SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [Mark One] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 0-32637 AMES NATIONAL CORPORATION ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) IOWA 42-1039071 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I. R. S. Employer Incorporation or Organization) Identification Number) 405 FIFTH STREET AMES, IOWA 50010 ---------------------------------------- (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (515) 232-6251 Not Applicable ---------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes __X__ No _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, $5.00 PAR VALUE 3,133,053 - -------------------------------------------------------------------------------- (Class) (Shares Outstanding at August 8, 2003) 1
AMES NATIONAL CORPORATION INDEX Page Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) 3 Consolidated Balance Sheets at June 30, 2003 and December 31, 2002 3 Consolidated Statements of Income for the three and six months ended June 30, 2003 and 2002 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 14 Part II. Other Information Items 1 through 6 14 Signatures 15 2
PART 1. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets (Unaudited) AMES NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) <TABLE> June 30, December 31, Assets 2003 2002 ---------------------------- <S> <C> <C> Cash and due from banks ............................................................. $ 28,600,917 $ 51,688,784 Federal funds sold .................................................................. 79,075,000 32,500,000 Interest bearing deposits in financial institutions ................................. 6,000,000 1,000,000 Securities available-for-sale ....................................................... 268,029,547 244,575,026 Loans receivable, net ............................................................... 345,748,025 332,306,497 Bank premises and equipment, net .................................................... 8,710,669 8,726,397 Accrued income receivable ........................................................... 5,161,355 5,849,017 Other assets ........................................................................ 177,583 582,849 ---------------------------- Total assets ............................................................. $741,503,096 $677,228,570 ============================ Liabilities and Stockholders' Equity Deposits: Demand ........................................................................... $ 61,024,546 $ 62,557,937 NOW accounts ..................................................................... 128,917,809 121,325,104 Savings and money market ......................................................... 171,903,731 153,296,259 Time, $100,000 and over .......................................................... 70,155,513 54,564,283 Other time ....................................................................... 172,158,482 158,878,796 ---------------------------- Total deposits ........................................................... 604,160,081 550,622,379 Federal funds purchased and securities sold under agreements to repurchase .......... 20,783,016 18,325,574 Dividends payable ................................................................... 2,878,663 1,376,752 Deferred taxes ...................................................................... 4,616,388 2,879,057 Accrued interest and other liabilities .............................................. 2,902,027 2,501,952 ---------------------------- Total liabilities ........................................................ 635,340,175 575,705,714 ---------------------------- Stockholders' Equity: Common stock, $5 par value; authorized 6,000,000 shares; issued 3,153,230 shares at June 30, 2003 and December 31, 2002; outstanding 3,133,053 shares at June 30, 2003 and 3,128,982 shares at December 31, 2002 ..................... 15,766,150 15,766,150 Surplus .......................................................................... 25,351,979 25,354,014 Retained earnings ................................................................ 55,181,682 53,917,544 Treasury stock, at cost; 20,177 shares at June 30, 2003 and 24,248 shares at December 31, 2002 ......................................... (1,109,735) (1,333,640) Accumulated other comprehensive income - net unrealized gain on securities available-for-sale ............................................... 10,972,845 7,818,788 ---------------------------- Total stockholders' equity ............................................... 106,162,921 101,522,856 ---------------------------- Total liabilities and stockholders' equity ............................... $741,503,096 $677,228,570 ============================ </TABLE> 3
AMES NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (unaudited) <TABLE> Three Months Ended Six Months Ended June 30, June 30, ` ----------------------------------------------------- 2003 2002 2003 2002 ----------------------------------------------------- <S> <C> <C> <C> <C> Interest and dividend income: Loans ............................ $ 5,651,200 $ 5,766,039 $11,207,235 $11,631,211 Securities Taxable ........................ 1,792,746 2,058,776 3,676,285 4,038,907 Tax-exempt ..................... 842,090 719,688 1,612,390 1,438,642 Federal funds sold ............... 249,908 251,243 413,602 452,027 Dividends ........................ 340,180 374,867 680,845 705,670 ----------------------------------------------------- Total interest income ...... 8,876,124 9,170,613 17,590,357 18,266,457 ----------------------------------------------------- Interest expense: Deposits......................... 2,646,208 2,971,413 5,272,198 5,959,373 Other borrowed funds............. 77,115 59,765 141,334 133,899 ----------------------------------------------------- Total interest expense 2,723,323 3,031,178 5,413,532 6,093,272 ----------------------------------------------------- Net interest income ........ 6,152,801 6,139,435 12,176,825 12,173,185 Provision for loan losses ............ 305,995 111,265 425,740 215,484 ----------------------------------------------------- Net interest income after provision for loan losses 5,846,806 6,028,170 11,751,085 11,957,701 ----------------------------------------------------- Noninterest income: Trust department income .......... 274,773 276,425 602,102 527,155 Service fees ..................... 383,076 361,518 742,000 719,193 Securities gains, net ............ 280,782 133,941 646,607 322,673 Loan and secondary market fees ... 322,876 93,250 570,996 228,877 Other ............................ 250,626 202,697 545,841 393,070 ----------------------------------------------------- Total noninterest income ... 1,512,133 1,067,831 3,107,546 2,190,968 ----------------------------------------------------- Noninterest expense: Salaries and employee benefits ... 2,324,737 2,075,667 4,494,421 3,858,002 Occupancy expenses ............... 231,737 226,202 500,345 429,564 Data processing .................. 617,875 436,629 1,085,675 841,040 Other operating expenses ......... 606,720 572,207 1,198,230 1,114,355 ----------------------------------------------------- Total noninterest expense .. 3,781,069 3,310,705 7,278,671 6,242,961 ----------------------------------------------------- Income before income taxes . 3,577,870 3,785,296 7,579,960 7,905,708 Income tax expense ................... 928,641 1,044,361 2,060,406 2,223,843 ----------------------------------------------------- Net income ................. $ 2,649,229 $ 2,740,935 $ 5,519,554 $ 5,681,865 ===================================================== Basic and diluted earnings per share . $ 0.85 $ 0.88 $ 1.76 $ 1.82 ===================================================== Declared dividends per share ......... $ 0.92 $ 0.88 $ 1.36 $ 1.30 ===================================================== Comprehensive Income ................. $ 6,186,196 $ 5,375,978 $ 8,673,611 $ 8,379,052 ===================================================== </TABLE> 4
AMES NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) <TABLE> Six Months Ended June 30, -------------------------- 2003 2002 -------------------------- <S> <C> <C> Cash flows from operating activities: Net income ............................................................................... $ 5,519,554 $ 5,681,865 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .............................................................. 425,740 215,484 Amortization and accretion, net ........................................................ 261,752 (2,095) Depreciation ........................................................................... 497,536 449,235 Provision for deferred taxes ........................................................... (115,052) (24,475) Securities gains, net .................................................................. (646,607) (322,673) Decrease in accrued income receivable .................................................. 687,662 679,984 Decrease (increase) in other assets .................................................... 405,266 (250,861) (Decrease) increase in accrued interest and other liabilities .......................... 400,075 (395,575) -------------------------- Net cash provided by operating activities ........................................ 7,435,926 6,030,889 ------------------------- Cash flow from investing activities: Purchase of securities available-for-sale ................................................ (56,962,306) (51,183,753) Proceeds from sale of securities available-for-sale ...................................... 3,735,979 23,852,113 Proceeds from maturities of securities available-for-sale ................................ 35,163,100 16,493,334 Net decrease (increase) in interest bearing deposits in financial institutions ........... (5,000,000) (350,000) Net increase in federal funds sold ....................................................... (46,575,000) (13,020,000) Net decrease (increase) in loans ......................................................... (13,867,268) 15,252,553 Purchase of bank premises and equipment .................................................. (481,808) (1,160,328) -------------------------- Net cash used in investing activities ............................................ (83,987,304) (10,116,081) -------------------------- Cash flows from financing activities: Increase (decrease) in deposits .......................................................... 53,537,702 (515,291) Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase ..................................... 2,457,442 441,209 Dividends paid ........................................................................... (2,753,504) (2,625,192) Proceeds from issuance of treasury stock ................................................. 221,870 158,151 -------------------------- Net cash provided by (used in) financing activities .............................. 53,463,510 (2,541,123) -------------------------- Net decrease in cash and cash equivalents ........................................ (23,087,867) (6,626,315) ------------------------- Cash and cash equivalents at beginning of year .............................................. 51,688,784 42,459,156 -------------------------- Cash and cash equivalents at end of the period .............................................. $28,600,917 $35,832,841 ========================== Supplemental disclosures of cash flow information: Cash paid for interest ................................................................... $ 5,438,043 $ 6,531,731 Cash paid for taxes ...................................................................... 2,074,118 2,405,502 ========================== </TABLE> 5
AMES NATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Significant Accounting Policies The consolidated financial statements for the three and six-month periods ended June 30, 2003 and 2002 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosure normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's 10-K. The consolidated condensed financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the "Banks"). All significant intercompany balances and transactions have been eliminated in consolidation. 2. Dividends On August 13, 2003, the Company declared a cash dividend on its common stock, payable on November 17, 2003 to stockholders of record as of November 3, 2003, equal to $0.46 per share. 3. Earnings Per Share Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended June 30, 2003 and 2002 were 3,129,743 and 3,125,889, respectively. The weighted average outstanding shares for the six months ended June 30, 2003 and 2002 were 3,129,364 and 3,125,163, respectively. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements about the Company, its business and its prospects. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include use of the words "believe", "expect", "anticipate", "intend", "plan", "estimate" or words of similar meaning, or future or conditional verbs such as "will", "would", "should", "could" or "may". Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors, many of which are beyond the Company's control, could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Such risks and uncertainties with respect to the Company include those related to the economic environment, particularly in the areas in which the Company and the Banks operate, competitive products and pricing, fiscal and monetary policies of the U.S. government, changes in governmental regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, credit risk management and asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. Results of Operations for Three Months Ending June 30, 2003 and June 30, 2002 General The Company earned net income of $2,649,000, or $0.85 per share for the three months ended June 30, 2003, compared to net income of $2,741,000, or $0.88 per share, for the three months ended June 30, 2002, a decrease of 3.4%. The lower net income is attributable to higher provision expense for loan losses and increased non-interest expense partially offset by higher non-interest income. The Company's return on average assets was 1.44% and 1.73%, respectively, for the three-month periods ending June 30, 2003 and 2002. The Company's return on average equity was 10.18% and 11.32%, respectively for the three month periods ending June 30, 2003 and 2002. 6
AVERAGE BALANCE SHEETS AND INTEREST RATES The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the three month periods ended June 30, 2003 and June 30, 2002, respectively. ASSETS (dollars in thousands) <TABLE> AVERAGE BALANCE SHEETS AND INTEREST RATES Three Months Ended June 30, ------------------------------------------------------------- 2003 2002 ---------------------------- ------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate ------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans Commercial ....................... $ 40,116 $ 561 5.59% $ 46,208 $ 828 7.17% Agricultural ..................... 26,035 451 6.93% 25,250 469 7.43% Real estate ...................... 263,757 4,293 6.51% 223,589 4,120 7.37% Installment and other ............ 20,055 346 6.90% 19,041 349 7.33% ------------------------------------------------------------ Total loans (including fees) ....... $349,963 $ 5,651 6.46% $314,088 $ 5,766 7.34% Investment securities Taxable .......................... $155,141 $ 1,904 4.91% $149,189 $ 2,306 6.18% Tax-exempt ....................... 90,884 1,607 7.07% 70,090 1,278 7.29% ------------------------------------------------------------ Total investment securities ........ $246,025 $ 3,511 5.71% $219,279 $ 3,584 6.54% Interest bearing deposits with banks $ 4,974 $ 10 0.80%$ 600 $ 5 3.33% Federal funds sold ................. 89,464 250 1.12% 59,639 251 1.68% ------------------------------------------------------------ Total interest-earning assets ...... $690,426 $ 9,422 5.46% $593,606 $ 9,606 6.47% Noninterest-earning assets ......... 46,660 41,830 -------- -------- TOTAL ASSETS ....................... $737,086 $635,436 ======== ======== <FN> 1 Average loan balance include nonaccrual loans, if any. Interest income on nonaccrual loans has been included. 2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%. </FN> </TABLE> 7
LIABILITIES AND STOCKHOLDERS' EQUITY (dollars in thousands) <TABLE> AVERAGE BALANCE SHEETS AND INTEREST RATES Three Months Ended June 30, ------------------------------------------------------------- 2003 2002 ---------------------------- ----------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate ------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Interest-bearing liabilities Deposits Savings, NOW accounts, and money markets . $310,295 $ 767 0.99% $270,611 $ 967 1.43% Time deposits < $100,000 ................. 171,734 1,410 3.28% 149,509 1,518 4.06% Time deposits > $100,000 ................. 65,571 469 2.86% 52,523 486 3.70% ------------------------------------------------------------ Total deposits ............................. $547,600 $ 2,646 1.93% $472,643 $ 2,971 2.51% Other borrowed funds ....................... 19,612 77 1.57% 11,589 60 2.07% ------------------------------------------------------------ Total Interest-bearing ..................... $567,212 $ 2,723 1.92% $484,232 $ 3,031 2.50% liabilities Noninterest-bearing liabilities Demand deposits ............................ $ 56,711 $ 49,496 Other liabilities .......................... 9,115 4,862 -------- -------- Stockholders' equity ....................... $104,048 $ 96,846 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $737,086 $635,436 ======== ======== Net interest income ........................ $ 6,699 3.88% $ 6,575 4.43% ================= ================= Spread Analysis Interest income/average assets ............. $ 9,422 5.11% $ 9,606 6.05% Interest expense/average assets ............ 2,723 1.48% 3,031 1.91% Net interest income/average assets ......... 6,699 3.63% 6,575 4.14% <FN> 1 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%. </FN> </TABLE> Net Interest Income For the three months ended June 30, 2003, the Company's net interest margin was 3.88% compared to 4.43% for the three months ended June 30, 2002. Net interest income, prior to the adjustment for tax-exempt income, for the quarters ended June 30, 2003 and 2002 totaled $6,153,000 and $6,139,000, respectively. Net interest income was relatively flat compared to the three-month period one-year ago despite the lower net interest margin. A higher volume of interest-earning assets, primarily associated with the growth of United Bank & Trust (United Bank), Marshalltown, Iowa, combined with a lower cost of funds served to offset the loss of income resulting from assets repricing to lower market rates. For the three months ended June 30, 2003, interest income decreased $294,000 or 3.2% when compared to the same period in 2002. This decrease was primarily attributable to significantly lower yields on earning assets as the result of a decline in market interest rates. The competitive banking environment in central Iowa continues to place significant downward pressure on loan yields. Interest expense decreased $308,000 or 10.2% for the quarter ended June 30, 2003 when compared to the same period in 2002. Lower interest rates on deposits and other borrowings resulted in decreased interest expense as the Company's cost of funds declined with market interest rates in spite of an increase in the average volume of interest-bearing liabilities. 8
Provision for Loan Losses The Company provided $306,000 for loan losses for the three months ended June 30, 2003 compared to $111,000 during the same period last year. Provision expense for the second quarter of 2003 was higher than the prior year period primarily as the result of increased specific allowance for impaired loans. Noninterest Income and Expense Noninterest income increased $444,000, or 41.6% during the quarter ended June 30, 2003 compared to the same period in 2002. The increase can be attributed to increased fee income on the sale of residential loans in the secondary mortgage market and gains on the sale of securities in the Company's equity portfolio. Noninterest expense increased $470,000 or 14.2% for the second quarter of 2003 compared to the same period in 2002. Noninterest expense items that increased include salary and benefits and data processing and equipment costs. The higher costs in 2003 are primarily attributable to having a full quarter of overhead expenses at United Bank for the second quarter of 2003 as the bank opened in June of 2002. Income Taxes The provision for income taxes for June 30, 2003 and 2002 was $929,000 and $1,044,000, respectively. This amount represents an effective tax rate of 26.0% for the second quarter of 2003, compared to 27.6% for the second quarter of 2002. The Company's marginal federal tax rate is currently 35%. The difference between the Company's effective and marginal tax rate is primarily related to investments made in tax exempt securities. Results of Operations for Six Months Ending June 30, 2003 and June 30, 2002 General The Company earned net income of $5,520,000 or $1.76 per share for the six months ended June 30, 2003, compared to net income of $5,682,000, or $1.82 per share, for the six months ended June 30, 2002, a decrease of 2.9%. The lower net income is attributable to higher provision expense for loan losses and increased non-interest expense partially offset by higher non-interest income. The Company's return on average assets was 1.55% and 1.81%, respectively for the six-month periods ending June 30, 2003 and 2002. The Company's return on average equity was 10.70% and 11.84%, respectively for the six month periods ending June 30, 2003 and 2002. 9
The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the six month periods ended June 30, 2003 and June 30, 2002, respectively. ASSETS (dollars in thousands) <TABLE> AVERAGE BALANCE SHEETS AND INTEREST RATES Six Months Ended June 30, 2003 2002 ---------------------------- --------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate ----------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans Commercial ....................... $ 38,834 $ 1,112 5.73% $ 45,114 $ 1,630 7.23% Agricultural ..................... 26,017 912 7.01% 24,929 938 7.53% Real estate ...................... 260,642 8,509 6.53% 225,653 8,366 7.41% Installment and other ............ 20,051 674 6.72% 19,546 697 7.13% ----------------------------------------------------------- Total loans (including fees) ....... $345,544 $ 11,207 6.49% $315,242 $ 11,631 7.38% Investment securities Taxable .......................... $155,074 $ 3,906 5.04% $145,042 $ 4,389 6.05% Tax-exempt ....................... 86,545 3,101 7.17% 70,263 2,710 7.71% ----------------------------------------------------------- Total investment securities ........ $241,619 $ 7,007 5.80% $215,305 $ 7,099 6.59% Interest bearing deposits with banks $ 2,998 $ 17 1.13% $ 501 $ 7 2.79% Federal funds sold ................. 74,274 414 1.11% 54,899 452 1.65% ----------------------------------------------------------- Total interest-earning assets ...... $664,435 $ 18,645 5.61% $585,947 $ 19,189 6.55% Total noninterest-earning assets ... $ 48,307 $ 41,306 -------- -------- TOTAL ASSETS ....................... $712,742 $627,253 ======== ======== <FN> 1 Average loan balance include nonaccrual loans, if any. Interest income on nonaccrual loans has been included. 2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%. </FN> 10
</TABLE> LIABILITIES AND STOCKHOLDERS' EQUITY (dollars in thousands) <TABLE> AVERAGE BALANCE SHEETS AND INTEREST RATES Six Months Ended June 30, 2003 2002 ---------------------------- ---------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate ------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Interest-bearing liabilities Deposits Savings, NOW accounts, and money markets . $294,608 $ 1,519 1.03% $260,293 $ 1,798 1.38% Time deposits < $100,000 ................. 168,551 2,817 3.34% 151,344 3,200 4.23% Time deposits > $100,000 ................. 63,505 936 2.95% 49,474 961 3.88% ------------------------------------------------------------ Total deposits ............................. $526,664 $ 5,272 2.00% $461,111 $ 5,959 2.58% Other borrowed funds ....................... 17,377 141 1.62% 13,407 134 2.00% ------------------------------------------------------------ Total Interest-bearing liabilities ......... $544,041 $ 5,413 1.99% $474,518 $ 6,093 2.57% Noninterest-bearing liabilities Demand deposits ............................ $ 57,319 $ 51,779 Other liabilities .......................... 8,200 4,986 -------- -------- Stockholders' equity ....................... $103,182 $ 95,970 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $712,742 $627,253 ======== ======== Net interest income ........................ $ 13,232 3.98% $ 13,096 4.47% ======== ======== Spread Analysis Interest income/average assets ............. $ 18,645 5.23% $ 19,189 6.12% Interest expense/average assets ............ 5,413 1.52% 6,093 1.94% Net interest income/average assets ......... 13,232 3.71% 13,096 4.18% <FN> 1 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%. </FN> </TABLE> 11
Net Interest Income For the six months ended June 30, 2003, the Company's net interest margin was 3.98% compared to 4.47% for the six months ended June 30, 2002. Net interest income, prior to the adjustment for tax-exempt income, for the six months ended June 30, 2003 and 2002 totaled $12,177,000 and $12,173,000, respectively. Net interest income was flat compared to the six-month period one-year ago despite the lower net interest margin. A higher volume of interest-earning assets, primarily associated with the growth of United Bank, combined with a lower cost of funds served to offset the loss of income resulting from assets repricing to lower market rates. For the six months ended June 30, 2003, interest income decreased $676,000 or 3.7% when compared to the same period in 2002. This decrease was primarily attributable to significantly lower yields on earning assets as the result of a decline in market interest rates. The competitive banking environment in central Iowa continues to place significant downward pressure on loan yields. Interest expense decreased $680,000 or 11.2% for the six months ended June 30, 2003 when compared to the same period in 2002. Lower interest rates on deposits and other borrowings resulted in decreased interest expense as the Company's cost of funds declined with market interest rates. Provision for Loan Losses The Company provided $426,000 for loan losses for the six months ended June 30, 2003 compared to $215,000 during the same period last year. Provision expense for the first half of 2003 was higher than the prior year period primarily as the result of increased specific allowance for impaired loans and establishing the allowance for loan losses at United Bank. Noninterest Income and Expense Noninterest income increased $917,000, or 41.8% during the six months ended June 30, 2003 compared to the same period in 2002. The increase can be attributed to increased fee income on the sale of residential loans in the secondary market, gains on the sale of securities in the Company's equity portfolio, and higher trust department income. Noninterest expense increased $1,036,000 or 16.6% for the first half of 2003 compared to the same period in 2002. Noninterest expense increased as the result of the opening of United Bank. Excluding overhead expenses of United Bank, noninterest expense increased 7.6%, primarily as the result of higher salary and benefit expenses at First National Bank. Income Taxes The provision for income taxes for the six months ending June 30, 2003 and 2002 was $2,060,000 and $2,224,000, respectively. This amount represents an effective tax rate of 27.2% for the first half of 2003, compared to 28.1% for the same period in 2002. The Company's marginal federal tax rate is currently 35%. The difference between the Company's effective and marginal tax rate is primarily related to investments made in tax exempt securities. Financial Condition Assets For the quarter ended June 30, 2003, total assets were $741,503,000, a $64,275,000 increase in comparison to December 31, 2002 totals. Deposit growth primarily at United Bank as well as the other Company's subsidiary banks allowed for the significant increase in earning assets. Investment Portfolio The increase in the volume of investment securities to $268,030,000 on June 30, 2003 from $244,575,000 on December 31, 2002 resulted from the purchase of U.S. government agencies and municipal bonds. 12
Loan Portfolio Net loans as of June 30, 2003 totaled $345,748,000, an increase of $13,442,000 from the outstanding balances as of December 31, 2002. The increase relates to loans generated by United Bank. Impaired loans totaled $1,906,000 as of June 30, 2003 compared to $2,409,000 as of December 31, 2002. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans include loans accounted for on a non-accrual basis; accruing loans which are contractually past due 90 days or more as to principal or interest payments; and any restructured loans. As of June 30, 2003, non-accrual loans totaled $1,808,000, past due loans still accruing totaled $98,000 and there were no restructured loans outstanding. Other real estate owned as of June 30, 2003 and December 31, 2002 totaled $124,000 and $295,000, respectively. Net charge offs were $301,000 for the six months ended June 30, 2003 as compared to net charge-offs $170,000 for the six months ended June 30, 2002. Losses related primarily to previously identified impaired commercial loans for both periods. The resulting allowance for loan losses was $5,882,000 as of June 30, 2003 compared to $5,758,000 as of December 31, 2002. The allowance for loan losses as a percentage of outstanding loans as of June 30, 2003 and December 31, 2002 was 1.67% and 1.70%, respectively. The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower; a realistic determination of value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; an analysis of the levels and trends of loan categories; and a review of delinquent and classified loans. Liabilities Deposits increased $53,538,000 from year-end 2002. The increase is primarily attributable to deposits generated by United Bank. Other borrowed funds as of June 30, 2003, consisted primarily of securities sold under agreements to repurchase totaling $20,783,000 compared to total other borrowing as of December 31, 2002 of $18,326,000. Liquidity and Capital Resources The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business expansion. The Company's principal source of funds is deposits including demand, money market, savings and certificates of deposits. Other sources include principal repayments on loans, proceeds from the maturity and sale of investment securities, federal funds purchased, repurchase agreements, advances from the Federal Home Loan Bank and funds provided by operations. Net cash from operating activities contributed $7,436,000 and $6,031,000 to liquidity for the six months ended June 30, 2003 and 2002, respectively. Liquid assets including cash on hand, balances due from other banks, federal funds sold and interest-bearing deposits in financial institutions increased to $113,676,000 as of June 30, 2003 compared to year-end 2002 balance of $85,189,000. The increase in federal funds sold is attributable to decreased loan demand and significant deposit growth. Securities available for sale increased to $268,030,000 as of June 30, 2003 from $244,575,000 as of December 31, 2002 and provide additional liquidity for the Company. To provide additional external liquidity, the Banks have outstanding lines of credit with the Federal Home Loan Bank of Des Moines, Iowa of $30,732,000 and federal funds borrowing capacity at correspondent banks of $46,000,000. As of June 30, 2003, the Company had no outstanding borrowings of federal funds purchased or Federal Home Loan Bank advances. Management believes that the Company's liquidity sources will be sufficient to support existing operations for the foreseeable future. The Company's total stockholder's equity increased to $106,163,000 as of June 30, 2003, from $101,523,000 as of December 31, 2002. Stockholders' equity as of June 30, 2003 was 14.3% of total assets, compared to 15.0% at December 31, 2002. Total equity increased due to the retention of earnings and from appreciation in the Company and Banks' stock and bond portfolios. No material capital expenditures or material changes in the capital resource mix are anticipated at this time. Management believes that, as of June 30, 2003, the Company and its Banks meet the capital requirements to which they are subject. As of that date, all the Company's Banks were "well capitalized" under regulatory prompt corrective action provisions. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed to-date in 2003 changed significantly when compared to 2002. Item 4. Disclosure Controls and Procedures As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders on April 23 2003, stockholders elected Robert L. Cramer and Warren R. Madden and re-elected Betty A. Baudler and James R. Larson II to the Company's Board of Directors. Continuing directors include, James R. Christy, Douglas C. Gustafson, Charles D. Jons, Daniel L. Krieger, and Marvin J. Walter. There were 3,128,982 issued and outstanding shares of common stock entitled to vote at the annual meeting. The voting results on the election of directors were as follows: Votes In Favor Withheld ----------------------------- Robert L. Cramer ....................... 2,823,000 305,982 Warren R. Madden ....................... 2,823,000 305,982 Betty A. Baudler ....................... 2,823,000 305,982 James R. Larson II ..................... 2,823,000 305,982 There were no broker non-votes or abstentions on this proposal. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1 - Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 - Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On April 18, 2003, the Company filed a Form 8-K pursuant to Item 5, announcing financial results for the three months ended March 31, 2003 and forecasted earnings for the year ended December 31, 2003. 14
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMES NATIONAL CORPORATION DATE: August 13, 2003 By: /s/ Daniel L. Krieger ----------------------------- Daniel L. Krieger, President (Principal Executive Officer) By: /s/ John P. Nelson ------------------------------ John P. Nelson, Vice President (Principal Financial Officer) 15