,238 5.0
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------
As of December 31, 2001:
Total capital (to risk- weighted assets):
Consolidated ................................. $93,622 22.0% $34,074 8.0% -- --
Boone Bank & Trust ........................... 10,678 14.9 5,722 8.0 $ 7,153 10.0%
First National Bank .......................... 35,711 16.1 17,770 8.0 22,213 10.0
Randall-Story State Bank ..................... 7,248 15.7 3,683 8.0 4,604 10.0
State Bank & Trust ........................... 10,423 15.5 5,366 8.0 6,707 10.0
Tier 1 capital ( to risk- weighted assets):
Consolidated ................................. $89,025 20.9% $17,037 4.0% -- --
Boone Bank & Trust ........................... 9,790 13.7 2,861 4.0 $ 4,292 6.0%
First National Bank .......................... 32,934 14.8 8,885 4.0 13,328 6.0
Randall-Story State Bank ..................... 6,672 14.5 1,842 4.0 2,763 6.0
State Bank & Trust ........................... 9,584 14.3 2,683 4.0 4,024 6.0
Tier 1 capital ( to average- weighted assets):
Consolidated ................................. $89,025 13.9% $25,702 4.0% -- --
Boone Bank & Trust ........................... 9,790 9.9 3,971 4.0 $ 4,964 5.0%
First National Bank .......................... 32,934 9.2 14,772 4.0 17,841 5.0
Randall-Story State Bank ..................... 6,672 10.6 2,507 4.0 3,134 5.0
State Bank & Trust ........................... 9,584 9.6 3,985 4.0 4,981 5.0
43
Note 11. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments (as described
in Note 1) were as follows:
2002 2001
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
Financial assets:
Cash and due from banks ............................... $ 51,688,784 $ 51,688,784 $ 42,459,156 $ 42,459,156
Federal funds sold .................................... 32,500,000 32,500,000 29,350,000 29,350,000
Interest-bearing deposits ............................. 1,000,000 1,000,000 250,000 250,000
Securities available-for-sale ......................... 244,575,026 244,575,026 213,778,175 213,778,175
Loans, net ............................................ 332,306,497 341,265,000 323,043,166 329,024,000
Accrued income receivable ............................. 5,849,017 5,849,017 5,977,353 5,977,353
Financial liabilities:
Deposits .............................................. 550,622,379 555,271,000 511,509,225 515,208,098
FHLB advances ......................................... -- -- 1,000,000 1,000,000
Other borrowings ...................................... 18,325,574 18,325,574 10,596,174 10,596,174
Accrued interest ...................................... 1,527,752 1,527,752 2,076,221 2,076,221
Notional Unrealized Notional Unrealized
Amount Gain (Loss) Amount Gain (Loss)
----------------------------------------------------------
Off-balance sheet items:
Commitments to extend credit .......................... $ 59,410,000 $ -- $ 51,636,000 $ --
Standby letters of credit ............................. 1,490,000 -- 1,231,000 --
Note 12. Parent Company Only Financial Statements
Information relative to the Parent Company's balance sheets at December 31, 2002
and 2001, and statements of income and cash flows for each of the years in the
three-year period ended December 31, 2002, is as follows:
STATEMENTS OF FINANCIAL CONDITION
December 31, 2002 and 2001
2002 2001
------------------------------
ASSETS
Cash and due from banks ...................... $ 6,602 $ 6,738
Interest-bearing deposits in banks ........... 1,396,656 2,166,465
Securities available-for-sale ................ 27,874,394 30,464,217
Investment in bank subsidiaries .............. 73,646,869 61,284,957
Loans receivable, net ........................ 706,968 258,227
Bank premises and equipment, net ............. 517,707 503,101
Accrued income receivable .................... 213,133 1,659,410
Other assets ................................. 155,785 25,504
------------------------------
Total assets ................................. $ 104,518,114 $ 96,368,619
==============================
LIABILITIES
Dividends payable ............................ $ 1,376,752 $ 1,312,596
Deferred taxes ............................... 1,266,922 1,328,606
Accrued expenses and other liabilities ....... 351,584 105,419
------------------------------
Total liabilities ............................ 2,995,258 2,746,621
------------------------------
STOCKHOLDERS' EQUITY
Common stock ................................. 15,766,150 15,766,150
Additional paid-in capital ................... 25,354,014 25,393,028
Retained earnings ............................ 53,917,544 49,397,011
Treasury stock, at cost ...................... (1,333,640) (1,530,805)
Accumulated other comprehensive income ....... 7,818,788 4,596,614
------------------------------
Total equity ................................. 101,522,856 93,621,998
------------------------------
Total liabilities and stockholders' equity ... $ 104,518,114 $ 96,368,619
==============================
44
STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------------------------------
Operating income:
Equity in net income of bank subsidiaries $10,108,107 $ 9,122,748 $ 7,855,578
Interest ................................ 745,488 953,071 808,091
Dividends ............................... 979,071 795,411 794,389
Rents ................................... 150,894 245,882 225,866
Securities gains, net ................... 881,938 1,092,808 741,456
---------------------------------------
12,865,498 12,209,920 10,425,380
---------------------------------------
Operating expenses:
Occupancy expense ....................... 165,447 178,802 178,191
Other ................................... 1,154,913 923,780 713,327
---------------------------------------
1,320,360 1,102,582 891,518
---------------------------------------
Income before income taxes .............. 11,545,138 11,107,338 9,533,862
Income tax expense ...................... 205,000 560,000 415,000
---------------------------------------
Net income .............................. $11,340,138 $10,547,338 $ 9,118,862
=======================================
45
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................ $ 11,340,138 $ 10,547,338 $ 9,118,862
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................... 80,620 66,781 65,247
Amortization and accretion, net ................... (16,060) (13,493) (13,497)
Provision for deferred taxes ...................... (56,023) -- --
Securities gains, net ............................. (881,938) (1,092,808) (741,456)
Undistributed net income of bank subsidiaries ..... (4,130,107) (1,994,748) (727,578)
(Increase) decrease in accrued income receivable .. 1,446,277 (18,340) (39,369)
(Increase) decrease in other assets ............... (130,281) 308,207 (325,579)
Increase (decrease) in accrued expense payable
and other liabilities ............................. 246,165 103,631 (845,213)
--------------------------------------------
Net cash provided by operating activities ......... 7,898,791 7,906,568 6,491,417
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale ......... (7,334,938) (10,244,488) (6,882,724)
Proceeds from sale of securities available-for-sale 8,611,304 4,025,880 4,949,983
Proceeds from maturities and calls of securities
available-for-sale ................................ 2,196,163 2,024,595 600,000
(Increase) decrease in interest bearing deposits
in banks .......................................... 769,809 (1,017,101) (272,968)
(Increase) decrease in loans ...................... (448,741) 2,400,844 (1,252,298)
Purchase of bank premises and equipment ........... (95,226) (79,194) (36,064)
Investment in bank subsidiary ..................... (5,000,000) -- --
--------------------------------------------
Net cash (used in) investing activities ........... (1,301,629) (2,889,464) (2,894,071)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid .................................... (6,755,449) (5,123,026) (4,867,972)
Proceeds from issuance of treasury stock .......... 158,151 110,834 1,268,493
--------------------------------------------
Net cash (used in) financing activities ........... (6,597,298) (5,012,192) (3,599,479)
--------------------------------------------
Net increase (decrease) in cash and
cash equivalents .................................. (136) 4,912 (2,133)
CASH AND CASH EQUIVALENTS
Beginning ......................................... 6,738 1,826 3,959
--------------------------------------------
Ending ............................................ $ 6,602 $ 6,738 $ 1,826
============================================
46
Note 13. Selected Quarterly Financial Data (Unaudited)
2002
-----------------------------------------------------
March 31 June 30 September 30 December 31
-----------------------------------------------------
Total interest income ............................. $ 9,095,844 $ 9,170,613 $ 9,051,618 $ 8,952,598
Total interest expense ............................ 3,062,094 3,031,178 2,809,797 2,759,901
Net interest income ............................... 6,033,750 6,139,435 6,241,821 6,192,697
Provision for loan losses ......................... 104,219 111,265 80,640 392,307
Net income ........................................ 2,940,930 2,740,935 2,952,283 2,705,990
Earnings per common share ......................... 0.94 0.88 0.94 0.87
2001
-----------------------------------------------------
Total interest income ............................. $10,689,478 $10,594,284 $10,206,893 $ 9,982,901
Total interest expense ............................ 5,526,539 5,139,785 4,496,532 3,719,777
Net interest income ............................... 5,162,939 5,454,499 5,710,361 6,263,124
Provision for loan losses ......................... 77,678 196,230 283,229 340,403
Net income ........................................ 2,580,058 2,717,398 2,682,320 2,567,562
Earnings per common share ......................... 0.83 0.87 0.86 0.82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's independent
accountants during the two most recently ended fiscal years of the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Refer to the information under the caption "Information Concerning Nominees for
Election as Directors" and "Information Concerning Directors Other Than
Nominees" contained in the Company's definitive proxy statement prepared in
connection with its Annual Meeting of Shareholders to be held April 23, 2003, as
filed with the SEC on March 25, 2003 (the "Proxy Statement"), which information
is incorporated herein by this reference.
Executive Officers
The following table sets forth summary information about the executive officers
of the Company and certain executive officers of the Banks. Unless otherwise
indicated, each executive officer has served in his current position for the
past five years.
Name Age Position with the Company or Bank and Principal Occupation and
Employment During the Past Five Years
- ------------------------------------------------------------------------------------------------------
Kevin G. Deardorff 48 Vice President & Technology Director of the Company.
Leo E. Herrick 61 President of United Bank commencing June, 2002. Previously,
Chairman of the Board and President of F&M Bank-Iowa, Marshalltown,
Iowa.
Edward C. Jacobson 62 Vice President and Treasurer of Company and Senior Vice President
Daniel L. Krieger 66 President of Company since 1997. Previously served as President
of First National. Also serves as a Director of the Company,
Chairman of the Board and Trust Officer of First National and
Chairman of the Board of Boone Bank and United Bank.
David L. Morris 60 President of Randall-Story Bank.
John P. Nelson 36 Vice President and Secretary of Company.
Thomas H. Pohlman 52 President of First National since 1999. Previously served as
Senior Vice President of First National.
Jeffrey K. Putzier 41 President of Boone Bank since 1999. Previously served as Vice
President of State Bank.
William D. Tufford 58 President of State Bank.
Terrill L. Wycoff 59 Executive Vice President of First National since 2000. Previously
served as served as Senior Vice President of First National.
47
Section 16(a) Beneficial Ownership Reporting Compliance
Refer to the information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement, which information is incorporated
herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Refer to the information under the caption "Executive Compensation" in the Proxy
Statement, which information is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Refer to the information under the captions "Security Ownership of Management
and Certain Beneficial Owners" in the Proxy Statement, which information is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to the information under the caption "Loans to Directors and Executive
Officers and Related Party Transactions" in the Proxy Statement, which
information is incorporated herein by this reference.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The principal executive officer and principal financial officer of the Company
have evaluated the effectiveness of the Company's disclosure controls and
procedures (as such terms are defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date
within 90 days prior to the filing date of this annual report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in bringing to their attention on a timely basis material information relating
to the Company (including its consolidated subsidiaries) required to be included
in the Company's periodic filings under the Exchange Act.
Changes in Internal Controls
Since the Evaluation Date, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Financial Statements and Schedules.
1. Financial Statements
Report of McGladrey & Pullen, LLP, Independent Auditor
Report of KPMG, LLP, Independent Auditor
Consolidated Balance Sheets, December 31, 2002 and 2001
Consolidated Statements of Income for the Years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K.
On October 18, 2002, the Company filed a Form 8-K pursuant to Item 5,
announcing net earnings for the three and nine months ended September
30, 2002.
48
(c) Exhibits.
3.1 - Restated Articles of Incorporation of the Company
(incorporated by reference to Form 10 filed on April 30,
2001).
3.2 - Bylaws of the Company.
10 - Management Incentive Compensation Plan (incorporated by
reference to Form 10K filed on March 25, 2002).
21 - Subsidiaries of the Registrant.
23.1 - Consent of Accountants-McGladrey & Pullen, LLP
23.2 - Consent of Accountants-KPMG, LLP
99 - Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMES NATIONAL CORPORATION
March 31, 2003 By: /s/ Daniel L. Krieger
----------------------------------------
Daniel L. Krieger, President
(Principle Executive Officer)
March 31, 2003 By: /s/ John P. Nelson
----------------------------------------
John P. Nelson, Vice President
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 31, 2003.
/s/ Robert W. Stafford
---------------------------------------
Robert W. Stafford, Chairman
/s/ Charles D. Jons
---------------------------------------
Charles D. Jons, Director
/s/ Betty A. Baulder
---------------------------------------
Betty A. Baudler, Director
/s/ James Christy
---------------------------------------
James Christy, Director
/s/ Jami R. Larson
---------------------------------------
Jami R. Larson II, Director
/s/ Marvin J. Walter
---------------------------------------
Marvin J. Walter, Director
/s/ Douglas C. Gustafson
---------------------------------------
Douglas C. Gustafson, Director
50
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Daniel L. Krieger, certify that:
1. I have reviewed this annual report on Form 10K of Ames National Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant , including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/ Daniel L. Krieger
--------------------------------------
Daniel L. Krieger, President
(Principal Executive Officer)
51
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, John P. Nelson, certify that:
1. I have reviewed this annual report on Form 10K of Ames National Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant , including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/ John P. Nelson
----------------------------------
John P. Nelson, Vice President
(Principal Financial Officer)
52