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, 2004 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 0-32637 AMES NATIONAL CORPORATION ------------------------------------------------------ (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 3,137,066 - -------------------------------------------------------------------------------- (Class) (Shares Outstanding at July 30, 2004) 1
AMES NATIONAL CORPORATION INDEX Page Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 3 Consolidated Statements of Income for the three and six months ended June 30, 2004 and 2003 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4 Evaluation of Disclosure Controls and Procedures 18 Part II. Other Information Items 1 through 6 19 Signatures 20 2
Part 1. FINANCIAL INFORMATION ITEM 1. AMES NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) <TABLE> June 30, December 31, Assets 2004 2003 ------------- -------------- <S> <C> <C> Cash and due from banks $ 22,365,358 $ 31,982,144 Federal funds sold 1,400,000 20,380,000 Interest bearing deposits in financial institutions 9,053,035 6,363,538 Securities available-for-sale 358,055,848 323,115,914 Loans receivable, net 382,602,275 355,533,119 Loans held for sale 1,266,300 859,139 Bank premises and equipment, net 8,312,472 8,377,807 Accrued income receivable 5,696,966 5,842,247 Other assets 579,629 332,556 -------------- -------------- Total assets $ 789,331,883 $ 752,786,464 ============== ============== Liabilities and Stockholders' Equity Liabilities: Deposits: Demand $ 64,153,372 $ 71,372,534 NOW accounts 150,610,085 138,308,140 Savings and money market 177,314,085 166,387,319 Time, $100,000 and over 67,585,809 69,486,570 Other time 174,206,039 173,993,964 -------------- -------------- Total deposits 633,869,390 619,548,527 Federal funds purchased and securities sold under agreements to repurchase 44,575,719 18,198,403 Dividends payable 3,070,392 1,441,204 Deferred taxes 445,010 3,238,665 Accrued interest and other liabilities 3,132,223 3,034,670 -------------- -------------- Total liabilities 685,092,734 645,461,469 -------------- -------------- Stockholders' Equity: Common stock, $5 par value; authorized 6,000,000 shares; issued 3,153,230 shares at June 30, 2004 and December 31, 2003; outstanding 3,137,066 shares at June 30, 2004 and 3,133,053 shares at December 31, 2003 15,766,150 15,766,150 Additional paid-in-capital 25,378,746 25,351,979 Retained earnings 59,715,644 58,400,660 Treasury stock, at cost; 16,164 shares at June 30, 2004 and 20,177 shares at December 31, 2003 (889,020) (1,109,735) Accumulated other comprehensive income - net unrealized gain on securities available-for-sale 4,267,629 8,915,941 -------------- -------------- Total stockholders' equity 104,239,149 107,324,995 -------------- -------------- Total liabilities and stockholders' equity $ 789,331,883 $ 752,786,464 ============== ============== </TABLE> 3
AMES NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (unaudited) <TABLE> Three Months Ended Six Months Ended June 30, June 30, ------------------------- --------------------------- 2004 2003 2004 2003 ----------- ----------- ------------ ------------ <S> <C> <C> <C> <C> Interest and dividend income: Loans $ 5,471,094 $ 5,651,200 $ 10,823,762 $ 11,207,235 Securities Taxable 2,151,710 1,792,746 4,227,791 3,676,285 Tax-exempt 1,093,670 842,090 2,145,656 1,612,390 Federal funds sold 21,223 249,908 78,096 413,602 Dividends 371,334 340,180 748,530 680,845 ----------- ----------- ------------ ------------ 9,109,031 8,876,124 18,023,835 17,590,357 ----------- ----------- ------------ ------------ Interest expense: Deposits 2,357,853 2,646,208 4,674,499 5,272,198 Other borrowed funds 94,099 77,115 168,627 141,334 ----------- ----------- ------------ ------------ 2,451,952 2,723,323 4,843,126 5,413,532 ----------- ----------- ------------ ------------ Net interest income 6,657,079 6,152,801 13,180,709 12,176,825 Provision for loan losses 210,353 305,995 268,708 425,740 ----------- ----------- ------------ ------------ Net interest income after provision for loan losses 6,446,726 5,846,806 12,912,001 11,751,085 ----------- ----------- ------------ ------------ Non-interest income: Trust department income 325,287 274,773 609,158 602,102 Service fees 460,937 383,076 817,868 742,000 Securities gains, net 0 280,782 31,542 646,607 Gain on sale of loans held for sale 183,553 322,876 347,741 570,996 Merchant and ATM fees 120,325 108,136 269,405 248,034 Other 159,805 142,490 315,126 297,807 ----------- ----------- ------------ ------------ Total non-interest income 1,249,907 1,512,133 2,390,840 3,107,546 ----------- ----------- ------------ ------------ Non-interest expense: Salaries and employee benefits 2,269,156 2,324,737 4,528,075 4,494,421 Occupancy expenses 236,975 231,737 504,952 500,345 Data processing 623,256 617,875 1,217,761 1,085,675 Other operating expenses 546,809 606,720 1,078,162 1,198,230 ----------- ----------- ------------ ------------ Total non-interest expense 3,676,196 3,781,069 7,328,950 7,278,671 ----------- ----------- ------------ ------------ Income before income taxes 4,020,437 3,577,870 7,973,891 7,579,960 Income tax expense 1,158,398 928,641 2,147,310 2,060,406 ----------- ----------- ------------ ------------ Net income $ 2,862,039 $ 2,649,229 $ 5,826,581 $ 5,519,554 =========== =========== ============ ============ Basic and diluted earnings per share $ 0.91 $ 0.85 $ 1.86 $ 1.76 =========== =========== ============ ============ Declared dividends per share $ 0.98 $ 0.92 $ 1.44 $ 1.36 =========== =========== ============ ============ Comprehensive Income (Loss) $(3,693,418) $ 6,186,196 $ 1,178,269 $ 8,673,611 =========== =========== ============ ============ </TABLE> 4
AMES NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) <TABLE> Six Months Ended June 30, ---------------------------- 2004 2003 ----------- ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 5,826,581 $ 5,519,554 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 268,708 425,740 Amortization and accretion, net 317,223 261,752 Depreciation 443,560 497,536 Provision for deferred taxes (63,694) (115,052) Securities gains, net (31,542) (646,607) Change in assets and liabilities: (Increase) decrease loans held for sale (407,161) (4,235,864) (Increase) decrease in accrued income receivable 145,281 687,662 (Increase) decrease in other assets (247,073) 405,266 Increase in accrued interest and other liabilities 97,553 400,075 ----------- ------------ Net cash provided by operating activities 6,349,436 3,200,062 ----------- ------------ Cash flow from investing activities: Purchase of securities available-for-sale (108,371,375) (56,962,306) Proceeds from sale of securities available-for-sale 1,576,886 3,735,979 Proceeds from maturities of securities available-for-sale 64,190,601 35,163,099 Net (increase) in interest bearing deposits in financial institutions (2,689,497) (5,000,000) Net (increase) decrease in federal funds sold 18,980,000 (46,575,000) Net (increase) in loans (27,337,864) (9,631,404) Purchase of bank premises and equipment (378,225) (481,808) ----------- ------------ Net cash used in investing activities (54,029,474) (79,751,439) ------------ ------------ Cash flows from financing activities: Increase in deposits 14,320,863 53,537,702 Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 26,377,316 2,457,442 Dividends paid (2,882,409) (2,753,504) Proceeds from issuance of treasury stock 247,482 221,870 ------------ ------------- Net cash provided by financing activities 38,063,252 53,463,510 ------------ ------------- Net decrease in cash and cash equivalents (9,616,786) (23,087,867) ------------ ------------- Cash and cash equivalents at beginning of quarter 31,982,144 51,688,784 ------------ ------------ Cash and cash equivalents at end of quarter $ 22,365,358 $ 28,600,917 ============ ============ Supplemental disclosures of cash flow information: Cash paid for interest $ 4,942,532 $ 5,438,043 Cash paid for taxes 2,095,222 2,074,118 </TABLE> 5
AMES NATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Significant Accounting Policies The consolidated financial statements for the six month periods ended June 30, 2004 and 2003 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures 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 May 12, 2004, the Company declared a cash dividend on its common stock, payable on August 16, 2004 to stockholders of record as of August 2, 2004, equal to $0.49 per share. Also on May 12, 2004, the Company declared an additional special cash dividend on its common stock, payable October 1, 2004 to stockholders of record as of September 16, 2004, equal to $0.49 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, 2004 and 2003 were 3,133,714 and 3,129,743, respectively. The weighted average outstanding shares for the six months ended June 30, 2004 and 2003 were 3,133,384 and 3,129,364, respectively. 4. Off-Balance Sheet Arrangements The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company's off-balance sheet arrangements have occurred since December 31, 2003. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Ames National Corporation is a bank holding company established in 1975 that owns and operates five bank subsidiaries in central Iowa. The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Randall-Story State Bank (Randall-Story Bank) and United Bank & Trust NA (United Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations. The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and trust services. The Banks also offer investment services through a third-party broker dealer. The Company employs nine individuals to assist with financial reporting, human resources, audit, compliance, technology systems and the coordination of management activities, in addition to 178 full-time equivalent individuals employed by the Banks. The Company's primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates. 6
The principal sources of Company revenues and cashflow are: (i) interest and fees earned on loans made by the Banks; (ii) service charges on deposit accounts maintained at the Banks; (iii) interest on fixed income investments held by the Banks; (iv) fees on trust services provided by those Banks exercising trust powers; and (v) securities gains and dividends on equity investments held by the Company and the Banks. The Company's principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing costs associated with maintaining the Bank's loan and deposit functions; and (iv) occupancy expenses for maintaining the Banks' facilities. The largest component contributing to the Company's net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management's principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk. The Company earned net income of $2,862,000, or $0.91 per share for the three months ended June 30, 2004, compared to net income of $2,649,000, or $0.85 per share, for the three months ended June 30, 2003, an increase of 8%. Net interest income increased $504,000 and was the largest contributor to the higher level of quarterly earnings. The improved net interest income was partially offset by the lack of realized securities gains and lower gains on the sale of secondary market residential mortgage loans. For the six month period ending June 30, 2004, the Company earned net income of $5,827,000, or $1.86 per share, a 6% increase over net income of $5,520,000, or $1.76 per share, earned a year ago. An improved net interest margin resulted in an additional $1,040,000 in net interest income for the first six months of 2004 compared to the same period one year ago. The following management discussion and analysis will provide a summary review of important items relating to: o Challenges o Key Performance Indicators and Industry Results o Income Statement Review o Balance Sheet Review o Asset Quality and Credit Risk Management o Liquidity and Capital Resources o Forward-Looking Statements and Business Risks Challenges Management has identified certain challenges that may negatively impact the Company's revenues in the future and is attempting to position the Company to best respond to those challenges. o Interest rates have moved above their historic lows; however, additional rapid increases in interest rates may present a challenge to the Company. Such an increase may negatively impact the Company's net interest margin if interest expense increases more quickly than interest income. The Company's earning assets (primarily its loan and investment portfolio) have longer maturities than its interest bearing liabilities (primarily deposits and other borrowings); therefore, in a rising interest rate environment, interest expense will increase more quickly than interest income as the interest bearing liabilities reprice more quickly than earning assets. In response to this challenge, the Banks model quarterly the changes in income that would result from various changes in interest rates. Management believes Bank assets have the appropriate maturity and repricing characteristics to optimize earnings and the Banks' interest rate risk positions. o The volume of mortgage loan refinancing has declined in 2004 and this trend is expected to continue for the remainder of the year. Income from the sale of secondary market loans totaled $348,000 for the six months ended June 30, 2004 compared to $571,000 for the same period in 2003. This slowdown will have a negative impact on the Company's noninterest income as the refinancing activity generated record fee income of $1,155,000 in 2003. The Banks are focusing more attention on relationships with local real estate agents in an effort to expand the mortgage loan fees derived from home purchases as refinancing activity begins to diminish. o The Company's market in central Iowa has numerous banks, credit unions, investment and insurance companies competing for similar business opportunities. This competitive environment will continue to put downward pressure on the Banks' net interest margins and thus affect profitability. Activities the Company is undertaking to address this challenge include additional focus on improving customer service, packaging products to provide more convenience for customers, and remaining operationally efficient to maintain profitability with lower net interest margins. 7
o A potential challenge to the Company's earnings would be poor performance in the Company's equity portfolio, thereby reducing the historical level of realized security gains. The Company invests capital that may be utilized for future expansion in a portfolio of primarily financial and utility stocks totaling $24 million as of June 30, 2004. The Company focuses on stocks that have historically paid dividends that may lessen the negative effects of a bear market. Key Performance Indicators and Industry Results Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (FDIC) and are derived from 9,116 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company's performance from quarter to quarter and to determine how the Company's operations compare to the industry as a whole.
Selected Indicators for the Company and the Industry <TABLE> June 30, 2004 March 31, 2004 ------------------ ------------------ Years Ended December 31, 3 Months 6 Months 3 Months -------------------------------------- Ended Ended Ended 2003 2002 ------------------ ------------------ ------------------ ------------------ Company Company Company Industry* Company Industry Company Industry ------- ------- ------- --------- ------- -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Return on assets 1.45% 1.51% 1.56% 1.38% 1.60% 1.38% 1.78% 1.30% Return on equity 10.76% 10.84% 10.91% 14.86% 11.16% 15.04% 11.54% 14.14% Net interest margin 3.99% 4.02% 4.09% 3.68% 4.02% 3.73% 4.51% 3.96% Efficiency ratio 46.49% 47.07% 48.02% 57.44% 47.18% 56.59% 44.64% 56.00% Capital ratio 13.23% 13.21% 13.87% 8.17% 14.33% 7.88% 15.46% 7.87% <FN> * Latest available data </FN> </TABLE> Key performances indicators include: o Return on Assets This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on average assets was 1.51% and 1.55%, respectively, for the six month periods ending June 30, 2004 and 2003. Although the Company's return on assets ratio compares favorably to that of the industry, this ratio declined in 2004 as assets grew more quickly than income. o Return on Equity This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders' equity investment in the Company. The Company's annualized return on equity ratio is below that of the industry primarily as a result of the higher level of capital the Company maintains for future growth and acquisitions. The Company's return on average equity was 10.84% and 10.70%, respectively for the six month periods ending June 30, 2004 and 2003. A higher average level of retained earnings and net unrealized gains on securities available for sale led to the lower return on equity in 2004. 8
o Net Interest Margin The ratio is calculated by dividing net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. The Company's net interest margin compares favorably to the industry; however, management expects the competitive nature of the Company's market environment to put downward pressure on the Company's margin. o Efficiency Ratio This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company's ability to manage noninterest expenses. The Company's efficiency ratio compares favorably to the industry's average and was 47.07% and 47.62% for the six months ended June 30, 2004 and 2003, respectively. o Capital Ratio The capital ratio is calculated by dividing total equity capital by total assets. It measures the level of average assets that are funded by shareholders' equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company's capital ratio is significantly higher than the industry average. The capital ratio declined from December 31, 2003 as the result of higher interest rates causing the unrealized gains in the Banks' bond portfolios to decline. Industry Results The FDIC Quarterly Banking Profile reported the following results for the first quarter of 2004: Strength in mortgage lending and lower expenses for loan losses helped bank and thrift earnings reach a new record in the first quarter of 2004. Industry earnings of $31.9 billion were $858 million (2.8%) higher than the previous quarterly record, set in the fourth quarter of 2003. Lower interest rates helped sustain mortgage refinancing activity and made it possible for institutions to realize higher gains on sales of fixed-rate securities and other assets. The industry's return on assets (ROA) was 1.38%, slightly below the all-time quarterly record of 1.39% recorded in the first quarter of 2003. More than half of all institutions (55%) reported higher earnings than in the first quarter of 2003, while half (50.3%) reported higher ROAs. The percentage of unprofitable institutions fell to 5.5%, compared to 5.9% a year earlier. This is the lowest percentage of unprofitable institutions the industry has had in almost six years, since the second quarter of 1998. Income Statement Review for Three Months Ended June 30, 2004 The following highlights a comparative discussion of the major components of net income and their impact for the last two years: Critical Accounting Policies The discussion contained in this Item 2 and other disclosures included within this report are based on the Company's audited consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company's significant accounting policies are described in the "Notes to Consolidated Financial Statements" contained in the Company's 10-K. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company's market area and the expected trend of the economic conditions. To the extent actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or lesser than future charge-offs. 9
AVERAGE BALANCES AND INTEREST RATES The following two tables are used to calculate the Company's net interest margin. The first table includes the Company's average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets. <TABLE> AVERAGE BALANCE SHEETS AND INTEREST RATES Three Months Ended June 30, ------------------------------------------------------------------------ 2004 2003 ----------------------------------- --------------------------------- ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/ (dollars in thousands) balance expense rate balance expense rate ----------------------------------- --------------------------------- <S> <C> <C> <C> <C> <C> <C> Interest-earning assets Loans Commercial $50,810 $ 622 4.90% $40,116 $ 561 5.59% Agricultural 28,542 449 6.29% 26,035 451 6.93% Real estate 275,770 4,067 5.90% 263,757 4,293 6.51% Installment and other 23,124 333 5.76% 20,055 346 6.90% ----------------------------------- ---------------------------------- Total loans (including fees) $378,246 $5,471 5.79% $349,963 $5,651 6.46% Investment securities Taxable $216,973 $2,231 4.11% $155,141 $1,904 4.91% Tax-exempt 128,426 2,081 6.48% 90,884 1,607 7.07% ----------------------------------- ---------------------------------- Total investment securities $345,399 $4,312 4.99% $246,025 $3,511 5.71% Interest bearing deposits with banks $8,574 $34 1.59% $4,974 $10 0.80% Federal funds sold 9,127 21 0.92% 89,464 250 1.12% ----------------------------------- ---------------------------------- Total interest-earning assets $741,346 $9,838 5.31% $690,426 $9,422 5.46% Non-interest-earning assets 46,521 46,660 -------- -------- TOTAL ASSETS $787,867 $737,086 ======== ======== <FN> 1 Average loan balances include nonaccrual loans, if any. Interest income on nonaccrual loans has been included. 2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35% and 34% in 2004 and 2003, respectively. </FN> </TABLE> 10
<TABLE> AVERAGE BALANCE SHEETS AND INTEREST RATES Three Months Ended June 30, 2004 2003 -------------------------------- -------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Average Revenue/ Yield/ Average Revenue/ Yield/ (dollars in thousands) balance expense rate balance expense rate -------------------------------- -------------------------------- <S> <C> <C> <C> <C> <C> <C> Interest-bearing liabilities Deposits Savings, NOW accounts, and money markets $335,098 $ 682 0.81% $310,295 $ 767 0.99% Time deposits < $100,000 175,350 1,244 2.84% 171,734 1,410 3.28% Time deposits > $100,000 71,919 432 2.40% 65,571 469 2.86% -------------------------------- -------------------------------- Total deposits $582,367 $2,358 1.62% $547,600 $2,646 1.93% Other borrowed funds 27,538 94 1.37% 19,612 77 1.57% -------------------------------- -------------------------------- Total Interest-bearing liabilities $609,905 $2,452 1.61% $567,212 $2,723 1.92% ------ ------ Non-interest-bearing liabilities Demand deposits $ 64,161 $ 56,711 Other liabilities 7,454 9,115 -------- -------- Stockholders' equity $106,347 $104,048 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $787,867 $737,086 ======== ======== Net interest: income / margin $7,386 3.99% $6,699 3.88% ====== ====== Spread Analysis Interest income/average assets 9,838 4.99% $9,422 5.11% Interest expense/average assets 2,452 1.24% 2,723 1.48% Net interest income/average assets 7,386 3.75% 6,699 3.63% <FN> 1 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35% and 34% in 2004 and 2003, respectively. </FN> </TABLE> 11
Net Interest Income For the three months ended June 30, 2004 and 2003, the Company's net interest margin adjusted for tax exempt income was 3.99%. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended June 30, 2004 and June 30, 2003 totaled $6,657,000 and $6,153,000, respectively. For the quarter ended June 30, 2004, net interest income increased $504,000 or 8.2% when compared to the same period in 2003. The increase was attributable to higher volume of investments and lower interest expense on deposits. Interest expense decreased $271,000 or 10.0% for the quarter ended June 30, 2004 when compared to the same period in 2003. The lower interest expense for the quarter is attributable to declining interest rates paid on deposits and other borrowed funds partially offset by a higher volume of deposits. Provision for Loan Losses The Company's provision for loan losses for the three months ended June 30, 2004 was $210,000 compared to $306,000 during the same period last year. Loan growth at First National Bank was the most significant factor leading to the provision expense recorded for quarter ended June 30, 2004 while much of 2003 provision expense related to a problem commercial loan. Net charge-offs totaled $22,000 for the three months ended June 30, 2004 compared to net charge-offs of $350,000 for the three months ended June 30, 2003. Non-interest Income and Expense Non-interest income decreased $262,000, or 17.3% during the quarter ended June 30, 2004 compared to the same period in 2003. The decrease can be attributed to the lack of realized gains on the sale of securities in the Company's equity portfolio in the second quarter of 2004 compared to $281,000 in the second quarter of 2003. Lower gains on the sale of secondary market residential mortgage loans also contributed to lower non-interest income as the record level of refinancing activity experienced in 2003 slowed down in 2004. Non-interest expense decreased $105,000 or 2.8% for the second quarter of 2004 compared to the same period in 2003. The decrease in non-interest expense is primarily related to lower salaries and employee benefits and lower data processing costs relating to internet banking services. Income Taxes The provision for income taxes for June 30, 2004 and June 30, 2003 was $1,158,000 and $929,000, respectively. This amount represents an effective tax rate of 28.8% for the three months ended June 30, 2004 versus 26.0% for the same quarter in 2003. The Company's marginal federal tax rate is currently 35%. The difference between the Company's effective and marginal tax rate is primarily related to investments made in tax exempt securities. Income Statement Review for Six Months Ended June 30, 2004 The following highlights a comparative discussion of the major components of net income and their impact for the last two years: 12
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 (dollars in thousands) <TABLE> AVERAGE BALANCE SHEETS AND INTEREST RATES Six Months Ended June 30, --------------------------------------------------------------------------- 2004 2003 ---------------------------------- ----------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ balance expense rate balance expense rate ---------------------------------- ----------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans Commercial $ 45,795 $ 1,154 5.04% $ 38,834 $ 1,112 5.73% Agricultural 27,624 880 6.37% 26,017 912 7.01% Real estate 273,805 8,113 5.93% 260,642 8,509 6.53% Installment and other 22,988 677 5.89% 20,051 674 6.72% ---------------------------------- ----------------------------------- Total loans (including fees) $370,212 $10,824 5.85% $345,544 $11,207 6.49% Investment securities Taxable $206,165 $ 4,396 4.26% $155,074 $ 3,906 5.04% Tax-exempt 124,630 4,046 6.49% 86,545 3,101 7.17% ---------------------------------- ----------------------------------- Total investment securities $330,795 $ 8,442 5.10% $241,619 $ 7,007 5.80% Interest bearing deposits with banks $ 7,340 $ 56 1.53% $ 2,998 $ 17 1.13% Federal funds sold 15,579 78 1.00% 74,274 414 1.11% ---------------------------------- ----------------------------------- Total interest-earning assets $723,926 $19,400 5.36% $664,435 $18,645 5.61% Total noninterest-earning assets $ 49,564 $ 48,307 -------- -------- TOTAL ASSETS $773,490 $712,742 ======== ======== <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 tax rate of 35% and 34% in 2004 and 2003, respectively. </FN> </TABLE> 13
LIABILITIES AND STOCKHOLDERS' EQUITY (dollars in thousands) <TABLE> AVERAGE BALANCE SHEETS AND INTEREST RATES Six Months Ended June 30, --------------------------------------------------------------------------- 2004 2003 --------------------------------- -------------------------------- 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 $323,301 $ 1,297 0.80% $294,608 $ 1,519 1.03% Time deposits < $100,000 175,432 2,521 2.87% 168,551 2,817 3.34% Time deposits > $100,000 70,642 856 2.42% 63,505 936 2.95% ------------------------------- --------------------------------- Total deposits $569,375 $ 4,674 1.64% $526,664 $ 5,272 2.00% Other borrowed funds 24,424 169 1.38% 17,377 141 1.62% ------------------------------- --------------------------------- Total Interest-bearing $593,799 $ 4,843 1.63% $544,041 $ 5,413 1.99% liabilities ------- ------ Noninterest-bearing liabilities Demand deposits $ 64,157 $ 57,319 Other liabilities 8,011 8,200 -------- -------- Stockholders' equity $107,523 $103,182 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $773,490 $712,742 ======== ======== Net interest income / margin $14,557 4.02% $13,232 3.98% ======= ======= Spread Analysis Interest income/average assets $19,400 5.02% $18,645 5.23% Interest expense/average assets 4,843 1.25% 5,413 1.52% Net interest income/average assets 14,557 3.76% 13,232 3.71% <FN> 1 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35% and 34% in 2004 and 2003, respectively. </FN> </TABLE> 14
Net Interest Income For the six months ended June 30, 2004 and 2003, the Company's net interest margin adjusted for tax exempt income was 4.02%. Net interest income, prior to the adjustment for tax-exempt income, for the six months ended June 30, 2004 and June 30, 2003 totaled $13,181,000 and $12,177,000, respectively. For the six months ended June 30, 2004, interest income increased $433,000 or 2.5% when compared to the same period in 2003. The increase was attributable to higher volume of investments and loans that offset a much lower yield on earning assets. Interest expense decreased $570,000 or 10.5% for the six months ended June 30, 2004 when compared to the same period in 2003. The lower interest expense for the six month period is attributable to declining interest rates paid on deposits and other borrowed funds partially offset by a higher volume of deposits. Provision for Loan Losses The Company's provision for loan losses for the six months ended June 30, 2004 was $269,000 compared to $426,000 during the same period last year. Loan growth at First National Bank was the most significant factor leading to the provision expense recorded for six months ended June 30, 2004. A problem commercial loan was the primary factor for higher provision expense in 2003. Net charge-offs totaled $42,000 for the six months ended June 30, 2004 compared to net charge-offs of $301,000 for the six months ended June 30, 2003. Non-interest Income and Expense Non-interest income decreased $717,000, or 23.1% during the six months ended June 30, 2004 compared to the same period in 2003. The decrease can be attributed to decreased realized gains on the sale of securities in the Company's equity portfolio of $32,000 in 2004 compared to $647,000 in first six months of 2003. Lower gains on the sale of secondary market residential mortgage loans also contributed to lower non-interest income as the record level of refinancing activity experienced in 2003 slowed down in 2004. Non-interest expense increased $50,000 or 0.7% for the first six months of 2004 compared to the same period in 2003. Income Taxes The provision for income taxes for June 30, 2004 and June 30, 2003 was $2,147,000 and $2,060,000, respectively. This amount represents an effective tax rate of 26.9% for the six months ended June 30, 2004 versus 27.2% for the same six months in 2003. The Company's marginal federal tax rate is currently 35%. The difference between the Company's effective and marginal tax rate is primarily related to investments made in tax exempt securities. Balance Sheet Review As of June 30, 2004, total assets were $789,332,000, a $36,545,000 increase compared to December 31, 2003. This higher level of assets is attributable to a higher volume of securities and loans that were funded with other borrowed money and deposits. United Bank's assets increased by $12,589,000 from December 31, 2003. Investment Portfolio The increase in the volume of investment securities to $358,056,000 on June 30, 2004 from $323,116,000 on December 31, 2003 resulted primarily from the purchase of U.S. government agency bonds. Loan Portfolio Net loans totaled $382,602,000 as of June 30, 2004 compared to $355,533,000 as of December 31, 2003. The increased level of loans relates primarily to new loan originations at First National and Boone Bank. Deposits Deposits totaled $633,869,000 as of June 30, 2004, an increase of $14,321,000 from December 31, 2003 and are $29,709,000 higher than the June 30, 2003 balance. The increase in deposits is attributable to growth in deposits at Boone Bank, First National, and United Bank primarily in the NOW and money market accounts. 15
Other Borrowed Funds Other borrowed funds as of June 30, 2004 totaled $44,576,000 consisting of federal funds sold and securities sold under agreements to repurchase. Other borrowings as of December 31, 2003 totaled $18,198,000. The increase is attributable to higher volume of loan originations and investment purchases in excess of the growth in deposits. Off-Balance Sheet Arrangements The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company's off-balance sheet arrangements have occurred since December 31, 2003. Asset Quality Review and Credit Risk Management The Company's credit risk is centered in the loan portfolio, which on June 30, 2004 totaled $382,602,000 compared to $355,533,000 as of December 31, 2003. Net loans comprise 48% of total assets as of June 30, 2004. The object in managing loan portfolio risk is to reduce the risk of loss resulting from a customer's failure to perform according to the terms of a transaction and to quantify and manage credit risk on a portfolio basis. The Company's level of problem loans consisting of non-accrual loans and loans past due 90 days or more as a percentage of total loans of 0.62% compares favorably to the average of the Company's peer group of 347 bank holding companies with assets of $500 million to $1 billion as of March 31, 2004 of 0.68%. Impaired loans totaled $2,428,000 as of June 30, 2004 compared to $2,187,000 as of December 31, 2003. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans include loans accounted for on a non-accrual basis, accruing loans which are contractually past due 90 days or more as to principal or interest payments, and any restructured loans. As of June 30, 2004, non-accrual loans totaled $2,288,000, loans past due 90 days still accruing totaled $140,000 and there were no restructured loans outstanding. Other real estate owned as of June 30, 2004 and December 31, 2003 totaled $354,000 and $159,000, respectively. The allowance for loan losses as a percentage of outstanding loans as of June 30, 2004 and December 31, 2003 was 1.61% and 1.71%, respectively. The allowance for loan and lease losses totaled $6,278,000 and $6,051,000 as of June 30, 2004 and December 31, 2003, respectively The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans. Liquidity and Capital Resources Liquidity management is the process by which the Company, through its Banks' Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements. Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, Federal Home Loan Bank (FHLB) advances and other capital market sources. As of June 30, 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. 16
The liquidity and capital resources discussion will cover the follows topics: o Review the Company's Current Liquidity Sources o Review of the Statements of Cash Flows o Company Only Cash Flows o Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs o Capital Resources 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 June 30, 2004 and December 31, 2003 totaled $32,818,000 and $58,726,000, respectively. Higher levels of loans and securities available for sale resulted in the lower level of liquid assets. Other sources of liquidity available to the Banks as of June 30, 2004 include outstanding lines of credit with the Federal Home Loan Bank of Des Moines, Iowa of $27,000,000 and federal funds borrowing capacity at correspondent banks of $37,500,000 with current outstanding federal fund balances of $22,500,000. The Company had securities sold under agreements to repurchase totaling $22,076,000 and did not have any outstanding FHLB advances as of June 30, 2004. Total investments as of June 30, 2004 were $358,056,000 compared to $323,116,000 as of year end 2003. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available for sale as of June 30, 2004. The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio's scheduled maturities represent a significant source of liquidity. Review of Statements of Cash Flows Operating cash flows for June 30, 2004 and 2003 totaled $6,349,000 and $3,200,000, respectively. The primary variance in operating cash flows for the first half of 2004 compared to the same period in 2003 was the cash used to fund secondary market residential loans in the first half of 2003. Net cash used in investing activities through June 30, 2004 and 2003 was $54,029,000 and $79,751,000, respectively. The largest investing activity was the purchase of U.S. government agency bonds in the first half of 2004. Net cash provided by financing activities for June 30, 2004 and 2003 totaled $38,063,000 and $53,464,000, respectively. A higher level of federal funds purchased was the largest source of financing cash flows in 2004 and the growth in deposits was the primary source of financing funds in 2003. As of June 30, 2004, the Company did not have any external debt financing, off balance sheet financing arrangements, or derivative instruments linked to its stock. Company Only Cash Flows The Company's liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Company requires adequate liquidity to pay its expenses and pay stockholder dividends. In 2003, dividends from the Banks amounted to $7,868,000 compared to $5,978,000 in 2002. Various federal and state statutory provisions limit the amount of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The Company has unconsolidated interest bearing deposits and marketable investment securities totaling $33,447,000 that are presently available to provide additional liquidity to the Banks. 17
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. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flows needs as of June 30, 2004 that is a concern to management. Capital Resources The Company's total stockholders' equity decreased to $104,239,000 as of June 30, 2004, from $107,325,000 at December 31, 2003. The decrease in equity is attributable to a lower level of net unrealized gains on securities available for sale as result of a decline in the market value of the Banks' bond portfolios. At June 30, 2004 and December 31, 2003, stockholders' equity as a percentage of total assets was 13.2% and 14.26%, respectively. The capital levels of the Company currently exceed applicable regulatory guidelines as of June 30, 2004. Forward-Looking Statements and Business Risks The discussion in the foregoing Management Discussion and Analysis and elsewhere in this Report contains forward-looking statements about the Company, its business and its prospects. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include use of the words "believe", "expect", "anticipate", "intend", "plan", "estimate" or words of similar meaning, or future or conditional verbs such as "will", "would", "should", "could" or "may". Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors, many of which are beyond the Company's control, could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Such risks and uncertainties with respect to the Company include, but are not limited to, those related to the economic conditions, particularly in the areas in which the Company and the Banks operate, competitive products and pricing, fiscal and monetary policies of the U.S. government, changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements), changes in prevailing interest rates, credit risk management and asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. These factors may not constitute all factors that could cause actual results to differ materially from those discussed in any forward-looking statement. The Company operates in a continually changing business environment and new facts emerge from time to time. It cannot predict such factors nor can it assess the impact, if any, of such factors on its financial position or its results of operations. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results. The Company disclaims any responsibility to update any forward-looking statement provided in this document. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed to-date in 2004 changed significantly when compared to 2003. Item 4. Evaluation of Disclosure Controls and Procedures The principal executive officer and principal financial officer of the Company have evaluated the effectiveness of the Company's disclosure controls and procedures (as such terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this annual report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. Changes in Internal Controls There was no change in the Company's internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 18
PART II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. (b) Reports on Form 8-K On May 14, 2004, the Company filed a Form 8-K pursuant to Item 5, announcing an increase in the dividend from $.46 per share to $.49 per share payable August 16, 2004 to shareholders of record August 2, 2004. The board also declared an extra dividend of $.49 per share payable October 1, 2004 to shareholders of record September 16, 2004. On July 16, 2004, the Company filed a Form 8-K pursuant to Item 5, announcing financial results for the three and six months ended June 30, 2004. 19
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 5, 2004 By: /s/ Daniel L. Krieger ------------------------------- Daniel L. Krieger, President Principal Executive Officer By: /s/ John P. Nelson ------------------------------- John P. Nelson, Vice President Principal Financial Officer 20