SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
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, 2003 Commission File Number 0-32637
-----
AMES NATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
IOWA 42-1039071
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
405 FIFTH STREET, AMES, IOWA 50010
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(515) 232-6251
(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
-----------------------------
(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 30, 2003, the aggregate market value of common 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 $137,170,267.
Shares of common stock beneficially owned by each executive officer and director
of the registrant 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
27, 2004, was 3,133,053.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, as filed with the
Securities and Exchange Commission on March 12, 2004, 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................................. 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 36
Item 9A. Controls and Procedures .................................... 55
Part III
Item 10. Directors and Executive Officers of the Registrant......... 55
Item 11. Executive Compensation..................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters .............. 56
Item 13. Certain Relationships and Related Transactions............. 56
Item 14. Principal Accountant Fees and Services .................... 56
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................. 56
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 and Internet banking 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 including many 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.
As of December 31, 2003, First National had capital of $40,031,000 and 96
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 $6,621,000 in 2003,
$6,294,000 in 2002 and $5,834,000 in 2001. Total assets as of December 31, 2003,
2002 and 2001 were $381,086,000, $375,341,000 and $349,702,000, respectively.
3
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.
As of December 31, 2003, State Bank had capital of $11,230,000 and 23 full-time
equivalent employees. It had net income of $1,554,000 in 2003, $1,501,000 in
2002 and $1,294,000 in 2001. Total assets as of December 31, 2003, 2002 and 2001
were $100,712,000, $104,079,000 and $94,004,000, 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, 2003, Boone Bank had capital of $12,128,000 and 27 full-time
equivalent employees. It had net income of $1,920,000 in 2003, $1,827,000 in
2002 and $1,302,000 in 2001. Total assets as of December 31, 2003, 2002 and 2001
were $110,712,000, $96,829,000 and $94,356,000, 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.
As of December 31, 2003, Randall-Story Bank had capital of $7,759,000 and 15
full-time equivalent employees. It had net income of $810,000 in 2003,
$1,009,000 in 2002 and $692,000 in 2001. Total assets as of December 31, 2003,
2002 and 2001 were $72,581,000, $64,946,000 and $63,680,000, 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 trust
services to customers located in the Marshalltown and surrounding Marshall
County area.
As of December 31, 2003, United Bank had capital of $4,959,000 and 16 full-time
equivalent employees. It had a net loss in 2003 of $465,000 and for the six and
one-half month period ended December 31, 2002 of $524,000. Total assets as of
December 31, 2003 and 2002 were $68,397,000 and $30,355,000, respectively.
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.
4
The Banks offer a full range of deposit services that are typically available in
most financial institutions, including checking accounts, savings accounts and
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
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 generally
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, 2003, the Banks had a total of 177 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.
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.
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
As of December 31, 2003, there were 25 FDIC insured institutions having
approximately 57 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.
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.
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 equity, money market, and insurance products offered by brokerage and
insurance companies. This competitive 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. 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.
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.
8
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.
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.
9
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).
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.
10
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 27, 2004, 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 $38,800,000 or less
(subject to an exemption not in excess of the first $6,600,000 of transaction
accounts). A reserve of $1,164,000 plus 10% of amounts in excess of $38,800,000
must be maintained in the event total transaction accounts exceed $38,800,000.
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 noninterest
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 makes 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.
The Company will provide a paper copy 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 or by email
request at info@amesnational.com.
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. This
space is leased by the Company from First National pursuant to a lease agreement
that 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 North Grand office
and the University 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 was 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 onwed by 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. 800 square feet of the remaining space is currently leased to
two tenants who occupy the space for business purposes and the remaining 7,058
square feet of rentable space is currently unoccupied. The Company entered into
a real estate contract on July 14, 2003 to purchase real estate adjacent to 2330
Lincoln Way at 2318 Lincoln Way for a total purchase price of $400,000. The 2318
Lincoln Way property consists of a single story commercial building with 2,400
square feet of leased space that is currently occupied by one tenant for
business purposes. As of February 27, 2004, the contract has not closed;
however, the agreement specifies that the closing of the contract will take
place no later than July 31, 2006.
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 any of 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 2003.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
On February 27, 2004, the Company had approximately 615 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 Piper Jaffray, 515 Grand Ave, 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 (which prices do not include retail mark-up, mark-down
or commissions):
2003 2002
- --------------------------------- -------------------------------
Sales Price Market Price
- --------------------------------- -------------------------------
Quarter High Low Quarter High Low
- --------------------------------------------------------------------------------
1st ....... $48.90 $46.05 1st ....... $40.00 $39.00
2nd ....... 55.25 51.50 2nd ....... 45.00 40.00
3rd ....... 57.25 53.10 3rd ....... 46.75 43.00
4th ....... 59.75 56.75 4th ....... 47.50 45.90
The Company declared aggregate annual cash dividends in 2003 and 2002 of
$7,142,000 and $6,820,000, respectively, or $2.28 per share in 2003 and $2.18
per share in 2002. On February 11, 2004, the Company declared an aggregate cash
dividend of $1,441,000 or $.46 per share. Quarterly dividends declared during
the last two years were as follows:
2003 2002
---------------------------------------------
Cash dividends Cash dividends
Quarter declared per share declared per share
- --------------------------------------------------------------------------------
1st $0.44 $0.42
2nd 0.92 0.88
3rd 0.46 0.44
4th 0.46 0.44
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, 2003 through 1999 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)
------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------
STATEMENT OF INCOME DATA
Interest income .......................... $ 35,314 $ 36,270 $ 41,474 $ 44,018 $ 40,361
Interest expense ......................... 10,339 11,663 18,883 24,261 19,981
------------------------------------------------------------------
Net interest income ...................... 24,975 24,607 22,591 19,757 20,380
Provision for loan losses ................ 645 688 898 460 166
------------------------------------------------------------------
Net interest income after provision for
loan losses .............................. 24,330 23,919 21,693 19,297 20,214
Noninterest income ....................... 6,435 5,135 5,080 4,130 5,750
Noninterest expense ...................... 14,819 13,276 11,587 10,712 11,208
------------------------------------------------------------------
Income before provision for income tax ... 15,946 15,778 15,186 12,715 14,756
Provision for income tax ................. 4,321 4,438 4,639 3,596 4,429
------------------------------------------------------------------
Net Income ............................... $ 11,625 $ 11,340 $ 10,547 $ 9,119 $ 10,327
==================================================================
DIVIDENDS AND EARNINGS PER SHARE DATA
Cash dividends declared .................. $ 7,142 $ 6,820 $ 5,187 $ 4,932 $ 4,664
CAsh dividends declared per share ........ 2.28 2.18 1.66 1.58 1.50
Basic and diluted earnings per share ..... 3.71 3.63 3.38 2.92 3.31
Weighted average shares outstanding ...... 3,131,224 3,127,285 3,123,885 3,120,375 3,118,427
BALANCE SHEET DATA
Total assets ............................. $ 752,786 $ 677,229 $ 622,280 $ 619,385 $ 605,881
Net loans ................................ 355,533 329,593 323,043 344,015 309,652
Deposits ................................. 619,549 550,622 511,509 493,429 484,620
Stockholders' equity ..................... 107,325 101,523 93,622 86,177 76,073
Equity to assets ratio ................... 14.26% 14.99% 15.04% 13.91% 12.56%
FIVE YEAR FINACNIAL PERFORMANCE
Net income ............................... $ 11,625 $ 11,340 $ 10,547 $ 9,119 $ 10,327
Average assets ........................... 726,945 635,816 616,971 626,560 594,441
Average stockholders' equity ............. 104,141 98,282 91,373 80,081 80,074
Return on assets (net income divided
by average assets) ..................... 1.60% 1.78% 1.71% 1.46% 1.74%
Return on equity (net income by
average equity) ........................ 11.16% 11.54% 11.54% 11.39% 12.90%
Efficiency ratio (noninterest expense
divided by noninterest income plus
net interest income) ................... 47.18% 44.64% 41.87% 44.84% 42.89%
Dividend payout ratio (dividends per
share divided by net income per share) . 61.46% 60.05% 49.11% 54.11% 45.32%
Dividend yield (dividends per share
divided by closing year-end market
price) ................................. 3.91% 4.69% 4.15% 2.87% 2.73%
Equity to assets ratio (average equity
divided by average assets) ............. 14.33% 15.46% 14.81% 12.78% 13.47%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Ames National Corporation (Company) is a bank holding company established in
1975 that owns and operates five bank subsidiaries (Banks) in central Iowa. The
following discussion is provided for the consolidated operations of the Company
and its Banks, 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.
15
The Company does not engage in any material business activities apart from its
ownership of the Banks. Products and services offered by the Banks are for
commercial and consumer purposes including loans, deposits and trust services.
The Banks also offer investment services through a third-party broker dealer.
The Company employs eight individuals to assist with financial reporting, human
resources, audit, compliance, technology systems and the coordination of
management activities, in addition to 177 full-time equivalent individuals
employed by the Banks.
The Company's primary competitive strategy is to utilize seasoned and competent
Bank management and local decision making authority to provide customers with
faster response times and more flexibility in the products and services offered.
This strategy is viewed as providing an opportunity to increase revenues through
creating a competitive advantage over other financial institutions. The Company
also strives to remain operationally efficient to provide better profitability
while enabling the Company to offer more competitive loan and deposit rates.
The principal sources of Company revenues and cashflow 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 Company's principal expenses are: (i) interest
expense on deposit accounts and other borrowings; (ii) salaries and employee
benefits; (iii) data processing costs associated with maintaining the Bank's
loan and deposit functions; and (iv) occupancy expenses for maintaining the
Banks' facilities. The largest component contributing to the Company's net
income is net interest income, which is the difference between interest earned
on earning assets (primarily loans and investments) and interest paid on
interest bearing liabilities (primarily deposits and other borrowings). One of
management's principal functions is to manage the spread between interest earned
on earning assets and interest paid on interest bearing liabilities in an effort
to maximize net interest income while maintaining an appropriate level of
interest rate risk.
The Company reported record net income of $11,625,000 for the year ended
December 31, 2003 compared to $11,340,000 and $10,547,000 reported for the years
ended December 31, 2002 and 2001, respectively. This represents an increase of
2.5% when comparing 2003 and 2002, and an increase of 7.5% when comparing 2002
and 2001. The improvement in net income for 2003 can be attributed primarily to
higher net interest income, secondary market income and security gains. The gain
in earnings in 2002 over 2001 relate primarily to much lower interest expense in
2002. Earnings per share for 2003 were a record $3.71 compared to $3.63 in 2002
and $3.38 in 2001. United Bank, which commenced operation in June of 2002, is
expected to be profitable in 2004 in contrast to the $465,000 loss posted in
2003. The other four Banks continued profitable operations during 2003.
The Company's return on average equity for 2003 was 11.16% versus 11.54% in both
2002 and 2001. The decline in return on average equity is primarily the result
of a higher average level of equity in 2003 relating to net unrealized gains on
securities available for sale. The average net unrealized gain on securities
available for sale was $8,287,000 in 2003 as compared to $6,225,000 in 2002. The
Company's return on average assets for 2003 was 1.60% compared to 1.78% in 2002
and 1.71% in 2001. The decline in the return on average assets in 2003 can be
attributable to growth in assets and the operating loss generated by United Bank
as a newly chartered bank.
The following management discussion and analysis will provide a summary review
of important items relating to:
o Challenges
o Key Performance Indicators and Industry Results
o Income Statement Review
o Balance Sheet Review
o Asset Quality and Credit Risk Management
o Liquidity and Capital Resources
o Interest Rate Risk
o Inflation
o Forward-Looking Statements and Business Risks
16
Challenges
Management has identified certain challenges that may negatively impact the
Company's revenues in the future and is attempting to position the Company to
best respond to those challenges.
o Interest rates at historic lows may present a challenge to the Company by
increasing the possibility of a rapid increase in interest rates. Such an
increase may negatively impact the Company's net interest margin if
interest expense increases more quickly than interest income. The Company's
earning assets (primarily its loan and investment portfolio) have longer
maturities than its interest bearing liabilities (primarily deposits and
other borrowings); therefore, in a rising interest rate environment,
interest expense will increase more quickly than interest income as the
interest bearing liabiliites reprice more quickly than earning assets. In
response to this challenge, the Banks model quarterly the changes in income
that would result from various changes in interest rates. Management
believes Bank assets have the appropriate maturity and repricing
characteristics to optimize earnings and the Banks' interest rate risk
positions.
o The volume of mortgage loan refinancing is expected to decline in 2004.
This slowdown will have a negative impact on the Company's noninterest
income as the refinancing activity generated record secondary market income
of $1,155,000 in 2003. The Banks are focusing more attention on
relationships with local real estate agents in an effort to expand the
mortgage loan fees derived from home purchases as refinancing activity
begins to diminish.
o The Company's market in central Iowa has numerous banks, credit unions,
investment and insurance companies competing for similar business
opportunities. This competitive environment will continue to put downward
pressure on the Banks' net interest margins and thus affect profitability.
Activities the Company is undertaking to address this challenge include
additional focus on improving customer service, packaging products to
provide more convenience for customers, and remaining operationally
efficient to maintain profitability with lower net interest margins.
o A potential challenge to the Company's earnings would be poor performance
in the Company's equity portfolio, thereby reducing the historical level of
realized security gains. The Company invests capital that may be utilized
for future expansion in a portfolio of primarily financial and utility
stocks totaling nearly $25 million as of December 31, 2003. The Company
focuses on stocks that have historically paid dividends that may lessen the
negative effects of a bear market.
Key Performance Indicators and Industry Results
Certain key performance indicators for the Company and the industry are
presented in the following chart. The industry figures are compiled by the
Federal Deposit Insurance Corporation (FDIC) and are derived from 9,182
commercial banks and savings institutions insured by the FDIC. Management
reviews these indicators on a quarterly basis for purposes of comparing the
Company's performance from quarter to quarter and to determine how the Company's
operations compare to the industry as a whole.
Selected Indicators for the Company and the Industry
Year Ended December 31,
------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------
Company Industry Company Industry Company Industry
Return on assets . 1.60% 1.38% 1.78% 1.30% 1.71% 1.14%
Return on equity . 11.16% 15.04% 11.54% 14.14% 11.54% 12.97%
Net interest ..... 4.02% 3.73% 4.51% 3.96% 4.19% 3.78%
Efficiency ratio . 47.18% 56.59% 44.64% 56.00% 41.87% 57.72%
Capital ratio .... 14.33% 7.88% 15.46% 7.87% 14.81% 7.78%
Key performances indicators include:
o Return on Assets
This ratio is calculated by dividing net income by average assets. It is
used to measure how effectively the assets of the Company are being
utilized in generating income. Although the Company's return on assets
ratio compares favorably to that of the industry, this ratio declined in
2003 as compared to 2002 as assets grew more quickly in relation to net
income, primarily as the result of the growth at United Bank.
17
o Return on Equity
This ratio is calculated by dividing net income by average equity. It is
used to measure the net income or return the Company generated for the
shareholders' equity investment in the Company. The Company's return on
equity ratio is below that of the industry primarily as a result of the
higher level of capital the Company maintains for future growth and
acquisitions. The Company's return on equity is trending downward as a
result of its increasing total equity capital. In 1999, total equity
capital totaled $76,073,000 (including a net unrealized loss on securities
available for sale of $2,026,000) compared to December 31, 2003 total
equity capital of $107,325,000 (including net unrealized gains on
securities of $8,916,000).
o Net Interest Margin
The ratio is calculated by dividing net interest income by average earning
assets. Earning assets are primarily made up of loans and investments that
earn interest. This ratio is used to measure how well the Company is able
maintain interest rates on earning assets above those of interest-bearing
liabilities, which is the interest expense paid on deposit and other
borrowings. The Company's net interest margin compares favorably to the
industry; however, management expects the competitive nature of the
Company's market environment to put downward pressure on the Company's
margin.
o Efficiency Ratio
This ratio is calculated by dividing noninterest expense by net interest
income and noninterest income. The ratio is a measure of the Company's
ability to manage noninterest expenses. The Company's efficiency ratio
compares favorably to the industry's average. The costs associated with
chartering United Bank have increased the ratio the past two years.
o Capital Ratio
The capital ratio is calculated by dividing total equity capital by total
assets. It measures the level of assets that are funded by shareholders'
equity. Given an equal level of risk in the financial condition of two
companies, the higher the capital ratio, generally the more financially
sound the company. The Company's capital ratio is significantly higher than
the industry average.
Industry Results
The FDIC Quarterly Banking Profile reported the following results for the fourth
quarter of 2003:
Led by rising income at credit-card lenders and large commercial banks, the
9,182 commercial banks and savings institutions insured by the FDIC reported
record-high earnings in the fourth quarter of 2003, the fourth consecutive
quarter that industry earnings have set a record. Net income totaled $31.1
billion, an increase of $755 million (2.5%) over the third quarter, and $5.7
billion (22.3%) more than the industry earned in the fourth quarter of 2002. The
average return on assets was 1.38%, up from 1.36% in the third quarter, and well
above the 1.22% of a year earlier. The greatest improvement in profitability
occurred at large institutions, whose earnings had been depressed by credit
losses on loans to large corporate borrowers and by weakness in market-sensitive
noninterest revenues. Fewer than half of all institutions (45.0%) reported a
return on assets of 1% or higher for the quarter. Slightly more than half
(52.7%) reported increased net income compared to the fourth quarter of 2002,
but only 45.4% reported higher quarterly return on assets.
Income Statement Review
The following highlights a comparative discussion of the major components of net
income and their impact for the last three years.
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 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.
18
The Company's significant accounting policies are described in the "Notes to
Consolidated Financial Statements" accompanying the Company's audited financial
statements. Based on its consideration of accounting policies that involve the
most complex and subjective estimates and judgments, 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
that is treated as an expense and charged against earnings. 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 loans. 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 lesser than future charge-offs.
Average Balances and Interest Rates
The following two tables are used to calculate the Company's net interest
margin. The first table includes the Company's average assets and the related
income to determine the average yield on earning assets. The second table
includes the average liabilities and related expense to determine the average
rate paid on interest bearing liabilities. The net interest margin is equal to
the interest income less the interest expense divided by average earning assets.
ASSETS
2003 2002 2001
--------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield Average Yield
Balance Revenue Rate Balance Revenue Rate Balance Revenue Rate
(dollars in thousands) -----------------------------------------------------------------------------------------
Interest-earning assets
Loans:
Commercial ................... $ 38,288 $ 2,163 5.65% $ 42,948 $ 3,042 7.08% $ 49,081 $ 4,107 8.37%
Agricultural ................. 25,962 1,783 6.87% 25,274 1,895 7.50% 28,302 2,492 8.81%
Real estate .................. 264,494 16,909 6.39% 229,805 16,929 7.37% 240,382 19,458 8.09%
Consumer and other ........... 21,068 1,342 6.37% 19,494 1,341 6.88% 23,675 1,834 7.75%
-----------------------------------------------------------------------------------------
Total loans (including fees) ... $349,812 $ 22,197 6.35% $317,521 $ 23,207 7.31% $341,440 $ 27,891 8.17%
Investment securities:
Taxable ...................... $162,273 $ 7,925 4.88% $142,089 $ 8,414 5.92% $146,213 $ 9,303 6.36%
Tax-exempt ................... 101,482 6,820 6.72% 78,171 5,797 7.42% 68,001 5,210 7.66%
-----------------------------------------------------------------------------------------
Total investment securities .... $263,755 $ 14,745 5.59% $220,260 $ 14,211 6.45% $214,214 $ 14,513 6.78%
Interest bearing deposits ...... $ 4,511 $ 62 1.37% $ 534 $ 14 2.62% $ 251 $ 13 5.18%
Federal funds sold ............. 60,293 628 1.04% 51,206 810 1.58% 25,953 829 3.19%
-----------------------------------------------------------------------------------------
Total Interest-earning assets .. $678,371 $ 37,632 5.55% $589,521 $ 38,242 6.49% $581,858 $ 43,246 7.43%
Noninterest-earning assets
Cash and due from banks ........ $ 27,733 $ 28,206 $ 21,040
Premises and equipment, net .... 8,599 7,912 5,892
Other, less allowance for loan
losses ....................... 12,242 10,177 8,181
-------- -------- --------
Total noninterest-earning assets $ 48,574 $ 46,295 $ 35,113
-------- -------- --------
TOTAL ASSETS ................... $726,945 $635,816 $616,971
======== ======== ========
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%.
19
Average Balances and Interest Rates (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002 2001
---------------------------- --------------------------- ---------------------------
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 ......... $298,885 $ 2,758 0.92% $260,426 $ 3,393 1.30% $228,908 $ 5,727 2.50%
Time deposits < $100,000 .... 170,534 5,480 3.21% 152,703 6,107 4.00% 158,625 8,736 5.51%
Time deposits > $100,000 .... 65,759 1,807 2.75% 51,428 1,898 3.69% 58,253 3,329 5.71%
--------------------------------------------------------------------------------------------
Total deposits ................ $535,178 $ 10,045 1.88% $464,557 $ 11,398 2.45% $445,786 $ 17,792 3.99%
Other borrowed funds .......... 19,588 293 1.50% 13,887 265 1.91% 23,008 1,091 4.74%
------------------------------------------------------------------------------------------
Total Interest-bearing ........ $554,766 $ 10,338 1.86% $478,444 $ 11,663 2.44% $468,794 $ 18,883 4.03%
------------------------------------------------------------------------------------------
Noninterest-bearing liabilities
Demand deposits ............... $ 59,614 $ 53,318 $ 51,113
Other liabilities ............. 8,424 5,772 5,691
-------- -------- --------
Stockholders' equity .......... $104,141 $ 98,282 $ 91,373
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .......... $726,945 $635,816 $616,971
======== ======== ========
Net interest income ........... $ 27,294 4.02% $ 26,579 4.51% $ 24,363 4.19%
======== ======== ========
Spread Analysis:
Interest income/average
assets .................... $ 37,632 5.18% $ 38,242 6.01% $ 43,246 7.01%
Interest expense/average
assets .................... 10,338 1.42% 11,663 1.83% 18,883 3.06%
Net interest income/average . 27,294 3.76% 26,579 4.18% 24,363 3.95%
Rate and Volume Analysis
The rate and volume analysis is used to determine how much of the change in
interest income or expense is the result of a change in volume or a change in
interest rate. For example, real estate interest income decreased $20,000 in
2003 compared to 2002. An increased volume of real estate loans added $2,384,000
in income in 2003; however, lower interest rates reduced interest income in 2003
by $2,404,000, a net difference of $20,000.
20
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.
(dollars in thousands) 2003 Compared to 2002 2002 Compared to 2001
------------------------------ -----------------------------
Volume Rate Total Volume Rate Total
--------------------------------------------------------------
Interest income
Loans:
Commercial ........................... $ (307) $ (572) $ (879) $ (477) $ (588) $(1,065)
Agricultural ......................... 50 (162) (112) (250) (347) (597)
Real estate .......................... 2,384 (2,404) (20) (836) (1,693) (2,529)
Consumer and other ................... 104 (103) 1 (301) (192) (493)
--------------------------------------------------------------
Total loans (including fees) ........... $ 2,231 $(3,241) $(1,010) $(1,864) $(2,820) $(4,684)
Investment securities:
Taxable .............................. $ 1,103 $(1,592) $ (489) $ (257) $ (632) $ (889)
Tax-exempt ........................... 1,608 (585) 1,023 755 (168) 587
--------------------------------------------------------------
Total investment
securities ............................. $ 2,711 $(2,177) $ 534 $ 498 $ (800) $ (302)
Interest bearing deposits with banks ... 58 (10) 48 10 (9) 1
Federal funds sold ..................... 127 (309) (182) 538 (557) (19)
--------------------------------------------------------------
Total Interest-earning assets .......... $ 5,127 $(5,737) $ (610) $ (818) $(4,186) $(5,004)
Interest-bearing liabilities
Deposits:
Savings, NOW accounts, and money
markets ............................ $ 452 $(1,086) $ (634) $ 704 $(3,038) $(2,334)
Time deposits < $100,000 ............. 663 (1,290) (627) (314) (2,315) (2,629)
Time deposits > $100,000 ............. 457 (548) (91) (431) (1,000) (1,431)
--------------------------------------------------------------
Total deposits ......................... $ 1,572 $(2,924) $(1,352) $ (41) $(6,353) $(6,394)
Other borrowed funds ................... 93 (68) 25 (330) (496) (826)
--------------------------------------------------------------
Total Interest-bearing liabilities ..... $ 1,665 $(2,992) $(1,327) $ (371) $(6,849) $(7,220)
--------------------------------------------------------------
Net interest income/earning assets ..... $ 3,462 $(2,745) $ 717 $ (447) $ 2,663 $ 2,216
==============================================================
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.
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 other 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. See the tables
preceding this paragraph for additional detail. 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, 2003, 2002 and 2001, the
Company's net interest margin was 4.02%, 4.51% and 4.19%, respectively. The
decline in the net interest margin in 2003 is attributable to growth in assets
and repricing of loans and investments at lower yields than those attainable
prior to 2003. The Banks' net interest margins, excluding United Bank, declined
by approximately 30 basis points while the net interest margin for United Bank
in 2003 was 1.53% on average earning assets of $54,847,000. The improved net
interest margin in 2002 as compared to 2001 is attributable to the Company being
able to lower rates paid on deposits and other borrowings more quickly than
rates declined on loans and investments.
Unless interest rates increase significantly in 2004, management expects average
yields on assets will likely fall again in 2004 as assets continue to reprice.
Also, the high level of competition in the local markets will continue to put
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, four credit unions and several other financial investment
companies. Multiple banks are also located in the Company's other communities
creating similarly competitive environments.
21
Net interest income during 2003, 2002 and 2001 totaled $24,975,000, $24,608,000
and $22,591,000, respectively, representing a 1.50% increase in 2003 from 2002
and an 8.93% increase in 2002 compared to 2001. Income earned on a higher volume
of earning assets exceeded the interest expense on interest bearing liabilities
utilized to fund those assets allowing the Company to increase its net interest
income in 2003 compared to 2002. The higher net interest income in 2002 results
from the Company being able to lower rates paid on deposits and other borrowings
more quickly than rates declined on loans and investments. Interest expense in
2003 verus 2002 was 11.35% lower compared to a much larger reduction in 2002
compared to 2001 to 38.23% reflecting the decline in market interest rates.
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 $645,000 for loan losses during 2003 compared to $688,000 in
2002 and $898,000 in 2001. Provision expense was higher in 2001 versus 2002 and
2003 as the result of deterioration in the commercial lease portfolio in 2001.
The growth of the loan portfolio and necessary loan reserves at United Bank
increased the provision for loan losses by $314,000 in 2003 compared to $166,000
in 2002 which represented 48.65% of the Company's provision expense in 2003. See
the Asset Quality and Credit Risk Management discussion for additional detail
with regard to loan loss provision expense.
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
Total noninterest income is comprised primarily of fee based revenues from trust
and agency services, bank related service charges on deposit activities, net
securities gains generated primarily by the Company's equity holdings, merchant
and ATM fees related to electronic processing of merchant and cash transactions
and secondary market income.
Noninterest income during 2003, 2002 and 2001 totaled $6,435,000, $5,135,000 and
$5,080,000, respectively, representing a 25.33% increase in 2003 from 2002 and a
1.08% increase in 2002 compared 2001. Both secondary market income and net
securities gains increased over 56% in 2003 from 2002. Low interest rates fueled
a record year in secondary market income through mortgage refinancings and the
Company realized a higher level of securities gains through liquidating equity
holdings that no longer fit the Company's long term investment strategy. Both
secondary market income and net security gains are expected to be lower in 2004.
The increased non interest income in 2002 is the result of improved
profitability of trust, secondary market and automated teller machine business,
offset by lower security gains.
Noninterest expense for the Company consists of all operating expenses other
than interest expense on deposits and other borrowed funds. Historically, the
Company has not had any material expenses relating to discontinued operations,
extraordinary losses or adjustments from a change in accounting principles.
Salaries and employee benefits are the largest component of the Company's
operating expenses and comprise 61.03% of noninterest expenses in 2003.
Noninterest expense during 2003, 2002 and 2001 totaled $14,820,000, $13,276,000
and $11,587,000, respectively, representing an 11.63% increase in 2003 versus
2002 and a 14.57% increase in 2002 compared to 2001. An increase in salaries and
employee benefits was the largest contributor to the increase in operating
expenses in both 2003 and 2002. United Bank had operating expenses in 2003 and
2002 of $1,418,000 and $698,000, respectively, increasing all overhead expense
categories in comparison to those of 2001. Another factor leading to the
increase in operating expenses in 2003 was the additional employees and higher
salaries at First National. The percentage of noninterest expense to average
assets was 2.04% in 2003, compared to 2.09% and 1.88% during 2002 and 2001,
respectively.
Provision for Income Taxes
The provision for income taxes for 2003, 2002 and 2001 was $4,321,000,
$4,438,000 and $4,639,000, respectively. This amount represents an effective tax
rate of 27.10% during 2003, compared to 28.13% and 30.54% for 2002 and 2001,
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.
22
Balance Sheet Review
The Company's ssets are comprised primarily of loans and investment bonds.
Average earning asset maturity or repricing dates are less than five years for
the combined portfolios as the assets are funded for the most part by short term
deposits with either immediate availability or less than one year average
maturities. This exposes the Company to risk with regard to changes in interest
rates that are more fully explained in Item 7A of this Report entitled
"Quantitative and Qualitative Disclosures about Interest Rate Risk".
Total assets increased to $752,786,000 in 2003 compared to $677,229,000 in 2002,
an 11.16% increase. The growth of United Bank to $68,397,000 in total assets
from the $30,355,000 posted at the end of 2002 was the most significant asset
growth factor. Boone Bank and Randall-Story Bank also posted double digit growth
in assets.
Loan Portfolio
Net loans (defined as gross loans less deferred loan fees and the allowance for
loans losses) for the year ended December 31, 2003, increased to $355,533,000
from $329,543,000 as of December 31, 2002, an increase of 7.89%. The increase in
loan volume can be primarily attributed to growth in the commercial, commercial
real estate and residential loan portfolios at United Bank. Loans are the
primary contributor to the Company's revenues and cashflows. The average
tax-equivalent yield on loans was 76 and 86 basis points higher in 2003 and
2002, respectively, than the investment portfolio yields for the same periods in
the previous year excluding short term federal funds sold and interest bearing
deposit with banks.
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, 2003.
----------------------------------------------------
2003 2002 2001 2000 1999
(dollars in thousands) ----------------------------------------------------
Real Estate
Construction ................. $ 13,126 $ 13,518 $ 12,677 $ 12,221 $ 9,062
1-4 family residential ....... 84,645 81,239 84,379 97,663 89,171
Commercial ................... 150,723 136,351 117,211 112,415 98,840
Agricultural ................. 24,297 21,693 21,029 21,095 19,999
Commercial ..................... 38,555 40,097 45,631 53,955 48,920
Agricultural ................... 27,815 26,022 27,367 28,199 25,575
Consumer and other ............. 23,242 19,921 20,920 24,576 23,897
----------------------------------------------------
Total loans .................... 362,403 338,841 329,214 350,124 315,464
Deferred loan fees, net ........ 819 777 725 736 826
----------------------------------------------------
Total loans net of deferred fees $361,584 $338,064 $328,489 $349,388 $314,638
====================================================
The Company's loan portfolio consists of real estate loans, commercial loans,
agricultural loans and consumer loans. As of December 31, 2003, gross loans
totaled approximately $362 million, which equals approximately 58% of total
deposits and 48% of total assets. For the Company's peer group, 347 bank holding
companies with total assets of $500 to $1,000 million, loan to deposit ratio as
of September 30, 2003 was a much higher 83%. The primary factor relating to the
lower loan to deposit ratio for the Company compared to peer group averages is a
more conservative underwriting philosophy. As of December 31, 2003, 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.
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.
23
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 for area producers.
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 and the amount
and 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 boards of directors of the Company and the Banks, and is 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.
Maturities and Sensitivities of Loans to Changes in Interest Rates as of
December 31, 2003
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. The maturity of fixed rate loans and the volume of variable rate
loans are relevant as an indicator of the Company's ability to reprice loans in
relation to changes in market interest rates.
After one
year but
Within within After
One Year five years five years Total
(dollars in thousands) --------------------------------------------
Real Estate
Construction ................. $ 10,868 $ 2,110 $ 148 $ 13,126
1-4 family residential ....... 3,807 34,544 46,294 84,645
Commercial ................... 14,504 104,023 32,196 150,723
Agricultural ................. 1,317 5,296 17,684 24,297
Commercial ..................... 22,835 13,804 1,916 38,555
Agricultural ................... 17,992 5,446 4,377 27,815
Consumer and other ............. 3,804 12,908 6,530 23,242
--------------------------------------------
Total loans .................... $ 75,127 $178,131 $109,145 $362,403
============================================
After one
year but
within After
five years five years
-----------------------------
Loan maturities after one year with:
Fixed rates ............................ $150,610 $ 21,456
Variable rates ......................... 27,521 87,689
----------------------------
$178,131 $109,145
Loans Held For Sale
Mortgage origination funding awaiting delivery to the secondary market totaled
$859,000 and $2,713,000 as of December 31, 2003 and 2002, respectively.
Residential mortgage loans are originated by the Banks and sold to several
secondary mortgage market outlets based upon customer product preferences and
pricing considerations. The mortgages are sold in the secondary market to
eliminate interest rate risk and to generate secondary market fee income. It is
not anticipated at the present time that loans held for sale will become a
significant portion of total assets.
24
Investment Portfolio
Total investments as of December 31, 2003 were $323,116,000, an increase of
$78,541,000 or 32% from the prior year end. As of December 31, 2003 and 2002,
the investment portfolio comprised 43% and 36%, respectively, of total assets.
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, 2003, 2002 and 2001, respectively. This portfolio
provides the Company with a significant amount of liquidity since all of the
investments are considered available for sale as of December 31, 2003 and 2002.
2003 2002 2001
(dollars in thousands) ----------------------------------
U.S. treasury securities ................ $ 2,229 $ 4,208 $ 12,548
U.S. government agencies ................ 118,637 85,780 60,858
State and political subdivisions ........ 105,963 70,516 63,109
Corporate bonds ......................... 63,586 56,357 51,106
Equity securities ....................... 32,701 27,714 26,157
----------------------------------
Total ................................... $323,116 $244,575 $213,778
==================================
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. As of December 31, 2003, 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,
2003, 2002, and 2001.
Investment Maturities as of December 31, 2003
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. The maturities of the investments are relevant as an indicator of the
Company's ability to reprice these earning assets in relation to changes in
market interest rates.
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 .................... $ 1,690 $ -- $ 539 $ -- $ 2,229
U.S. government agencies ......... 15,378 55,930 36,753 10,576 118,637
States and political subdivisions 7,806 22,847 41,637 33,673 105,963
Corporate bonds .................. 3,056 37,304 22,722 504 63,586
------------------------------------------------------------
Total ............................ $ 27,930 $116,081 $101,651 $ 44,753 $290,415
Weighted average yield
U.S. treasury .................... 4.22% --% 5.19% --% 4.44%
U.S. government agencies ......... 4.98% 3.63% 4.30% 4.89% 4.11%
States and political subdivisions* 5.61% 6.27% 6.91% 6.36% 6.50%
Corporate bonds .................. 6.21% 5.02% 5.82% 6.40% 5.37%
------------------------------------------------------------
Total ............................ 5.25% 4.60% 5.71% 6.01% 5.26%
* Yields on tax-exempt obligations of states and political subdivisions have
been computed on a tax-equivalent basis.
Deposits
Total deposits equaled $619,461,000 and $550,622,000 as of December 31, 2003 and
2002, respectively. The increase of $68,927,000 can be attributed to deposit
growth at four of the five Banks with United Bank and First National posting the
largest increases of $36,997,000 and $20,717,000, respectively. Average deposits
for the year ended December 31, 2003 were $76,917,000 higher than the same
period in 2002. Deposit categories seeing the largest balance increases were NOW
accounts and other time certificates under $100,000.
25
The Company's primary source of funds is customer deposits. The Company attempts
to attract noninterest-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 64% 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, 2003, 2002 and 2001.
2003 2002 2001
--------------------------------------------------------
Amount Rate Amount Rate Amount Rate
(dollars in thousands) --------------------------------------------------------
Noninterest bearing demand deposits $ 59,614 --% $ 53,318 --% $ 51,113 --%
Interest bearing demand deposits .. 130,138 0.70% 115,494 1.00% 103,529 2.01%
Money market deposits ............. 143,478 1.20% 120,446 1.71% 101,267 3.23%
Savings deposits .................. 25,269 0.50% 24,486 0.71% 24,112 1.56%
Time certificates < $100,000 ...... 170,534 3.21% 152,703 4.00% 158,625 5.51%
Time certificates > $100,000 ...... 65,759 2.75% 51,428 3.69% 58,253 5.71%
-------- -------- --------
$594,792 $517,875 $496,899
======== ======== ========
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, 2003, 2002 and 2001.
2003 2002 2001
(dollars in thousands) -----------------------------------
3 months or less ..................... $23,801 $15,162 $16,771
Over 3 through 12 months ............. 29,896 25,939 24,590
Over 12 through 36 months ............ 11,374 9,281 4,765
Over 36 months ....................... 4,416 4,182 1,590
-----------------------------------
Total ................................ $69,487 $54,564 $47,716
===================================
Borrowed Funds
Borrowed funds that may be utilized by the Company are comprised of Federal Home
Loan Bank (FHLB) advances, federal funds purchased and repurchase agreements.
Borrowed funds are an alternative funding source to deposits and can be used to
fund the Company's assets and unforeseen liquidity needs. FHLB advances are
loans from the FHLB that can mature daily or have longer maturities for fixed or
floating rates of interest. Federal funds purchased are borrowings from other
banks that mature daily. Securities sold under agreement to repurchase
(repurchase agreements) are similar to deposits as they are funds lent by
various Bank customers; however, the bank pledges investment securities to
secure such borrowings. The Company's repurchase agreements normally reprice
daily. The Company does not have any FHLB advances or federal funds purchased
outstanding as of December 31, 2003.
26
The following table summarizes the outstanding amount of and the average rate on
borrowed funds as of December 31, 2003, 2002 and 2001.
2003 2002 2001
---------------- ----------------- -----------------
Average Average Average
Balance Rate Balance Rate Balance Rate
(dollars in thousands) --------------------------------------------------------
FHLB advances ............. $ -- --% $ -- --% $ 1,000 5.21%
Federal funds purchased and
repurchase agreements ..... 18,199 1.39% 18,326 1.50% 10,596 2.54%
--------------------------------------------------------
Total ..................... $18,199 1.39% $18,326 1.50% $11,596 2.77%
========================================================
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,
2003, 2002 and 2001.
2003 2002 2001
---------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(dollars in thousands) ---------------------------------------------------------
FHLB advances ............................ $ -- -- $ 47 4.26% $ 8,791 6.29%
Federal funds purchased
& repurchase agreements .................. 19,588 1.48% 13,840 1.91% 14,217 3.78%
---------------------------------------------------------
Total .................................... $19,588 1.48% $13,887 1.91% $23,008 4.74%
Maximum Amount Outstanding during the year
FHLB advances .......................... -- $ 1,000 $16,000
Federal funds purchased
and repurchase agreements .............. $22,728 $18,326 $25,400
Off Balance Sheet Arrangements
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, 2003 and 2002 is as follows:
(dollars in thousands) 2003 2002
-----------------------
Commitments to extend credit ................... $71,100 $59,410
Standby letters of credit ...................... 1,741 1,490
-----------------------
$72,841 $60,900
=======================
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.
27
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
commitments were funded, the Banks would be entitled to seek recovery from the
customer. At December 31, 2003 and 2002, no amounts have been recorded as
liabilities for the Bank's potential obligations under these guarantees.
Asset Quality Review and Credit Risk Management
The Company's credit risk is centered in the loan portfolio, which on December
31, 2003 totaled $355,533,000 as compared to $329,543,000 as of December 31,
2002, an increase of 7.87%. Net loans comprise 47% of total assets as of the end
of 2003. The object in managing loan portfolio risk is to reduce the risk of
loss resulting from a customer's failure to perform according to the terms of a
transaction and to quantify and manage credit risk on a portfolio basis. As the
following chart indicates, the Company's credit risk management efforts reflect
an improving trend with regard to non-performing assets that total $2,346,000 as
of December 31, 2003. The Company's level of problem assets as a percentage of
assets of 0.31% compares favorably to the average for FDIC insured institutions
as of September 30, 2003 of 0.77%.
Non-performing Assets
The following table sets forth information concerning the Company's
non-performing assets for the past five years ending December 31, 2003.
------------------------------------------
2003 2002 2001 2000 1999
(dollars in thousands) ------------------------------------------
Non-performing assets:
Nonaccrual loans .................. $1,756 $2,015 $2,692 $2,663 $ 405
Loans 90 days or more past due .... 431 394 797 242 723
Restructured loans ................ -- -- -- -- --
------------------------------------------
2,187 2,409 3,489 2,905 1,128
Other real estate owned ........... 159 295 159 75 41
------------------------------------------
Total non-performing assets ....... $2,346 $2,704 $3,648 $2,980 $1,169
==========================================
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 $200,000 were placed on non-accrual status in 2003 with
total non-accrual loans equaling $1,756,000 as of December 31, 2003. 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. A real estate loan at First
National with a December 31, 2003 and 2002 balance of $1,305,000 is the largest
non-performing asset. For the years ended December 31, 2003, 2002 and 2001,
interest income, which would have been recorded under the original terms of such
loans was approximately $179,000, $160,000 and $243,000, respectively, with
$177,000, $17,000 and $114,000, respectively, recorded. Loans greater than 90
days past due and still accruing interest were $431,000 and $394,000 at December
31, 2003 and 2002, respectively.
28
Summary of the Allowance for Loan Losses
The provision for loan losses represents an expense charged against 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; criticism of the loan 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 warrant special monitoring.
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.
--------------------------------------------------------
2003 2002 2001 2000 1999
(dollars in thousands) --------------------------------------------------------
Balance at beginning of period .... $ 5,758 $ 5,446 $ 5,373 $ 4,986 $ 4,846
Charge-offs:
Real Estate
Construction ................... 24 -- -- -- --
1-4 Family Residential ......... 5 -- -- -- --
Commercial ..................... -- 40 -- -- 18
Agricultural ................... -- -- -- -- --
Commercial ........................ 392 235 768 55 --
Agricultural ...................... -- -- -- -- --
Consumer and other ................ 43 155 83 96 41
--------------------------------------------------------
464 430 852 151 59
Recoveries:
Real Estate
Construction ................... -- -- -- -- --
1-4 Family Residential ......... -- 20 -- -- --
Commercial ..................... -- -- -- -- 16
Agricultural ................... -- -- -- -- --
Commercial ........................ 100 14 8 66 --
Agricultural ...................... -- -- -- -- --
Consumer and other ................ 12 20 19 12 17
--------------------------------------------------------
112 54 27 78 33
Net charge-offs (recoveries) ...... 352 376 825 73 26
Additions charged to
operations ........................ 645 688 898 460 166
--------------------------------------------------------
Balance at end of period .......... $ 6,051 $ 5,758 $ 5,446 $ 5,373 $ 4,986
Average Loans Outstanding ......... $349,812 $317,521 $341,440 $339,115 $299,064
Ratio of net charge-offs during the
period to average loans
outstanding ....................... 0.10% 0.12% 0.24% 0.02% 0.01%
Ratio of allowance for loan losses
to total loans net of deferred fees 1.67% 1.70% 1.65% 1.54% 1.58%
29
The allowance for loan losses increased to $6,051,000 at the end of 2003 in
comparison to the allowance of $5,758,000 at year end 2002. The increase can be
primarily attributed to the growth of general reserves at United Bank. As of
December 31, 2003 and 2002, United Bank had allowance for loan losses of
$480,000 and $166,000, respectively. The increase in the reserve levels in 2002
relate primarily to First National as the result of higher specific reserves for
two problem credits identified by management prior to 2002 and a large specific
reserve for a newly downgraded problem loan in 2002. Problem commercial leases
identified at First National 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 2003 with prior years.
General reserves for loan categories normally range from 1.00 to 1.30% 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
stabilized since 2001 as net charge-offs, loan loss provision expense and the
allowance for loan losses to total loans are similar for the twelve months ended
2003 and 2002. The general reserve loss factors have remained consistent over
the five-year period presented. The allowance relating to commercial real estate
and 1-4 family residential 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, 2003, 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, 2003 and 2002, specific reserves increased $146,000 or 8.65% and $386,000 or
29.65%, respectively, over prior periods. In 2003, specific allocations to
problem agricultural real estate loans was the largest contributor to the
increase in the specific reserve level when compared to year end 2002. 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
entity employers, including Iowa State University and the Iowa Department of
Transportation; and the health of Iowa's agricultural sector that in turn, is
dependent on weather conditions and government programs. No significant reserves
have been established for local and national economic conditions over the last
five-year period as the economic outlook has generally been favorable. However,
no assurances can be made that losses will remain at the favorable levels
experienced over the past five years.
30
Allocation of the Allowance for Loan Losses
The following table sets forth information concerning the Company's allocation
of the allowance for loan losses.
2003 2002 2001 2000 1999
(dollars in thousands) ---------------- --------------- -------------- -------------- --------------
Amount % * Amount % * Amount % * Amount % * Amount % *
--------------------------------------------------------------------------------------------
Balance at end of
Deceember 31,
applicable to:
Real Estate
Construction ... $ 196 3.62% $ 210 3.99% $ 178 3.99% $ 163 3.49% $ 91 2.87%
1-4 family ..... 948 23.36% 892 23.98% 980 23.98% 1,088 27.89% 899 28.27%
Commercial ..... 2,663 41.59% 2,453 40.24% 1,704 40.24% 1,619 32.11% 1,536 31.33%
Agricultural ... 458 6.70% 302 6.40% 279 6.40% 315 6.03% 237 6.34%
Commercial ........ 775 10.64% 910 11.83% 938 11.83% 754 15.41% 573 15.51%
Agricultural ...... 488 7.68% 504 7.68% 457 7.68% 421 8.05% 541 8.11%
Consumer and other. 255 6.41% 235 5.88% 258 5.88% 538 7.02% 560 7.58%
Unallocated ....... 268 252 652 475 549
--------------------------------------------------------------------------------------------
$6,051 100% $5,758 100% $5,446 100% $5,373 100% $4,986 100%
============================================================================================
* Percent of loans in each category to total loans.
Liquidity and Capital Resources
Liquidity management is the process by which the Company, through its Banks'
Asset and Liability Committees (ALCO), ensures that adequate liquid funds are
available to meet its financial commitments on a timely basis, at a reasonable
cost and within acceptable risk tolerances. These commitments include funding
credit obligations to borrowers, funding of mortgage originations pending
delivery to the secondary market, withdrawals by depositors, maintaining
adequate collateral for pledging for public funds, trust deposits and
borrowings, paying dividends to shareholders, payment of operating expenses,
funding capital expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from core deposit growth and retention; principal
and interest payments on loans; principal and interest payments, sale, maturity
and prepayment of investment securities; net cash provided from operations; and
access to other funding sources. Other funding sources include federal funds
purchased lines, Federal Home Loan Bank (FHLB) advances and other capital market
sources.
As of December 31, 2003, the level of liquidity and capital resources of the
Company remain at a satisfactory level and compare favorably to that of other
FDIC insured institutions. Management believes that the Company's liquidity
sources will be sufficient to support its existing operations for the
foreseeable future.
The liquidity and capital resources discussion will cover the follows topics:
o Review the Company's Current Liquidity Sources
o Review of the Statements of Cash Flows
o Company Only Cash Flows
o Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and
Known Trends in Liquidity and Cash Flows Needs
o Capital Resources
Review of the Company's Current Liquidity Sources
Liquid assets of cash on hand, balances due from other banks, federal funds sold
and interest-bearing deposits in financial institutions for December 31, 2003,
2002, and 2001 totaled $58,725,000, $85,189,000, and $72,059,000, respectively.
The lower balance of liquid assets as of December 31, 2003 relates to a lower
level of federal funds sold and correspondent bank balances. Federal funds sold
have been utilized to fund loan growth and investment purchases and
correspondent compensating balances were abnormally high at the end of 2002 as
First National transitioned to a new correspondent bank to process check
clearings. The increase in liquidity in 2002 was the result of diminished loan
demand, increased deposit levels and maintaining a higher level of federal funds
sold as a result of historically low investment yields.
31
Other sources of liquidity available to the Banks at December 31, 2003 include
outstanding lines of credit with the Federal Home Loan Bank of Des Moines, Iowa
of $27,336,000 and federal funds borrowing capacity at correspondent banks of
$37,500,000. The Company did not have any outstanding FHLB advances as of
December 31, 2003 and securities sold under agreement to repurchase totaled
$18,198,000.
Total investments as of December 31, 2003 were $323,116,000 compared to
$244,575,000 as of year end 2002. At December 31, 2003 and 2002, the investment
portfolio as a percentage of average assets was 43% and 36%, respectively. This
provides the Company with a significant amount of liquidity since all of the
investments are classified as available for sale as of December 31, 2003 and
2002.
The investment portfolio serves an important role in the overall context of
balance sheet management in terms of balancing capital utilization and
liquidity. The decision to purchase or sell securities is based upon the current
assessment of economic and financial conditions, including the interest rate
environment, liquidity and credit considerations. The portfolio's scheduled
maturities represent a significant source of liquidity.
Review of Statements of Cash Flows
Operating cash flows for December 31, 2003, 2002, and 2001 totaled $14,828,000,
$13,803,000, and $7,773,000, respectively. The primary variance in operating
cash flows in 2003 compared to 2002 was the source of cash provided in 2003 from
accrued expenses and other liabilities that was a use of cash in 2002. The 2003
increase in accrued expenses was associated with property tax, vacation and
income tax expenses, while in 2002 lower market interest rates caused a decline
in the level of accrued interest on deposits. The combined effect is a
$1,082,000 increase in 2003 operating cash flows compared to the cash flows of
2002. A change in loans held for sale was the primary reason for the lower
operating cash flow in 2001.
Net cash used in investing activities for December 31, 2003 and 2002 was
$96,479,000 and $43,819,000, respectively, while 2001 reflected net cash
provided by investing activity of $16,254,000. The largest investing activities
were the purchase of U.S. government agency bonds, municipal bonds and the
funding of commercial real estate loans in both 2003 and 2002. In contrast, 2001
investing cash flows reflect declining loan demand and a lower level of bond
purchases that resulted in an increased level of federal funds sold.
Net cash provided by financing activities for December 31, 2003 and 2002 totaled
$61,944,000 and $39,245,000, respectively, while in 2001, net cash used in
finance activities totaled $10,343,000. Growth in deposits was the primary
source of financing funds in 2003 and 2002. However, the repayment of federal
funds purchased and other borrowings was the primary use of financing funds in
2001. As of December 31, 2003, the Company did not have any external debt
financing, off balance sheet financing arrangements, or derivative instruments
linked to its stock.
Company Only Cash Flows
The Company's liquidity on an unconsolidated basis is heavily dependent upon
dividends paid to the Company by the Banks. The Company requires adequate
liquidity to pay its expenses and pay stockholder dividends. In 2003, dividends
from the Banks amounted to $7,868,000 compared to $5,978,000 in 2002. 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. United Bank is not expected to generate sufficient earning to pay any
dividends in 2004. 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.
32
The Company has unconsolidated interest bearing deposits and marketable
investment securities totaling $35,243,000 that are presently available to
provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and
Known Trends in Liquidity and Cash Flows Needs
No material capital expenditures or material changes in the capital resource mix
are anticipated at this time. Commitments to extend credit totaled $71,100,000
as of December 31, 2003 compared to a total of $59,410,000 at the end of 2002.
The timing of these credit commitments varies with the underlying borrowers;
however, the Company has satisfactory liquidity to fund these obligations as of
December 31, 2003. The primary cash flow uncertainty would be a sudden decline
in deposits causing the Banks to liquidate securities. Historically, the Banks
have maintained an adequate level of short term marketable investments to fund
the temporary declines in deposit balances. There are no known trends in
liquidity and cash flows needs as of December 31, 2003 that are a concern to
management.
Capital Resources
The Company's total stockholders' equity increased to $107,325,000 at December
31, 2003, from $101,523,000 at December 31, 2002. At December 31, 2003 and 2002,
stockholders' equity as a percentage of total assets was 14.26% and 14.99%,
respectively. Total equity increased due to retention of earnings and from
appreciation in the Company's and Banks' investment portfolios. The capital
levels of the Company currently exceed applicable regulatory guidelines as of
December 31, 2003.
Interest Rate Risk
Interest rate risk refers to the impact that a change in interest rates may have
on the Company's earnings and capital. 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 as a
traditional gap analysis does not reflect the multiple effects of interest rate
movement on the entire range of assets and liabilities and ignores the future
impact of new business strategies.
Inflation
The primary impact of inflation on the Company's operations is to increase 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 price 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.
33
Forward-Looking Statements and Business Risks
The discussion in the foregoing Management Discussion and Analysis and elsewhere
in this Report contains 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,
but are not limited to, those related to the economic conditions, 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.
These factors may not constitute all factors that could cause actual results to
differ materially from those discussed in any forward-looking statement. The
Company operates in a continually changing business environment and new facts
emerge from time to time. It cannot predict such factors nor can it assess the
impact, if any, of such factors on its financial position or its results of
operations. Accordingly, forward-looking statements should not be relied upon as
a predictor of actual results. The Company disclaims any responsibility to
update any forward-looking statement provided in this document.
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 making loans and taking deposits. 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 2003 changed
when compared to 2002.
Based on a simulation modeling analysis performed as of December 31, 2003, 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 ........................ $ 586 2.2%
+100 Basis Points ........................ 311 1.2%
- -100 Basis Points ........................ (957) -3.6%
- -200 Basis Points ........................ (3,186) -11.8%
As shown above, at December 31, 2003, the estimated effect of an immediate 200
basis point increase in interest rates would increase the Company's net interest
income by 2.2% or approximately $586,000 in 2004. The estimated effect of an
immediate 200 basis point decrease in rates would decrease the Company's net
interest income by 11.8% or approximately $3,186,000 in 2004. 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.
34
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, 2003. 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 $ 5,364 $ 500 $ 500 $ -- $ 6,364
Federal funds sold ................. 20,380 -- -- -- 20,380
Investments * ...................... 7,256 20,674 116,081 179,105 323,116
Loans .............................. 58,115 36,253 196,999 71,036 362,403
Loans held for sale
-------------------------------------------------------------
Total interest - earning
assets ............................. $ 91,115 $ 57,427 $ 313,580 $ 250,141 $ 712,263
=============================================================
Interest - bearing liabilities
Interest bearing demand deposits ... $ 138,308 $ -- $ -- $ -- $ 138,308
Money market and savings deposits .. 166,387 -- -- -- 166,387
Time certificates < $100,000 ....... 22,682 78,639 72,529 144 173,994
Time certificates > $100,000 ....... 23,801 29,896 15,790 -- 69,487
Other borrowed funds ............... 18,198 -- -- -- 18,198
-------------------------------------------------------------
Total interest - bearing liabilities $ 369,376 $ 108,535 $ 88,319 $ 144 $ 566,374
Interest sensitivity gap ........... ($278,261) ($ 51,108) $ 225,261 $ 249,997 $ 145,889
=============================================================
Cumulative interest sensitivity gap ($278,261) ($329,369) ($104,108) $ 145,889 $ 145,889
=============================================================
Cumulative interest sensitivity
gap as a percent of total assets ... -36.96% -43.75% -13.83% 19.38%
================================================
* Investments with maturities over 5 years include the market value of equity
securities of $32,701.
As of December 31, 2003, the Company's cumulative gap ratios for assets and
liabilities repricing within three months and within one year were .37 and .44,
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.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditor's Report
The Board of Directors
Ames National Corporation and Subsidiaries
Ames, Iowa
We have audited the accompanying consolidated balance sheets of Ames National
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period then ended December 31, 2003. 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.
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, 2003 and 2002 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
- ---------------------------
Des Moines, Iowa
January 23, 2004
36
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
ASSETS 2003 2002
- ---------------------------------------------------------------------------------------------
Cash and due from banks (Note 2) ........................... $ 31,982,144 $ 51,688,784
Federal funds sold ......................................... 20,380,000 32,500,000
Interest bearing deposits in financial institutions ........ 6,363,538 1,000,000
Securities available-for-sale (Note 3) ..................... 323,115,914 244,575,026
Loans receivable, net (Note 4) ............................. 355,533,119 329,593,051
Loans held for sale ........................................ 859,139 2,713,446
Bank premises and equipment, net (Note 5) .................. 8,377,807 8,726,397
Accrued income receivable .................................. 5,842,247 5,849,017
Other assets ............................................... 332,556 582,849
------------------------------
Total assets ....................................... $ 752,786,464 $ 677,228,570
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6)
Demand, noninterest bearing ............................ $ 71,372,534 $ 62,557,937
NOW accounts .......................................... 138,308,140 121,325,104
Savings and money market .............................. 166,387,319 153,296,259
Time, $100,000 and over ............................... 69,486,570 54,564,283
Other time ............................................ 173,993,964 158,878,796
------------------------------
Total deposits ..................................... 619,548,527 550,622,379
Federal funds purchased and securities sold under agreements
to repurchase ............................................ 18,198,403 18,325,574
Dividend payable ........................................... 1,441,204 1,376,752
Deferred income taxes (Note 8) ............................. 3,238,665 2,879,057
Accrued expenses and other liabilities ..................... 3,034,670 2,501,952
------------------------------
Total liabilities .................................. 645,461,469 575,705,714
------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 10)
Common stock, $5 par value, authorized 6,000,000 shares;
issued 2003 and 2002 3,153,230 shares; outstanding 2003
3,133,053 shares, 2002 3,128,982 shares ................ 15,766,150 15,766,150
Additional paid-in capital ............................... 25,351,979 25,354,014
Retained earnings ........................................ 58,400,660 53,917,544
Treasury stock, at cost; 2003 20,177 shares,
2002 24,248 shares ..................................... (1,109,735) (1,333,640)
Accumulated other comprehensive income, net unrealized
gain on securities available-for-sale .................. 8,915,941 7,818,788
------------------------------
Total stockholders' equity ......................... 107,324,995 101,522,856
------------------------------
Total liabilities and stockholders' equity ......... $ 752,786,464 $ 677,228,570
==============================
See Notes to Consolidated Financial Statements.
37
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
- -----------------------------------------------------------------------------------------
Interest and dividend income:
Loans, including fees ....................... $22,197,335 $23,207,184 $27,891,379
Securities:
Taxable ................................... 7,510,671 7,931,041 8,714,486
Tax-exempt ................................ 3,604,641 2,938,423 2,876,432
Federal funds sold .......................... 628,203 810,675 829,083
Dividends ................................... 1,372,890 1,383,350 1,162,176
---------------------------------------
35,313,740 36,270,673 41,473,556
---------------------------------------
Interest expense:
Deposits .................................... 10,045,178 11,397,125 17,791,314
Other borrowed funds ........................ 293,604 265,845 1,091,319
---------------------------------------
10,338,782 11,662,970 18,882,633
---------------------------------------
Net interest income ................... 24,974,958 24,607,703 22,590,923
Provision for loan losses (Note 4) ............ 645,447 688,431 897,540
---------------------------------------
Net interest income after provision for
loan losses ........................... 24,329,511 23,919,272 21,693,383
---------------------------------------
Noninterest income:
Trust department income ..................... 1,225,099 1,032,500 948,499
Service fees ................................ 1,513,964 1,492,344 1,585,036
Securities gains, net (Note 3) .............. 1,395,320 889,923 1,197,050
Gain on sales of loans held for sale ........ 1,155,311 739,907 589,215
Merchant and ATM fees ....................... 513,832 405,667 282,072
Other ....................................... 631,949 574,473 478,172
---------------------------------------
Total noninterest income .............. 6,435,475 5,134,814 5,080,044
---------------------------------------
Noninterest expense:
Salaries and employee benefits (Note 7) ..... 9,044,896 8,074,181 6,834,588
Data processing ............................. 2,188,488 1,934,006 1,772,726
Occupancy expenses .......................... 1,088,438 927,287 726,049
Other operating expenses .................... 2,497,692 2,340,098 2,253,920
---------------------------------------
Total noninterest expense ............. 14,819,514 13,275,572 11,587,283
---------------------------------------
Income before income taxes ............ 15,945,472 15,778,514 15,186,144
Provision for income taxes (Note 8) ........... 4,320,787 4,438,376 4,638,806
---------------------------------------
Net income ............................ $11,624,685 $11,340,138 $10,547,338
=======================================
Basic earnings per share (Note 1) ............. $ 3.71 $ 3.63 $ 3.38
=======================================
See Notes to Consolidated Financial Statements.
38
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
Accumulated
Additional Other Total
Comprehensive Common Paid-in Retained Treasury Comprehensive Stockholders'
Income Stock Capital Earnings Stock Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
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
Comprehensive income:
Net income ...................... $11,624,685 -- -- 11,624,685 -- -- 11,624,685
Other comprehensive income,
unrealized gains on securities,
net of reclassification
adjustment, net of tax (Note 3) 1,097,153 -- -- -- -- 1,097,153 1,097,153
-----------
Total comprehensive income .. $12,721,838
===========
Cash dividends declared, $2.28 per
share ........................... -- -- (7,141,569) -- -- (7,141,569)
Sale of 4,071 shares of treasury
stock ........................... -- (2,035) -- 223,905 -- 221,870
-------------------------------------------------------------------------------
Balance, December 31, 2003 .......... 15,766,150 25,351,979 58,400,660 (1,109,735) 8,915,941 107,324,995
===============================================================================
See Notes to Consolidated Financial Statements.
39
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................... $ 11,624,685 $ 11,340,138 $ 10,547,338
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses .................................................. 645,447 688,431 897,540
Amortization and accretion ................................................. 563,612 51,495 (58,859)
Depreciation ............................................................... 1,030,377 996,180 642,835
Provision for deferred taxes ............................................... (284,751) (200,013) (129,614)
Securities gains, net ...................................................... (1,395,320) (889,923) (1,197,050)
Change in assets and liabilities:
(Increase) decrease in loans held for sale ............................... 1,854,307 2,582,434 (4,480,280)
(Increase) decrease in accrued income receivable ......................... 6,770 128,336 1,043,261
(Increase) decrease in other assets ...................................... 250,293 (344,372) 820,285
Increase (decrease) in accrued expenses and other liabilities ............ 532,718 (549,337) (312,376)
-----------------------------------------------
Net cash provided by operating activities .............................. 14,828,138 13,803,369 7,773,080
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale .................................... (194,136,066) (86,337,490) (47,350,981)
Proceeds from sale of securities available-for-sale .......................... 9,299,986 26,635,715 23,282,181
Proceeds from maturities and calls of securities available-for-sale .......... 108,868,412 34,855,926 47,385,595
Net decrease (increase) in interest bearing deposits in financial institutions (5,363,538) (750,000) 98,174
Net decrease (increase) in federal funds sold ................................ 12,120,000 (3,150,000) (29,105,000)
Net decrease (increase) in loans ............................................. (26,585,515) (12,534,196) 24,554,301
Purchase of bank premises and equipment ...................................... (681,787) (2,538,922) (2,610,189)
-----------------------------------------------
Net cash provided by (used in) investing activities .................... (96,478,508) (43,818,967) 16,254,081
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits ......................................................... 68,926,148 39,113,124 18,080,400
Increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase ......................... (127,171) 6,729,400 (23,411,245)
Dividends paid ............................................................... (7,077,117) (6,755,449) (5,123,026)
Proceeds from issuance of treasury stock ..................................... 221,870 158,151 110,834
-----------------------------------------------
Net cash provided by (used in) financing activities .................... 61,943,730 39,245,226 (10,343,037)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents ................... (19,706,640) 9,229,628 13,684,124
CASH AND CASH EQUIVALENTS
Beginning ...................................................................... 51,688,784 42,459,156 28,775,032
-----------------------------------------------
Ending ......................................................................... $ 31,982,144 $ 51,688,784 $ 42,459,156
===============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest ..................................................................... $ 10,504,715 $ 12,211,439 $ 19,749,270
Income taxes ................................................................. 4,553,669 4,725,572 4,321,320
See Notes to Consolidated Financial Statements.
40
AMES NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and Marshall counties
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. The Company reports
net cash flows for customer loan transactions, deposit transactions and short
term borrowings with maturities of 90 days or less.
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 held for sale: Loans held for sale are the loans the Banks have the intent
to sell in the foreseeable future. They are carried at the lower of aggregate
cost or market value. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income. Gains and losses on sales of loans are
recognized at settlement dates and are determined by the difference between the
sale proceeds and the carrying value of the loans.
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.
Income on nonaccrual loans is subsequently recognized only to the extent that
cash payments are received. 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.
41
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.
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.
Premises and equipment: 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 held for sale: The fair value of loans held for sale are based on
prevailing market prices.
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.
42
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.
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.
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, 2003, 2002 and 2001, 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, 2003, 2002, and 2001.
2003 2002 2001
---------------------------------------
Basic earning per share computation:
Net income ......................... $11,624,685 $11,340,138 $10,547,338
Weighted average common
shares outstanding ............... 3,131,224 3,127,285 3,123,885
---------------------------------------
Basic earnings per share...... $ 3.71 $ 3.63 $ 3.38
=======================================
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement was effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Implementation of the Statement on
July 1, 2003 did not have a significant impact on the consolidated financial
statements.
The Financial Accounting Standards Board has issued Statement 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement established standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and requires that certain freestanding financial instruments be
reported as liabilities in the balance sheet. For the Company, the Statement was
effective July 1, 2003 and implementation had no significant impact on the
consolidated financial statements.
The Financial Accounting Standards Board has issued Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57, and 107, and a rescission of FASB Interpretation No. 34".
This Interpretation elaborates on the financial statements about its obligations
under guarantees issued and clarifies that a guarantor is required to recognize,
at inception of a guarantee, a liability for the fair value of the obligation
undertaken. The effect of implementation on the Company's financial statements
was not material.
43
The Financial Accounting Standard Board has issued Interpretation (FIN) No. 46
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51". FIN 46 establishes accounting guidance for
consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46, VIE's were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity. The provisions of FIN 46 are effective for existing VIEs the first
period ending after December 15, 2003. The Company has not identified any VIEs
and the implementation of FIN 46 has had no impact on the consolidated financial
statements.
The Accounting Standards Executive Committee has issued Statement of Position
03-3, Accounting for Certain Loans or Debit Securities Acquired in a Transfer.
This Statement applies to all loans acquired in a transfer, including those
acquired in the acquisition of a bank or a branch, and provides that such loans
be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are less than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective for calendar year 2005 and, early adoption, although permitted, is not
planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
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 $14,375,000 and $7,418,000 at December 31, 2003 and 2002,
respectively.
Note 3. Debt and Equity Securities
The amortized cost of securities available for sale and their approximate fair
values at December 31, 2003 and 2002, are summarized below:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
---------------------------------------------------------------
2003:
U.S. treasury .................. $ 2,158,571 $ 70,341 $ -- $ 2,228,912
U.S. government agencies ....... 117,321,783 1,728,234 (412,733) 118,637,284
State and political subdivisions 103,411,430 3,087,981 (536,295) 105,963,116
Corporate bonds ................ 59,991,655 3,639,909 (45,868) 63,585,696
Equity securities .............. 26,080,188 6,796,873 (176,155) 32,700,906
---------------------------------------------------------------
$ 308,963,627 $ 15,323,338 $ (1,171,051) $ 323,115,914
===============================================================
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
===============================================================
The amortized cost and estimated fair value of debt securities
available-for-sale as of December 31, 2003, 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 ...................... $ 27,567,407 $ 27,930,313
Due after one year through five years ........ 113,050,065 116,080,787
Due after five years through ten years ....... 97,729,993 101,651,232
Due after ten years .......................... 44,535,974 44,752,676
-----------------------------
282,883,439 290,415,008
Equity securities ............................ 26,080,188 32,700,906
-----------------------------
$308,963,627 $323,115,914
=============================
44
At December 31, 2003 and 2002, securities with a carrying value of approximately
$49,758,000 and $39,076,000, respectively, were pledged as collateral on public
deposits, securities sold under agreements 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 $1,395,320 and none respectively, in 2003, $1,087,290 and
$197,367, respectively, in 2002, $1,200,323 and $3,273, respectively, in 2001.
The components of other comprehensive income (loss) - net unrealized gains
(losses) on securities available-for-sale for the years ended December 31, 2003,
2002, and 2001, were as follows:
2003 2002 2001
-----------------------------------------
Unrealized holding gains arising
during the period ..................... $ 3,136,832 $ 6,002,497 $ 4,329,954
Reclassification adjustment for net gains
realized in net income ................ (1,395,320) (889,923) (1,197,050)
-----------------------------------------
Net unrealized gains
before tax effect ............... 1,741,512 5,112,574 3,132,904
Tax effect .............................. (644,359) (1,890,400) (1,159,834)
-----------------------------------------
Other comprehensive income
net unrealized gains
on securities ................... $ 1,097,153 $ 3,222,174 $ 1,973,070
=========================================
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2003 are summarized as follows:
Less than 12 Months 12 Months or More Total
----------------------------- ---------------------------- -----------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury securities ......... $ -- $ -- $ -- $ -- $ -- $ --
U.S. government agencies ......... 31,608,073 (412,733) -- -- 31,608,073 (412,733)
State and political subsidivisions 22,823,408 (507,233) 628,846 (29,062) 23,452,254 (536,295)
Corporate obligations ............ 15,160,687 (45,868) -- -- 15,160,687 (45,868)
Equity securities ................ -- -- 3,242,200 (176,155) 3,242,200 (176,155)
--------------------------------------------------------------------------------------------
$ 69,592,168 $ (965,834) $ 3,871,046 $ (205,217) $ 73,463,214 $ (1,171,051)
============================================================================================
For all of the above investment securities, the unrealized losses are generally
due to changes in interest rates or general market conditions, as such, are
considered to be temporary, by the Company.
Note 4. Loans Receivable
The composition of loans receivable at December 31, 2003 and 2002, is as
follows:
2003 2002
----------------------------------
Commercial and agricultural .......... $ 66,369,814 $ 66,119,092
Real estate .......................... 272,790,845 250,087,154
Consumer ............................. 13,208,113 11,061,689
Other ................................ 10,034,281 8,859,704
----------------------------------
362,403,053 336,127,639
Less:
Allowance for loan losses .......... (6,050,989) (5,757,694)
Deferred loan fees ................. (818,945) (776,894)
----------------------------------
$ 355,533,119 $ 329,593,051
==================================
45
Changes in the allowance for loan losses for the year ended December 31, 2003,
2002 and 2001 are as follows:
2003 2002 2001
-----------------------------------------
Balance, beginning ................ $ 5,757,694 $ 5,445,671 $ 5,373,167
Provision for loan losses ....... 645,447 688,431 897,540
Recoveries of loans charged-off . 111,926 53,805 27,131
Loans charged-off ............... (464,078) (430,213) (852,167)
-----------------------------------------
Balance, ending ................... $ 6,050,989 $ 5,757,694 $ 5,445,671
=========================================
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, 2003 and 2002:
2003 2002
--------------------------------
Balance, beginning of year ............. $ 7,791,668 $ 4,755,229
New loans ............................ 19,425,895 11,533,030
Repayments ........................... (16,650,452) (8,365,219)
Change in status ..................... 424,173 (131,372)
--------------------------------
Balance, end of year ................... $ 10,991,284 $ 7,791,668
================================
At December 31, 2003 and 2002, the Company had impaired loans of approximately
$2,187,075 and $2,409,000, respectively. The allowance for loan losses related
to these impaired loans was approximately $134,000 and $212,000 at December 31,
2003 and 2002, respectively. The average balances of impaired loans for the
years ended December 31, 2003 and 2002, were $2,050,154 and $2,532,000,
respectively. For the years ended December 31, 2003, 2002, and 2001 interest
income which would have been recorded under the original terms of such loans was
approximately $179,000, $160,000, and $243,000 respectively, with $177,000,
$17,000 and $114,000, respectively, recorded. Loans greater than 90 days past
due and still accruing interest were approximately $431,000 and $394,000 at
December 31, 2003 and 2002, 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, 2003, there were no material commitments to lend additional funds
to customers whose loans were classified as impaired.
Note 5. Bank Premises and Equipment
The major classes of bank premises and equipment and the total accumulated
depreciation as of December 31, 2003 and 2002, are as follows:
2003 2002
-----------------------------
Land ....................................... $ 1,284,771 $ 1,284,771
Buildings and improvements ................. 9,120,088 9,178,368
Furniture and equipment .................... 5,721,259 5,945,231
-----------------------------
16,126,118 16,408,370
Less accumulated depreciation .............. 7,748,311 7,681,973
-----------------------------
$ 8,377,807 $ 8,726,397
=============================
46
Note 6. Deposits
At December 31, 2003, the maturities of time deposits are as follows:
Years ended December 31,
2004 $ 155,017,653
2005 42,955,122
2006 17,372,503
2007 19,113,326
2008 8,877,984
Thereafter 143,946
-------------
$ 243,480,534
=============
Interest expense on deposits is summarized as follows:
2003 2002 2001
-------------------------------------------
NOW accounts ................... $ 909,137 $ 1,155,459 $ 2,060,963
Savings and money market ....... 1,849,238 2,237,034 3,665,428
Time, $100,000 and over ........ 1,807,047 1,897,855 3,329,175
Other time ..................... 5,479,756 6,106,777 8,735,748
-------------------------------------------
$10,045,178 $11,397,125 $17,791,314
===========================================
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 purchase price of the shares is 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 combined
Company on behalf of the employees. For the years ended December 31, 2003, 2002
and 2001, Company contributions to the merged plans were approximately $659,000,
$607,000, and $473,000, respectively.
Note 8. Income Taxes
The components of income tax expense for the year ended December 31, 2003, 2002
and 2001 are as follows:
Current Deferred Total
-------------------------------------------------
2003:
Federal .............. $ 3,482,686 $ (266,898) $ 3,215,788
State ................ 1,122,852 (17,853) 1,104,999
-------------------------------------------------
$ 4,605,538 $ (284,751) $ 4,320,787
=================================================
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
=================================================
47
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to income before income taxes is a result of the
following for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
-----------------------------------------
Computed "expected" tax expense ... $ 5,580,915 $ 5,364,695 $ 5,163,289
Tax exempt interest and dividends . (1,577,116) (1,356,187) (1,222,985)
State taxes and other ............. 316,988 429,868 698,502
-----------------------------------------
$ 4,320,787 $ 4,438,376 $ 4,638,806
=========================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred liabilities at December 31, 2003 and
2002, are as follows:
2003 2002
---------------------------
Deferred tax assets:
Allowance for loan losses .................... $ 1,741,344 $ 1,636,575
Other ........................................ 297,041 161,867
---------------------------
Total gross deferred tax assets ........ 2,038,385 1,798,442
---------------------------
Deferred tax liabilities:
Unrealized gain on securities ................ (5,236,346) (4,591,984)
Other ........................................ (40,704) (85,515)
---------------------------
Total gross deferred tax liabilities ... (5,277,050) (4,677,499)
---------------------------
Net deferred tax liabilities ........... $(3,238,665) $(2,879,057)
===========================
At December 31, 2003 and 2002, income taxes currently payable of approximately
$390,000 and $338,000, respectively, are included in accrued interest and other
liabilities.
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, 2003 and 2002 is as follows:
2003 2002
------------------------------
Commitments to extend credit ............. $71,100,000 $59,410,000
Standby letters of credit ................ 1,741,000 1,490,000
------------------------------
$72,841,000 $60,900,000
==============================
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
commitments were funded, the Banks would be entitled to seek recovery from the
customer. At December 31, 2003 and 2002, no amounts have been recorded as
liabilities for the Bank's potential obligations under these guarantees.
48
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.
Note 10. Regulatory Matters
The Company and its subsidiary banks 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 Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to regulatory accounting practices.
The Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
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,
2003 and 2002, that the Company and each subsidiary bank met all capital
adequacy requirements to which they are subject.
As of December 31, 2003, 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, 2003 and 2002 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, 2003:
Total capital (to risk- weighted assets):
Consolidated ............................. $104,460 20.3% $ 41,261 8.0% $ -- --%
Boone Bank & Trust ....................... 12,284 14.9 6,613 8.0 8,267 10.0
First National Bank ...................... 40,460 16.0 20,264 8.0 25,330 10.0
Randall-Story State Bank ................. 7,902 15.5 4,069 8.0 5,087 10.0
State Bank & Trust ....................... 11,509 18.2 5,048 8.0 6,310 10.0
nited Bank & Trust ....................... 5,491 12.0 3,653 8.0 4,566 10.0
Tier 1 capital ( to risk- weighted assets):
Consolidated ............................... $ 98,409 19.1% $ 20,630 4.0% -- --
Boone Bank & Trust ......................... 11,333 13.7 3,307 4.0 4,960 6.0%
First National Bank ........................ 37,354 14.7 10,132 4.0 15,198 6.0
Randall-Story State Bank ................... 7,266 14.3 2,035 4.0 3,052 6.0
State Bank & Trust ......................... 10,719 17.0 2,524 4.0 3,786 6.0
United Bank & Trust ........................ 5,011 11.0 1,826 4.0 2,740 6.0
Tier 1 capital ( to average- weighted assets):
Consolidated ............................... $ 98,409 13.0% 30,330 4.0% -- --
Boone Bank & Trust ......................... 11,333 10.2 4,442 4.0 5,553 5.0%
First National Bank ........................ 37,354 9.8 15,179 4.0 18,974 5.0
Randall-Story State Bank ................... 7,266 10.2 2,840 4.0 3,551 5.0
State Bank & Trust ......................... 10,719 9.9 4,343 4.0 5,429 5.0
United Bank & Trust ........................ 5,011 7.3 2,741 4.0 3,426 5.0
49
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
Note 11. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments (as described
in Note 1) as of December 31, 2003 and 2002 were as follows:
2003 2002
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
Financial assets:
Cash and due from banks ............................. $ 31,982,144 $ 31,982,144 $ 51,688,784 $ 51,688,784
Federal funds sold .................................. 20,380,000 20,380,000 32,500,000 32,500,000
Interest-bearing deposits ........................... 6,363,538 6,363,538 1,000,000 1,000,000
Securities available-for-sale ....................... 323,115,914 323,115,914 244,575,026 244,575,026
Loans, net .......................................... 355,533,119 358,891,066 329,593,051 338,551,554
Loans held for sale ................................. 859,139 859,139 2,713,446 2,713,446
Accrued income receivable ........................... 5,842,247 5,842,247 5,849,017 5,849,017
Financial liabilities:
Deposits ............................................ 619,548,527 623,208,058 550,622,379 555,271,000
Other borrowings .................................... 18,198,403 18,198,403 18,325,574 18,325,574
Accrued interest .................................... 1,361,819 1,361,819 1,527,752 1,527,752
Notional Unrealized Notional Unrealized
Amount Gain (Loss) Amount Gain (Loss)
----------------------------------------------------------
Off-balance sheet items:
Commitments to extend credit ........................ $ 71,100,000 $ -- $ 59,410,000 $ --
Standby letters of credit ........................... 1,741,000 -- 1,490,000 --
50
Note 12. Ames National Corporation (Parent Company Only) Financial Statements
Information relative to the Parent Company's balance sheets at December 31, 2003
and 2002, and statements of income and cash flows for each of the years in the
three-year period ended December 31, 2003, is as follows:
BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------------------------
ASSETS
Cash and due from banks .......................... $ 1,213 $ 6,602
Interest-bearing deposits in banks ............... 1,588,995 1,396,656
Securities available-for-sale .................... 33,654,060 27,874,394
Investment in bank subsidiaries .................. 76,105,383 73,646,869
Loans receivable, net ............................ -- 706,968
Premises and equipment, net ...................... 475,551 517,707
Accrued income receivable ........................ 151,335 213,133
Other assets ..................................... 7,198 155,785
------------------------------
Total assets ............................. $ 111,983,735 $ 104,518,114
==============================
LIABILITIES
Dividends payable .............................. $ 1,441,204 $ 1,376,752
Deferred income taxes .......................... 2,528,955 1,266,922
Accrued expenses and other liabilities ......... 688,581 351,584
------------------------------
Total liabilities ........................ 4,658,740 2,995,258
------------------------------
STOCKHOLDERS' EQUITY
Common stock ................................... 15,766,150 15,766,150
Additional paid-in capital ..................... 25,351,979 25,354,014
Retained earnings .............................. 58,400,660 53,917,544
Treasury stock, at cost ........................ (1,109,735) (1,333,640)
Accumulated other comprehensive income ......... 8,915,941 7,818,788
------------------------------
Total equity ............................. 107,324,995 101,522,856
------------------------------
Total liabilities and stockholders' equity $ 111,983,735 $ 104,518,114
==============================
51
STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---------------------------------------
Operating income:
Equity in net income of bank subsidiaries $10,440,180 $10,108,107 $ 9,122,748
Interest ................................ 542,640 745,488 953,071
Dividends ............................... 962,049 979,071 795,411
Rents ................................... 140,147 150,894 245,882
Securities gains, net ................... 1,207,735 881,938 1,092,808
---------------------------------------
13,292,751 12,865,498 12,209,920
---------------------------------------
Operating expenses:
Occupancy expense ....................... 163,018 165,447 178,802
Other ................................... 1,200,048 1,154,913 923,780
---------------------------------------
1,363,066 1,320,360 1,102,582
---------------------------------------
Income before income taxes ........ 11,929,685 11,545,138 11,107,338
Income tax expense ........................ 305,000 205,000 560,000
---------------------------------------
Net income ........................ $11,624,685 $11,340,138 $10,547,338
=======================================
52
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................ $ 11,624,685 $ 11,340,138 $ 10,547,338
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................... 77,132 80,620 66,781
Provision for loan losses ....................... (16,000) -- --
Amortization and accretion, net ................. (8,014) (16,060) (13,493)
Provision for deferred taxes .................... (36,385) (56,023) --
Securities gains, net ........................... (1,207,735) (881,938) (1,092,808)
Undistributed net income of bank subsidiaries ... (2,572,180) (4,130,107) (1,994,748)
(Increase) decrease in accrued income receivable 61,798 1,446,277 (18,340)
(Increase) decrease in other assets ............. 148,587 (130,281) 308,207
Increase (decrease) in accrued expense payable
and other liabilities ......................... 336,997 246,165 103,631
--------------------------------------------
Net cash provided by operating activities ... 8,408,885 7,898,791 7,906,568
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale ......... (7,292,720) (7,334,938) (10,244,488)
Proceeds from sale of securities available-for-sale 4,067,605 8,611,304 4,025,880
Proceeds from maturities and calls of securities
available-for-sale .............................. 2,170,435 2,196,163 2,024,595
(Increase) decrease in interest bearing deposits
in banks ........................................ (192,339) 769,809 (1,017,101)
(Increase) decrease in loans ...................... 722,968 (448,741) 2,400,844
Purchase of bank premises and equipment ........... (34,976) (95,226) (79,194)
Investment in bank subsidiaries ................... (1,000,000) (5,000,000)
--------------------------------------------
Net cash (used in) investing activities ..... (1,559,027) (1,301,629) (2,889,464)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid .................................... (7,077,117) (6,755,449) (5,123,026)
Proceeds from issuance of treasury stock .......... 221,870 158,151 110,834
--------------------------------------------
Net cash (used in) financing activities ..... (6,855,247) (6,597,298) (5,012,192)
--------------------------------------------
Net increase (decrease) in cash and
cash equivalents ............................ (5,389) (136) 4,912
CASH AND CASH EQUIVALENTS
Beginning ......................................... 6,602 6,738 1,826
--------------------------------------------
Ending ............................................ $ 1,213 $ 6,602 $ 6,738
============================================
53
Note 13. Selected Quarterly Financial Data (Unaudited)
March 31 June 30 September 30 December 31
---------------------------------------------------
2003
---------------------------------------------------
Total interest income ............................. $8,714,233 $8,876,124 $8,818,046 $8,905,337
Total interest expense ............................ 2,690,209 2,723,323 2,467,155 2,458,095
Net interest income ............................... 6,024,024 6,152,801 6,350,891 6,447,242
Provision for loan losses ......................... 119,745 305,995 87,000 132,707
Net income ........................................ 2,870,325 2,649,229 3,240,642 2,864,489
Earnings per common share ......................... 0.92 0.85 1.03 0.91
2002
------------------------------------------------
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
54
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.
ITEM 9A. 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-15(e) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by 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
There was no change in the Company's internal control over finacnial reporting
identified in connection with the evaluation required by Rule 13a-15(d) of the
Exchange Act that occurred during the Company's last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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 28, 2004, as
filed with the SEC on or about March 12, 2004 (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.
Position with the Company or Bank and Principal
Occupation and Employment During the Past Five
Name Age Years
- --------------------------------------------------------------------------------
Kevin G. Deardorff 49 Vice President & Technology Director of the
Company.
Leo E. Herrick 62 President of United Bank commencing June, 2002.
Previously employeed as Chairman of the Board
and President of F&M Bank-Iowa, Marshalltown,
Iowa.
Daniel L. Krieger 67 Chairman of the Company since 2003 and 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.
Stephen C. McGill 49 President of State Bank. Previously served as
Senior Vice President of State Bank.
John P. Nelson 37 Vice President, Secretary and Treasurer of
Company.
Thomas H. Pohlman 53 President of First National since 1999.
Previously employed as Senior Vice President
of First National.
Jeffrey K. Putzier 42 President of Boone Bank since 1999. Previously
employed as Vice President of State Bank.
Harold E. Thompson 58 President of Randall Story Bank. Previously
served as Executive Vice President of Randall
Story Bank.
Terrill L. Wycoff 60 Executive Vice President of First National since
2000. Previously employed as Senior Vice
President of First National.
55
Section 16(a) Beneficial Ownership Reporting Compliance
Refer to the information under the captions "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement, which information is incorporated
herein by this reference.
Audit Committee Financial Expert
The board of directors of the Company has determined that Warren R. Madden, a
member of the Audit Committee, qualifies as an "audit committee financial
expert" under applicable SEC rules. The board of directors has further
determined that Mr. Madden qualifies as an "independent" director under
applicable SEC rules and the corporate governance rules of the NASDAQ stock
market. The board's affirmative determination was based, among other things,
upon Mr. Madden's experience as Vice President of Finance and Business of Iowa
State University, a position in which he functions as the principal financial
officer of the university.
Code of Ethics
The Company has adopted a Finance Code of Ethics that applies to its principal
executive officer and principal financial officer. A copy of the Finance Code of
Ethics is posted on the Company's website at www.amesnational.com. In the event
that the Company makes any amendments to, or grants any waivers of, a provision
of the Finance Code of Ethics that requires disclosure under applicable SEC
rules, the Company intends to disclose such amendments or waiver and the reasons
therefore on its website.
ITEM 11. EXECUTIVE COMPENSATION
Refer to the information under the captions "Information Concerning the Board of
Directors- Director Compensation" and "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 caption "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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Refer to the information under the caption "Relationship with Independent Public
Accountants" in the Proxy Statement, which information is incorporated herein by
this reference.
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
Consolidated Balance Sheets, December 31, 2003 and 2002
Consolidated Statements of Income for the Years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for
the Years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years ended
December 31, 2003, 2002 and 2001
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.
56
(b) Reports on Form 8-K.
On October 17, 2003, the Company filed a Current Report on Form 8-K
pursuant to Item 5, announcing net earnings for the three and nine
months ended September 30, 2003.
(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 - Consent of Accountants-McGladrey & Pullen, LLP
31.1 - Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 - Certification of Principal Financail Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 - Certification of Principal Executive Officer Pursuant
to 18 U.S.C. Section 1350
32.2 - Certification of Principal Executive Officer Pursuant
to 18 U.S.C. Section 1350
57
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 12, 2004 By: /s/ Daniel L. Kreiger
--------------------------------------------
Daniel L. Krieger, Chairman and President
(Principle Executive Officer)
March 12, 2004 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 12, 2004.
/s/ Betty A. Baudler
-------------------------------------------
Betty A. Baudler, Director
/s/ James R. Christy
-------------------------------------------
James R. Christy, Director
/s/ Robert L. Cramer
-------------------------------------------
Robert L. Cramer, Director
/s/ Douglas C. Gustafson
-------------------------------------------
Douglas C. Gustafson, Director
/s/ Charles D. Jons
-------------------------------------------
Charles D. Jons, Director
/s/ James R. Larson
-------------------------------------------
James R. Larson II, Director
/s/ Warren R. Madden
-------------------------------------------
Warren R. Madden, Director
/s/ Marvin J. Walter
-------------------------------------------
Marvin J. Walter, Director
58