-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K/wzEyA1oFek85mzDoZGc2XNsabifmx33ZdTj3b5TYrPseuhCqXITbNnw6Oi7uNk dArQ1/nPzS5AKPAXiGG0PA== 0000743530-03-000031.txt : 20030331 0000743530-03-000031.hdr.sgml : 20030331 20030331155218 ACCESSION NUMBER: 0000743530-03-000031 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMES NATIONAL CORP CENTRAL INDEX KEY: 0001132651 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 421039071 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-32637 FILM NUMBER: 03630520 BUSINESS ADDRESS: STREET 1: PO BOX 846 CITY: AMES STATE: IA ZIP: 50010 BUSINESS PHONE: 5152326251 MAIL ADDRESS: STREET 1: PO BOX 846 CITY: AMES STATE: IA ZIP: 50010 10-K 1 ames10k.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2002. Commission File Number 0-32637. ----- AMES NATIONAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) IOWA 42-1039071 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 405 FIFTH STREET, AMES, IOWA 50010 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (515) 232-6251 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $5.00 PAR VALUE ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes __X__ - No _____ As of June 28, 2002, the aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sale price for the registrant's common stock in the over the counter market, was $81,522,926. Shares of common stock beneficially owned by each executive officer and director of the Company and by each person who owns 5% or more of the outstanding common stock have been excluded on the basis that such persons may be deemed to be an affiliate of the registrant. This determination of affiliate status is not necessarily a conclusive determination for any other purpose. The number of shares outstanding of the registrant's common stock on February 28, 2003, was 3,128,982. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement, as filed with the Securities and Exchange Commission on March 25, 2003, are incorporated by reference into Part III of this Form 10-K. 1 TABLE OF CONTENTS PAGE Part I Item 1. Business........................................... 3 Item 2. Properties......................................... 13 Item 3. Legal Proceedings.................................. 13 Item 4. Submission of Matters to a Vote of Shareholders.... 13 Part II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters............................. 14 Item 6. Selected Financial Data........................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations............. 16 Item 7A. Quantitative and Qualitative Disclosures about Market Risk..................................... 27 Item 8. Financial Statements and Supplementary Data....... 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 47 Part III Item 10. Directors and Executive Officers of the Registrant. Item 11. Executive Compensation............................. 47 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .. 48 Item 13. Certain Relationships and Related Transactions..... 48 Item 14. Controls and Procedures ........................... 48 Part IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 48 2 PART I ITEM 1. BUSINESS General Ames National Corporation (the "Company") is an Iowa corporation and bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company owns 100% of the stock of five banking subsidiaries consisting of two national banks and three state-chartered banks, as described below. All of the Company's operations are conducted in the State of Iowa and primarily within the central Iowa counties of Boone, Story and Marshall where the Company's banking subsidiaries are located. The Company does not engage in any material business activities apart from its ownership of its banking subsidiaries. The principal executive offices of the Company are located at 405 Fifth Street, Ames, Iowa 50010 and its telephone number is (515) 232-6251. The Company was organized and incorporated on January 21, 1975 under the laws of the State of Iowa to serve as a holding company for its principal banking subsidiary, First National Bank, Ames, Iowa ("First National") located in Ames, Iowa. In 1983, the Company acquired the stock of the State Bank & Trust Co. ("State Bank") located in Nevada, Iowa; in 1991, the Company, through a newly-chartered state bank known as Boone Bank & Trust Co. ("Boone Bank"), acquired certain assets and assumed certain liabilities of the former Boone State Bank & Trust Company located in Boone, Iowa; in 1995, the Company acquired the stock of the Randall-Story State Bank ("Randall-Story Bank") located in Story City, Iowa; and in 2002, the Company chartered and commenced operations of a new national banking organization, United Bank & Trust NA ("United Bank"), located in Marshalltown, Iowa. First National, State Bank, Boone Bank, Randall-Story Bank and United Bank are each operated as a wholly owned subsidiary of the Company. These five financial institutions are referred to in this Form 10-K collectively as the "Banks" and individually as a "Bank". The principal sources of Company revenue are: (i) interest and fees earned on loans made by the Banks; (ii) service charges on deposit accounts maintained at the Banks; (iii) interest on fixed income investments held by the Banks; (iv) fees on trust services provided by those Banks exercising trust powers; and (v) securities gains and dividends on equity investments held by the Company and the Banks. The Banks' lending activities consist primarily of short-term and medium-term commercial and residential real estate loans, agricultural and business operating loans and lines of credit, equipment loans, vehicle loans, personal loans and lines of credit, home improvement loans and secondary mortgage loan origination. The Banks also offer a variety of demand, savings and time deposits, cash management services, merchant credit card processing, safe deposit boxes, wire transfers, direct deposit of payroll and social security checks and automated teller machine access. Four of the five Banks also offer trust services. The Company provides various services to the Banks which include, but are not limited to, management assistance, auditing services, human resources services and administration, compliance management, marketing assistance and coordination, loan review and assistance with respect to computer systems and procedures. Banking Subsidiaries First National Bank, Ames, Iowa. First National is a nationally chartered, commercial bank insured by the Federal Deposit Insurance Corporation (the "FDIC"). It was organized in 1903 and became a wholly owned subsidiary of the Company in 1975 through a bank holding company reorganization whereby the then shareholders of First National exchanged all of their First National stock for stock in the Company. First National provides full-service banking to businesses and residents within the Ames community and surrounding area. It provides a variety of products and services designed to meet the needs of the market it serves. It has an experienced staff of bank officers who have spent the majority of their banking careers with First National and who emphasize long-term customer relationships. First National conducts business out of three full-service offices and one super market location, all located in the city of Ames. 3 As of December 31, 2002, First National had capital of $38,789,000 and 88 full-time equivalent employees. Full-time equivalents represent the number of people a business would employ if all its employees were employed on a full-time basis. It is calculated by dividing the total number of hours worked by all full and part-time employees by the number of hours a full-time individual would work for a given period of time. First National had net income of $6,294,000 in 2002, $5,834,000 in 2001 and $4,800,000 in 2000. Total assets as of December 31, 2002, 2001 and 2000 were $375,341,000, $349,702,000 and $341,864,000, respectively. State Bank & Trust Co., Nevada, Iowa. State Bank is an Iowa, state-chartered, FDIC insured commercial bank. State Bank was acquired by the Company in 1983 through a stock transaction whereby the then shareholders of State Bank exchanged all their State Bank stock for stock in the Company. State Bank was organized in 1939 and provides full-serve banking to businesses and residents within the Nevada area from its main Nevada location and two offices; one in McCallsburg, Iowa and the other in Colo, Iowa. It is strong in agricultural, commercial and residential real estate lending. State Bank also provides insurance services offering a broad line of insurance products to customers. As of December 31, 2002, State Bank had capital of $11,147,000 and 26 full-time equivalent employees. It had net income of $1,501,000 in 2002, $1,294,000 in 2001 and $1,134,000 in 2000. Total assets as of December 31, 2002, 2001 and 2000 were $104,079,000, $94,004,000 and $97,285,000, respectively. Boone Bank & Trust Co., Boone, Iowa. Boone Bank is an Iowa, state-chartered, FDIC insured commercial bank. Boone Bank was organized in 1992 by the Company under a new state charter in connection with a purchase and assumption transaction whereby Boone Bank purchased certain assets and assumed certain liabilities of the former Boone State Bank & Trust Company in exchange for a cash payment. It provides full service banking to businesses and residents within the Boone community and surrounding area. It is actively engaged in agricultural, consumer and commercial lending, including real estate, operating and equipment loans. It conducts business from its main office and a full service branch office, both located in Boone. As of December 31, 2002, Boone Bank had capital of $11,511,000 and 26 full-time equivalent employees. It had net income of $1,827,000 in 2002, $1,302,000 in 2001 and $1,178,000 in 2000. Total assets as of December 31, 2002, 2001 and 2000 were $96,829,000, $94,356,000 and $99,867,000, respectively. Randall-Story State Bank, Story City, Iowa. Randall-Story Bank is an Iowa, state-chartered, FDIC insured commercial bank. Randall-Story Bank was acquired by the Company in 1995 through a stock transaction whereby the then shareholders of Randall-Story Bank exchanged all their Randall-Story Bank stock for stock in the Company. Randall-Story Bank was organized in 1928 and provides full-service banking to Story City and the surrounding area from its main location in Story City and a full service office in Randall, Iowa. While its primary emphasis is in agricultural lending, Randall-Story Bank also provides the traditional lending services typically offered by community banks. It also owns a small insurance agency which operates out of the Randall office. As of December 31, 2002, Randall-Story Bank had capital of $7,680,000 and 15 full-time equivalent employees. It had net income of $1,009,000 in 2002, $692,000 in 2001 and $744,000 in 2000. Total assets as of December 31, 2002, 2001 and 2000 were $64,946,000, $63,680,000 and $60,312,000, respectively. United Bank & Trust NA, Marshalltown, Iowa. United Bank is a nationally chartered, commercial bank insured by the FDIC. It was newly chartered in June of 2002 and offers a broad range of deposit and loan products, as well as Internet banking and trust services to customers located in the Marshalltown and surrounding Marshall County area. As of December 31, 2002, United Bank had capital of $4,519,000 and 10 full-time equivalent employees. It had a net loss for the six and one-half month period ended December 31, 2002 of $524,000. The bank was capitalized by a $5,000,000 equity contribution by the Company. Total assets as of December 31, 2002 were $30,355,000. Business Strategy and Operations As a locally owned, multi-bank holding company, the Company emphasizes strong personal relationships to provide products and services that meet the needs of the Banks' customers. The Company seeks to achieve growth and maintain a strong return on equity. To accomplish these goals, the Banks focus on small to medium size businesses that traditionally wish to develop an exclusive relationship with a single bank. The Banks, individually and collectively, have the size to give the personal attention required by business owners, in addition to the credit expertise to help businesses meet their goals. 4 The Banks offer a full range of deposit services that are typically available in most financial institutions, including checking accounts, savings accounts and other time deposits of various types, ranging from money market accounts to longer term certificates of deposit. One major goal in developing the Banks' product mix is to keep the product offerings as simple as possible, both in terms of the number of products and the features and benefits of the individual services. The transaction accounts and time certificates are tailored to each Bank's principal market area at rates competitive in that Bank's market. In addition, retirement accounts such as IRAs (Individual Retirement Accounts) are available. The FDIC insures all deposit accounts up to the maximum amount. The Banks solicit these accounts from small-to-medium sized businesses in their respective primary trade areas, and from individuals who live and/or work within these areas. No material portion of the Banks' deposits has been obtained from a single person or from a few persons. Therefore, the Company does not believe that the loss of the deposits of any person or of a few persons would have an adverse effect on the Banks' operations or erode their deposit base. Loans are provided to creditworthy borrowers regardless of their race, color, national origin, religion, sex, age, marital status, disability, receipt of public assistance or any other basis prohibited by law. The Banks intend to fulfill this commitment while maintaining prudent credit standards. In the course of fulfilling this obligation to meet the credit needs of the communities which they serve, the Banks give consideration to each credit application regardless of the fact that the applicant may reside in a low to moderate income neighborhood, and without regard to the geographic location of the residence, property or business within their market areas. The Banks provide innovative, quality financial products, such as Internet banking and trust services that meet the banking needs of their customers and communities. The loan programs and acceptance of certain loans may vary from time-to-time depending on the funds available and regulations governing the banking industry. The Banks offer all basic types of credit to their local communities and surrounding rural areas, including commercial, agricultural and consumer loans. The types of loans within these categories are as follows: Commercial Loans. Commercial loans are typically made to sole proprietors, partnerships, corporations and other business entities such as municipalities and individuals where the loan is to be used primarily for business purposes. These loans are typically secured by assets owned by the borrower and often times involve personal guarantees given by the owners of the business. The types of loans the Banks offer include: - financing guaranteed under Small Business Administration programs - operating and working capital loans - loans to finance equipment and other capital purchases - commercial real estate loans - business lines of credit - term loans - loans to professionals - letters of credit Agricultural Loans. The Banks by nature of their location in central Iowa are directly and indirectly involved in agriculture and agri-business lending. This includes short-term seasonal lending associated with cyclical crop and livestock production, intermediate term lending for machinery, equipment and breeding stock acquisition and long-term real estate lending. These loans are typically secured by the crops, livestock, equipment or real estate being financed. The basic tenet of the Banks' agricultural lending philosophy is a blending of strong, positive cash flow supported by an adequate collateral position, along with a demonstrated capacity to withstand short-term negative impact if necessary. Applicable governmental subsidies and affiliated programs are utilized if warranted to accomplish these parameters. Approximately 14% of the Banks' loans have been made for agricultural purposes. The Banks have not experienced a material adverse effect on their business as a result of defaults on agricultural loans and do not anticipate at the present time experiencing any such effect in the future. Consumer Loans. Consumer loans are typically available to finance home improvements and consumer purchases, such as automobiles, household furnishings, boats and education. These loans are made on both a secured and an unsecured basis. The following types of consumer loans are available: - automobiles and trucks - boats and recreational vehicles - personal loans and lines of credit - home equity lines of credit - home improvement and rehabilitation loans - consumer real estate loans 5 Other types of credit programs, such as loans to nonprofit organizations, to public entities, for community development and to other governmental offered programs also are available. First National, Boone Bank, State Bank and United Bank offer trust services typically found in a commercial bank with trust powers, including the administration of estates, conservatorships, personal and corporate trusts and agency accounts. The Banks also provide farm management, investment and custodial services for individuals, businesses and non-profit organizations. The Banks earn fees from the origination of residential mortgages that are sold in the secondary real estate market without retaining the mortgage servicing rights. The Banks offer traditional banking services, such as safe deposit boxes, wire transfers, direct deposit of payroll and social security checks, automated teller machine access and automatic drafts (ACH) for various accounts. Credit Management The Company strives to achieve sound credit risk management. In order to achieve this goal, the Company has established uniform credit policies and underwriting criteria for the Banks' loan portfolios. The Banks diversify in the types of loans offered and are subject to regular credit examinations, annual internal and external loan audits and annual review of large loans, as well as quarterly reviews of loans experiencing deterioration in credit quality. The Company attempts to identify potential problem loans early, charge off loans promptly and maintain an adequate allowance for loan losses. The Company has established credit guidelines for the Banks' lending portfolios which include guidelines relating to the more commonly requested loan types, as follows: Commercial Real Estate Loans - Commercial real estate loans, including agricultural real estate loans, are normally based on loan to appraisal value ratios of 75% and secured by a first priority lien position. Loans are typically subject to interest rate adjustments no less frequently than 5 years from origination. Fully amortized monthly repayment terms normally do not exceed twenty years. Projections and cash flows that show ability to service debt within the amortization period are required. Property and casualty insurance is required to protect the Banks' collateral interests. Commercial and agricultural real estate loans represent approximately 42% of the loan portfolio. Major risk factors for commercial real estate loans, as well as the other loan types described below, include a geographic concentration in central Iowa; the dependence of the local economy upon several large governmental entities, including Iowa State University and the Iowa Department of Transportation; and the health of Iowa's agricultural sector that is dependent on weather conditions and government programs. Commercial and Agricultural Operating Lines - These loans are made to businesses and farm operations with terms up to twelve months. The credit needs are generally seasonal with the source of repayment coming from the entity's normal business cycle. Cash flow reviews are completed to establish the ability to service the debt within the terms of the loan. A first priority lien on the general assets of the business normally secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed by the principal(s). Commercial and Agricultural Term Loans - These loans are made to businesses and farm operations to finance equipment, breeding stock and other capital expenditures. Terms are generally the lesser of five years or the useful life of the asset. Term loans are normally secured by the asset being financed and are often additionally secured with the general assets of the business. Loan to value is generally 75% of the cost or value of the assets. Loans are normally guaranteed by the principal(s). Commercial and agricultural operating and term loans represent approximately 20% of the loan portfolio. Residential First Mortgage Loans - Proceeds of these loans are used to buy or refinance the purchase of residential real estate with the loan secured by a first lien on the real estate. Most of the residential mortgage loans originated by the Banks (including servicing rights) are sold in the secondary mortgage market due to the higher interest rate risk inherent in the 15 and 30 year fixed rate terms consumers prefer. Loans that are originated and not sold in the secondary market generally have higher interest rates and have rate adjustment periods of no longer than seven years. The maximum amortization of first residential real estate is 30 years. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. Property insurance is required on all loans to protect the Banks' collateral position. Loans secured by one to four family residential properties represent approximately 24% of the loan portfolio. 6 Home Equity Term Loans - These loans are normally for the purpose of home improvement or other consumer purposes and are secured by a junior mortgage on residential real estate. Loan-to-value ratios normally do not exceed 90% of market value. Home Equity Lines of Credit - The Banks offer a home equity line of credit with a maximum term of 60 months. These loans are secured by a junior mortgage on the residential real estate and normally do not exceed a loan-to-market value ratio of 90% with the interest adjusted quarterly. Consumer Loans - Consumer loans are normally made to consumers under the following guidelines. Automobiles - loans on new and used automobiles will not exceed 80% and 75% of the value, respectively. Recreational vehicles and boats - 66% of the value. Mobile home - maximum term on these loans is 180 months with the loan-to-value ratio generally not exceeding 66%. Each of these loans is secured by a first priority lien on the assets and requires insurance to protect the Banks' collateral position. Unsecured - The term for unsecured loans generally does not exceed 12 months. Consumer and other loans represent approximately 6% of the loan portfolio. Employees At December 31, 2002, the Banks had a total of 165 full-time equivalent employees and the Company had an additional 8 full-time employees. The Company and Banks provide their employees with a comprehensive program of benefits, including comprehensive medical and dental plans, long-term and short-term disability coverage, and a 401(k) profit sharing plan. Management considers its relations with employees to be satisfactory. Unions represent none of the employees. Market Area The Company operates five commercial banks with locations in Story, Boone and Marshall Counties in central Iowa. First National is located in Ames, Iowa with a population of 50,731. The major employers are Iowa State University, Ames Laboratories, Iowa Department of Transportation, Mary Greeley Medical Center, National Veterinary Services Laboratory, Ames Community Schools, City of Ames, Barilla, Sauer-Danfoss and McFarland Clinic. First National's primary business includes providing retail banking services and business and consumer lending. First National has a minimum exposure to agricultural lending. Boone Bank is located in Boone, Iowa with a population of 12,800. Boone is the county seat of Boone County. The major employers are Fareway Stores, Inc., Patterson Dental Supply Co., Union Pacific Railroad, and Communication Data Services. Boone Bank provides lending services to the agriculture, commercial and real estate markets. State Bank is located in Nevada, Iowa with a population of 6,658. Nevada is the county seat of Story County. The major employers are Print Graphics, General Financial Supply, Central Iowa Printing, Burke Corporation and Almaco. State Bank provides various types of loans with a major agricultural presence. It provides a wide variety of banking services and products including insurance services to its customers. Randall-Story Bank is located in Story City, Iowa with a population of 3,228. The major employers are Pella Corporation, Bethany Manor, American Packaging, Precision Machine and Record Printing. Located in a major agricultural area, it has a strong presence in this type of lending. As a full service commercial bank it provides a full line of products and services including insurance services. United Bank is located in Marshalltown, Iowa with a population of 26,123. The major employers are Swift & Co., Fisher Controls International, Lenox Industries and Marshalltown Medical & Surgical Center. The newly chartered bank offers a full line of loan, deposit, and trust services. Competition The geographic market area served by the Banks is highly competitive with respect to both loans and deposits. The Banks compete principally with other commercial banks, savings and loan associations, credit unions, mortgage companies, finance divisions of auto and farm equipment companies, agricultural suppliers and other financial service providers. Some of these competitors are local, while others are statewide or nationwide. The major commercial bank competitors include F & M Bank, U.S. Bank National Association and Wells Fargo Bank, each of which have a branch office or offices within the Banks' primary trade areas. Among the advantages such larger banks have are their ability to finance extensive advertising campaigns and to allocate their investment assets to geographic regions of higher yield and demand. These larger banking organizations have much higher legal lending limits than the Banks and thus are better able to finance large regional, national and global commercial customers. 7 In order to compete with the other financial institutions in their primary trade areas, the Banks use, to the fullest extent possible, the flexibility which is accorded by independent status. This includes an emphasis on specialized services, local promotional activity and personal contacts by the Banks' officers, directors and employees. In particular, the Banks compete for deposits principally by offering depositors a wide variety of deposit programs, convenient office locations, hours and other services. The Banks compete for loans primarily by offering competitive interest rates, experienced lending personnel and quality products and services. As of December 31, 2002, there were 25 FDIC insured institutions having approximately 55 offices or branch offices within Boone, Story and Marshall County, Iowa where the Banks' offices are located. First National, State Bank and Randall-Story Bank together have the largest percentage of deposits in Story County and Boone Bank has the highest percentage of deposits in Boone County. The Banks also compete with the financial markets for funds. Yields on corporate and government debt securities and commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for funds with money market instruments and similar investment vehicles offered by competitors including brokerage firms, insurance companies, credit card issuers and retailers such as Sears. Money market funds offered by these types of organizations have provided substantial competition for deposits. This trend will likely continue in the future. The Company anticipates bank competition will continue to change materially over the next several years as more financial institutions, including the major regional and national banks, continue to consolidate. The larger financial institutions will continue to consolidate their branch systems by providing incentives to their customers to use electronic banking instead of brick and mortar branches. Credit unions, because of their income tax benefits, will continue to show substantial growth. Supervision and Regulation The following discussion generally refers to certain statutes and regulations affecting the banking industry. These references provide brief summaries and therefore do not purport to be complete and are qualified in their entirety by reference to those statutes and regulations. In addition, due to the numerous statutes and regulations that apply to and regulate the operation of the banking industry, many are not referenced below. The Company and the Banks are subject to extensive federal and state regulation and supervision. Regulation and supervision of financial institutions is primarily intended to protect depositors and the FDIC rather than shareholders of the Company. The laws and regulations affecting banks and bank holding companies have changed significantly over recent years, particularly with the passage of the Financial Services Modernization Act. There is reason to expect that similar changes will continue in the future. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of the Company. The Company is unable to predict the nature or the extent of the effects on its business and earnings that any fiscal or monetary policies or new federal or state legislation may have in the future. The Company The Company is a bank holding company by virtue of its ownership of the Banks, and is registered as such with the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"), which subjects the Company and the Banks to supervision and examination by the Federal Reserve. Under the BHCA, the Company files with the Federal Reserve annual reports of its operations and such additional information as the Federal Reserve may require. Source of Strength to the Banks. The Federal Reserve takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve's position that in serving as a source of strength to its subsidiary banks, bank holding companies should use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. It should also maintain the financial flexibility and capital raising capacity to obtain additional resources for providing assistance to its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations or both. 8 Federal Reserve Approval. Bank holding companies must obtain the approval of the Federal Reserve before they: (i) acquire direct or indirect ownership or control of any voting stock of any bank if, after such acquisition, they would own or control, directly or indirectly, more than 5% of the voting stock of such bank; (ii) merge or consolidate with another bank holding company; or (iii) acquire substantially all of the assets of any additional banks. Non-Banking Activities. With certain exceptions, the BHCA also prohibits bank holding companies from acquiring direct or indirect ownership or control of voting stock in any company other than a bank or a bank holding company unless the Federal Reserve finds the company's business to be incidental to the business of banking. When making this determination, the Federal Reserve in part considers whether allowing a bank holding company to engage in those activities would offer advantages to the public that would outweigh possible adverse effects. A bank holding company may engage in permissible non-banking activities on a de novo basis, if the holding company meets certain criteria and notifies the Federal Reserve within ten (10) business days after the activity has commenced. Under the Financial Services Modernization Act, eligible bank holding companies may elect (with the approval of the Federal Reserve) to become a "financial holding company." Financial holding companies are permitted to engage in certain financial activities through affiliates which had previously been prohibited activities for bank holding companies. Such financial activities include securities and insurance underwriting and merchant banking. At this time, the Company has not elected to become a financial holding company, but may choose to do so at some time in the future. Control Transactions. The Change in Bank Control Act of 1978, as amended, requires a person or group of persons acquiring "control" of a bank holding company to provide the Federal Reserve with at least 60 days prior written notice of the proposed acquisition. Following receipt of this notice, the Federal Reserve has 60 days to issue a notice disapproving the proposed acquisition, but the Federal Reserve may extend this time period for up to another 30 days. An acquisition may be completed before the disapproval period expires if the Federal Reserve issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, would constitute the acquisition of control. In addition, any "company" would be required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (or 5% if the "company" is a bank holding company) or more of the outstanding shares of the Company, or otherwise obtain control over the Company. Affiliate Transactions. The Company and the Banks are deemed affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Generally, the Federal Reserve Act: (i) limits the extent to which the financial institution or its subsidiaries may engage in "covered transactions" with an affiliate; and (ii) requires all transactions with an affiliate, whether or not "covered transactions," to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions. State Law on Acquisitions. Iowa law permits bank holding companies to make acquisitions throughout the state. However, Iowa currently has a deposit concentration limit of 15% on the amount of deposits in the state that any one banking organization can control and continue to acquire banks or bank deposits (by acquisitions), which applies to all depository institutions doing business in Iowa. Banking Subsidiaries Applicable federal and state statutes and regulations governing a bank's operations relate, among other matters, to capital adequacy requirements, required reserves against deposits, investments, loans, legal lending limits, certain interest rates payable, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches and dealings with affiliated persons. 9 First National and United Bank are national banks subject to primary federal regulation and supervision by the Office of the Comptroller of the Currency (the "OCC"). The FDIC, as an insurer of the deposits, also has some limited regulatory authority over First National and United Bank. State Bank, Boone Bank and Randall-Story Bank are state banks subject to regulation and supervision by the Iowa Division of Banking. The three state Banks are also subject to regulation and examination by the FDIC, which insures their respective deposits to the maximum extent permitted by law. The federal laws that apply to the Banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for loans. The laws and regulations governing the Banks generally have been promulgated to protect depositors and the deposit insurance fund of the FDIC and not to protect stockholders of such institutions or their holding companies. The OCC and FDIC each has authority to prohibit banks under their supervision from engaging in what it considers to be an unsafe and unsound practice in conducting their business. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires federal banking regulators to adopt regulations or guidelines in a number of areas to ensure bank safety and soundness, including internal controls, credit underwriting, asset growth, management compensation, ratios of classified assets to capital and earnings. FDICIA also contains provisions which are intended to change independent auditing requirements, restrict the activities of state-chartered insured banks, amend various consumer banking laws, limit the ability of "undercapitalized banks" to borrow from the Federal Reserve's discount window, require regulators to perform periodic on-site bank examinations and set standards for real estate lending. Borrowing Limitations. Each of the Banks is subject to limitations on the aggregate amount of loans that it can make to any one borrower, including related entities. Subject to numerous exceptions based on the type of loans and collateral, applicable statutes and regulations generally limit loans to one borrower of 15% of total equity and reserves. Each of the Banks is in compliance with applicable loans to one borrower requirements. FDIC Insurance. Generally, customer deposit accounts in banks are insured by the FDIC for up to a maximum amount of $100,000. The FDIC has adopted a risk-based insurance assessment system under which depository institutions contribute funds to the FDIC insurance fund based on their risk classification. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after an administrative hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law. Capital Adequacy Requirements. The Federal Reserve, the FDIC and the OCC (collectively, the "Agencies") have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for off-balance sheet items. Failure to achieve and maintain adequate capital levels may give rise to supervisory action through the issuance of a capital directive to ensure the maintenance of required capital levels. Each of the Banks is in compliance with applicable capital level requirements. The current guidelines require all federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term preferred stock, 45% of unrealized gain of equity securities and general reserve for loan and lease losses up to 1.25% of risk weighted assets. None of the Banks has received any notice indicating that it will be subject to higher capital requirements. Under these guidelines, banks' assets are given risk weights of 0%, 20%, 50% or 100%. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans (both carry a 50% rating). Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds (which have a 50% rating) and direct obligations of or obligations guaranteed by the United States Treasury or United States Government Agencies (which have a 0% rating). 10 The Agencies have also implemented a leverage ratio, which is equal to Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to the risk based guidelines. The principal objective of the leverage ratio is to limit the maximum degree to which a bank may leverage its equity capital base. The minimum required leverage ratio for top rated institutions is 3%, but most institutions are required to maintain an additional cushion of at least 100 to 200 basis points. Any institution operating at or near the 3% level is expected to be a strong banking organization without any supervisory, financial or operational weaknesses or deficiencies. Any institutions experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. Prompt Corrective Action. Regulations adopted by the Agencies impose even more stringent capital requirements. The FDIC and other Agencies must take certain "prompt corrective action" when a bank fails to meet capital requirements. The regulations establish and define five capital levels: (i) "well-capitalized," (ii) "adequately capitalized," (iii) "undercapitalized," (iv) "significantly undercapitalized" and (v) "critically undercapitalized." Increasingly severe restrictions are imposed on the payment of dividends and management fees, asset growth and other aspects of the operations of institutions that fall below the category of being "adequately capitalized". Undercapitalized institutions are required to develop and implement capital plans acceptable to the appropriate federal regulatory agency. Such plans must require that any company that controls the undercapitalized institution must provide certain guarantees that the institution will comply with the plan until it is adequately capitalized. As of February 28, 2003, neither the Company nor any of the Banks were subject to any regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. Furthermore, as of that same date, each of the Banks was categorized as "well capitalized" under regulatory prompt corrective action provisions. Restrictions on Dividends. Dividends paid to the Company by the Banks is the major source of Company cash flow. Various federal and state statutory provisions limit the amount of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. First National, as a national bank, generally may pay dividends from undivided profits without restriction, provided that its surplus fund is at least equal to its common stock capital fund. Boone Bank, Randall-Story Bank and State Bank are also restricted under Iowa law to paying dividends only out of their undivided profits. Additionally, the payment of dividends by the Banks is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and the Banks generally are prohibited from paying any dividends if, following payment thereof, the Bank would be undercapitalized. Reserves Against Deposits. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts (primarily checking accounts) and non-personal time deposits. Generally, reserves of 3% must be maintained against total transaction accounts of $36,100,000 or less (subject to an exemption not in excess of the first $6,000,000 of transaction accounts). A reserve of $1,083,000 plus 10% of amounts in excess of $36,100,000 must be maintained in the event total transaction accounts exceed $36,100,000. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy applicable liquidity requirements. Because required reserves must be maintained in the form of vault cash or a non-interest bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce the earning assets of the Banks. Bank Offices. Iowa law regulates the establishment of bank offices and thus may affect the Company's future plans to establish additional offices of its Banks. Pursuant to amendments to Iowa law effective February 21, 2002, current Iowa law permits a state bank to establish up to three (3) offices anywhere in the state. Until July 1, 2004, and in addition to the three offices which may be established anywhere in the state, a bank may only establish a bank office inside the boundaries of the county in which the principal place of business of the state bank is located and those counties contiguous to or cornering upon such county. The number of offices a state bank may establish in a particular municipality or urban complex may also be limited depending upon the population. Effective July 1, 2004, the geographical restrictions on bank office locations will be repealed. Finally, until July 1, 2004, Iowa law restricts the ability of a bank to establish a de novo office within the limits of a municipal corporation where there is an already established state or national bank or bank office. 11 Regulatory Developments In 2000, the Financial Services Modernization Act was enacted which: (i) repealed historical restrictions on preventing banks from affiliating with securities firms; (ii) broadens the activities that may be conducted by national banks and banking subsidiaries of holding companies; and (iii) provides an enhanced framework for protecting the privacy of consumers' information. In addition, bank holding companies may be owned, controlled or acquired by any company engaged in financially related activities, as long as such company meets regulatory requirements. To the extent that this legislation permits banks to affiliate with financial services companies, the banking industry may experience further consolidation. Regulatory Enforcement Authority The enforcement powers available to federal and state banking regulators are substantial and include, among other things, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, enforcement actions must be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions, or inactions, may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Applicable law also requires public disclosure of final enforcement actions by the federal banking agencies. National Monetary Policies In addition to being affected by general economic conditions, the earnings and growth of the Banks are affected by the regulatory authorities' policies, including the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply, credit conditions and interest rates. Among the instruments used to implement these objectives are open market operations in U.S. Government securities, changes in reserve requirements against bank deposits and the Federal Reserve Discount Rate, which is the rate charged member banks to borrow from the Federal Reserve Bank. These instruments are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve have had a material impact on the operating results of commercial banks in the past and are expected to have a similar impact in the future. Also important in terms of effect on banks are controls on interest rates paid by banks on deposits and types of deposits that may be offered by banks. The Depository Institutions Deregulation Committee, created by Congress in 1980, phased out ceilings on the rate of interest that may be paid on deposits by commercial banks and savings and loan associations, with the result that the differentials between the maximum rates banks and savings and loans can pay on deposit accounts have been eliminated. The effect of deregulation of deposit interest rates has been to increase banks' cost of funds and to make banks more sensitive to fluctuation in market rates. Availability of Information on Company Website The Company files periodic reports with the Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The Company does not currently provide access to such reports on or through its Internet website, as its website is not currently configured for this purpose. The Company is, however, in the process of restructuring its website to enable the Company to provide access to these reports on or through its website. Upon completion of this process, the Company expects to make available on or through its website free of charge all periodic reports filed by the Company with the SEC, including any amendments to such reports, as soon as reasonably practicable after such reports have been electronically filed with the SEC. The address of the Company's website on the Internet is: www.amesnational.com. Until such time as these reports are available on or through the Company's website, the Company will provide electronic or paper copies of these reports free of charge upon written or telephonic request directed to John P. Nelson, Vice President and Secretary, 405 Fifth Street, Ames, Iowa 50010 or (515) 232-6251. 12 ITEM 2. PROPERTIES The Company's office is housed in the main office of First National located at 405 Fifth Street, Ames, Iowa and occupies approximately 3,357 square feet. A lease agreement between the Company and First National provides the Company will make available for use by First National an equal amount of interior space at the Company's building located at 2330 Lincoln Way in lieu of rental payments. The main office is owned by First National free of any mortgage and consists of approximately 45,000 square feet and includes a drive through banking facility. In addition to its main office, First National conducts its business through two full-service offices, the University office and the North Grand office, and one super-market location, the Cub Food office. All offices are located within the city of Ames. The North Grand office is owned by First National free of any mortgage. The University office is located in a 16,000 square foot multi-tenant property owned by the Company. A 24-year lease agreement with the Company has been modified in 2002 to provide that an equal amount of interior space will be made available to the Company at First National's main office at 405 Fifth Street in lieu of rental payments. First National will continue to rent the drive-up facilities of approximately 1,850 square feet at this location for $1,200 per month. The Cub Foods office is leased by First National from Super Valu Stores under a 20 year lease with a five year initial term and three, five year renewal options. The current annual rental payment is $19,000. State Bank conducts its business from its main office located at 1025 Sixth Street, Nevada, Iowa and from two additional full-service offices located in McCallsburg and Colo, Iowa. All of these properties are owned by State Bank free of any mortgage. Boone Bank conducts its business from its main office located at 716 Eighth Street, Boone, Iowa and from one additional full-service office also located in Boone, Iowa. All properties are owned by Boone Bank free of any mortgage. Randall-Story Bank conducts its business from its main office located at 606 Broad Street, Story City, Iowa and from one additional full-service office located in Randall, Iowa. All of these properties are owned by Randall-Story Bank free of any mortgage. United Bank conducts its business from its main office located at 2101 South Center Street, Marshalltown, Iowa. The 5,200 square foot premise was constructed in 2002. The property is owned by United Bank free of any mortgage. The only property the Company owns is located at 2330 Lincoln Way, Ames, Iowa consisting of a multi tenant building of approximately 16,000 square feet. First National leases 5,422 square feet of this building to serve as its University office. The remaining space is currently leased to four other tenants who occupy the space for business purposes. ITEM 3. LEGAL PROCEEDINGS The Banks are from time to time parties to various legal actions arising in the normal course of business. The Company believes that there is no threatened or pending proceeding against the Company or the Banks, which, if determined adversely, would have a material adverse effect on the business or financial condition of the Company or the Banks. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS There were no matters submitted to a vote of the shareholders of the Company during the fourth quarter of 2002. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS On February 28, 2003, the Company had approximately 613 shareholders of record. The Company's common stock is traded in the over-the-counter market under the symbol "ATLO". Trading in the Company's common stock is, however, relatively limited. Market makers in the stock include US Bancorp Piper Jaffray, 402 Main Street, Ames, Iowa 50010 (515-233-4064); Howe Barnes Investments, Inc., 135 So. LaSalle, Chicago, IL 60603 (312-655-3000); and Monroe Securities, Inc., 47 State St., Rochester, NY 14614 (800-766-5560). Based on information provided to and gathered by the Company on an informal basis, the Company believes that the high and low sales price for the common stock on a per share basis during the last two years is as follows: 2002 2001 --------------- --------------- Market Price Market Price --------------- --------------- Quarter High Low Quarter High Low - ---------------------------------------- ------------------------------------- 1st ............ $40.00 $39.00 1st ............ $55.00 $40.00 2nd ............ 45.00 40.00 2nd ............ 44.50 36.25 3rd ............ 46.75 43.00 3rd ............ 41.50 36.55 4th ............ 47.50 45.90 4th ............ 40.00 35.75 The Company declared aggregate annual cash dividends in 2002 and 2001 of $6,820,000 and $5,187,000, respectively, or $2.18 per share in 2002 and $1.66 per share in 2001. In February 2003, the Company declared an aggregate cash dividend of $1,377,000 or $.44 per share. Quarterly dividends declared during the last two years were as follows: 2002 2001 ------------------ ------------------ Cash dividends Cash dividends Quarter declared per share declared per share - -------------------------------------------------------------------------------- 1st .................................. $0.42 $ 0.40 2nd .................................. 0.88 0.42 3rd .................................. 0.44 0.42 4th .................................. 0.44 0.42 The decision to declare any such cash dividends in the future and the amount thereof rests within the discretion of the Board of Directors of the Company and will be subject to, among other things, the future earnings, capital requirements and financial condition of the Company and certain regulatory restrictions imposed on the payment of dividends by the Banks. Such restrictions are discussed in greater detail in Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. 14 ITEM 6. SELECTED FINANCIAL DATA The following financial data of the Company for the five years ended December 31, 2002 through 1998 is derived from the Company's historical audited financial statements and related footnotes. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the consolidated financial statements and related notes contained elsewhere in this Annual Report. Year Ended December 31 (dollars in thousands, except per share amounts) ------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------------------------------------------------------------ STATEMENT OF INCOME DATA Interest income ....................... $ 36,270 $ 41,474 $ 44,018 $ 40,361 $ 39,439 Interest expense ...................... 11,663 18,883 24,261 19,981 19,668 ------------------------------------------------------------------ Net interest income ................... 24,607 22,591 19,757 20,380 19,771 Provision for loan losses ............. 688 898 460 166 437 ------------------------------------------------------------------ Net interest income after provision for loan losses ........................... 23,919 21,693 19,297 20,214 19,334 Noninterest income .................... 5,135 5,080 4,130 5,750 4,835 Noninterest expense ................... 13,276 11,587 10,712 11,208 10,264 ------------------------------------------------------------------ Income before provision for income tax 15,778 15,186 12,715 14,756 13,905 Provision for income tax .............. 4,438 4,639 3,596 4,429 4,279 ------------------------------------------------------------------ Net Income ............................ $ 11,340 $ 10,547 $ 9,119 $ 10,327 $ 9,626 ================================================================== DIVIDENDS AND EARNINGS PER SHARE DATA Cash dividends declared ............... $ 6,820 $ 5,187 $ 4,932 $ 4,664 $ 4,355 Cash dividends declared per share ..... $ 2.18 $ 1.66 $ 1.58 $ 1.50 $ 1.39 Basic and diluted earnings per share .. $ 3.63 $ 3.38 $ 2.92 $ 3.31 $ 3.07 Weighted average shares outstanding ... 3,127,285 3,123,885 3,120,375 3,118,427 3,138,939 BALANCE SHEET DATA Total assets .......................... $ 677,229 $ 622,280 $ 619,385 $ 605,881 $ 579,956 Net loans ............................. 332,306 323,043 344,015 309,652 287,713 Deposits .............................. 550,622 511,509 493,429 484,620 482,513 Stockholders' equity .................. 101,523 93,622 86,177 76,073 79,109 Equity to assets ratio ................ 14.99% 15.04% 13.91% 12.56% 13.64%
Year Ended December 31 (dollars in thousands, except per share amounts) ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------------------- FIVE YEAR FINANCIAL PERFORMANCE Net income ............................................. $ 11,340 $ 10,547 $ 9,119 $ 10,327 $ 9,626 Average assets ......................................... 635,816 616,971 626,560 594,441 560,524 Average stockholders' equity ........................... 98,282 91,373 80,081 80,074 77,445 Return on assets (net income divided by average assets) 1.78% 1.71% 1.46% 1.74% 1.72% Return on equity (net income divided by average equity) 11.54% 11.54% 11.39% 12.90% 12.43% Efficiency ratio (noninterest expense divided by noninterest income plus net interest income) .......... 44.64% 41.87% 44.84% 42.89% 41.71% Dividend payout ratio (dividends per share divided by net income per share) ....................... 60.05% 49.11% 54.11% 45.32% 45.28% Dividend yield (dividends per share divided by closing market price) ....................................... 4.69% 4.15% 2.87% 2.73% 2.78% Equity to assets ratio (average equity divided by average assets) ..................................... 15.46% 14.81% 12.78% 13.47% 13.82%
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is provided for the consolidated operations of the Company, which includes its wholly owned banking subsidiaries, First National, State Bank, Boone Bank, Randall-Story Bank and United Bank. The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations. Forward-Looking Statements The discussion herein may contain forward-looking statements about the Company, its business and its prospects. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include use of the words "believe", "expect", "anticipate", "intend", "plan", "estimate" or words of similar meaning, or future or conditional verbs such as "will", "would", "should", "could" or "may". Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors, many of which are beyond the Company's control, could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Such risks and uncertainties with respect to the Company include those related to the economic environment, particularly in the areas in which the Company and the Banks operate, competitive products and pricing, fiscal and monetary policies of the U.S. government, changes in governmental regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, credit risk management and asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. Critical Accounting Policies The discussion contained in this Item 7 and other disclosures included within this report, are based on the Company's audited consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on approximate measures of 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". Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgements, 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 charged to expense. 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 credits. 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 less than future charge-offs. General The Company earned net income of $11,340,000 in 2002, compared to net income of $10,547,000 in 2001 and net income of $9,119,000 in 2000. The higher level of net income in 2002 as compared to 2001 and 2001 versus 2000 is attributable to an improved net interest margin as interest expense declined on deposits and other borrowings at a faster pace than the decline in interest income on loans and investment securities. The Company's net income is derived principally from the operating results of the Banks. Boone Bank, First National, Randall-Story Bank and State Bank are well-established financial institutions that have a record of profitable operations. As a newly chartered bank, United Bank was not profitable in 2002, and it is not expected to be profitable in 2003. 16 Financial Condition Net loans for the year ended December 31, 2002, increased to $332,306,000 from $323,043,000 for the same period in 2001. The increase in loan volume can be primarily attributed to growth in the 1-4 family and commercial real estate portfolios at United Bank. For the year 2001, net loans declined $20,972,000 as the result of a slowdown in local, state, and national economic activity and aggressive competition for loans. While the net interest margin shows a favorable trend for the past two years as the result of declining interest rates, the average yield on assets will likely fall given the current interest rate environment and competition will continue to create downward pressure on the net interest margins of the Company's Banks into the foreseeable future. Currently, the Company's largest market, Ames, Iowa, has competitors consisting of seven banks, three thrifts, five credit unions and several other financial investment companies. Multiple banks are also located in the Company's other communities creating similarly competitive environments. The increase in investment securities to $244,575,000 on December 31, 2002 compared to $213,778,000 on December 31, 2001 resulted primarily from the purchase of U.S. government agency securities during 2002. Total assets increased $54,949,000 or 8.83% as of December 31, 2002 versus the same date one year earlier as the result of deposit growth at United Bank and State Bank. In 2002, the rates paid on deposits were lower than in 2001 as a result of decreases in market interest rates. Deposits increased 7.65% in 2002 compared to an increase of 3.66% in 2001. The Banks continue to compete for deposits in market areas where the total deposit growth continues to be weak as a result of significant bank and non-bank competition. Other borrowings, including Federal Home Loan Bank advances, federal funds purchased, and securities sold under agreements to repurchase, totaled $18,326,000 in 2002 compared to $11,596,000 in 2001. Other borrowings increased at year end 2002 compared to one year prior as the result of customers maintaining higher balances relating to securities sold under agreement to repurchase. Average Balance Sheet and Interest Rates The following tables show average balances and interest income or interest expense, with the resulting average yield or rate by category of average earning asset or interest bearing liability. ASSETS 2002 2001 2000 ---------------------------- ---------------------------- ----------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate (dollars in thousands) ------------------------------------------------------------------------------------------ Interest-earning assets Loans Commercial .......................... $ 42,948 $ 3,042 7.08% $ 49,081 $ 4,107 8.37% $ 52,764 $ 4,378 8.30% Agricultural ........................ 25,274 1,895 7.50% 28,302 2,492 8.81% 26,328 2,465 9.36% Real estate ......................... 229,805 16,929 7.37% 240,382 19,458 8.09% 232,823 18,963 8.14% Consumer and other .................. 19,494 1,341 6.88% 23,675 1,834 7.75% 27,200 2,500 9.19% ------------------------------------------------------------------------------------------ Total loans (including fees) ........ $317,521 $ 23,207 7.31% $341,440 $ 27,891 8.17% $339,115 $ 28,306 8.35% Investment securities Taxable ............................. $142,089 $ 8,414 5.92% $146,213 $ 9,303 6.36% $179,858 $ 11,644 6.47% Tax-exempt .......................... 78,171 5,797 7.42% 68,001 5,210 7.66% 72,521 5,442 7.50% ------------------------------------------------------------------------------------------ Total investment securities ......... $220,260 $ 14,211 6.45% $214,214 $ 14,513 6.78% $252,379 $ 17,086 6.77% Interest bearing deposits with banks $ 534 $ 14 2.62% $ 251 $ 13 5.18% $ 1,718 $ 99 5.76% Federal funds sold .................. 51,206 810 1.58% 25,953 829 3.19% 5,602 377 6.73% ------------------------------------------------------------------------------------------ Total Interest-earning assets ....... $589,521 $ 38,242 6.49% $581,858 $ 43,246 7.43% $598,814 $ 45,868 7.66% Noninterest-earning assets Cash and due from banks ............. $ 28,206 $ 21,040 $ 19,324 Premises and equipment, net ......... 7,912 5,892 5,285 Other, less allowance for loan losses 10,177 8,181 3,137 -------- -------- Total noninterest-earning assets .... $ 46,295 $ 35,113 $ 27,746 -------- -------- -------- TOTAL ASSETS ........................ $635,816 $616,971 $626,560 ======== ======== ======== 1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included. 2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 34%.
17 LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 2000 ---------------------------- ---------------------------- ---------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate (dollars in thousands) ------------------------------------------------------------------------------------------ Interest-bearing liabilities Deposits Savings, NOW accounts, and money markets ................ $260,426 $ 3,393 1.30% $228,908 $ 5,727 2.50% $218,795 $ 8,144 3.72% Time deposits < $100,000 ......... 152,703 6,107 4.00% 158,625 8,736 5.51% 159,035 8,972 5.64% Time deposits > $100,000 ......... 51,428 1,898 3.69% 58,253 3,329 5.71% 62,052 3,823 6.16% ------------------------------------------------------------------------------------------- Total deposits ................... $464,557 $ 11,398 2.45% $445,786 $ 17,792 3.99% $439,882 $ 20,939 4.76% Other borrowed funds ............. 13,887 265 1.91% 23,008 1,091 4.74% 52,749 3,322 6.30% ------------------------------------------------------------------------------------------- Total Interest-bearing liabilities $478,444 $ 11,663 2.44% $468,794 $ 18,883 4.03% $492,631 $ 24,261 4.92% ------------------------------------------------------------------------------------------- Noninterest-bearing liabilities Demand deposits .................. $ 53,318 $ 51,113 $ 47,590 Other liabilities ................ 5,772 5,691 6,258 -------- -------- -------- Stockholders' equity ............. $ 98,282 $ 91,373 $ 80,081 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $635,816 $616,971 $626,560 ======== ======== ======== Net interest income .............. $ 26,579 4.51% $ 24,363 4.19% $ 21,607 3.61% ======== ======== ======== Spread Analysis Interest income/average assets ... $ 38,242 6.01% $ 43,246 7.01% $ 45,868 7.32% Interest expense/average assets .. 11,663 1.83% 18,883 3.06% 24,261 3.87% Net interest income/average assets 26,579 4.18% 24,363 3.95% 21,607 3.45%
Rate and Volume Analysis The following table sets forth, on a tax-equivalent basis, a summary of the changes in net interest income resulting from changes in volume and rates. 2002 Compared to 2001 2001 Compared to 2000 (dollars in thousands) ------------------------------ ----------------------------- Volume Rate Total Volume Rate Total --------------------------------------------------------------- Interest income Loans Commercial ............................. $ (477) $ (588) $(1,065) $ (308) $ 37 $ (271) Agricultural ........................... (250) (347) $ (597) 179 (152) 27 Real estate ............................ (836) (1,693) $(2,529) 613 (118) 495 Consumer and other ..................... (301) (192) $ (493) (301) (365) (666) -------------------------------------------------------------- Total loans (including fees) ........... $(1,864) $(2,820) $(4,684) $ 183 $ (598) $ (415) Investment securities Taxable ................................ $ (257) $ (632) $ (889) $(2,144) $ (197) $(2,341) Tax-exempt ............................. 755 (168) $ 587 (344) 112 (232) -------------------------------------------------------------- Total investment securities ............................. $ 498 $ (800) $ (302) $(2,488) $ (85) $(2,573) Interest bearing deposits with banks ... $ 10 $ (9) $ 1 $ (77) $ (9) $ (86) Federal funds sold ..................... 538 (557) $ (19) 741 (289) 452 -------------------------------------------------------------- Total Interest-earning assets .......... $ (818) $(4,186) $(5,004) $(1,641) $ (981) $(2,622) Interest-bearing liabilities Deposits Savings, NOW accounts, and money markets $ 704 $(3,038) $(2,334) $ 361 $(2,778) $(2,417) Time deposits < $100,000 ............... (314) (2,315) $(2,629) (23) (213) (236) Time deposits > $100,000 ............... (431) (1,000) $(1,431) (226) (268) (494) -------------------------------------------------------------- Total deposits ......................... $ (41) $(6,353) $(6,394) $ 112 $(3,259) $(3,147) Other borrowed funds ................... (330) (496) (826) (1,551) (680) (2,231) -------------------------------------------------------------- Total Interest-bearing liabilities ..... $ (371) $(6,849) $(7,220) $(1,439) $(3,939) $(5,378) -------------------------------------------------------------- Net interest income/earning assets ..... $ (447) $ 2,663 $ 2,216 $ (202) $ 2,958 $ 2,756 1 The change in interest due to both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the absolute value of the change in each.
18 Net Interest Income The Company's largest component contributing to net income is net interest income, which is the difference between interest earned on earning assets which are primarily loans and investments and interest paid on interest bearing liabilities which are primarily deposits and borrowings. The volume of and yields earned on earning assets and the volume of and the rates paid on interest bearing liabilities determine net interest income. Interest earned and interest paid is also affected by general economic conditions, particularly changes in market interest rates, and by government policies and the action of regulatory authorities. Net interest income divided by average earning assets is referred to as net interest margin. For the years December 31, 2002, 2001 and 2000, the Company's net interest margin was 4.51%, 4.19% and 3.61%, respectively. The improved net interest margin in 2002 and 2001 is attributable to lower interest expense as the Company was able to lower deposit and other borrowings rates more quickly than loans and investment rates declined. While the trend of the net interest margin is favorable for the past two years, the average yield on assets will likely fall given the current interest rate environment and the high level of competition in the local markets will likely cause downward pressure on the net interest margin of the Company into the foreseeable future. Currently, the Company's largest market, Ames, Iowa, has seven banks, three thrifts, five credit unions and several other financial investment companies. Multiple banks are also located in the Company's other communities creating similarly competitive environments. Net interest income during 2002, 2001 and 2000 totaled $24,608,000, $22,591,000 and $19,757,000, respectively, representing an 8.93% increase in 2002 from 2001 and a 14.34% increase in 2001 compared to 2000. The higher net interest income in both periods resulted from lower interest expense as the Company was able to lower deposit and other borrowings rates more quickly than loans and investment rates declined. Provision for Loan Losses The provision for loan losses reflects management's judgment of the expense to be recognized in order to maintain an adequate allowance for loan losses. The Company provided $688,000 for loan losses during 2002 compared to $898,000 in 2001 and $460,000 in 2000. Provision expense was higher in 2001 versus 2002 and 2000 as the result of deterioration in the commercial lease portfolio in 2001. Management believes the allowance for loan losses to be adequate to absorb probable losses in the current portfolio. This statement is based upon management's continuing evaluation of inherent risks in the current loan portfolio, current levels of classified assets and general economic factors. The Company will continue to monitor the allowance and make future adjustments to the allowance as conditions dictate. Noninterest Income and Expense Non-interest income during 2002, 2001 and 2000 totaled $5,135,000, $5,080,000 and $4,130,000, respectively, representing a 1.08% increase in 2002 from 2001 and a 23.00% increase in 2001 compared 2000. The increase in 2002 is the result of improved profitability of trust, secondary market, and automated teller machine business offset by lower security gains. The increase in 2001 can be attributed to higher security gains and increased revenues from deposit, trust and secondary market lending services. Non-interest expense during 2002, 2001 and 2000 totaled $13,276,000, $11,587,000 and $10,712,000, respectively, representing an 14.57% increase in 2002 versus 2001 and a 8.17% increase in 2001 compared to 2000. The higher noninterest expense in 2002 is the result of overhead expenses in chartering United Bank and increased salary and benefit expenses related to profit sharing and retirement plans. The higher noninterest expense in 2001 is primarily attributable to higher salary and benefits expenses, data processing costs, and professional fees associated with filings with the Securities and Exchange Commission. The percentage of non-interest expense to average assets was 2.09% in 2002, compared to 1.88% and 1.71% during 2001 and 2000, respectively. Provision for Income Taxes The provision for income taxes for 2002, 2001 and 2000 was $4,438,000, $4,639,000 and $3,596,000, respectively. This amount represents an effective tax rate of 28.13% during 2002, compared to 30.54% and 28.28% for 2001 and 2000, respectively. The Company's marginal federal tax rate is currently 35%. The difference between the Company's effective and marginal tax rate is primarily related to investments made in tax exempt securities. 19 Investment Portfolio The following table presents the market values, which represent the carrying values due to the available-for-sale classification, of the Company's investment portfolio as of December 31, 2002, 2001 and 2000, respectively. ---------------------------------- 2002 2001 2000 (dollars in thousands) ---------------------------------- U.S. treasury securities ................ $ 4,208 $ 12,548 $ 23,150 U.S. government agencies ................ 85,780 60,858 85,864 State and political subdivisions ........ 70,516 63,109 61,411 Corporate bonds ......................... 56,357 51,106 43,167 Equity securities ....................... 27,714 26,157 19,114 ---------------------------------- Total ................................... $244,575 $213,778 $232,706 Investments in states and political subdivisions represent purchases of municipal bonds located primarily in the state of Iowa and contiguous states. Investment in other securities includes corporate debt obligations of companies located and doing business throughout the United States. The debt obligations were all within the credit ratings acceptable under the Banks' investment policies with the exception of one corporate bond with an amortized cost of $498,000 and a market value of $485,000. The bond was rated by Moody's and Standard & Poor's rating service publications as B1 and B+, respectively, as of December 31, 2002 falling outside the Bank's acceptable rating standards subsequent to its purchase date of November 16, 1998. As of December 31, 2002, the Company did not have securities from a single issuer, except for the United States Government or its agencies, which exceeded 10% of consolidated stockholders' equity. The equity securities portfolio consists primarily of financial and utility stocks as of December 31, 2002, 2001, and 2000. Investment Maturities as of December 31, 2002 The investments in the following table are reported by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. After One After Five Year But Years But Within Within Within After One Year Five Years Ten Years Ten Years Total (dollars in thousands) ------------------------------------------------------------------- U.S. treasury .................... $ 1,915 $ 1,749 $ 544 $ -- $ 4,208 U.S. government agencies ......... 14,953 45,223 22,754 2,850 85,780 States and political subdivisions 4,165 20,430 30,163 15,758 70,516 Corporate bonds .................. 7,044 19,526 29,262 525 56,357 ------------------------------------------------------------------- Total ............................ $ 28,077 $ 86,928 $ 82,723 $ 19,133 $ 216,861 Weighted average yield U.S. treasury .................... 5.40% 4.22% 5.20% 4.89% U.S. government agencies ......... 5.75% 4.57% 5.03% 4.42% 4.90% States and political subdivisions* 6.45% 7.19% 7.45% 7.41% 7.30% Corporate bonds .................. 6.18% 6.59% 6.33% 6.41% 6.40% ------------------------------------------------------------------- Total ............................ 5.94% 5.63% 6.37% 6.94% 6.07% * Yields on tax-exempt obligations of states and political subdivisions have been computed on a tax-equivalent basis.
20 Loan Portfolio Types of Loans The following table sets forth the composition of the Company's loan portfolio for the past five years ending at December 31, 2002. ---------------------------------------------------- 2002 2001 2000 1999 1998 (dollars in thousands) ---------------------------------------------------- Real Estate Construction ................ $ 13,518 $ 12,677 $ 12,221 $ 9,062 $ 7,641 1-4 family residential ...... 81,239 84,379 97,663 89,171 84,767 Commercial .................. 136,351 117,211 112,415 98,840 83,115 Agricultural ................ 21,693 21,029 21,095 19,999 18,336 Commercial ..................... 40,097 45,631 53,955 48,920 52,458 Agricultural ................... 26,022 27,367 28,199 25,575 23,882 Consumer and other ............. 19,921 20,920 24,576 23,897 23,263 ---------------------------------------------------- Total loans .................... 338,841 329,214 350,124 315,464 293,462 Deferred loan fees, net ........ 777 725 736 826 903 ---------------------------------------------------- Total loans net of deferred fees $338,064 $328,489 $349,388 $314,638 $292,559
The Company's loan portfolio consists of commercial loans, agricultural loans, commercial real estate and residential real estate loans and consumer loans. As of December 31, 2002, gross loans totaled approximately $339 million, which equals approximately 62% of total deposits and 50% of total assets. As of December 31, 2002, the majority of the loans were originated directly by the Banks to borrowers within the Banks' principal market areas. There are no foreign loans outstanding during the years presented. Commercial loans consist primarily of loans to businesses for various purposes including revolving lines to finance current operations, floor-plans, inventory and accounts receivable; capital expenditure loans to finance equipment and other fixed assets; and letters of credit. These loans generally have short maturities, have either adjustable or fixed rates and are unsecured or secured by inventory, accounts receivable, equipment and/or real estate. Agricultural loans play an important part in the Banks' loan portfolios. Iowa is a major agricultural state and is a national leader in both grain and livestock production. The Banks play a significant role in their communities in financing operating, livestock and real estate activities. All lending is done on a personal basis using cash flow as the most important criterion after assessing the borrower's character. Government programs are utilized where the benefit to both borrower and lender is evident. Real estate loans include various types of loans for which the Banks hold real property as collateral and consist of loans primarily on commercial properties and single family residences. Real estate loans typically have fixed rates for up to five years with the Company's loan policy having a maximum fixed rate maturity of up to 15 years. The majority of construction loan volume is to contractors to construct commercial buildings and generally have maturities of up to 12 months. The Banks originate residential real estate loans for sale to the secondary market for a fee. Consumer loans include loans extended to individuals for household, family and other personal expenditures not secured by real estate. The majority of the Banks' consumer lending is for vehicles, consolidation of personal debts, household appliances and improvements. The interest rates charged on loans vary with the degree of risk, the amount of the loan and the maturity of the loan. Competitive pressures, market interest rates, the availability of funds and government regulation further influence the rate charged on a loan. The Banks follow a loan policy, which has been approved by both the Company and Banks' Boards of Directors and are overseen by both Company and Bank management. These policies establish lending limits, review and grading criteria and other guidelines such as loan administration and allowance for loan losses. Loans are approved by the Banks' Board of Directors and/or designated officers in accordance with respective guidelines and underwriting policies of the Company. Loans to one borrower are limited by applicable state and federal banking laws. Credit limits generally vary according to the type of loan and the individual loan officer's experience. 21 Maturities and Sensitivities of Loans to Changes in Interest Rates as of December 31, 2002. The contractual maturities of the Company's loan portfolio are as shown below. Actual maturities may differ from contractual maturities because individual borrowers may have the right to prepay loans with or without prepayment penalties. After One Year But Within Within After One Year five years Five Years Total (dollars in thousands) -------------------------------------------- Real Estate Construction ................ $ 10,175 $ 2,578 $ 765 $ 13,518 1-4 family residential ...... 5,004 33,403 42,832 81,239 Commercial .................. 9,371 94,643 32,337 136,351 Agricultural ................ 1,486 4,394 15,813 21,693 Commercial ..................... 25,064 11,444 3,589 40,097 Agricultural ................... 18,580 4,058 3,384 26,022 Consumer and other ............. 5,113 10,335 4,473 19,921 -------------------------------------------- Total loans .................... $ 74,793 $160,855 $103,193 $338,841 After One Year But Within After Five Years Five Years ------------------------ Loan maturities after one year with: Fixed rates ...................................... $146,405 $ 63,056 Variable rates ................................... 14,450 40,137 ----------------------- $160,855 $103,193 Non-performing Assets The following table sets forth information concerning the Company's non-performing assets for the past five years ending December 31, 2002. ------------------------------------------ 2002 2001 2000 1999 1998 (dollars in thousands) ------------------------------------------ Non-performing assets: Nonaccrual loans .................. $2,015 $2,692 $2,663 $ 405 $ 80 Loans 90 days or more past due .... 394 797 242 723 581 Restructured loans ................ -- -- -- -- -- ------------------------------------------ 2,409 3,489 2,905 1,128 661 Other real estate owned ........... 295 159 75 41 43 ------------------------------------------ Total non-performing assets ....... $2,704 $3,648 $2,980 $1,169 $ 704 The accrual of interest on non-accrual and other impaired loans is discontinued at 90 days or when, in the opinion of management, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Interest income on restructured loans is recognized pursuant to the terms of the new loan agreement. Interest income on other impaired loans is monitored and based upon the terms of the underlying loan agreement. However, the recorded net investment in impaired loans, including accrued interest, is limited to the present value of the expected cash flows of the impaired loan or the observable fair market value of the loan's collateral. Outstanding loans of $383,000 were placed on non-accrual status in 2002 with total non-accrual loans equaling $2,015,000 as of December 31, 2002. Outstanding loans of $886,000 were placed on non-accrual status in 2001 with total non-accrual loans equaling $2,692,000 as of December 31, 2001. Outstanding loans of $2,578,000 were placed on non-accrual status in 2000 with total non-accrual loans equaling $2,663,000 as of December 31, 2000. A real estate loan at First National with a December 31, 2002 and 2001 balance of $1,305,000 is the largest non-performing asset. For the years ended December 31, 2002, 2001 and 2000, interest income, which would have been recorded under the original terms of such loans was approximately $160,000, $243,000 and $254,000, respectively, with $17,000, $114,000 and $101,000, respectively, recorded. 22 Summary of the Allowance for Loan Losses The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses. The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower; a realistic determination of value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; an analysis of the levels and trends of loan categories; and a review of delinquent and classified loans. The adequacy of allowance for loan losses is evaluated quarterly by management and the respective Bank boards. This evaluation focuses on specific loan reviews, changes in the type and volume of the loan portfolio given the current and forecasted economic conditions and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the customer's cash flow or net worth are sufficient to repay the loan; delinquent status; the loan has been criticized in a regulatory examination; the accrual of interest has been suspended; or other reasons including when the loan has other special or unusual characteristics which suggest special monitoring is warranted. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgment about information available to them at the time of their examination. Analysis of the Allowance for Loan Losses The Company's policy is to charge-off loans when, in management's opinion, the loan is deemed uncollectible, although concerted efforts are made to maximize future recoveries. The following table sets forth information regarding changes in the Company's Allowance for Loan Losses For The Most Recent Five Years. -------------------------------------------------------- 2002 2001 2000 1999 1998 (dollars in thousands) -------------------------------------------------------- Balance at beginning of period .... $ 5,446 $ 5,373 $ 4,986 $ 4,846 $ 4,459 Charge-offs: Real Estate Construction ................... -- -- -- -- -- 1-4 Family Residential ......... -- 1 -- -- -- Commercial ..................... 40 -- -- 18 -- Agricultural ................... -- -- -- -- -- Commercial ........................ 235 768 55 -- 118 Agricultural ...................... -- -- -- -- -- Consumer and other ................ 155 83 96 41 26 -------------------------------------------------------- 430 852 151 59 144 Recoveries: Real Estate Construction ................... -- -- -- -- -- 1-4 Family Residential ......... 20 -- -- -- -- Commercial ..................... -- -- -- 16 -- Agricultural ................... -- -- -- -- -- Commercial ........................ 14 8 66 -- 79 Agricultural ...................... -- -- -- -- -- Consumer and other ................ 20 19 12 17 15 -------------------------------------------------------- 54 27 78 33 94 Net charge-offs (recoveries) ...... $ 376 $ 825 $ 73 $ 26 $ 50 Additions charged to operations ........................ 688 898 460 166 437 -------------------------------------------------------- Balance at end of period .......... $ 5,758 $ 5,446 $ 5,373 $ 4,986 $ 4,846 Average Loans Outstanding ......... $317,521 $341,440 $339,115 $299,064 $279,054 Ratio of net charge-offs during the period to average loans outstanding ....................... 0.12% 0.24% 0.02% 0.01% 0.02% Ratio of allowance for loan losses to total loans net of deferred fees 1.70% 1.65% 1.54% 1.58% 1.66%
23 Reserve levels increased to 1.70% of total loans outstanding as of December 31, 2002 compared to 1.65% as of December 31, 2001. The increase in reserve levels relates primarily to First National as the result of higher specific reserves for two problem credits identified by management prior to 2002 and large specific reserve for a newly downgraded problem loan in 2002. Problem commercial leases identified in 2001 led to higher provision expense, net charge-offs and specific reserves as credit weaknesses were identified in 2001. General reserve allocations remained consistent in 2002 with prior years. General reserves for loan categories normally range from 1.00 to 2.00% of the outstanding loan balances. As loan volume increases, the general reserve levels increase with that growth. As the previous table indicates, loan provisions have increased in 2001 and 2002 as the result of higher level of net charge-offs and specific reserves. The general reserve loss factors have remained consistent over the five-year period presented. The allowance relating to commercial real estate and commercial loans are the largest reserve components. Commercial real estate loans have higher general reserve levels than other real estate loans as management perceives more risk in this type of lending. Elements contributing to the higher risk level include susceptibility of businesses to changing environmental factors such as the economic business cycle, the larger individual loan amounts, a limited number of buyers and the specialized uses for some properties. As of December 31, 2002, commercial real estate loans have general reserves of 1.30% and 1-4 family residential loans, which management generally considers lower risk, have general reserves of 1.00%. The estimation methods and assumptions used in determining the allowance for the five years presented have remained consistent. Loans that the Banks have identified as having higher risk levels are reviewed individually in an effort to establish adequate loss reserves. These reserves are considered specific reserves and are directly impacted by the credit quality of the underlying loans. Normally, as the actual or expected level of non-performing loans increase, the specific reserves also increase. For December 31, 2002 and 2001, specific reserves increased $386,000 or 29.65% and $142,000 or 12.24%, respectively. Specific allocations for commercial real estate loans triggered the increase in 2002 while commercial leases contributed to the increase in total reserve levels in 2001. The specific reserves are dependent upon assumptions regarding the liquidation value of collateral and the cost of recovering collateral including legal fees. Changing the amount of specific reserves on individual loans has had the largest impact on the reallocation of the reserve among different parts of the portfolio. Other factors that are considered when determining the adequacy of the reserve include loan concentrations, loan growth, the economic outlook and historical losses. The Company's concentration risks include geographic concentration in central Iowa; the local economy's dependence upon several large governmental entities, including Iowa State University and the Iowa Department of Transportation; and the health of Iowa's agricultural sector that is dependent on weather conditions and government programs. Additional reserves have not been established for local and national economic conditions over the last five-year period. Historical losses reflect good credit quality over the past five years, as net losses have not exceeded .24% which compares favorably to the Company's reserve of 1.70% as of December 31, 2002. However, no assurances can be made that losses will remain at the favorable levels experienced over the past five years. Allocation of the Allowance for Loan Losses The following table sets forth information concerning the Company's allocation of the allowance for loan losses. ---------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 (dollars in thousands) ---------------------------------------------------------------------------------------- Amount % * Amount % * Amount % * Amount % * Amount % * Balance at end of period applicable to: Real Estate Construction ......... 210 3.99% 178 3.85% 163 3.49% 91 2.87% 80 2.60% 1-4 family residential 892 23.98% 980 25.63% 1,088 27.89% 899 28.27% 809 28.89% Commercial ........... 2,453 40.24% 1,704 35.60% 1,619 32.11% 1,536 31.33% 1,330 28.32% Agricultural ......... 302 6.40% 279 6.39% 315 6.03% 237 6.34% 194 6.25% Commercial .............. 910 11.83% 938 13.86% 754 15.41% 573 15.51% 828 17.88% Agricultural ............ 504 7.68% 457 8.31% 421 8.05% 541 8.11% 517 8.14% Consumer and other ...... 235 5.88% 258 6.35% 538 7.02% 560 7.58% 604 7.93% Unallocated ............. 252 652 475 549 484 ---------------------------------------------------------------------------------------- $5,758 100% $5,446 100% $5,373 100% $4,986 100% $4,846 100% * Percent of loans in each category to total loans.
24 Deposits Types of Deposits The Company's primary source of funds is customer deposits. The Company attempts to attract non-interest-bearing deposits, which are a low cost funding source. In addition, the Banks offer a variety of interest-bearing accounts designed to attract both short-term and longer-term deposits from customers. Interest-bearing accounts earn interest at rates established by Bank management based on competitive market factors and the Company's need for funds. While nearly 61% of the Banks' certificates of deposit mature in the next year, it is anticipated that a majority of these certificates will be renewed. Rate sensitive certificates of deposits in excess of $100,000 are subject to somewhat higher volatility with regard to renewal volume as the Banks adjust rates based upon funding needs. In the event a substantial volume of certificates are not renewed, the Company has sufficient liquid assets and borrowing lines to fund significant runoff. A sustained reduction in deposit volume would have a significant negative impact on the Company's operation and liquidity. The Company traditionally has not relied upon brokered deposits and does not anticipate utilizing such funds at the present time. Average Deposits by Type The following table sets forth the average balances for each major category of deposit and the weighted average interest rate paid for deposits during the years ended December 31, 2002, 2001 and 2000. 2002 2001 2000 ----------------------------------------------------------- Amount Rate Amount Rate Amount Rate (dollars in thousands) ----------------------------------------------------------- Noninterest bearing demand deposits $ 53,318 $ 51,113 $ 47,590 Interest bearing demand deposits .. 115,494 1.00% 103,529 2.01% 98,105 3.17% Money market deposits ............. 120,446 1.71% 101,267 3.23% 93,583 4.67% Savings deposits .................. 24,486 0.71% 24,112 1.56% 27,107 2.39% Time certificates < $100,000 ...... 152,703 4.00% 158,625 5.51% 159,035 5.64% Time certificates > $100,000 ...... 51,428 3.69% 58,253 5.71% 62,052 6.16% -------- -------- -------- $517,875 $496,899 $487,472
Deposit Maturity The following table shows the amounts and remaining maturities of time certificates of deposit that had balances of $100,000 and over as of December 31, 2002, 2001 and 2000. 2002 2001 2000 (dollars in thousands) ----------------------------------- 3 months or less ..................... $15,162 $16,771 $21,665 Over 3 through 12 months ............. 25,939 24,590 34,901 Over 12 through 36 months ............ 9,281 4,765 6,996 Over 36 months ....................... 4,182 1,590 333 ----------------------------------- Total ................................ $54,564 $47,716 $63,895 Borrowed Funds The following table summarizes the outstanding amount of and the average rate on borrowed funds as of December 31, 2002, 2001 and 2000. 2002 2001 2000 -------------------------------------------------- Average Average Average Balance Rate Balance Rate Balance Rate (dollars in thousands) -------------------------------------------------- FHLB advances ............. $ 0 0.00%$ 1,000 5.21% $16,000 6.59% Federal funds purchased and repurchase agreements ..... 18,326 1.50% 10,596 2.54% 19,007 6.19% -------------------------------------------------- Total ..................... $18,326 1.50% $11,596 2.77% $35,007 6.37% 25 Average Annual Borrowed Funds The following table sets forth the average amount of, the average rate paid and maximum outstanding balance on borrowed funds for the years ended December 31, 2002, 2001 and 2000. 2002 2001 2000 ---------------------------------------------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate (dollars in thousands) ---------------------------------------------------------- FHLB advances ............................ $ 47 4.26% $ 8,791 6.29% $20,973 6.99% Federal funds purchased & repurchase agreements .................. 13,840 1.91% 14,217 3.78% 31,776 5.84% -------------------------------------------------------- Total .................................... $13,887 1.91% $23,008 4.74% $52,749 6.30% Maximum Amount Outstanding during the year FHLB advances .......................... $ 1,000 $16,000 $50,300 Federal funds purchased and repurchase agreements .............. 18,326 25,400 36,362
Liquidity and Capital Resources The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business expansion. The Company's principal source of funds is deposits including demand, money market, savings and certificates of deposit. Other sources include principal repayments on loans, proceeds from the maturity and sale of investment securities, federal fund purchased, repurchase agreements, advances from the Federal Home Loan Bank (FHLB) and funds provided by operations. Net cash from operating activities contributed $11,221,000, $12,253,000 and $8,212,000 to liquidity for years 2002, 2001 and 2000, respectively. Liquid assets of cash on hand, balances due from other banks, federal funds sold and interest-bearing deposits in financial institutions increased from $72,059,000 in 2001 to $85,189,000 in 2002 and from $29,368,000 in 2000 to $72,059,000 in 2001. The increase in liquidity in 2002 is the result of diminished loan demand, increased deposit levels, and historically low investment yields. Federal funds sold are expected to be invested in longer-term assets as loan demand increases or investment yields become more favorable. To provide additional external liquidity, the Banks have outstanding lines of credit with the FHLB of Des Moines, Iowa of $30,732,000 and federal funds borrowing capacity at correspondent banks of $46,000,000. The Company did not have any outstanding FHLB advances as of December 31,2002 and other borrowed funds for the Company totaled $18,326,000. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future. The Company's liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. Various federal and state statutory provisions limit the amount of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. First National, as a national bank, generally may pay dividends from undivided profits without restriction, provided that its surplus fund is at least equal to its common stock capital fund. Boone Bank, Randall-Story Bank and State Bank are also restricted under Iowa law to paying dividends only out of their undivided profits. As United Bank is not expected to be profitable in 2003, payments of dividends from this subsidiary are not anticipated for the upcoming year. Additionally, the payment of dividends by the Banks is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and the Banks generally are prohibited from paying any dividends if, following payment thereof, the Bank would be undercapitalized. The Company has unconsolidated interest bearing deposits and marketable investment securities totaling $29,271,000 that are presently available to provide additional liquidity to the Banks. The Company's total stockholders' equity increased to $101,523,000 at December 31, 2002, from $93,622,000 at December 31, 2001. At December 31, 2002 and 2001, stockholders' equity was 15.0% of total assets. Total equity increased due to retention of earnings and from appreciation in the Company and Banks' stock and bond portfolios. No material capital expenditures or material changes in the capital resource mix are anticipated at this time. The capital levels of the Company currently exceed applicable regulatory guidelines as of December 31, 2002. 26 Interest Rate Risk Interest rate risk refers to the exposure of earnings and capital arising from changes in interest rates. Management's objectives are to control interest rate risk and to ensure predictable and consistent growth of earnings and capital. Interest rate risk management focuses on fluctuations in net interest income identified through computer simulations to evaluate volatility, varying interest rate, spread and volume assumptions. The risk is quantified and compared against tolerance levels. The Company uses a third-party computer software simulation modeling program to measure its exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made such as prepayment speeds on loans, the slope of the Treasury yield curve, the rates and volumes of the Company's deposits and the rates and volumes of the Company's loans. This analysis measures the estimated change in net interest income in the event of hypothetical changes in interest rates. Another measure of interest rate sensitivity is the gap ratio. This ratio indicates the amount of interest-earning assets repricing within a given period in comparison to the amount of interest-bearing liabilities repricing within the same period of time. A gap ratio of 1.0 indicates a matched position, in which case the effect on net interest income due to interest rate movements will be minimal. A gap ratio of less than 1.0 indicates that more liabilities than assets reprice within the time period and a ratio greater than 1.0 indicates that more assets reprice than liabilities. The simulation model process provides a dynamic assessment of interest rate sensitivity, whereas a static interest rate gap table is compiled as of a point in time. The model simulations differ from a traditional gap analysis because a traditional gap analysis does not reflect the multiple effects of interest rate movement on the entire range of assets, liabilities and ignores the future impact of new business strategies. Inflation The primary impact of inflation on the Company's operations is increased asset yields, deposit costs and operating overhead. Unlike most industries, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than they would on non-financial companies. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. The effects of inflation can magnify the growth of assets and if significant, require that equity capital increase at a faster rate than would be otherwise necessary. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk is the risk that changes in market interest rates may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how that exposure was managed in 2002 changed when compared to 2001. Based on a simulation modeling analysis performed as of December 31, 2002, the following table presents the estimated change in net interest income in the event of hypothetical changes in interest rates for the various rate shock levels: Net Interest Income at Risk Estimated Change in Net Interest Income for Year Ending December 31, 2003 $ Change % Change (dollars in thousands) --------------------------- +200 Basis Points ........................ $ 972 3.9% +100 Basis Points ........................ 575 2.3% - -100 Basis Points ........................ (769) -3.1% - -200 Basis Points ........................ (2,366) -9.5% 27 As shown above, at December 31, 2002, the estimated effect of an immediate 200 basis point increase in interest rates would increase the Company's net interest income by 3.9% or approximately $972,000 in 2003. The estimated effect of an immediate 200 basis point decrease in rates would decrease the Company's net interest income by 9.5% or approximately $2,366,000 in 2003. The Company's Asset Liability Management Policy establishes parameters for a 200 basis point change in interest rates. Under this policy, the Company and the Banks' objective is to properly structure the balance sheet to prevent a 200 basis point change in interest rates from causing a decline in net interest income by more than 15% in one year compared to the base year that hypothetically assumes no change in interest rates. Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions. Actual values may differ from those projections set forth above. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates. Current interest rates on certain liabilities are at a level that does not allow for significant repricing should market interest rates decline considerably. Contractual Maturity or Repricing The following table sets forth the estimated maturity or re-pricing and the resulting interest sensitivity gap, of the Company's interest-earning assets and interest-bearing liabilities and the cumulative interest sensitivity gap at December 31, 2002. The expected maturities are presented on a contractual basis. Actual maturities may differ from contractual maturities because of prepayment assumptions, early withdrawal of deposits and competition. Less Than Three One to Over Three Months to Five Five Cumulative Months One Year Years Years Total (dollars in thousands) ------------------------------------------------------------- $100,000 ....... 15,162 25,939 13,463 -- 54,564 Other borrowed funds ............... 18,326 -- -- -- 18,326 ------------------------------------------------------------- Total interest - bearing liabilities $ 332,860 $ 91,046 $ 82,442 $ 42 $ 506,390 Interest sensitivity gap ........... ($225,710) ($ 43,363) $ 178,578 $ 201,022 $ 110,527 ============================================================= Cumulative interest sensitivity gap ($225,710) ($269,073) ($ 90,495) $ 110,527 $ 110,527 ============================================================= Cumulative interest sensitivity gap as a percent of total assets ... -33.33% -39.73% -13.36% 16.32% ================================================ * Investments with maturities over 5 years include the market value of equity securities of $27,714.
As of December 31, 2002, the Company's cumulative gap ratios for assets and liabilities repricing within three months and within one year were .33 and .40 respectively, meaning more liabilities than assets are scheduled to reprice within these periods. This situation suggests that a decrease in market interest rates may benefit net interest income and that an increase in interest rates may negatively impact the Company. The liability sensitive gap position is largely the result of classifying the interest bearing NOW accounts, money market accounts and savings accounts as immediately repriceable. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities and periods to repricing, they may react differently to changes in market interest rates. Also, interest rates on assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other assets and liabilities may follow changes in market interest rates. Additionally, certain assets have features that restrict changes in the interest rates of such assets, both on a short-term basis and over the lives of such assets. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Independent Auditor's Report The Board of Directors Ames National Corporation Ames, Iowa We have audited the accompanying consolidated balance sheets of Ames National Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of Ames National Corporation and subsidiaries for the year ended December 31, 2000 were audited by other auditors whose report, dated March 2, 2001 expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ames National Corporation and subsidiaries as of December 31, 2002 and 2001 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP. - --------------------------- Des Moines, Iowa January 24, 2003 29 Independent Auditors' Report The Board of Directors Ames National Corporation: We have audited the accompanying consolidated balance sheet of Ames National Corporation and subsidiaries (the Company) as of December 31, 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ames National Corporation and subsidiaries as of December 31, 2000, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG, LLP - ----------------- Des Moines, Iowa March 2, 2001 30 AMES NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001 ASSETS 2002 2001 - --------------------------------------------------------------------------------------------- Cash and due from banks (Note 2) ........................... $ 51,688,784 $ 42,459,156 Federal funds sold (Note 9) ................................ 32,500,000 29,350,000 Interest bearing deposits in financial institutions ........ 1,000,000 250,000 Securities available-for-sale (Note 3) ..................... 244,575,026 213,778,175 Loans receivable, net (Note 4) ............................. 332,306,497 323,043,166 Bank premises and equipment, net (Note 5) .................. 8,726,397 7,183,655 Accrued income receivable .................................. 5,849,017 5,977,353 Other assets ............................................... 582,849 238,477 ------------------------------ Total assets ....................................... $ 677,228,570 $ 622,279,982 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Note 6) Demand ................................................. $ 62,557,937 $ 62,796,265 NOW accounts ........................................... 121,325,104 108,509,319 Savings and money market ............................... 153,296,259 138,342,052 Time, $100,000 and over ................................ 54,564,283 47,716,458 Other time ............................................. 158,878,796 154,145,161 ------------------------------ Total deposits ..................................... 550,622,379 511,509,255 FHLB advances .............................................. -- 1,000,000 Federal funds purchased and securities sold under agreements to repurchase ............................................ 18,325,574 10,596,174 Dividend payable ........................................... 1,376,752 1,312,596 Deferred taxes (Note 8) .................................... 2,879,057 1,188,670 Accrued expenses and other liabilities ..................... 2,501,952 3,051,289 ------------------------------ Total liabilities .................................. 575,705,714 528,657,984 ------------------------------ COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' EQUITY (Note 10) Common stock, $5 par value, authorized 6,000,000 shares; issued 2002 and 2001 3,153,230 shares; outstanding 2002 3,128,982 shares, 2001 3,125,229 shares ................ 15,766,150 15,766,150 Additional paid-in capital ............................... 25,354,014 25,393,028 Retained earnings ........................................ 53,917,544 49,397,011 Treasury stock, at cost; 2002 24,248 shares, 2001 28,001 shares ..................................... (1,333,640) (1,530,805) Accumulated other comprehensive income, net unrealized gain on securities available-for-sale .................. 7,818,788 4,596,614 ------------------------------ Total stockholders' equity ......................... 101,522,856 93,621,998 ------------------------------ Total liabilities and stockholders' equity ......... $ 677,228,570 $ 622,279,982 ==============================
See Notes to Consolidated Financial Statements. 31 AMES NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 - ----------------------------------------------------------------------------------------- Interest and dividend income: Loans ......................................... $23,207,184 $27,891,379 $28,306,128 Securities: Taxable ................................... 7,931,041 8,714,486 11,277,141 Tax-exempt ................................ 2,938,423 2,876,432 3,036,610 Federal funds sold ............................ 810,675 829,083 376,851 Dividends ..................................... 1,383,350 1,162,176 1,020,822 --------------------------------------- 36,270,673 41,473,556 44,017,552 ---------------------------------------- Interest expense: Deposits .................................... 11,397,125 17,791,314 20,937,730 Other borrowed funds ........................ 265,845 1,091,319 3,322,924 --------------------------------------- 11,662,970 18,882,633 24,260,654 --------------------------------------- Net interest income ................... 24,607,703 22,590,923 19,756,898 Provision for loan losses (Note 4) ............ 688,431 897,540 460,049 --------------------------------------- Net interest income after provision for loan losses ........................... 23,919,272 21,693,383 19,296,849 --------------------------------------- Noninterest income: Trust department income ..................... 1,032,500 948,499 879,686 Service fees ................................ 1,492,344 1,585,036 1,454,528 Securities gains, net (Note 3) .............. 889,923 1,197,050 715,929 Loan and secondary market fees .............. 739,907 589,215 245,656 Other ....................................... 980,140 760,244 834,165 --------------------------------------- Total noninterest income .............. 5,134,814 5,080,044 4,129,964 --------------------------------------- Noninterest expense: Salaries and employee benefits (Note 7) ..... 8,074,181 6,834,588 6,347,357 Data processing ............................. 1,934,006 1,772,726 1,557,875 Occupancy expenses .......................... 927,287 726,049 708,188 Other operating expenses .................... 2,340,098 2,253,920 2,098,580 --------------------------------------- Total noninterest expense ............. 13,275,572 11,587,283 10,712,000 --------------------------------------- Income before income taxes ............ 15,778,514 15,186,144 12,714,813 Provision for income taxes (Note 9) ........... 4,438,376 4,638,806 3,595,951 --------------------------------------- Net income ............................ $11,340,138 $10,547,338 $ 9,118,862 ======================================= Basic earnings per share (Note 1) ............. $ 3.63 $ 3.38 $ 2.92 =======================================
See Notes to Consolidated Financial Statements. 32 AMES NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2002, 2001 and 2000 Accumulated Additional Other Total Comprehensive Common Paid-in Retained Treasury Comprehensive Stockholders' Income Stock Capital Earnings Stock Income (Loss) Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 .... $15,766,150 $25,307,051 $39,849,354 $(2,824,155) $(2,025,691) $ 76,072,709 Comprehensive income: Net income ................ $ 9,118,862 -- -- 9,118,862 -- -- 9,118,862 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) ................ 4,649,235 -- -- -- -- 4,649,235 4,649,235 ----------- Total comprehensive income ................ $13,768,097 =========== Cash dividends declared, $1.58 per share ................. -- -- (4,931,838) -- -- (4,931,838) Sale of 22,931 shares of treasury stock ............ -- 121,943 -- 1,146,550 -- 1,268,493 -------------------------------------------------------------------------------------- Balance, December 31, 2000 .... 15,766,150 25,428,994 44,036,378 (1,677,605) 2,623,544 86,177,461 Comprehensive income: Net income ................ $10,547,338 -- -- 10,547,338 -- -- 10,547,338 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) ................ 1,973,070 -- -- -- -- 1,973,070 1,973,070 ----------- Total comprehensive income ................ $12,520,408 =========== Cash dividends declared, $1.66 per share ................. -- -- (5,186,705) -- -- (5,186,705) Sale of 2,936 shares of treasury stock ............ -- (35,966) -- 146,800 -- 110,834 -------------------------------------------------------------------------------------- Balance, December 31, 2001 .... 15,766,150 25,393,028 49,397,011 (1,530,805) 4,596,614 93,621,998 Comprehensive income: Net income ................ $11,340,138 -- -- 11,340,138 -- -- 11,340,138 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) ................ 3,222,174 -- -- -- -- 3,222,174 3,222,174 ----------- Total comprehensive income ................ $14,562,312 =========== Cash dividends declared, $2.18 per share ................. -- -- 6,819,605) -- -- (6,819,605) Sale of 3,753 shares of treasury stock ............ -- (39,014) -- 197,165 -- 158,151 ------------------------------------------------------------------------------------ Balance, December 31, 2002 ..... $15,766,150 $25,354,014 $53,917,544 $(1,333,640) $ 7,818,788 $101,522,856 ====================================================================================
See Notes to Consolidated Financial Statements. 33 AMES NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................... $ 11,340,138 $ 10,547,338 $ 9,118,862 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .................................................. 688,431 897,540 460,049 Amortization and accretion ................................................. 51,495 (58,859) (9,227) Depreciation ............................................................... 996,180 642,835 731,370 Provision for deferred taxes ............................................... (200,013) (129,614) (137,000) Securities gains, net ...................................................... (889,923) (1,197,050) (715,929) Gain on sale of bank premises and equipment ................................ -- -- (94,135) Change in assets and liabilities: (Increase) decrease in accrued income receivable ........................... 128,336 1,043,261 (405,350) (Increase) decrease in other assets ........................................ (344,372) 820,285 (382,484) (Decrease) in accrued interest and other liabilities ....................... (549,337) (312,376) (354,516) -------------------------------------------- Net cash provided by operating activities .............................. 11,220,935 12,253,360 8,211,640 -------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available-for-sale .................................... (86,337,490) (47,350,981) (28,065,802) Proceeds from sale of securities available-for-sale .......................... 26,635,715 23,282,181 30,835,280 Proceeds from maturities and calls of securities available-for-sale .......... 34,855,926 47,385,595 26,795,364 Proceeds from sale of bank premises and equipment ............................ -- -- 146,152 Net decrease (increase) in interest bearing deposits in financial institutions (750,000) 98,174 378,222 Net (increase) in federal funds sold ......................................... (3,150,000) (29,105,000) (160,000) Net decrease (increase) in loans ............................................. (9,951,762) 20,074,021 (34,822,664) Purchase of bank premises and equipment ...................................... (2,538,922) (2,610,189) (617,332) -------------------------------------------- Net cash provided by (used in) investing activities .................... (41,236,533) 11,773,801 (5,510,780) -------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits ......................................................... 39,113,124 18,080,400 8,809,148 Increase (decrease) in FHLB advances, federal funds purchased and securities sold under agreements to repurchase ......................... 6,729,400 (23,411,245) (5,277,893) Dividends paid ............................................................... (6,755,449) (5,123,026) (4,867,972) Proceeds from issuance of treasury stock ..................................... 158,151 110,834 1,268,493 -------------------------------------------- Net cash provided by (used in) financing activities .................... 39,245,226 (10,343,037) (68,224) -------------------------------------------- Net increase in cash and cash equivalents .............................. 9,229,628 13,684,124 2,632,636 CASH AND CASH EQUIVALENTS Beginning .................................................................... 42,459,156 28,775,032 26,142,396 -------------------------------------------- Ending ....................................................................... $ 51,688,784 $ 42,459,156 $ 28,775,032 ============================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for: Interest ..................................................................... $ 12,211,439 $ 19,749,270 $ 24,720,709 Income taxes ................................................................. 4,725,572 4,321,320 3,681,134
34 Note 1. Summary of Significant Accounting Policies Description of business: Ames National Corporation and subsidiaries (the Company) operates in the commercial banking industry through its subsidiaries in Ames, Boone, Story City, Nevada and Marshalltown, Iowa. Loan and deposit customers are located primarily in Story, Boone, Hamilton, Marshall and adjacent counties in Iowa. Segment information: The Company uses the "management approach" for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Based on the "management approach" model, the Company has determined that its business is comprised of one operating segment: banking. The banking segment generates revenues through personal, business, agricultural and commercial lending, management of the investment securities portfolio, providing deposit account services and providing trust services. Consolidation: The consolidated financial statements include the accounts of Ames National Corporation (the Parent Company) and its wholly-owned subsidiaries, First National Bank, Ames, Iowa; State Bank & Trust Co., Nevada, Iowa; Boone Bank & Trust Co., Boone, Iowa; Randall-Story State Bank, Story City, Iowa; and United Bank & Trust NA, Marshalltown, Iowa (collectively, the Banks). All significant intercompany transactions and balances have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and fair value of financial instruments. Cash and cash equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. Cashflows from loans and deposits are reported net. Securities available-for-sale: Securities available-for-sale consist of equity securities and debt securities not classified as trading or held-to-maturity and are carried at fair value. Unrealized holding gains and losses, net of deferred income taxes, are reported in a separate component of accumulated other comprehensive income until realized. Realized gains and losses on the sale of such securities are determined using the specific identification method and are reflected in the consolidated statements of income. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or call date of the related security. Unrealized losses judged to be other than temporary are charged to operations. Loans: Loans are stated at the principal amount outstanding, net of deferred loan fees and the allowance for loan losses. Interest on loans is credited to income as earned based on the principal amount outstanding. The Banks' policy is to discontinue the accrual of interest income on any loan 90 days or more past due unless the loans are well collateralized and in the process of collection. Nonaccrual loans are returned to an accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to timely payment of principal or interest. Allowance for loan losses: The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The allowance is based upon a continuing review of past loan loss experience, current economic conditions, and the underlying collateral value securing the loans. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. Recoveries on loans charged-off and the provision for loan losses are added to the allowance. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. 35 Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. Bank premises and equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using straight-line and accelerated methods over the estimated useful lives of the respective assets. Depreciable lives range from 3 to 7 years for equipment and 15 to 39 years for premises. Trust department assets: Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets, as such items are not assets of the Banks. Income taxes: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company files a consolidated federal income tax return, with each entity computing its taxes on a separate company basis. For state tax purposes, the Banks file franchise tax returns, while the Parent Company files a corporate income tax return. Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Gains and losses on available-for-sale securities are reclassified to net income as the gains or losses are realized upon sale of the securities. Other-than-temporary impairment charges are reclassified to net income at the time of the charge. Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating fair value disclosures: Cash and due from banks, federal funds sold and interest-bearing deposits in financial institutions: The recorded amount of these assets approximates fair value. Securities available-for-sale: Fair values of securities available-for-sale are based on bid prices published in financial newspapers, bid quotations received from securities dealers, or quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans: The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. The effect of nonperforming loans is considered in assessing the credit risk inherent in the fair value estimate. Deposit liabilities: Fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, are equal to the amount payable on demand as of the respective balance sheet date. Fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. FHLB advances: The recorded amount of FHLB advances approximates fair value because of the short-term nature of the instrument. Other borrowings: The carrying amounts of federal funds purchased and securities sold under agreements to repurchase approximate fair value because of the short-term nature of the instruments. 36 Accrued income receivable and accrued interest payable: The carrying amounts of accrued income receivable and interest payable approximate fair value. Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Earnings per share: Basic earnings per share computations for the years ended December 31, 2002, 2001 and 2000, were determined by dividing net income by the weighted-average number of common shares outstanding during the years then ended. The Company had no potentially dilutive securities outstanding during the periods presented. The following information was used in the computation of basic earnings per share for the years ended December 31, 2002, 2001, and 2000. 2002 2001 2000 ----------------------------------------------- Basic EPS computation: Net income ................... $ 11,340,138 $ 10,547,338 $ 9,118,862 Weighted average common shares outstanding ........... 3,127,285 3,123,885 3,120,375 ----------------------------------------------- Basic EPS .................... $ 3.63 $ 3.38$ $ 2.92 ===============================================
Current accounting developments: The Financial Accounting Standards Board has issued Interpretation No. 45, Guarantor's Accounting and Disclosures Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Implementation of these provisions of the Interpretation is not expected to have a material impact on the Company's financial statements. Note 2. Restrictions on Cash and Due from Banks The Federal Reserve Bank requires member banks to maintain certain cash and due from bank reserves. The subsidiary banks' reserve requirements totaled approximately $7,418,000 and $6,699,000 at December 31, 2002 and 2001, respectively. 37 Note 3. Securities The amortized cost of securities available-for-sale and their approximate fair values at December 31, 2002 and 2001, are summarized below: Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------------------------------------------------------------- 2002: - -------------------------------- U.S. treasury .................. $ 4,058,028 $ 150,313 $ -- $ 4,208,341 U.S. government agencies ....... 82,797,531 2,982,650 -- 85,780,181 State and political subdivisions 67,711,678 2,899,680 (95,702) 70,515,656 Corporate bonds ................ 53,041,832 3,439,554 (124,469) 56,356,917 Equity securities .............. 24,555,182 4,429,505 (1,270,756) 27,713,931 --------------------------------------------------------------- $ 232,164,251 $ 13,901,702 $ (1,490,927) $ 244,575,026 =============================================================== 2001: - -------------------------------- U.S. treasury .................. $ 12,237,419 $ 310,957 $ -- $ 12,548,376 U.S. government agencies ....... 59,085,647 1,789,720 (17,706) 60,857,661 State and political subdivisions 62,114,862 1,149,176 (154,659) 63,109,379 Corporate bonds ................ 50,241,082 1,167,157 (302,700) 51,105,539 Equity securities .............. 22,800,966 3,532,047 (175,793) 26,157,220 --------------------------------------------------------------- $ 206,479,976 $ 7,949,057 $ (650,858) $ 213,778,175 ===============================================================
The amortized cost and estimated fair value of debt securities available-for-sale as of December 31, 2002, are shown below by contractual maturity. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Estimated Cost Fair Value ----------------------------- Due in one year or less ...................... $ 27,596,953 $ 28,076,510 Due after one year through five years ........ 82,969,847 86,928,283 Due after five years through ten years ....... 78,456,771 82,723,367 Due after ten years .......................... 18,585,498 19,132,935 ----------------------------- 207,609,069 216,861,095 Equity securities ............................ 24,555,182 27,713,931 ----------------------------- $232,164,251 $244,575,026 ============================= At December 31, 2002 and 2001, securities with a carrying value of approximately $39,076,000 and $31,360,000, respectively, were pledged as collateral on public deposits, securities sold under agreement to repurchase, and for other purposes as required or permitted by law. Gross realized gains and gross realized losses on sales of available-for-sale securities were $1,087,290 and $197,367, respectively, in 2002, $1,200,323 and $3,273, respectively, in 2001, and $790,793 and $74,864 respectively, in 2000. The components of other comprehensive income - net unrealized gains on securities available-for-sale for the years ended December 31, 2002, 2001, and 2000, were as follows: 2002 2001 2000 ----------------------------------------- Unrealized holding gains arising during the period ..................... $ 6,002,497 $ 4,329,954 $ 8,095,667 Reclassification adjustment for net gains realized in net income ................ (889,923) (1,197,050) (715,929) ---------------------------------------- Net unrealized gains before tax effect ............... 5,112,574 3,132,904 7,379,738 Tax effect .............................. (1,890,400) (1,159,834) (2,730,503) ----------------------------------------- Other comprehensive income net unrealized gains on securities .................... $ 3,222,174 $ 1,973,070 $ 4,649,235 =========================================
38 Note 4. Loans Receivable The composition of loans receivable at December 31, 2002 and 2001, is as follows: 2002 2001 ---------------------------------- Commercial and agricultural .......... $ 66,119,092 $ 72,997,606 Real estate .......................... 252,800,600 235,295,873 Consumer ............................. 11,061,689 12,363,604 Other ................................ 8,859,704 8,556,838 ---------------------------------- 338,841,085 329,213,921 Less: Allowance for loan losses ............ (5,757,694) (5,445,671) Deferred loan fees ................... (776,894) (725,084) ---------------------------------- $ 332,306,497 $ 323,043,166 ================================== Changes in the allowance for loan losses for the year ended December 31, 2002, 2001 and 2000 are as follows: 2002 2001 2000 ----------------------------------------- Balance, beginning ................ $ 5,445,671 $ 5,373,167 $ 4,986,474 Provision for loan losses ......... 688,431 897,540 460,049 Recoveries of loans charged-off ... 53,805 27,131 77,669 Loans charged-off ................. (430,213) (852,167) (151,025) ----------------------------------------- Balance, ending ................... $ 5,757,694 $ 5,445,671 $ 5,373,167 ========================================= Loans are made in the normal course of business to directors and executive officers of the Company and to their affiliates. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with others and do not involve more than a normal risk of collectibility. Loan transactions with related parties were as follows for the years ended December 31, 2002 and 2001: 2002 2001 -------------------------------- Balance, beginning of year ............. $ 4,755,229 $ 5,235,102 New loans ............................ 11,533,030 8,535,527 Repayments ........................... (8,365,219) (9,015,400) Change in status ..................... (131,372) -- -------------------------------- Balance, end of year ................... $ 7,791,668 $ 4,755,229 ================================ At December 31, 2002 and 2001, the Company had impaired loans of approximately $2,409,000 and $2,692,000, respectively. The allowance for loan losses related to these impaired loans was approximately $212,000 and $207,000 at December 31, 2002 and 2001, respectively. The average balances of impaired loans for the years ended December 31, 2002 and 2001, were $2,532,000 and $2,837,000, respectively. For the years ended December 31, 2002 and 2001, interest income which would have been recorded under the original terms of such loans was approximately $160,000 and $243,000, respectively, with $17,000 and $114,000, respectively, recorded. Loans greater than 90 days past due and still accruing interest were approximately $394,000 and $797,000 at December 31, 2002 and 2001, respectively. The amount the Company will ultimately realize from these loans could differ materially from their carrying value because of future developments affecting the underlying collateral or the borrowers' ability to repay the loans. As of December 31, 2002, there were no material commitments to lend additional funds to customers whose loans were classified as impaired. 39 Note 5. Bank Premises and Equipment The major classes of bank premises and equipment and the total accumulated depreciation as of December 31, 2002 and 2001, are as follows: 2002 2001 ----------------------------- Land ....................................... $ 1,284,771 $ 1,042,869 Buildings and improvements ................. 9,178,368 5,648,698 Furniture and equipment .................... 5,945,231 5,509,082 Construction in process .................... -- 2,240,129 ----------------------------- 16,408,370 14,440,778 Less accumulated depreciation .............. 7,681,973 7,257,123 ----------------------------- $ 8,726,397 $ 7,183,655 ============================= Note 6. Deposits At December 31, 2002, the maturities of time deposits are as follows: Years ended December 31, 2003 $ 130,958,148 2004 41,879,256 2005 21,465,236 2006 3,671,195 2007 15,426,428 Thereafter 42,816 ------------- $ 213,443,079 ============= Interest expense on deposits is summarized as follows: 2002 2001 2000 ------------------------------------------- NOW accounts ................... $ 1,155,459 $ 2,060,963 $ 3,112,960 Savings and money market ....... 2,237,034 3,665,428 5,030,644 Time, $100,000 and over ........ 1,897,855 3,329,175 3,823,665 Other time ..................... 6,106,777 8,735,748 8,970,461 ------------------------------------------- $11,397,125 $17,791,314 $20,937,730 =========================================== Note 7. Employee Benefit Plans The Company has a stock purchase plan with the objective of encouraging equity interests by officers, employees, and directors of the Company and its subsidiaries to provide additional incentive to improve banking performance and retain qualified individuals. The 2002 and 2001 purchase price was $42.14 and $37.75 per share, respectively and approximated the fair market value of the stock based upon current market trading activity. The terms of the plan provide for the issuance of up to 14,000 shares of common stock per year for a ten-year period commencing in 1999 and continuing through 2008. Prior to 2002, the Company had a qualified 401(k) profit-sharing plan and a qualified money purchase pension plan. The qualified money purchase pension plan was merged into the 401(k) profit-sharing plan beginning January 1, 2002 with the merged plans covering substantially all employees. The Company matches employee contributions up to a maximum of 2% of qualified compensation and also contributes an amount equal to 5% of the participating employee's compensation. In addition, contributions can be made on a discretionary basis by the Company on behalf of the employees. For the years ended December 31, 2002, 2001 and 2000, Company contributions to the plans were approximately $607,000, $473,000, and $376,000, respectively. 40 Note 8. Income Taxes The components of income tax expense for the year ended December 31, 2002, 2001 and 2000 are as follows: Current Deferred Total --------------------------------------------------- 2002: - --------------------- Federal ............. $ 3,819,350 $ (184,965) $ 3,634,385 State ............... 819,039 (15,048) 803,991 --------------------------------------------------- $ 4,638,389 $ (200,013) $ 4,438,376 =================================================== 2001: - --------------------- Federal ............. $ 4,028,481 $ (110,851) $ 3,917,630 State ............... 739,939 (18,763) 721,176 --------------------------------------------------- $ 4,768,420 $ (129,614) $ 4,638,806 =================================================== 2000: - --------------------- Federal ............. $ 3,121,724 $ (118,000) $ 3,003,724 State ............... 611,227 (19,000) 592,227 --------------------------------------------------- $ 3,732,951 $ (137,000) $ 3,595,951 =================================================== Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes and is a result of the following for the years ended December 31, 2002, 2001 and 2000: 2002 2001 2000 ----------------------------------------- Computed "expected" tax expense ... $ 5,364,695 $ 5,163,289 $ 4,323,036 Tax exempt interest and dividends . (1,356,187) (1,222,985) (1,180,343) State taxes and other ............. ----------------------------------------- $ 4,438,376 $ 4,638,806 $ 3,595,951 ========================================= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities at December 31, 2002 and 2001, are as follows: 2002 2001 ---------------------------- Deferred tax assets: Allowance for loan losses .................... $ 1,636,575 $ 1,523,580 Other ........................................ 161,867 45,619 ---------------------------- Total gross deferred tax assets .............. 1,798,442 1,569,199 ---------------------------- Deferred tax liabilities: Unrealized gain on securities ................ (4,591,984) 2,701,584 Other ........................................ (85,515) 56,285 ---------------------------- Total gross deferred tax liabilities ......... (4,677,499) 2,757,869 ---------------------------- Net deferred tax liabilities ................. $(2,879,057) $(1,188,670) ============================ At December 31, 2002 and 2001, income taxes currently payable of approximately $338,000 and $469,000, respectively, are included in accrued interest and other liabilities. 41 Note 9. Commitments, Contingencies and Concentrations of Credit Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. A summary of the Company's commitments at December 31, 2002 and 2001, is as follows: 2002 2001 ------------------------------ Commitments to extend credit ............. $59,410,000 $51,636,000 Standby letters of credit ................ 1,490,000 1,231,000 ------------------------------ $60,900,000 $52,867,000 ============================== Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies and is required in instances which the Banks deem necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Banks would be required to fund the commitment. The maximum potential amount of future payments the Banks could be required to make is represented by the contractual amount shown in the summary above. If the commitment were funded, the Banks would be entitled to seek recovery from the customer. At December 31, 2002 and 2001 no amounts have been recorded as liabilities for the Banks' potential obligations under these guarantees. In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company's financial statements. Concentrations of credit risk: The Banks originate real estate, consumer, and commercial loans, primarily in Story, Boone, Hamilton and Marshall Counties, Iowa, and adjacent counties. Although the Banks have diversified loan portfolios, a substantial portion of their borrowers' ability to repay loans is dependent upon economic conditions in the Banks' market areas. At December 31, 2002, the Company has a concentration of federal funds sold in the amount of $18,500,000 with one institution. Note 10. Regulatory Matters The Company and its subsidiary banks (Entities) are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Entities' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Entities must meet specific capital guidelines that involve quantitative measures of the Entities' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Entities' capital amounts and classification are also subject to regulatory accounting practices. The Entities' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 42 Quantitative measures established by regulation to ensure capital adequacy require the Company and each subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002 and 2001, that the Company and each subsidiary bank met all capital adequacy requirements to which they are subject. As of December 31, 2002, the most recent notification from the federal banking regulators categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. Management believes there are no conditions or events since that notification that have changed the institution's category. The Company's and each of the subsidiary bank's actual capital amounts and ratios as of December 31, 2002 and 2001 are also presented in the table. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------- As of December 31, 2002: Total capital (to risk- weighted assets): Consolidated ................................. $99,398 21.8% $36,439 8.0% -- -- Boone Bank & Trust ........................... 11,516 15.3 6,006 8.0 $ 7,508 10.0% First National Bank .......................... 38,650 16.4 18,878 8.0 23,598 10.0 Randall-Story State Bank ..................... 7,684 15.9 3,855 8.0 4,819 10.0 State Bank & Trust ........................... 11,087 17.1 5,181 8.0 6,476 10.0 United Bank & Trust .......................... 4,642 31.0 1,198 8.0 1,497 10.0 Tier 1 capital ( to risk- weighted assets): Consolidated ................................. $93,704 20.6% $18,220 4.0% -- -- Boone Bank & Trust ........................... 10,577 14.1 3,003 4.0 $ 4,504 6.0% First National Bank .......................... 35,700 15.1 9,439 4.0 14,159 6.0 Randall-Story State Bank ..................... 7,081 14.7 1,927 4.0 2,891 6.0 State Bank & Trust ........................... 10,276 15.9 2,590 4.0 3,886 6.0 United Bank & Trust .......................... 4,476 29.9 599 4.0 898 6.0 Tier 1 capital ( to average- weighted assets): Consolidated ................................. $93,704 14.1% $26,669 4.0% -- -- Boone Bank & Trust ........................... 10,577 10.6 3,995 4.0 $ 4,993 5.0% First National Bank .......................... 35,700 9.8 14,565 4.0 18,206 5.0 Randall-Story State Bank ..................... 7,081 11.0 2,585 4.0 3,231 5.0 State Bank & Trust ........................... 10,276 10.0 4,126 4.0 5,157 5.0 United Bank & Trust .......................... 4,476 18.1 990 4.0 1,238 5.0
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------- As of December 31, 2001: Total capital (to risk- weighted assets): Consolidated ................................. $93,622 22.0% $34,074 8.0% -- -- Boone Bank & Trust ........................... 10,678 14.9 5,722 8.0 $ 7,153 10.0% First National Bank .......................... 35,711 16.1 17,770 8.0 22,213 10.0 Randall-Story State Bank ..................... 7,248 15.7 3,683 8.0 4,604 10.0 State Bank & Trust ........................... 10,423 15.5 5,366 8.0 6,707 10.0 Tier 1 capital ( to risk- weighted assets): Consolidated ................................. $89,025 20.9% $17,037 4.0% -- -- Boone Bank & Trust ........................... 9,790 13.7 2,861 4.0 $ 4,292 6.0% First National Bank .......................... 32,934 14.8 8,885 4.0 13,328 6.0 Randall-Story State Bank ..................... 6,672 14.5 1,842 4.0 2,763 6.0 State Bank & Trust ........................... 9,584 14.3 2,683 4.0 4,024 6.0 Tier 1 capital ( to average- weighted assets): Consolidated ................................. $89,025 13.9% $25,702 4.0% -- -- Boone Bank & Trust ........................... 9,790 9.9 3,971 4.0 $ 4,964 5.0% First National Bank .......................... 32,934 9.2 14,772 4.0 17,841 5.0 Randall-Story State Bank ..................... 6,672 10.6 2,507 4.0 3,134 5.0 State Bank & Trust ........................... 9,584 9.6 3,985 4.0 4,981 5.0
43 Note 11. Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments (as described in Note 1) were as follows: 2002 2001 --------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------------------------------------------------- Financial assets: Cash and due from banks ............................... $ 51,688,784 $ 51,688,784 $ 42,459,156 $ 42,459,156 Federal funds sold .................................... 32,500,000 32,500,000 29,350,000 29,350,000 Interest-bearing deposits ............................. 1,000,000 1,000,000 250,000 250,000 Securities available-for-sale ......................... 244,575,026 244,575,026 213,778,175 213,778,175 Loans, net ............................................ 332,306,497 341,265,000 323,043,166 329,024,000 Accrued income receivable ............................. 5,849,017 5,849,017 5,977,353 5,977,353 Financial liabilities: Deposits .............................................. 550,622,379 555,271,000 511,509,225 515,208,098 FHLB advances ......................................... -- -- 1,000,000 1,000,000 Other borrowings ...................................... 18,325,574 18,325,574 10,596,174 10,596,174 Accrued interest ...................................... 1,527,752 1,527,752 2,076,221 2,076,221 Notional Unrealized Notional Unrealized Amount Gain (Loss) Amount Gain (Loss) ---------------------------------------------------------- Off-balance sheet items: Commitments to extend credit .......................... $ 59,410,000 $ -- $ 51,636,000 $ -- Standby letters of credit ............................. 1,490,000 -- 1,231,000 --
Note 12. Parent Company Only Financial Statements Information relative to the Parent Company's balance sheets at December 31, 2002 and 2001, and statements of income and cash flows for each of the years in the three-year period ended December 31, 2002, is as follows: STATEMENTS OF FINANCIAL CONDITION December 31, 2002 and 2001 2002 2001 ------------------------------ ASSETS Cash and due from banks ...................... $ 6,602 $ 6,738 Interest-bearing deposits in banks ........... 1,396,656 2,166,465 Securities available-for-sale ................ 27,874,394 30,464,217 Investment in bank subsidiaries .............. 73,646,869 61,284,957 Loans receivable, net ........................ 706,968 258,227 Bank premises and equipment, net ............. 517,707 503,101 Accrued income receivable .................... 213,133 1,659,410 Other assets ................................. 155,785 25,504 ------------------------------ Total assets ................................. $ 104,518,114 $ 96,368,619 ============================== LIABILITIES Dividends payable ............................ $ 1,376,752 $ 1,312,596 Deferred taxes ............................... 1,266,922 1,328,606 Accrued expenses and other liabilities ....... 351,584 105,419 ------------------------------ Total liabilities ............................ 2,995,258 2,746,621 ------------------------------ STOCKHOLDERS' EQUITY Common stock ................................. 15,766,150 15,766,150 Additional paid-in capital ................... 25,354,014 25,393,028 Retained earnings ............................ 53,917,544 49,397,011 Treasury stock, at cost ...................... (1,333,640) (1,530,805) Accumulated other comprehensive income ....... 7,818,788 4,596,614 ------------------------------ Total equity ................................. 101,522,856 93,621,998 ------------------------------ Total liabilities and stockholders' equity ... $ 104,518,114 $ 96,368,619 ============================== 44 STATEMENTS OF INCOME Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 --------------------------------------- Operating income: Equity in net income of bank subsidiaries $10,108,107 $ 9,122,748 $ 7,855,578 Interest ................................ 745,488 953,071 808,091 Dividends ............................... 979,071 795,411 794,389 Rents ................................... 150,894 245,882 225,866 Securities gains, net ................... 881,938 1,092,808 741,456 --------------------------------------- 12,865,498 12,209,920 10,425,380 --------------------------------------- Operating expenses: Occupancy expense ....................... 165,447 178,802 178,191 Other ................................... 1,154,913 923,780 713,327 --------------------------------------- 1,320,360 1,102,582 891,518 --------------------------------------- Income before income taxes .............. 11,545,138 11,107,338 9,533,862 Income tax expense ...................... 205,000 560,000 415,000 --------------------------------------- Net income .............................. $11,340,138 $10,547,338 $ 9,118,862 =======================================
45 STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 -------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................ $ 11,340,138 $ 10,547,338 $ 9,118,862 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ...................................... 80,620 66,781 65,247 Amortization and accretion, net ................... (16,060) (13,493) (13,497) Provision for deferred taxes ...................... (56,023) -- -- Securities gains, net ............................. (881,938) (1,092,808) (741,456) Undistributed net income of bank subsidiaries ..... (4,130,107) (1,994,748) (727,578) (Increase) decrease in accrued income receivable .. 1,446,277 (18,340) (39,369) (Increase) decrease in other assets ............... (130,281) 308,207 (325,579) Increase (decrease) in accrued expense payable and other liabilities ............................. 246,165 103,631 (845,213) -------------------------------------------- Net cash provided by operating activities ......... 7,898,791 7,906,568 6,491,417 -------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available-for-sale ......... (7,334,938) (10,244,488) (6,882,724) Proceeds from sale of securities available-for-sale 8,611,304 4,025,880 4,949,983 Proceeds from maturities and calls of securities available-for-sale ................................ 2,196,163 2,024,595 600,000 (Increase) decrease in interest bearing deposits in banks .......................................... 769,809 (1,017,101) (272,968) (Increase) decrease in loans ...................... (448,741) 2,400,844 (1,252,298) Purchase of bank premises and equipment ........... (95,226) (79,194) (36,064) Investment in bank subsidiary ..................... (5,000,000) -- -- -------------------------------------------- Net cash (used in) investing activities ........... (1,301,629) (2,889,464) (2,894,071) -------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid .................................... (6,755,449) (5,123,026) (4,867,972) Proceeds from issuance of treasury stock .......... 158,151 110,834 1,268,493 -------------------------------------------- Net cash (used in) financing activities ........... (6,597,298) (5,012,192) (3,599,479) -------------------------------------------- Net increase (decrease) in cash and cash equivalents .................................. (136) 4,912 (2,133) CASH AND CASH EQUIVALENTS Beginning ......................................... 6,738 1,826 3,959 -------------------------------------------- Ending ............................................ $ 6,602 $ 6,738 $ 1,826 ============================================
46 Note 13. Selected Quarterly Financial Data (Unaudited) 2002 ----------------------------------------------------- March 31 June 30 September 30 December 31 ----------------------------------------------------- Total interest income ............................. $ 9,095,844 $ 9,170,613 $ 9,051,618 $ 8,952,598 Total interest expense ............................ 3,062,094 3,031,178 2,809,797 2,759,901 Net interest income ............................... 6,033,750 6,139,435 6,241,821 6,192,697 Provision for loan losses ......................... 104,219 111,265 80,640 392,307 Net income ........................................ 2,940,930 2,740,935 2,952,283 2,705,990 Earnings per common share ......................... 0.94 0.88 0.94 0.87 2001 ----------------------------------------------------- Total interest income ............................. $10,689,478 $10,594,284 $10,206,893 $ 9,982,901 Total interest expense ............................ 5,526,539 5,139,785 4,496,532 3,719,777 Net interest income ............................... 5,162,939 5,454,499 5,710,361 6,263,124 Provision for loan losses ......................... 77,678 196,230 283,229 340,403 Net income ........................................ 2,580,058 2,717,398 2,682,320 2,567,562 Earnings per common share ......................... 0.83 0.87 0.86 0.82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with the Company's independent accountants during the two most recently ended fiscal years of the Company. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors Refer to the information under the caption "Information Concerning Nominees for Election as Directors" and "Information Concerning Directors Other Than Nominees" contained in the Company's definitive proxy statement prepared in connection with its Annual Meeting of Shareholders to be held April 23, 2003, as filed with the SEC on March 25, 2003 (the "Proxy Statement"), which information is incorporated herein by this reference. Executive Officers The following table sets forth summary information about the executive officers of the Company and certain executive officers of the Banks. Unless otherwise indicated, each executive officer has served in his current position for the past five years. Name Age Position with the Company or Bank and Principal Occupation and Employment During the Past Five Years - ------------------------------------------------------------------------------------------------------ Kevin G. Deardorff 48 Vice President & Technology Director of the Company. Leo E. Herrick 61 President of United Bank commencing June, 2002. Previously, Chairman of the Board and President of F&M Bank-Iowa, Marshalltown, Iowa. Edward C. Jacobson 62 Vice President and Treasurer of Company and Senior Vice President Daniel L. Krieger 66 President of Company since 1997. Previously served as President of First National. Also serves as a Director of the Company, Chairman of the Board and Trust Officer of First National and Chairman of the Board of Boone Bank and United Bank. David L. Morris 60 President of Randall-Story Bank. John P. Nelson 36 Vice President and Secretary of Company. Thomas H. Pohlman 52 President of First National since 1999. Previously served as Senior Vice President of First National. Jeffrey K. Putzier 41 President of Boone Bank since 1999. Previously served as Vice President of State Bank. William D. Tufford 58 President of State Bank. Terrill L. Wycoff 59 Executive Vice President of First National since 2000. Previously served as served as Senior Vice President of First National.
47 Section 16(a) Beneficial Ownership Reporting Compliance Refer to the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement, which information is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION Refer to the information under the caption "Executive Compensation" in the Proxy Statement, which information is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Refer to the information under the captions "Security Ownership of Management and Certain Beneficial Owners" in the Proxy Statement, which information is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Refer to the information under the caption "Loans to Directors and Executive Officers and Related Party Transactions" in the Proxy Statement, which information is incorporated herein by this reference. ITEM 14. CONTROLS AND PROCEDURES 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 Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of 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 Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of Financial Statements and Schedules. 1. Financial Statements Report of McGladrey & Pullen, LLP, Independent Auditor Report of KPMG, LLP, Independent Auditor Consolidated Balance Sheets, December 31, 2002 and 2001 Consolidated Statements of Income for the Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements 2. Financial Statement Schedules All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K. On October 18, 2002, the Company filed a Form 8-K pursuant to Item 5, announcing net earnings for the three and nine months ended September 30, 2002. 48 (c) Exhibits. 3.1 - Restated Articles of Incorporation of the Company (incorporated by reference to Form 10 filed on April 30, 2001). 3.2 - Bylaws of the Company. 10 - Management Incentive Compensation Plan (incorporated by reference to Form 10K filed on March 25, 2002). 21 - Subsidiaries of the Registrant. 23.1 - Consent of Accountants-McGladrey & Pullen, LLP 23.2 - Consent of Accountants-KPMG, LLP 99 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMES NATIONAL CORPORATION March 31, 2003 By: /s/ Daniel L. Krieger ---------------------------------------- Daniel L. Krieger, President (Principle Executive Officer) March 31, 2003 By: /s/ John P. Nelson ---------------------------------------- John P. Nelson, Vice President (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 31, 2003. /s/ Robert W. Stafford --------------------------------------- Robert W. Stafford, Chairman /s/ Charles D. Jons --------------------------------------- Charles D. Jons, Director /s/ Betty A. Baulder --------------------------------------- Betty A. Baudler, Director /s/ James Christy --------------------------------------- James Christy, Director /s/ Jami R. Larson --------------------------------------- Jami R. Larson II, Director /s/ Marvin J. Walter --------------------------------------- Marvin J. Walter, Director /s/ Douglas C. Gustafson --------------------------------------- Douglas C. Gustafson, Director 50 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Daniel L. Krieger, certify that: 1. I have reviewed this annual report on Form 10K of Ames National Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant , including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Daniel L. Krieger -------------------------------------- Daniel L. Krieger, President (Principal Executive Officer) 51 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John P. Nelson, certify that: 1. I have reviewed this annual report on Form 10K of Ames National Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant , including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ John P. Nelson ---------------------------------- John P. Nelson, Vice President (Principal Financial Officer) 52 EX-3 4 amesexhbt32.txt EXHIBIT 3.2 BYLAWS OF AMES NATIONAL CORPORATION (an Iowa Corporation) (hereinafter referred to as "Corporation") ARTICLE 1 PRINCIPAL OFFICE The location of the principal office of the Corporation in the State of Iowa will be identified in the Corporation's annual report filed with the Iowa Secretary of State. ARTICLE 2 REGISTERED OFFICE AND AGENT The initial registered agent and office of the Corporation are set forth in the Articles of Incorporation. The registered agent or registered office, or both, may be changed by resolution of the Board of Directors. ARTICLE 3 MEETINGS OF SHAREHOLDERS Section 3.1 Annual Meeting. (a) The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held on the last Wednesday in April of each year at such place as the board of directors shall each year fix, or at such other place, time and date as the board of directors shall fix, which date shall be within the earlier of the first six months after the end of the Corporation's fiscal year or fifteen (15) months after the shareholders' last annual meeting. (b) At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (B) otherwise properly brought before the meeting by or at the direction of the board of directors, or (C) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or be mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not later than the close of business on the later of one hundred twenty (120) calendar days in advance of such annual meeting or ten (10) calendar days following the date on which public announcement of the date of the meeting is first made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (I) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholders proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business, and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. 1 (c) only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth (I) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominees are to be made by the stockholder, and (E)any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 2.2. At the request of the board of directors, any person nominated by a stockholder for election as a director shall furnish to the secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrants, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. Section 3.2 Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by law (which for purposes of these bylaws shall mean as required from time to time by the Iowa Business Corporation Act or the articles of incorporation of the Corporation), may be called by the Chairman of the Board, President or the board of directors, and shall be called by the board of directors upon the written demand, signed, dated and delivered to the Secretary, of the holders of at least ten percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. Such written demand shall state the purpose or purposes for which such meeting is to be called. The time, date and place of any special meeting shall be determined by the board of directors, by the Chairman of the Board, or by the President. Section 3.3 Notices and Reports to Shareholders. (a) Notice of the place, date and time of all meetings of shareholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be communicated not fewer than ten (10) days nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote at such meeting. The board of directors may establish a record date for the determination of shareholders entitled to notice, as provided in section 3.5 of these bylaws. Notice of adjourned meetings need only be given if required by law or section 3.7 of these bylaws. (b) In the event (i) of the issuance, or the authorization for issuance of shares for promissory notes or promises to render services in the future, or (ii) of any indemnification of or advancement of expenses to a director required by law to be reported to shareholders, the Corporation shall report the same to the shareholders with or before the notice of the next shareholders' meeting, including, in the case of issuance of shares, the number of shares and the consideration received. (c) In the event corporate action is taken without a meeting in accordance with section 3.12 of these bylaws by less than unanimous written consent, prompt notice of the taking of such corporate action shall be given to those shareholders who have not consented in writing. 2 (d) If notice of proposed corporate action is required by law to be given to shareholders not entitled to vote and the action is to be taken by consent of the voting shareholders, the Corporation shall give all shareholders written notice of the proposed action at least ten (10) days before the action is taken. The notice must contain or be accompanied by the same material that would have been required to be sent to shareholders not entitled to vote in a notice of meeting at which the proposed action would have been submitted to the shareholders for action. Section 3.4 Waiver of Notice. (a) Any shareholder may waive any notice required by law or these bylaws if in writing and signed by any shareholder entitled to such notice, whether before or after the date and time stated in such notice. Such a waiver shall be equivalent to notice to such shareholder in due time as required by law or these bylaws. Any such waiver shall be delivered to the Corporation for inclusion in the minutes or filing with the corporate records. (b) A shareholder's attendance at a meeting, in person or by proxy, waives (i) objection to lack of notice or defective notice of such meeting, unless the shareholder at the beginning of the meeting or promptly upon the shareholder's arrival objects to holding the meeting or transacting business at the meeting, and (ii) objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. Section 3.5 Record Date. The board of directors may fix, in advance, a date as the record date for any determination of shareholders for any purpose, such date in every case to be not more than seventy (70) days prior to the date on which the particular action or meeting requiring such determination of shareholders is to be taken or held. If no record date is so fixed for the determination of shareholders, the close of business on the day before the date on which the first notice of a shareholders' meeting is communicated to shareholders or the date on which the board of directors authorizes a share dividend or a distribution (other than one involving a repurchase or reacquisition of shares), as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, unless the board of directors selects a new record date or unless a new record date is required by law. Section 3.6 Shareholders' List. After fixing a record date for a meeting, the Secretary shall prepare an alphabetical list of the names of all shareholders who are entitled to notice of a shareholders' meeting. The list must be arranged by voting group and within each voting group by class or series of shares, and show the address of and number of shares held by each shareholder. The shareholders' list must be available for inspection by any shareholder beginning two (2) business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the Corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder, or a shareholder's agent or attorney, is entitled on written demand to inspect and, subject to the requirements of law, to copy the list, during regular business hours and at the person's expense, during the period it is available for inspection. The Corporation shall make the shareholders' list available at the meeting, and any shareholder, or a shareholder's agent or attorney, is entitled to inspect the list at any time during the meeting or any adjournment. Section 3.7 Quorum. (a) At any meeting of the shareholders, a majority of the votes entitled to be cast on the matter by a voting group constitutes a quorum of that voting group for action on that matter, unless the representation of a different number is required by law, and in that case, the representation of the number so required shall constitute a quorum. If a quorum shall fail to attend any meeting, the chairperson of the meeting or a majority of the votes present may adjourn the meeting to another place, date or time. (b) When a meeting is adjourned to another place, date or time, notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than one hundred twenty (120) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, notice of the place, date and time of the adjourned meeting shall be given in conformity with these bylaws. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 3 (c) Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment thereof unless a new record date is or must be set for that adjourned meeting. Section 3.8 Organization. (a) The Chairman of the Board, or in the absence of the Chairman, the President, or in the President's absence, such person as the board of directors may have designated, or, in the absence of such a person, such person as shall be designated by the holders of a majority of the votes present at the meeting, shall call meetings of the shareholders to order and shall act as chairperson of such meetings. (b) The Secretary of the Corporation shall act as secretary at all meetings of the shareholders, but in the absence of the Secretary at any meeting of the shareholders, the chairperson may appoint any person to act as secretary of the meeting. Section 3.9 Voting of Shares. (a) Every shareholder entitled to vote may vote in person or by proxy. Except as provided in subsection (c) or unless otherwise provided by law, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Unless otherwise provided by law, directors shall be elected by a majority of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. Shareholders do not have the right to cumulate their votes for directors unless the articles of incorporation so provide. (b) The shareholders having the right to vote shares at any meeting shall be only those of record on the stock books of the Corporation, on the record date fixed by law or pursuant to the provisions of section 3.5 of these bylaws. (c) Absent special circumstances, the shares of the Corporation held, directly or indirectly, by another corporation, are not entitled to vote if a majority of the shares entitled to vote for the election of directors of such other corporation is held by the Corporation. The foregoing does not limit the power of the Corporation to vote any shares held by the Corporation in a fiduciary capacity. (d) Voting by shareholders on any question or in any election may be viva voce unless the chairperson of the meeting shall order or any shareholder shall demand that voting be by ballot. On a vote by ballot, each ballot shall be signed by the shareholder voting, or in the shareholder's name by proxy, if there be such proxy, and shall state the number of shares voted by such shareholder. (e) If a quorum exists, action on a matter, other than the election of directors, by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless a greater number is required by law. Section 3.10 Voting by Proxy or Representative. (a) At all meetings of the shareholders, a shareholder entitled to vote may vote in person or by proxy appointed in writing, which appointment shall be effective when received by the secretary of the meeting or other officer or agent authorized to tabulate votes. An appointment of a proxy is valid for eleven months from the date of its execution, unless a longer period is expressly provided in the appointment form. (b) Shares held by an administrator, executor, guardian, conservator, receiver, trustee, pledgee, or another corporation may be voted as provided by law. 4 Section 3.11 Inspectors. The board of directors in advance of any meeting of shareholders may (but shall not be obligated to) appoint inspectors to act at such meeting or any adjournment thereof. If inspectors are not so appointed, the officer or person acting as chairperson of any such meeting may, and on the request of any shareholder or the shareholder's proxy, shall make such appointment. In case any person appointed as inspector shall fail to appear or act, the vacancy may be filled by appointment made by the board of directors in advance of the meeting, or at the meeting by the officer or person acting as chairperson. The inspectors shall register proxies, determine the number of shares outstanding, the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes, ballots, assents or consents, hear and determine all challenges and questions in any way arising in connection with the vote, count and tabulate all votes, assents and consents, determine and announce the result, and do such acts as may appear proper to conduct the election or vote with fairness to all shareholders. The maximum number of such inspectors appointed shall be three, and no inspector whether appointed by the board of directors or by the officer or person acting as chairperson need be a shareholder. Section 3.12 Action Without Meeting. Except as otherwise set forth in this section 3.12, any action required or permitted by law to be taken at a meeting of the shareholders may be taken without a meeting or vote if one or more consents in writing setting forth the action taken shall be signed and dated by the holders of outstanding shares having not less than ninety percent (90%) of the votes entitled to be cast at a meeting at which all shares entitled to vote on the action were present and voted, and are delivered to the Corporation for inclusion in the minutes or filing with the Corporation's records. Written consents from a sufficient number of shareholders must be obtained within sixty (60) days from the date of the earliest dated consent for such consents to be effective to take corporate action. Provided, however, a director shall not be removed by written consents unless written consents are obtained from the holders of all the outstanding shares of the Corporation. If not otherwise fixed by law or in accordance with these bylaws, the record date for determining shareholders entitled to take action without a meeting is the date the first shareholder signs such a written consent. Section 3.13 Conduct of Business. The chairperson of any meeting of shareholders shall determine the order of business and procedure at the meeting, including such regulation of the manner of voting and the conduct of business as seem to him or her to be in order. ARTICLE 4 BOARD OF DIRECTORS Section 4.1 Qualifications and General Powers. No director is required to be an officer or employee or a shareholder of the Corporation or a resident of the State of Iowa. The business and affairs of the Corporation shall be managed under the direction of the board of directors. The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or to execute and deliver any instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 4.2 Number of Directors; Tenure. The number of directors of the Corporation shall be no fewer than 5 nor more than 25, the exact number within such range to be determined from time to time by resolution of the board of directors. The board of directors shall not be authorized to change the range or to change to a fixed number of directors without the approval of the shareholders. Each director shall hold office until his or her successor shall have been elected and qualifies, or until his or her death, resignation or removal. Section 4.3 Quorum and Manner of Acting. A quorum of the board of directors consists of a majority of the number of directors prescribed in accordance with section 4.2. If at any meeting of the board there be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. At all meetings of directors, a quorum being present, the act of the majority of the directors present at the meeting shall be the act of the board of directors. Section 4.4 Resignation. Any director of the Corporation may resign at any time by delivering written notice to the Chairman of the Board, the board of directors, or the Corporation. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. 5 Section 4.5 Removal. A director shall be subject to removal, with or without cause, at a meeting of the shareholders called for that purpose in the manner prescribed by law. Section 4.6 Vacancies. Any vacancy occurring in the board of directors through death, resignation, removal or any other cause, including an increase in the number of directors, may be filled by the shareholders or by the board of directors. If the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of the remaining directors. Section 4.7 Compensation of Directors. The directors may be reimbursed for any expenses paid by them on account of attendance at any regular or special meeting of the board of directors and the board may fix the compensation of directors from time to time by resolution of the board. Section 4.8 Place of Meetings, etc. The board of directors may hold its meetings at such place or places within or without the State of Iowa, as the board may from time to time determine. Section 4.9 Annual Meeting. The board of directors shall meet the second Wednesday of May of each year at such a place and time as the Board shall fix, for the purpose of organization, the election of officers and the transaction of other business. Notice of such meeting need not be given. Such meeting may be held at any other time or place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors or in a consent and waiver of notice thereof signed by all the directors, at which meeting the same matters shall be acted upon as is above provided. Section 4.10 Regular Meetings. Regular meetings of the board of directors shall be held at such place and at such times as the board of directors shall by resolution fix and determine from time to time. No notice shall be required for any such regular meeting of the board. Section 4.11 Special Meetings; Notice. (a) Special meetings of the board of directors shall be held whenever called by direction of the Chairman of the Board, the President, or one-third (1/3) of the directors at the time being in office. (b) Notice of each such meeting shall be communicated to each director at least two (2) days before the date on which the meeting is to be held. Each notice shall state the date, time and place of the meeting and maybe made by telephone, letter, or in person. Unless otherwise stated in the notice thereof, any and all business may be transacted at a special meeting. At any meeting at which every director shall be present, even without any notice, any business may be transacted. Section 4.12 Waiver of Notice. A director may waive any notice required by law or these bylaws if in writing and signed by a director entitled to such notice, whether before or after the date and time stated in such notice. Such a waiver shall be equivalent to notice in due time as required by these bylaws. Attendance of a director at or participation in a meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting or promptly upon arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 4.13 Director's Assent Presumed. A director of the Corporation who is present at a meeting of its board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless the director's dissent shall be entered in the minutes of the meeting or unless the director shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 4.14 Order of Business. (a) At meetings of the board of directors, business shall be transacted in such order as, from time to time, the board of directors may determine by resolution. (b) At all meetings of the board, the Chairman of the Board, or in his or her absence, the President, or in the President's absence the most senior Vice President present, or otherwise the person designated by the vote of a majority of the directors present shall preside. Section 4.15 Action Without Meeting. Any action required or permitted by law to be taken at any meeting of the board of directors may be taken without a meeting if the action is taken by all members of the board and if one or more consents in writing describing the action so taken shall be signed by each director then in office and included in the minutes or filed with the corporate records reflecting the action taken. Action taken under this section is effective when the last director signs the consent, unless the consent specifies a different effective date. 6 Section 4.16 Committees. (a) The board of directors, by resolution adopted by the affirmative vote of a majority of the number of directors then in office, may establish one or more committees, each committee to consist of two (2) or more directors appointed by the board of directors. Any such committee shall serve at the will of the board of directors. Each such committee shall have the powers and duties delegated to it by the board of directors. The board of directors may elect one or more of its members as alternate members of any such committee who may take the place of any absent member or members at any meeting of such committee, upon request by the President or the chairperson of such committee. Each such committee shall fix its own rules governing the conduct of its activities as the board of directors may request. (b) A committee of the board shall not: (i) authorize distributions by the Corporation; (ii) approve or propose to shareholders of the Corporation action that the law requires be approved by shareholders; (iii) fill vacancies on the board of directors of the Corporation or on any of its committees; (iv) amend the articles of incorporation of the Corporation; (v) adopt, amend or repeal bylaws of the Corporation; (vi) approve a plan of merger not requiring shareholder approval; (vii) authorize or approve reacquisition of shares by the Corporation, except according to a formula or method prescribed by the board of directors; or (viii) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize a committee or a senior executive officer of the Corporation to do so within limits specifically prescribed by the board of directors. ARTICLE 5 OFFICERS Section 5.1 Executive Officers. The executive officers of the Corporation shall be a President, one or more Vice Presidents (the number thereof to be determined by the board of directors), a Secretary, a Treasurer and such other officers as may from time to time be appointed by the board of directors. One person may hold the offices and perform the duties of any two or more of said offices. In its discretion, the board of directors may delegate the powers or duties of any officer to any other officer or agents, notwithstanding any provision of these bylaws, and the board of directors may leave unfilled for any such period as it may fix, any office except those of President, Treasurer and Secretary. The officers of the Corporation shall be appointed annually by the board of directors at the annual meeting thereof. Each such officer shall hold office until the next succeeding annual meeting of the board of directors and until his or her successor shall have been duly chosen and shall qualify or until his or her death or until he or she shall resign or shall have been removed. Section 5.2 Resignation and Removal. An officer may resign at any time by delivering notice to the Secretary. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. Any officer may be removed by the board of directors at any time with or without cause, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 5.3 Power and Duties of the President. Subject to the control of the board of directors, the President shall have general charge of and direct the operations of the Corporation and shall be the chief executive officer of the Corporation. The President shall keep the board of directors fully informed and shall freely consult with them concerning the business of the Corporation in his or her charge. He or she shall have authority to sign, execute and acknowledge all contracts, checks, deeds, mortgages, bonds, leases or other obligations on behalf of the Corporation as may be deemed necessary or proper to be executed in the course of the Corporation's regular business, or which shall be authorized by the board of directors, and with the Secretary may sign all certificates for the shares of the capital stock of the Corporation. The President may sign in the name of the Corporation reports and all other documents or instruments which are necessary or proper to be executed in the course of the Corporation's business. He or she shall perform all duties as from time to time may be assigned by the board of directors. The President shall, in the absence of the Chairman of the Board, preside at all meetings of the shareholders or the board of directors. Section 5.4 Power and Duties of the Chairman of the Board. The Chairman of the Board shall, when present, preside at all meetings of the shareholders and shall preside at all meetings of the board of directors. He or she shall perform all duties incident to the office of Chairman of the Board as herein defined, and all such other duties as from time to time may be assigned by the board of directors. 7 Section 5.5 Powers and Duties of the Vice President(s). In the absence of the President or in the event of the death, inability or refusal to act of the President, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their appointment, or in the absence of any designation, the senior Vice President in length of service) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President may sign, with the Secretary or Assistant Secretary, certificates for shares of the Corporation; and shall perform such other duties and have such authority as from time to time may be assigned to such Vice President by the President or by the board of directors. Section 5.6 Powers and Duties of the Secretary. The Secretary shall (a) keep minutes of all meetings of the shareholders and of the board of directors; (b) authenticate records of the Corporation and attend to giving and serving all notices of the Corporation as provided by these bylaws or as required by law; (c) be custodian of the corporate seal, if any, the stock certificate books and such other books, records and papers as the board of directors may direct; (d) keep a stock record showing the names of all persons who are shareholders of the Corporation, their post office addresses as furnished by each such shareholder, and the number of shares of each class of stock held by them respectively, and at least ten (10) days before each shareholders' meeting, prepare a complete list of shareholders entitled to vote at such meeting arranged in alphabetical order; (e) sign with the President or a Vice President certificates for shares of the Corporation, the issuance of which shall have been duly authorized; and (f) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to the Secretary by the President or the board of directors. Section 5.7 Powers and Duties of the Treasurer. The Treasurer shall (a) have custody of and be responsible for all moneys and securities of the Corporation, shall keep full and accurate records and accounts in books belonging to the Corporation, showing the transactions of the Corporation, its accounts, liabilities and financial condition and shall see that all expenditures are duly authorized and are evidenced by proper receipts and vouchers; (b) deposit in the name of the Corporation in such depository or depositories as are approved by the board of directors, all moneys that may come into the Treasurer's hands for the Corporation's account; (c) prepare annual financial statements that include a balance sheet as of the end of the fiscal year and an income statement for that year; and (d) in general, perform such duties as may from time to time be assigned to the Treasurer by the President or by the board of directors. Section 5.8 Assistants. There shall be such number of Assistant Secretaries and Assistant Treasurers as the board of directors may from time to time authorize and appoint. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary, or the Treasurer, respectively, or by the President or the board of directors. The board of directors shall have the power to appoint any person to act as assistant to any other officer, or to perform the duties of any other officer, whenever for any reason it is impracticable for such officer to act personally, and such assistant or acting officer so appointed shall have the power to perform all the duties of the office to which he or she is so appointed to be assistant, or as to which he or she is so appointed to act, except as such power may be otherwise defined or restricted by the board of directors. ARTICLE 6 SHARES, THEIR ISSUANCE AND TRANSFER Section 6.1 Consideration for Shares. The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the Corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the Corporation. Before the Corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be issued is adequate. Section 6.2 Certificates for Shares. Every shareholder of the Corporation shall be entitled to a certificate or certificates, to be in such form as the board of directors shall prescribe, certifying the number and class of shares of the Corporation owned by such shareholder. 8 Section 6.3 Execution of Certificates. The certificates for shares of stock shall be numbered in the order in which they shall be issued and shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary of the Corporation. The signatures of the President or Vice President and the Secretary or Assistant Secretary or other persons signing for the Corporation upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. In case any officer or other authorized person who has signed or whose facsimile signature has been placed upon such certificate for the Corporation shall have ceased to be such officer or employee or agent before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer or employee or agent at the date of its issue. Section 6.4 Share Record. A record shall be kept by the Secretary, or by any other officer, employee or agent designated by the board of directors, of the names and addresses of all shareholders and the number and class of shares held by each represented by such certificates and the respective dates thereof and in case of cancellation, the respective dates of cancellation. Section 6.5 Cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided in section 6.8 of these bylaws. Section 6.6 Transfers of Stock. Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the record holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided, however, that whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact, if known to the Secretary of the Corporation, shall be so expressed in the entry of transfer. Section 6.7 Regulations. The board of directors may make such other rules and regulations as it may deem expedient, not inconsistent with law, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. Section 6.8 Lost, Destroyed, or Mutilated Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the board of directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. ARTICLE 7 CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 7.1 Contracts. The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 7.2 Loans. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. Section 7.3 Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by the President or such other officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by the President or by resolution of the board of directors. 9 ARTICLE 8 MISCELLANEOUS PROVISIONS Section 8.1 Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the board of directors or a committee thereof. Section 8.2 Corporate Seal. The Corporation may adopt an official seal. Section 8.3 Fiscal Year. The fiscal year of the Corporation shall be from the first day of January through the last day of December. Section 8.4 Corporate Records. The books and records of the Corporation shall be kept (except that the shareholder list must also be kept at the places described in section 3.6 of these bylaws) at the principal office of the Corporation. Section 8.5 Voting of Stocks Owned by the Corporation. In the absence of a resolution of the board of directors to the contrary, the President and any Vice President acting within the scope of his or her authority as provided in these bylaws, are authorized and empowered on behalf of the Corporation to attend and vote, or to grant discretionary proxies to be used, at any meeting of shareholders of any corporation in which this Corporation holds or owns shares of stock, and in that connection, on behalf of this Corporation, to execute a waiver of notice of any such meeting or a written consent to action without a meeting. The board of directors shall have authority to designate any officer or person as a proxy or attorney-in-fact to vote shares of stock in any other corporation in which this Corporation may own or hold shares of stock. Section 8.6 Shareholders' Right to Information. (a) A shareholder of the Corporation is entitled to inspect and copy, during regular business hours at the Corporation's principal office, any of the following records of the Corporation: (i) Articles or restated articles of incorporation and all amendments currently in effect; (ii) Bylaws or restated bylaws and all amendments currently in effect; (iii) Resolutions adopted by the board of directors creating one or more classes or series of shares and fixing their relative rights, preferences and limitations, if shares issued pursuant to those resolutions are outstanding; (iv) Minutes of all shareholders' meetings and records of all action taken by shareholders without a meeting, for the past three (3) years; (v) All written communications to shareholders generally within the past three years, including the financial statements furnished for the past three (3) years; (vi) A list of the names and business addresses of the Corporation's current directors and officers; and (vii) The Corporation's most recent annual report delivered to the Iowa Secretary of State. Provided the shareholder shall have given the Corporation written notice of the shareholder's demand at least five business days before the date on which the shareholder wishes to inspect and copy. (b) If a shareholder makes a demand in good faith and for a proper purpose, the shareholder describes with reasonable particularity the shareholder's purpose and the records the shareholder desires to inspect, and the record requested is directly connected with the shareholder's stated purpose, then the shareholder shall be entitled to inspect and copy, during regular business hours at a reasonable location specified by the Corporation, any of the following records of the Corporation provided the shareholder gives the Corporation written notice of the shareholder's demand at least five business days before the date on which the shareholder wishes to inspect and copy any of the following: 10 (i) Excerpts from minutes of any meeting of the board of directors, records of any actions of a committee of the board of directors while acting in place of the board of directors on behalf of the Corporation, minutes of any meeting of the shareholders, and records of action taken by the shareholders or the board of directors without a meeting to the extent not subject to inspection under paragraph (a) above; (ii) Accounting records of the Corporation; and (iii) The record of shareholders of the Corporation. (c) Upon written request from a shareholder, the Corporation, at its expense, shall furnish to that shareholder the annual financial statements of the Corporation, including a balance sheet and income statement and, if the annual financial statements are reported upon by a public accountant, that report must accompany them. (d) The Corporation may impose a reasonable charge, covering the costs of labor and material, for copies of any documents provided to the shareholder. The charge shall not exceed the estimated cost of production or reproduction of the records. ARTICLE 9 INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 9.1. Indemnity. The Corporation shall indemnify and advance expenses to any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including a grand jury proceeding) and whether formal or informal, by reason of the fact that such person (a) is or was a director or officer of the Corporation, or (b) while a director, officer, or employee of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, agent, partner or trustee (or in a similar capacity) of another corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan, to the maximum extent it is empowered to indemnify and advance expenses to a director by Part E of Division VIII of the Iowa Business Corporation Act as the same exists or may hereafter be amended or changed (but, in the case of any such amendment or change, only to the extent that such amendment or change empowers the Corporation to provide broader indemnification than said law empowered the Corporation to provide prior to such amendment or change), against reasonable expenses (including attorneys' fees), judgments, fines, penalties, including an excise tax assessed with respect to an employee benefit plan, and amounts paid in settlement actually and reasonably incurred by such person in connection with such claim, action, suit or proceeding or any appeal thereof; provided, however, that except as provided in section 9.2 of these bylaws with respect to proceedings seeking to enforce rights of indemnification, entitlement to such indemnification shall be conditional upon the Corporation being afforded the opportunity to participate directly on behalf of such person in such claim, action, suit or proceeding or any settlement discussions relating thereto, and with respect to any settlement or other non-adjudicated disposition of any threatened or pending claim, action, suit or proceeding, entitlement to indemnification shall be further conditional upon the prior approval by the Corporation of the proposed settlement or nonadjudicated disposition. Such approval shall be made (a) by the board of directors by majority vote of a quorum consisting of directors not at the time parties to the claim, action, suit or proceeding, or (b) by special legal counsel selected by the board of directors by majority vote, of a quorum consisting of directors not at the time parties to the claim, action or proceeding, or, if the requisite quorum of the full board cannot be obtained therefor, by a majority vote of the full board, in which selection of counsel directors who are parties may participate. Approval or disapproval by the Corporation of any proposed settlement or other nonadjudicated disposition shall not subject the Corporation to any liability to or require indemnification or reimbursement of any party whom the Corporation would not otherwise have been required to indemnify or reimburse. The right to indemnification conferred in this Article shall include the right to payment or reimbursement by the Corporation of reasonable expenses incurred in connection with any such claim, action, suit or proceeding in advance of its final disposition; provided, however, that the payment or reimbursement of such expenses in advance of the final disposition of such claim, action, suit or proceeding shall be made only upon (a) delivery to the Corporation of a written undertaking, by or on behalf of the person claiming indemnification under this Article to repay all amounts so advanced if it shall ultimately be determined that such person is not entitled to be indemnified under this Article or otherwise, or (b) delivery to the Corporation of a written affirmation of such person's good faith belief that such person has met the applicable standard of conduct necessary to require indemnification by the Corporation pursuant to this Article or otherwise, or (c) a determination that the facts then known to those making the determination would not preclude indemnification under this Article. 11 Section 9.2. Payment. Any indemnification or advancement of expenses required under this Article shall be made promptly upon, and in any event within thirty (30) days after, the written request of the person entitled thereto. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days of the date such request is received by the Corporation, the person seeking indemnification or advancement of expenses as granted by this Article may at any time within the applicable statute of limitations bring suit against the Corporation in any court of competent jurisdiction to establish such person's right to indemnity or advancement of expenses. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification in any such action or proceeding shall also be indemnified by the Corporation. It shall be a defense to any action brought against the Corporation to compel indemnification (other than an action brought to enforce a claim for the advancement of expenses pursuant to this Article where the written affirmation of good faith or the undertaking to repay as required above has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 490.851 of the Iowa Business Corporation Act, but the burden of proving such defense shall be on the Corporation. Neither (a) the failure of the Corporation (including its board of directors, special legal counsel or the shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 490.851 of the Iowa Business Corporation Act, nor (b) the fact that there has been an actual determination by the Corporation (including its board of directors, special legal counsel or the shareholders) that the claimant has not met such applicable standard of conduct, shall create a presumption that the claimant has not met the applicable standard of conduct. In the event that the applicable standard of conduct has been met as to some claims, actions, suits or proceedings, but not as to others, a person who has a right of indemnification pursuant to this Article shall be indemnified against all expenses (including attorney fees) actually and reasonably incurred by such person in connection with the claim, action, suit or proceeding as to which the applicable standard has been met. Nothing contained in this section shall limit the obligation, duty or ability of the Corporation to indemnify such person as provided elsewhere in this Article. Section 9.3. Contract. The provisions of this Article shall be deemed a contract between the Corporation and each director and officer who serves in such capacity at any time while this Article and the relevant provisions of the Iowa Business Corporation Act are in effect, and any repeal or modification of any such law or of this Article shall not adversely affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any claim, action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. Section 9.4. Witnesses. The Corporation shall indemnify and advance expenses to any person who was or is a witness in or is threatened to be made a witness in any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including a grand jury proceeding) and whether formal or informal, by reason of the fact that such person (a) is or was a director or officer of the Corporation, or (b) while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, agent, partner or trustee (or in a similar capacity) of another corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan, to the same extent that such person would be entitled to indemnification and advancement of expenses under this Article if such person were, or were threatened to be made, a party to such claim, action, suit or proceeding, against reasonable expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with such claim, action, suit or proceeding or any appeal thereof. Section 9.5. Nonexclusive. Except as limited by section 490.851 of the Iowa Business Corporation Act, the indemnification and advancement of expenses provided by or granted pursuant to this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise; provided, however, that in no event shall any such provision or agreement provide indemnification to a person who was or is a director or officer of the Corporation (a) for a breach of a director's or officer's duty of loyalty to the Corporation or its shareholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law, (c) for a transaction from which the person seeking indemnification derived an improper personal benefit or (d) for liability under section 490.833 of the Iowa Business Corporation Act. 12 Section 9.6. Applicability. This Article shall be applicable to all claims, actions, suits or proceedings commenced after the effective date hereof, whether arising from acts or omissions occurring before or after the effective date hereof. Each person who is now serving or who shall hereafter serve as a director or officer of the Corporation shall be deemed to be doing so in reliance upon the rights of indemnification provided for in this Article, and such rights of indemnification shall continue as to a person who has ceased to be a director or officer, and shall inure to the benefit of the heirs, executors, administrators and legal or personal representatives of such a person. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director and officer of the Corporation to the maximum extent permitted by any applicable portion of this Article that shall not have been invalidated. Section 9.7. Initiation of Claims. Notwithstanding anything in this Article to the contrary, except with respect to proceedings initiated to enforce rights of indemnification to which such person is entitled under this Article or otherwise, the Corporation shall indemnify any such person in connection with a claim, action, suit or proceeding (or part thereof) initiated by such person only if the initiation of such claim, action, suit or proceeding (or part thereof) was authorized by the board of directors. Section 9.8. Insurance. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan against any liability asserted against such person and incurred by such person in such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article, the Iowa Business Corporation Act or otherwise. The Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or similar arrangements), as well as enter into contracts providing for indemnification to the maximum extent permitted by law and including as part thereof any or all of the foregoing, to ensure the payment of such sums as may become necessary to effect full indemnification. The Corporation's obligation to make indemnification and pay expenses pursuant to this Article shall be in excess of any insurance purchased and maintained by the Corporation and such insurance shall be primary. To the extent that indemnity or expenses of a person entitled to indemnification and payment of expenses pursuant to this Article are paid on behalf of or to such person by such insurance such payments shall be deemed to be in satisfaction of the Corporation's obligation to such person to make indemnification and pay expenses pursuant to this Article. ARTICLE 10 AMENDMENTS Section 10.1 Amendments to Bylaws. These bylaws may be amended or repealed by the board of directors or by the shareholders; provided, however, that the shareholders may from time to time specify particular provisions of the bylaws which shall not be amended or repealed by the board of directors. 13 EX-21 5 amesexhbt21.txt EXHIBIT 21 SUBSIDIARIES OF COMPANY Parent Ames National Corporation Percentage Of Subsidiaries (a) Ownership - -------------------------------------------------------------- ---------- First National Bank, Ames, Iowa, a National Bank 100% Boone Bank and Trust Co., Boone, Iowa, an Iowa State Bank 100% State Bank & Trust Co., Nevada, Iowa, an Iowa State Bank 100% Randall-Story State Bank, Story City, Iowa, an Iowa State Bank 100% United Bank & Trust NA, a National Bank 100% (a) The operation of Ames National Corporation's five wholly owned subsidiaries are included in the financial statements set forth in this Form 10-K. 1 EX-23 6 amesexhbt231.txt EXHIBIT 23.1 To the Board of Directors Ames National Corporation Ames, Iowa We consent to the incorporation by reference in Registration Statement No. 333-89772 of Ames National Corporation on Form S-8 of our report, dated January 24, 2003 appearing in this Annual Report on Form 10-K of Ames National Corporation for the year ended December 31, 2002. /s/ McGladrey & Pullen, LLP - --------------------------- Des Moines, Iowa March 27, 2003 1 EX-23 7 amesexhbt232.txt EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Ames National Corporation and subsidiaries: We consent to incorporation by reference in the registration statement No. 333-89772 on Form S-8 dated June 30, 2002 of Ames National Corporation of our report dated March 2, 2001, related to the consolidated balance sheet of Ames National Corporation and subsidiaries as of December 31, 2000 and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2000, which report appears in the December 31, 2002 annual report on Form 10-K of Ames National Corporation. /s/ KPMG LLP - ---------------------- Des Moines, Iowa March 26, 2003 1 EX-99 8 amesexhbt99.txt EXHIBIT 99 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report on Form 10K for the Year Ended December 31, 2002 (the "Report") by Ames National Corporation (the "Company"), each of the undersigned officers of the Company hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. IN WITNESS WHEREOF, the undersigned have executed this Certification as of the 31st day of March, 2003. /s/ Daniel L. Krieger ----------------------------- Daniel L. Krieger, President (Principal Executive Officer) /s/ John P. Nelson ----------------------------- John P. Nelson, Vice President (Principal Financial Officer) 1 -----END PRIVACY-ENHANCED MESSAGE-----