SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-32637
AMES NATIONAL CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
IOWA 42-1039071
- --------------------------------------------------------------------------------
State or Other Jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification Number)
405 FIFTH STREET
AMES, IOWA 50010
----------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (515) 232-6251
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $5.00 PAR VALUE 3,133,053
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(Class) (Shares Outstanding at April 30, 2004)
1
AMES NATIONAL CORPORATION
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2004
and December 31, 2003 3
Consolidated Statements of Income for the three
months ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 6-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Item 4 Controls and Procedures 15
Part II. Other Information
Items 1 through 6 16
Signatures 17
2
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets (Unaudited)
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2004 2003
------------------------------
Assets
Cash and due from banks ...................................................... $ 26,268,260 $ 31,982,144
Federal funds sold ........................................................... 38,690,000 20,380,000
Interest bearing deposits in financial institutions .......................... 8,588,576 6,363,538
Securities available-for-sale ................................................ 350,165,660 323,115,914
Loans receivable, net ........................................................ 359,405,771 355,533,119
Loans held for sale .......................................................... 660,000 859,139
Bank premises and equipment, net ............................................. 8,447,894 8,377,807
Accrued income receivable .................................................... 5,981,800 5,842,247
Other assets ................................................................. 514,182 332,556
------------------------------
Total assets ......................................................... $ 798,722,143 $ 752,786,464
==============================
Liabilities and Stockholders' Equity
Deposits:
Demand ................................................................... $ 64,423,914 $ 71,372,534
NOW accounts ............................................................. 165,640,307 138,308,140
Savings and money market ................................................. 185,799,563 166,387,319
Time, $100,000 and over .................................................. 67,780,557 69,486,570
Other time ............................................................... 176,115,766 173,993,964
------------------------------
Total deposits ....................................................... 659,760,107 619,548,527
Federal funds purchased and securities
sold under agreements to repurchase ........................................ 18,854,237 18,198,403
Dividends payable ............................................................ 1,441,204 1,441,204
Deferred taxes ............................................................... 4,340,041 3,238,665
Accrued interest and other liabilities ....................................... 3,571,076 3,034,670
------------------------------
Total liabilities .................................................... 687,966,665 645,461,469
------------------------------
Stockholders' Equity:
Common stock, $5 par value; authorized 6,000,000 shares; issued 3,153,230
shares at March 31, 2004 and December 31, 2003;
outstanding 3,133,053 at March 31, 2004 and December 31, 2003 ............ 15,766,150 15,766,150
Surplus .................................................................... 25,351,979 25,351,979
Retained earnings .......................................................... 59,923,998 58,400,660
Treasury stock, at cost; 24,248 shares at
March 31, 2004 and December 31, 2003 ..................................... (1,109,735) (1,109,735)
Accumulated other comprehensive income - net unrealized gain
on securities available-for-sale ......................................... 10,823,086 8,915,941
------------------------------
Total stockholders' equity ........................................... 110,755,478 107,324,995
------------------------------
Total liabilities and stockholders' equity ........................... $ 798,722,143 $ 752,786,464
==============================
3
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended
March 31,
-----------------------
2004 2003
-----------------------
Interest and dividend income:
Loans ................................................... $5,352,668 $5,556,035
Securities
Taxable ............................................... 2,076,081 1,883,539
Tax-exempt ............................................ 1,051,986 770,300
Federal funds sold ...................................... 56,873 163,694
Dividends ............................................... 377,196 340,665
-----------------------
8,914,804 8,714,233
-----------------------
Interest expense:
Deposits ................................................ 2,316,646 2,625,990
Other borrowed funds .................................... 74,528 64,219
-----------------------
2,391,174 2,690,209
-----------------------
Net interest income ............................... 6,523,630 6,024,024
Provision for loan losses ................................. 58,355 119,745
-----------------------
Net interest income after provision for loan losses 6,465,275 5,904,279
-----------------------
Non-interest income:
Trust department income ................................. 283,871 327,329
Service fees ............................................ 356,931 358,924
Securities gains, net ................................... 31,542 365,825
Gain on sale of loans held for sale ..................... 164,188 248,120
Merchant and ATM fees ................................... 149,080 139,898
Other ................................................... 155,321 155,317
-----------------------
Total non-interest income ......................... 1,140,933 1,595,413
-----------------------
Non-interest expense:
Salaries and employee benefits .......................... 2,258,919 2,169,684
Occupancy expenses ...................................... 267,977 268,608
Data processing ......................................... 594,505 467,800
Other operating expenses ................................ 531,353 591,510
-----------------------
Total non-interest expense ........................ 3,652,754 3,497,602
-----------------------
Income before income taxes ........................ 3,953,454 4,002,090
Income tax expense ........................................ 988,912 1,131,765
-----------------------
Net income ........................................ $2,964,542 $2,870,325
=======================
Basic and diluted earnings per share ...................... $ 0.95 $ 0.92
=======================
Declared dividends per share .............................. $ 0.46 $ 0.44
=======================
Comprehensive Income ...................................... $4,871,687 $2,487,415
=======================
4
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
--------------------------
2004 2003
--------------------------
Cash flows from operating activities:
Net income ........................................................ $ 2,964,542 $ 2,870,325
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ....................................... 58,355 119,745
Amortization and accretion, net ................................. 128,672 151,601
Depreciation .................................................... 215,597 247,253
Provision for deferred taxes .................................... (18,693) (115,053)
Securities gains, net ........................................... (31,542) (365,825)
Change in assets and liabilities:
(Increase) decrease loans held for sale ....................... 199,139 (1,443,298)
(Increase) decrease in accrued income receivable .............. (139,553) 147,773
(Increase) decrease in other assets ........................... (181,626) 225,038
Increase in accrued interest and other liabilities ............ 536,406 952,586
--------------------------
Net cash provided by operating activities ................... 3,731,297 2,790,145
--------------------------
Cash flow from investing activities:
Purchase of securities available-for-sale ......................... (45,577,674) (26,888,288)
Proceeds from sale of securities available-for-sale ............... 1,465,948 1,290,340
Proceeds from maturities of securities available-for-sale ......... 19,992,064 15,775,545
Net increase in interest bearing deposits in financial institutions (2,225,038) --
Net increase in federal funds sold ................................ (18,310,000) (67,820,000)
Net increase in loans ............................................. (3,931,007) (6,753,349)
Purchase of bank premises and equipment ........................... (285,684) (143,959)
--------------------------
Net cash used in investing activities ....................... (48,871,391) (84,539,711)
--------------------------
Cash flows from financing activities:
Increase in deposits .............................................. 40,211,580 63,272,017
Increase (decrease) in FHLB advances, federal funds purchased
and securities sold under agreements to repurchase .............. 655,834 (4,963,555)
Dividends paid .................................................... (1,441,204) (1,376,752)
--------------------------
Net cash provided by financing activities ................... 39,426,210 56,931,710
--------------------------
Net decrease in cash and cash equivalents ................... (5,713,884) (24,817,856)
--------------------------
Cash and cash equivalents at beginning of quarter ................... 31,982,144 51,688,784
--------------------------
Cash and cash equivalents at end of quarter ......................... $26,268,260 $26,870,928
==========================
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................ $ 2,482,191 $ 2,781,226
Cash paid for taxes ............................................... 130,780 273,633
5
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Significant Accounting Policies
The consolidated financial statements for the three month periods ended March
31, 2004 and 2003 are unaudited. In the opinion of the management of Ames
National Corporation (the "Company"), these financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly these consolidated financial statements. The results of operations for
the interim periods are not necessarily indicative of results which may be
expected for an entire year. Certain information and footnote disclosure
normally included in complete financial statements prepared in accordance with
generally accepted accounting principles have been omitted in accordance with
the requirements for interim financial statements. The interim financial
statements and notes thereto should be read in conjunction with the year-end
audited financial statements contained in the Company's 10-K. The consolidated
condensed financial statements include the accounts of the Company and its
wholly-owned banking subsidiaries (the "Banks"). All significant intercompany
balances and transactions have been eliminated in consolidation.
2. Dividends
On February 11, 2004, the Company declared a cash dividend on its common stock,
payable on May 17, 2004 to stockholders of record as of May 3, 2004, equal to
$0.46 per share.
3. Earnings Per Share
Earnings per share amounts were calculated using the weighted average shares
outstanding during the periods presented. The weighted average outstanding
shares for the three months ended March 31, 2004 and 2003 were 3,133,053 and
3,128,982, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Ames National Corporation is a bank holding company established in 1975 that
owns and operates five bank subsidiaries in central Iowa. The following
discussion is provided for the consolidated operations of the Company and its
Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co.
(State Bank), Boone Bank & Trust Co. (Boone Bank), Randall-Story State Bank
(Randall-Story Bank) and United Bank & Trust NA (United Bank). The purpose of
this discussion is to focus on significant factors affecting the Company's
financial condition and results of operations.
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.
6
The Company earned net income of $2,965,000, or $0.95 per share for the three
months ended March 31, 2004, compared to net income of $2,870,000, or $0.92 per
share, for the three months ended March 31, 2003, an increase of 3.28%. Net
interest income increased $500,000 and was the largest contributor to the higher
level of earnings. The improved net interest income was partially offset by
lower realized securities gains and the gain on the sale of secondary market
residential mortgage loans.
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 Forward-Looking Statements and Business Risks
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 liabilities 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 and
income on the sale of loans held for sale totaled $164,000 for the
three-months ended March 31, 2004 compared to $248,000 for the first
quarter of 2003. This slowdown will have a negative impact on the Company's
noninterest income as the refinancing activity generated record fee 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 March 31, 2004. 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.
7
Selected Indicators for the Company and the Industry
Years Ended December 31,
Quarter Ended --------------------------------------------------------------
March 31, 2004 2003 2002 2001
-------------------------------------------------------------------------------
Company Company Industry Company Industry Company Industry
-------------------------------------------------------------------------------
Return on assets 1.56 1.60% 1.38% 1.78% 1.30% 1.71% 1.14%
Return on equity 10.91 11.16% 15.04% 11.54% 14.14% 11.54% 12.97%
Net interest
margin ....... 4.09% 4.02% 3.73% 4.51% 3.96% 4.19% 3.78%
Efficiency ratio 48.02% 47.18% 56.59% 44.64% 56.00% 41.87% 57.72%
Capital ratio .. 13.87% 14.26% 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. The Company's annualized return on average
assets was 1.56% and 1.67%, respectively, for the three month periods
ending March 31, 2004 and 2003. Although the Company's return on assets
ratio compares favorably to that of the industry, this ratio declined in
the first three months of 2004 as assets grew more quickly than income
primarily as the result of public fund deposits.
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 annualized
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 average equity was 10.91% and 11.26%,
respectively for the three month periods ending March 31, 2004 and 2003. A
higher level of retained earnings and net unrealized gains on securities
available for sale led to the lower return on equity in 2004.
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
to maintain interest rates on earning assets above those of
interest-bearing liabilities, which is the interest expense paid on
deposits 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 and was 48.02% and 45.90% for
the three months ended March 31, 2004 and 2003, respectively. Higher data
processing expenses relating to computer equipment and maintenance was the
largest contributing factor to the higher efficiency ratio.
o Capital Ratio
The capital ratio is calculated by dividing total equity capital by total
assets. It measures the level of average 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.
8
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 two years:
Critical Accounting Policies
The discussion contained in this Item 2 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.
The Company's significant accounting policies are described in the "Notes to
Consolidated Financial Statements" contained in the Company's 10-K. 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.
9
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.
AVERAGE BALANCE SHEETS AND INTEREST RATES
Three Months Ended March 31,
------------------------------------------------------------
2004 2003
---------------------------- -----------------------------
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate
------------------------------------------------------------
Interest-bearing assets
Loans
Commercial ......................... $ 40,780 $ 531 5.21% $ 38,186 $ 565 5.92%
Agricultural ....................... 26,705 431 6.46% 25,998 461 7.09%
Real estate ........................ 271,841 4,048 5.96% 257,491 4,215 6.55%
Installment and other .............. 22,851 343 6.00% 19,401 315 6.49%
-------------------------------------------------------------
Total loans (including fees) ....... $362,177 $ 5,353 5.91% $341,076 $ 5,556 6.52%
Investment securities
Taxable ............................ $195,356 $ 2,164 4.43% $156,000 $ 2,003 5.14%
Tax-exempt ......................... 120,834 2,024 6.70% 81,167 1,494 7.36%
-----------------------------------------------------------
Total investment securities ........ $316,190 $ 4,189 5.30% $237,167 $ 3,497 5.90%
Interest bearing deposits with banks $ 7,252 $ 24 1.32% $ 1,000 $ 5 2.00%
Federal funds sold ................. 21,388 57 1.07% 58,914 164 1.11%
-----------------------------------------------------------
Total interest-earning assets ...... $707,007 $ 9,623 5.44% $638,157 $ 9,222 5.78%
Non-interest-earning assets ........ $ 51,465 $ 49,973
-------- --------
TOTAL ASSETS ....................... $758,472 $688,130
======== ========
1 Average loan balances include nonaccrual loans, if any. Interest income on
nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental tax rate of 35% and 34% in 2004 and 2003, respectively.
10
AVERAGE BALANCE SHEETS AND INTEREST RATES
Three Months Ended March 31,
--------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Average Revenue/ Yield/ Average Revenue/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and money markets ... $311,503 $ 615 0.79% $278,748 $ 752 1.08%
Time deposits < $100,000 ................... 175,513 1,277 2.91% 165,333 1,407 3.40%
Time deposits > $100,000 ................... 69,366 424 2.45% 61,415 467 3.04%
-------------------------------------------------------------
Total deposits ............................. $556,382 $ 2,316 1.67% $505,496 $ 2,626 2.08%
Other borrowed funds ....................... 20,857 75 1.44% 15,116 64 1.69%
-------------------------------------------------------------
Total Interest-bearing ..................... $577,239 $ 2,391 1.66% $520,612 $ 2,690 2.07%
liabilities ................................ -------- --------
Non-interest-bearing liabilities
Demand deposits ............................ $ 64,154 $ 57,934
Other liabilities .......................... 8,380 7,604
-------- --------
Stockholders' equity ....................... $108,699 $101,980
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ....................... $758,472 $688,130
======== ========
Net interest: income / margin ............. $ 7,232 4.09% $ 6,532 4.09%
======== ========
Spread Analysis
Interest income/average assets ............. 9,623 5.07% 9,222 5.36%
Interest expense/average assets ............ 2,391 1.26% 2,690 1.56%
Net interest income/average assets ......... 7,232 3.81% 6,532 3.80%
1 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental tax rate of 35% and 34% in 2004 and 2003, respectively.
Net Interest Income
For the three months ended March 31, 2004 and 2003, the Company's net interest
margin adjusted for tax exempt income was 4.09%. Net interest income, prior to
the adjustment for tax-exempt income, for the three months ended March 31, 2004
and March 31, 2003 totaled $6,524,000 and $6,024,000, respectively.
For the quarter ended March 31, 2004, interest income increased $201,000 or 1.9%
when compared to the same period in 2003. The slight increase was attributable
to higher volume of investments and loans that offset a much lower yield on
earning assets.
Interest expense decreased $299,000 or 11.1% for the quarter ended March 31,
2004 when compared to the same period in 2003. The lower interest expense for
the quarter is attributable to declining interest rates paid on deposits and
other borrowed funds partially offset by a higher volume of deposits.
Provision for Loan Losses
The Company's provision for loan losses for the three months ended March 31,
2004 was $58,000 compared to $120,000 during the same period last year. Loan
growth at United Bank was the most significant factor leading to the provision
expense recorded for quarters ended March 31, 2004 and 2003.
11
Non-interest Income and Expense
Non-interest income decreased $454,000, or 28.5% during the quarter ended March
31, 2004 compared to the same period in 2003. The decrease can be attributed to
decreased realized gains on the sale of securities in the Company's equity
portfolio of $32,000 in 2004 compared to $366,000 in first quarter of 2003.
Lower gains on the sale of secondary market residential mortgage loans also
contributed to lower non-interest income as the record level of refinancing
activity experienced in 2003 slowed down in 2004.
Non-interest expense increased $155,000 or 4.4% for the first quarter of 2004
compared to the same period in 2003. The increase in non-interest expense is
primarily related to higher data processing costs associated with upgrading
computer software and equipment.
Income Taxes
The provision for income taxes for March 31, 2004 and March 31, 2003 was
$989,000 and $1,132,000, respectively. This amount represents an effective tax
rate of 25.0% for the three months ended March 31, 2004 versus 28.3% for the
same quarter in 2003. 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.
Balance Sheet Review
For the quarter ended March 31, 2004, total assets were $798,722,000, a
$45,936,000 increase compared to December 31, 2003. This higher level of assets
is attributable to a higher volume of federal funds sold resulting from
temporary large public fund deposit balances associated with the collection of
property taxes. Average assets for the first quarter ended March 31, 2004
totaled $758,472,000 versus $688,130,000 for the first quarter ended March 31,
2003. United Bank & Trust's assets increased by $29,997,000 from March 31, 2003.
Investment Portfolio
The increase in the volume of investment securities to $350,166,000 on March 31,
2004 from $323,116,000 on December 31, 2003 resulted primarily from the purchase
of U.S. government agency bonds.
Loan Portfolio
Net loans totaled $359,406,000 as of March 31, 2004 compared to 355,533,000 as
of December 31, 2003. The increased level of loans relates primarily to new loan
originations at United Bank.
Deposits
Deposits totaled $659,760,000 as of March 31, 2004, an increase of $40,212,000
from December 31, 2003 and are $45,866,000 higher than the March 31, 2003
balance. The increase in deposits is attributable to growth in deposit volume
particularly at United Bank and a large influx of public funds invested on a
short-term basis until the funds are withdrawn over the following 60 day period.
The Company's deposits typically increase significantly at the end of the first
and third quarters as local municipalities receive local property tax payments.
Other Borrowed Funds
Other borrowed funds as of March 31, 2004 totaled $18,854,000 and consisted
primarily of securities sold under agreements to repurchase. Other borrowing as
of December 31, 2003 totaled $18,198,000.
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. No material changes in the Company's off-balance sheet
arrangements have occurred since December 31, 2003.
12
Asset Quality Review and Credit Risk Management
The Company's credit risk is centered in the loan portfolio, which on March 31,
2004 totaled $359,406,000 as compared to $355,533,000 as of December 31, 2003.
Net loans comprise 45% of total assets as of March 31, 2004. 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. The Company's level of
problem loans consisting of non-accrual loans and loans past due 90 days or more
as a percentage of total loans of 0.60% compares favorably to the average of the
Company's peer group of 335 bank holding companies with assets of $500 million
to $1 billion as of December 31, 2003 of 0.71%.
Impaired loans totaled $2,532,000 as of March 31, 2004 compared to $2,187,000 as
of December 31, 2003. 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. Impaired loans include loans
accounted for on a non-accrual basis, accruing loans which are contractually
past due 90 days or more as to principal or interest payments, and any
restructured loans. As of March 31, 2004, non-accrual loans totaled $2,404,000,
loans past due 90 days still accruing totaled $128,000 and there were no
restructured loans outstanding. Other real estate owned as of March 31, 2004 and
December 31, 2003 totaled $349,000 and $159,000, respectively.
Net charge-offs totaled $20,000 for the three months ended March 31, 2004
compared to net recoveries of $49,000 for the three months ended March 31, 2003.
The resulting allowance for loan losses as a percentage of outstanding loans as
of March 31, 2004 and December 31, 2003 was 1.66% and 1.71%, respectively. The
allowance for loan and lease losses totaled $6,090,000 and $6,051,000 as of
March 31, 2004 and December 31, 2003, respectively
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.
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 March 31, 2004, 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
13
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 March 31, 2004 and
December 31, 2003 totaled $73,547,000 and $58,726,000, respectively. The federal
funds sold balance was $18,310,000 higher as of March 31, 2004 as the result of
a temporary increase in public fund deposits.
Other sources of liquidity available to the Banks at March 31, 2004 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 March
31, 2004 and securities sold under agreement to repurchase totaled $18,854,000.
Total investments as of March 31, 2004 were $350,166,000 compared to
$323,116,000 as of year end 2003. These investments provide the Company with a
significant amount of liquidity since all of the investments are classified as
available for sale as of March 31, 2004..
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 March 31, 2004 and 2003 totaled $3,731,000 and
$2,790,000, respectively. The primary variance in operating cash flows for the
first quarter of 2004 compared to the same quarter in 2003 was the cash used to
fund secondary market residential loans in the first quarter of 2003.
Net cash used in investing activities for March 31, 2004 and 2003 was
$48,871,000 and $84,540,000, respectively. The largest investing activity was
the purchase of U.S. government agency bonds in the first quarter of 2004.
Net cash provided by financing activities for March 31, 2004 and 2003 totaled
$39,426,000 and $56,932,000, respectively. Growth in deposits was the primary
source of financing funds in 2004 and 2003. As of March 31, 2004, 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.
The Company has unconsolidated interest bearing deposits and marketable
investment securities totaling $35,167,000 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
14
No material capital expenditures or material changes in the capital resource mix
are anticipated at this time. 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 March 31, 2004 that
is a concern to management.
Capital Resources
The Company's total stockholders' equity increased to $110,755,000 at March 31,
2004, from $107,325,000 at December 31, 2003. At March 31, 2004 and December 31,
2003, stockholders' equity as a percentage of total assets was 13.87% and
14.26%, 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
March 31, 2004.
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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk is comprised primarily of interest rate risk arising
from its core banking activities of lending and deposit taking. Interest rate
risk results from the changes in market interest rates which 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 it has been managed to-date in
2004 changed significantly when compared to 2003.
Item 4. 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 Rule 13a-15(e) 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 financial 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.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of 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 Financial Officer Pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K
On January 23, 2004, the Company filed a Form 8-K pursuant to
Item 5, announcing financial results for the three and twelve
months ended December 31, 2003.
On April 16, 2004, the Company filed a Form 8-K pursuant to Item
5, announcing financial results for the three months ended March
31, 2004.
On April 22, 2004, the Company filed a Form 8-K/A pursuant to
Item 5, to include the Company's Consolidated Balance Sheets and
Statements of Income for March 31, 2004 and 2003.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMES NATIONAL CORPORATION
DATE: May 10, 2004 By: /s/ Daniel L. Krieger
------------------------------
Daniel L. Krieger, President
Principal Executive Officer
By: /s/ John P. Nelson
------------------------------
John P. Nelson, Vice President
Principal Financial Officer
17