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, 2004. 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 (the "Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
Indicate bycheck mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __X__ No _____
As of June 30,2004, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the closing sale price for the
registrant's common stock in the over the counter market, was $162,670,109.
Shares of common stock beneficially owned by each executive officer and director
of the Company and by each person who owns 5% or more of the outstanding common
stock have been excluded on the basis that such persons may be deemed to be an
affiliate of the registrant. This determination of affiliate status is not
necessarily a conclusive determination for any other purpose.
The number of shares outstanding of the registrant's common stock on
February 28, 2005, was 3,137,066.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, as filed with the
Securities and Exchange Commission on March 16, 2005, are incorporated by
reference into Part III of this Form 10-K.
1
TABLE OF CONTENTS
Part I
Item 1. Business..................................................... 3
Item 2. Properties................................................... 14
Item 3. Legal Proceedings............................................ 14
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...................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results Of Operations..................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 35
Item 8. Financial Statements and Supplementary Data.................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................ 58
Item 9 A. Controls and Procedures...................................... 58
Item 9 B. Other Information............................................ 58
Part III
Item 10. Directors and Executive Officers of the Registrant........... 58
Item 11. Executive Compensation....................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and Management 59
Item 13. Certain Relationships and Related Transactions............... 59
Item 14. Principal Accounting Fees and Services ...................... 60
Part IV
Item 15. Exhibits and Financial Statement Schedules................... 60
2
PART I
ITEM 1. BUSINESS
General
Ames National Corporation (the "Company") is an Iowa corporation and bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company owns 100% of the stock of five banking subsidiaries
consisting of two national banks and three state-chartered banks, as described
below. All of the Company's operations are conducted in the State of Iowa and
primarily within the central Iowa counties of Boone, Story and Marshall where
the Company's banking subsidiaries are located. The Company does not engage in
any material business activities apart from its ownership of its banking
subsidiaries. The principal executive offices of the Company are located at 405
Fifth Street, Ames, Iowa 50010 and its telephone number is (515) 232-6251.
The Company was organized and incorporated on January 21, 1975 under the
laws of the State of Iowa to serve as a holding company for its principal
banking subsidiary, First National Bank, Ames, Iowa ("First National") located
in Ames, Iowa. In 1983, the Company acquired the stock of the State Bank & Trust
Co. ("State Bank") located in Nevada, Iowa; in 1991, the Company, through a
newly-chartered state bank known as Boone Bank & Trust Co. ("Boone Bank"),
acquired certain assets and assumed certain liabilities of the former Boone
State Bank & Trust Company located in Boone, Iowa; in 1995, the Company acquired
the stock of the Randall-Story State Bank ("Randall-Story Bank") located in
Story City, Iowa; and in 2002, the Company chartered and commenced operations of
a new national banking organization, United Bank & Trust NA ("United Bank"),
located in Marshalltown, Iowa. First National, State Bank, Boone Bank,
Randall-Story Bank and United Bank are each operated as a wholly owned
subsidiary of the Company. These five financial institutions are referred to in
this Form 10-K collectively as the "Banks" and individually as a "Bank".
The principal sources of Company revenue are: (i) interest and fees earned
on loans made by the Banks; (ii) service charges on deposit accounts maintained
at the Banks; (iii) interest on fixed income investments held by the Banks; (iv)
fees on trust services provided by those Banks exercising trust powers; and (v)
securities gains and dividends on equity investments held by the Company and the
Banks.
The Banks' lending activities consist primarily of short-term and
medium-term commercial and residential real estate loans, agricultural and
business operating loans and lines of credit, equipment loans, vehicle loans,
personal loans and lines of credit, home improvement loans and secondary
mortgage loan origination. The Banks also offer a variety of demand, savings and
time deposits, cash management services, merchant credit card processing, safe
deposit boxes, wire transfers, direct deposit of payroll and social security
checks and automated teller machine access. Four of the five Banks also offer
trust services.
The Company provides various services to the Banks which include, but are
not limited to, management assistance, auditing services, human resources
services and administration, compliance management, marketing assistance and
coordination, loan review and assistance with respect to computer systems and
procedures.
Banking Subsidiaries
First National Bank, Ames, Iowa. First National is a nationally chartered,
commercial bank insured by the Federal Deposit Insurance Corporation (the
"FDIC"). It was organized in 1903 and became a wholly owned subsidiary of the
Company in 1975 through a bank holding company reorganization whereby the then
shareholders of First National exchanged all of their First National stock for
stock in the Company. First National provides full-service banking to businesses
and residents within the Ames community and surrounding area. It provides a
variety of products and services designed to meet the needs of the market it
serves. It has an experienced staff of bank officers including many who have
spent the majority of their banking careers with First National and who
emphasize long-term customer relationships. First National conducts business out
of three full-service offices and one super market location, all located in the
city of Ames.
As of December 31, 2004, First National had capital of $40,482,000 and 91
full-time equivalent employees. Full-time equivalents represent the number of
people a business would employ if all its employees were employed on a full-time
basis. It is calculated by dividing the total number of hours worked by all full
and part-time employees by the number of hours a full-time individual would work
for a given period of time. First National had net income of $6,949,000 in 2004,
$6,621,000 in 2003 and $6,294,000 in 2002. Total assets as of December 31, 2004,
2003 and 2002 were $436,074,000, $381,086,000 and $375,341,000, respectively.
3
State Bank & Trust Co., Nevada, Iowa. State Bank is an Iowa,
state-chartered, FDIC insured commercial bank. State Bank was acquired by the
Company in 1983 through a stock transaction whereby the then shareholders of
State Bank exchanged all their State Bank stock for stock in the Company. State
Bank was organized in 1939 and provides full-serve banking to businesses and
residents within the Nevada area from its main Nevada location and two offices;
one in McCallsburg, Iowa and the other in Colo, Iowa. It is strong in
agricultural, commercial and residential real estate lending.
As of December 31, 2004, State Bank had capital of $11,288,000 and 22
full-time equivalent employees. It had net income of $1,707,000 in 2004,
$1,554,000 in 2003 and $1,501,000 in 2002. Total assets as of December 31, 2004,
2003 and 2002 were $112,599,000, $100,712,000 and $104,079,000, respectively.
Boone Bank & Trust Co., Boone, Iowa. Boone Bank is an Iowa,
state-chartered, FDIC insured commercial bank. Boone Bank was organized in 1992
by the Company under a new state charter in connection with a purchase and
assumption transaction whereby Boone Bank purchased certain assets and assumed
certain liabilities of the former Boone State Bank & Trust Company in exchange
for a cash payment. It provides full service banking to businesses and residents
within the Boone community and surrounding area. It is actively engaged in
agricultural, consumer and commercial lending, including real estate, operating
and equipment loans. It conducts business from its main office and a full
service branch office, both located in Boone.
As of December 31, 2004, Boone Bank had capital of $12,622,000 and 28
full-time equivalent employees. It had net income of $2,059,000 in 2004,
$1,920,000 in 2003 and $1,827,000 in 2002. Total assets as of December 31, 2004,
2003 and 2002 were $112,578,000, $110,712,000 and $96,829,000, respectively.
Randall-Story State Bank, Story City, Iowa. Randall-Story Bank is an Iowa,
state-chartered, FDIC insured commercial bank. Randall-Story Bank was acquired
by the Company in 1995 through a stock transaction whereby the then shareholders
of Randall-Story Bank exchanged all their Randall-Story Bank stock for stock in
the Company. Randall-Story Bank was organized in 1928 and provides full-service
banking to Story City and the surrounding area from its main location in Story
City and a full service office in Randall, Iowa. While its primary emphasis is
in agricultural lending, Randall-Story Bank also provides the traditional
lending services typically offered by community banks.
As of December 31, 2004, Randall-Story Bank had capital of $7,857,000 and
16 full-time equivalent employees. It had net income of $1,036,000 in 2004,
$810,000 in 2003 and $1,009,000 in 2002. Total assets as of December 31, 2004,
2003 and 2002 were $74,427,000, $72,581,000 and $64,946,000, respectively.
United Bank & Trust NA, Marshalltown, Iowa. United Bank is a nationally
chartered, commercial bank insured by the FDIC. It was newly chartered in June
of 2002 and offers a broad range of deposit and loan products, as well as
Internet banking and trust services to customers located in the Marshalltown and
surrounding Marshall County area.
As of December 31, 2004, United Bank had capital of $6,902,000 and 17
full-time equivalent employees. United Bank had a profit of $105,000 in 2004 and
posted a net loss in 2003 of $465,000 and for the six and one-half month period
ended December 31, 2002 a loss of $524,000. Total assets as of December 31,
2004, 2003 and 2002 were $89,653,000, $68,397,000 and $30,355,000, respectively.
Business Strategy and Operations
As a locally owned, multi-bank holding company, the Company emphasizes
strong personal relationships to provide products and services that meet the
needs of the Banks' customers. The Company seeks to achieve growth and maintain
a strong return on equity. To accomplish these goals, the Banks focus on small
to medium size businesses that traditionally wish to develop an exclusive
relationship with a single bank. The Banks, individually and collectively, have
the size to give the personal attention required by business owners, in addition
to the credit expertise to help businesses meet their goals.
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The Banks offer a full range of deposit services that are typically
available in most financial institutions, including checking accounts, savings
accounts and time deposits of various types, ranging from money market accounts
to longer term certificates of deposit. One major goal in developing the Banks'
product mix is to keep the product offerings as simple as possible, both in
terms of the number of products and the features and benefits of the individual
services. The transaction accounts and time certificates are tailored to each
Bank's principal market area at rates competitive in that Bank's market. In
addition, retirement accounts such as IRAs (Individual Retirement Accounts) are
available. The FDIC insures all deposit accounts up to the maximum amount. The
Banks solicit these accounts from small-to-medium sized businesses in their
respective primary trade areas, and from individuals who live and/or work within
these areas. No material portion of the Banks' deposits has been obtained from a
single person or from a few persons. Therefore, the Company does not believe
that the loss of the deposits of any person or of a few persons would have an
adverse effect on the Banks' operations or erode their deposit base.
Loans are provided to creditworthy borrowers regardless of their race,
color, national origin, religion, sex, age, marital status, disability, receipt
of public assistance or any other basis prohibited by law. The Banks intend to
fulfill this commitment while maintaining prudent credit standards. In the
course of fulfilling this obligation to meet the credit needs of the communities
which they serve, the Banks give consideration to each credit application
regardless of the fact that the applicant may reside in a low to moderate income
neighborhood, and without regard to the geographic location of the residence,
property or business within their market areas.
The Banks provide innovative, quality financial products, such as Internet
banking and trust services that meet the banking needs of their customers and
communities. The loan programs and acceptance of certain loans may vary from
time-to-time depending on the funds available and regulations governing the
banking industry. The Banks offer all basic types of credit to their local
communities and surrounding rural areas, including commercial, agricultural and
consumer loans. The types of loans within these categories are as follows:
Commercial Loans. Commercial loans are typically made to sole proprietors,
partnerships, corporations and other business entities such as municipalities
and individuals where the loan is to be used primarily for business purposes.
These loans are typically secured by assets owned by the borrower and often
times involve personal guarantees given by the owners of the business. The types
of loans the Banks offer include:
- financing guaranteed under Small Business Administration programs
- operating and working capital loans
- loans to finance equipment and other capital purchases
- commercial real estate loans
- business lines of credit
- term loans
- loans to professionals
- letters of credit
Agricultural Loans. The Banks by nature of their location in central Iowa
are directly and indirectly involved in agriculture and agri-business lending.
This includes short-term seasonal lending associated with cyclical crop and
livestock production, intermediate term lending for machinery, equipment and
breeding stock acquisition and long-term real estate lending. These loans are
typically secured by the crops, livestock, equipment or real estate being
financed. The basic tenet of the Banks' agricultural lending philosophy is a
blending of strong, positive cash flow supported by an adequate collateral
position, along with a demonstrated capacity to withstand short-term negative
impact if necessary. Applicable governmental subsidies and affiliated programs
are utilized if warranted to accomplish these parameters. Approximately 14% of
the Banks' loans have been made for agricultural purposes. The Banks have not
experienced a material adverse effect on their business as a result of defaults
on agricultural loans and do not anticipate at the present time experiencing any
such effect in the future.
Consumer Loans. Consumer loans are typically available to finance home
improvements and consumer purchases, such as automobiles, household furnishings,
boats and education. These loans are made on both a secured and an unsecured
basis. The following types of consumer loans are available:
- automobiles and trucks
- boats and recreational vehicles
- personal loans and lines of credit
- home equity lines of credit
- home improvement and rehabilitation loans
- consumer real estate loans
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Other types of credit programs, such as loans to nonprofit organizations,
to public entities, for community development and to other governmental offered
programs also are available.
First National, Boone Bank, State Bank and United Bank offer trust services
typically found in a commercial bank with trust powers, including the
administration of estates, conservatorships, personal and corporate trusts and
agency accounts. The Banks also provide farm management, investment and
custodial services for individuals, businesses and non-profit organizations.
The Banks earn income from the origination of residential mortgages that
are sold in the secondary real estate market without retaining the mortgage
servicing rights.
The Banks offer traditional banking services, such as safe deposit boxes,
wire transfers, direct deposit of payroll and social security checks, automated
teller machine access and automatic drafts (ACH) for various accounts.
Credit Management
The Company strives to achieve sound credit risk management. In order to
achieve this goal, the Company has established uniform credit policies and
underwriting criteria for the Banks' loan portfolios. The Banks diversify in the
types of loans offered and are subject to regular credit examinations, annual
internal and external loan audits and annual review of large loans, as well as
quarterly reviews of loans experiencing deterioration in credit quality. The
Company attempts to identify potential problem loans early, charge off loans
promptly and maintain an adequate allowance for loan losses. The Company has
established credit guidelines for the Banks' lending portfolios which include
guidelines relating to the more commonly requested loan types, as follows:
Commercial Real Estate Loans - Commercial real estate loans, including
agricultural real estate loans, are normally based on loan to appraisal value
ratios of 75% and secured by a first priority lien position. Loans are typically
subject to interest rate adjustments no less frequently than 5 years from
origination. Fully amortized monthly repayment terms normally do not exceed
twenty years. Projections and cash flows that show ability to service debt
within the amortization period are required. Property and casualty insurance is
required to protect the Banks' collateral interests. Commercial and agricultural
real estate loans represent approximately 45% of the loan portfolio. Major risk
factors for commercial real estate loans, as well as the other loan types
described below, include a geographic concentration in central Iowa; the
dependence of the local economy upon several large governmental entities,
including Iowa State University and the Iowa Department of Transportation; and
the health of Iowa's agricultural sector that is dependent on weather conditions
and government programs.
Commercial and Agricultural Operating Lines - These loans are made to
businesses and farm operations with terms up to twelve months. The credit needs
are generally seasonal with the source of repayment coming from the entity's
normal business cycle. Cash flow reviews are completed to establish the ability
to service the debt within the terms of the loan. A first priority lien on the
general assets of the business normally secures these types of loans. Loan to
value limits vary and are dependent upon the nature and type of the underlying
collateral and the financial strength of the borrower. Crop and hail insurance
is required for most agricultural borrowers. Loans are generally guaranteed by
the principal(s).
Commercial and Agricultural Term Loans - These loans are made to businesses
and farm operations to finance equipment, breeding stock and other capital
expenditures. Terms are generally the lesser of five years or the useful life of
the asset. Term loans are normally secured by the asset being financed and are
often additionally secured with the general assets of the business. Loan to
value is generally 75% of the cost or value of the assets. Loans are normally
guaranteed by the principal(s). Commercial and agricultural operating and term
loans represent approximately 20% of the loan portfolio.
Residential First Mortgage Loans - Proceeds of these loans are used to buy
or refinance the purchase of residential real estate with the loan secured by a
first lien on the real estate. Most of the residential mortgage loans originated
by the Banks (including servicing rights) are sold in the secondary mortgage
market due to the higher interest rate risk inherent in the 15 and 30 year fixed
rate terms consumers prefer. Loans that are originated and not sold in the
secondary market generally have higher interest rates and have rate adjustment
periods of no longer than seven years. The maximum amortization of first
mortgage residential real estate loans is 30 years. The loan-to-value ratios
normally do not exceed 80% without credit enhancements such as mortgage
insurance. Property insurance is required on all loans to protect the Banks'
collateral position. Loans secured by one to four family residential properties
represent approximately 24% of the loan portfolio.
6
Home Equity Term Loans - These loans are normally for the purpose of home
improvement or other consumer purposes and are secured by a junior mortgage on
residential real estate. Loan-to-value ratios normally do not exceed 90% of
market value.
Home Equity Lines of Credit - The Banks offer a home equity line of credit
with a maximum term of 60 months. These loans are secured by a junior mortgage
on the residential real estate and normally do not exceed a loan-to-market value
ratio of 90% with the interest adjusted quarterly.
Consumer Loans - Consumer loans are normally made to consumers under the
following guidelines. Automobiles - loans on new and used automobiles generally
will not exceed 80% and 75% of the value, respectively. Recreational vehicles
and boats - 66% of the value. Mobile home - maximum term on these loans is 180
months with the loan-to-value ratio generally not exceeding 66%. Each of these
loans is secured by a first priority lien on the assets and requires insurance
to protect the Banks' collateral position. Unsecured - The term for unsecured
loans generally does not exceed 12 months. Consumer and other loans represent
approximately 6% of the loan portfolio.
Employees
At December 31, 2004, the Banks had a total of 174 full-time equivalent
employees and the Company had an additional 10 full-time employees. The Company
and Banks provide their employees with a comprehensive program of benefits,
including comprehensive medical and dental plans, long-term and short-term
disability coverage, and a 401(k) profit sharing plan. Management considers its
relations with employees to be satisfactory. Unions represent none of the
employees.
Market Area
The Company operates five commercial banks with locations in Story, Boone
and Marshall Counties in central Iowa.
First National is located in Ames, Iowa with a population of 50,731. The
major employers are Iowa State University, Ames Laboratories, Iowa Department of
Transportation, Mary Greeley Medical Center, National Veterinary Services
Laboratory, Ames Community Schools, City of Ames, Barilla, Sauer-Danfoss and
McFarland Clinic. First National's primary business includes providing retail
banking services and business and consumer lending. First National has a minimum
exposure to agricultural lending.
Boone Bank is located in Boone, Iowa with a population of 12,800. Boone is
the county seat of Boone County. The major employers are Fareway Stores, Inc.,
Patterson Dental Supply Co., Union Pacific Railroad, and Communication Data
Services. Boone Bank provides lending services to the agriculture, commercial
and real estate markets.
State Bank is located in Nevada, Iowa with a population of 6,658. Nevada is
the county seat of Story County. The major employers are Print Graphics, General
Financial Supply, Central Iowa Printing, Burke Corporation and Almaco. State
Bank provides various types of loans with a major agricultural presence. It
provides a wide variety of banking services and products including insurance
services to its customers.
Randall-Story Bank is located in Story City, Iowa with a population of
3,228. The major employers are Pella Corporation, Bethany Manor, American
Packaging, Precision Machine and Record Printing. Located in a major
agricultural area, it has a strong presence in this type of lending. As a full
service commercial bank it provides a full line of products and services.
United Bank is located in Marshalltown, Iowa with a population of 26,123.
The major employers are Swift & Co., Fisher Controls International, Lenox
Industries and Marshalltown Medical & Surgical Center. The newly chartered bank
offers a full line of loan, deposit, and trust services.
Competition
The geographic market area served by the Banks is highly competitive with
respect to both loans and deposits. The Banks compete principally with other
commercial banks, savings and loan associations, credit unions, mortgage
companies, finance divisions of auto and farm equipment companies, agricultural
suppliers and other financial service providers. Some of these competitors are
local, while others are statewide or nationwide. The major commercial bank
competitors include F & M Bank, U.S. Bank National Association and Wells Fargo
Bank, each of which have a branch office or offices within the Banks' primary
trade areas. Among the advantages such larger banks have are their ability to
finance extensive advertising campaigns and to allocate their investment assets
to geographic regions of higher yield and demand. These larger banking
organizations have much higher legal lending limits than the Banks and thus are
better able to finance large regional, national and global commercial customers.
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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, 2004, there were 25 FDIC insured institutions having
approximately 57 offices or branch offices within Boone, Story and Marshall
County, Iowa where the Banks' offices are located. First National, State Bank
and Randall-Story Bank together have the largest percentage of deposits in Story
County and Boone Bank has the highest percentage of deposits in Boone County.
The Banks also compete with the financial markets for funds. Yields on
corporate and government debt securities and commercial paper affect the ability
of commercial banks to attract and hold deposits. Commercial banks also compete
for funds with equity, money market, and insurance products offered by brokerage
and insurance companies. This competitive trend will likely continue in the
future.
The Company anticipates bank competition will continue to change materially
over the next several years as more financial institutions, including the major
regional and national banks, continue to consolidate. Credit unions, because of
their income tax benefits, will continue to show substantial growth.
Supervision and Regulation
The following discussion generally refers to certain statutes and
regulations affecting the banking industry. These references provide brief
summaries and therefore do not purport to be complete and are qualified in their
entirety by reference to those statutes and regulations. In addition, due to the
numerous statutes and regulations that apply to and regulate the operation of
the banking industry, many are not referenced below.
USA Patriot Act. The USA Patriot Act was enacted in 2001 which, together
with regulations issued pursuant to this act, substantially broadened previously
existing anti-money laundering law and regulation, increased compliance, due
diligence and reporting obligations for financial institutions, created new
crimes and penalties and required federal banking agencies, in reviewing merger
and other acquisition transactions, to consider the effectiveness of the parties
in combating money laundering activities. The act requires all financial
institutions to establish certain anti-money laundering compliance and due
diligence programs that are reasonably designed to detect and report instances
of money laundering. The Company believes its compliance policies, procedures
and controls satisfy the material requirements of the Patriot Act and
regulations.
Sarbanes-Oxley Act. The Sarbanes-Oxley Act was enacted in 2002 to, among
other things, increase corporate responsibility and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
federal securities laws. This act generally applies to all companies that are
required to file periodic reports with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. The act implements significant
changes in the responsibilities of officers and directors of public companies
and makes certain changes to the corporate reporting obligation of those
companies and their external auditors. Among the requirements and prohibitions
addressed by the act are certifications required by CEOs and CFOs of periodic
reports filed with the SEC; accelerated reporting of stock transactions by
directors, officers and large shareholders; prohibitions against personal loans
from companies to directors and executive officers (except loans made in the
ordinary course of business); new requirements for public companies' audit
committees; new requirements for auditor independence; the forfeiture of bonuses
or other incentive-based compensation and profits from the sale of an issuer's
securities by directors and executive officers in the 12-month period following
initial publication of any financial statements that later require restatement;
various increased criminal penalties for violations of securities laws; and the
creation of a public company accounting oversight board. Rules adopted by the
SEC to implement various provisions of the act include CEO and CFO
certifications related to fair presentation of financial statements and
financial information in public filings, as well as management's evaluation of
disclosure controls and procedures; disclosure of whether any audit committee
members qualify as a "financial expert"; disclosures related to audit committee
composition and auditor pre-approval policies; disclosure related to adoption of
a written code of ethics; reconciling non-GAAP financial information with GAAP
in public communications; disclosure of off-balance sheet transactions; and
disclosure related to director independence and the director nomination process.
The Company has adopted modifications to its corporate governance procedures to
comply with the provisions of the act and regulations.
8
The Company and the Banks are subject to extensive federal and state
regulation and supervision. Regulation and supervision of financial institutions
is primarily intended to protect depositors and the FDIC rather than
shareholders of the Company. The laws and regulations affecting banks and bank
holding companies have changed significantly over recent years, particularly
with the passage of the Financial Services Modernization Act. There is reason to
expect that similar changes will continue in the future. Any change in
applicable laws, regulations or regulatory policies may have a material effect
on the business, operations and prospects of the Company. The Company is unable
to predict the nature or the extent of the effects on its business and earnings
that any fiscal or monetary policies or new federal or state legislation may
have in the future.
The Company
The Company is a bank holding company by virtue of its ownership of the
Banks, and is registered as such with the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). The Company is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), which
subjects the Company and the Banks to supervision and examination by the Federal
Reserve. Under the BHCA, the Company files with the Federal Reserve annual
reports of its operations and such additional information as the Federal Reserve
may require.
Source of Strength to the Banks. The Federal Reserve takes the position
that a bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the Federal Reserve's
position that in serving as a source of strength to its subsidiary banks, bank
holding companies should use available resources to provide adequate capital
funds to its subsidiary banks during periods of financial stress or adversity.
It should also maintain the financial flexibility and capital raising capacity
to obtain additional resources for providing assistance to its subsidiary banks.
A bank holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve to be an unsafe and unsound banking practice or a violation of the
Federal Reserve's regulations or both.
Federal Reserve Approval. Bank holding companies must obtain the approval
of the Federal Reserve before they: (i) acquire direct or indirect ownership or
control of any voting stock of any bank if, after such acquisition, they would
own or control, directly or indirectly, more than 5% of the voting stock of such
bank; (ii) merge or consolidate with another bank holding company; or (iii)
acquire substantially all of the assets of any additional banks.
Non-Banking Activities. With certain exceptions, the BHCA also prohibits
bank holding companies from acquiring direct or indirect ownership or control of
voting stock in any company other than a bank or a bank holding company unless
the Federal Reserve finds the company's business to be incidental to the
business of banking. When making this determination, the Federal Reserve in part
considers whether allowing a bank holding company to engage in those activities
would offer advantages to the public that would outweigh possible adverse
effects. A bank holding company may engage in permissible non-banking activities
on a de novo basis, if the holding company meets certain criteria and notifies
the Federal Reserve within ten (10) business days after the activity has
commenced.
Under the Financial Services Modernization Act, eligible bank holding
companies may elect (with the approval of the Federal Reserve) to become a
"financial holding company." Financial holding companies are permitted to engage
in certain financial activities through affiliates which had previously been
prohibited activities for bank holding companies. Such financial activities
include securities and insurance underwriting and merchant banking. At this
time, the Company has not elected to become a financial holding company, but may
choose to do so at some time in the future.
Control Transactions. The Change in Bank Control Act of 1978, as amended,
requires a person or group of persons acquiring "control" of a bank holding
company to provide the Federal Reserve with at least 60 days prior written
notice of the proposed acquisition. Following receipt of this notice, the
Federal Reserve has 60 days to issue a notice disapproving the proposed
acquisition, but the Federal Reserve may extend this time period for up to
another 30 days. An acquisition may be completed before the disapproval period
expires if the Federal Reserve issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended, would constitute the acquisition of
control. In addition, any "company" would be required to obtain the approval of
the Federal Reserve under the BHCA before acquiring 25% (or 5% if the "company"
is a bank holding company) or more of the outstanding shares of the Company, or
otherwise obtain control over the Company.
9
Affiliate Transactions. The Company and the Banks are deemed affiliates
within the meaning of the Federal Reserve Act, and transactions between
affiliates are subject to certain restrictions. Generally, the Federal Reserve
Act: (i) limits the extent to which the financial institution or its
subsidiaries may engage in "covered transactions" with an affiliate; and (ii)
requires all transactions with an affiliate, whether or not "covered
transactions," to be on terms substantially the same, or at least as favorable
to the institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar transactions.
State Law on Acquisitions. Iowa law permits bank holding companies to make
acquisitions throughout the state. However, Iowa currently has a deposit
concentration limit of 15% on the amount of deposits in the state that any one
banking organization can control and continue to acquire banks or bank deposits
(by acquisitions), which applies to all depository institutions doing business
in Iowa.
Banking Subsidiaries
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital adequacy requirements,
required reserves against deposits, investments, loans, legal lending limits,
certain interest rates payable, mergers and consolidations, borrowings, issuance
of securities, payment of dividends, establishment of branches and dealings with
affiliated persons.
First National and United Bank are national banks subject to primary
federal regulation and supervision by the Office of the Comptroller of the
Currency (the "OCC"). The FDIC, as an insurer of the deposits, also has some
limited regulatory authority over First National and United Bank. State Bank,
Boone Bank and Randall-Story Bank are state banks subject to regulation and
supervision by the Iowa Division of Banking. The three state Banks are also
subject to regulation and examination by the FDIC, which insures their
respective deposits to the maximum extent permitted by law. The federal laws
that apply to the Banks regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
loans. The laws and regulations governing the Banks generally have been
promulgated to protect depositors and the deposit insurance fund of the FDIC and
not to protect stockholders of such institutions or their holding companies.
The OCC and FDIC each has authority to prohibit banks under their
supervision from engaging in what it considers to be an unsafe and unsound
practice in conducting their business. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") requires federal banking regulators to adopt
regulations or guidelines in a number of areas to ensure bank safety and
soundness, including internal controls, credit underwriting, asset growth,
management compensation, ratios of classified assets to capital and earnings.
FDICIA also contains provisions which are intended to change independent
auditing requirements, restrict the activities of state-chartered insured banks,
amend various consumer banking laws, limit the ability of "undercapitalized
banks" to borrow from the Federal Reserve's discount window, require regulators
to perform periodic on-site bank examinations and set standards for real estate
lending.
Borrowing Limitations. Each of the Banks is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Subject to numerous exceptions based on the type of loans and
collateral, applicable statutes and regulations generally limit loans to one
borrower of 15% of total equity and reserves. Each of the Banks is in compliance
with applicable loans to one borrower requirements.
FDIC Insurance. Generally, customer deposit accounts in banks are insured
by the FDIC for up to a maximum amount of $100,000. The FDIC has adopted a
risk-based insurance assessment system under which depository institutions
contribute funds to the FDIC insurance fund based on their risk classification.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after an administrative hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law.
10
Capital Adequacy Requirements. The Federal Reserve, the FDIC and the OCC
(collectively, the "Agencies") have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. Failure to achieve
and maintain adequate capital levels may give rise to supervisory action through
the issuance of a capital directive to ensure the maintenance of required
capital levels. Each of the Banks is in compliance with applicable capital level
requirements.
The current guidelines require all federally regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying
perpetual preferred stock and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles and
the allowance for loan and lease losses. Tier 2 capital includes the excess of
any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate term
preferred stock, 45% of unrealized gain of equity securities and general reserve
for loan and lease losses up to 1.25% of risk weighted assets. None of the Banks
has received any notice indicating that it will be subject to higher capital
requirements.
Under these guidelines, banks' assets are given risk weights of 0%, 20%,
50% or 100%. Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property and, under certain
circumstances, residential construction loans (both carry a 50% rating). Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds (which have a 50% rating) and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to Tier
1 capital as a percentage of average total assets less intangibles, to be used
as a supplement to the risk based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points. Any institution operating at or
near the 3% level is expected to be a strong banking organization without any
supervisory, financial or operational weaknesses or deficiencies. Any
institutions experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions, well above the
minimum levels.
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, 2005, neither the Company nor
any of the Banks were subject to any regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure. Furthermore,
as of that same date, each of the Banks was categorized as "well capitalized"
under regulatory prompt corrective action provisions.
Restrictions on Dividends. Dividends paid to the Company by the Banks is
the major source of Company cash flow. Various federal and state statutory
provisions limit the amount of dividends banking subsidiaries are permitted to
pay to their holding companies without regulatory approval. Federal Reserve
policy further limits the circumstances under which bank holding companies may
declare dividends. For example, a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition. In addition, the Federal Reserve and the FDIC have issued
policy statements which provide that insured banks and bank holding companies
should generally pay dividends only out of current operating earnings. Federal
and state banking regulators may also restrict the payment of dividends by
order.
11
First National, as a national bank, generally may pay dividends from
undivided profits without restriction, provided that its surplus fund is at
least equal to its common stock capital fund. Boone Bank, Randall-Story Bank and
State Bank are also restricted under Iowa law to paying dividends only out of
their undivided profits. Additionally, the payment of dividends by the Banks is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and the Banks generally are
prohibited from paying any dividends if, following payment thereof, the Bank
would be undercapitalized.
Reserves Against Deposits. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts (primarily
checking accounts) and non-personal time deposits. Generally, reserves of 3%
must be maintained against total transaction accounts of $47,600,000 or less
(subject to an exemption not in excess of the first $7,000,000 of transaction
accounts). A reserve of $1,428,000 plus 10% of amounts in excess of $47,600,000
must be maintained in the event total transaction accounts exceed $47,600,000.
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 noninterest
bearing account at a Federal Reserve Bank, the effect of this reserve
requirement is to reduce the earning assets of the Banks.
Regulatory Developments
In 2000, the Financial Services Modernization Act was enacted which: (i)
repealed historical restrictions on preventing banks from affiliating with
securities firms; (ii) broadens the activities that may be conducted by national
banks and banking subsidiaries of holding companies; and (iii) provides an
enhanced framework for protecting the privacy of consumers' information. In
addition, bank holding companies may be owned, controlled or acquired by any
company engaged in financially related activities, as long as such company meets
regulatory requirements. To the extent that this legislation permits banks to
affiliate with financial services companies, the banking industry may experience
further consolidation.
Regulatory Enforcement Authority
The enforcement powers available to federal and state banking regulators
are substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, enforcement actions must be initiated for violations of
laws and regulations and unsafe or unsound practices. Other actions, or
inactions, may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities. Applicable law also requires
public disclosure of final enforcement actions by the federal banking agencies.
National Monetary Policies
In addition to being affected by general economic conditions, the earnings
and growth of the Banks are affected by the regulatory authorities' policies,
including the Federal Reserve. An important function of the Federal Reserve is
to regulate the money supply, credit conditions and interest rates. Among the
instruments used to implement these objectives are open market operations in
U.S. Government securities, changes in reserve requirements against bank
deposits and the Federal Reserve Discount Rate, which is the rate charged member
banks to borrow from the Federal Reserve Bank. These instruments are used in
varying combinations to influence overall growth and distribution of credit,
bank loans, investments and deposits, and their use may also affect interest
rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve have had a material impact on
the operating results of commercial banks in the past and are expected to have a
similar impact in the future. Also important in terms of effect on banks are
controls on interest rates paid by banks on deposits and types of deposits that
may be offered by banks. The Depository Institutions Deregulation Committee,
created by Congress in 1980, phased out ceilings on the rate of interest that
may be paid on deposits by commercial banks and savings and loan associations,
with the result that the differentials between the maximum rates banks and
savings and loans can pay on deposit accounts have been eliminated. The effect
of deregulation of deposit interest rates has been to increase banks' cost of
funds and to make banks more sensitive to fluctuation in market rates.
12
Availability of Information on Company Website
The Company files periodic reports with the Securities and Exchange
Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K. The Company makes available on or
through its website free of charge all periodic reports filed by the Company
with the SEC, including any amendments to such reports, as soon as reasonably
practicable after such reports have been electronically filed with the SEC. The
address of the Company's website on the Internet is: www.amesnational.com.
The Company will provide a paper copy of these reports free of charge upon
written or telephonic request directed to John P. Nelson, Vice President and
Secretary, 405 Fifth Street, Ames, Iowa 50010 or (515) 232-6251 or by email
request at info@amesnational.com. The information found on the Company's website
is not part of this or any other report the Company files with the SEC.
Executive Officers of Company and Banks
The following table sets forth summary information about the executive
officers of the Company and certain executive officers of the Banks. Unless
otherwise indicated, each executive officer has served in his current position
for the past five years.
Name Age Position with the Company or Bank and Principal
Occupation and Employment During the Past Five
Years
- ------------------------ ------- -----------------------------------------------
Kevin G. Deardorff 50 Vice President & Technology Director of the
Company.
Leo E. Herrick 63 President of United Bank commencing June, 2002.
Previously, employed as Chairman of the Board
and President of F&M Bank-Iowa, Marshalltown,
Iowa.
Daniel L. Krieger 68 Chairman of the Company since 2003 and
President of Company since 1997. Previously
served as President of First National. Also
serves as a Director of the Company, Chairman
of the Board and Trust Officer of First
National and Chairman of the Board of Boone
Bank and United Bank.
Stephen C. McGill 50 President of State Bank since 2003. Previously
served as Senior Vice President of State Bank.
John P. Nelson 38 Vice President, Secretary and Treasurer of
Company. Also serves as Director of
Randall-Story Bank and State Bank.
Thomas H. Pohlman 54 President of First National since 1999.
Previously served as Senior Vice President of
First National.
Jeffrey K. Putzier 43 President of Boone Bank since 1999.
Harold E. Thompson 59 President of Randall Story Bank since 2003.
Previously served as Executive Vice President
of Randall-Story State Bank.
Terrill L. Wycoff 61 Executive Vice President of First National
since 2000. Previously served as served as
Senior Vice President of First National.
13
ITEM 2. PROPERTIES
The Company's office is housed in the main office of First National located
at 405 Fifth Street, Ames, Iowa and occupies approximately 3,357 square feet. A
lease agreement between the Company and First National provides the Company will
make available for use by First National an equal amount of interior space at
the Company's building located at 2330 Lincoln Way in lieu of rental payments.
The main office is owned by First National free of any mortgage and consists of
approximately 45,000 square feet and includes a drive through banking facility.
In addition to its main office, First National conducts its business through two
full-service offices, the University office and the North Grand office, and one
super-market location, the Cub Food office. All offices are located within the
city of Ames. The North Grand office is owned by First National free of any
mortgage. The University office is located in a 16,000 square foot multi-tenant
property owned by the Company. A 24-year lease agreement with the Company has
been modified in 2002 to provide that an equal amount of interior space will be
made available to the Company at First National's main office at 405 Fifth
Street in lieu of rental payments. First National will continue to rent the
drive-up facilities of approximately 1,850 square feet at this location for
$1,200 per month. The Cub Foods office is leased by First National from Super
Valu Stores under a 20 year lease with a five year initial term and three, five
year renewal options. The current annual rental payment is $19,000.
State Bank conducts its business from its main office located at 1025 Sixth
Street, Nevada, Iowa and from two additional full-service offices located in
McCallsburg and Colo, Iowa. All of these properties are owned by State Bank free
of any mortgage.
Boone Bank conducts its business from its main office located at 716 Eighth
Street, Boone, Iowa and from one additional full-service office also located in
Boone, Iowa. All properties are owned by Boone Bank free of any mortgage.
Randall-Story Bank conducts its business from its main office located at
606 Broad Street, Story City, Iowa and from one additional full-service office
located in Randall, Iowa. All of these properties are owned by Randall-Story
Bank free of any mortgage.
United Bank conducts its business from its main office located at 2101
South Center Street, Marshalltown, Iowa. The 5,200 square foot premise was
constructed in 2002. The property is owned by United Bank free of any mortgage.
The 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. 800 square feet of the remaining space is currently leased to two
tenants who occupy the space for business purposes; the remaining 7,058 square
feet of rentable space is currently unoccupied. The Company entered into a real
estate contract on July 14, 2003 to purchase real estate adjacent to 2330
Lincoln Way at 2318 Lincoln Way for a total purchase price of $400,000. The 2318
Lincoln Way property consists of a single story commercial building with 2,400
square feet of leased space that is currently occupied by one tenant for
business purposes. As of February 28, 2005, the contract has not closed;
however, the agreement specifies that the closing of the contract will take
place no later than July 31, 2006.
ITEM 3. LEGAL PROCEEDINGS
The Banks are from time to time parties to various legal actions arising in
the normal course of business. The Company believes that there is no threatened
or pending proceeding against the Company or the Banks, which, if determined
adversely, would have a material adverse effect on the business or financial
condition of the Company or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
On February 28, 2005, the Company had approximately 602 shareholders of
record. The Company's common stock is listed on the NASDAQ SmallCap Market under
the symbol "ATLO". Trading in the Company's common stock is, however, relatively
limited.
14
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:
2004 2003
------------------------ -------------------------------
Market Price Market Price
------------------------- -------------------------------
Quarter High Low Quarter High Low
------------------------- -------------------------------
1st $61.00 $58.25 1st $48.90 $46.05
2nd 63.50 60.00 2nd 55.25 51.50
3rd 71.50 62.25 3rd 57.25 53.10
4th 105.00 70.50 4th 59.75 56.75
The Company declared aggregate annual cash dividends in 2004 and 2003 of
$7,590,000 and $7,142,000, respectively, or $2.42 per share in 2004 and $2.28
per share in 2003. In February 2005, the Company declared an aggregate cash
dividend of $2,353,000 or $.75 per share. Quarterly dividends declared during
the last two years were as follows:
2004 2003
------------------ ------------------
Cash dividends Cash dividends
Quarter declared per share declared per share
-----------------------------------------------------------
1st $0.46 $0.44
2nd 0.98 0.92
3rd 0.49 0.46
4th 0.49 0.46
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.
15
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company for the five years ended
December 31, 2004 through 2000 is derived from the Company's historical audited
financial statements and related footnotes. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and the consolidated financial
statements and related notes contained elsewhere in this Annual Report.
Year Ended December 31
------------------------------------------------------------
(dollars in thousands, except per share amounts)
------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------
STATEMENT OF INCOME DATA
Interest income $ 37,354 $ 35,314 $ 36,270 $ 41,474 $ 44,018
Interest expense 10,564 10,339 11,663 18,883 24,261
-------------------------------------------------------------
Net interest income 26,790 24,975 24,607 22,591 19,757
Provision for loan losses 479 645 688 898 460
-------------------------------------------------------------
Net interest income after provision for
loan losses 26,311 24,330 23,919 21,693 19,297
Noninterest income 5,269 6,435 5,135 5,080 4,130
Noninterest expense 14,935 14,819 13,276 11,587 10,712
-------------------------------------------------------------
Income before provision for income tax 16,645 15,946 15,778 15,186 12,715
Provision for income tax 4,255 4,321 4,438 4,639 3,596
-------------------------------------------------------------
Net Income $ 12,390 $ 11,625 $ 11,340 $ 10,547 $ 9,119
=============================================================
DIVIDENDS AND EARNINGS PER SHARE DATA
Cash dividends declared $ 7,590 $ 7,142 $ 6,820 $ 5,187 $ 4,932
Cash dividends declared per share 2.42 2.28 2.18 1.66 1.58
Basic and diluted earnings per share 3.95 3.71 3.63 3.38 2.92
Weighted average shares outstanding 3,135,235 3,131,224 3,127,285 3,123,885 3,120,375
BALANCE SHEET DATA
Total assets $ 839,753 $ 752,786 $ 677,229 $ 622,280 $ 619,385
Net loans 411,639 355,533 329,593 323,043 344,015
Deposits 658,176 619,549 550,622 511,509 493,429
Stockholders' equity 110,924 107,325 101,523 93,622 86,177
Equity to assets ratio 13.21% 14.26% 14.99% 15.04% 13.91%
FIVE YEAR FINANCIAL PERFORMANCE
Net income $ 12,390 $ 11,625 $ 11,340 $ 10,547 $ 9,119
Average assets 793,076 726,945 635,816 616,971 626,560
Average stockholders' equity 108,004 104,141 98,282 91,373 80,081
Return on assets (net income divided by average assets) 1.56% 1.60% 1.78% 1.71% 1.46%
Return on equity (net income divided by average equity) 11.47% 11.16% 11.54% 11.54% 11.39%
Efficiency ratio (noninterest expense divided by
noninterest income plus net interest income) 46.59% 47.18% 44.64% 41.87% 44.84%
Dividend payout ratio (dividends per share
divided by net income per share) 61.27% 61.46% 60.05% 49.11% 54.11%
Dividend yield (dividends per share divided by
closing year-end market price) 3.01% 3.91% 4.69% 4.15% 2.87%
Equity to assets ratio (average equity divided
by average assets) 13.62% 14.33% 15.46% 14.81% 12.78%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Ames National Corporation (Company) is a bank holding company established
in 1975 that owns and operates five bank subsidiaries (Banks) in central Iowa.
The following discussion is provided for the consolidated operations of the
Company and its Banks, First National, State Bank, Boone Bank, Randall-Story
Bank and United Bank. The purpose of this discussion is to focus on significant
factors affecting the Company's financial condition and results of operations.
16
The Company does not engage in any material business activities apart from
its ownership of the Banks. Products and services offered by the Banks are for
commercial and consumer purposes, including loans, deposits and trust services.
The Banks also offer investment services through a third-party broker dealer.
The Company employs ten individuals to assist with financial reporting, human
resources, audit, compliance, technology systems and the coordination of
management activities, in addition to 174 full-time equivalent individuals
employed by the Banks.
The Company's primary competitive strategy is to utilize seasoned and
competent Bank management and local decision making authority to provide
customers with prompt response times and flexibility in the products and
services offered. This strategy is viewed as providing an opportunity to
increase revenues through creating a competitive advantage over other financial
institutions. The Company also strives to remain operationally efficient to
provide better profitability while enabling the Company to offer more
competitive loan and deposit rates.
The principal sources of Company revenues and cashflow are: (i) interest
and fees earned on loans made by the Banks; (ii) service charges on deposit
accounts maintained at the Banks; (iii) interest on fixed income investments
held by the Banks; (iv) fees on trust services provided by those Banks
exercising trust powers; and (v) securities gains and dividends on equity
investments held by the Company and the Banks. The Company's principal expenses
are: (i) interest expense on deposit accounts and other borrowings; (ii)
salaries and employee benefits; (iii) data processing costs associated with
maintaining the Banks' loan and deposit functions; and (iv) occupancy expenses
for maintaining the Banks' facilities. The largest component contributing to the
Company's net income is net interest income, which is the difference between
interest earned on earning assets (primarily loans and investments) and interest
paid on interest bearing liabilities (primarily deposit accounts and other
borrowings). One of management's principal functions is to manage the spread
between interest earned on earning assets and interest paid on interest bearing
liabilities in an effort to maximize net interest income while maintaining an
appropriate level of interest rate risk.
The Company reported record net income of $12,390,000 for the year ended
December 31, 2004 compared to $11,625,000 and $11,340,000 reported for the years
ended December 31, 2003 and 2002, respectively. This represents an increase of
6.6% when comparing 2004 and 2003, and an increase of 2.5% when comparing 2003
and 2002. The improvement in net income for 2004 can be attributed primarily to
higher net interest income resulting from a higher volume of loans and
investments partially offset by lower secondary market income and security
gains. The gain in net income in 2003 over 2002 related primarily to higher net
interest income, secondary market income and security gains. Earnings per share
for 2004 were a record $3.95 compared to $3.71 in 2003 and $3.63 in 2002. Each
of the Banks had profitable operations during 2004.
The Company's return on average equity for 2004 was 11.47% versus 11.16%
and 11.54% in 2003 and 2002, respectively. Higher net income and lower capital
levels relating to the average net unrealized gain on securities available for
sale contributed to the improved return on average equity in 2004. The Company's
return on average assets for 2004 was 1.56% compared to 1.60% in 2003 and 1.78%
in 2002. The decline in the return on average assets in 2004 can be attributed
to growth in assets at slightly lower profitability margins.
The following discussion will provide a summary review of important items
relating to:
o Challenges
o Key Performance Indicators and Industry Results
o Income Statement Review
o Balance Sheet Review
o Asset Quality and Credit Risk Management
o Liquidity and Capital Resources
o Interest Rate Risk
17
Challenges
Management has identified certain challenges that may negatively impact
Company's revenues in the future and is attempting to position the Company to
best respond to those challenges.
o Rising interest rates may present a challenge to the Company in 2005.
Continued increases in interest rates may negatively impact the Company's
net interest margin if interest expense increases more quickly than
interest income. The Company's earning assets (primarily its loan and
investment portfolio) have longer maturities than its interest bearing
liabilities (primarily deposits and other borrowings); therefore, in a
rising interest rate environment, interest expense will increase more
quickly than interest income as the interest bearing liabilities reprice
more quickly than earning assets. In response to this challenge, the
Banks model quarterly the changes in income that would result from
various changes in interest rates. Management believes Bank earning
assets have the appropriate maturity and repricing characteristics to
optimize earnings and the Banks interest rate risk positions.
o The Company's market in central Iowa has numerous banks, credit unions,
investment and insurance companies competing for similar business
opportunities. This competitive environment will continue to put downward
pressure on the Banks' net interest margins and thus affect
profitability. Strategic planning efforts at the Company and Banks
continue to focus on capitalizing on the Banks' strengths in local
markets while working to identify opportunities for improvement to gain
competitive advantages.
o A substandard performance in the Company's equity portfolio could lead to
a reduction in the historical level of realized security gains, thereby
negatively impacting the Company's earnings. The Company invests capital
that may be utilized for future expansion in a portfolio of primarily
financial and utility stocks with an estimated fair market value of
approximately $25 million as of December 31, 2004. The Company focuses on
stocks that have historically paid dividends in an effort to lessen the
negative effects of a bear market.
Key Performance Indicators and Industry Results
Certain key performance indicators for the Company and the industry are
presented in the following chart. The industry figures are compiled by the
Federal Deposit Insurance Corporation (FDIC) and are derived from 8,975
commercial banks and savings institutions insured by the FDIC. Management
reviews these indicators on a quarterly basis for purposes of comparing the
Company's performance from quarter to quarter against the industry as a whole.
Selected Indicators for the Company and the Industry
Year Ended December 31,
----------------------------------------------------------
2004 2003 2002
----------------------------------------------------------
Company Industry Company Industry Company Industry
Return on assets 1.56% 1.29% 1.60% 1.38% 1.78% 1.30%
Return on equity 11.47% 13.28% 11.16% 15.04% 11.54% 14.14%
Net interest margin 3.97% 3.53% 4.02% 3.73% 4.51% 3.96%
Efficiency ratio 46.59% 58.03% 47.18% 56.59% 44.64% 56.00%
Capital ratio 13.62% 8.12% 14.33% 7.88% 15.46% 7.87%
Key performances indicators include:
o Return on Assets
This ratio is calculated by dividing net income by average assets. It is
used to measure how effectively the assets of the Company are being
utilized in generating income. Although the Company's return on assets
ratio compares favorably to that of the industry, this ratio declined
slightly in 2004 as compared to 2003 as assets grew more quickly in
relation to net income.
18
o Return on Equity
This ratio is calculated by dividing net income by average equity. It is
used to measure the net income or return the Company generated for the
shareholders' equity investment in the Company. The Company's return on
equity ratio is below that of the industry primarily as a result of the
higher level of capital the Company maintains for future growth and
acquisitions. The Company's return on equity improved in 2004 as a result
of net income growing more quickly in relation to average equity.
o Net Interest Margin
The ratio is calculated by dividing net interest income by average earning
assets. Earning assets consist primarily of loans and investments that earn
interest. This ratio is used to measure how well the Company is able
maintain interest rates on earning assets above those of interest-bearing
liabilities, which is the interest expense paid on deposit accounts and
other borrowings. The Company's net interest margin compares favorably to
the industry; however, management expects the competitive nature of the
Company's market environment to put downward pressure on the Company's
margin.
o Efficiency Ratio
This ratio is calculated by dividing noninterest expense by net interest
income and noninterest income. The ratio is a measure of the Company's
ability to manage noninterest expenses. The Company's efficiency ratio
compares favorably to the industry average.
o Capital Ratio
The capital ratio is calculated by dividing average total equity capital by
average total assets. It measures the level of average assets that are
funded by shareholders' equity. Given an equal level of risk in the
financial condition of two companies, the higher the capital ratio,
generally the more financially sound the company. The Company's capital
ratio is significantly higher than the industry average.
Industry Results
The FDIC Quarterly Banking Profile reported the following results for the
fourth quarter of 2004:
Strong loan growth and wider netinterest margins did not offset the negative
effects of merger expenses at large banks and lower gains on sales of securities
and other assets in the fourth quarter. Insured commercial banks and savings
institutions reported $31.8 billion in net income for the quarter, a decline of
$668 million (2.1%) from the record earnings registered in the third quarter.
Nevertheless, the industry's earnings were the third-highest ever reported, and
represented a $787-million (2.5%) improvement over the fourth quarter of 2003.
Also, the industry's net operating (core) income, which does not include gains
on securities sales, set a new quarterly record of $30.9 billion. The average
return on assets (ROA) was 1.28% in the fourth quarter, marking the first time
in two years that the industry's quarterly ROA has been below 1.30%. Fewer than
half of all insured banks and thrifts (48.4%) had an ROA of 1% or higher in the
fourth quarter, but this was an improvement over the fourth quarter of 2003,
when only 44.8% achieved this benchmark level of profitability. Almost two out
of every three institutions (62.1%) had higher net income than in the fourth
quarter of 2003.
Income Statement Review
The following highlights a comparative discussion of the major components of net
income and their impact for the last three years.
Critical Accounting Policy
The discussion contained in this Item 7 and other disclosures included
within this report are based on the Company's audited consolidated financial
statements. These statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained in these statements is, for the most part, based on the
financial effects of transactions and events that have already occurred.
However, the preparation of these statements requires management to make certain
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses.
19
The Company's significant accounting policies are described in the "Notes
to Consolidated Financial Statements" accompanying the Company's audited
financial statements. Based on its consideration of accounting policies that
involve the most complex and subjective estimates and judgments, management has
identified the allowance for loan losses to be the Company's most critical
accounting policy.
The allowance for loan losses is established through a provision for loan
losses that is treated as an expense and charged against earnings. Loans are
charged against the allowance for loan losses when management believes that
collectibility of the principal is unlikely. The Company has policies and
procedures for evaluating the overall credit quality of its loan portfolio,
including timely identification of potential problem loans. On a quarterly
basis, management reviews the appropriate level for the allowance for loan
losses, incorporating a variety of risk considerations, both quantitative and
qualitative. Quantitative factors include the Company's historical loss
experience, delinquency and charge-off trends, collateral values, known
information about individual loans and other factors. Qualitative factors
include the general economic environment in the Company's market area and the
expected trend of the economic conditions. To the extent actual results differ
from forecasts and management's judgment, the allowance for loan losses may be
greater or lesser than future charge-offs.
Average Balances and Interest Rates
The following two tables are used to calculate the Company's net interest
margin. The first table includes the Company's average assets and the related
income to determine the average yield on earning assets. The second table
includes the average liabilities and related expense to determine the average
rate paid on interest bearing liabilities. The net interest margin is equal to
the interest income less the interest expense divided by average earning assets.
ASSETS
2004 2003 2002
----------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
balance expense rate balance expense rate balance expense rate
(dollars in thousands) ----------------------------------------------------------------------------------------
Interest-earning assets
Loans
Commercial $ 48,775 $ 2,548 5.22% $ 38,288 $ 2,163 5.65% $ 42,948 $ 3,042 7.08%
Agricultural 28,406 1,839 6.47% 25,962 1,783 6.87% 25,274 1,895 7.50%
Real estate 285,087 17,169 6.02% 264,494 16,909 6.39% 229,805 16,929 7.37%
Consumer and other 23,079 1,317 5.71% 21,068 1,342 6.37% 19,494 1,341 6.88%
--------------------------------------------------------------------------------------
Total loans (including fees) $385,347 $22,873 5.94% $349,812 $22,197 6.35% $317,521 $23,207 7.31%
Investment securities
Taxable $213,043 $ 8,911 4.18% $162,273 $ 7,925 4.88% $142,089 $ 8,414 5.92%
Tax-exempt 127,048 8,125 6.40% 101,482 6,820 6.72% 78,171 5,797 7.42%
--------------------------------------------------------------------------------------
Total investment securities $340,091 $17,036 5.01% $263,755 $14,745 5.59% $220,260 $14,211 6.45%
Interest bearing deposits with
banks $8,713 $ 130 1.49% $ 4,511 $ 62 1.37% $ 534 $ 14 2.62%
Federal funds sold 11,630 159 1.37% 60,293 628 1.04% 51,206 810 1.58%
--------------------------------------------------------------------------------------
Total Interest-earning assets $745,781 $40,198 5.39% $678,371 $37,632 5.55% $589,521 $38,242 6.49%
Noninterest-earning assets
Cash and due from banks $ 27,581 $ 27,733 $ 28,206
Premises and equipment, net 8,517 8,599 7,912
Other, less allowance for loan
losses 11,197 12,242 10,177
--------------------------------------------------------------------------------------
Total noninterest-earning assets $47,295 $ 48,574 $ 46,295
--------------------------------------------------------------------------------------
TOTAL ASSETS $793,076 $726,945 $635,816
======================================================================================
<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 tax rate of 35% in 2004 and 34% for prior years.
</FN>
20
Average Balances and Interest Rates(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003 2002
-------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
balance expense rate balance expense rate balance expense rate
(dollars in thousands) ------- ------- ----- ------- ------- ----- ------- ------- -----
Interest-bearing liabilities
Deposits
Savings, NOW accounts,
and money markets $329,410 $ 3,210 0.97% $298,885 $ 2,758 0.92% $260,426 $ 3,393 1.30%
Time deposits < $100,000 173,581 4,974 2.87% 170,534 5,480 3.21% 152,703 6,107 4.00%
Time deposits > $100,000 70,076 1,759 2.51% 65,759 1,807 2.75% 51,428 1,898 3.69%
-------------------------------------------------------------------------------------
Total deposits $573,067 $ 9,943 1.74% $535,178 $10,045 1.88% $464,557 $11,398 2.45%
Other borrowed funds 38,211 620 1.62% 19,588 293 1.50% 13,887 265 1.91%
-------------------------------------------------------------------------------------
Total Interest-bearing
liabilities $611,278 $10,563 1.73% $554,766 $10,338 1.86% $478,444 $11,663 2.44%
-------------------------------------------------------------------------------------
Noninterest-bearing liabilities
Demand deposits $ 65,785 $ 59,614 $ 53,318
Other liabilities 8,009 8,424 5,772
-------------------------------------------------------------------------------------
Stockholders' equity $108,004 $104,141 $ 98,282
-------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $793,076 $726,945 $635,816
=====================================================================================
Net interest income $29,635 3.97% $27,294 4.02% $26,579 4.51%
=====================================================================================
Spread Analysis
Interest income/average assets $40,198 5.07% $37,632 5.18% $38,242 6.01%
Interest expense/average assets 10,563 1.33% 10,334 1.42% 11,663 1.83%
Net interest income/average
assets 29,635 3.74% 27,294 3.76% 26,579 4.18%
Rate and Volume Analysis
The rate and volume analysis is used to determine how much of the change in
interest income or expense is the result of a change in volume or a change in
interest rate. For example, real estate interest income increased $260,000 in
2004 compared to 2003. An increased volume of real estate loans added $1,272,000
in income in 2004; however, lower interest rates reduced interest income in 2004
by $1,012,000, a net difference of $260,000.
21
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) 2004 Compared to 2003 2003 Compared to 2002
-------------------------------------------------------------
Volume Rate Total Volume Rate Total
Interest Income
Loans
Commercial $ 559 $ (174) $ 385 $ (307) $ (572) $ (879)
Agricultural 163 (107) 56 50 (162) (112)
Real estate 1,272 (1,012) 260 2,384 (2,404) (20)
Consumer and other 121 (146) (25) 104 (103) 1
-------------------------------------------------------------
Total loans (including fees) $2,115 $(1,439) $ 676 $2,231 $(3,241) $(1,010)
Investment securities
Taxable $2,234 $(1,248) $ 986 $1,103 $(1,592) $ (489)
Tax-exempt 1,644 (339) 1,305 1,608 (585) 1,023
-------------------------------------------------------------
Total investment
securities $3,878 $(1,587) $2,291 $2,711 $(2,177) $ 534
62 6 68 58 (10) 48
Interest bearing deposits with banks (622) 153 $ (469) 127 (309) (182)
Federal funds sold -------------------------------------------------------------
$5,433 $(2,867) $2,566 $5,127 $(5,737) $ (610)
Total Interest-earning assets
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and money markets $ 285 $ 167 $ 452 $ 452 $(1,086) $ (634)
Time deposits < $100,000 96 (602) (506) 663 (1,290) (627)
Time deposits > $100,000 119 (167) (48) 457 (548) (91)
-------------------------------------------------------------
Total deposits $ 500 $ (602) $ (102) $1,572 $(2,924) $(1,352)
Other borrowed funds 281 46 327 93 (68) 25
-------------------------------------------------------------
Total Interest-bearing liabilities $ 781 $ (556) $ 225 $1,665 $(2,992) $(1,327)
-------------------------------------------------------------
Net interest income/earning assets $4,652 $(2,311) $2,341 $3,462 $(2,745) $ 717
<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>
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 accounts and other borrowings). The
volume of and yields earned on earning assets and the volume of and the rates
paid on interest bearing liabilities determine net interest income. Refer to the
tables preceding this paragraph for additional detail. Interest earned and
interest paid is also affected by general economic conditions, particularly
changes in market interest rates, and by government policies and the action of
regulatory authorities. Net interest income divided by average earning assets is
referred to as net interest margin. For the years December 31, 2004, 2003 and
2002, the Company's net interest margin was 3.97%, 4.02% and 4.51%,
respectively. Yields on earning assets declined slightly faster than those of
interest bearing liabilities and led to a slight decline in the Company's net
interest margin in 2004. Assets repricing to lower market rates resulted in the
decline in net interest margin in 2003 from 2002.
The high level of competition in the local markets will continue to put
downward pressure on the net interest margin of the Company into the foreseeable
future. Currently, the Company's largest market, Ames, Iowa, has seven banks,
three thrifts, four credit unions and several other financial investment
companies. Multiple banks are also located in the Company's other communities
creating similarly competitive environments.
22
Net interest income during 2004, 2003 and 2002 totaled $26,790,000,
$24,975,000 and $24,607,000, respectively, representing a 7.27% increase in 2004
from 2003 and a 1.50% increase in 2003 compared to 2002. A higher volume of
earning assets was primary reason for the increase in net interest income in
2004. The higher net interest income in 2003 resulted from lower interest
expense as the Company was able to lower rates paid on deposits and other
borrowings more quickly than rates declined on loans and investments.
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 a $479,000 provision for loan losses during 2004 compared to
$645,000 in 2003 and $688,000 in 2002. Net charge-offs declined significantly in
2004 and was the primary reason for the lower level of provision expense in
2004. In 2003 and 2002, net charge-offs approximated 55% of the total loan
provisions while loan growth was the primary contributor for the remaining
provisions. Refer to the Asset Quality and Credit Risk Management discussion for
additional detail with regard to loan loss provision expense.
Management believes the allowance for loan losses to be adequate to absorb
probable losses in the current portfolio. This statement is based upon
management's continuing evaluation of inherent risks in the current loan
portfolio, current levels of classified assets and general economic factors. The
Company will continue to monitor the allowance and make future adjustments to
the allowance as conditions dictate.
Noninterest Income and Expense
Total noninterest income is comprised primarily of fee-based revenues from
trust and agency services, bank related service charges on deposit activities,
net securities gains generated primarily by the Company's equity holdings,
merchant and ATM fees related to electronic processing of merchant and cash
transactions and secondary market income.
Noninterest income during 2004, 2003 and 2002 totaled $5,269,000,
$6,435,000 and $5,135,000, respectively, representing an 18.12% decrease in 2004
from 2003 and a 25.33% increase in 2003 compared 2002. The decrease in 2004 is
the result of lower secondary market income and net securities gains that
increased over 56% in 2003 from 2002. In 2003, low interest rates fueled a
record year in mortgage refinancing resulting in record secondary market income.
The Company also realized a higher level of securities gains in 2003 through
liquidating equity holdings that no longer fit the Company's long term
investment strategy.
Noninterest expense for the Company consists of all operating expenses
other than interest expense on deposits and other borrowed funds. Historically,
the Company has not had any material expenses relating to discontinued
operations, extraordinary losses or adjustments from a change in accounting
principles. Salaries and employee benefits are the largest component of the
Company's operating expenses and comprise 60.39% of noninterest expenses in
2004.
Noninterest expense during 2004, 2003 and 2002 totaled $14,935,000,
$14,820,000 and $13,276,000, respectively, representing a 0.78% increase in 2004
versus 2003 and an 11.62% increase in 2003 compared to 2002. The retirement of
several higher paid senior officers allowed for stable non-interest expense for
the year ended December 31, 2004 compared to the same period in 2003. An
increase in salaries and employee benefits was the largest contributor to the
increase in operating expenses in 2003 and related primarily to additional
staffing at United Bank as a result of its significant growth. The percentage of
noninterest expense to average assets was 1.88% in 2004, compared to 2.04% and
2.09% during 2003 and 2002, respectively.
Provision for Income Taxes
The provision for income taxes for 2004, 2003 and 2002 was $4,255,000,
$4,321,000 and $4,438,000, respectively. This amount represents an effective tax
rate of 25.57% during 2004, compared to 27.10% and 28.13% for 2003 and 2002,
respectively. The Company's marginal federal tax rate is currently 35%. The
difference between the Company's effective and marginal tax rate is primarily
related to investments made in tax exempt securities. The average balance of tax
exempt securities increased $25,566,000 in 2004 compared to 2003.
23
Balance Sheet Review
The Company's assets are comprised primarily of loans and investment
securities. Average earning asset maturity or repricing dates are less than five
years for the combined portfolios as the assets are funded for the most part by
short term deposits with either immediate availability or less than one year
average maturities. This exposes the Company to risk with regard to changes in
interest rates that are more fully explained in Item 7A of this report
Quantitative and Qualitative Disclosures about Market Risk".
Total assets increased to $839,753,000 in 2004 compared to $752,786,000 in
2003, an 11.55% increase. First National, State Bank and United Bank posted
double digit growth in assets versus one year ago.
Loan Portfolio
Net loans for the year ended December 31, 2004, increased to $411,639,000
from $355,533,000 as of December 31, 2003, an increase of 15.78%. The increase
in loan volume can be primarily attributed to growth in the commercial,
commercial real estate and residential loan portfolios. Loans are the primary
contributor to the Company's revenues and cash flows. The average yield on loans
was 93 and 76 basis points higher in 2004 and 2003, respectively, than the
average tax-equivalent investment portfolio yields for the same periods in the
previous year.
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, 2004 .
------------------------------------------------
2004 2003 2002 2001 2000
(dollars in thousands) ------------------------------------------------
Real Estate
Construction $ 21,042 $ 13,126 $ 13,518 $ 12,677 $ 12,221
1-4 family residential 97,612 84,645 81,239 84,379 97,663
Commercial 160,176 150,723 136,351 117,211 112,415
Agricultural 27,443 24,297 21,693 21,029 21,095
Commercial 57,189 38,555 40,097 45,631 53,955
Agricultural 30,713 27,815 26,022 27,367 28,199
Consumer and other 24,584 23,242 19,921 20,920 24,576
------------------------------------------------
Total loans 418,759 362,403 338,841 329,214 350,124
Deferred loan fees, net 644 819 777 725 736
------------------------------------------------
Total loans net of deferred
fees $418,115 $361,584 $338,064 $328,489 $349,388
The Company's loan portfolio consists of real estate loans, commercial
loans, agricultural loans and consumer loans. As of December 31, 2004, gross
loans totaled approximately $419 million, which equals approximately 64% of
total deposits and 50% of total assets. The Company's peer group (consisting of
353 bank holding companies with total assets of $500 to $1,000 million) loan to
deposit ratio as of September 30, 2004 was a much higher 86%. The primary factor
relating to the lower loan to deposit ratio for the Company compared to peer
group averages is a more conservative underwriting philosophy. As of December
31, 2004, the majority of the loans were originated directly by the Banks to
borrowers within the Banks' principal market areas. There are no foreign loans
outstanding during the years presented.
Real estate loans include various types of loans for which the Banks hold
real property as collateral and consist of loans primarily on commercial
properties and single family residences. Real estate loans typically have fixed
rates for up to five years, with the Company's loan policy permitting a maximum
fixed rate maturity of up to 15 years. The majority of construction loan volume
is to contractors to construct commercial buildings and these loans generally
have maturities of up to 12 months. The Banks originate residential real estate
loans for sale to the secondary market for a fee.
Commercial loans consist primarily of loans to businesses for various
purposes, including revolving lines to finance current operations, floor-plans,
inventory and accounts receivable; capital expenditure loans to finance
equipment and other fixed assets; and letters of credit. These loans generally
have short maturities, have either adjustable or fixed rates and are unsecured
or secured by inventory, accounts receivable, equipment and/or real estate.
Agricultural loans play an important part in the Banks' loan portfolios.
Iowa is a major agricultural state and is a national leader in both grain and
livestock production. The Banks play a significant role in their communities in
financing operating, livestock and real estate activities for area producers.
24
Consumer loans include loans extended to individuals for household, family
and other personal expenditures not secured by real estate. The majority of the
Banks' consumer lending is for vehicles, consolidation of personal debts,
household appliances and improvements.
The interest rates charged on loans vary with the degree of risk and the
amount and maturity of the loan. Competitive pressures, market interest rates,
the availability of funds and government regulation further influence the rate
charged on a loan. The Banks follow a loan policy, which has been approved by
both the board of directors of the Company and the Banks, and is overseen by
both Company and Bank management. These policies establish lending limits,
review and grading criteria and other guidelines such as loan administration and
allowance for loan losses. Loans are approved by the Banks' board of directors
and/or designated officers in accordance with respective guidelines and
underwriting policies of the Company. Credit limits generally vary according to
the type of loan and the individual loan officer's experience. Loans to any one
borrower are limited by applicable state and federal banking laws.
Maturities and Sensitivities of Loans to Changes in Interest Rates as of
December 31, 2004
The contractual maturities of the Company's loan portfolio are as shown
below. Actual maturities may differ from contractual maturities because
individual borrowers may have the right to prepay loans with or without
prepayment penalties.
After one
year but
Within within After
one year five years five years Total
(dollars in thousands) ---------------------------------------------
Real Estate
Construction $10,154 $ 2,400 $ 8,488 $ 21,042
1-4 family residential 3,968 41,797 51,847 97,612
Commercial 14,670 113,706 31,800 160,176
Agricultural 1,262 7,639 18,542 27,443
Commercial 38,122 14,823 4,244 57,189
Agricultural 19,141 8,473 3,099 30,713
Consumer and other 2,563 15,328 6,693 24,584
--------------------------------------------
Total loans $89,880 $204,166 $124,713 $418,759
After one
year but
within After
five years five years
----------------------
Loan maturities after one year with:
Fixed rates $174,184 $ 42,045
Variable rates 29,982 82,668
--------------------
$204,166 $124,713
Loans Held For Sale
Mortgage origination funding awaiting delivery to the secondary market
totaled $234,000 and $859,000 as of December 31, 2004 and 2003, respectively.
Residential mortgage loans are originated by the Banks and sold to several
secondary mortgage market outlets based upon customer product preferences and
pricing considerations. The mortgages are sold in the secondary market to
eliminate interest rate risk and to generate secondary market fee income. It is
not anticipated at the present time that loans held for sale will become a
significant portion of total assets.
Investment Portfolio
Total investments as of December 31, 2004 were $363,460,000, an increase of
$40,344,000 or 12% from the prior year end. As of December 31, 2004 and 2003,
the investment portfolio comprised 43% of total assets.
25
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, 2004, 2003 and 2002, respectively. This
portfolio provides the Company with a significant amount of liquidity since all
of the investments are considered available for sale as of December 31, 2004,
2003 and 2002.
-------------------------------------
2004 2003 2002
(dollars in thousands) -------------------------------------
U.S. treasury securities $ 531 $ 2,229 $ 4,208
U.S. government agencies 137,634 118,637 85,780
States and political subdivisions 113,818 105,963 70,516
Corporate bonds 77,573 63,586 56,357
Equity securities 33,904 32,701 27,714
-------------------------------------
Total $363,460 $323,116 $244,575
Investments in states and political subdivisions represent purchases of
municipal bonds located primarily in the state of Iowa and contiguous states.
Investment in other securities includes corporate debt obligations of
companies located and doing business throughout the United States. The debt
obligations were all within the credit ratings acceptable under the Banks'
investment policies. As of December 31, 2004, the Company did not have
securities from a single issuer, except for the United States Government or its
agencies, which exceeded 10% of consolidated stockholders' equity. The equity
securities portfolio consists primarily of financial and utility stocks as of
December 31, 2004, 2003, and 2002.
Investment Maturities as of December 31, 2004
The investments in the following table are reported by contractual
maturity. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
After one After five
year but years but
Within within within After
one year five years ten years ten years Total
(dollars in thousands) ------------------------------------------------------------
U.S. treasury
$ - $ - $ 531 $ - $ 531
U.S. government agencies 9,691 102,607 18,546 6,790 137,634
States and political subdivisions 5,867 33,271 46,760 27,920 113,818
Corporate bonds 4,891 58,871 13,811 - 77,573
------------------------------------------------------------
Total $20,449 $194,749 $79,648 $34,710 $329,556
Weighted average yield
U.S. treasury
- - 5.19% - 5.19%
U.S. government agencies 4.60% 3.30% 4.49% 4.46% 3.63%
States and political subdivisions* 5.27% 5.36% 6.68% 6.15% 6.09%
Corporate bonds
4.55% 4.53% 5.31% - 4.67%
------------------------------------------------------------
Total 4.78% 4.03% 5.93% 5.81% 4.73%
<FN>
* Yields on tax-exempt obligations of states and political subdivisions have
been computed on a tax-equivalent basis.
</FN>
Deposits
Types of Deposits
Total deposits equaled $658,176,000 and $619,549,000 as of December 31,
2004 and 2003, respectively. The increase of $38,627,000 can be attributed to
deposit growth at four of the five Banks, with United Bank and First National
posting the largest increases of $16,656,000 and $14,861,000, respectively.
Average deposits for the year ended December 31, 2004 were $37,889,000 higher
than the same period in 2003. The deposit category seeing the largest balance
increases were NOW accounts.
26
The Company's primary source of funds is customer deposits. The Company
attempts to attract noninterest-bearing deposits, which are a low-cost funding
source. In addition, the Banks offer a variety of interest-bearing accounts
designed to attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank management
based on competitive market factors and the Company's need for funds. While
nearly 57% of the Banks' certificates of deposit mature in the next year, it is
anticipated that a majority of these certificates will be renewed. Rate
sensitive certificates of deposits in excess of $100,000 are subject to somewhat
higher volatility with regard to renewal volume as the Banks adjust rates based
upon funding needs. In the event a substantial volume of certificates are not
renewed, the Company has sufficient liquid assets and borrowing lines to fund
significant runoff. A sustained reduction in deposit volume would have a
significant negative impact on the Company's operation and liquidity. The
Company traditionally has not relied upon brokered deposits and does not
anticipate utilizing such funds at the present time.
Average Deposits by Type
The following table sets forth the average balances for each major category
of deposit and the weighted average interest rate paid for deposits during the
years ended December 31, 2004, 2003 and 2002.
----------------------------------------------------
2004 2003 2002
----------------------------------------------------
Amount Rate Amount Rate Amount Rate
(dollars in thousands) ----------------------------------------------------
Noninterest bearing demand deposits $ 65,785 $ 59,614 - $ 53,318 -
Interest bearing demand deposits 154,332 0.80% 130,138 0.70% 115,494 1.00%
Money market deposits 146,479 1.25% 143,478 1.20% 120,446 1.71%
Savings deposits 28,599 0.47% 25,269 0.50% 24,486 0.71%
Time certificates < $100,000 173,581 2.87% 170,534 3.21% 152,703 4.00%
Time certificates > $100,000 70,076 2.51% 65,759 2.75% 51,428 3.69%
----------------------------------------------------
$638,852 $594,792 $517,875
Deposit Maturity
The following table shows the amounts and remaining maturities of time
certificates of deposit that had balances of $100,000 and over as of December
31, 2004, 2003 and 2002.
2004 2003 2002
(dollars in thousands) --------------------------------
3 months or less $20,613 $23,801 $15,162
Over 3 through 12 months 29,217 29,896 25,939
Over 12 through 36 months 17,131 11,374 9,281
Over 36 months 2,103 4,416 4,182
--------------------------------
Total $69,064 $69,487 $54,564
Borrowed Funds
Borrowed funds that may be utilized by the Company are comprised of Federal
Home Loan Bank (FHLB) advances, federal funds purchased and repurchase
agreements. Borrowed funds are an alternative funding source to deposits and can
be used to fund the Company's assets and unforeseen liquidity needs. FHLB
advances are loans from the FHLB that can mature daily or have longer maturities
for fixed or floating rates of interest. Federal funds purchased are borrowings
from other banks that mature daily. Securities sold under agreement to
repurchase (repurchase agreements) are similar to deposits as they are funds
lent by various Bank customers; however, the bank pledges investment securities
to secure such borrowings. The Company's repurchase agreements normally reprice
daily. The Company does not have any FHLB advances or federal funds purchased
outstanding as of December 31, 2004.
27
The following table summarizes the outstanding amount of, and the average
rate on, borrowed funds as of December 31, 2004, 2003 and 2002.
2004 2003 2002
-------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
(dollars in thousands) -------------------------------------------------------------------
FHLB advances $ - - $ - - $ - -
Federal funds purchased and
repurchase agreements 64,072 1.99% 18,199 1.39% 18,326 1.50%
-------------------------------------------------------------------
Total $64,072 1.99% $18,199 1.39% $18,326 1.50%
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, 2004, 2003 and 2002.
2004 2003 2002
------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
dollars in thousands) ------------------------------------------------------------------------
FHLB advances $ - - $ - - $ 47 4.26%
Federal funds purchased
& repurchase agreements 38,211 1.62% 19,588 1.48% 13,840 1.91%
-----------------------------------------------------------------------
Total $ 38,211 1.62% $19,588 1.48% $13,887 1.91%
Maximum Amount Outstanding
during the year:
FHLB advances $ - $ - $ 1,000
Federal funds purchased
and repurchase agreements 65,391 22,728 18,326
Off-Balance-Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business. These financial instruments include
commitments to extend credit and standby letters of credit. The instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. For additional information, see footnote 9 of
the "Notes to Consolidated Statements".
Asset Quality Review and Credit Risk Management
The Company's credit risk is centered in the loan portfolio, which on
December 31, 2004 totaled $411,639,000 as compared to $355,533,000 as of
December 31, 2003, an increase of 15.78%. Loans comprise 49% of total assets as
of the end of 2004. The object in managing loan portfolio risk is to reduce the
risk of loss resulting from a customer's failure to perform according to the
terms of a transaction and to quantify and manage credit risk on a portfolio
basis. As the following chart indicates, the Company's credit risk management
practices have resulted in a low level of non-performing assets that total
$2,748,000 as of December 31, 2004. The Company's level of problem assets as a
percentage of assets of 0.33% compares favorably to the average for FDIC insured
institutions as of September 30, 2004 of 0.61%.
28
Non-performing Assets
The following table sets forth information concerning the Company's
non-performing assets for the past five years ending
December 31, 2004.
2004 2003 2002 2001 2000
(dollars in thousands) ----------------------------------------------------------------
Non-performing assets:
Nonaccrual loans $1,896 $1,756 $2,015 $2,692 $2,663
Loans 90 days or more past due
and still accruing 80 431 394 797 242
----------------------------------------------------------------
Other real estate owned 1,976 2,187 2,409 3,489 2,905
772 159 295 159 75
Total non-performing assets ----------------------------------------------------------------
$2,748 $,2,346 $2,704 $3,648 $2,980
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 $481,000 were placed on non-accrual status in 2004
with total non-accrual loans equaling $1,896,000 as of December 31, 2004.
Outstanding loans of $200,000 were placed on non-accrual status in 2003 with
total non-accrual loans equaling $1,756,000 as of December 31, 2003. Outstanding
loans of $383,000 were placed on non-accrual status in 2002 with total
non-accrual loans equaling $2,015,000 as of December 31, 2002. A real estate
loan at First National with a December 31, 2004 and 2003 balance of $1,305,000
is the largest non-performing asset. For the years ended December 31, 2004, 2003
and 2002, interest income, which would have been recorded under the original
terms of such loans was approximately $239,000, $179,000 and $160,000,
respectively, with $211,000, $177,000 and $17,000, respectively, recorded. Loans
greater than 90 days past due and still accruing interest were $80,000 and
$431,000 at December 31, 2004 and 2003, respectively.
Summary of the Allowance for Loan Losses
The provision for loan losses represents an expense charged against
earnings to maintain an adequate allowance for loan losses. The allowance for
loan losses is management's best estimate of probable losses inherent in the
loan portfolio as of the balance sheet date. Factors considered in establishing
an appropriate allowance include: an assessment of the financial condition of
the borrower; a realistic determination of value and adequacy of underlying
collateral; the condition of the local economy and the condition of the specific
industry of the borrower; an analysis of the levels and trends of loan
categories; and a review of delinquent and classified loans.
The adequacy of the allowance for loan losses is evaluated quarterly by
management and the respective Bank boards. This evaluation focuses on specific
loan reviews, changes in the type and volume of the loan portfolio given the
current and forecasted economic conditions and historical loss experience. Any
one of the following conditions may result in the review of a specific loan:
concern about whether the customer's cash flow or net worth are sufficient to
repay the loan; delinquent status; criticism of the loan in a regulatory
examination; the accrual of interest has been suspended; or other reasons,
including when the loan has other special or unusual characteristics which
warrant special monitoring.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
29
Analysis of the Allowance for Loan Losses
The Company's policy is to charge-off loans when, in management's opinion,
the loan is deemed uncollectible, although concerted efforts are made to
maximize future recoveries. The following table sets forth information regarding
changes in the Company's allowance for loan losses for the most recent five
years.
2004 2003 2002 2001 2000
(dollars in thousands) ---------------------------------------------------------
Balance at beginning of period $ 6,051 $ 5,758 $ 5,446 $ 5,373 $ 4,986
Charge-offs:
Real Estate
Construction - 24 - - -
1-4 Family Residential 19 5 - - -
Commercial 93 - 40 - -
Agricultural - - - - -
Commercial 3 392 235 768 55
Agricultural - - - - -
Consumer and other 115 43 155 83 96
---------------------------------------------------------
230 464 430 852 151
Recoveries:
Real Estate
Construction - - - - -
1-4 Family Residential - - 20 - -
Commercial - - - - -
Agricultural - - - - -
Commercial 13 100 14 8 66
Agricultural - - - - -
Consumer and other 163 12 20 19 12
---------------------------------------------------------
176 112 54 27 78
Net charge-offs 54 352 376 825 73
Additions charged to
operations 479 645 688 898 460
---------------------------------------------------------
Balance at end of period $ 6,476 $6,051 $5,758 $5,446 $5,373
Average Loans Outstanding $385,347 $349,812 $317,521 $341,440 $339,115
Ratio of net charge-offs during the
period to average loans
outstanding 0.01% 0.11% 0.12% 0.24% 0.02%
Ratio of allowance for loan losses
to total loans net of deferred fees 1.55% 1.67% 1.70% 1.65% 1.54%
The allowance for loan losses increased to $6,476,000 at the end of 2004 in
comparison to the allowance of $6,051,000 at year end 2003. The increase can be
primarily attributed to the growth of general reserves at First National. The
increase in the reserve levels in 2003 relate primarily to general reserves
established by United Bank. The 2002 increase relates primarily to First
National as the result of higher specific reserves for two problem credits
identified by management prior to 2002 and a large specific reserve for a newly
downgraded problem loan in 2002. Problem commercial leases identified at First
National in 2001 led to higher provision expense, net charge-offs and specific
reserves as credit weaknesses were identified in 2001. General reserve
allocations remained consistent in 2004 with prior years.
30
General reserves for loan categories normally range from 1.00 to 1.30% of
the outstanding loan balances. As loan volume increases, the general reserve
levels increase with that growth. As the previous table indicates, loan
provisions have been trending downward since 2001 as the level of net
charge-offs has declined. The general reserve loss factors have remained
consistent over the five-year period presented. The allowance relating to
commercial real estate and 1-4 family residential loans are the largest reserve
components. Commercial real estate loans have higher general reserve levels than
other real estate loans as management perceives more risk in this type of
lending. Elements contributing to the higher risk level include susceptibility
of businesses to changing environmental factors such as the economic business
cycle, the larger individual loan amounts, a limited number of buyers and the
specialized uses for some properties. As of December 31, 2004, commercial real
estate loans have general reserves of 1.30%. The estimation methods and
assumptions used in determining the allowance for the five years presented have
remained consistent.
Loans that the Banks have identified as having higher risk levels are
reviewed individually in an effort to establish adequate loss reserves. These
reserves are considered specific reserves and are directly impacted by the
credit quality of the underlying loans. Normally, as the actual or expected
level of non-performing loans increase, the specific reserves also increase. For
December 31, 2004 specific reserves decreased $431,000 or 23.50% compared to
year end 2003 levels as four of the five banks had improved loan quality. As of
December 31, 2003, specific reserves increased $146,000 or 8.65% over year end
2002. In 2003, specific allocations to problem agricultural real estate loans
was the largest contributor to the increase in the specific reserve level when
compared to year end 2002. Specific allocations for commercial real estate loans
triggered the increase in 2002 while commercial leases contributed to the
increase in total reserve levels in 2001. The specific reserves are dependent
upon assumptions regarding the liquidation value of collateral and the cost of
recovering collateral including legal fees. Changing the amount of specific
reserves on individual loans has had the largest impact on the reallocation of
the reserve among different parts of the portfolio.
Other factors that are considered when determining the adequacy of the
reserve include loan concentrations, loan growth, the economic outlook and
historical losses. The Company's concentration risks include geographic
concentration in central Iowa; the local economy's dependence upon several large
governmental entity employers, including Iowa State University and the Iowa
Department of Transportation; and the health of Iowa's agricultural sector that
in turn, is dependent on weather conditions and government programs. No
significant reserves have been established for local and national economic
conditions over the last five-year period as the economic outlook has generally
been favorable. However, no assurances can be made that losses will remain at
the favorable levels experienced over the past five years.
Allocation of the Allowance for Loan Losses
The following table sets forth information concerning the Company's
allocation of the allowance for loan losses.
2004 2003 2002 2001 2000
(dollars in thousands) -----------------------------------------------------------------------------------------
Amount % * Amount % * Amount % * Amount % * Amount % *
Balance at end of period
applicable to:
Real Estate
Construction $ 429 5.02% $ 196 3.62% $ 210 3.99% $ 178 3.99% $ 163 3.49%
1-4 family residential 1,021 23.31% 948 23.36% 892 23.98% 980 23.98% 1,088 27.89%
Commercial 2,676 38.25% 2,663 41.59% 2,453 40.24% 1,704 40.24% 1,619 32.11%
Agricultural 486 6.55% 458 6.70% 302 6.40% 279 6.40% 315 6.03%
Commercial 809 13.66% 775 10.64% 910 11.83% 938 11.83% 754 15.41%
Agricultural 360 7.33% 488 7.68% 504 7.68% 457 7.68% 421 8.05%
Consumer and other 302 5.87% 255 6.41% 235 5.88% 258 5.88% 538 7.02%
Unallocated 393 268 252 652 475
----------------------------------------------------------------------------------------
$6,476 100% $6,051 100% $5,758 100% $5,446 100% $5,373 100%
<FN>
* Percent of loans in each category to total loans.
</FN>
31
Liquidity and Capital Resources
Liquidity management is the process by which the Company, through its
Banks' Asset and Liability Committees (ALCO), ensures that adequate liquid funds
are available to meet its financial commitments on a timely basis, at a
reasonable cost and within acceptable risk tolerances. These commitments include
funding credit obligations to borrowers, funding of mortgage originations
pending delivery to the secondary market, withdrawals by depositors, maintaining
adequate collateral for pledging for public funds, trust deposits and
borrowings, paying dividends to shareholders, payment of operating expenses,
funding capital expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from core deposit growth and retention;
principal and interest payments on loans; principal and interest payments, sale,
maturity and prepayment of investment securities; net cash provided from
operations; and access to other funding sources. Other funding sources include
federal funds purchased lines, Federal Home Loan Bank (FHLB) advances and other
capital market sources.
As of December 31, 2004, the level of liquidity and capital resources of
the Company remain at a satisfactory level and compare favorably to that of
other FDIC insured institutions. Management believes that the Company's
liquidity sources will be sufficient to support its existing operations for the
foreseeable future.
The liquidity and capital resources discussion will cover the follows topics:
o Review the Company's Current Liquidity Sources
o Review of the Statements of Cash Flows
o Review Company Only Cash Flows
o Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and
Known Trends in Liquidity and Cash Flows Needs
o Capital Resources
Review of the Company's Current Liquidity Sources
Liquid assets of cash on hand, balances due from other banks, federal funds
sold and interest-bearing deposits in financial institutions for December 31,
2004, 2003 and 2002 totaled $48,199,000, $58,725,000 and $85,189,000,
respectively. The lower balance of liquid assets as of December 31, 2004 relates
to a lower level of deposits maintained with other financial institutions.
Other sources of liquidity available to the Banks include outstanding lines
of credit with the Federal Home Loan Bank of Des Moines, Iowa of $28,471,000 and
federal funds borrowing capacity at correspondent banks of $52,500,000. The
Company did not have any outstanding FHLB advances or federal funds sold as of
December 31, 2004 and securities sold under agreement to repurchase totaled
$64,072,000. Approximately $40,000,000 in repurchases agreement balances at
First National are expected to be withdrawn gradually from January to August
2005.
Total investments as of December 31, 2004 were $363,459,000 compared to
$323,116,000 as of year end 2003. At both December 31, 2004 and 2003, the
investment portfolio as a percentage of average assets was 43%. This provides
the Company with a significant amount of liquidity since all of the investments
are classified as available for sale as of December 31, 2004 and 2003 and have
net unrealized gains of $11,854,000 and $14,152,000, respectively.
The investment portfolio serves an important role in the overall context of
balance sheet management in terms of balancing capital utilization and
liquidity. The decision to purchase or sell securities is based upon the current
assessment of economic and financial conditions, including the interest rate
environment, liquidity and credit considerations. The portfolio's scheduled
maturities represent a significant source of liquidity.
Review of the Consolidated Statements of Cash Flows
Operating cash flows for December 31, 2004, 2003 and 2002 totaled
$13,169,000, $14,828,000, and $13,803,000, respectively. The decrease in
operating cash flows in 2004 compared to 2003 included a reduction in loans held
for sale and an increase in other assets in 2004. These decreases were offset by
security gains realized in 2004 as compared to 2003 and an increase net income.
The primary variance in 2003 compared to 2002 was the source of cash provided
from a lower level of accrued expense and other liabilities that was a use of
cash in 2002.
32
Net cash used in investing activities for December 31, 2004, 2003 and 2002
was $103,647,000, $96,479,000 and 43,819,000, respectively. The largest
investing activities in 2004 were the purchase of U.S. government agency and
corporate bonds and the funding of commercial operating and commercial real
estate loans offset by the maturities, calls, and sales of securities available
for sale. U.S. government agency bonds, municipal bonds and commercial real
estate loans were the most significant investing activities in 2003.
Net cash provided by financing activities for December 31, 2004, 2003 and
2002 totaled $77,255,000, $61,944,000 and $39,245,000, respectively. Growth in
securities sold under agreement to repurchase and deposits was the primary
source of financing funds in 2004. Deposit growth was the primary source of cash
flows for 2003 and 2002. As of December 31, 2004, the Company did not have any
external debt financing, off balance sheet financing arrangements or derivative
instruments linked to its stock.
Company Only Cash Flows
The Company's liquidity on an unconsolidated basis is heavily dependent
upon dividends paid to the Company by the Banks. The Company requires adequate
liquidity to pay its expenses and pay stockholder dividends. In 2004, dividends
from the Banks amounted to $8,384,000 compared to $7,868,000 in 2003. Various
federal and state statutory provisions limit the amount of dividends banking
subsidiaries are permitted to pay to their holding companies without regulatory
approval. Federal Reserve policy further limits the circumstances under which
bank holding companies may declare dividends. For example, a bank holding
company should not continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset quality and overall financial condition. In addition, the Federal
Reserve and the FDIC have issued policy statements which provide that insured
banks and bank holding companies should generally pay dividends only out of
current operating earnings. Federal and state banking regulators may also
restrict the payment of dividends by order.
First National, as a national bank, generally may pay dividends from
undivided profits without restriction, provided that its surplus fund is at
least equal to its common stock capital fund. Boone Bank, Randall-Story Bank and
State Bank are also restricted under Iowa law to paying dividends only out of
their undivided profits. United Bank is not expected to generate sufficient
earnings to pay any dividends in 2005. 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 $34,902,000 that are presently available to
provide additional liquidity to the Banks.
Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and
Known Trends in Liquidity and Cash Flows Needs
No material capital expenditures or material changes in the capital
resource mix are anticipated at this time. Commitments to extend credit totaled
$65,894,000 as of December 31, 2004 compared to a total of $71,100,000 at the
end of 2003. The timing of these credit commitments varies with the underlying
borrowers; however, the Company has satisfactory liquidity to fund these
obligations as of December 31, 2004. The primary cash flow uncertainty would be
a sudden decline in deposits causing the Banks to liquidate securities.
Historically, the Banks have maintained an adequate level of short term
marketable investments to fund the temporary declines in deposit balances. There
are no known trends in liquidity and cash flow needs as of December 31, 2004
that are a concern to management.
Capital Resources
The Company's total stockholders' equity increased to $110,924,000 at
December 31, 2004, from $107,325,000 at December 31, 2003. At December 31, 2004
and 2003, stockholders' equity as a percentage of total assets was 13.21% and
14.26%, respectively. Total equity increased due to retention of earnings which
was partially offset by depreciation in the Banks' investment portfolios. The
capital levels of the Company currently exceed applicable regulatory guidelines
as of December 31, 2004.
33
Interest Rate Risk
Interest rate risk refers to the impact that a change in interest rates may
have on the Company's earnings and capital. Management's objectives are to
control interest rate risk and to ensure predictable and consistent growth of
earnings and capital. Interest rate risk management focuses on fluctuations in
net interest income identified through computer simulations to evaluate
volatility, varying interest rate, spread and volume assumptions. The risk is
quantified and compared against tolerance levels.
The Company uses a third-party computer software simulation modeling
program to measure its exposure to potential interest rate changes. For various
assumed hypothetical changes in market interest rates, numerous other
assumptions are made such as prepayment speeds on loans, the slope of the
Treasury yield curve, the rates and volumes of the Company's deposits and the
rates and volumes of the Company's loans. This analysis measures the estimated
change in net interest income in the event of hypothetical changes in interest
rates.
Another measure of interest rate sensitivity is the gap ratio. This ratio
indicates the amount of interest-earning assets repricing within a given period
in comparison to the amount of interest-bearing liabilities repricing within the
same period of time. A gap ratio of 1.0 indicates a matched position, in which
case the effect on net interest income due to interest rate movements will be
minimal. A gap ratio of less than 1.0 indicates that more liabilities than
assets reprice within the time period and a ratio greater than 1.0 indicates
that more assets reprice than liabilities.
The simulation model process provides a dynamic assessment of interest rate
sensitivity, whereas a static interest rate gap table is compiled as of a point
in time. The model simulations differ from a traditional gap analysis as a
traditional gap analysis does not reflect the multiple effects of interest rate
movement on the entire range of assets and liabilities and ignores the future
impact of new business strategies.
Inflation
The primary impact of inflation on the Company's operations is to increase
asset yields, deposit costs and operating overhead. Unlike most industries,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than they would on
non-financial companies. Although interest rates do not necessarily move in the
same direction or to the same extent as the price of goods and services,
increases in inflation generally have resulted in increased interest rates. The
effects of inflation can magnify the growth of assets and, if significant,
require that equity capital increase at a faster rate than would be otherwise
necessary.
Forward-Looking Statements and Business Risks
The discussion in the foregoing Management Discussion and Analysis and
elsewhere in this Report contains forward-looking statements about the Company,
its business and its prospects. Forward-looking statements can be identified by
the fact that they do not relate strictly to historical or current facts. They
often include use of the words "believe", "expect", "anticipate", "intend",
"plan", "estimate" or words of similar meaning, or future or conditional verbs
such as "will", "would", "should", "could" or "may" reward-looking statements,
by their nature, are subject to risks and uncertainties. A number of factors,
many of which are beyond the Company's control, could cause actual conditions,
events or results to differ significantly from those described in the
forward-looking statements. Such risks and uncertainties with respect to the
Company include, but are not limited to, those related to the economic
conditions, particularly in the areas in which the Company and the Banks
operate, competitive products and pricing, fiscal and monetary policies of the
U.S. government, changes in governmental regulations affecting financial
institutions, (including regulatory fees and capital requirements), changes in
prevailing interest rates, credit risk management and asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.
34
These factors may not constitute all factors that could cause actual
results to differ materially from those discussed in any forward-looking
statement. The Company operates in a continually changing business environment
and new facts emerge from time to time. It cannot predict such factors nor can
it assess the impact, if any, of such factors on its financial position or its
results of operations. Accordingly, forward-looking statements should not be
relied upon as a predictor of actual results. The Company disclaims any
responsibility to update any forward-looking statement provided in this
document.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is comprised primarily of interest rate risk
arising from its core banking activities of making loans and taking deposits.
Interest rate risk is the risk that changes in market interest rates may
adversely affect the Company's net interest income. Management continually
develops and applies strategies to mitigate this risk. Management does not
believe that the Company's primary market risk exposure and how that exposure
was managed in 2004 changed when compared to 2003.
Based on a simulation modeling analysis performed as of December 31, 2004,
the following table presents the estimated change in net interest income in the
event of hypothetical changes in interest rates for the various rate shock
levels:
Net Interest Income at Risk
Estimated Change in Net Interest Income for Year Ending December 31, 2004
$ Change % Change
(dollars in thousands) ------------------------
+200 Basis Points $ (158) (0.6%)
+100 Basis Points (91) (0.3%)
- -100 Basis Points (554) (2.0%)
- -200 Basis Points (2,595) (9.5%)
As shown above, at December 31, 2004, the estimated effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 0.6% or approximately $158,000 in 2005. The estimated effect
of an immediate 200 basis point decrease in rates would decrease the Company's
net interest income by 9.5% or approximately $2,595,000 in 2005. The Company's
Asset Liability Management Policy establishes parameters for a 200 basis point
change in interest rates. Under this policy, the Company and the Banks'
objective is to properly structure the balance sheet to prevent a 200 basis
point change in interest rates from causing a decline in net interest income by
more than 15% in one year compared to the base year that hypothetically assumes
no change in interest rates.
Computations of the prospective effects of hypothetical interest rate
changes are based on numerous assumptions. Actual values may differ from those
projections set forth above. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.
Current interest rates on certain liabilities are at a level that does not allow
for significant repricing should market interest rates decline considerably.
35
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, 2004. The expected maturities are presented on a contractual basis.
Actual maturities may differ from contractual maturities because of prepayment
assumptions, early withdrawal of deposits and competition.
Less than Three One to Over
three months to five five Cumulative
months one year years years Total
(dollars in thousands) -------------------------------------------------------------------------------
Interest - earning assets
Interest-bearing deposits with banks $ 5,676 $ 1,272 $ 2,627 $ - $ 9,575
Federal funds sold 19,865 - - - 19,865
Investments * 5,158 15,291 194,749 148,261 363,459
Loans 103,940 28,146 218,301 68,372 418,759
Loans held for sale 234 234
------------------------------------------------------------------------
Total interest - earning
assets $ 134,873 $ 44,709 $415,677 $216,633 $811,892
========================================================================
Interest - bearing liabilities
Interest bearing demand deposits $ 172,313 - - - $172,313
Money market and savings deposits 174,358 - - - 174,358
Time certificates < $100,000 27,744 59,043 83,838 149 170,774
Time certificates > $100,000 20,613 29,217 19,234 - 69,064
Other borrowed funds 64,072 - - - 64,072
------------------------------------------------------------------------
Total interest - bearing liabilities $ 459,100 $88,260 $103,072 $149 $650,581
Interest sensitivity gap $(324,227) $ (43,551) $312,605 $216,484 $161,311
========================================================================
Cumulative interest sensitivity gap $(324,227) $(367,778) $(55,173) $161,311 $161,311
========================================================================
Cumulative interest sensitivity
gap as a percent of total assets -38.61% -43.80% -6.57% 19.21%
========================================================================
<FN>
* Investments with maturities over 5 years include the market value of equity
securities of $33,904.
</FN>
As of December 31, 2004, the Company's cumulative gap ratios for assets and
liabilities repricing within three months and within one year were 39% and 44%,
respectively, meaning more liabilities than assets are scheduled to reprice
within these periods. This situation suggests that a decrease in market interest
rates may benefit net interest income and that an increase in interest rates may
negatively impact the Company. The liability sensitive gap position is largely
the result of classifying the interest bearing NOW accounts, money market
accounts and savings accounts as immediately repriceable. Certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities and
periods to repricing, they may react differently to changes in market interest
rates. Also, interest rates on assets and liabilities may fluctuate in advance
of changes in market interest rates, while interest rates on other assets and
liabilities may follow changes in market interest rates. Additionally, certain
assets have features that restrict changes in the interest rates of such assets,
both on a short-term basis and over the lives of such assets.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Ames National Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. Ames National
Corporation's internal control system was designed to provide reasonable
assurance to the company's management and board of directors regarding the
preparation and fair presentation of published financial statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Ames National Corporation's management assessed the effectiveness of the
company's internal control over financial reporting as of December 31, 2004. In
making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment we determined that, as of
December 31, 2004, the company's internal control over financial reporting is
effective based on those criteria.
Our management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
McGladrey & Pullen, LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
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)
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Ames National Corporation and Subsidiaries
Ames, Iowa
We have audited the accompanying consolidated balance sheets of Ames National
Corporation and Subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Ames National
Corporation and subsidiaries' internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated February 3, 2005 expressed an
unqualified opinion.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
February 3, 2005
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Ames National Corporation and Subsidiaries
Ames, Iowa
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting that Ames
National Corporation maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Ames National Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
the financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Ames National Corporation
maintained effective internal control over financial reporting as of December
31, 2004 is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, Ames National Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of Ames National
Corporation as of December 31, 2004 and 2003, and the related statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2004, and our report dated February 3,
2005, expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
February 3, 2005
39
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
ASSETS 2004 2003
- ------------------------------------------------------------------------------------------
Cash and due from banks (Note 2) $ 18,759,086 $ 31,982,144
Federal funds sold 19,865,000 20,380,000
Interest bearing deposits in financial institutions 9,575,174 6,363,538
Securities available-for-sale (Note 3) 363,459,462 323,115,914
Loans receivable, net (Note 4) 411,638,565 355,533,119
Loans held for sale 234,469 859,139
Bank premises and equipment, net (Note 5) 8,790,636 8,377,807
Accrued income receivable 6,262,424 5,842,247
Other assets 1,167,971 332,556
----------------------------------
Total assets $ 839,752,787 $ 752,786,464
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6)
Demand, noninterest bearing $ 71,666,385 $ 71,372,534
NOW accounts 172,313,429 138,308,140
Savings and money market 174,358,165 166,387,319
Time, $100,000 and over 69,063,977 69,486,570
Other time 170,773,883 173,993,964
----------------------------------
Total deposits 658,175,839 619,548,527
Federal funds purchased and securities sold
under agreements to repurchase 64,072,475 18,198,403
Dividend payable 1,537,162 1,441,204
Deferred income taxes (Not8) 2,334,670 3,238,665
Accrued expenses and otheriabilities 2,708,701 3,034,670
----------------------------------
Total liabilities 728,828,847 645,461,469
----------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 10)
Common stock, $5 par value, authorized 6,000,000
shares; issued 2004 and 2003 3,153,230 shares;
outstanding 2004 3,137,066 shares, 2003
3,133,053 shares 15,766,150 15,766,150
Additional paid-in capital 25,378,746 25,351,979
Retained earnings 63,200,352 58,400,660
Treasury stock, at cost; 2004 16,164 shares,
2003 20,177 shares (889,020) (1,109,735)
Accumulated other comprehensive income, net
unrealized gain on securities available-
for-sale 7,467,712 8,915,941
----------------------------------
Total stockholders' equity 110,923,940 107,324,995
----------------------------------
Total liabilities and stockholders' equity $ 839,752,787 $ 752,786,464
==================================
See Notes to Consolidated Financial Statements.
40
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans, including fees $ 22,872,764 $ 22,197,335 $ 23,207,184
Securities:
Taxable 8,536,759 7,510,671 7,931,041
Tax-exempt 4,274,033 3,604,641 2,938,423
Federal funds sold 159,438 628,203 810,675
Dividends 1,510,665 1,372,890 1,383,350
-----------------------------------------------------
37,353,659 35,313,740 36,270,673
-----------------------------------------------------
Interest expense:
Deposits 9,942,250 10,045,178 11,397,125
Other borrowed funds 621,077 293,604 265,845
-----------------------------------------------------
10,563,327 10,338,782 11,662,970
-----------------------------------------------------
Net interest income 26,790,332 24,974,958 24,607,703
Provision for loan losses (Note 4) 479,355 645,447 688,431
-----------------------------------------------------
Net interest income after provision for
loan losses 26,310,977 24,329,511 23,919,272
-----------------------------------------------------
Noninterest income:
Trust department income 1,185,681 1,225,099 1,032,500
Service fees 1,813,795 1,513,964 1,492,344
Securities gains, net (Note 3) 324,030 1,395,320 889,923
Gain on sales of loans held for sale 610,077 1,155,311 739,907
Merchant and ATM fees 534,897 513,832 405,667
Other 800,835 631,949 574,473
-----------------------------------------------------
Total noninterest income 5,269,315 6,435,475 5,134,814
-----------------------------------------------------
Noninterest expense:
Salaries and employee benefits (Note 7) 9,019,139 9,044,896 8,074,181
Data processing 2,241,441 2,188,488 1,934,006
Occupancy expenses 1,048,323 1,088,438 927,287
Other operating expenses 2,626,451 2,497,692 2,340,098
-----------------------------------------------------
Total noninterest expense 14,935,354 14,819,514 13,275,572
-----------------------------------------------------
Income before income taxes 16,644,938 15,945,472 15,778,514
Provision for income taxes (Note 8) 4,255,392 4,320,787 4,438,376
-----------------------------------------------------
Net income $ 12,389,546 $ 11,624,685 $ 11,340,138
=====================================================
Basic earnings per share (Note 1) $ 3.95 $ 3.71 $ 3.63
=====================================================
See Notes to Consolidated Financial Statements.
41
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
Accumulated
Additional Other Total
Comprehensive Common Paid-in Retained Treasury Comprehensive Stockholders'
Income Stock Capital Earnings Stock Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $15,766,150 $25,393,028 $49,397,011 $(1,530,805) $4,596,614 $ 93,621,998
Comprehensive income:
Net income $11,340,138 - - 11,340,138 - - 11,340,138
Other comprehensive income,
unrealized gains on
securities, net of
reclassification adjustment,
net of tax (Note 3) 3,222,174 - - - - 3,222,174 3,222,174
-----------
Total comprehensive income $14,562,312
===========
Cash dividends declared,
$2.18 per share - - (6,819,605) - - (6,819,605)
Sale of 3,753 shares of
treasury stock - (39,014) - 197,165 - 158,151
------------------------------------------------------------------------------
Balance, December 31, 2002 $15,766,150 $25,354,014 $53,917,544 $(1,333,640) $7,818,788 $101,522,856
Comprehensive income:
Net income $11,624,685 - - 11,624,685 - - 11,624,685
Other comprehensive income,
unrealized gains on securities,
net of reclassification
adjustment, net of tax (Note 3) 1,097,153 - - - - 1,097,153 1,097,153
-----------
Total comprehensive income $12,721,838
===========
Cash dividends declared,
$2.28 per share - - (7,141,569) - - (7,141,569)
Sale of 4,071 shares of
treasury stock - (2,035) - 223,905 - 221,870
------------------------------------------------------------------------------
Balance, December 31, 2003 $15,766,150 $25,351,979 $58,400,660 $(1,109,735) $8,915,941 $107,324,995
Comprehensive income:
Net income $12,389,546 - - 12,389,546 - - 12,389,546
Other comprehensive income,
unrealized (losses) on
securities,net of
reclassification adjustment,
net of tax benefit (Note 3) (1,448,229) - - - - (1,448,229) (1,448,229)
-----------
Total comprehensive income $10,941,317
===========
Cash dividends declared,
$2.42 per share - - (7,589,854) - - (7,589,854)
Sale of 4,013 shares of treasury
stock - 26,767 - 220,715 - 247,482
------------------------------------------------------------------------------
Balance, December 31, 2004 $15,766,150 $25,378,746 $63,200,352 $ (889,020) $7,467,712 $110,923,940
See Notes to Consolidated Financial Statements.
42
AMES NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,389,546 $ 11,624,685 $ 11,340,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 479,355 645,447 688,431
Amortization and accretion 683,012 563,612 51,495
Depreciation 951,477 1,030,377 996,180
Provision for deferred taxes (53,448) (284,751) (200,013)
Securities gains, net (324,030) (1,395,320) (889,923)
Change in assets and liabilities:
Decrease in loans held for sale 624,670 1,854,307 2,582,434
(Increase) decrease in accrued income receivable (420,177) 6,770 128,336
(Increase) decrease in other assets (835,415) 250,293 (344,372)
Increase (decrease) in accrued expenses and other liabilities (325,969) 532,718 (549,337)
-----------------------------------------------
Net cash provided by operating activities 13,169,021 14,828,138 13,803,369
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (163,349,539) (194,136,066) (86,337,490)
Proceeds from sale of securities available-for-sale 5,045,102 9,299,986 26,635,715
Proceeds from maturities and calls of securities available-for-sale 115,303,131 108,868,412 34,855,926
Net (increase) in interest bearing deposits in financial institutions (3,211,636) (5,363,538) (750,000)
Net decrease (increase) in federal funds sold 515,000 12,120,000 (3,150,000)
Net (increase) in loans (56,584,801) (26,585,515) (12,534,196)
Purchase of bank premises and equipment (1,364,306) (681,787) (2,538,922)
-----------------------------------------------
Net cash (used in) investing activities (103,647,049) (96,478,508) (43,818,967)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits 38,627,312 68,926,148 39,113,124
Increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 45,874,072 (127,171) 6,729,400
Dividends paid (7,493,896) (7,077,117) (6,755,449)
Proceeds from issuance of treasury stock 247,482 221,870 158,151
-----------------------------------------------
Net cash provided by financing activities 77,254,970 61,943,730 39,245,226
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents (13,223,058) (19,706,640) 9,229,628
CASH AND DUE FROM BANKS
Beginning 31,982,144 51,688,784 42,459,156
-----------------------------------------------
Ending $ 18,759,086 $ 31,982,144 $ 51,688,784
===============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 10,623,125 $ 10,504,715 $ 12,211,439
Income taxes 4,516,823 4,553,669 4,725,572
See Notes to Consolidated Financial Statements.
43
Note 1. Summary of Significant Accounting Policies
Description of business: Ames National Corporation and subsidiaries (the
Company) operates in the commercial banking industry through its subsidiaries in
Ames, Boone, Story City, Nevada and Marshalltown, Iowa. Loan and deposit
customers are located primarily in Story, Boone, Hamilton and Marshall Counties
and adjacent counties in Iowa.
Segment information: The Company uses the "management approach" for reporting
information about segments in annual and interim financial statements. The
management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Based on the "management approach" model, the Company has
determined that its business is comprised of one operating segment: banking. The
banking segment generates revenues through personal, business, agricultural and
commercial lending, management of the investment securities portfolio, providing
deposit account services and providing trust services.
Consolidation: The consolidated financial statements include the accounts of
Ames National Corporation (the Parent Company) and its wholly-owned
subsidiaries, First National Bank, Ames, Iowa; State Bank & Trust Co., Nevada,
Iowa; Boone Bank & Trust Co., Boone, Iowa; Randall-Story State Bank, Story City,
Iowa; and United Bank & Trust NA, Marshalltown, Iowa (collectively, the Banks).
All significant intercompany transactions and balances have been eliminated in
consolidation.
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses and fair value of financial instruments.
Cash and cash equivalents: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand and amounts due from banks. The Company reports
net cash flows for customer loan transactions, deposit transactions and short
term borrowings with maturities of 90 days or less.
Securities available-for-sale: Securities available-for-sale consists of equity
securities and debt securities not classified as trading or held-to-maturity and
are carried at fair value. Unrealized holding gains and losses, net of deferred
income taxes, are reported in a separate component of accumulated other
comprehensive income until realized. Realized gains and losses on the sale of
such securities are determined using the specific identification method and are
reflected in the consolidated statements of income. Premiums and discounts are
recognized in interest income using the interest method over the period to
maturity or call date of the related security.
Unrealized losses judged to be other than temporary are charged to operations.
Loans held for sale: Loans held for sale are the loans the Banks have the intent
to sell in the foreseeable future. They are carried at the lower of aggregate
cost or market value. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income. Gains and losses on sales of loans are
recognized at settlement dates and are determined by the difference between the
sale proceeds and the carrying value of the loans.
Loans: Loans are stated at the principal amount outstanding, net of deferred
loan fees and the allowance for loan losses. Interest on loans is credited to
income as earned based on the principal amount outstanding. The Banks' policy is
to discontinue the accrual of interest income on any loan 90 days or more past
due unless the loans are well collateralized and in the process of collection.
Income on nonaccrual loans is subsequently recognized only to the extent that
cash payments are received. Nonaccrual loans are returned to an accrual status
when, in the opinion of management, the financial position of the borrower
indicates there is no longer any reasonable doubt as to timely payment of
principal or interest.
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.
44
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Impairment is measured on a loan by
loan basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed using straight-line
and accelerated methods over the estimated useful lives of the respective
assets. Depreciable lives range from 3 to 7 years for equipment and 15 to 39
years for premises.
Trust department assets: Property held for customers in fiduciary or agency
capacities is not included in the accompanying consolidated balance sheets, as
such items are not assets of the Banks.
Income taxes: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
The Company files a consolidated federal income tax return, with each entity
computing its taxes on a separate company basis. For state tax purposes, the
Banks file franchise tax returns, while the Parent Company files a corporate
income tax return.
Comprehensive income: Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. Gains and losses on available-for-sale
securities are reclassified to net income as the gains or losses are realized
upon sale of the securities. Other-than-temporary impairment charges are
reclassified to net income at the time of the charge.
Fair value of financial instruments: The following methods and assumptions were
used by the Company in estimating fair value disclosures:
Cash and due from banks, federal funds sold and interest-bearing deposits in
financial institutions: The recorded amount of these assets approximates fair
value.
Securities available-for-sale: Fair values of securities available-for-sale
are based on bid prices published in financial newspapers, bid quotations
received from securities dealers, or quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the
instruments being valued.
Loans held for sale: The fair value of loans held for sale is based on
prevailing market prices.
Loans: The fair value of loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates,
which reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the historical experience, with repayments
for each loan classification modified, as required, by an estimate of the
effect of current economic and lending conditions. The effect of
nonperforming loans is considered in assessing the credit risk inherent in
the fair value estimate.
45
Deposit liabilities: Fair values of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money
market accounts, are equal to the amount payable on demand as of the
respective balance sheet date. Fair values of certificates of deposit are
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market.
Other borrowings: The carrying amounts of federal funds purchased and
securities sold under agreements to repurchase approximate fair value because
of the short-term nature of the instruments.
Accrued income receivable and accrued interest payable: The carrying amounts
of accrued income receivable and interest payable approximate fair value.
Commitments to extend credit and standby letters of credit: The fair values
of commitments to extend credit and stand by letters of credit are based on
fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreement and credit worthiness of the
counterparties. The carry value and fair value of the commitments to extend
credit and standby letters of credit are not considered significant.
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, 2004, 2003 and 2002, 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, 2004, 2003, and 2002.
2004 2003 2002
------------------------------------------
Basic earning per share computation:
Net income $ 12,389,546 $ 11,624,685 $ 11,340,138
Weighted average common
shares outstanding 3,135,235 3,131,224 3,127,285
------------------------------------------
Basic EPS $ 3.95 $ 3.71 $ 3.63
==========================================
New Accounting Pronouncements
SEC Staff Accounting Bulletin ("SAB") No. 105, Application of Accounting
Principles to Loan Commitments, was released in March 2004. This release
summarizes the SEC staff position regarding the application of GAAP to loan
commitments accounted for as derivative instruments. The Company accounts for
interest rate lock commitments issued on mortgage loans that will be held for
sale as derivative instruments. Consistent with SAB No. 105, the Company
considers the fair value of these commitments to be zero at the commitment date,
with the subsequent changes in fair value determined solely on changes in market
interest rates. The Company's adoption of this bulletin had no impact on the
consolidated financial statements.
At the March 17-18, 2004 Emerging Issues Task Force ("EITF") meeting, the Task
Force reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments. EITF 03-1 provides
guidance for determining the meaning of "other-than-temporarily impaired" and
its application to certain debt and equity securities within the scope of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115") and investments accounted
for under the cost method. The guidance set forth in the Statement was
originally to be effective for the Company in the September 30, 2004
consolidated financial statements. However, in September 2004, the effective
dates of certain parts of the Statement were delayed. Management is currently
assessing the impact of Issue 03-1 on the consolidated financial statements.
46
In December 2004, the FASB issued SFAS No. 123(Revised), "Share-Based Payment"
("SFAS No. 123R"), establishing accounting standards for transactions in which
an entity exchanges its equity instruments for goods or services, SFAS No. 123R
also addresses transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the entity's equity
instruments, or that may be settled by the issuance of those equity instruments.
SFAS No. 123R covers a wide range of share-based compensation arrangements
including stock options, restricted stock plans, performance-based stock awards,
stock appreciation rights, and employee stock purchase plans. SFAS No. 123R
replaces existing requirements under SFAS No. 123R, "Accounting for Stock-Based
Compensation," and eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25. The provisions of SFAS No.
123R are effective for the Company on July 1, 2005. The Company is currently
assessing the financial statement impact of adopting SFAS No. 123R.
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities
Acquired in a "Transfer" ("SOP 03-3"). SOP 03-3 requires loans acquired through
a transfer, such as a business combination, where there are differences in
expected cash flows and contractual cash flows due in part to credit quality, to
be recognized at their fair value. Under the provisions of SOP 03-3, any future
excess of cash flows over the original expected cash flows is to be recognized
as an adjustment of future yield. Future decreases in actual cash flow compared
to the original expected cash flow is recognized as a valuation allowance and
expensed immediately. Under SOP 03-3, valuation allowances cannot be created or
"carried over" in the initial accounting for impaired loans acquired. SOP 03-3
is effective for impaired loans acquired in fiscal years beginning after
December 15, 2004. The company does not expect adoption to have material impact
on the consolidated financial statement.
Note 2. Restrictions on Cash and Due from Banks
The Federal Reserve Bank requires member banks to maintain certain cash and due
from bank reserves. The subsidiary banks' reserve requirements totaled
approximately $7,562,000 and $14,375,000 at December 31, 2004 and 2003,
respectively.
Note 3. Debt and Equity Securities
The amortized cost of securities available for sale and their approximate fair
values at December 31, 2004 and 2003, are summarized below:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
------------------------------------------------------------
2004:
U.S. treasury $ 495,040 $ 35,859 $ - $ 530,899
U.S. government agencies 138,024,045 627,981 (1,017,948) 137,634,078
State and political subdivisions 112,004,478 2,391,038 (577,902) 113,817,614
Corporate bonds 75,510,784 2,471,332 (408,929) 77,573,187
Equity securities 25,571,604 8,332,080 - 33,903,684
--------------------------------------------------------
$ 351,605,951 $13,858,290 $(2,004,779) $363,459,462
========================================================
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
--------------------------------------------------------
2003:
U.S. treasury $ 2,158,571 $ 70,341 $ - $ 2,228,912
U.S. government agencies 117,321,783 1,728,234 (412,733) 118,637,284
State and political subdivisions 103,411,430 3,087,981 (536,295) 105,963,116
Corporate bonds 59,991,655 3,639,909 (45,868) 63,585,696
Equity securities 26,080,188 6,796,873 (176,155) 32,700,906
--------------------------------------------------------
$ 308,963,627 $15,323,338 $(1,171,051) $323,115,914
========================================================
47
The amortized cost and estimated fair value of debt securities
available-for-sale as of December 31, 2004, 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 $ 20,357,537 $ 20,448,845
Due after one year through five years 193,586,146 194,749,053
Due after five years through ten years 77,349,858 79,647,967
Due after ten years 34,740,806 34,709,913
--------------------------------
326,034,347 329,555,778
Equity securities 25,571,604 33,903,684
--------------------------------
$351,605,951 $363,459,462
================================
At December 31, 2004 and 2003, securities with a carrying value of approximately
$173,765,000 and $49,758,000, respectively, were pledged as collateral on public
deposits, securities sold under agreements to repurchase and for other purposes
as required or permitted by law.
Gross realized gains and gross realized losses on sales of available-for-sale
securities were $443,974 and $119,944 respectively, in 2004, $1,395,320 and
none, respectively, in 2003, $1,087,290 and $197,367, respectively, in 2002.
The components of other comprehensive income (loss) - net unrealized gains
(losses) on securities available-for-sale for the years ended December 31, 2004,
2003, and 2002, were as follows:
2004 2003 2002
-------------------------------------------------
Unrealized holding gains (losses) arising
during the period $(1,974,746) $ 3,136,832 $ 6,002,497
Reclassification adjustment for net gains
realized in net income (324,030) (1,395,320) (889,923)
-------------------------------------------------
Net unrealized gains (losses)
before tax effect (2,298,776) 1,741,512 5,112,574
Tax effect 850,547 (644,359) (1,890,400)
-------------------------------------------------
Other comprehensive income
Net unrealized gains (losses)
on securities $(1,448,229) $ 1,097,153 $ 3,222,174
=================================================
48
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2004 and 2003 are summarized as follows:
Less than 12 Months 12 Months or More Total
-----------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------------------------------------------------------------------------------
2004:
Securities available for sale:
U.S. government agencies $ 81,532,939 $ (775,150) $ 9,849,426 $ (242,798) $ 91,382,365 $ (1,017,948)
State and political subsidivisions 24,844,595 (296,117) 10,701,463 (281,785) 35,546,058 (577,902)
Corporate obligations 36,136,660 (408,929) - - 36,136,660 (408,929)
Equity securities - - - - - -
------------------------------------------------------------------------------------
$142,514,194 $(1,480,196) $20,550,889 $ (524,583) $163,065,083 $ (2,004,779)
====================================================================================
Less than 12 Months 12 Months or More Total
----------------------------- --------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------
2003:
U.S. government agencies $ 31,608,073 $ (412,733) $ - $ - $ 31,608,073 $ (412,733)
State and political subsidivisions 22,823,408 (507,233) 628,846 (29,062) 23,452,254 (536,295)
Corporate obligations 15,160,687 (45,868) - - 15,160,687 (45,868)
Equity securities - - 3,242,200 (176,155) 3,242,200 (176,155)
------------------------------------------------------------------------------------
$ 69,592,168 $ (965,834) $ 3,871,046 $ (205,217) $ 73,463,214 $ (1,171,051)
====================================================================================
For all of the above investment securities, the unrealized losses are generally
due to changes in interest rates or general market conditions, as such, are
considered to be temporary, by the Company.
Note 4. Loans Receivable
The composition of loans receivable at December 31, 2004 and 2003 is as follows:
2004 2003
----------------------------------
Commercial and agricultural $ 87,901,970 $ 66,369,814
Real estate 306,272,605 272,790,845
Consumer 14,244,501 13,208,113
Other 10,339,393 10,034,281
-----------------------------------
418,758,469 362,403,053
Less:
Allowance for loan losses (6,475,530) (6,050,989)
Deferred loan fees (644,374) (818,945)
-----------------------------------
$ 411,638,565 $ 355,533,119
===================================
Changes in the allowance for loan losses for the year ended December 31, 2004,
2003 and 2002 are as follows:
2004 2003 2002
---------------------------------------------
Balance, beginning $ 6,050,989 $ 5,757,694 $ 5,445,671
Provision for loan losses 479,355 645,447 688,431
Recoveries of loans charged-off 174,703 111,926 53,805
Loans charged-off (229,517) (464,078) (430,213)
---------------------------------------------
Balance, ending $ 6,475,530 $ 6,050,989 $ 5,757,694
=============================================
49
Loans are made in the normal course of business to directors and executive
officers of the Company and to their affiliates. The terms of these loans,
including interest rates and collateral, are similar to those prevailing for
comparable transactions with others and do not involve more than a normal risk
of collectibility.
Loan transactions with related parties were as follows for the years ended
December 31, 2004 and 2003:
2004 2003
----------------------------------
Balance, beginning of year $ 10,991,284 $ 7,791,668
New loans 17,173,833 19,425,895
Repayments (13,297,861) (16,650,452)
Change in status 13,788,737 424,173
----------------------------------
Balance, end of year $ 28,655,993 $ 10,991,284
==================================
At December 31, 2004 and 2003, the Company had impaired loans of approximately
$1,977,000 and $2,187,075, respectively. The allowance for loan losses related
to these impaired loans was approximately $158,000 and $134,000 at December 31,
2004 and 2003, respectively. The average balances of impaired loans for the
years ended December 31, 2004 and 2003 were $2,373,465 and $2,050,154,
respectively. For the years ended December 31, 2004, 2003, and 2002 interest
income which would have been recorded under the original terms of such loans was
approximately $239,000, $179,000, and $160,000 respectively, with $211,000,
$177,000 and $17,000, respectively, recorded. Loans greater than 90 days past
due and still accruing interest were approximately $80,000 and $431,000 at
December 31, 2004 and 2003, respectively.
The amount the Company will ultimately realize from these loans could differ
materially from their carrying value because of future developments affecting
the underlying collateral or the borrowers' ability to repay the loans. As of
December 31, 2004, 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, 2004 and 2003, are as follows:
2004 2003
--------------------------------
Land $ 1,284,771 $ 1,284,771
Buildings and improvements 9,889,939 9,120,088
Furniture and equipment 6,041,317 5,721,259
--------------------------------
17,216,027 16,126,118
Less accumulated depreciation 8,425,391 7,748,311
--------------------------------
$ 8,790,636 $ 8,377,807
================================
Note 6. Deposits
At December 31, 2004, the maturities of time deposits are as follows:
Years ended December 31,
2005 $ 136,616,566
2006 45,485,074
2007 40,585,356
2008 10,609,685
2009 6,392,181
Thereafter 148,998
-------------
$ 239,837,860
=============
50
Interest expense on deposits is summarized as follows:
2004 2003 2002
--------------------------------------
NOW accounts $ 1,237,381 $ 909,137 $ 1,155,459
Savings and money market 1,972,211 1,849,238 2,237,034
Time, $100,000 and over 1,758,187 1,807,047 1,897,855
Other time 4,974,471 5,479,756 6,106,777
--------------------------------------
$ 9,942,250 $ 10,045,178 $11,397,125
======================================
Note 7. Employee Benefit Plans
The Company has a stock purchase plan with the objective of encouraging equity
interests by officers, employees, and directors of the Company and its
subsidiaries to provide additional incentive to improve banking performance and
retain qualified individuals. The purchase price of the shares is the fair
market value of the stock based upon current market trading activity. The terms
of the plan provide for the issuance of up to 14,000 shares of common stock per
year for a ten-year period commencing in 1999 and continuing through 2008.
The Company has a qualified 401(k) profit-sharing plan. The Company matches
employee contributions up to a maximum of 2% of qualified compensation and also
contributes an amount equal to 5% of the participating employee's compensation.
In addition, contributions can be made on a discretionary basis by the combined
Company on behalf of the employees. For the years ended December 31, 2004, 2003
and 2002, Company contributions to the merged plans were approximately $676,000,
$659,000, and $607,000, respectively. The plan covered substantially all
employees.
Note 8. Income Taxes
The components of income tax expense for the year ended December 31, 2004, 2003
and 2002 are as follows:
2004 2003 2002
------------------------------------------
Federal:
Current $3,493,176 $3,752,585 $3,819,350
Deferred (48,519) (266,898) (184,965)
----------------------------------------
3,444,657 3,485,687 3,634,385
----------------------------------------
State:
Current 815,664 852,953 819,039
Deferred (4,929) (17,853) (15,048)
----------------------------------------
810,735 835,100 803,991
----------------------------------------
Income tax expense $4,255,392 $4,320,787 $4,438,376
========================================
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to income before income taxes is a result of the
following for the years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
---------------------------------------
Income taxes at 35% federal tax rate $ 5,825,727 $ 5,580,915 $5,364,695
Increase (decrease) resulting from:
Tax-exempt interest and dividends (1,870,264) (1,577,116) (1,356,187)
State taxes, net of federal tax
benefit 522,929 548,897 534,831
Other (223,000) (231,909) (104,963)
---------------------------------------
Total income tax expense $ 4,255,392 $ 4,320,787 $4,438,376
=======================================
51
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred liabilities at December 31, 2004 and
2003, are as follows:
2004 2003
------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,901,776 $ 1,741,344
ther items 333,792 297,041
------------------------------
2,235,568 2,038,385
------------------------------
Deferred tax liabilities:
Net unrealized gains on securities
available for sale (4,385,799) (5,236,346)
Other (184,439) (40,704)
------------------------------
(4,570,238) (5,277,050)
-------------------------------
Net deferred tax assets (liabilities) $ (2,334,670) $ (3,238,665)
===============================
At December 31, 2004 and 2003, income taxes currently payable of approximately
$182,000 and $390,000, respectively, are included in accrued interest and other
liabilities.
Note 9. Commitments, Contingencies and Concentrations of Credit Risk
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. A summary
of the Company's commitments at December 31, 2004 and 2003 is as follows:
2004 2003
--------------------------------
Commitments to extend credit $ 65,894,000 $ 71,100,000
Standby letters of credit 2,717,000 1,741,000
--------------------------------
$ 68,611,000 $ 72,841,000
================================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third-party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
and is required in instances which the Banks deem necessary. In the event the
customer does not perform in accordance with the terms of the agreement with the
third party, the Banks would be required to fund the commitment. The maximum
potential amount of future payments the Banks could be required to make is
represented by the contractual amount shown in the summary above. If the
commitments were funded, the Banks would be entitled to seek recovery from the
customer. At December 31, 2004 and 2003, no amounts have been recorded as
liabilities for the Bank's potential obligations under these guarantees.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Company's financial
statements.
52
Concentrations of credit risk: The Banks originate real estate, consumer, and
commercial loans, primarily in Story, Boone, Hamilton and Marshall Counties,
Iowa, and adjacent counties. Although the Banks have diversified loan
portfolios, a substantial portion of their borrowers' ability to repay loans is
dependent upon economic conditions in the Banks' market areas.
Note 10. Regulatory Matters
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to regulatory accounting practices.
The Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and each subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2004 and 2003, that the Company and each subsidiary bank met all capital
adequacy requirements to which they are subject.
As of December 31, 2004, 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, 2004 and 2003 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, 2004:
Total capital (to risk
- weighted assets):
Consolidated $ 109,931 18.6% $ 47,274 8.0%
Boone Bank & Trust 13,047 15.0 6,966 8.0 $ 8,707 10.0%
First National Bank 42,473 14.6 23,196 8.0 28,995 10.0
Randall-Story State Bank 8,262 15.7 4,220 8.0 5,275 10.0
State Bank & Trust 12,114 15.2 6,370 8.0 7,962 10.0
United Bank & Trust 7,700 12.6 4,897 8.0 6,122 10.0
Tier 1 capital ( to risk
- weighted assets):
Consolidated $ 103,456 17.5% $ 23,637 4.0%
Boone Bank & Trust 12,092 13.9 3,483 4.0 $ 5,224 6.0%
First National Bank 39,119 13.5 11,598 4.0 17,397 6.0
Randall-Story State Bank 7,602 14.4 2,110 4.0 3,165 6.0
State Bank & Trust 11,227 14.1 3,185 4.0 4,777 6.0
United Bank & Trust 7,065 11.5 2,449 4.0 3,673 6.0
Tier 1 capital( to average
- weighted assets):
Consolidated $ 103,456 12.3% $ 33,654 4.0%
Boone Bank & Trust 12,092 10.6 4,580 4.0 $ 5,726 5.0%
First National Bank 39,119 9.3 16,911 4.0 21,139 5.0
Randall-Story State Bank 7,602 10.5 2,892 4.0 3,614 5.0
State Bank & Trust 11,227 9.4 4,794 4.0 5,992 5.0
United Bank & Trust 7,065 8.2 3,458 4.0 4,322 5.0
53
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2003:
Total capital (to risk-
weighted assets):
Consolidated $ 104,460 20.3% $ 41,261 8.0%
Boone Bank & Trust 12,284 14.9 6,613 8.0 $ 8,267 10.0%
First National Bank 40,460 16.0 20,264 8.0 25,330 10.0
Randall-Story State Bank 7,902 15.5 4,069 8.0 5,087 10.0
State Bank & Trust 11,509 18.2 5,048 8.0 6,310 10.0
United Bank & Trust 5,491 12.0 3,653 8.0 4,566 10.0
Tier 1 capital ( to risk-
weighted assets):
Consolidated $ 98,409 19.1% $ 20,630 4.0%
Boone Bank & Trust 11,333 13.7 3,307 4.0 $ 4,960 6.0%
First National Bank 37,354 14.7 10,132 4.0 15,198 6.0
Randall-Story State Bank 7,266 14.3 2,035 4.0 3,052 6.0
State Bank & Trust 10,719 17.0 2,524 4.0 3,786 6.0
United Bank & Trust 5,011 11.0 1,826 4.0 2,740 6.0
Tier 1 capital ( to average-
weighted assets):
Consolidated $ 98,409 13.0% $ 30,330 4.0%
Boone Bank & Trust 11,333 10.2 4,442 4.0 $ 5,553 5.0%
First National Bank 37,354 9.8 15,179 4.0 18,974 5.0
Randall-Story State Bank 7,266 10.2 2,840 4.0 3,551 5.0
State Bank & Trust 10,719 9.9 4,343 4.0 5,429 5.0
United Bank & Trust 5,011 7.3 2,741 4.0 3,426 5.0
Note 11. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments (as described
in Note 1) as of December 31, 2004 and 2003 were as follows:
2004 2003
- -----------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 18,759,086 $ 18,759,086 $ 31,982,144 $ 31,982,144
Federal funds sold 19,865,000 19,865,000 20,380,000 20,380,000
Interest-bearing deposits 9,575,174 9,575,174 6,363,538 6,363,538
Securities available-for-sale 363,459,462 363,459,462 323,115,914 323,115,914
Loans, net 411,638,565 413,071,863 355,533,119 358,891,066
Loans held for sale 234,469 234,469 859,139 859,139
Accrued income receivable 6,262,424 6,262,424 5,842,247 5,842,247
Financial liabilities:
Deposits $ 658,175,839 $ 659,865,147 $ 619,548,527 $ 623,208,058
Other borrowings 64,072,475 64,072,475 18,198,403 18,198,403
Accrued interest 1,302,021 1,302,021 1,361,819 1,361,819
54
Note 12. Ames National Corporation (Parent Company Only) Financial Statements
Information relative to the Parent Company's balance sheets at December 31, 2004
and 2003, and statements of income and cash flows for each of the years in the
three-year period ended December 31, 2004, is as follows:
BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 6,983 $ 1,213
Interest-bearing deposits in banks 2,718,126 1,588,995
Securities available-for-sale 32,177,363 33,654,060
Investment in bank subsidiaries 79,151,605 76,105,383
Loans receivable, net 1,077,000 -
Premises and equipment, net 439,059 475,551
Accrued income receivable 160,537 151,335
Other assets 142,938 7,198
-------------------------------
Total assets $115,873,611 $111,983,735
===============================
LIABILITIES
Dividends payable $ 1,537,162 $ 1,441,204
Deferred income taxes 3,074,468 2,528,955
Accrued expenses and other liabilities 338,041 688,581
------------------------------
Total liabilities 4,949,671 4,658,740
-------------------------------
STOCKHOLDERS' EQUITY
Common stock 15,766,150 15,766,150
Additional paid-in capital 25,378,746 25,351,979
Retained earnings 63,200,352 58,400,660
Treasury stock, at cost (889,020) (1,109,735)
Accumulated other comprehensive income 7,467,712 8,915,941
-------------------------------
Total equity 110,923,940 107,324,995
-------------------------------
Total liabilities and
stockholders' equity $115,873,611 $111,983,735
===============================
55
STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
- --------------------------------------------------------------------------------
Operating income:
Equity in net income of bank
subsidiaries $11,857,298 $10,440,180 $10,108,107
Interest 473,375 542,640 745,488
Dividends 1,063,203 962,049 979,071
Rents 70,425 140,147 150,894
Securities gains, net 308,273 1,207,735 881,938
--------------------------------------
13,772,574 13,292,751 12,865,498
Provision for loan losses 16,000 (16,000) -
--------------------------------------
Operating income after
provision for
loan losses 13,756,574 13,308,751 12,865,498
Operating expenses: 1,517,028 1,379,066 1,320,360
--------------------------------------
Income before income taxes 12,239,546 11,929,685 11,545,138
Income tax expense (benefit) (150,000) 305,000 205,000
---------------------------------------
Net income $12,389,546 $11,624,685 $11,340,138
=======================================
56
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,389,546 $ 11,624,685 $11,340,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 66,473 77,132 80,620
Provision for loan losses 16,000 (16,000) -
Amortization and accretion, net (6,004) (8,014) (16,060)
Provision for deferred taxes - (36,385) (56,023)
Securities gains, net (308,273) (1,207,735) (881,938)
Equity in net income of bank subsidiaries (11,857,299) (10,440,180) (10,108,107)
Dividends received from bank subsidiaries 8,384,000 7,868,000 5,978,000
(Increase) decrease in accrued income receivable (9,202) 61,798 1,446,277
(Increase) decrease in other assets (135,740) 148,587 (130,281)
Increase (decrease) in accrued expense payable
and other liabilities (350,540) 336,997 246,165
----------------------------------------------------
Net cash provided by operating activities $ 8,188,961 $ 8,408,885 $ 7,898,791
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale $ (1,454,604) $ (7,292,720) $(7,334,938)
Proceeds from sale of securities available-for-sale 4,200,716 4,067,605 8,611,304
Proceeds from maturities and calls of securities 519,223
available-for-sale - 2,170,435 2,196,163
(Increase) decrease in interest bearing deposits
in banks (1,129,131) (192,339) 769,809
(Increase) decrease in loans (1,093,000) 722,968 (448,741)
Purchase of bank premises and equipment (29,981) (34,976) (95,226)
Investment in bank subsidiaries (1,950,000) (1,000,000) (5,000,000)
----------------------------------------------------
Net cash (used in) investing activities $ (936,777) $ (1,559,027) $(1,301,629)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (7,493,896) (7,077,117) (6,755,449)
Proceeds from issuance of treasury stock 247,482 221,870 158,151
----------------------------------------------------
Net cash (used in) financing activities $ (7,246,414) $ (6,855,247) $(6,597,298)
----------------------------------------------------
Net increase (decrease) in cash and
cash equivalents $ 5,770 $ (5,389) $ (136)
CASH AND DUE FROM BANKS
Beginning 1,213 6,602 6,738
----------------------------------------------------
Ending $ 6,983 $ 1,213 $ 6,602
====================================================
57
Note 13. Selected Quarterly Financial Data (Unaudited)
2004
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------
Total interest income $ 8,914,804 $ 9,109,031 $ 9,323,847 $ 10,005,977
Total interest expense 2,391,174 2,451,952 2,662,249 3,057,952
Net interest income 6,523,630 6,657,079 6,661,598 6,948,025
Provision for loan losses 58,355 210,353 (63,820) 274,467
Net income 2,964,542 2,862,039 3,372,387 3,190,578
Basic and diluted earnings per common share 0.95 0.91 1.08 1.01
2003
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------
Total interest income $ 8,714,233 $ 8,876,124 $ 8,818,046 $ 8,905,337
Total interest expense 2,690,209 2,723,323 2,467,155 2,458,095
Net interest income 6,024,024 6,152,801 6,350,891 6,447,242
Provision for loan losses 119,745 305,995 87,000 132,707
Net income 2,870,325 2,649,229 3,240,642 2,864,489
Basic and diluted earnings per common share 0.92 0.85 1.03 0.91
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
independent accountants during the two most recently ended fiscal years of the
Company.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
performed under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer of the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act Rule
240.13a-15 (e)). Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that the Company's current disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
Management's annual report on internal control over financial reporting is
contained in Item 8 of this Report.
The attestation report of the Company's registered public accounting firm
on management's assessment of the Company's internal control over financial
reporting is contained in Item 8 of this Report.
There were no changes in the Company's internal control over financial
reporting that occurred during the quarter ended December 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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 27, 2005, as
filed with the SEC on March 16, 2005 (the "Proxy Statement"), which information
is incorporated herein by this reference.
58
Executive Officers
The information required by Item 10 regarding the executive officers
appears in Item 1 of Part I of this Report under the heading "Executive Officers
of the Company and Banks".
Section 16(a) Beneficial Ownership Reporting Compliance
Refer to the information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement, which information is
incorporated herein by this reference.
Audit Committee Financial Expert
The board of directors of the Company has determined that Warren R. Madden, a
member of the Audit Committee, qualifies as an "audit committee financial
expert" under applicable SEC rules. The board of directors has further
determined that Mr. Madden qualifies as an "independent" director under
applicable SEC rules and the corporate governance rules of the NASDAQ stock
market. The board's affirmative determination was based, among other things,
upon Mr. Madden's experience as Vice President of Finance and Business of Iowa
State University, a position in which he functions as the principal financial
officer of the university.
Code of Ethics
The Company has adopted an Ethics and Confidentiality Policy that applies to all
directors, officers and employees of the Company. A copy of this policy is
posted on the Company's website at www.amesnational.com. In the event that the
Company makes any amendments to, or grants any waivers of, a provision of the
Ethics and Confidentiality Policy that requires disclosure under applicable SEC
rules, the Company intends to disclose such amendments or waiver and the reasons
therefore on its website.
ITEM 11. EXECUTIVE COMPENSATION
Refer to the information under the caption "Executive Compensation" in the
Proxy Statement, which information is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Refer to the information under the caption "Security Ownership of
Management and Certain Beneficial Owners" in the Proxy Statement, which
information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to the information under the caption "Loans to Directors and
Executive Officers and Related Party Transactions" in the Proxy Statement, which
information is incorporated herein by this reference.
59
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Refer to the information under the caption "Relationship with Independent
Public Accountants" in the Proxy Statement, which information is incorporated
herein by this reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of Financial Statements and Schedules.
1. Financial Statements
Reports of McGladrey & Pullen, LLP, Independent Registered Public
Accounting Firm
Consolidated Balance Sheets, December 31, 2004 and 2003
Consolidated Statements of Income for the Years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002
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) List of Exhibits.
3.1 - Restated Articles of Incorporation of the Company (incorporated
by reference to Registration Statement on Form 10 filed on April 30,
2002).
3.2 - Bylaws of the Company (incorporated by reference to the Annual
Report on Form 10K filed on March 12, 2004).
10 - Management Incentive Compensation Plan (incorporated by
reference to) Annual Report on Form 10K filed on March 25, 2003).*
21 - Subsidiaries of the Registrant.
23.1 - Consent of Independent Registered Public Accounting Firm.
31.1 - Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 - Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 - Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 - Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350
* Indicates a management compensatory plan or arrangement.
60
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 15, 2005 By: /s/ Daniel L. Krieger
--------------------------------------------
Daniel L. Krieger, Chairman and President
(Principal Executive Officer)
March 15, 2005 By: /s/ John P. Nelson
--------------------------------------------
John P. Nelson, Vice President
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on March 15, 2005.
By: /s/ Betty A. Baudler Horras
---------------------------------
Betty A. Baudler Horras, Director
By: /s/Douglas C. Gustafson
---------------------------------
Douglas C. Gustafson, Director
By: /s/ Charles D. Jons
--------------------------------
Charles D. Jons, Director
By: /s/ Warren R. Madden
----------------------------------
Warren R. Madden, Director
By: /s/ Fred C. Samuelson
----------------------------------
Fred C. Samuelson, Director
By: /s/ Marvin J. Walter
----------------------------------
Marvin J. Walter, Director
61
EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit No. Description
- ---------- --------------------------------------------------------------------
3.1 - Restated Articles of Incorporation of the Company (incorporated
by reference to Registration Statement on Form 10 filed on
April 30, 2002).
3.2 - Bylaws of the Company (incorporated by reference to the Annual
Report on Form 10K filed on March 12, 2004).
10 - Management Incentive Compensation Plan (incorporated by
reference to) Annual Report on Form 10K filed on March 25, 2003).*
21 - Subsidiaries
23.1 - Consent of Independent Registered Public Accounting Firm.
31.1 - Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 - Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 - Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 - Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
62