SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 0-32637
AMES NATIONAL CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
IOWA 42-1039071
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification Number)
405 FIFTH STREET
AMES, IOWA 50010
----------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (515) 232-6251
Not Applicable
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $5.00 PAR VALUE 3,133,053
- --------------------------------------------------------------------------------
(Class) (Shares Outstanding at November 7, 2003)
1
AMES NATIONAL CORPORATION
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2003
and December 31, 2002 3
Consolidated Statements of Income for the three
and nine months ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 15
Item 4 Controls and Procedures 15
Part II. Other Information
Items 1 through 6 15
Signatures 16
2
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
Assets 2003 2002
----------------------------
Cash and due from banks ............................................................ $ 23,786,945 $ 51,688,784
Federal funds sold ................................................................. 47,983,000 32,500,000
Interest bearing deposits in financial institutions ................................ 6,000,000 1,000,000
Securities available-for-sale ...................................................... 300,766,501 244,575,026
Loans receivable, net .............................................................. 345,003,127 332,306,497
Bank premises and equipment, net ................................................... 8,551,794 8,726,397
Accrued income receivable .......................................................... 6,314,908 5,849,017
Other assets ....................................................................... 358,198 582,849
----------------------------
Total assets ............................................................ $738,764,473 $677,228,570
============================
Liabilities and Stockholders' Equity
Deposits:
Demand .......................................................................... $ 63,523,911 $ 62,557,937
NOW accounts .................................................................... 137,857,750 121,325,104
Savings and money market ........................................................ 166,661,183 153,296,259
Time, $100,000 and over ......................................................... 63,297,586 54,564,283
Other time ...................................................................... 171,181,614 158,878,796
----------------------------
Total deposits .......................................................... 602,522,044 550,622,379
Federal funds purchased and securities sold under agreements to repurchase ......... 22,452,228 18,325,574
Dividends payable .................................................................. 2,882,409 1,376,752
Deferred income taxes .............................................................. 2,749,662 2,879,057
Accrued interest and other liabilities ............................................. 3,322,574 2,501,952
----------------------------
Total liabilities ....................................................... 633,928,917 575,705,714
----------------------------
Stockholders' Equity:
Common stock, $5 par value; authorized 6,000,000 shares; issued 3,153,230
shares at September 30, 2003 and December 31, 2002; outstanding 3,133,053
shares at September 30, 2003 and 3,128,982 shares at December 31, 2002 ........ 15,766,150 15,766,150
Surplus ......................................................................... 25,351,979 25,354,014
Retained earnings ............................................................... 56,977,374 53,917,544
Treasury stock, at cost; 20,177 shares at September 30, 2003
and 24,248 shares at December 31, 2002 ........................................ (1,109,735) (1,333,640)
Accumulated other comprehensive income - net unrealized gain
on securities available-for-sale .............................................. 7,849,788 7,818,788
----------------------------
Total stockholders' equity .............................................. 104,835,556 101,522,856
----------------------------
Total liabilities and stockholders' equity .............................. $738,764,473 $677,228,570
============================
3
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-----------------------------------------------------
Interest and dividend income:
Loans ............................ $ 5,576,844 $ 5,830,765 $16,784,078 $17,461,976
Securities
Taxable ........................ 1,841,920 1,957,301 5,518,204 5,996,207
Tax-exempt ..................... 940,760 735,748 2,553,150 2,174,390
Federal funds sold ............... 121,263 186,630 534,865 638,657
Dividends ........................ 337,259 341,174 1,018,103 1,046,845
-----------------------------------------------------
Total interest income ...... 8,818,046 9,051,618 26,408,400 27,318,075
-----------------------------------------------------
Interest expense:
Deposits ......................... 2,392,420 2,747,913 7,664,617 8,707,285
Other borrowed funds ............. 74,735 61,884 216,069 195,784
-----------------------------------------------------
Total interest expense ..... 2,467,155 2,809,797 7,880,686 8,903,069
-----------------------------------------------------
Net interest income ........ 6,350,891 6,241,821 18,527,714 18,415,006
Provision for loan losses ............ 87,000 80,640 512,740 296,124
-----------------------------------------------------
Net interest income after
provision for loan losses 6,263,891 6,161,181 18,014,974 18,118,882
-----------------------------------------------------
Noninterest income:
Trust department income .......... 279,157 270,214 881,259 797,369
Service fees ..................... 395,491 381,772 1,137,490 1,100,965
Securities gains, net ............ 539,623 239,748 1,186,230 562,422
Loan and secondary market fees ... 366,978 181,768 937,974 410,609
Other ............................ 350,372 239,853 896,215 632,958
-----------------------------------------------------
Total noninterest income ... 1,931,621 1,313,355 5,039,168 3,504,323
-----------------------------------------------------
Noninterest expense:
Salaries and employee benefits ... 2,204,712 2,087,159 6,699,133 5,945,161
Occupancy expenses ............... 341,562 225,634 841,908 655,198
Data processing .................. 504,643 440,660 1,589,780 1,282,700
Other operating expenses ......... 594,914 597,064 1,793,681 1,710,419
-----------------------------------------------------
Total noninterest expense .. 3,645,831 3,350,517 10,924,502 9,593,478
-----------------------------------------------------
Income before income taxes . 4,549,681 4,124,019 12,129,640 12,029,727
Income tax expense ................... 1,309,039 1,171,736 3,369,445 3,395,579
-----------------------------------------------------
Net income ................. $ 3,240,642 $ 2,952,283 $ 8,760,195 $ 8,634,148
=====================================================
Basic and diluted earnings per share . $ 1.03 $ 0.94 $ 2.80 $ 2.76
=====================================================
Declared dividends per share ......... $ 0.46 $ 0.44 $ 1.82 $ 1.74
=====================================================
Comprehensive Income ................. $ 117,585 $ 4,209,682 $ 8,791,195 $12,588,734
=====================================================
4
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
2003 2002
---------------------------
Cash flows from operating activities:
Net income ...................................................................... $ 8,760,195 $ 8,634,148
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ..................................................... 512,740 296,124
Amortization and accretion, net ............................................... 457,624 8,451
Depreciation .................................................................. 759,812 686,169
Provision for deferred taxes .................................................. (147,602) (24,475)
Securities gains, net ......................................................... (1,186,230) (562,422)
Increase in accrued income receivable ......................................... (465,891) (89,960)
Decrease (increase) in other assets ........................................... 224,651 (352,106)
(Decrease) increase in accrued interest and other liabilities ................. 820,622 (31,266)
---------------------------
Net cash provided by operating activities ............................... 9,735,921 8,564,663
---------------------------
Cash flow from investing activities:
Purchase of securities available-for-sale ....................................... (114,406,276) (69,481,343)
Proceeds from sale of securities available-for-sale ............................. 4,916,172 19,399,628
Proceeds from maturities of securities available-for-sale ....................... 54,076,441 31,892,668
Net increase in interest bearing deposits in financial institutions ............. (5,000,000) (250,000)
Net increase in federal funds sold .............................................. (15,483,000) (22,620,000)
Net decrease (increase) in loans ................................................ (13,209,370) 12,468,637
Purchase of bank premises and equipment ......................................... (585,209) (1,638,684)
----------------------------
Net cash used in investing activities ................................... (89,691,242) (30,229,094)
----------------------------
Cash flows from financing activities:
Increase in deposits ............................................................ 51,899,665 25,426,453
Increase in federal funds purchased
and securities sold under agreements to repurchase ............................ 4,126,654 3,259,167
Dividends paid .................................................................. (4,194,707) (5,378,694)
Proceeds from issuance of treasury stock ........................................ 221,870 158,151
----------------------------
Net cash provided by financing activities ............................... 52,053,482 23,465,077
----------------------------
Net increase (decrease) in cash and cash equivalents .................... (27,901,839) 1,800,646
----------------------------
Cash and cash equivalents at beginning of year ..................................... 51,688,784 42,459,156
----------------------------
Cash and cash equivalents at end of the period ..................................... $ 23,786,945 $ 44,259,802
============================
Supplemental disclosures of cash flow information:
Cash paid for interest .......................................................... $ 7,905,197 $ 9,476,728
Cash paid for taxes ............................................................. 3,383,157 3,413,299
============================
5
AMES NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Significant Accounting Policies
The consolidated financial statements for the three and nine-month periods ended
September 30, 2003 and 2002 are unaudited. In the opinion of the management of
Ames National Corporation (the "Company"), these financial statements reflect
all adjustments, consisting only of normal recurring accruals, necessary to
present fairly these consolidated financial statements. The results of
operations for the interim periods are not necessarily indicative of results
which may be expected for an entire year. Certain information and footnote
disclosure normally included in complete financial statements prepared in
accordance with generally accepted accounting principles have been omitted in
accordance with the requirements for interim financial statements. The interim
financial statements and notes thereto should be read in conjunction with the
year-end audited financial statements contained in the Company's 10-K. The
consolidated condensed financial statements include the accounts of the Company
and its wholly-owned banking subsidiaries (the "Banks"). All significant
intercompany balances and transactions have been eliminated in consolidation.
2. Dividends
On November 12, 2003, the Company declared a cash dividend on its common stock,
payable on February 16, 2004 to stockholders of record as of February 2, 2004,
equal to $0.46 per share.
3. Earnings Per Share
Earnings per share amounts were calculated using the weighted average shares
outstanding during the periods presented. The weighted average outstanding
shares for the three months ended September 30, 2003 and 2002 were 3,133,053 and
3,128,982, respectively. The weighted average outstanding shares for the nine
months ended September 30, 2003 and 2002 were 3,130,607 and 3,126,714,
respectively.
4. Commitments
In the normal course of business, the Company enters into a number of
off-balance sheet commitments. These commitments expose the Company to varying
degrees of credit and market risk and are subject to the same credit reviews as
those recorded on the balance sheet.
The Company enters into commitments to extend credit such as loan commitments
and standby letters of credit to meet the financing needs of its customers. For
additional information on credit extension commitments see Note 9 of the
Company's 2002 consolidated financial statements. The Company's commitments as
of September 30, 2003 and December 31, 2002 are approximately as follows:
September 30, 2003 December 31, 2002
--------------------------------------
Commitments to extend credit ........... $60,600,000 $59,410,000
Standby letters of credit .............. 1,330,000 1,490,000
-------------------------------
$61,930,000 $60,900,000
===============================
5. Impact of New Financial Accounting Standards
Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No.
5, 57 and 107 and Rescission of FASB Interpretation No 34." FIN 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002, and were adopted in the Corporation's financial statements for the year
ended December 31, 2002. Implementation of the remaining provisions of FIN 45 on
January 1, 2003 did not have a significant impact of the Corporation's financial
statements.
6
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 ("FIN 46"), "Consolidated Variable Interest Entities". The
objective of the Interpretation is to provide guidance on how to identify a
variable interest entity and determine when the assets, liabilities,
non-controlling interests, and results of operations of a variable interest in
an entity need to be included in a company's consolidated financial statements.
A company that holds variable interests in an entity will need to consolidate
the entity if the company's interest in the variable interest entity is such
that the company will absorb a majority of the variable interest entity's losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also required additional disclosures by primary beneficiaries and
other significant variable interest holders. The provisions of this
interpretation are effective upon issuance. The Company is not impacted by the
provisions of FIN 46.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement No.
133, Accounting for Derivative Instruments and Hedging Activities." This
statement clarifies the definition of a derivative and incorporates certain
decisions made by the Board as part of the Derivative Implementation Group
process. This statement is effective for contracts entered into or modified, and
for hedging relationships designated after June 30, 2003 and should be applied
prospectively. The Company is not impacted by this Statement.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
for both Liabilities and Equity." SFAS 150 established standards for how an
issuer classifies, measures and discloses in its financial statements certain
financial instruments with characteristics for both liabilities and equity. SFAS
150 requires that an issuer classify financial instruments that are within its
scope as liabilities, in most circumstances. Such financial instruments include
(i) financial instruments that are issued in the form of shares that are
mandatorily redeemable; (ii) financial instruments that embody an obligation to
repurchase the issue's equity shares, or are indexed to such an obligation, and
that require the issue to settle the obligation by transferring assets; (iii)
financial instruments that embody an obligation that the issuer may settle by
issuing a variable number of its equity shares if, at inception, the monetary
value of the obligation is predominantly based on a fixed amount, variations in
something other than the fair value of the issuer's equity shares or variations
inversely related to changes in the fair value of the issuer's equity shares;
and (iv) certain freestanding financial instruments. SFAS 150 is effective for
contracts entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. Adoption of SFAS 150 on July 1, 2003 did not have a significant impact on
the Corporation's financial statements.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements about the
Company, its business and its prospects. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts. They often include use of the words "believe", "expect", "anticipate",
"intend", "plan", "estimate" or words of similar meaning, or future or
conditional verbs such as "will", "would", "should", "could" or "may".
Forward-looking statements, by their nature, are subject to risks and
uncertainties. A number of factors, many of which are beyond the Company's
control, could cause actual conditions, events or results to differ
significantly from those described in the forward-looking statements. Such risks
and uncertainties with respect to the Company include 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.
Results of Operations for Three Months Ending September 30, 2003 and September
30, 2002
General
The Company earned net income of $3,241,000, or $1.03 per share for the three
months ended September 30, 2003, compared to net income of $2,952,000, or $0.94
per share, for the three months ended September 30, 2002, an increase of 9.8%.
The higher net income is attributable to lower interest expense and higher
noninterest income. The Company's annualized return on average assets was 1.78%
and 1.87%, respectively, for the three-month periods ending September 30, 2003
and 2002. The Company's annualized return on average equity was 12.42% and
11.80%, respectively for the three month periods ending September 30, 2003 and
2002.
AVERAGE BALANCE SHEETS AND INTEREST RATES
The following table sets forth certain information relating to the Company's
average balance sheets and reflects the average yield on assets and average cost
of liabilities for the three month periods ended September 30, 2003 and
September 30, 2002, respectively.
ASSETS
(dollars in thousands)
AVERAGE BALANCE SHEETS AND INTEREST RATES
Three Months Ended September 30,
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------------ ------------------------------
Loans
Commercial ....................... $ 37,426 $ 533 5.70% $ 43,844 $ 793 7.23%
Agricultural ..................... 25,788 439 6.81% 25,252 469 7.43%
Real estate ...................... 266,781 4,273 6.41% 225,541 4,236 7.51%
Installment and other ............ 21,431 332 6.20% 19,225 333 6.93%
---------------------------------------------------------------
Total loans (including fees) ....... $351,426 $ 5,577 6.35% $313,862 $ 5,831 7.43%
Investment securities
Taxable .......................... $162,453 $ 1,933 4.76% $144,426 $ 2,057 5.70%
Tax-exempt ....................... 108,285 1,762 6.51% 76,658 1,477 7.71%
----------------------------------------------------------------
Total investment securities ........ $270,738 $ 3,695 5.46% $221,084 $ 3,534 6.39%
Interest bearing deposits with banks $ 6,000 $ 24 1.60% $ 524 $ 2 1.53%
Federal funds sold ................. 49,991 121 0.97% 46,412 187 1.61%
----------------------------------------------------------------
Total interest-earning assets ...... $678,155 $ 9,417 5.55% $581,882 $ 9,554 6.57%
Noninterest-earning assets ......... 48,413 50,337
-------- --------
TOTAL ASSETS ....................... $726,568 $632,219
======== ========
<FN>
1 Average loan balance include nonaccrual loans, if any. Interest income on
nonaccrual loans has been included. 2 Tax-exempt income has been adjusted
to a tax-equivalent basis using an incremental rate of 34%.
</FN>
8
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
AVERAGE BALANCE SHEETS AND INTEREST RATES
Three Months Ended September 30,
------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense rate
------------------------------- -------------------------------
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and money markets . $293,207 $ 591 0.81% $253,148 $ 808 1.28%
Time deposits < $100,000 ................. 171,865 1,357 3.16% 150,933 1,465 3.88%
Time deposits > $100,000 ................. 66,458 444 2.67% 53,526 475 3.55%
------------------------------------------------------------------
Total deposits ............................. $531,530 $ 2,392 1.80% $457,607 $ 2,748 2.40%
Other borrowed funds ....................... 21,144 75 1.42% 12,978 62 1.91%
------------------------------------------------------------------
Total Interest-bearing ..................... $552,674 $ 2,467 1.79% $470,585 $ 2,810 2.39%
liabilities
Noninterest-bearing liabilities
Demand deposits ............................ $ 60,434 $ 54,616
Other liabilities .......................... 9,099 6,977
-------- --------
Stockholders' equity ....................... $104,361 $100,041
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ....................... $726,568 $632,219
======== ========
Net interest income ........................ $ 6,950 4.10% $ 6,744 4.64%
======== ========
Spread Analysis
Interest income/average assets ............. $ 9,417 5.18% $ 9,554 6.04%
Interest expense/average assets ............ 2,467 1.36% 2,810 1.78%
Net interest income/average assets ......... 6,950 3.82% 6,744 4.27%
<FN>
1 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34%.
</FN>
Net Interest Income
For the three months ended September 30, 2003, the Company's net interest margin
was 4.10% compared to 4.64% for the three months ended September 30, 2002. Net
interest income, prior to the adjustment for tax-exempt income, for the quarters
ended September 30, 2003 and 2002 totaled $6,351,000 and $6,242,000,
respectively. Net interest income increased 1.8% compared to the three-month
period one-year ago despite the lower net interest margin. A higher volume of
interest-earning assets, primarily associated with the growth of United Bank &
Trust (United Bank), Marshalltown, Iowa, combined with a lower cost of funds
served to offset the loss of income resulting from assets repricing to lower
market rates.
For the three months ended September 30, 2003, interest income decreased
$234,000 or 2.6% when compared to the same period in 2002. This decrease was
primarily attributable to significantly lower yields on earning assets as the
result of a decline in market interest rates. The competitive banking
environment in central Iowa continues to place significant downward pressure on
loan yields.
Interest expense decreased $343,000 or 12.2% for the quarter ended September 30,
2003 when compared to the same period in 2002. Lower interest rates on deposits
and other borrowings resulted in decreased interest expense as the Company's
cost of funds declined with market interest rates in spite of an increase in the
average volume of interest-bearing liabilities.
9
Provision for Loan Losses
The Company provided $87,000 for loan losses for the three months ended
September 30, 2003 compared to $81,000 during the same period last year.
Provision expense for the second quarter of 2003 was higher than the prior year
period primarily as the result of increased amounts associated with loan growth
at United Bank.
Noninterest Income and Expense
Noninterest income increased $618,000, or 47.1% during the quarter ended
September 30, 2003 compared to the same period in 2002. The increase can be
attributed to increased fee income on the sale of residential loans in the
secondary mortgage market and gains on the sale of securities in the Company's
equity portfolio.
Noninterest expense increased $295,000 or 8.8% for the second quarter of 2003
compared to the same period in 2002. Noninterest expense items that increased
include salary and benefits, occupancy, data processing and equipment costs. The
higher costs in 2003 are in part attributable to higher overhead expenses with
operating United Bank. The efficiency ratio for the three months ended September
30, 2003 and 2002 was 44.0% and 44.4, respectively.
Income Taxes
The provision for income taxes for September 30, 2003 and 2002 was $1,309,000
and $1,172,000, respectively. This amount represents an effective tax rate of
28.8% for the third quarter of 2003, compared to 28.4% for the third quarter of
2002. The Company's marginal federal tax rate is currently 35%. The difference
between the Company's effective and marginal tax rate is primarily related to
investments made in tax exempt securities.
Results of Operations for Nine Months Ending September 30, 2003 and September
30, 2002
General
The Company earned net income of $8,760,000 or $2.80 per share for the nine
months ended September 30, 2003, compared to net income of $8,634,000, or $2.76
per share, for the nine months ended September 30, 2002, an increase of 1.5%.
Significantly higher noninterest income offset higher provision expense and
noninterest expense. The Company's annualized return on average assets was 1.63%
and 1.83%, respectively for the nine-month periods ending September 30, 2003 and
2002. The Company's annualized return on average equity was 11.28% and 11.83%,
respectively for the nine month periods ending September 30, 2003 and 2002.
10
The following table sets forth certain information relating to the Company's
average balance sheets and reflects the average yield on assets and average cost
of liabilities for the nine month periods ended September 30, 2003 and September
30, 2002, respectively.
ASSETS
(dollars in thousands)
AVERAGE BALANCE SHEETS AND INTEREST RATES
Nine Months Ended September 30,
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------------ ------------------------------
Loans
Commercial ......................... $ 38,360 $ 1,645 5.72% $ 44,686 $ 2,423 7.23%
Agricultural ....................... 25,940 1,351 6.94% 25,038 1,408 7.50%
Real estate ........................ 262,710 12,751 6.47% 225,615 12,622 7.46%
Installment and other .............. 20,516 1,037 6.74% 19,438 1,009 6.92%
----------------------------------------------------------------
Total loans (including fees) ....... $347,526 $ 16,784 6.44% $314,777 $ 17,462 7.40%
Investment securities
Taxable .......................... $155,779 $ 5,838 5.00% $142,150 $ 6,362 5.97%
Tax-exempt ....................... 95,654 4,863 6.78% 75,102 4,312 7.66%
----------------------------------------------------------------
Total investment securities ........ $251,433 $ 10,701 5.67% $217,252 $ 10,674 6.55%
Interest bearing deposits with banks $ 4,010 $ 41 1.36% $ 509 $ 9 2.36%
Federal funds sold ................. 66,091 535 1.08% 51,322 639 1.66%
----------------------------------------------------------------
Total interest-earning assets ...... $669,060 $ 28,061 5.59% $583,860 $ 28,784 6.57%
Total noninterest-earning assets ... $ 48,343 $ 44,068
-------- --------
TOTAL ASSETS ....................... $717,403 $627,928
======== ========
<FN>
1 Average loan balance include nonaccrual loans, if any. Interest income on
nonaccrual loans has been included. 2 Tax-exempt income has been adjusted
to a tax-equivalent basis using an incremental rate of 34%.
</FN>
11
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
AVERAGE BALANCE SHEETS AND INTEREST RATES
Nine Months Ended September 30,
2003 2002
------------------------------- -------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense rate
------------------------------- -------------------------------
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and money markets . $294,136 $ 2,110 0.96% $257,895 $ 2,606 1.35%
Time deposits < $100,000 ................. 169,677 4,176 3.28% 151,205 4,666 4.11%
Time deposits > $100,000 ................. 64,509 1,379 2.85% 50,840 1,435 3.76%
------------------------------------------------------------------
Total deposits ............................. $528,322 $ 7,665 1.93% $459,940 $ 8,707 2.52%
Other borrowed funds ....................... 18,646 216 1.54% 13,263 196 1.97%
------------------------------------------------------------------
Total Interest-bearing ..................... $546,968 $ 7,881 1.92% $473,203 $ 8,903 2.51%
liabilities
Noninterest-bearing liabilities
Demand deposits ............................ $ 58,369 $ 52,735
Other liabilities .......................... 8,486 4,647
-------- --------
Stockholders' equity ....................... $103,580 $ 97,343
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ....................... $717,403 $627,928
======== ========
Net interest income ........................ $ 20,180 4.02% $ 19,881 4.54%
======== ========
Spread Analysis
Interest income/average assets ............. $ 28,061 5.22% $ 28,784 6.11%
Interest expense/average assets ............ 7,881 1.46% 8,903 1.89%
Net interest income/average assets ......... 20,180 3.75% 19,881 4.22%
<FN>
1 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34%.
</FN>
12
Net Interest Income
For the nine months ended September 30, 2003, the Company's net interest margin
was 4.02% compared to 4.54% for the nine months ended September 30, 2002. Net
interest income, prior to the adjustment for tax-exempt income, for the nine
months ended September 30, 2003 and 2002 totaled $18,528,000 and $18,415,000,
respectively. Net interest income was slightly higher compared to the nine-month
period one-year ago despite the lower net interest margin. A higher volume of
interest-earning assets, primarily associated with the growth of United Bank,
combined with a lower cost of funds served to offset the loss of income
resulting from assets repricing to lower market rates.
For the nine months ended September 30, 2003, interest income decreased $910,000
or 3.3% when compared to the same period in 2002. This decrease was primarily
attributable to significantly lower yields on earning assets as the result of a
decline in market interest rates. The competitive banking environment in central
Iowa continues to place significant downward pressure on loan yields.
Interest expense decreased $1,022,000 or 11.5% for the nine months ended
September 30, 2003 when compared to the same period in 2002. Lower interest
rates on deposits and other borrowings resulted in decreased interest expense as
the Company's cost of funds declined with market interest rates.
Provision for Loan Losses
The Company provided $513,000 for loan losses for the nine months ended
September 30, 2003 compared to $296,000 during the same period last year.
Provision expense for the nine month period ending September 30, 2003 was higher
than the prior year period primarily as the result of increased specific
allowance for impaired loans and establishing the allowance for loan losses at
United Bank.
Noninterest Income and Expense
Noninterest income increased $1,535,000, or 43.8% during the nine months ended
September 30, 2003 compared to the same period in 2002. The increase can be
attributed to increased fee income on the sale of residential loans in the
secondary market, gains on the sale of securities in the Company's equity
portfolio, and higher trust department income.
Noninterest expense increased $1,331,000 or 13.9% for the first nine months of
2003 compared to the same period in 2002. Noninterest expense increased as the
result of the opening of United Bank. United Bank opened in June of 2002 so the
nine month period ending September 30, 2003 includes nearly two additional
quarters of noninterest expense versus the same nine month period in 2002. The
efficiency ratio for the nine months ended September 30, 2003 and 2002 was 46.4%
and 43.8, respectively.
Income Taxes
The provision for income taxes for the nine months ending September 30, 2003 and
2002 was $3,369,000 and $3,396,000, respectively. This amount represents an
effective tax rate of 27.8% for the first nine months of 2003, compared to 28.2%
for the same period in 2002. The Company's marginal federal tax rate is
currently 35%. The difference between the Company's effective and marginal tax
rate is primarily related to investments made in tax exempt securities.
Financial Condition
Assets
As of September 30, 2003, total assets were $738,764,000, a $61,536,000 increase
in comparison to December 31, 2002 totals. Deposit growth primarily at United
Bank as well as the other Company's subsidiary banks and a higher volume of
federal funds sold resulting from temporary large public fund deposit balances
associated with the collection of property taxes allowed for the significant
increase in earning assets.
Investment Portfolio
The increase in the volume of investment securities to $300,767,000 on September
30, 2003 from $244,575,000 on December 31, 2002 resulted from the purchase of
U.S. government agencies and municipal bonds.
13
Loan Portfolio
Net loans as of September 30, 2003 totaled $345,003,000, an increase of
$12,697,000 from the outstanding balances as of December 31, 2002. The increase
relates to loans generated by United Bank.
Impaired loans totaled $1,820,000 as of September 30, 2003 compared to
$2,409,000 as of December 31, 2002. A loan is considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Impaired loans include loans
accounted for on a non-accrual basis; accruing loans which are contractually
past due 90 days or more as to principal or interest payments; and any
restructured loans. As of September 30, 2003, non-accrual loans totaled
$1,607,000, past due loans still accruing totaled $213,000 and there were no
restructured loans outstanding. Other real estate owned as of September 30, 2003
and December 31, 2002 totaled $124,000 and $295,000, respectively.
Net charge offs were $321,000 for the nine months ended September 30, 2003 as
compared to net charge-offs $177,000 for the nine months ended September 30,
2002. Losses related primarily to previously identified impaired commercial
loans for both periods. The resulting allowance for loan losses was $5,950,000
as of September 30, 2003 compared to $5,758,000 as of December 31, 2002. The
allowance for loan losses as a percentage of outstanding loans as of both
September 30, 2003 and December 31, 2002 was 1.70%.
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.
Liabilities
Deposits increased $51,900,000 from year-end 2002. The increase is primarily
attributable to deposits generated by United Bank.
Other borrowed funds as of September 30, 2003, consisted primarily of securities
sold under agreements to repurchase totaling $22,452,000 compared to total other
borrowing as of December 31, 2002 of $18,326,000.
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
deposits. Other sources include principal repayments on loans, proceeds from the
maturity and sale of investment securities, federal funds purchased, repurchase
agreements, advances from the Federal Home Loan Bank and funds provided by
operations. Net cash from operating activities contributed $9,736,000 and
$8,565,000 to liquidity for the nine months ended September 30, 2003 and 2002,
respectively. Liquid assets including cash on hand, balances due from other
banks, federal funds sold and interest-bearing deposits in financial
institutions decreased to $77,770,000 as of September 30, 2003 compared to
year-end 2002 balance of $85,189,000. The decrease in federal funds sold is
attributable to the purchase of U.S. government agencies and municipal bonds.
Securities available for sale increased to $300,767,000 as of September 30, 2003
from $244,575,000 as of December 31, 2002 and provide another source of
liquidity for the Company.
To provide additional external liquidity, the Banks have outstanding lines of
credit with the Federal Home Loan Bank of Des Moines, Iowa of $30,732,000 and
federal funds borrowing capacity at correspondent banks of $46,000,000. As of
September 30, 2003, the Company had no outstanding borrowings of federal funds
purchased or Federal Home Loan Bank advances. Management believes that the
Company's liquidity sources will be sufficient to support existing operations
for the foreseeable future.
14
The Company's total stockholder's equity increased to $104,836,000 as of
September 30, 2003, from $101,523,000 as of December 31, 2002. Stockholders'
equity as of September 30, 2003 was 14.2% of total assets, compared to 15.0% at
December 31, 2002. Total equity increased due to the 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. Management believes that, as of September 30,
2003, the Company and its Banks meet the capital requirements to which they are
subject. As of that date, all the Company's Banks were "well capitalized" under
regulatory prompt corrective action provisions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk is comprised primarily of interest rate risk arising
from its core banking activities of lending and deposit taking. Interest rate
risk results from the changes in market interest rates which may adversely
affect the Company's net interest income. Management continually develops and
applies strategies to mitigate this risk. Management does not believe that the
Company's primary market risk exposure and how it has been managed to-date in
2003 changed significantly when compared to 2002.
Item 4. Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 - Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 18, 2003, the Company filed a Form 8-K pursuant to Item
5, announcing financial results for the three and six months
ended June 30, 2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMES NATIONAL CORPORATION
DATE: November 13, 2003 By: /s/ Daniel L. Krieger
-------------------------------
Daniel L. Krieger, Chairman and
President
(Principal Executive Officer)
By: /s/ John P. Nelson
-------------------------------
John P. Nelson, Vice President
(Principal Financial Officer)
16