SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001. Commission File Number 0-32637
AMES NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
IOWA 42-1039071
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
405 FIFTH STREET, AMES, IOWA 50010
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(Address of principal executive offices) (Zip Code)
(515) 232-6251
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $5.00 PAR VALUE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2002 was $74,610,560.
The number of shares outstanding of the registrant's common stock, $5.00 par
value, on February 28, 2002, were 3,125,229.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, as filed with the
Securities and Exchange Commission on March 25, 2002, are incorporated by
reference under 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................... 14
Part II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters............................................. 14
Item 6. Selected Financial Data........................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results Of Operations............................. 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 28
Item 8. Financial Statements and Supplementary Data....................... 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 49
Part III
Item 10. Directors and Executive Officers of the Registrant................ 50
Item 11. Executive Compensation............................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 50
Item 13. Certain Relationships and Related Transactions.................... 50
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 51
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 percent of the stock of four banking subsidiaries
consisting of one national bank 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 and Story 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 and Trust Co. ("Boone Bank"),
acquired certain assets and assumed certain liabilities of the former Boone
State Bank & Trust Company located in Boone, Iowa; and in 1995, the Company
acquired the stock of the Randall-Story State Bank ("Randall-Story Bank")
located in Story City, Iowa. First National, State Bank, Boone Bank and
Randall-Story Bank are each operated as a wholly owned subsidiary of the
Company. These four 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 real estate loans, agricultural and business operating loans and
lines of credit, equipment loans, vehicle loans, personal loans and lines of
credit, home improvement loans and secondary mortgage loan origination. The
Banks also offer a variety of demand, savings and time deposits, cash management
services, merchant credit card processing, safe deposit boxes, wire transfers,
direct deposit of payroll and social security checks and automated teller
machine access. Three of the four 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.
On February 14, 2002, the Company submitted an application to the Office of the
Comptroller of the Currency ("OCC") to establish a de novo national bank in
Marshalltown, Iowa under the name "United Bank & Trust National Association"
(the "Proposed Bank"). The Company received preliminary conditional approval to
establish the Proposed Bank from the OCC on March 20, 2002. Final approval from
the OCC is contingent, among other things, upon approval by the Board of
Governors of the Federal Reserve System of the Company's application to
establish the Proposed Bank and approval by the Federal Deposit Insurance
Corporation ("FDIC") of deposit insurance for the Proposed Bank. Provided that
all regulatory approvals are received within the expected timeframe, the Company
contemplates that the Proposed Bank will commence operations during the second
or third quarter of 2002. Additional information concerning the Proposed Bank is
set forth below.
3
Banking Subsidiaries
First National Bank, Ames, Iowa. First National is a nationally chartered,
commercial bank insured by the FDIC. It was organized in 1903 and became a
wholly owned subsidiary of the Company in 1975 through a bank holding company
reorganization whereby the then shareholders of First National exchanged all of
their First National stock for stock in the Company. First National provides
full-service banking to businesses and residents within the Ames community and
surrounding area. It provides a variety of products and services designed to
meet the needs of the market it serves. It has an experienced staff of bank
officers who have spent the majority of their banking careers with First
National and who emphasize long-term customer relationships. First National
conducts business out of three full-service offices and one super market
location, all located in the city of Ames.
As of December 31, 2001, First National had capital of $34,192,364 and 90
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 $5,834,000 in 2001,
$4,800,000 in 2000 and $5,659,000 in 1999. Total assets as of December 31, 2001,
2000 and 1999 were $349,702,000, $341,864,000 and $343,461,000, respectively.
State Bank & Trust Co., Nevada, Iowa. State Bank is an Iowa, state-chartered,
FDIC insured commercial bank. State Bank was acquired by the Company in 1983
through a stock transaction whereby the then shareholders of State Bank
exchanged all their State Bank stock for stock in the Company. State Bank was
organized in 1939 and provides full-serve banking to businesses and residents
within the Nevada area from its main Nevada location and two offices; one in
McCallsburg, Iowa and the other in Colo, Iowa. It is strong in agricultural,
commercial, and residential real estate lending. State Bank also provides a
broad line of property, casualty, personal and business insurance products to
its customers.
As of December 31, 2001, State Bank had capital of $10,128,000 and 23 full-time
equivalent employees. It had net income of $1,294,000 in 2001, $1,134,000 in
2000 and $1,284,000 in 1999. Total assets as of December 31, 2001, 2000 and 1999
were $94,004,000, $97,285,000 and $92,436,000, respectively.
Boone Bank and 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 office, both located in Boone.
As of December 31, 2001, Boone Bank had capital of $10,032,000 and 26 full-time
equivalent employees. It had net income of $1,302,000 in 2001, $1,178,000 in
2000 and $1,306,000 in 1999. Total assets as of December 31, 2001, 2000 and 1999
were $94,356,000, $99,867,000 and $99,294,000, respectively.
Randall-Story State Bank, Story City, Iowa. Randall-Story Bank is an Iowa,
state-chartered, FDIC insured commercial bank. Randall-Story Bank was acquired
by the Company in 1995 through a stock transaction whereby the then shareholders
of Randall-Story Bank exchanged all their Randall-Story Bank stock for stock in
the Company. Randall-Story Bank was organized in 1928 and provides full-service
banking to Story City and the surrounding area from its main location in Story
City and a full service office in Randall, Iowa. While its primary emphasis is
in agricultural lending, Randall-Story Bank also provides the traditional
lending services typically offered by community banks. It also owns a small
insurance agency which operates out of the Randall office.
As of December 31, 2001, Randall-Story Bank had capital of $6,933,000 and 16
full-time equivalent employees. It had net income of $692,000 in 2001, $744,000
in 2000 and $611,000 in 1999. Total assets as of December 31, 2001, 2000 and
1999 were $63,680,000, $60,312,000 and $55,024,000, respectively.
The business plan for the Proposed Bank submitted as part of the OCC application
provides that the Proposed Bank will be established as a de novo national bank
in Marshalltown, Iowa. The Proposed Bank will operate as a community bank
offering a broad range of deposit and loan products, as well as internet banking
and trust services, to customers located in the Marshalltown and surrounding
Marshall County, Iowa area. The Proposed Bank will be wholly-owned by the
Company and will be capitalized through a $5 million contribution to capital
(consisting of $1.5 million of capital and $3.5 million of surplus) to be made
by the Company. The capital contribution to be made by the Company will be
financed through the sale of a portion of the Company's investment portfolio.
4
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.
The Banks offer a full range of deposit services that are typically available in
most financial institutions, including checking accounts, savings accounts and
other time deposits of various types, ranging from money market accounts to
longer term certificates of deposit. One major goal in developing the Banks'
product mix is to keep the product offerings as simple as possible, both in
terms of the number of products and the features and benefits of the individual
services. The transaction accounts and time certificates are tailored to each
Bank's principal market area at rates competitive in that Bank's market. In
addition, retirement accounts such as IRAs (Individual Retirement Accounts) are
available. The FDIC insures all deposit accounts up to the maximum amount. The
Banks solicit these accounts from small-to-medium sized businesses in their
respective primary trade areas, and from individuals who live and/or work within
these areas. No material portion of the Banks' deposits has been obtained from a
single person or from a few persons. Therefore, the Company does not believe
that the loss of the deposits of any person or of a few persons would have an
adverse effect on the Banks' operations or erode their deposit base.
Loans are provided to creditworthy borrowers regardless of their race, color,
national origin, religion, sex, age, marital status, disability, receipt of
public assistance or any other basis prohibited by law. The Banks intend to
fulfill this commitment while maintaining prudent credit standards. In the
course of fulfilling this obligation to meet the credit needs of the communities
which they serve, the Banks give consideration to each credit application
regardless of the fact that the applicant may reside in a low to moderate income
neighborhood, and without regard to the geographic location of the residence,
property or business within their market areas.
The Banks provide innovative, quality financial products, such as Internet
banking and trust services that meet the banking needs of their customers and
communities. The loan programs and acceptance of certain loans may vary from
time-to-time depending on the funds available and regulations governing the
banking industry. The Banks offer all basic types of credit to their local
communities and surrounding rural areas, including commercial, agricultural and
consumer loans. The types of loans within these categories are as follows:
Commercial Loans. Commercial loans are typically made to sole proprietors,
partnerships, corporations and other business entities such as municipalities
and individuals where the loan is to be used primarily for business purposes.
These loans are typically secured by assets owned by the borrower and often
times involve personal guarantees given by the owners of the business. The types
of loans the Banks offer include:
- - financing guaranteed under Small Business Administration programs
- - operating and working capital loans
- - loans to finance equipment and other capital purchases
- - commercial real estate loans
- - business lines of credit
- - term loans
- - loans to professionals
- - letters of credit
Agricultural Loans. The Banks by nature of their location in central Iowa are
directly and indirectly involved in agriculture and agri-business lending. This
includes short-term seasonal lending associated with cyclical crop and livestock
production, intermediate term lending for machinery, equipment and breeding
stock acquisition and long-term real estate lending. These loans are typically
secured by the crops, livestock, equipment or real estate being financed. The
basic tenet of the Banks' agricultural lending philosophy is a blending of
strong, positive cash flow supported by an adequate collateral position, along
with a demonstrated capacity to withstand short-term negative impact if
necessary. Applicable governmental subsidies and affiliated programs are
utilized if warranted to accomplish these parameters. Approximately 15 percent
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.
5
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
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 and State 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. State
Bank offers individual, professional and business insurance services through a
subsidiary established for that purpose.
Credit Management
The Company strives to achieve sound credit risk management. In order to achieve
this goal, the Company has established uniform credit policies and underwriting
criteria for the Banks' loan portfolios. The Banks diversify in the types of
loans offered and are subject to regular credit examinations, annual internal
and external loan audits and annual review of large loans, as well as quarterly
reviews of loans experiencing deterioration in credit quality. The Company
attempts to identify potential problem loans early, charge off loans promptly
and maintain an adequate allowance for loan losses. The Company has established
credit guidelines for the Banks' lending portfolios which include guidelines
relating to the more commonly requested loan types, as follows:
Commercial Real Estate Loans - Commercial real estate loans, including
agricultural real estate loans, are normally based on loan to appraisal value
ratios of 75 percent 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 percent 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 secure 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).
6
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 percent 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 22 percent 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 percent 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 26 percent of the loan portfolio.
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 percent
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 percent with the interest adjusted quarterly.
Consumer Loans - Consumer loans are normally made to consumers under the
following guidelines. Automobiles - loans on new and used automobiles will not
exceed 80 and 75 percent of the value, respectively. Recreational vehicles and
boats - 66 percent of the value. Mobile home - maximum term on these loans is
180 months with the loan-to-value ratio generally not exceeding 66 percent. 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 percent of the loan portfolio.
Employees
At December 31, 2001, the Banks had a total of 163 full-time equivalent
employees including eight full-time Company 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, a 401(k) profit sharing plan, a money purchase plan and an employee
stock purchase plan. Management considers its relations with employees to be
satisfactory. Unions represent none of the employees.
Market Area
The Company operates four commercial banks with locations in Story and Boone
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.
7
State Bank is located in Nevada, Iowa with a population of 6,658. Nevada is the
county seat of Story County. The major employers are Print Graphics, General
Financial Supply, Central Iowa Printing, Burke Corporation and Almaco. State
Bank provides various types of loans with a major agricultural presence. It
provides a wide variety of banking services and products including insurance
services to its customers.
Randall-Story Bank is located in Story City, Iowa with a population of 3,228.
The major employers are Pella Corporation, Bethany Manor, American Packaging,
Precision Machine and Record Printing. Located in a major agricultural area, it
has a strong presence in this type of lending. As a full service commercial bank
it provides a full line of products and services including insurance services.
The Proposed Bank will be located in Marshalltown, Iowa with a population of
26,000. The major employers are Swift & Co., Fisher Controls International,
Lenox Industries and Marshalltown Medical & Surgical Center.
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 several regional banks, F & M Bank and Firstar Bank, and
nationwide banks, U.S. Bank National Association and Wells Fargo Bank, that 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. Such banks offer certain services, which are
not offered directly by the Banks, but that may be offered through correspondent
banking institutions. 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.
In order to compete with the other financial institutions in their primary trade
areas, the Banks use, to the fullest extent possible, the flexibility, which is
accorded by independent status. This includes an emphasis on specialized
services, local promotional activity and personal contacts by the Banks'
officers, directors and employees. In particular, the Banks compete for deposits
principally by offering depositors a wide variety of deposit programs,
convenient office locations, hours and other services. The Banks compete for
loans primarily by offering competitive interest rates, experienced lending
personnel and quality products and services.
As of December 31, 2001, there were approximately 21 other banks or savings and
loan associations having approximately 37 offices or branch offices within Boone
and Story 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 Marshall County, Iowa, the location of the Proposed Bank in Marshalltown,
Iowa, there were 11 banks and savings institutions with approximately $700
million in deposits as of June 30, 2001. The two largest banks accounted for
nearly 60% of the total deposits.
The Banks also compete with the financial markets for funds. Yields on corporate
and government debt securities and commercial paper affect the ability of
commercial banks to attract and hold deposits. Commercial banks also compete for
funds with money market instruments and similar investment vehicles offered by
competitors including brokerage firms, insurance companies, credit card issuers
and retailers such as Sears. Money market funds offered by these types of
organizations have provided substantial competition for deposits. This trend
will likely continue in the future.
The Company anticipates bank competition will continue to change materially over
the next several years as more banks, including the major regionals and
nationals, continue to consolidate. The larger financial institutions will
continue to consolidate their branch systems by providing incentives to their
customers to use electronic banking instead of brick and mortar branches. Credit
unions, because of their income tax benefits, will continue to show substantial
growth.
8
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 percent of the voting stock of such
bank; (ii) merge or consolidate with another bank holding company; or (iii)
acquire substantially all of the assets of any additional banks.
Non-Banking Activities. With certain exceptions, the BHCA also prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting stock in any company other than a bank or a bank holding company unless
the Federal Reserve finds the company's business to be incidental to the
business of banking. When making this determination, the Federal Reserve in part
considers whether allowing a bank holding company to engage in those activities
would offer advantages to the public that would outweigh possible adverse
effects. A bank holding company may engage in permissible non-banking activities
on a de novo basis, if the holding company meets certain criteria and notifies
the Federal Reserve within ten (10) business days after the activity has
commenced.
Under the Financial Services Modernization Act, eligible bank holding companies
may elect (with the approval of the Federal Reserve) to become a "financial
holding company." Financial holding companies are permitted to engage in certain
financial activities through affiliates which had previously been prohibited
activities for bank holding companies. Such financial activities include
securities and insurance underwriting and merchant banking. At this time, the
Company has not elected to become a financial holding company, but may choose to
do so at some time in the future.
9
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 percent 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 percent
(or 5 percent 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 percent 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 is a national bank 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 of First National, also has some limited
regulatory authority over First National. State Bank, Boone Bank and
Randall-Story Bank are state banks subject to regulation and supervision by the
Iowa Division of Banking. The three state Banks are also subject to regulation
and examination by the FDIC, which insures their respective deposits to the
maximum extent permitted by law. The federal laws that apply to the Banks
regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for loans. The laws and
regulations governing the Banks generally have been promulgated to protect
depositors and the deposit insurance fund of the FDIC and not to protect
stockholders of such institutions or their holding companies.
The OCC and FDIC each has authority to prohibit banks under their supervision
from engaging in what it considers to be an unsafe and unsound practice in
conducting their business. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") requires federal banking regulators to adopt regulations
or guidelines in a number of areas to ensure bank safety and soundness,
including internal controls, credit underwriting, asset growth, management
compensation, ratios of classified assets to capital and earnings. FDICIA also
contains provisions which are intended to change independent auditing
requirements, restrict the activities of state-chartered insured banks, amend
various consumer banking laws, limit the ability of "undercapitalized banks" to
borrow from the Federal Reserve's discount window, require regulators to perform
periodic on-site bank examinations and set standards for real estate lending.
10
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 percent 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 percent, of which at least 4
percent 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 percent of unrealized gain of equity
securities and general reserve for loan and lease losses up to 1.25 percent 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 percent, 20
percent, 50 percent or 100 percent. Most loans are assigned to the 100 percent
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans (both
carry a 50 percent rating). Most investment securities are assigned to the 20
percent category, except for municipal or state revenue bonds (which have a 50
percent rating) and direct obligations of or obligations guaranteed by the
United States Treasury or United States Government Agencies (which have a 0
percent 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 percent, 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 percent level is expected to be a strong banking
organization without any supervisory, financial or operational weaknesses or
deficiencies. Any institutions experiencing or anticipating significant growth
would be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels.
Prompt Corrective Action. Regulations adopted by the Agencies impose even more
stringent capital requirements. The FDIC and other Agencies must take certain
"prompt corrective action" when a bank fails to meet capital requirements. The
regulations establish and define five capital levels: (i) "well-capitalized,"
(ii) "adequately capitalized," (iii) "undercapitalized," (iv) "significantly
undercapitalized" and (v) "critically undercapitalized." Increasingly severe
restrictions are imposed on the payment of dividends and management fees, asset
growth and other aspects of the operations of institutions that fall below the
category of being "adequately capitalized". Undercapitalized institutions are
required to develop and implement capital plans acceptable to the appropriate
federal regulatory agency. Such plans must require that any company that
controls the undercapitalized institution must provide certain guarantees that
the institution will comply with the plan until it is adequately capitalized. As
of February 28, 2002, 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.
11
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
percent must be maintained against total transaction accounts of $35,600,000 or
less (subject to an exemption not in excess of the first $5,700,000 of
transaction accounts). A reserve of $1,068,000 plus 10 percent of amounts in
excess of $35,600,000 must be maintained in the event total transaction accounts
exceed $35,600,000. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy applicable liquidity
requirements. Because required reserves must be maintained in the form of vault
cash or a non-interest bearing account at a Federal Reserve Bank, the effect of
this reserve requirement is to reduce the earning assets of the Banks.
Bank Offices. Iowa law regulates the establishment of bank offices and thus may
affect the Company's future plans to establish additional offices of its Banks.
Pursuant to amendments to Iowa law effective February 21, 2001, 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.
Regulatory Developments
In 1999, 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, although the impact of this legislation on the Company
and the Banks is unclear at this time.
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, as defined. 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.
12
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.
ITEM 2. PROPERTIES
The Company's office is housed in the main office of First National located at
405 Fifth Street, Ames, Iowa. That building is owned by First National free of
any mortgage and consists of approximately 36,000 square feet and includes a
drive through banking facility. First National has nearly completed construction
of a 16,000 square foot addition to the building. The Company's office is now
located in the new addition. In addition to its main office, First National
conducts its business through two full-service offices, the University office
and the North Grand office, and one super-market location, the Cub Food office.
All offices are located within the city of Ames. The North Grand office is owned
by First National free of any mortgage. The University office is located in a
16,000 square foot multi-tenant property owned by the Company. First National
occupies 5,422 square feet in that building under a 24 year lease with rent
adjusted every six years based upon a consumer price index. The current annual
rental is $120,804. 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.
It is anticipated that the Proposed Bank, upon receiving all regulatory
approvals and commencing operations, will conduct its business from an office
located at 2101 S. Center Street, Marshalltown, Iowa. This property will be
purchased by the Proposed Bank from the individual who is expected to become the
president of the Proposed Bank upon commencement of operations at a price that
the Company believes to be the fair market value of the property.
The only property the Company owns is located at 2330 Lincoln Way, Ames, Iowa
consisting of a multi tenant building of approximately 16,000 square feet. First
National leases 5,422 square feet of this building to serve as its University
office. The remaining space is currently leased to four other tenants who occupy
the space for business purposes.
ITEM 3. LEGAL PROCEEDINGS
The Banks are from time to time parties to various legal actions arising in the
normal course of business. The Company believes that there is no threatened or
pending proceeding against the Company or the Banks, which, if determined
adversely, would have a material adverse effect on the business or financial
position of the Company or the Banks.
13
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 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
On February 28, 2002, the Company had approximately 562 shareholders of record.
The Company's common stock is traded in the over-the-counter market under the
symbol "ATLO". Trading in the Company's common stock is, however, relatively
limited. Market makers in the stock include US Bancorp Piper Jaffray, 402 Main
Street, Ames, Iowa 50010 (515-233-4064); Howe Barnes Investments, Inc., 135 So.
LaSalle, Chicago, IL 60603 (312-655-3000); and Monroe Securities, Inc., 47 State
St., Rochester, NY 14614 (800-766-5560). Based on information provided to and
gathered by the Company on an informal basis, the Company believes that the high
and low sales price for the common stock on a per share basis during the last
two years is as follows:
2001 2000
- ---------------------------- --------------------------
Quarter High Low Quarter High Low
- ---------------------------------------------------------
1st $55.00 $40.00 1st $55.00 $55.00
2nd 44.50 36.25 2nd 57.00 55.00
3rd 41.50 36.55 3rd 57.00 57.00
4th 40.00 35.75 4th 55.00 55.00
The Company declared aggregate annual cash dividends in 2001 and 2000 of
$5,187,000 and $4,932,000, respectively, or $1.66 per share in 2001 and $1.58
per share in 2000. In February 2002, the Company declared an aggregate cash
dividend of $1,313,000 or $.42 per share. Quarterly dividends declared during
the last two years were as follows:
2001 2000
--------------------------------------------
Cash Dividends Cash Dividends
Quarter Declared Per Share Declared Per Share
- -----------------------------------------------------------------
1st $0.40 $0.38
2nd 0.42 0.40
3rd 0.42 0.40
4th 0.42 0.40
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."
The Company engaged in certain sales of its common stock during 2001 without
registration of such sales under the Securities Act of 1933, as amended (the
"Securities Act"). On June 15, 2001, the Company sold a total of 2,936 shares of
its common stock, previously reacquired and held as treasury shares, at a price
of $37.75 per share, for an aggregate purchase price of $110,834, to eligible
employees and directors under the Ames National Corporation Stock Purchase Plan.
The Company relied on Rule 504 promulgated under the Securities Act to exempt
the issuance of such shares from the registration provisions of the Securities
Act.
14
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company for the five years ended December
31, 2001 through 1997 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.
Selected Financial Data
Year Ended December 31
------------------------------------------------------------------
(dollars in thousands, except per share amounts)
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------
STATEMENT OF INCOME DATA
Interest Income ....................... $ 41,474 $ 44,018 $ 40,361 $ 39,439 $ 37,073
Interest expense ...................... 18,883 24,261 19,981 19,668 18,830
------------------------------------------------------------------
Net interest income ............. 22,591 19,757 20,380 19,771 18,243
Provision for loan losses ............. 898 460 166 437 279
Net interest income after provision for
loan losses ......................... 21,693 19,297 20,214 19,334 17,964
Noninterest income .................... 5,080 4,130 5,750 4,835 4,192
Noninterest expense ................... 11,587 10,712 11,208 10,264 9,447
------------------------------------------------------------------
Income before provision for income tax 15,186 12,715 14,756 13,905 12,709
Provision for income tax .............. 4,639 3,596 4,429 4,279 3,966
------------------------------------------------------------------
Net Income ...................... $ 10,547 $ 9,119 $ 10,327 $ 9,626 $ 8,743
==================================================================
DIVIDENDS AND EARNINGS PER SHARE DATA
Cash Dividends ........................ $ 5,187 $ 4,932 $ 4,664 $ 4,355 $ 3,971
Cash Dividends declared per weighted
average share outstanding ........... $ 1.66 $ 1.58 $ 1.50 $ 1.39 $ 1.26
Basic and diluted earnings per share .. $ 3.38 $ 2.92 $ 3.31 $ 3.07 $ 2.78
Weighted average shares outstanding ... 3,123,885 3,120,375 3,118,427 3,138,939 3,143,656
BALANCE SHEET DATA
Total Assets .......................... $ 622,280 $ 619,385 $ 605,881 $ 579,956 $ 542,460
Net loans ............................. 323,043 344,015 309,652 287,713 266,305
Deposits .............................. 511,509 493,429 484,620 482,513 442,353
Stockholders' equity .................. 93,622 86,177 76,073 79,109 74,045
Equity to assets ratio ................ 15.04% 13.91% 12.56% 13.64% 13.65%
FIVE YEAR FINANCIAL PERFORMANCE
Net Income ............................ $ 10,547 $ 9,119 $ 10,327 $ 9,626 $ 8,743
Average Assets ........................ 616,971 626,560 594,441 560,524 518,631
Average Stockholders' Equity .......... 91,373 80,081 80,074 77,445 70,451
Return on Assets (net income divided by
average assets) ..................... 1.71% 1.46% 1.74% 1.72% 1.69%
Return on Equity (net income divided
by average equity) .................. 11.54% 11.39% 12.90% 12.43% 12.41%
Efficiency Ratio (noninterest expense
divided by noninterest income plus
net interest income) ................ 41.87% 44.84% 42.89% 41.71% 42.11%
Dividend payout ratio (dividends per
share divided by net income per
share) .............................. 49.11% 54.11% 45.32% 45.28% 45.32%
Equity to assets ratio (Average equity
divided by average assets) .......... 14.81% 12.78% 12.78% 13.03% 13.58%
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is provided for the consolidated operations of the
Company, which includes its wholly owned banking subsidiaries, First National,
State Bank, Boone Bank and Randall-Story Bank. The purpose of this discussion is
to focus on significant factors affecting the Company's financial condition and
results of operations.
Forward-Looking Statements
The discussion herein may contain forward-looking statements about the Company,
its business and its prospects. Forward-looking statements can be identified by
the fact that they do not relate strictly to historical or current facts. They
often include use of the words "believe", "expect", "anticipate", "intend",
"plan", "estimate" or words of similar meaning, or future or conditional verbs
such as "will", "would", "should", "could" or "may". Forward-looking statements,
by their nature, are subject to risks and uncertainties. A number of factors,
many of which are beyond the Company's control, could cause actual conditions,
events or results to differ significantly from those described in the
forward-looking statements. Such risks and uncertainties with respect to the
Company include those related to the economic environment, particularly in the
areas in which the Company and the Banks operate, competitive products and
pricing, fiscal and monetary policies of the U.S. government, changes in
governmental regulations affecting financial institutions, including regulatory
fees and capital requirements, changes in prevailing interest rates, credit risk
management and asset/liability management, the financial and securities markets
and the availability of and costs associated with sources of liquidity.
General
The Company earned net income of $10,547,000 in 2001, compared to net income of
$9,119,000 in 2000 and net income of $10,327,000 in 1999. The higher level of
income in 2001 as compared to 2000 is attributable to lower interest expense on
deposits and other borrowings partially offset by lower interest income on loans
and investment securities. Income declined in 2000 in comparison to 1999
primarily as a result of reduced realized gains on securities ($716,000 in 2000
versus $1,266,000 in 1999) and a charged-off bond recovery of $846,000 in 1999
which did not recur in 2000. The Company's net income is derived principally
from the operating results of the Banks. All four Banks are well-established
financial institutions that have a record of profitable operations.
Financial Condition
Net loans for the year ended December 31, 2001, declined to $328,489,000 from
$349,388,000 for the same period in 2000. The decline in loan volume can be
attributed to a slowdown in local, state, and national economic activity and
aggressive competition for loans. For the year 2000, net loans increased
$34,363,000, and $26,323,000 of the increase was in real estate mortgage loans.
A strong local economy, moderate interest rates and several new business
opportunities in 2000 contributed to the loan growth. The reasons for the
declining trend in the net interest margin prior to 2001 were the competitive
pressures in the local markets and the higher deposit interest rates experienced
in 2000. Currently, the Company's largest market, Ames, Iowa, has six banks,
three thrifts, five credit unions and several other financial investment
companies. In addition, several of the financial institutions have multiple
branch locations. Multiple banks are also located in the Company's other
communities creating similarly competitive environments. This high level of
competition in the local markets will likely cause downward pressure on the net
interest margin of the Company into the foreseeable future. The decrease in
investment securities to $213,778,000 on December 31, 2001 compare to
$232,706,000 on December 31, 2000 resulted from the proceeds of maturing and
called investment securities being held as federal funds sold. These short-term
funds are expected to be re-invested in longer-term assets as investment yields
become more favorable. Total assets increased 0.47 percent in 2001, compared to
an increase of 2.29 percent in 2000. The limited increase in assets in 2001 and
2000 was primarily attributable to market competition limiting deposit growth.
In 2001, the rates paid on deposits were lower than in 2000 as a result of
decreases in market interest rates. Deposits increased 3.66 percent in 2001
compared to an increase of 1.82 percent in 2000. The Banks continue to compete
for deposits in market areas where the total deposit growth continues to be weak
as a result of significant bank and non-bank competition. Other borrowings,
including Federal Home Loan Bank Advances, federal funds purchased, and
securities sold under agreement to repurchase, totaled $11,596,000 in 2001
compared to $35,007,000 in 2000. Other borrowings declined in 2001 as the result
of the maturity and sale of securities.
16
Average Balance Sheet and Interest Rates
The following tables show average balances and interest income or interest
expense, with the resulting average yield or rate by category of average earning
asset or interest bearing liability.
ASSETS
(dollars in thousands)
2001 2000 1999
-----------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------------
Interest-earning assets
Loans ................................ $ 49,081 $ 4,107 8.37% $ 52,764 $ 4,378 8.30% $ 44,536 $ 4,072 9.14%
Commercial ........................... 28,302 2,492 8.81% 26,328 2,465 9.36% 24,242 2,365 9.76%
Agricultural ......................... 240,382 19,458 8.09% 232,823 18,963 8.14% 206,830 16,091 7.78%
Consumer and other ................... 23,675 1,834 7.75% 27,200 2,500 9.19% 23,456 1,858 7.92%
-----------------------------------------------------------------------------------------
Total loans (including fees) ... $341,440 $ 27,891 8.17% $339,115 $ 28,306 8.35% $299,064 $ 24,386 8.15%
Investment securities
Taxable .............................. $146,213 $ 9,303 6.36% $179,858 $ 11,644 6.47% $186,504 $ 12,187 6.53%
Tax-exempt ........................... 68,001 5,210 7.66% 72,521 5,442 7.50% 67,998 5,088 7.48%
-----------------------------------------------------------------------------------------
Total investment securities .... $214,214 $ 14,513 6.78% $252,379 $ 17,086 6.77% $254,502 $ 17,275 6.79%
Interest bearing deposits with banks ... $ 251 $ 13 5.18% $ 1,718 $ 99 5.76%$ 2,416 $ 137 5.67%
Federal funds sold ..................... 25,953 829 3.19% 5,602 377 6.73% 5,927 294 4.96%
-----------------------------------------------------------------------------------------
Total interest-earning assets .. $581,858 $ 43,246 7.43% $598,814 $ 45,868 7.66% $561,909 $ 42,092 7.49%
Noninterest-earning assets
Cash and due from banks .............. $ 21,040 $ 19,324 $ 18,255
Premises and equipment, net .......... 5,892 5,285 5,368
Other, less allowance for loan losses 8,181 3,137 8,909
-------- -------- --------
Total noninterest-earning assets $ 35,113 $ 27,746 $ 32,532
-------- -------- --------
Total assets ................... $616,971 $626,560 $594,441
======== ======== ========
<FN>
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 rate of 34%.
</FN>
17
Average Balance Sheet and Interest Rates
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands) 2001 2000 1999
---------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and money markets $228,908 $ 5,727 2.50% $218,795 $ 8,144 3.72% $212,612 $ 6,880 3.24%
Time deposits < $100,000 ............... 158,625 8,736 5.51% 159,035 8,972 5.64% 157,268 8,327 5.29%
Time deposits > $100,000 ............... 58,253 3,329 5.71% 62,052 3,823 6.16% 67,310 3,687 5.48%
---------------------------------------------------------------------------------------
Total deposits ......................... $445,786 $ 17,792 3.99% $439,882 $ 20,939 4.76% $437,208 $18,894 4.32%
Other borrowed funds ................... 23,008 1,091 4.74% 52,749 3,322 6.30% 22,854 1,087 4.76%
---------------------------------------------------------------------------------------
Total Interest-bearing liabilities $468,794 $ 18,883 4.03% $492,631 $ 24,261 4.92% $460,062 $19,981 4.34%
---------------------------------------------------------------------------------------
Noninterest-bearing liabilities
Demand deposits ........................ $ 51,113 $ 47,590 $ 45,719
Other liabilities ...................... 5,691 6,258 8,586
-------- -------- --------
Stockholders' equity ..................... $ 91,373 $ 80,081 $ 80,074
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ............. $616,971 $626,560 $594,441
======== ======== ========
Net interest income ...................... $ 24,363 4.19% $ 21,607 3.61% $ 22,111 3.93%
======== ======== ========
Margin Analysis
Interest income/earning assets ......... $ 43,246 7.43% $ 45,868 7.66% $ 42,092 7.49%
Interest expense/earning assets ........ 18,883 3.25% 24,261 4.05% 19,981 3.56%
Net interest income/earning assets ..... 24,363 4.19% 21,607 3.61% 22,111 3.93%
Rate and Volume Analysis
The following table sets forth, on a tax-equivalent basis, a summary of the
changes in net interest income resulting from changes in volume and rates
(dollars in thousands and in tax equivalent basis).
2001 Compared to 2000 2000 Compared to 1999
--------------------------------------------------------------
Volume Rate Total Volume Rate Total
--------------------------------------------------------------
Interest income
Loans
Commercial ............................. ($ 308) $ 37 ($ 271) $ 706 ($ 400) $ 306
Agricultural ........................... 179 (152) $ 27 198 (98) 100
Real estate ............................ 613 (118) 495 2,091 781 2,872
Consumer and other ..................... (301) (365) (666) 321 321 642
--------------------------------------------------------------
Total loans (including fees) ....... $ 183 ($ 598) ($ 415) $ 3,316 $ 604 $ 3,920
Investment securities
Taxable .................................. ($2,144) ($ 197) ($2,341) ($ 431) ($ 112) ($ 543)
Tax-exempt ............................... (344) 112 (232) 339 15 354
--------------------------------------------------------------
Total investment securities ........ ($2,488) ($ 85) ($2,573) ($ 92) ($ 97) ($ 189)
Interest bearing deposits with banks ....... ($ 77) ($ 9) ($ 86) ($ 40) $ 2 ($ 38)
Federal funds sold ......................... 741 (289) 452 (17) 100 83
--------------------------------------------------------------
Total Interest-earning assets ...... ($1,641) ($ 981) ($2,622) $ 3,167 $ 609 $ 3,776
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and money markets $ 361 ($2,778) ($2,417) $ 205 $ 1,059 $ 1,264
Time deposits < $100,000 ............... (23) (213) (236) 94 551 645
Time deposits > $100,000 ............... (226) (268) (494) (301) 437 136
--------------------------------------------------------------
Total deposits ..................... $ 112 ($3,259) ($3,147) ($ 2) $ 2,047 $ 2,045
Other borrowed funds ....................... (1,551) (680) (2,231) 1,792 443 2,235
--------------------------------------------------------------
Total Interest-bearing liabilities . ($1,439) ($3,939) ($5,378) $ 1,790 $ 2,490 $ 4,280
--------------------------------------------------------------
Net interest income/earning assets . ($ 202) $ 2,958 $ 2,756 $ 1,377 ($1,881) ($ 504)
==============================================================
<FN>
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.
</FN>
18
Net Interest Income
The Company's largest component contributing to net income is net interest
income, which is the difference between interest earned on earning assets which
are primarily loans and investments and interest paid on interest bearing
liabilities which are primarily deposits and borrowings. The volume of and
yields earned on earning assets and the volume of and the rates paid on interest
bearing liabilities determine net interest income. Interest earned and interest
paid is also affected by general economic conditions, particularly changes in
market interest rates, and by government policies and the action of regulatory
authorities. Net interest income divided by average earning assets is referred
to as net interest margin. For the years December 31, 2001, 2000 and 1999, the
Company's net interest margin was 4.19 percent, 3.61 percent and 3.93 percent,
respectively. The improved net interest margin in 2001 is attributable to lower
interest expense as the Company was able to lower deposit and other borrowings
rates more quickly than loans and investment rates declined. Conversely, rising
rates and market competition caused the net interest margin to decline in 2000.
The reasons for the declining trend in the net interest margin prior to 2001
were the competitive pressures in the local markets and the higher deposit
interest rates experienced in 2000. Currently, the Company's largest market,
Ames, Iowa, has six banks, three thrifts, five credit unions and several other
financial investment companies. In addition, several of the financial
institutions have multiple branch locations. Multiple banks are also located in
the Company's other communities creating similarly competitive environments.
This high level of competition in the local markets will likely cause downward
pressure on the net interest margin of the Company into the foreseeable future.
Net interest income during 2001, 2000 and 1999 totaled $22,591,000, $19,757,000
and $20,380,000, respectively, representing a 14.34 percent increase in 2001
from 2000 and a 3.06 percent decrease in 2000 compared to 1999. The higher net
interest income in 2001 as compared to 2000 resulted from lower interest expense
as the Company was able to lower deposit and other borrowings rates more quickly
than loans and investment rates declined. Other borrowing costs were also down
significantly as the result of a lower level of borrowing in 2001 versus 2000,
as proceeds from maturing and sold investments were utilized to lower borrowing
levels. The decrease in net interest income in 2000 as compared to 1999 is
attributable to higher interest expense on interest bearing liabilities
attributable to both volume and interest rate, partially offset by higher
interest income on earning assets. The rising 2000 interest rate environment
increased interest expense compared to 1999 as the funding liabilities repriced
more quickly than the assets.
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 $898,000 for loan losses during 2001 compared to $460,000 in
2000 and $166,000 in 1999. The primary reason for the increased allowance for
loan losses in 2001 versus 2000 was the charge-off of $612,000 in commercial
leases. The increased provision for loan losses in 2000 versus 1999 was due to
the growth in the Banks' loan portfolios.
Management believes the allowance for loan losses to be adequate to absorb
probable losses in the current portfolio. This statement is based upon
management's continuing evaluation of inherent risks in the current loan
portfolio, current levels of classified assets and general economic factors. The
Company will continue to monitor the allowance and make future adjustments to
the allowance as conditions dictate.
Noninterest Income and Expense
Non-interest income during 2001, 2000 and 1999 totaled $5,080,000, $4,130,000
and $5,750,000, respectively, representing a 23.00 percent increase in 2001 from
2000 and a 28.17 percent decrease in 2000 compared 1999. The increase in 2001
can be attributed to higher security gains and increased revenues from deposit,
trust and secondary market lending services. The decrease in 2000 was primarily
related to a lower level of security gains, decreased income from secondary
market loan fees and the non-recurrence of a recovery of a charged-off
investment in 1999. The recovered investment was a corporate bond issued by the
Bank of New England purchased for $1,004,000 in 1989 that was subsequently
written down to $150,000 in 1991 and 1992 due to the commencement of bankruptcy
proceedings by the issuer. The delay in the recovery was due to extended
litigation involving the issuer's bankruptcy trustee, bank regulatory agencies
and the issuer's external auditors.
19
Non-interest expense during 2001, 2000 and 1999 totaled $11,587,000, $10,712,000
and $11,208,000, respectively, representing a 8.17 percent increase in 2001
versus 2000 and a 4.43 percent decrease in 2000 compared to 1999. The higher
noninterest expense in 2001 is primarily attributable to higher salary and
benefits expenses, data processing costs, and professional fees associated with
filings with the Securities and Exchange Commission. The decrease in 2000 was
primarily related to lower costs associated with data processing, equipment and
advertising. The percentage of non-interest expense to average assets was 1.88
percent in 2001, compared to 1.71 percent and 1.89 percent during 2000 and 1999,
respectively.
Provision for Income Taxes
The provision for income taxes for 2001, 2000 and 1999 was $4,639,000,
$3,596,000 and $4,429,000, respectively. This amount represents an effective tax
rate of 30.54 percent during 2001, compared to 28.28 percent and 30.01 percent
for 2000 and 1999, respectively. The Company's marginal federal tax rate is
currently 35 percent. The difference between the Company's effective and
marginal tax rate is primarily related to investments made in tax exempt
securities.
Investment Portfolio
The following table presents the market values, which represent the carrying
values due to the available-for-sale classification, of the Company's investment
portfolio as of December 31, 2001, 2000 and 1999, respectively (dollars in
thousands).
----------------------------------
2001 2000 1999
----------------------------------
U.S. treasury securities ................ $ 12,548 $ 23,150 $ 29,599
U.S. government agencies ................ 60,858 85,864 97,209
State and political subdivisions ........ 63,109 61,411 64,582
Corporate bonds ......................... 51,106 43,167 46,011
Equity securities ....................... 26,157 19,114 16,763
----------------------------------
Total ........................... $213,778 $232,706 $254,164
==================================
Investments in States and political subdivisions represent purchases of
municipal bonds located primarily in the state of Iowa and contiguous states.
Investment in other securities includes corporate debt obligations of companies
located and doing business throughout the United States. The debt obligations
were all within the credit ratings acceptable under the Banks' investment
policies with the exception of one corporate bond with an amortized cost of
$496,000 and a market value of $448,000. The bond was rated by Moody's and
Standard & Poor's rating service publications as BA1 and BB, respectively, as of
December 31, 2001 falling outside the bank's acceptable rating standards
subsequent to its purchase date of November 16, 1998. As of December 31, 2001,
the Company did not have securities from a single issuer, except for the United
States Government or its agencies, which exceeded 10 percent of consolidated
stockholders' equity.
20
Investment Maturities as of December 31, 2001
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 (dollars in thousands).
After one After five
year but years but
Within within within After
One Year five years ten years ten years Total
-------------------------------------------------------------------
U.S. treasury ...................... $ 8,888 $ 3,162 $ 498 $ -- $ 12,548
U.S. government agencies ........... 5,425 34,892 18,541 2,000 60,858
States and political subdivisions .. 6,953 20,283 24,026 11,847 63,109
Corporate bonds .................... 7,357 22,987 19,489 1,273 51,106
-------------------------------------------------------------------
Total ...................... $ 28,623 $ 81,324 $ 62,554 $ 15,120 $ 187,621
===================================================================
Weighted average yield
U.S. treasury .................... 6.41% 5.45% 5.20% -- 6.15%
U.S. government agencies ......... 6.07% 5.73% 6.54% 7.00% 6.06%
States and political subdivisions* 7.24% 7.38% 7.65% 7.57% 7.51%
Corporate bonds .................. 7.36% 6.51% 6.44% 6.42% 6.60%
-------------------------------------------------------------------
Total ...................... 6.76% 6.36% 6.93% 7.40% 6.70%
<FN>
* Yields on tax-exempt obligations of states and political subdivisions have
been computed on a tax-equivalent basis.
</FN>
Loan Portfolio
Types of Loans
The following table sets forth the composition of the Company's loan portfolio
for the past five years ending at December 31, 2001 (dollars in thousands).
----------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------
Real Estate
Construction ......... $ 12,677 $ 12,221 $ 9,062 $ 7,641 $ 8,562
1-4 family residential 84,379 97,663 89,171 84,767 80,632
Commercial ........... 117,211 112,415 98,840 83,115 69,193
Agricultural ......... 21,029 21,095 19,999 18,336 17,202
Commercial .............. 45,631 53,955 48,920 52,458 50,387
Agricultural ............ 27,367 28,199 25,575 23,882 23,682
Consumer and other ...... 20,920 24,576 23,897 23,263 22,023
----------------------------------------------------
Total loans ..... 329,214 350,124 315,464 293,462 271,681
Deferred loan fees, net . 725 736 826 903 917
----------------------------------------------------
Net loans ....... $328,489 $349,388 $314,638 $292,559 $270,764
====================================================
The Company's loan portfolio consists of commercial loans, agricultural loans,
commercial real estate and residential real estate loans and consumer loans. As
of December 31, 2001, gross loans totaled approximately $329 million, which
equals approximately 64 percent of total deposits and 53 percent of total
assets. As of December 31, 2001, the majority of the loans were originated
directly by the Banks to borrowers within the Banks' principal market areas.
There are no foreign loans outstanding during the years presented.
Commercial loans consist primarily of loans to businesses for various purposes
including revolving lines to finance current operations, floor-plans, inventory
and accounts receivable; capital expenditure loans to finance equipment and
other fixed assets; and letters of credit. These loans generally have short
maturities, have either adjustable or fixed rates and are unsecured or secured
by inventory, accounts receivable, equipment and/or real estate.
21
Agricultural loans play an important part in the Banks' loan portfolios. Iowa is
a major agricultural state and is a national leader in both grain and livestock
production. The Banks play a significant role in their communities in financing
operating, livestock and real estate activities.
All lending is done on a personal basis using cash flow as the most important
criterion after assessing the borrower's character. Government programs are
utilized where the benefit to both borrower and lender is evident.
Real estate loans include various types of loans for which the Banks hold real
property as collateral and consist of loans primarily on commercial properties
and single family residences. Real estate loans typically have fixed rates for
up to five years with the Company's loan policy having a maximum fixed rate
maturity of up to 15 years. The majority of construction loan volume is to
contractors to construct commercial buildings and generally have maturities of
up to 12 months. The Banks originate residential real estate loans for sale to
the secondary market for a fee.
Consumer loans include loans extended to individuals for household, family and
other personal expenditures not secured by real estate. The majority of the
Banks' consumer lending is for vehicles, consolidation of personal debts,
household appliances and improvements.
The interest rates charged on loans vary with the degree of risk, the amount of
the loan and the maturity of the loan. Competitive pressures, market interest
rates, the availability of funds and government regulation further influence the
rate charged on a loan.
The Banks follow a loan policy, which has been approved by both the Company and
Banks' Boards of Directors and are overseen by both Company and Bank management.
These policies establish lending limits, review and grading criteria and other
guidelines such as loan administration and allowance for loan losses. Loans are
approved by the Banks' Board of Directors and/or designated officers in
accordance with respective guidelines and underwriting policies of the Company.
Loans to one borrower are limited by applicable state and federal banking laws.
Credit limits generally vary according to the type of loan and the individual
loan officer's experience.
Maturities and Sensitivities of Loans to Changes in Interest Rates as of
December 31, 2001
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 (dollars in thousands).
After one
year but
Within within After
One Year five years five years Total
--------------------------------------------
Real Estate
Construction ................ $ 9,778 $ 2,583 $ 316 $ 12,677
1-4 family residential ...... 5,036 36,151 43,192 84,379
Commercial .................. 7,671 76,098 33,442 117,211
Agricultural ................ 1,999 3,939 15,091 21,029
Commercial ..................... 19,844 19,843 5,944 45,631
Agricultural ................... 18,377 6,128 2,862 27,367
Consumer and other ............. 4,175 8,854 7,891 20,920
--------------------------------------------
Total loans .................... $ 66,880 $153,596 $108,738 $329,214
============================================
After one
year but
within After
five years five years
-----------------------
Loan maturities after one year with:
Fixed rates .................................... $129,409 $108,551
Variable rates ................................. 24,187 187
-----------------------
$153,596 $108,738
=======================
22
Non-performing Assets
The following table sets forth information concerning the Company's
non-performing assets for the past five years ending December 31, 2001 (dollars
in thousands).
------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------
Non-performing assets:
Nonaccrual loans ................ $2,692 $2,663 $ 405 $ 80 $ 69
Loans 90 days or more past due .. 797 242 723 581 872
Restructured loans .............. -- -- -- -- 253
------------------------------------------
3,489 2,905 1,128 661 1,194
Other real estate owned ........... 159 75 41 43 89
------------------------------------------
Total non-performing
assets .................... $3,648 $2,980 $1,169 $ 704 $1,283
==========================================
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 $886,000 were placed on non-accrual status in 2001 with
total non-accrual loans equaling $2,692,000 as of December 31, 2001. Outstanding
loans of $2,578,000 were placed on non-accrual status in 2000 with total
non-accrual loans equaling $2,663,000 as of December 31, 2000. Outstanding loans
of $392,000 were placed on non-accrual status in 1999 with total non-accrual
loans equaling $405,000 as of December 31, 1999. A real estate loan at First
National with a December 31, 2001 balance of $1,305,000 compared to $1,790,000
as December 31, 2000 is the largest non-performing asset that was placed on
non-accrual status in 2000. For the years ended December 31, 2001, 2000 and
1999, interest income, which would have been recorded under the original terms
of such loans was approximately $243,000, $254,000 and $46,000, respectively,
with $114,000, $101,000 and $17,000, respectively, recorded. Additional
potential problem loans and leases as of December 31, 2001, consisted of a pool
of purchased leases with a balance of $2,330,000.
Summary of the Allowance for Loan Losses
The provision for loan losses represents charges made to earnings to maintain an
adequate allowance for loan losses. The allowance for loan losses is
management's best estimate of probable losses inherent in the loan portfolio as
of the balance sheet date. Factors considered in establishing an appropriate
allowance include: an assessment of the financial condition of the borrower; a
realistic determination of value and adequacy of underlying collateral; the
condition of the local economy and the condition of the specific industry of the
borrower; an analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans.
The adequacy of allowance for loan losses is evaluated quarterly by management
and the respective Bank boards. This evaluation focuses on specific loan
reviews, changes in the type and volume of the loan portfolio given the current
and forecasted economic conditions and historical loss experience. Any one of
the following conditions may result in the review of a specific loan: concern
about whether the customer's cash flow or net worth are sufficient to repay the
loan; delinquent status; the loan has been criticized in a regulatory
examination; the accrual of interest has been suspended; or other reasons
including when the loan has other special or unusual characteristics which
suggest special monitoring is warranted.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
23
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 uncollectable, 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
(dollars in thousands).
--------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------
Balance at beginning of period .... $ 5,373 $ 4,986 $ 4,846 $ 4,459 $ 4,159
Charge-offs:
Real Estate
Construction ................... -- -- -- -- --
1-4 Family Residential ......... 1 -- -- -- --
Commercial ..................... -- -- 18 -- --
Agricultural ................... -- -- -- -- --
Commercial ........................ 768 55 -- 118 --
Agricultural ...................... -- -- -- -- --
Consumer and other ................ 83 96 41 26 34
-------------------------------------------------------------
852 151 59 144 34
Recoveries:
Real Estate
Construction ................... -- -- -- -- --
1-4 Family Residential ......... -- -- -- -- --
Commercial ..................... -- -- 16 -- 1
Agricultural ................... -- -- -- -- --
Commercial ........................ 8 66 -- 79 36
Agricultural ...................... -- -- -- -- --
Consumer and other ................ 19 12 17 15 18
-------------------------------------------------------------
27 78 33 94 55
Net charge-offs (recoveries) ...... $ 825 $ 73 $ 26 $ 50 ($ 21)
Additions charged to
operations ...................... 898 460 166 437 279
-------------------------------------------------------------
Balance at end of period .......... $ 5,446 $ 5,373 $ 4,986 $ 4,846 $ 4,459
=============================================================
Average Loans Outstanding ......... $ 341,440 $ 339,115 $ 299,064 $ 279,054 $ 237,601
Ratio of net charge-offs during the
period to average loans
outstanding ..................... 0.24% 0.02% 0.01% 0.02% -0.01%
Ratio of allowance for loan losses
to average loans outstanding .... 1.60% 1.58% 1.67% 1.74% 1.88%
Reserve levels increased to 1.60 percent of outstanding loans as of December 31,
2001 compared to 1.58 percent for the prior year-end. Problem commercial leases
identified in 2001 led to higher provision expense, net charge-offs and specific
reserves as credit weaknesses were identified. General reserve allocations
remained consistent in 2001 with prior years.
General reserves for loan categories normally range from 1.0 to 2.0 percent of
the outstanding loan balances. As loan volume increases, the general reserve
levels increase with that growth. As the previous table indicates, the
additional loan provision for years 1997 through 2000 is the most significant
change in the reserve level as a result of growth in the loan portfolio. The
general reserve loss factors have remained consistent over the five-year period
presented. The allowance relating to commercial and 1-4 family residential real
estate loans are the largest reserve components. Commercial real estate loans
have higher general reserve levels than 1-4 family residential 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, 2001, commercial real estate loans have general
reserves of 1.30 percent and 1-4 family residential loans, which management
generally considers lower risk, have general reserves of 1.00 percent. The
estimation methods and assumptions used in determining the allowance for the
five years presented have remained consistent.
24
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. The rise in
specific reserves from 1997 through 1999 was minimal, with the largest increase
in total specific reserves being limited to $35,000 from 1998 to 1999. For
December 31, 2001 and 2000, specific reserves increased $142,000 or 12 percent
and $177,000 or 18 percent, respectively. Specific allocations for commercial
leases was the primary reason for the increase in total reserve levels in 2001.
The specific reserves are dependent upon assumptions regarding the liquidation
value of collateral and the cost of recovering collateral including legal fees.
Changing the amount of specific reserves on individual loans has had the largest
impact on the reallocation of the reserve among different parts of the
portfolio.
Other factors that are considered when determining the adequacy of the reserve
include loan concentrations, loan growth, the economic outlook and historical
losses. The Company's concentration risks include geographic concentration in
central Iowa; the local economy's dependence upon several large governmental
entities, including Iowa State University and the Iowa Department of
Transportation; and the health of Iowa's agricultural sector that is dependent
on weather conditions and government programs. Additional reserves have not been
established for local and national economic conditions over the last five-year
period, as the economy has been healthy and credit quality has remained
favorable. Historical losses reflect good credit quality over the past five
years, as net losses have not exceeded .24 percent which compares favorably to
the Company's reserve of 1.60 percent as of December 31, 2001. However, no
assurances can be made that losses will remain at the favorable levels
experienced over the past five years.
Allocation of the Allowance for Loan Losses
The following table sets forth information concerning the Company's allocation
of the allowance for loan losses (dollars in thousands).
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------
Amount % * Amount % * Amount % * Amount % * Amount % *
--------------------------------------------------------------------------------------------
Balance at end of period
applicable to:
Real Estate
Construction ......... $ 178 3.85% $ 163 3.49% $ 91 2.87% $ 80 2.60% $ 99 3.15%
1-4 family residential 980 25.63% 1,088 27.89% 899 28.27% 809 28.89% 916 29.68%
Commercial ........... 1,704 35.60% 1,619 32.11% 1,536 31.33% 1,330 28.32% 1,143 25.47%
Agricultural ......... 279 6.39% 315 6.03% 237 6.34% 194 6.25% 175 6.33%
Commercial .............. 938 13.86% 754 15.41% 573 15.51% 828 17.88% 728 18.55%
Agricultural ............ 457 8.31% 421 8.05% 541 8.11% 517 8.14% 367 8.72%
Consumer and other ...... 258 6.35% 538 7.02% 560 7.58% 604 7.93% 535 8.11%
Unallocated ............. 652 475 549 484 479
--------------------------------------------------------------------------------------------
$5,446 100% $5,373 100% $4,986 100% $4,846 100% $4,442 100%
============================================================================================
* Percent of total loans in each category to total loans.
Deposits
Types of Deposits
The Company's primary source of funds is customer deposits. The Company attempts
to attract non-interest-bearing deposits, which are a low cost funding source.
In addition, the Banks offer a variety of interest-bearing accounts designed to
attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank management
based on competitive market factors and the Company's need for funds. While
nearly 75 percent 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.
25
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, 2001, 2000 and 1999 (dollars in thousands).
---------------------------------------------------------
2001 2000 1999
---------------------------------------------------------
Amount Rate Amount Rate Amount Rate
---------------------------------------------------------
Noninterest bearing demand
deposits ................. $ 51,113 $ 47,590 $ 45,719
Interest bearing demand
deposits ................. 103,529 2.01% 98,105 3.17% 93,910 2.61%
Money market deposits ...... 101,267 3.23% 93,583 4.67% 88,834 4.25%
Savings deposits ........... 24,112 1.56% 27,107 2.39% 29,868 2.21%
Time certificates < $100,000 158,625 5.51% 159,035 5.64% 157,286 5.29%
Time certificates > $100,000 58,253 5.71% 62,052 6.16% 67,310 5.48%
---------------------------------------------------------
$496,899 $487,472 $482,927
=========================================================
Deposit Maturity
The following table shows the amounts and remaining maturities of time
certificates of deposit that had balances of more than $100,000 at December 31,
2001, 2000 and 1999 (in thousands).
2001 2000 1999
-----------------------------------
3 months or less ..................... $16,771 $21,665 $21,548
Over 3 through 12 months ............. 24,590 34,901 27,362
Over 12 through 36 months ............ 4,765 6,996 11,829
Over 36 months ....................... 1,590 333 1,364
-----------------------------------
Total ........................ $47,716 $63,895 $62,103
===================================
Borrowed Funds
The following table summarizes the outstanding amount of and the average rate on
borrowed funds as of December 31, 2001, 2000 and 1999. (dollars in thousands)
2001 2000 1999
---------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
---------------------------------------------------
FHLB advances ............. $ 1,000 5.21% $16,000 6.59% $ 3,000 5.94%
Federal funds purchased and
repurchase agreements ..... 10,596 2.54% 19,007 6.19% 37,285 5.44%
--------------------------------------------------
Total ............. $11,596 2.77% $35,007 6.37% $40,285 5.48%
===================================================
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,
2001, 2000 and 1999.
2001 2000 1999
---------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------------------------------------------------------
FHLB advances ............................ $ 8,791 6.29% $20,973 6.99%$ $ 1,060 5.38%
Federal funds purchased
& repurchase agreements ................ 14,217 3.78% 31,776 5.84% 21,794 4.73%
---------------------------------------------------------
Total ............................ $23,008 4.74% $52,749 6.30% $22,854 4.76%
=========================================================
Maximum Amount Outstanding during the year
FHLB advances .......................... $16,000 $50,300 $ 3,000
Federal funds purchased
and repurchase agreements ............ 25,400 36,362 27,973
26
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for profitable business expansion. The Company's principal source
of funds is deposits including demand, money market, savings and certificates of
deposit. Other sources include principal repayments on loans, proceeds from the
maturity and sale of investment securities, federal fund purchased, repurchase
agreements, advances from the Federal Home Loan Bank (FHLB) and funds provided
by operations. Net cash from operating activities contributed $12,253,000,
$8,212,000 and $8,756,000 to liquidity for years 2001, 2000 and 1999,
respectively. Liquid assets of cash on hand, balances due from other banks,
federal funds sold and interest-bearing deposits in financial institutions
increased from $29,368,000 in 2000 to $72,059,000 in 2001 and from $26,954,000
in 1999 to $29,368,000 in 2000. The significant increase in liquidity in 2001 is
the result of diminished loan demand and proceeds from maturing and called
investments. These proceeds were invested in federal funds sold as of December
31, 2001 and are expected to be invested in longer-term assets as investment
yields become more favorable. To provide additional external liquidity, the
Banks have outstanding lines of credit with the Federal Home Loan Bank of Des
Moines, Iowa of $51,400,000 and federal funds borrowing capacity at
correspondent banks of $46,000,000. The FHLB advances and other borrowed funds
for the Company totaled $1,000,000 and $10,596,000, respectively as of December
31, 2001. Management believes that the Company's liquidity sources will be
sufficient to support its existing operations for the foreseeable future.
The Company's liquidity on an unconsolidated basis is heavily dependent upon
dividends paid to the Company by the Banks. Various federal and state statutory
provisions limit the amount of dividends banking subsidiaries are permitted to
pay to their holding companies without regulatory approval. Federal Reserve
policy further limits the circumstances under which bank holding companies may
declare dividends. For example, a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition. In addition, the Federal Reserve and the FDIC have issued
policy statements which provide that insured banks and bank holding companies
should generally pay dividends only out of current operating earnings. Federal
and state banking regulators may also restrict the payment of dividends by
order.
First National, as a national bank, generally may pay dividends from undivided
profits without restriction, provided that its surplus fund is at least equal to
its common stock capital fund. Boone Bank, Randall-Story Bank and State Bank are
also restricted under Iowa law to paying dividends only out of their undivided
profits. Additionally, the payment of dividends by the Banks is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and the Banks generally are prohibited from paying
any dividends if, following payment thereof, the Bank would be undercapitalized.
The Company has unconsolidated interest bearing deposits and marketable
investment securities totaling $32,631,000 that are presently available to
provide additional liquidity to the Banks.
The Company's total stockholders' equity increased to $93,622,000 at December
31, 2001, from $86,177,000 at December 31, 2000. At December 31, 2001,
stockholders' equity was 15.0 percent of total assets, compared to 13.9 percent
at December 31, 2000. Total equity increased due to retention of earnings and
from appreciation in the Company and Banks' stock and bond portfolios. No
material capital expenditures or material changes in the capital resource mix
are anticipated at this time. The capital levels of the Company currently exceed
applicable regulatory guidelines as of December 31, 2001.
Interest Rate Risk
Interest rate risk refers to the exposure of earnings and capital arising from
changes in interest rates. Management's objectives are to control interest rate
risk and to ensure predictable and consistent growth of earnings and capital.
Interest rate risk management focuses on fluctuations in net interest income
identified through computer simulations to evaluate volatility, varying interest
rate, spread and volume assumptions. The risk is quantified and compared against
tolerance levels.
27
The Company uses a third-party computer software simulation modeling program to
measure its exposure to potential interest rate changes. For various assumed
hypothetical changes in market interest rates, numerous other assumptions are
made such as prepayment speeds on loans, the slope of the Treasury yield curve,
the rates and volumes of the Company's deposits and the rates and volumes of the
Company's loans. This analysis measures the estimated change in net interest
income in the event of hypothetical changes in interest rates.
Another measure of interest rate sensitivity is the gap ratio. This ratio
indicates the amount of interest-earning assets repricing within a given period
in comparison to the amount of interest-bearing liabilities repricing within the
same period of time. A gap ratio of 1.0 indicates a matched position, in which
case the effect on net interest income due to interest rate movements will be
minimal. A gap ratio of less than 1.0 indicates that more liabilities than
assets reprice within the time period and a ratio greater than 1.0 indicates
that more assets reprice than liabilities.
The simulation model process provides a dynamic assessment of interest rate
sensitivity, whereas a static interest rate gap table is compiled as of a point
in time. The model simulations differ from a traditional gap analysis because a
traditional gap analysis does not reflect the multiple effects of interest rate
movement on the entire range of assets, liabilities and ignores the future
impact of new business strategies.
Effect of New Statements of Financial Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued two
statements, Statement 141, Business Combinations and Statement 142, Goodwill and
Other Intangible Assets. Statement 141 eliminates the pooling method for
accounting for business combinations and requires that intangible assets that
meet certain criteria be reported separately from goodwill. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life. It also requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life and require the carrying value of goodwill which exceeds
its implied fair value to be recognized as an impairment loss.
The provisions of FASB 141 apply to all business combinations initiated after
June 30, 2001, and all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001 or later. The
provisions of FASB Statement 142 are required to be implemented by the Company
in the first quarter of 2002. The adoption of these standards will not have an
effect on the Company's consolidated financial statements.
Inflation
The primary impact of inflation on the Company's operations is increased asset
yields, deposit costs and operating overhead. Unlike most industries, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than they would on non-financial
companies. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. The effects of
inflation can magnify the growth of assets and if significant, require that
equity capital increase at a faster rate than would be otherwise necessary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is comprised primarily of interest rate risk arising
from its core banking activities of lending and deposit taking. Interest rate
risk is the risk that changes in market interest rates may adversely affect the
Company's net interest income. Management continually develops and applies
strategies to mitigate this risk. Management does not believe that the Company's
primary market risk exposure and how that exposure was managed in 2001 changed
when compared to 2000.
Based on a simulation modeling analysis performed as of December 31, 2001, 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:
28
Net Interest Income at Risk
Estimated Change in Net Interest Income for Year Ending December 31, 2002
$ Change % Change
-----------------------
+200 Basis Points $ 99,000 0.5%
+100 Basis Points 269,000 1.3%
Base 0 0.0%
- -100 Basis Points (526,000) -2.6%
- -200 Basis Points (817,000) -4.0%
As shown above, at December 31, 2000, the estimated effect of an immediate 200
basis point increase in interest rates would increase the Company's net interest
income by .5 percent or approximately $99,000 in 2002. The estimated effect of
an immediate 200 basis point decrease in rates would decrease the Company's net
interest income by 4.0 percent or approximately $817,000 in 2002. 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 percent in one year compared to the base year that hypothetically
assumes no change in interest rates.
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions. Actual values may differ from those
projections set forth above. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.
Current interest rates on certain liabilities are at a level that does not allow
for significant repricing should market interest rates decline considerably.
Contractual Maturity or Repricing
The following table sets forth the estimated maturity or re-pricing and the
resulting interest sensitivity gap, of the Company's interest-earning assets and
interest-bearing liabilities and the cumulative interest sensitivity gap at
December 31, 2001. 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 (dollars in
thousands).
Less than Three One to Over
three months to five five Cumulative
months one year years years Total
-------------------------------------------------------------
Interest - earning assets
Interest-bearing deposits with banks ..... $ 150 $ -- $ 100 $ -- $ 250
Federal funds sold ....................... 29,350 -- -- -- 29,350
Investments * ............................ 4,940 23,683 81,324 103,831 213,778
Loans .................................... 63,161 21,169 161,316 83,568 329,214
-------------------------------------------------------------
Total interest - earning
assets ............................. $ 97,601 $ 44,852 $ 242,740 $ 187,399 $ 572,592
=============================================================
Interest - bearing liabilities
Interest bearing demand deposits ......... $ 108,509 -- -- -- $ 108,509
Money market and savings deposits ........ 138,342 -- -- -- 138,342
Time certificates < $100,000 ............. 33,305 77,011 41,700 2,130 154,146
Time certificates > $100,000 ............. 16,771 24,590 6,355 -- 47,716
Other borrowed funds ..................... 11,596 -- -- -- 11,596
-------------------------------------------------------------
Total interest - bearing liabilities $ 308,523 $ 101,601 $ 48,055 $ 2,130 $ 460,309
Interest sensitivity gap ................... ($210,922) ($ 56,749) $ 194,685 $ 185,269 $ 112,283
=============================================================
Cumulative interest sensitivity gap ........ ($210,922) ($267,671) ($ 72,986) $ 112,283 $ 112,283
=============================================================
Cumulative interest sensitivity
gap as a percent of total assets ......... -34.05% -43.22% -11.78% 18.13%
=============================================================
<FN>
* Investments with maturities over 5 years include the market value of equity
securities of $26,157.
</FN>
29
As of December 31, 2001, the Company's cumulative gap ratios for assets and
liabilities repricing within three months and within one year were .34 and .43
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditor's Report
The Board of Directors Ames National Corporation Ames, Iowa
We have audited the accompanying consolidated balance sheet of Ames National
Corporation and subsidiaries as of December 31, 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements of Ames National Corporation and subsidiaries as of
December 31, 2000 and for the years ended December 31, 2000 and 1999 were
audited by other auditors whose report, dated March 2, 2001 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2001 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, 2001, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
January 28, 2002
30
Independent Auditors' Report
The Board of Directors
Ames National Corporation:
We have audited the accompanying consolidated balance sheet of Ames National
Corporation and subsidiaries (the Company) as of December 31, 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Ames National Corporation and subsidiaries as of December
31, 2000, and the consolidated results of their operations and their cash flows
for each of the years in the two-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG, LLP
Des Moines, Iowa
March 2, 2001
31
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS 2001 2000
- ---------------------------------------------------------------------------------------------
Cash and due from banks (Note 2) ........................... $ 42,459,156 $ 28,775,032
Federal funds sold (Note 10) ............................... 29,350,000 245,000
Interest bearing deposits in financial institutions ........ 250,000 348,174
Securities available-for-sale (Notes 3 and 7) .............. 213,778,175 232,706,157
Loans receivable, net (Notes 4 and 7) ...................... 323,043,166 344,014,727
Bank premises and equipment, net (Note 5) .................. 7,183,655 5,216,301
Accrued income receivable .................................. 5,977,353 7,020,614
Other assets ............................................... 238,477 1,058,762
------------------------------
Total assets ............................................... $ 622,279,982 $ 619,384,767
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6)
Demand ................................................. $ 62,796,265 $ 54,597,366
NOW accounts ........................................... 108,509,319 96,328,264
Savings and money market ............................... 138,342,052 122,321,564
Time, $100,000 and over ................................ 47,716,458 63,894,549
Other time ............................................. 154,145,161 156,287,112
------------------------------
Total deposits ..................................... 511,509,255 493,428,855
FHLB advances (Note 7) ..................................... 1,000,000 16,000,000
Federal funds purchased and securities sold under agreements
to repurchase ............................................ 10,596,174 19,007,419
Dividend payable ........................................... 1,312,596 1,248,917
Deferred taxes (Note 9) .................................... 1,188,670 158,450
Accrued expenses and other liabilities ..................... 3,051,289 3,363,665
------------------------------
Total liabilities .................................. 528,657,984 533,207,306
------------------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Note 11)
Common stock, $5 par value, authorized 6,000,000 shares;
issued 3,153,230 shares ................................ 15,766,150 15,766,150
Additional paid-in capital ............................... 25,393,028 25,428,994
Retained earnings ........................................ 49,397,011 44,036,378
Treasury stock, at cost; 2001 28,001shares,
2000 30,937 shares ..................................... (1,530,805) (1,677,605)
Accumulated other comprehensive income, net unrealized
gain on securities available-for-sale .................. 4,596,614 2,623,544
------------------------------
Total stockholders' equity ......................... 93,621,998 86,177,461
------------------------------
Total liabilities and stockholders' equity ......... $ 622,279,982 $ 619,384,767
==============================
See Notes to Consolidated Financial Statements.
32
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
- -----------------------------------------------------------------------------------------
Interest and dividend income:
Loans ....................................... $27,891,379 $28,306,128 $24,386,312
Securities .................................. 11,590,918 14,313,751 14,838,813
Federal funds sold .......................... 829,083 376,851 293,594
Dividends ................................... 1,162,176 1,020,822 842,823
---------------------------------------
41,473,556 44,017,552 40,361,542
---------------------------------------
Interest expense:
Deposits .................................... 17,791,314 20,937,730 18,893,947
Other borrowed funds ........................ 1,091,319 3,322,924 1,087,013
---------------------------------------
18,882,633 24,260,654 19,980,960
---------------------------------------
Net interest income ................... 22,590,923 19,756,898 20,380,582
Provision for loan losses (Note 4) ............ 897,540 460,049 166,260
---------------------------------------
Net interest income after provision for
loan losses ........................... 21,693,383 19,296,849 20,214,322
---------------------------------------
Noninterest income:
Trust department income ..................... 948,499 879,686 932,291
Service fees ................................ 1,585,036 1,454,528 1,594,549
Securities gains, net (Note 3) .............. 1,197,050 715,929 1,265,520
Recovery of written-off investment .......... -- -- 846,407
Other ....................................... 1,349,459 1,079,821 1,111,317
---------------------------------------
Total noninterest income .............. 5,080,044 4,129,964 5,750,084
---------------------------------------
Noninterest expense:
Salaries and employee benefits (Note 8) ..... 6,834,588 6,347,357 6,151,031
Data processing ............................. 1,772,726 1,557,875 1,793,307
Occupancy expenses .......................... 726,049 708,188 706,895
Other operating expenses .................... 2,253,920 2,098,580 2,557,315
---------------------------------------
Total noninterest expense ............. 11,587,283 10,712,000 11,208,548
---------------------------------------
Income before income taxes ............ 15,186,144 12,714,813 14,755,858
Provision for income taxes (Note 9) ........... 4,638,806 3,595,951 4,428,716
---------------------------------------
Net income ............................ $10,547,338 $ 9,118,862 $10,327,142
=======================================
Basic earnings per share (Note 1) ............. $ 3.38 $ 2.92 $ 3.31
=======================================
See Notes to Consolidated Financial Statements.
33
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
Additional
Comprehensive Common Paid-in Retained Treasury
Income Stock Capital Earnings Stock
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 .................. $15,766,150 $25,272,044 $34,186,419 $(1,806,351)
Comprehensive income:
Net income .............................. $ 10,327,142 -- -- 10,327,142 --
Other comprehensive (loss), unrealized
(losses) on securities, net of
reclassification adjustment, net of
tax (Note 3) .......................... (7,715,983) -- -- -- --
------------
Total comprehensive income .......... $ 2,611,159
============
Cash dividends declared, $1.50 per share .. -- -- (4,664,207) --
Purchase of 26,150 shares of treasury stock -- -- -- (1,438,305)
Sale of 8,844 shares of treasury stock .... -- 35,007 -- 420,501
-------------------------------------------------------
Balance, December 31, 1999 .................. 15,766,150 25,307,051 39,849,354 (2,824,155)
Comprehensive income:
Net income .............................. $ 9,118,862 -- -- 9,118,862 --
Other comprehensive income, unrealized
gains on securities, net of
reclassification adjustment, net of
tax (Note 3) .......................... 4,649,235 -- -- -- --
------------
Total comprehensive income .......... $ 13,768,097
============
Cash dividends declared, $1.58 per share .. -- -- (4,931,838) --
Sale of 22,931 shares of treasury stock ... -- 121,943 -- 1,146,550
-----------
Balance, December 31, 2000 .................. 15,766,150 25,428,994 44,036,378 (1,677,605)
Comprehensive income:
Net income .............................. $ 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 -- -- -- --
------------
Total comprehensive income .......... $ 12,520,408
============
Cash dividends declared, $1.66 per share .. -- -- (5,186,705) --
Sale of 2,936 shares of treasury stock .... -- (35,966) -- 146,800
-------------------------------------------------------
Balance, December 31, 2001 .................. $15,766,150 $ 25,393,028 $49,397,011 $(1,530,805)
======================================================
Continue ...
See Notes to Consolidated Financial Statements.
34
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Years Ended December 31, 2001, 2000 and 1999
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
- --------------------------------------------------------------------------------
Balance, December 31, 1998 .................. $5,690,292 $79,108,554
Comprehensive income:
Net income .............................. -- 10,327,142
Other comprehensive (loss), unrealized
(losses) on securities, net of
reclassification adjustment, net of
tax (Note 3) .......................... (7,715,983) (7,715,983)
Total comprehensive income ..........
Cash dividends declared, $1.50 per share .. -- (4,664,207)
Purchase of 26,150 shares of treasury stock (1,438,305)
Sale of 8,844 shares of treasury stock .... -- 455,508
--------------------------------
Balance, December 31, 1999 .................. (2,025,691) 76,072,709
Comprehensive income:
Net income .............................. -- 9,118,862
Other comprehensive income, unrealized
gains on securities, net of
reclassification adjustment, net of
tax (Note 3) .......................... 4,649,235 4,649,235
Total comprehensive income ..........
Cash dividends declared, $1.58 per share .. -- (4,931,838)
Sale of 22,931 shares of treasury stock ... -- 1,268,493
--------------------------------
Balance, December 31, 2000 .................. 2,623,544 86,177,461
Comprehensive income:
Net income .............................. -- 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
Total comprehensive income ..........
Cash dividends declared, $1.66 per share .. -- (5,186,705)
Sale of 2,936 shares of treasury stock .... -- 110,834
--------------------------------
Balance, December 31, 2001 .................. $4,596,614 $93,621,998
================================
See Notes to Consolidated Financial Statements.
35
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 10,547,338 $ 9,118,862 $ 10,327,142
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ....................................... 897,540 460,049 166,260
Amortization and accretion ...................................... (58,859) (9,227) 13,331
Depreciation .................................................... 642,835 731,370 919,005
Provision for deferred taxes .................................... (129,614) (137,000) 12,500
(Gain) on sale of securities available-for-sale ................. (1,197,050) (715,929) (1,265,520)
(Gain) on sale of property and equipment ........................ -- (94,135) --
Recovery of written-off investment .............................. -- -- (846,407)
Change in assets and liabilities:
(Increase) decrease in accrued income receivable .............. 1,043,261 (405,350) (183,638)
(Increase) decrease in other assets ........................... 820,285 (382,484) 490,528
(Decrease) in accrued interest and other liabilities .......... (312,376) (354,516) (876,979)
--------------------------------------------
Net cash provided by operating activities ................... 12,253,360 8,211,640 8,756,222
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale ......................... (47,350,981) (28,065,802) (85,097,789)
Proceeds from sale of securities available-for-sale ............... 23,282,181 30,835,280 8,157,702
Proceeds from recovery of written-off investment .................. -- -- 846,407
Proceeds from maturities of securities available-for-sale ......... 47,385,595 26,795,364 56,773,055
Proceeds from sale of property and equipment ...................... -- 146,152 --
Net decrease in interest bearing deposits in financial institutions 98,174 378,222 679,102
Net decrease (increase) in federal funds sold ..................... (29,105,000) (160,000) 11,315,000
Net decrease (increase) in loans .................................. 20,074,021 (34,822,664) (22,105,741)
Purchase of bank premises and equipment ........................... (2,610,189) (617,332) (839,017)
--------------------------------------------
Net cash provided by (used in) investing activities ......... 11,773,801 (5,510,780) (30,271,281)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits .............................................. 18,080,400 8,809,148 2,107,009
Increase (decrease) in FHLB advances, federal funds purchased
and securities sold under agreements to repurchase .............. (23,411,245) (5,277,893) 29,755,604
Dividends paid .................................................... (5,123,026) (4,867,972) (4,585,605)
Treasury stock purchased .......................................... -- -- (1,438,305)
Proceeds from issuance of treasury stock .......................... 110,834 1,268,493 455,508
--------------------------------------------
Net cash provided by (used in) financing activities ......... (10,343,037) (68,224) 26,294,211
--------------------------------------------
Net increase in cash and cash equivalents ................... 13,684,124 2,632,636 4,779,152
CASH AND CASH EQUIVALENTS
Beginning ......................................................... 28,775,032 26,142,396 21,363,244
--------------------------------------------
Ending ............................................................ $ 42,459,156 $ 28,775,032 $ 26,142,396
============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for:
Interest ........................................................ $ 19,749,270 $ 24,720,709 $ 20,044,292
Income taxes .................................................... 4,321,320 3,681,134 4,614,727
See Notes to Consolidated Financial Statements.
36
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, and Nevada, Iowa. Loan and deposit customers are
located primarily in Story, Boone, and Hamilton counties in Iowa and adjacent
counties.
Segment information: The Company has 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 and Trust Co., Boone, Iowa; and Randall-Story State Bank, Story
City, 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.
Securities available-for-sale: Securities available-for-sale consist of equity
securities and debt securities not classified as trading or held-to-maturity and
are carried at fair value. Unrealized holding gains and losses, net of deferred
income taxes, are reported in a separate component of accumulated other
comprehensive income until realized. Realized gains and losses on the sale of
such securities are determined using the specific identification method and are
reflected in the consolidated statements of income. Premiums and discounts are
recognized in interest income using the interest method over the period to
maturity or call date of the related security.
Unrealized losses judged to be other than temporary are charged to operations.
Loans: Loans are stated at the principal amount outstanding, net of deferred
loan fees and the allowance for loan losses. Interest on loans is credited to
income as earned based on the principal amount outstanding. The Banks' policy is
to discontinue the accrual of interest income on any loan 90 days or more past
due unless the loans are well collateralized and in the process of collection.
Nonaccrual loans are returned to an accrual status when, in the opinion of
management, the financial position of the borrower indicates there is no longer
any reasonable doubt as to timely payment of principal or interest.
Allowance for loan losses: The allowance for loan losses is maintained at a
level deemed appropriate by management to provide for known and inherent risks
in the loan portfolio. The allowance is based upon a continuing review of past
loan loss experience, current economic conditions, and the underlying collateral
value securing the loans. Loans which are deemed to be uncollectible are charged
off and deducted from the allowance. Recoveries on loans charged-off and the
provision for loan losses are added to the allowance.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Impairment is measured on a loan by
loan basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
37
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.
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: The recorded amount of cash and due from banks
approximates fair value.
Federal funds sold: The recorded amount of Federal funds sold approximates fair
value, because of the short term nature of the instruments.
Interest-bearing deposits: The recorded amount of interest-bearing deposits
approximates fair value.
Securities available-for-sale: Fair values of securities available-for-sale are
based on bid prices published in financial newspapers, bid quotations received
from securities dealers, or quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued.
Loans: The fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates, which
reflect the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the historical experience, with repayments for each loan
classification modified, as required, by an estimate of the effect of current
economic and lending conditions. The effect of nonperforming loans is considered
in assessing the credit risk inherent in the fair value estimate.
Deposit liabilities: Fair values of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money market
accounts, are equal to the amount payable on demand as of the respective balance
sheet date. Fair values of certificates of deposit are based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
FHLB advances: The recorded amount of FHLB advances approximates fair value
because of the short-term nature of the instrument.
Other borrowings: The carrying amounts of federal funds purchased and securities
sold under agreements to repurchase approximate fair value because of the
short-term nature of the instruments.
Accrued income receivable and accrued interest payable: The carrying amounts of
accrued income receivable and interest payable approximate fair value.
38
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, 2001, 2000 and 1999, 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, 2001, 2000, and 1999.
2001 2000 1999
-------------------------------------------
Basic EPS computation:
Net income ................... $10,547,338 $ 9,118,862 $10,327,142
Weighted average common
shares outstanding ......... 3,123,885 3,120,375 3,118,427
-------------------------------------------
Basic EPS .............. $ 3.38 $ 2.92 $ 3.31
===========================================
Effects of new Statement of Financial Accounting Standards: In July 2001, the
Financial Accounting Standards Board (FASB) issued two statements, Statement
141, Business Combinations and Statement 142, Goodwill and Other Intangible
Assets. Statement 141 eliminates the pooling method for accounting for business
combinations and requires that intangible assets that meet certain criteria be
reported separately from goodwill. Statement 142 eliminates the amortization of
goodwill and other intangibles that are determined to have an indefinite life.
It also requires, at a minimum, annual impairment tests for goodwill and other
intangible assets that are determined to have an indefinite life and require the
carrying value of goodwill which exceeds its implied fair value to be recognized
as an impairment loss.
The provisions of FASB 141 apply to all business combinations initiated after
June 30, 2001, and all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001 or later. The
provisions of FASB Statement 142 are required to be implemented by the Company
in the first quarter of 2002. The adoption of these standards will not have an
effect on the Company's consolidated financial statements.
Note 2. Restrictions on Cash and Due from Banks
The Federal Reserve Bank requires member banks to maintain certain cash and due
from bank reserves. The subsidiary banks' reserve requirements totaled
approximately $6,699,000 at December 31, 2001.
Note 3. Securities
The carrying amount of securities and their approximate fair values at December
31, 2001 and 2000, are summarized below:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------------------------------------------------
2001:
Securities available-for-sale:
U.S. treasury .................... $ 12,237,419 $ 310,957 $ -- $ 12,548,376
U.S. government agencies ......... 59,085,647 1,789,720 17,706 60,857,661
State and political subdivisions . 62,114,862 1,149,176 154,659 63,109,379
Corporate bonds .................. 50,241,082 1,167,157 302,700 51,105,539
Equity securities ................ 22,800,966 3,532,047 175,793 26,157,220
---------------------------------------------------------
$206,479,976 $ 7,949,057 $ 650,858 $213,778,175
=========================================================
2000:
Securities available-for-sale:
U.S. treasury .................... $ 22,970,692 $ 192,215 $ 13,077 $ 23,149,830
U.S. government agencies ......... 86,193,244 416,748 745,708 85,864,284
State and political subdivisions . 60,644,943 947,188 181,099 61,411,032
Corporate bonds .................. 43,739,245 244,474 816,714 43,167,005
Equity securities ................ 14,992,738 4,121,268 -- 19,114,006
---------------------------------------------------------
$228,540,862 $ 5,921,893 $ 1,756,598 $232,706,157
=========================================================
39
The amortized cost and estimated fair value of securities available-for-sale as
of December 31, 2001, 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 ...................... $ 28,113,269 $ 28,623,067
Due after one year through five years ........ 78,781,164 81,324,254
Due after five years through ten years ....... 61,696,352 62,553,594
Due after ten years .......................... 15,088,225 15,120,040
-----------------------------
183,679,010 187,620,955
Equity securities ............................ 22,800,966 26,157,220
-----------------------------
$206,479,976 $213,778,175
=============================
At December 31, 2001 and 2000, securities with a carrying value of approximately
$31,360,000 and $39,307,000, respectively, were pledged as collateral on public
deposits, repurchase agreements, 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 $1,200,323 and $3,273, respectively, in 2001, $790,793 and
$74,864, respectively, in 2000, and $1,290,456 and $24,936, respectively, in
1999.
The components of other comprehensive income (loss) - net unrealized gains
(losses) on securities for the years ended December 31, 2001, 2000, and 1999,
were as follows:
2001 2000 1999
--------------------------------------------
Unrealized holding gains (losses) arising
during the period ..................... $ 4,329,954 $ 8,095,667 $(10,982,072)
Reclassification adjustment for net gains
realized in net income ................ (1,197,050) (715,929) (1,265,520)
--------------------------------------------
Net unrealized gains (losses)
before tax effect ............... 3,132,904 7,379,738 (12,247,592)
Tax effect .............................. (1,159,834) (2,730,503) 4,531,609
--------------------------------------------
Other comprehensive income
(loss) - net unrealized gains
(losses) on securities .......... $ 1,973,070 $ 4,649,235 $ (7,715,983)
============================================
Note 4. Loans Receivable
The composition of net loans receivable at December 31, 2001 and 2000, is as
follows:
2001 2000
-----------------------------------
Commercial and agricultural .......... $ 72,997,606 $ 82,153,469
Real estate .......................... 235,295,873 243,394,465
Consumer ............................. 12,363,604 14,710,597
Other ................................ 8,556,838 9,865,302
----------------------------------
329,213,921 350,123,833
Less:
Allowance for loan losses .......... (5,445,671) (5,373,167)
Deferred loan fees ................. (725,084) (735,939)
----------------------------------
$ 323,043,166 $ 344,014,727
==================================
Changes in the allowance for loan losses for the year ended December 31, 2001,
2000 and 1999 are as follows:
2001 2000 1999
------------------------------------------
Balance, beginning ................ $ 5,373,167 $ 4,986,474 $ 4,845,822
Provision for loan losses ....... 897,540 460,049 166,260
Recoveries of loans charged-off . 27,131 77,669 32,970
Loans charged-off ............... (852,167) (151,025) (58,578)
-----------------------------------------
Balance, ending ................... $ 5,445,671 $ 5,373,167 $ 4,986,474
=========================================
40
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. Such loans amounted to $4,755,229 and $5,235,102 at December
31, 2001 and 2000, respectively. During the year ended December 31, 2001, total
principal additions were $8,535,527 and total principal repayments were
$9,015,400.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of these loans were
approximately $29,703,000 at December 31, 2000. Custodial escrow balances
maintained in connection with the foregoing serviced loans, and included in
demand deposits, were approximately $89,000 at December 31, 2000. During 2001,
all mortgage servicing rights on mortgage loans serviced for others were sold.
At December 31, 2001 and 2000, the Company had impaired loans of approximately
$2,692,000 and $2,663,000, respectively. The allowance for loan losses related
to these impaired loans was approximately $207,000 and $233,000 at December 31,
2001 and 2000, respectively. The average balances of impaired loans for the
years ended December 31, 2001 and 2000, were $2,837,000 and $1,367,000,
respectively. For the years ended December 31, 2001 and 2000, interest income
which would have been recorded under the original terms of such loans was
approximately $243,000 and $254,000, respectively, with $114,000 and $101,000,
respectively, recorded.
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, 2001, 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, 2001 and 2000, are as follows:
2001 2000
-----------------------------
Land ....................................... $ 1,042,869 $ 1,042,869
Buildings and improvements ................. 5,648,698 5,495,324
Furniture and equipment .................... 5,509,082 5,701,396
Construction in process .................... 2,240,129 --
-----------------------------
14,440,778 12,239,589
Less accumulated depreciation .............. 7,257,123 7,023,288
-----------------------------
$ 7,183,655 $ 5,216,301
=============================
Note 6. Deposits
At December 31, 2001, the maturities of time deposits are as follows:
Years ended December 31,
2002 $ 151,676,684
2003 25,031,477
2004 19,087,286
2005 3,936,002
2006 and thereafter 2,130,170
-------------
$ 201,861,619
=============
Interest expense on deposits is summarized as follows:
2001 2000 1999
-------------------------------------------
NOW accounts ................... $ 2,060,963 $ 3,112,960 $ 2,450,116
Savings and money market ....... 3,665,428 5,030,644 4,430,422
Time, $100,000 and over ........ 3,329,175 3,823,665 3,686,835
Other time ..................... 8,735,748 8,970,461 8,326,574
-------------------------------------------
$17,791,314 $20,937,730 $18,893,947
===========================================
41
Note 7. FHLB Advances
Advances from the Federal Home Loan Bank of Des Moines (FHLB) at December 31,
2001 and 2000, were as follows:
2001 2000
------------------------------ -----------------------------
Weighted- Weighted-
Average Average
Amount Interest Rate Amount Interest Rate
--------------------------------------------------------------
Advance maturity within one year:
Variable ...................... $ -- --% $ 8,000,000 6.55%
Fixed ......................... 1,000,000 5.21 8,000,000 6.63
----------- -----------
$ 1,000,000 $16,000,000
=========== ===========
The advances are collateralized by FHLB stock and qualifying residential
mortgage loans representing 120% to 160% of the total advances outstanding.
Note 8. Employee Benefit Plans
The Company has a stock purchase plan for employees of the Company and its
subsidiaries. The shares are sold at fair market value as determined by the
Board of Directors of the Company. At December 31, 2001 and 2000, 14,000 shares
were unissued and reserved for the plan. The 2001 and 2000 purchase price was
$37.75 and $57.00 per share, respectively.
The Company has a qualified 401(k) profit-sharing plan that covers substantially
all employees. The Company matches employee contributions up to a maximum of 2%
of qualified compensation. In addition, contributions can be made on a
discretionary basis by the Company on behalf of the employees. For the years
ended December 31, 2001, 2000 and 1999. Company contributions to the plan were
approximately $243,000, $188,000, and $246,000, respectively.
The Company has a qualified money purchase pension plan that covers
substantially all employees. The Company contributes an amount equal to 5% of
the participating employee's compensation. For the years ended December 31,
2001, 2000 and 1999, Company contributions to the plan were approximately
$223,000, $188,800, and $184,700, respectively.
Note 9. Income Taxes
The components of income tax expense for the year ended December 31, 2001, 2000
and 1999 are as follows:
Current Deferred Total
-------------------------------------------------
2001:
Federal .............. $ 4,028,481 $ (110,851) $ 3,917,630
State ................ 739,939 (18,763) 721,176
-------------------------------------------------
$ 4,768,420 $ (129,614) $ 4,638,806
=================================================
2000:
Federal .............. $ 3,121,724 $ (118,000) $ 3,003,724
State ................ 611,227 (19,000) 592,227
-------------------------------------------------
$ 3,732,951 $ (137,000) $ 3,595,951
=================================================
1999:
Federal .............. $ 3,687,264 $ 11,314 $ 3,698,578
State ................ 728,952 1,186 730,138
-------------------------------------------------
$ 4,416,216 $ 12,500 $ 4,428,716
=================================================
42
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income taxes is a result of the
following for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
-----------------------------------------
Computed "expected" tax expense ... $ 5,163,289 $ 4,323,036 $ 5,016,992
Tax exempt interest and dividends . (1,222,985) (1,180,343) (917,000)
State taxes and other ............. 698,502 453,258 328,724
-----------------------------------------
$ 4,638,806 $ 3,595,951 $ 4,428,716
=========================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred liabilities at December 31, 2001 and
2000, are as follows:
2001 2000
---------------------------
Deferred tax assets:
Allowance for loan losses .................... $ 1,523,580 $ 1,495,379
Other ........................................ 45,619 18,632
---------------------------
Total gross deferred tax assets ........ 1,569,199 1,514,011
---------------------------
Deferred tax liabilities:
Unrealized gain on securities ................ 2,701,584 1,541,750
Other ........................................ 56,285 130,711
---------------------------
Total gross deferred tax liabilities ... 2,757,869 1,672,461
---------------------------
Net deferred tax asset (liability) ..... $(1,188,670) $ (158,450)
===========================
At December 31, 2001 and 2000, income taxes currently payable of approximately
$469,000 and $22,000, respectively, are included in accrued interest and other
liabilities.
Note 10. 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, 2001 and 2000, is as follows:
2001 2000
------------------------------
Commitments to extend credit ............. $51,636,000 $49,540,000
Standby letters of credit ................ 1,231,000 3,448,000
------------------------------
$52,867,000 $52,988,000
==============================
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.
43
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 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, and Hamilton Counties, Iowa, and
adjacent counties. Although the Banks have diversified loan portfolios, a
substantial portion of their borrowers' ability to repay loans is dependent upon
economic conditions in the Banks' market areas.
At December 31, 2001, the Company has a concentration of federal funds sold in
the amount of $20,000,000 with one institution.
Note 11. 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,
2001 and 2000, that the Company and each subsidiary bank met all capital
adequacy requirements to which they are subject.
As of December 31, 2001, 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, 2001 and 2000 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, 2001:
Total capital (to risk-
weighted assets):
Consolidated .............. $93,622 22.0% $34,074 8.0% $42,592 10.0%
Boone Bank & Trust ........ 10,678 14.9 5,722 8.0 7,153 10.0
First National Bank ....... 35,711 16.1 17,770 8.0 22,213 10.0
Randall-Story State Bank .. 7,248 15.7 3,683 8.0 4,604 10.0
State Bank & Trust ........ 10,423 15.5 5,366 8.0 6,707 10.0
Tier 1 capital ( to risk-
weighted assets):
Consolidated ............. $89,025 20.9% $17,037 4.0% $25,555 6.0%
Boone Bank & Trust ....... 9,790 13.7 2,861 4.0 4,292 6.0
First National Bank ...... 32,934 14.8 8,885 4.0 13,328 6.0
Randall-Story State Bank . 6,672 14.5 1,842 4.0 2,763 6.0
State Bank & Trust ....... 9,584 14.3 2,683 4.0 4,024 6.0
Tier 1 capital ( to average-
weighted assets):
Consolidated ............. $89,025 13.9% $25,702 4.0% $32,128 5.0%
Boone Bank & Trust ....... 9,790 9.9 3,971 4.0 4,964 5.0
First National Bank ...... 32,934 9.2 14,772 4.0 17,841 5.0
Randall-Story State Bank . 6,672 10.6 2,507 4.0 3,134 5.0
State Bank & Trust ....... 9,584 9.6 3,985 4.0 4,981 5.0
44
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------
As of December 31, 2000:
Total capital (to risk-
weighted assets):
Consolidated ............. $88,699 21.4% $33,101 8.0% $41,376 10.0%
Boone Bank & Trust ....... 10,246 12.8 8,915 8.0 7,091 10.0
First National Bank ...... 34,587 15.0 18,430 8.0 23,038 10.0
Randall-Story State Bank . 7,087 17.5 3,239 8.0 4,049 10.0
State Bank & Trust ....... 10,146 15.2 5,327 8.0 6,658 10.0
Tier 1 capital ( to risk-
weighted assets):
Consolidated ............. $83,525 20.2% $16,550 4.0% $24,825 6.0%
Boone Bank & Trust ....... 9,360 13.2 2,836 4.0 4,255 6.0
First National Bank ...... 31,707 13.8 9,215 4.0 13,823 6.0
Randall-Story State Bank . 6,580 16.2 1,620 4.0 2,430 6.0
State Bank & Trust ....... 9,310 14.0 2,663 4.0 3,995 6.0
Tier 1 capital ( to average-
weighted assets):
Consolidated ............. $83,525 13.4% $24,985 4.0% $31,231 5.0%
Boone Bank & Trust ....... 9,360 9.4 3,967 4.0 4,959 5.0
First National Bank ...... 31,707 9.3 13,583 4.0 16,978 5.0
Randall-Story State Bank . 6,580 10.9 2,412 4.0 3,015 5.0
State Bank & Trust ....... 9,310 9.4 3,960 4.0 4,950 5.0
Note 12. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments (as described
in Note 1) were as follows:
2001 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
Financial assets:
Cash and due from banks ............................. $ 42,459,156 $ 42,459,156 $ 28,775,032 $ 28,775,032
Federal funds sold .................................. 29,350,000 29,350,000 245,000 245,000
Interest-bearing deposits ........................... 250,000 250,000 348,174 348,174
Securities available-for-sale ....................... 213,778,175 213,778,175 232,706,157 232,706,157
Loans, net .......................................... 323,043,166 329,024,000 344,014,727 336,670,000
Accrued income receivable ........................... 5,977,353 5,977,353 7,020,614 7,020,614
Financial liabilities:
Deposits ............................................ 511,509,225 515,208,098 493,428,855 493,428,855
FHLB advances ....................................... 1,000,000 1,000,000 16,000,000 16,000,000
Other borrowings .................................... 10,596,174 10,596,174 19,007,419 19,007,419
Accrued interest .................................... 3,051,289 3,051,289 3,363,665 3,363,665
Notional Unrealized Notional Unrealized
Amount Gain (Loss) Amount Gain (Loss)
---------------------------------------------------------
Off-balance sheet items:
Commitments to extend credit ........................ $ 51,636,000 $ -- $ 49,500,000 $ --
Standby letters of credit ........................... 1,231,000 -- 3,448,000 --
45
Note 13. Parent Company Only Financial Statements
Information relative to the Parent Company's balance sheets at December 31, 2001
and 2000, and statements of income and cash flows for each of the years in the
three-year period ended December 31, 2001, is as follows:
STATEMENTS OF FINANCIAL CONDITION
December 31, 2001 and 2000
2001 2000
----------------------------
ASSETS
Cash and due from banks .................................. $ 6,738 $ 1,826
Interest-bearing deposits in banks ....................... 2,166,465 1,149,364
Securities available-for-sale ............................ 30,464,217 25,750,486
Investment in bank subsidiaries .......................... 61,284,957 56,947,590
Loans receivable, net .................................... 258,227 2,659,071
Bank premises and equipment, net ......................... 503,101 490,688
Accrued income receivable ................................ 1,659,410 1,641,070
Other assets ............................................. 25,504 333,711
----------------------------
Total assets ..................................... $ 96,368,619 $ 88,973,806
============================
LIABILITIES AND EQUITY
LIABILITIES
Dividends payable ...................................... $ 1,312,596 $ 1,248,917
Deferred taxes ......................................... 1,328,606 1,545,640
Accrued interest and other liabilities ................. 105,419 1,788
----------------------------
Total liabilities ................................ 2,746,621 2,796,345
----------------------------
EQUITY
Common stock, $5 par value; authorized 6,000,000 shares;
issued 3,153,230 shares at December 31, 2001 and 2000 15,766,150 15,766,150
Additional paid-in capital ............................. 25,393,028 25,428,994
Retained earnings ...................................... 49,397,011 44,036,378
Treasury stock, at cost; 2001 28,001 shares and
2000 30,937 shares ................................... (1,530,805) (1,677,605)
Accumulated other comprehensive income ................. 4,596,614 2,623,544
----------------------------
Total equity ..................................... 93,621,998 86,177,461
----------------------------
Total liabilities and equity ..................... $ 96,368,619 $ 88,973,806
============================
46
STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---------------------------------------
Operating income:
Equity in net income of bank subsidiaries $ 9,122,748 $ 7,855,578 $ 8,860,252
Interest ................................ 953,071 808,091 625,736
Dividends ............................... 795,411 794,389 711,934
Rents ................................... 245,882 225,866 185,855
Security gains, net ..................... 1,092,808 741,456 1,206,011
---------------------------------------
12,209,920 10,425,380 11,589,788
---------------------------------------
Operating expenses:
Occupancy expense ....................... 178,802 178,191 164,069
Other ................................... 923,780 713,327 458,577
---------------------------------------
1,102,582 891,518 622,646
---------------------------------------
Income before income taxes ........ 11,107,338 9,533,862 10,967,142
Income tax expense ........................ 560,000 415,000 640,000
---------------------------------------
Net income ........................ $10,547,338 $ 9,118,862 $10,327,142
=======================================
47
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................ $ 10,547,338 $ 9,118,862 $ 10,327,142
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................... 66,781 65,247 55,931
Amortization and accretion, net ................. (13,493) (13,497) (8,410)
Provision for deferred taxes .................... -- -- 3,300
(Gains) on sales of securities available-for-sale (1,092,808) (741,456) (1,206,011)
Undistributed net income of bank subsidiaries ... (1,994,748) (727,578) (1,976,254)
(Increase) in accrued income receivable ......... (18,340) (39,369) (72,418)
(Increase) decrease in other assets ............. 308,207 (325,579) 803,779
Increase (decrease) in accrued interest payable
and other liabilities ......................... 103,631 (845,213) 756,969
--------------------------------------------
Net cash provided by operating activities ... 7,906,568 6,491,417 8,684,028
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale ......... (10,244,488) (6,882,724) (6,959,270)
Proceeds from sale of securities available-for-sale 4,025,880 4,949,983 2,107,310
Proceeds from maturities of securities
available-for-sale .............................. 2,024,595 600,000 1,995,537
(Increase) decrease in interest bearing deposits
in banks ........................................ (1,017,101) (272,968) 679,102
(Increase) decrease in loans ...................... 2,400,844 (1,252,298) (839,255)
Purchase of bank premises and equpment ............ (79,194) (36,064) (98,754)
--------------------------------------------
Net cash (used in) investing activities ..... (2,889,464) (2,894,071) (3,115,330)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid .................................... (5,123,026) (4,867,972) (4,585,605)
Treasury stock purchased .......................... -- -- (1,438,305)
Proceeds from issuance of treasury stock .......... 110,834 1,268,493 455,508
--------------------------------------------
Net cash (used in) financing activities ..... (5,012,192) (3,599,479) (5,568,402)
--------------------------------------------
Net increase (decrease) in cash and
cash equivalents ............................ 4,912 (2,133) 296
CASH AND CASH EQUIVALENTS
Beginning ......................................... 1,826 3,959 3,663
--------------------------------------------
Ending ............................................ $ 6,738 $ 1,826 $ 3,959
============================================
48
Note 14. Selected Quarterly Financial Data (Unaudited)
2001
-----------------------------------------------------
March 31 June 30 September 30 December 31
-----------------------------------------------------
Total interest income ............................. $10,689,478 $10,594,284 $10,206,893 $ 9,982,901
Total interest expense ............................ 5,526,539 5,139,785 4,496,532 3,719,777
Net interest income ............................... 5,162,939 5,454,499 5,710,361 6,263,124
Provision for loan losses ......................... 77,678 196,230 283,229 340,403
Net income ........................................ 2,580,058 2,717,398 2,682,320 2,567,562
Earnings per common share ......................... 0.83 0.87 0.86 0.82
2000
-----------------------------------------------------
Total interest income ............................. $10,528,450 $11,073,835 $11,277,978 $11,137,289
Total interest expense ............................ 5,587,758 6,089,989 6,423,712 6,159,195
Net interest income ............................... 4,940,692 4,983,846 4,854,266 4,978,094
Provision for loan losses ......................... 105,943 156,230 84,174 113,702
Net income ........................................ 2,009,439 2,388,061 2,430,373 2,290,989
Earnings per common share ......................... 0.64 0.77 0.78 0.73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 8, 2000, the Board of Directors of the Company approved the
dismissal of KPMG LLP ("KPMG") as the Company's independent accountants. The
dismissal was recommended by the Audit Committee of the Board of Directors. The
dismissal was effective upon the issuance of KPMG's report on the consolidated
financial statements of the Company for the year ended December 31, 2000.
The audit reports of KPMG on the consolidated financial statements of the
Company for the years ended December 31, 2000 and 1999 do not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
During the audits of the years ended December 31, 2000 and 1999, there were no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which agreement,
if not resolved to KPMG's satisfaction, would have caused KPMG to make reference
to the subject matter of the disagreement in connection with its reports.
The Company requested that KPMG furnish it with a letter addressed to the
Securities and Exchange Commission ("SEC") stating whether or not KPMG agreed
with the above statements. A copy of KPMG's letter to the SEC dated April 30,
2001 is filed as Exhibit 16 hereto.
The Board of Directors of the Company approved the engagement of McGladrey &
Pullen, LLP as the Company's new independent accountants effective January 1,
2001.
49
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 24, 2002, as
filed with the SEC on March 25, 2002 (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 Company or Bank and Principal Occupation and
Name Age Employment During the Past Five Years
- ---------------------------------------------------------------------------------------------------------
Kevin G. Deardorff 47 Vice President & Technology Director of the Company since 1998.
Previously served as Vice President of First National.
Edward C. Jacobson 61 Vice President and Treasurer of Company and Senior Vice President of
First National.
Daniel L. Krieger 65 President of Company since 1999. 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.
David L. Morris 59 President of Randall-Story Bank
John P. Nelson 35 Secretary and Vice President of Company
Thomas H. Pohlman 51 President of First National since 1999. Served as Executive Vice
President of First National from 1998 to 1999. Previously served as
President of state-wide banking for Norwest Bank, Iowa.
Jeffrey K. Putzier 40 President of Boone Bank since 1999. Previously served as Vice President
of State Bank.
William D. Tufford 56 President of State Bank
Terrill L. Wycoff 58 Executive Vice President of First National since 2000. Previously
served as Senior Vice President of First National.
The executive officers of the Company and the Banks are elected on an annual
basis by the board of directors of the Company and of the Banks, as applicable.
An executive officer may be removed by the board of directors whenever in its
judgment the best interest of the Company or the Bank, as applicable, will be
served thereby.
Section 16(a) Beneficial Ownership Reporting Compliance
Refer to the information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Proxy Statement, which information is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Refer to the information under the caption "Executive Compensation" contained 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" contained 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" contained in the Proxy Statement, which information is incorporated
herein by this reference.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Financial Statements and Schedules.
1. Financial Statements
Report of McGladrey & Pullen, LLP, Independent Auditor
Report of KPMG LLP, Independent Auditor
Consolidated Balance Sheets, December 31, 2001 and 2000
Consolidated Statements of Income for the Years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fourth
quarter of 2001.
(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 (incorporated by reference to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001).
10 Management Incentive Compensation Plan.
16 Letter from KPMG LLP to Securities and Exchange Commission.
(incorporated by reference to Form 10 filed on April 30, 2001).
21 Subsidiaries of the Registrant. (incorporated by reference to
Form 10 filed on April 30, 2001).
51
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 28, 2002 By: /s/ Daniel L. Krieger
------------------------------------
Daniel L. Krieger,
President
March 28, 2002 By: /s/ John P. Nelson
------------------------------------
John P. Nelson
Principal Financial 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 the dates indicated.
March 28, 2002 /s/ Charles D. Jons
-----------------------------------------
Charles D. Jons, Director
March 28, 2002 /s/ Betty A. Baudler
-----------------------------------------
Betty A. Baudler, Director
March 28, 2002 /s/ James Christy
-----------------------------------------
James Christy, Director
March 28, 2002 /s/ Jamie R. Larson II
-----------------------------------------
Jamie R. Larson II, Director
March 28, 2002 /s/ Marvin J. Walter
-----------------------------------------
Marvin J. Walter, Director
March 28, 2002 /s/ Dale F. Collings
-----------------------------------------
Dale F. Collings, Director
March 28, 2002 /s/ Douglas C. Gustafson
-----------------------------------------
Douglas C. Gustafson, Director
52