AMES NATIONAL CORP - Annual Report: 2005 (Form 10-K)
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
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For
the fiscal year ended December 31, 2005.
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Commission
File Number 0-32637.
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AMES
NATIONAL CORPORATION
(Exact
name of registrant as specified in its charter)
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IOWA
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42-1039071
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer Identification No.)
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405
FIFTH STREET, AMES, IOWA
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50010
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(Address
of principal executive offices)
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(Zip
Code)
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(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, $2.00 PAR VALUE
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
*
No
T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
*
No
T
Note
-
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
under
those Sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange 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
T
No
*
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
*
No
T
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
*
_ Accelerated
filer
T
_
Non-accelerated
filer
*
As
of
June 30, 2005, 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 NASDAQ market, was $259,242,857. 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,
2006, was 9,419,271.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement, as filed with the Securities and
Exchange Commission on March 16, 2006, are incorporated by reference into Part
III of this Form 10-K.
2
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Part
I
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Part
II
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Part
III
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Part
IV
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PART
I
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BUSINESS
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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, internal auditing services, human resources
services and administration, compliance management, marketing assistance and
coordination, loan review and assistance with respect to computer systems and
procedures.
Banking
Subsidiaries
First
National Bank, Ames, Iowa. First National is a nationally chartered, commercial
bank insured by the Federal Deposit Insurance Corporation (the “FDIC”). It was
organized in 1903 and became a wholly owned subsidiary of the Company in 1975
through a bank holding company reorganization whereby the then shareholders
of
First National exchanged all of their First National stock for stock in the
Company. First National provides full-service banking to businesses and
residents within the Ames community and surrounding area. It provides a variety
of products and services designed to meet the needs of the market it serves.
It
has an experienced staff of bank officers including many who have spent the
majority of their banking careers with First National and who emphasize
long-term customer relationships. First National conducts business out of three
full-service offices and one super market location, all located in the city
of
Ames.
As
of
December 31, 2005, First National had capital of $39,745,000 and 89 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 $6,417,000 in 2005,
$6,949,000 in 2004 and $6,621,000 in 2003. Total assets as of December 31,
2005,
2004 and 2003 were $413,412,000, $436,074,000 and $381,086,000, 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.
As
of
December 31, 2005, State Bank had capital of $11,035,000 and 21 full-time
equivalent employees. It had net income of $1,401,000 in 2005, $1,707,000 in
2004 and $1,554,000 in 2003. Total assets as of December 31, 2005, 2004 and
2003
were $112,626,000, $112,599,000 and $100,712,000, 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, 2005, Boone Bank had capital of $12,419,000 and 28 full-time
equivalent employees. It had net income of $1,849,000 in 2005, $2,059,000 in
2004 and $1,920,000 in 2003. Total assets as of December 31, 2005, 2004 and
2003
were $108,780,000, $112,578,000 and $110,712,000, respectively.
Randall-Story
State Bank, Story City, Iowa. Randall-Story Bank is an Iowa, state-chartered,
FDIC insured commercial bank. Randall-Story Bank was acquired by the Company
in
1995 through a stock transaction whereby the then shareholders of Randall-Story
Bank exchanged all their Randall-Story Bank stock for stock in the Company.
Randall-Story Bank was organized in 1928 and provides full-service banking
to
Story City and the surrounding area from its main location in Story City and
a
full service office in Randall, Iowa. While its primary emphasis is in
agricultural lending, Randall-Story Bank also provides the traditional lending
services typically offered by community banks.
As
of
December 31, 2005, Randall-Story Bank had capital of $7,687,000 and 15 full-time
equivalent employees. It had net income of $869,000 in 2005, $1,036,000 in
2004
and $810,000 in 2003. Total assets as of December 31, 2005, 2004 and 2003 were
$70,371,000, $74,427,000 and $72,581,000, 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, 2005, United Bank had capital of $7,236,000 and 19 full-time
equivalent employees. United Bank had a profit in 2005 and 2004 of $124,000
and
$105,000, respectively; and posted a net loss in 2003 of $465,000. Total assets
as of December 31, 2005, 2004 and 2003 were $94,684,000, $89,653,000 and
$68,397,000, respectively.
Business
Strategy and Operations
As
a
locally owned, multi-bank holding company, the Company emphasizes strong
personal relationships to provide products and services that meet the needs
of
the Banks’ customers. The Company seeks to achieve growth and maintain a strong
return on equity. To accomplish these goals, the Banks focus on small to medium
size businesses that traditionally wish to develop an exclusive relationship
with a single bank. The Banks, individually and collectively, have the size
to
give the personal attention required by business owners, in addition to the
credit expertise to help businesses meet their goals.
The
Banks
offer a full range of deposit services that are typically available in most
financial institutions, including checking accounts, savings accounts and time
deposits of various types, ranging from money market accounts to longer-term
certificates of deposit. One major goal in developing the Banks' product mix
is
to keep the product offerings as simple as possible, both in terms of the number
of products and the features and benefits of the individual services. The
transaction accounts and time certificates are tailored to each Bank's principal
market area at rates competitive in that Bank’s market. In addition, retirement
accounts such as IRAs (Individual Retirement Accounts) are available. The FDIC
insures all deposit accounts up to the maximum amount. The Banks solicit these
accounts from small-to-medium sized businesses in their respective primary
trade
areas, and from individuals who live and/or work within these areas. No material
portion of the Banks' deposits has been obtained from a single person or from
a
few persons. Therefore, the Company does not believe that the loss of the
deposits of any person or of a few persons would have an adverse effect on
the
Banks' operations or erode their deposit base.
Loans
are
provided to creditworthy borrowers regardless of their race, color, national
origin, religion, sex, age, marital status, disability, receipt of public
assistance or any other basis prohibited by law. The Banks intend to fulfill
this commitment while maintaining prudent credit standards. In the course of
fulfilling this obligation to meet the credit needs of the communities which
they serve, the Banks give consideration to each credit application regardless
of the fact that the applicant may reside in a low to moderate income
neighborhood, and without regard to the geographic location of the residence,
property or business within their market areas.
The
Banks
provide innovative, quality financial products, such as Internet banking and
trust services that meet the banking needs of their customers and communities.
The loan programs and acceptance of certain loans may vary from time-to-time
depending on the funds available and regulations governing the banking industry.
The Banks offer all basic types of credit to their local communities and
surrounding rural areas, including commercial, agricultural and consumer loans.
The types of loans within these categories are as follows:
Commercial
Loans. Commercial loans are typically made to sole proprietors, partnerships,
corporations and other business entities such as municipalities and individuals
where the loan is to be used primarily for business purposes. These loans are
typically secured by assets owned by the borrower and often times involve
personal guarantees given by the owners of the business. The types of loans
the
Banks offer include:
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financing
guaranteed under Small Business Administration
programs
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operating
and working capital loans
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loans
to finance equipment and other capital purchases
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commercial
real estate loans
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business
lines of credit
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term
loans
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loans
to professionals
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letters
of credit
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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:
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automobiles
and trucks
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boats
and recreational vehicles
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personal
loans and lines of credit
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home
equity lines of credit
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home
improvement and rehabilitation
loans
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consumer
real estate loans
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Other
types of credit programs, such as loans to nonprofit organizations, to public
entities, for community development and to other governmental offered programs
also are available.
First
National, Boone Bank, State Bank and United Bank offer trust services typically
found in a commercial bank with trust powers, including the administration
of
estates, conservatorships, personal and corporate trusts and agency accounts.
The Banks also provide farm management, investment and custodial services for
individuals, businesses and non-profit organizations.
The
Banks
earn income from the origination of residential mortgages that are sold in
the
secondary real estate market without retaining the mortgage servicing
rights.
The
Banks
offer traditional banking services, such as safe deposit boxes, wire transfers,
direct deposit of payroll and social security checks, automated teller machine
access and automatic drafts (ACH) for various accounts.
Credit
Management
The
Company strives to achieve sound credit risk management. In order to achieve
this goal, the Company has established uniform credit policies and underwriting
criteria for the Banks’ loan portfolios. The Banks diversify in the types of
loans offered and are subject to regular credit examinations, annual internal
and external loan audits and annual review of large loans, as well as quarterly
reviews of loans experiencing deterioration in credit quality. The Company
attempts to identify potential problem loans early, charge off loans promptly
and maintain an adequate allowance for loan losses. The Company has established
credit guidelines for the Banks’ lending portfolios which include guidelines
relating to the more commonly requested loan types, as follows:
Commercial
Real Estate Loans - Commercial real estate loans, including agricultural real
estate loans, are normally based on loan to appraisal value ratios of 80% and
secured by a first priority lien position. Loans are typically subject to
interest rate adjustments no less frequently than 5 years from origination.
Fully amortized monthly repayment terms normally do not exceed twenty years.
Projections and cash flows that show ability to service debt within the
amortization period are required. Property and casualty insurance is required
to
protect the Banks’ collateral interests. Commercial and agricultural real estate
loans represent approximately 45% of the loan portfolio. Major risk factors
for
commercial real estate loans, as well as the other loan types described below,
include a geographic concentration in central Iowa; the dependence of the local
economy upon several large governmental entities, including Iowa State
University and the Iowa Department of Transportation; and the health of Iowa’s
agricultural sector that is dependent on weather conditions and government
programs.
Commercial
and Agricultural Operating Lines - These loans are made to businesses and farm
operations with terms up to twelve months. The credit needs are generally
seasonal with the source of repayment coming from the entity’s normal business
cycle. Cash flow reviews are completed to establish the ability to service
the
debt within the terms of the loan. A first priority lien on the general assets
of the business normally secures these types of loans. Loan to value limits
vary
and are dependent upon the nature and type of the underlying collateral and
the
financial strength of the borrower. Crop and hail insurance is required for
most
agricultural borrowers. Loans are generally guaranteed by the principal(s).
Commercial
and Agricultural Term Loans - These loans are made to businesses and farm
operations to finance equipment, breeding stock and other capital expenditures.
Terms are generally the lesser of five years or the useful life of the asset.
Term loans are normally secured by the asset being financed and are often
additionally secured with the general assets of the business. Loan to value
is
generally 75% of the cost or value of the assets. Loans are normally guaranteed
by the principal(s). Commercial and agricultural operating and term loans
represent approximately 20% of the loan portfolio.
Residential
First Mortgage Loans - Proceeds of these loans are used to buy or refinance
the
purchase of residential real estate with the loan secured by a first lien on
the
real estate. Most of the residential mortgage loans originated by the Banks
(including servicing rights) are sold in the secondary mortgage market due
to
the higher interest rate risk inherent in the 15 and 30 year fixed rate terms
consumers prefer. Loans that are originated and not sold in the secondary market
generally have higher interest rates and have rate adjustment periods of no
longer than seven years. The maximum amortization of first mortgage residential
real estate loans is 30 years. The loan-to-value ratios normally do not exceed
80% without credit enhancements such as mortgage insurance. Property insurance
is required on all loans to protect the Banks’ collateral position. Loans
secured by one to four family residential properties represent approximately
23%
of the loan portfolio.
Home
Equity Term Loans - These loans are normally for the purpose of home improvement
or other consumer purposes and are secured by a junior mortgage on residential
real estate. Loan-to-value ratios normally do not exceed 90% of market
value.
Home
Equity Lines of Credit - The Banks offer a home equity line of credit with
a
maximum term of 60 months. These loans are secured by a junior mortgage on
the
residential real estate and normally do not exceed a loan-to-market value ratio
of 90% with the interest adjusted quarterly.
Consumer
Loans - Consumer loans are normally made to consumers under the following
guidelines. Automobiles - loans on new and used automobiles generally will
not
exceed 80% and 75% of the value, respectively. Recreational vehicles and boats
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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 7% of the loan portfolio.
Employees
At
December 31, 2005, the Banks had a total of 172 full-time equivalent employees
and the Company had an additional 10 full-time employees. The Company and Banks
provide their employees with a comprehensive program of benefits, including
comprehensive medical and dental plans, long-term and short-term disability
coverage, and a 401(k) profit sharing plan. Management considers its relations
with employees to be satisfactory. Unions represent none of the
employees.
Market
Area
The
Company operates five commercial banks with locations in Story, Boone and
Marshall Counties in central Iowa.
First
National is located in Ames, Iowa with a population of 50,731. The major
employers are Iowa State University, Ames Laboratories, Iowa Department of
Transportation, Mary Greeley Medical Center, National Veterinary Services
Laboratory, Ames Community Schools, City of Ames, Barilla, Sauer-Danfoss and
McFarland Clinic. First National’s primary business includes providing retail
banking services and business and consumer lending. First National has a minimum
exposure to agricultural lending.
Boone
Bank is located in Boone, Iowa with a population of 12,800. Boone is the county
seat of Boone County. The major employers are Fareway Stores, Inc., Patterson
Dental Supply Co., Union Pacific Railroad, and Communication Data Services.
Boone Bank provides lending services to the agriculture, commercial and real
estate markets.
State
Bank is located in Nevada, Iowa with a population of 6,658. Nevada is the county
seat of Story County. The major employers are Print Graphics, General Financial
Supply, Central Iowa Printing, Burke Corporation and Almaco. State Bank provides
various types of loans with a major agricultural presence. It provides a wide
variety of banking services including trust, deposit, ATM, and merchant card
processing.
Randall-Story
Bank is located in Story City, Iowa with a population of 3,228. The major
employers are Pella Corporation, Bethany Manor, American Packaging, Precision
Machine and Record Printing. Located in a major agricultural area, it has a
strong presence in this type of lending. As a full service commercial bank
it
provides a full line of products and services.
United
Bank is located in Marshalltown, Iowa with a population of 26,123. The major
employers are Swift & Co., Fisher Controls International, Lennox Industries
and Marshalltown Medical & Surgical Center. The bank offers a full line of
loan, deposit, and trust services. Loan services include primarily commercial
and consumer types of credit including operating lines, equipment loans,
automobile financing and real estate loans.
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.
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, 2005, there were 28 FDIC insured institutions having approximately
62 offices or branch offices within Boone, Story and Marshall County, Iowa
where
the Banks' offices are located. First National, State Bank and Randall-Story
Bank together have the largest percentage of deposits in Story County and Boone
Bank has the highest percentage of deposits in Boone County.
The
Banks
also compete with the financial markets for funds. Yields on corporate and
government debt securities and commercial paper affect the ability of commercial
banks to attract and hold deposits. Commercial banks also compete for funds
with
equity, money market, and insurance products offered by brokerage and insurance
companies. This competitive trend will likely continue in the
future.
The
Company anticipates bank competition will continue to change materially over
the
next several years as more financial institutions, including the major regional
and national banks, continue to consolidate. Credit unions, which are not
subject to income taxes, have a significant competitive advantage and provide
additional competition in the Company’s local markets.
Supervision
and Regulation
The
following discussion generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries and
therefore do not purport to be complete and are qualified in their entirety
by
reference to those statutes and regulations. In addition, due to the numerous
statutes and regulations that apply to and regulate the operation of the banking
industry, many are not referenced below.
USA
Patriot Act. The USA Patriot Act was enacted in 2001 which, together with
regulations issued pursuant to this act, substantially broadened previously
existing anti-money laundering law and regulation, increased compliance, due
diligence and reporting obligations for financial institutions, created new
crimes and penalties and required federal banking agencies, in reviewing merger
and other acquisition transactions, to consider the effectiveness of the parties
in combating money laundering activities. The act requires all financial
institutions to establish certain anti-money laundering compliance and due
diligence programs that are reasonably designed to detect and report instances
of money laundering. The Company believes its compliance policies, procedures
and controls satisfy the material requirements of the Patriot Act and
regulations; however, changes are being proposed by Congress that will likely
change some of the Act’s requirements in 2006.
Sarbanes-Oxley
Act. The Sarbanes-Oxley Act was enacted in 2002 to, among other things, increase
corporate responsibility and to protect investors by improving the accuracy
and
reliability of corporate disclosures pursuant to the federal securities laws.
This act generally applies to all companies that are required to file periodic
reports with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. The act implements significant changes in the
responsibilities of officers and directors of public companies and makes certain
changes to the corporate reporting obligation of those companies and their
external auditors. Among the requirements and prohibitions addressed by the
act
are certifications required by CEOs and CFOs of periodic reports filed with
the
SEC; accelerated reporting of stock transactions by directors, officers and
large shareholders; prohibitions against personal loans from companies to
directors and executive officers (except loans made in the ordinary course
of
business); requirements for public companies’ audit committees; requirements for
auditor independence; the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuer’s securities by directors
and executive officers in the 12-month period following initial publication
of
any financial statements that later require restatement; various increased
criminal penalties for violations of securities laws; and the creation of a
public company accounting oversight board. Rules adopted by the SEC to implement
various provisions of the act include CEO and CFO certifications related to
fair
presentation of financial statements and financial information in public
filings, as well as management’s evaluation of disclosure controls and
procedures; disclosure of whether any audit committee members qualify as a
“financial expert” disclosures related to audit committee composition and
auditor pre-approval policies; disclosure related to adoption of a written
code
of ethics; reconciling non-GAAP financial information with GAAP in public
communications; disclosure of off-balance sheet transactions; and disclosure
related to director independence and the director nomination process. The
Company has adopted modifications to its corporate governance procedures to
comply with the provisions of the act and regulations.
The
Company and the Banks are subject to extensive federal and state regulation
and
supervision. Regulation and supervision of financial institutions is primarily
intended to protect depositors and the FDIC rather than shareholders of the
Company. The laws and regulations affecting banks and bank holding companies
have changed significantly over recent years, particularly with the passage
of
the Financial Services Modernization Act. There is reason to expect that similar
changes will continue in the future. Any change in applicable laws, regulations
or regulatory policies may have a material effect on the business, operations
and prospects of the Company. The Company is unable to predict the nature or
the
extent of the effects on its business and earnings that any fiscal or monetary
policies or new federal or state legislation may have in the
future.
The
Company
The
Company is a bank holding company by virtue of its ownership of the Banks,
and
is registered as such with the Board of Governors of the Federal Reserve System
(the "Federal Reserve"). The Company is subject to regulation under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), which subjects the Company
and the Banks to supervision and examination by the Federal Reserve. Under
the
BHCA, the Company files with the Federal Reserve annual reports of its
operations and such additional information as the Federal Reserve may require.
Source
of
Strength to the Banks. The Federal Reserve takes the position that a bank
holding company is required to serve as a source of financial and managerial
strength to its subsidiary banks and may not conduct its operations in an unsafe
or unsound manner. In addition, it is the Federal Reserve's position that in
serving as a source of strength to its subsidiary banks, bank holding companies
should use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity. It should
also
maintain the financial flexibility and capital raising capacity to obtain
additional resources for providing assistance to its subsidiary banks. A bank
holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve to be an unsafe and unsound banking practice or a violation of the
Federal Reserve's regulations or both.
Federal
Reserve Approval. Bank holding companies must obtain the approval of the Federal
Reserve before they: (i) acquire direct or indirect ownership or control of
any
voting stock of any bank if, after such acquisition, they would own or control,
directly or indirectly, more than 5% of the voting stock of such bank; (ii)
merge or consolidate with another bank holding company; or (iii) acquire
substantially all of the assets of any additional banks.
Non-Banking
Activities. With certain exceptions, the BHCA also prohibits bank holding
companies from acquiring direct or indirect ownership or control of voting
stock
in any company other than a bank or a bank holding company unless the Federal
Reserve finds the company's business to be incidental to the business of
banking. When making this determination, the Federal Reserve in part considers
whether allowing a bank holding company to engage in those activities would
offer advantages to the public that would outweigh possible adverse effects.
A
bank holding company may engage in permissible non-banking activities on a
de
novo basis, if the holding company meets certain criteria and notifies the
Federal Reserve within ten (10) business days after the activity has commenced.
Under
the
Financial Services Modernization Act, eligible bank holding companies may elect
(with the approval of the Federal Reserve) to become a "financial holding
company." Financial holding companies are permitted to engage in certain
financial activities through affiliates that 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.
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).
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, 2006, 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 Bank, as a national bank, generally may pay dividends, without
obtaining the express approval of the Office of the Comptroller of the Currency,
in amount up to its retained net profits for the preceding two calendar years
plus retained net profits up to the date of any dividend declaration in the
current calendar year. Retained net profits as defined by the OCC, consists
of
net income less dividends declared during the period. Boone Bank, Randall-Story
Bank and State Bank are also restricted under Iowa law to paying dividends
only
out of their undivided profits. Additionally, the payment of dividends by the
Banks is affected by the requirement to maintain adequate capital pursuant
to
applicable capital adequacy guidelines and regulations, and the Banks generally
are prohibited from paying any dividends if, following payment thereof, the
Bank
would be undercapitalized.
Reserves
Against Deposits. The Federal Reserve requires all depository institutions
to
maintain reserves against their transaction accounts (primarily checking
accounts) and non-personal time deposits. Generally, reserves of 3% must be
maintained against total transaction accounts of $47,600,000 or less (subject
to
an exemption not in excess of the first $7,000,000 of transaction accounts).
A
reserve of $1,428,000 plus 10% of amounts in excess of $47,600,000 must be
maintained in the event total transaction accounts exceed $47,600,000. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve may be used to satisfy applicable liquidity requirements. Because
required reserves must be maintained in the form of vault cash or a noninterest
bearing account at a Federal Reserve Bank, the effect of this reserve
requirement is to reduce the earning assets of the Banks.
Regulatory
Developments
In
2000,
the Financial Services Modernization Act was enacted which: (i) repealed
historical restrictions on preventing banks from affiliating with securities
firms; (ii) broadens the activities that may be conducted by national banks
and
banking subsidiaries of holding companies; and (iii) provides an enhanced
framework for protecting the privacy of consumers' information. In addition,
bank holding companies may be owned, controlled or acquired by any company
engaged in financially related activities, as long as such company meets
regulatory requirements. To the extent that this legislation permits banks
to
affiliate with financial services companies, the banking industry may experience
further consolidation.
Regulatory
Enforcement Authority
The
enforcement powers available to federal and state banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, enforcement actions must be initiated for violations of
laws and regulations and unsafe or unsound practices. Other actions, or
inactions, may provide the basis for enforcement action, including misleading
or
untimely reports filed with regulatory authorities. Applicable law also requires
public disclosure of final enforcement actions by the federal banking
agencies.
National
Monetary Policies
In
addition to being affected by general economic conditions, the earnings and
growth of the Banks are affected by the regulatory authorities’ policies,
including the Federal Reserve. An important function of the Federal Reserve
is
to regulate the money supply, credit conditions and interest rates. Among the
instruments used to implement these objectives are open market operations in
U.S. Government securities, changes in reserve requirements against bank
deposits and the Federal Reserve Discount Rate, which is the rate charged member
banks to borrow from the Federal Reserve Bank. These instruments are used in
varying combinations to influence overall growth and distribution of credit,
bank loans, investments and deposits, and their use may also affect interest
rates charged on loans or paid on deposits.
The
monetary policies of the Federal Reserve have had a material impact on the
operating results of commercial banks in the past and are expected to have
a
similar impact in the future. Also important in terms of effect on banks are
controls on interest rates paid by banks on deposits and types of deposits
that
may be offered by banks. The Depository Institutions Deregulation Committee,
created by Congress in 1980, phased out ceilings on the rate of interest that
may be paid on deposits by commercial banks and savings and loan associations,
with the result that the differentials between the maximum rates banks and
savings and loans can pay on deposit accounts have been eliminated. The effect
of deregulation of deposit interest rates has been to increase banks' cost
of
funds and to make banks more sensitive to fluctuation in market
rates.
Availability
of Information on Company Website
The
Company files periodic reports with the Securities and Exchange Commission
(“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K. The Company makes available on or through
its
website free of charge all periodic reports filed by the Company with the SEC,
including any amendments to such reports, as soon as reasonably practicable
after such reports have been electronically filed with the SEC. The address
of
the Company’s website on the Internet is: www.amesnational.com.
The
Company will provide a paper copy of these reports free of charge upon written
or telephonic request directed to John P. Nelson, Vice President and Secretary,
405 Fifth Street, Ames, Iowa 50010 or (515) 232-6251 or by email request at
info@amesnational.com.
The
information found on the Company’s website is not part of this or any other
report the Company files with the SEC.
Executive
Officers of Company and Banks
The
following table sets forth summary information about the executive officers
of
the Company and certain executive officers of the Banks. Unless otherwise
indicated, each executive officer has served in his current position for the
past five years.
|
Name
|
Age
|
Position
with the Company or Bank and Principal Occupation and Employment
During
the Past Five Years
|
||
|
Kevin
G. Deardorff
|
51
|
Vice
President & Technology Director of the Company.
|
||
|
Leo
E. Herrick
|
64
|
President
of United Bank commencing June, 2002. Previously, employed as Chairman
of
the Board and President of F&M Bank-Iowa, Marshalltown,
Iowa.
|
||
|
Daniel
L. Krieger
|
69
|
Chairman
of the Company since 2003 and President of Company since 1997. Previously
served as President of First National. Also serves as a Director
of the
Company, Chairman of the Board and Trust Officer of First National
and
Chairman of the Board of Boone Bank and United Bank.
|
||
|
Stephen
C. McGill
|
51
|
President
of State Bank since 2003. Previously served as Senior Vice President
of
State Bank.
|
||
|
John
P. Nelson
|
39
|
Vice
President, Secretary and Treasurer of Company. Also serves as Director
of
Randall-Story Bank and State Bank.
|
||
|
Thomas
H. Pohlman
|
55
|
President
of First National since 1999. Previously served as Senior Vice President
of First National.
|
||
|
Jeffrey
K. Putzier
|
44
|
President
of Boone Bank since 1999.
|
||
|
Harold
E. Thompson
|
60
|
President
of Randall Story Bank since 2003. Previously served as Executive
Vice
President of Randall-Story State Bank.
|
||
|
Terrill
L. Wycoff
|
62
|
Executive
Vice President of First National since 2000. Previously served as
served
as Senior Vice President of First
National.
|
|
RISK
FACTORS
|
Rising
Interest Rates
Rising
interest rates will present a challenge to the Company in 2006. Continued
increases in interest rates may negatively impact the Company’s net interest
margin if interest expense increases more quickly than interest income. The
Company’s earning assets (primarily its loan and investment portfolio) have
longer maturities than its interest bearing liabilities (primarily its deposits
and other borrowings). Therefore, in a rising interest rate environment,
interest expense will increase more quickly than interest income, as the
interest bearing liabilities reprice more quickly than earning assets. In
response to this challenge, the Banks model quarterly the changes in income
that
would result from various changes in interest rates. Management believes Bank
earning assets have the appropriate maturity and repricing characteristics
to
optimize earnings and the Banks’ interest rate risk positions.
Concentration
of Operations
The
Company’s operations are concentrated in central Iowa. As a result of this
geographic concentration, the Company’s results may correlate to the economic
conditions in this area. Deterioration in economic conditions, particularly
in
the industries on which this area depends, may adversely affect the quality
of
the Company’s loan portfolio and the demand for the Company’s products and
services, and accordingly, its results of operations.
Risks
Associated with Loans
A
significant source of risk for the Company arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties
may
fail to perform in accordance with the terms of their loans. The Company has
underwriting and credit monitoring procedures and credit policies, including
the
establishment and review of the allowance for loan losses, that management
believes are appropriate to minimize this risk by assessing the likelihood
of
nonperformance, tracking loan performance and diversifying the Company’s loan
portfolio. Such policies and procedures, however, may not prevent unexpected
losses that could adversely affect results of operations.
Competition
with Larger Financial Institutions
The
banking and financial services business in the Company’s market area continues
to be a competitive field and is becoming more competitive as a result of:
|
Ÿ
|
changes
in regulations;
|
|
Ÿ
|
changes
in technology and product delivery systems;
and
|
|
Ÿ
|
the
accelerating pace of consolidation among financial services
providers.
|
It
may be
difficult to compete effectively in the Company’s market, and results of
operations could be adversely affected by the nature or pace of change in
competition. The Company competes for loans, deposits and customers with various
bank and non-bank financial services providers, many of which are much larger
in
total assets and capitalization, have greater access to capital markets and
offer a broader array of financial services.
Trading
Volume
The
trading volume in the Company’s common stock on the Nasdaq Small Cap Market is
relatively limited compared to those of larger companies listed on the Nasdaq
Small Cap Market, the Nasdaq National Market System, the New York Stock Exchange
or other consolidated reporting systems or stock exchanges. A change in the
supply or demand for the Company’s common stock may have a more significant
impact on the price of the Company’s stock than for more actively traded
companies.
Technological
Advances
The
financial services industry is undergoing technological changes with frequent
introductions of new technology-driven products and services. In addition to
improving customer services, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. The Company’s
future success will depend, in part, on its ability to address the needs of
its
customers by using technology to provide products and services that will satisfy
customer demands for convenience, as well as to create additional efficiencies
in the Company’s operations. Many of our competitors have substantially greater
resources than the Company to invest in technological improvements.
Government
Regulations
Current
and future legislation and the policies established by federal and state
regulatory authorities will affect the Company’s operations. The Company and its
Banks are subject extensive supervision of, and examination by, federal and
state regulatory authorities which may limit the Company’s growth and the return
to our shareholders by restricting certain activities, such as:
|
Ÿ
|
the
payment of dividends to the Company’s
shareholders;
|
|
Ÿ
|
the
payment of dividends to the Company from the
Banks;
|
|
Ÿ
|
possible
mergers with or acquisitions of or by other
institutions;
|
|
Ÿ
|
investment
policies;
|
|
Ÿ
|
loans
and interest rates on loans;
|
|
Ÿ
|
interest
rates paid on deposits;
|
|
Ÿ
|
expansion
of branch offices; and/or
|
|
Ÿ
|
the
possibility to provide or expand securities or trust
services.
|
The
Company cannot predict what changes, if any, will be made to existing federal
and state legislation and regulations or the effect that any changes may have
on
future business and earnings prospects. The cost of compliance with regulatory
requirements may adversely affect the Company’s net income.
Equity
Prices
A
substandard performance in the Company’s equity portfolio could lead to a
reduction in the historical level of realized security gains, thereby negatively
impacting the Company’s earnings. The Company invests capital that may be
utilized for future expansion in a portfolio of primarily financial and utility
stocks with an estimated fair market value of approximately $22 million as
of
December 31, 2005. The Company focuses on stocks that have historically paid
dividends in an effort to lessen the negative effects of a bear
market.
|
UNRESOLVED
STAFF COMMENTS
|
The
Company has not received any written comments from the staff of the SEC
regarding its periodic or current reports filed under the Exchange Act in
2005.
|
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 presently located
within the city of Ames; however, land was purchased in 2005 in Ankeny, Iowa
to
open a new full-service branch office in 2006. 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 under a 20 year lease with a five year initial term
and
three, five year renewal options. The current annual rental payment is $21,000.
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. In 2005, United Bank purchased a branch location at 29 S. Center Street
in
Marshalltown that is 1,972 square feet. Both properties are owned by United
Bank
free of any mortgage.
The
property the Company owns is located at 2330 Lincoln Way, Ames, Iowa consisting
of a multi tenant building of approximately 16,000 square feet. First National
leases 5,422 square feet of this building to serve as its University Office.
4,131 square feet of the remaining space is currently leased to five tenants
who
occupy the space for business purposes; the remaining 3,536 square feet of
rentable space is currently unoccupied. The Company purchased real estate
adjacent to 2330 Lincoln Way at 2318 Lincoln Way for a total purchase price
of
$400,000 in 2005. The 2318 Lincoln Way property consists of a single story
commercial building with 2,400 square feet of leased space that is currently
occupied by one tenant for business purposes.
|
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.
|
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 2005.
PART
II
|
MARKET
FOR REGISTRANT’S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF COMMON
STOCK
|
On
February 28, 2006, the Company had approximately 577 shareholders of record.
The
Company’s common stock is traded on the NASDAQ SmallCap Market under the symbol
“ATLO”. Trading in the Company’s common stock is, however, relatively limited.
On
June
15, 2005, shareholders of the Company approved an amendment to the Restated
Articles of Incorporation increasing the Company’s authorized common stock from
6 million to 18 million shares and reducing the par value of such common stock
from $5.00 to $2.00 per share. The purpose of the amendment was to provide
a
sufficient number of shares of authorized common stock to accommodate a 3-for-1
stock split previously approved by the Board of Directors of the Company on
May
11, 2005. The stock split was effective July 15, 2005 for holders of record
as
of July 1, 2005. Share and per share data for all periods presented have been
restated to reflect the stock split.
The
Board
of Directors of the Company approved a stock repurchase program on November
9,
2005. The Company has a strong capital position and this program provides an
opportunity to repurchase Company stock on the open market when it is deemed
to
be favorably priced for repurchase. The program authorizes the repurchase of
up
to 90,000 shares during the calendar year 2006, or approximately 1% of 9,419,271
shares of common stock presently outstanding. The repurchases will be made
in
open market transactions at the discretion of management using Company cash.
The
timing and actual number of shares purchased will depend on a variety of factors
such as price, the Company’s liquidity position and other market conditions. The
program may be limited or discontinued at any time without notice. The Company
did not repurchase any shares in 2005.
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:
|
2005
|
2004
|
|||||||||||||||
|
Market
Price
|
Market
Price
|
|||||||||||||||
|
Quarter
|
High
|
Low
|
Quarter
|
High
|
Low
|
|||||||||||
|
1st
|
$
|
32.67
|
$
|
27.57
|
1st
|
$
|
20.33
|
$
|
19.42
|
|||||||
|
2nd
|
$
|
40.00
|
$
|
30.00
|
2nd
|
$
|
21.17
|
$
|
20.00
|
|||||||
|
3rd
|
$
|
42.82
|
$
|
25.57
|
3rd
|
$
|
23.83
|
$
|
20.75
|
|||||||
|
4th
|
$
|
29.00
|
$
|
23.12
|
4th
|
$
|
35.00
|
$
|
23.50
|
|||||||
The
Company declared aggregate annual cash dividends in 2005 and 2004 of $9,417,000
and $7,590,000, respectively, or $1.00 per share in 2005 and $0.81 per share
in
2004. In February 2006, the Company declared an aggregate cash dividend of
$2,355,000 or $.25 per share. Quarterly dividends declared during the last
two
years were as follows:
|
2005
|
2004
|
||||||
|
Quarter
|
Cash
dividends
declared
per share
|
Cash
dividends
declared
per share
|
|||||
|
1st
|
$
|
0.25
|
$
|
0.153
|
|||
|
2nd
|
0.25
|
0.327
|
|||||
|
3rd
|
0.25
|
0.163
|
|||||
|
4th
|
0.25
|
0.163
|
|||||
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.
|
SELECTED
FINANCIAL DATA
|
The
following financial data of the Company for the five years ended December 31,
2005 through 2001 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)
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
STATEMENT
OF INCOME DATA
|
||||||||||||||||
|
Interest
income
|
$
|
41,306
|
$
|
37,354
|
$
|
35,314
|
$
|
36,270
|
$
|
41,474
|
||||||
|
Interest
expense
|
15,933
|
10,564
|
10,339
|
11,663
|
18,883
|
|||||||||||
|
Net
interest income
|
25,373
|
26,790
|
24,975
|
24,607
|
22,591
|
|||||||||||
|
Provision
for loan losses
|
331
|
479
|
645
|
688
|
898
|
|||||||||||
|
Net
interest income after provision for
|
||||||||||||||||
|
loan
losses
|
25,042
|
26,311
|
24,330
|
23,919
|
21,693
|
|||||||||||
|
Noninterest
income
|
5,613
|
5,269
|
6,435
|
5,135
|
5,080
|
|||||||||||
|
Noninterest
expense
|
15,210
|
14,935
|
14,819
|
13,276
|
11,587
|
|||||||||||
|
Income
before provision for income tax
|
15,445
|
16,645
|
15,946
|
15,778
|
15,186
|
|||||||||||
|
Provision
for income tax
|
3,836
|
4,255
|
4,321
|
4,438
|
4,639
|
|||||||||||
|
Net
Income
|
$
|
11,609
|
$
|
12,390
|
$
|
11,625
|
$
|
11,340
|
$
|
10,547
|
||||||
|
DIVIDENDS
AND EARNINGS PER SHARE DATA
|
||||||||||||||||
|
Cash
dividends declared
|
$
|
9,417
|
$
|
7,590
|
$
|
7,142
|
$
|
6,820
|
$
|
5,187
|
||||||
|
Cash
dividends declared per share
|
$
|
1.00
|
$
|
0.81
|
$
|
0.76
|
$
|
0.73
|
$
|
0.55
|
||||||
|
Basic
and diluted earnings per share
|
$
|
1.23
|
$
|
1.32
|
$
|
1.24
|
$
|
1.21
|
$
|
1.13
|
||||||
|
Weighted
average shares outstanding
|
9,415,599
|
9,405,705
|
9,393,672
|
9,381,855
|
9,371,655
|
|||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||
|
Total
assets
|
$
|
819,444
|
$
|
839,753
|
$
|
752,786
|
$
|
677,229
|
$
|
622,280
|
||||||
|
Net
loans
|
440,318
|
411,639
|
355,533
|
329,593
|
323,043
|
|||||||||||
|
Deposits
|
668,342
|
658,176
|
619,549
|
550,622
|
511,509
|
|||||||||||
|
Stockholders'
equity
|
109,227
|
110,924
|
107,325
|
101,523
|
93,622
|
|||||||||||
|
Equity
to assets ratio
|
13.33
|
%
|
13.21
|
%
|
14.26
|
%
|
14.99
|
%
|
15.04
|
%
|
||||||
|
FIVE
YEAR FINANCIAL PERFORMANCE
|
||||||||||||||||
|
Net
income
|
$
|
11,609
|
$
|
12,390
|
$
|
11,625
|
$
|
11,340
|
$
|
10,547
|
||||||
|
Average
assets
|
831,198
|
793,076
|
726,945
|
635,816
|
616,971
|
|||||||||||
|
Average
stockholders' equity
|
109,802
|
108,004
|
104,141
|
98,282
|
91,373
|
|||||||||||
|
Return
on assets (net income divided by average assets)
|
1.40
|
%
|
1.56
|
%
|
1.60
|
%
|
1.78
|
%
|
1.71
|
%
|
||||||
|
Return
on equity (net income divided by average equity)
|
10.57
|
%
|
11.47
|
%
|
11.16
|
%
|
11.54
|
%
|
11.54
|
%
|
||||||
|
Net
interest margin (net interest income divided by average earning
assets)
|
3.56
|
%
|
3.97
|
%
|
4.02
|
%
|
4.51
|
%
|
4.19
|
%
|
||||||
|
Efficiency
ratio (noninterest expense divided by noninterest income plus
net interest
income)
|
49.09
|
%
|
46.59
|
%
|
47.18
|
%
|
44.64
|
%
|
41.87
|
%
|
||||||
|
Dividend
payout ratio (dividends per share divided by net income per
share)
|
81.30
|
%
|
61.46
|
%
|
60.05
|
%
|
49.11
|
%
|
54.11
|
%
|
||||||
|
Dividend
yield (dividends per share divided by closing year-end market
price)
|
3.89
|
%
|
3.91
|
%
|
4.69
|
%
|
4.15
|
%
|
2.87
|
%
|
||||||
|
Equity
to assets ratio (average equity divided by average assets)
|
13.21
|
%
|
14.33
|
%
|
15.46
|
%
|
14.81
|
%
|
12.78
|
%
|
||||||
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Ames
National Corporation (Company) is a bank holding company established in 1975
that owns and operates five bank subsidiaries (Banks) in central Iowa. The
following discussion is provided for the consolidated operations of the Company
and its Banks, First National, State Bank, Boone Bank, Randall-Story Bank and
United Bank. The purpose of this discussion is to focus on significant factors
affecting the Company's financial condition and results of operations.
The
Company does not engage in any material business activities apart from its
ownership of the Banks and managing its own bond and equity portfolio. Products
and services offered by the Banks are for commercial and consumer purposes,
including loans, deposits and trust services. The Banks also offer investment
services through a third-party broker dealer. The Company employs ten
individuals to assist with financial reporting, human resources, marketing,
audit, compliance, technology systems and the coordination of management
activities, in addition to 172 full-time equivalent individuals employed by
the
Banks.
The
Company’s primary competitive strategy is to utilize seasoned and competent Bank
management and local decision-making authority to provide customers with prompt
response times and flexibility in the products and services offered. This
strategy is viewed as providing an opportunity to increase revenues through
creating a competitive advantage over other financial institutions. The Company
also strives to remain operationally efficient to provide better profitability
while enabling the Company to offer more competitive loan and deposit rates.
The
principal sources of Company revenues and cashflow are: (i) interest and fees
earned on loans made by the Banks; (ii) service charges on deposit accounts
maintained at the Banks; (iii) interest on fixed income investments held by
the
Banks; (iv) fees on trust services provided by those Banks exercising trust
powers; and (v) securities gains and dividends on equity investments held by
the
Company and the Banks. The Company’s principal expenses are: (i) interest
expense on deposit accounts and other borrowings; (ii) salaries and employee
benefits; (iii) data processing costs associated with maintaining the Banks’
loan and deposit functions; and (iv) occupancy expenses for maintaining the
Banks’ facilities. The largest component contributing to the Company’s net
income is net interest income, which is the difference between interest earned
on earning assets (primarily loans and investments) and interest paid on
interest bearing liabilities (primarily deposit accounts and other borrowings).
One of management’s principal functions is to manage the spread between interest
earned on earning assets and interest paid on interest bearing liabilities
in an
effort to maximize net interest income while maintaining an appropriate level
of
interest rate risk.
The
Company reported net income of $11,609,000 for the year ended December 31,
2005
compared to $12,390,000 and $11,625,000 reported for the years ended December
31, 2004 and 2003, respectively. This represents a decrease of 6.3% when
comparing 2005 and 2004, and an increase of 6.6% when comparing 2004 and 2003.
The decline in net income in 2005 is primarily the result of lower net interest
income as the result of higher market interest rates causing deposit interest
expense to increase more quickly than interest income on earning assets. The
improvement in net income for 2004 can be attributed primarily to higher net
interest income resulting from a higher volume of loans and investments
partially offset by lower secondary market income and security gains. Earnings
per share for 2005 were $1.23 compared to a record $1.32 in 2004 and $1.24
in
2003. Each of the Banks had profitable operations during 2005.
The
Company’s return on average equity for 2005 was 10.57% compared to 11.47% and
11.16% in 2004 and 2003, respectively, and the return on average assets for
2005
was 1.40% compared to 1.56% in 2004 and 1.60% in 2003.
Lower
net
interest income caused both the return on average equity and return on average
assets to decline in 2005 compared to 2004. Higher net income and lower capital
levels relating to the average net unrealized gain on securities available
for
sale contributed to the improved return on average equity in 2004. The decline
in the return on average assets in 2004 can be attributed to growth in assets
at
slightly lower profitability margins.
The
following discussion will provide a summary review of important items relating
to:
|
Ÿ
|
Challenges
|
|
Ÿ
|
Key
Performance Indicators and Industry
Results
|
|
Ÿ
|
Income
Statement Review
|
|
Ÿ
|
Balance
Sheet Review
|
|
Ÿ
|
Asset
Quality and Credit Risk Management
|
|
Ÿ
|
Liquidity
and Capital Resources
|
|
Ÿ
|
Interest
Rate Risk
|
Challenges
Management
has identified certain challenges that may negatively impact the Company’s
revenues in the future and is attempting to position the Company to best respond
to those challenges.
|
Ÿ
|
Rising
interest rates will present a challenge to the Company in 2006. Continued
increases in interest rates may negatively impact the Company’s net
interest margin if interest expense increases more quickly than interest
income. The Company’s earning assets (primarily its loan and investment
portfolio) have longer maturities than its interest bearing liabilities
(primarily deposits and other borrowings); therefore, in a rising
interest
rate environment, interest expense will increase more quickly than
interest income as the interest bearing liabilities reprice more
quickly
than earning assets. In response to this challenge, the Banks model
quarterly the changes in income that would result from various changes
in
interest rates. Management believes Bank earning assets have the
appropriate maturity and repricing characteristics to optimize earnings
and the Banks’ interest rate risk positions.
|
|
Ÿ
|
The
Company’s market in central Iowa has numerous banks, credit unions,
investment and insurance companies competing for similar business
opportunities. This competitive environment will continue to put
downward
pressure on the Banks’ net interest margins and thus affect profitability.
Strategic planning efforts at the Company and Banks continue to focus
on
capitalizing on the Banks’ strengths in local markets while working to
identify opportunities for improvement to gain competitive
advantages.
|
|
Ÿ
|
A
substandard performance in the Company’s equity portfolio could lead to a
reduction in the historical level of realized security gains, thereby
negatively impacting the Company’s earnings. The Company invests capital
that may be utilized for future expansion in a portfolio of primarily
financial and utility stocks with an estimated fair market value
of
approximately $22 million as of December 31, 2005. The Company focuses
on
stocks that have historically paid dividends in an effort to lessen
the
negative effects of a bear market.
|
Key
Performance Indicators and Industry Results
Certain
key performance indicators for the Company and the industry are presented in
the
following chart. The industry figures are compiled by the Federal Deposit
Insurance Corporation (FDIC) and are derived from 8,832 commercial banks and
savings institutions insured by the FDIC. Management reviews these indicators
on
a quarterly basis for purposes of comparing the Company’s performance from
quarter to quarter against the industry as a whole.
Selected
Indicators for the Company and the Industry
|
Year
Ended December 31,
|
|||||||||||||||||||
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Company
|
Industry
|
Company
|
Industry
|
Company
|
Industry
|
||||||||||||||
|
Return
on assets
|
1.40
|
%
|
1.28
|
%
|
1.56
|
%
|
1.29
|
%
|
1.60
|
%
|
1.38
|
%
|
|||||||
|
Return
on equity
|
10.57
|
%
|
12.46
|
%
|
11.47
|
%
|
13.28
|
%
|
11.16
|
%
|
15.04
|
%
|
|||||||
|
Net
interest margin
|
3.56
|
%
|
3.49
|
%
|
3.97
|
%
|
3.53
|
%
|
4.02
|
%
|
3.73
|
%
|
|||||||
|
Efficiency
ratio
|
49.09
|
%
|
57.24
|
%
|
46.59
|
%
|
58.03
|
%
|
47.18
|
%
|
56.59
|
%
|
|||||||
|
Capital
ratio
|
13.21
|
%
|
8.25
|
%
|
13.62
|
%
|
8.12
|
%
|
14.33
|
%
|
7.88
|
%
|
|||||||
Key
performance indicators include:
|
Ÿ
|
Return
on Assets
|
This
ratio is calculated by dividing net income by average assets. It is used to
measure how effectively the assets of the Company are being utilized in
generating income. Although the Company’s return on assets ratio compares
favorably to that of the industry, this ratio declined in 2005 as compared
to
2004 as the result of lower net interest income.
|
Ÿ
|
Return
on Equity
|
This
ratio is calculated by dividing net income by average equity. It is used to
measure the net income or return the Company generated for the shareholders’
equity investment in the Company. The Company’s return on equity ratio is below
that of the industry primarily as a result of lower net interest income in
2005
and the higher level of capital the Company maintains for future growth and
acquisitions.
|
Ÿ
|
Net
Interest Margin
|
The
ratio
is calculated by dividing net interest income by average earning assets. Earning
assets consist primarily of loans and investments that earn interest. This
ratio
is used to measure how well the Company is able to maintain interest rates
on
earning assets above those of interest-bearing liabilities, which is the
interest expense paid on deposit accounts and other borrowings. The Company’s
net interest margin is in line with peer bank averages but has fallen since
2004
as rising market interest rates have caused interest expense to increase more
quickly than interest income.
|
Ÿ
|
Efficiency
Ratio
|
This
ratio is calculated by dividing noninterest expense by net interest income
and
noninterest income. The ratio is a measure of the Company’s ability to manage
noninterest expenses. The Company’s efficiency ratio compares favorably to the
industry average.
|
Ÿ
|
Capital
Ratio
|
The
capital ratio is calculated by dividing average total equity capital by average
total assets. It measures the level of average assets that are funded by
shareholders’ equity. Given an equal level of risk in the financial condition of
two companies, the higher the capital ratio, generally the more financially
sound the company. The Company’s capital ratio is significantly higher than the
industry average.
Industry
Results
The
FDIC
Quarterly Banking Profile reported the following results for the fourth quarter
of 2005:
Challenged
by a flattening yield curve and softening loan demand, FDIC-insured institutions
managed to post their fourth-best earnings quarter ever in the fourth quarter
of
2005. Net income of the 8,832 insured banks and thrifts was $1.7 billion (5.4%)
higher than in the fourth quarter of 2004, thanks primarily to a $3.2-billion
(4.0%) increase in net interest income. Noninterest income made a modest $373
million (0.7%) pretax contribution to the improvement in earnings. Against
these
positive factors, expenses for loan-loss provisions were $893 million (11.6%)
higher, and gains on sales of securities and other assets were $624 million
(56.4%) lower. Noninterest expenses registered a small increase, rising by
$824
million (1.0%) from a year earlier. The average return on assets (ROA) in the
fourth quarter was 1.22%, the lowest quarterly level since the fourth quarter
of
2002. The average ROA in the fourth quarter of 2004 was 1.25%. Almost half
of
all insured institutions (49.7%) reported a fourth-quarter ROA of one percent
or
better, slightly above the 48.0% of institutions that achieved that benchmark
in
the fourth quarter of 2004. At the other end of the performance spectrum, the
share of unprofitable institutions declined slightly to 9.4%, from 9.5% a year
earlier. More than half of all institutions reported higher quarterly earnings
(58.6%), and higher quarterly ROAs (51.2%) than a year ago.
The
average net interest margin in the fourth quarter was 3.49%, down slightly
from
3.50% in the third quarter, and matching the fourteen-year low level reached
in
the second quarter. The average margin in the fourth quarter of 2004 was 3.63%.
A combination of rising short-term interest rates and relatively stable
longer-term rates has caused the spread between these rates to diminish
considerably throughout 2005. For insured banks and thrifts, which have
traditionally lent "long" and borrowed "short," the narrowing of this spread
has
put downward pressure on the relative profitability of their lending and
deposit-taking. The effect has been less pronounced at smaller institutions
during 2005. They obtain most of their funding from smaller denomination "core"
deposits, which tend to reprice upward more slowly when short-term interest
rates rise. Large institutions fund a larger share of their assets with
short-term nondeposit liabilities, which reprice more quickly when rates rise.
A
majority of institutions (54.9%) reported higher net interest margins for the
full year in 2005 than they reported for 2004, but most of the improvements
occurred prior to the fourth quarter, and they were concentrated among smaller
institutions. The 4.0% increase in net interest income between the fourth
quarter of 2004 and the fourth quarter of 2005 was made possible by 7.9% growth
in interest-earning assets during that period which outweighed the negative
effect of the narrower average margin.
Income
Statement Review
The
following highlights a comparative discussion of the major components of net
income and their impact for the last three years.
Critical
Accounting Policy
The
discussion contained in this Item 7 and other disclosures included within this
report are based on the Company’s audited consolidated financial statements.
These statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The financial information
contained in these statements is, for the most part, based on the financial
effects of transactions and events that have already occurred. However, the
preparation of these statements requires management to make certain estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses.
The
Company’s significant accounting policies are described in the “Notes to
Consolidated Financial Statements” accompanying the Company’s audited financial
statements. Based on its consideration of accounting policies that involve
the
most complex and subjective estimates and judgments, management has identified
the allowance for loan losses to be the Company’s most critical accounting
policy.
The
allowance for loan losses is established through a provision for loan losses
that is treated as an expense and charged against earnings. Loans are charged
against the allowance for loan losses when management believes that
collectibility of the principal is unlikely. The Company has policies and
procedures for evaluating the overall credit quality of its loan portfolio,
including timely identification of potential problem loans. On a quarterly
basis, management reviews the appropriate level for the allowance for loan
losses, incorporating a variety of risk considerations, both quantitative and
qualitative. Quantitative factors include the Company’s historical loss
experience, delinquency and charge-off trends, collateral values, known
information about individual loans and other factors. Qualitative factors
include the general economic environment in the Company’s market area and the
expected trend of the economic conditions. To the extent actual results differ
from forecasts and management’s judgment, the allowance for loan losses may be
greater or lesser than future charge-offs.
Average
Balances and Interest Rates
The
following two tables are used to calculate the Company’s net interest margin.
The first table includes the Company’s average assets and the related income to
determine the average yield on earning assets. The second table includes the
average liabilities and related expense to determine the average rate paid
on
interest bearing liabilities. The net interest margin is equal to the interest
income less the interest expense divided by average earning assets.
|
ASSETS
|
||||||||||||||||||||||||||||
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||
|
Average
balance
|
Revenue/
expense
|
Yield/
rate
|
Average
balance
|
Revenue/
expense
|
Yield/
rate
|
Average
balance
|
Revenue/
expense
|
Yield/
rate
|
||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Interest-earning
assets
|
||||||||||||||||||||||||||||
|
Loans
|
||||||||||||||||||||||||||||
|
Commercial
|
$
|
66,581
|
$
|
4,286
|
6.44
|
%
|
$
|
48,775
|
$
|
2,548
|
5.22
|
%
|
$
|
38,288
|
$
|
2,163
|
5.65
|
%
|
||||||||||
|
Agricultural
|
29,772
|
2,143
|
7.20
|
%
|
28,406
|
1,839
|
6.47
|
%
|
25,962
|
1,783
|
6.87
|
%
|
||||||||||||||||
|
Real
estate
|
310,438
|
18,912
|
6.09
|
%
|
285,087
|
17,169
|
6.02
|
%
|
264,494
|
16,909
|
6.39
|
%
|
||||||||||||||||
|
Consumer
and other
|
29,206
|
1,638
|
5.61
|
%
|
23,079
|
1,317
|
5.71
|
%
|
21,068
|
1,342
|
6.37
|
%
|
||||||||||||||||
|
Total
loans (including fees)
|
$
|
435,997
|
$
|
26,979
|
6.19
|
%
|
$
|
385,347
|
$
|
22,873
|
5.94
|
%
|
$
|
349,812
|
$
|
22,197
|
6.35
|
%
|
||||||||||
|
Investment
securities
|
||||||||||||||||||||||||||||
|
Taxable
|
$
|
216,785
|
$
|
8,823
|
4.07
|
%
|
$
|
213,043
|
$
|
8,911
|
4.18
|
%
|
$
|
162,273
|
$
|
7,925
|
4.88
|
%
|
||||||||||
|
Tax-exempt
|
126,323
|
8,006
|
6.34
|
%
|
127,048
|
8,125
|
6.40
|
%
|
101,482
|
6,820
|
6.72
|
%
|
||||||||||||||||
|
Total
investment securities
|
$
|
343,108
|
$
|
16,829
|
4.90
|
%
|
$
|
340,091
|
$
|
17,036
|
5.01
|
%
|
$
|
263,755
|
$
|
14,745
|
5.59
|
%
|
||||||||||
|
Interest
bearing deposits with banks
|
$
|
7,037
|
$
|
169
|
2.40
|
%
|
$
|
8,713
|
$
|
130
|
1.49
|
%
|
$
|
4,511
|
$
|
62
|
1.37
|
%
|
||||||||||
|
Federal
funds sold
|
4,833
|
131
|
2.71
|
%
|
11,630
|
159
|
1.37
|
%
|
60,293
|
628
|
1.04
|
%
|
||||||||||||||||
|
Total
Interest-earning assets
|
$
|
790,975
|
$
|
44,108
|
5.58
|
%
|
$
|
745,781
|
$
|
40,198
|
5.39
|
%
|
$
|
678,371
|
$
|
37,632
|
5.55
|
%
|
||||||||||
|
Noninterest-earning
assets
|
||||||||||||||||||||||||||||
|
Cash
and due from banks
|
$
|
22,885
|
$
|
27,581
|
$
|
27,733
|
||||||||||||||||||||||
|
Premises
and equipment, net
|
9,229
|
8,517
|
8,599
|
|||||||||||||||||||||||||
|
Other,
less allowance for loan losses
|
8,109
|
11,197
|
12,242
|
|||||||||||||||||||||||||
|
Total
noninterest-earning assets
|
$
|
40,223
|
$
|
47,295
|
$
|
48,574
|
||||||||||||||||||||||
|
TOTAL
ASSETS
|
$
|
831,198
|
$
|
793,076
|
$
|
726,945
|
||||||||||||||||||||||
|
1
|
Average
loan balance includes nonaccrual loans, if any. Interest income collected
on nonaccrual loans has been
included.
|
|
2
|
Tax-exempt
income has been adjusted to a tax-equivalent basis using an incremental
tax rate of 35%.
|
Average
Balances and Interest Rates(continued)
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||
|
Average
balance
|
Revenue/
expense
|
Yield/
rate
|
Average
balance
|
Revenue/
expense
|
Yield/
rate
|
Average
balance
|
Revenue/
expense
|
Yield/
rate
|
||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||||||
|
Savings,
NOW accounts, and money markets
|
$
|
323,334
|
$
|
5,755
|
1.78
|
%
|
$
|
329,410
|
$
|
3,210
|
0.97
|
%
|
$
|
298,885
|
$
|
2,758
|
0.92
|
%
|
||||||||||
|
Time
deposits < $100,000
|
173,966
|
5,530
|
3.18
|
%
|
173,581
|
4,974
|
2.87
|
%
|
170,534
|
5,480
|
3.21
|
%
|
||||||||||||||||
|
Time
deposits > $100,000
|
90,687
|
3,095
|
3.41
|
%
|
70,076
|
1,759
|
2.51
|
%
|
65,759
|
1,807
|
2.75
|
%
|
||||||||||||||||
|
Total
deposits
|
$
|
587,987
|
$
|
14,380
|
2.45
|
%
|
$
|
573,067
|
$
|
9,943
|
1.74
|
%
|
$
|
535,178
|
$
|
10,045
|
1.88
|
%
|
||||||||||
|
Other
borrowed funds
|
56,443
|
1,551
|
2.75
|
%
|
38,211
|
620
|
1.62
|
%
|
19,588
|
293
|
1.50
|
%
|
||||||||||||||||
|
Total
Interest-bearing liabilities
|
$
|
644,430
|
$
|
15,931
|
2.47
|
%
|
$
|
611,278
|
$
|
10,563
|
1.73
|
%
|
$
|
554,766
|
$
|
10,338
|
1.86
|
%
|
||||||||||
|
|
|
|||||||||||||||||||||||||||
|
Noninterest-bearing
liabilities
|
||||||||||||||||||||||||||||
|
Demand
deposits
|
$
|
69,577
|
$
|
65,785
|
$
|
59,614
|
||||||||||||||||||||||
|
Other
liabilities
|
7,389
|
8,009
|
8,424
|
|||||||||||||||||||||||||
|
Stockholders'
equity
|
$
|
109,802
|
$
|
108,004
|
$
|
104,141
|
||||||||||||||||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
831,198
|
$
|
793,076
|
$
|
726,945
|
||||||||||||||||||||||
|
Net
interest income
|
$
|
28,177
|
3.56
|
%
|
$
|
29,635
|
3.97
|
%
|
$
|
27,294
|
4.02
|
%
|
||||||||||||||||
|
Spread
Analysis
|
||||||||||||||||||||||||||||
|
Interest
income/average assets
|
$
|
44,108
|
5.31
|
%
|
$
|
40,198
|
5.07
|
%
|
$
|
37,632
|
5.18
|
%
|
||||||||||||||||
|
Interest
expense/average assets
|
15,931
|
1.92
|
%
|
10,563
|
1.33
|
%
|
10,334
|
1.42
|
%
|
|||||||||||||||||||
|
Net
interest income/average assets
|
28,177
|
3.39
|
%
|
29,635
|
3.74
|
%
|
27,294
|
3.76
|
%
|
|||||||||||||||||||
Rate
and
Volume Analysis
The
rate
and volume analysis is used to determine how much of the change in interest
income or expense is the result of a change in volume or a change in interest
rate. For example, real estate interest income increased $1,743,000 in 2005
compared to 2004. An increased volume of real estate loans added $1,541,000
in
income in 2005 and higher interest rates increased interest income in 2005
by
$202,000.
The
following table sets forth, on a tax-equivalent basis, a summary of the changes
in net interest income resulting from changes in volume and rates.
|
(dollars
in thousands)
|
2005
Compared to 2004
|
2004
Compared to 2003
|
|||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||
|
Interest
income
|
|||||||||||||||||||
|
Loans
|
|||||||||||||||||||
|
Commercial
|
$
|
1,060
|
$
|
678
|
$
|
1,738
|
$
|
559
|
$
|
(174
|
)
|
$
|
385
|
||||||
|
Agricultural
|
91
|
213
|
304
|
163
|
(107
|
)
|
56
|
||||||||||||
|
Real
estate
|
1,541
|
202
|
1,743
|
1,272
|
(1,012
|
)
|
260
|
||||||||||||
|
Consumer
and other
|
344
|
(23
|
)
|
321
|
121
|
(146
|
)
|
(25
|
)
|
||||||||||
|
Total
loans (including fees)
|
$
|
3,036
|
$
|
1,070
|
$
|
4,106
|
$
|
2,115
|
$
|
(1,439
|
)
|
$
|
676
|
||||||
|
Investment
securities
|
|||||||||||||||||||
|
Taxable
|
$
|
152
|
$
|
(240
|
)
|
$
|
(88
|
)
|
$
|
2,234
|
$
|
(1,248
|
)
|
$
|
986
|
||||
|
Tax-exempt
|
(45
|
)
|
(74
|
)
|
(119
|
)
|
1,644
|
(339
|
)
|
1,305
|
|||||||||
|
Total
investment securities
|
$
|
107
|
$
|
(314
|
)
|
$
|
(207
|
)
|
$
|
3,878
|
$
|
(1,587
|
)
|
$
|
2,291
|
||||
|
$
|
(29
|
)
|
$
|
68
|
$
|
39
|
$
|
62
|
$
|
6
|
$
|
68
|
|||||||
|
Interest
bearing deposits with banks
|
(127
|
)
|
99
|
(28
|
)
|
(622
|
)
|
153
|
(469
|
)
|
|||||||||
| Federal funds sold |
$
|
2,987
|
$
|
923
|
$
|
3,910
|
$
|
5,433
|
$
|
(2,867
|
)
|
$
|
2,566
|
||||||
|
Total
Interest-earning assets
|
|||||||||||||||||||
|
Interest-bearing
liabilities
|
|||||||||||||||||||
|
Deposits
|
|||||||||||||||||||
|
Savings,
NOW accounts, and money markets
|
$
|
(60
|
)
|
$
|
2,605
|
$
|
2,545
|
$
|
285
|
$
|
167
|
$
|
452
|
||||||
|
Time
deposits < $100,000
|
12
|
544
|
556
|
96
|
(602
|
)
|
(506
|
)
|
|||||||||||
|
Time
deposits > $100,000
|
602
|
734
|
1,336
|
119
|
(167
|
)
|
(48
|
)
|
|||||||||||
|
Total
deposits
|
$
|
554
|
$
|
3,883
|
$
|
4,437
|
$
|
500
|
$
|
(602
|
)
|
$
|
(102
|
)
|
|||||
|
Other
borrowed funds
|
378
|
553
|
931
|
281
|
46
|
327
|
|||||||||||||
|
Total
Interest-bearing liabilities
|
$
|
932
|
$
|
4,436
|
$
|
5,368
|
$
|
781
|
$
|
(556
|
)
|
$
|
225
|
||||||
|
Net
interest income/earning assets
|
$
|
2,055
|
$
|
(3,513
|
)
|
$
|
(1,458
|
)
|
$
|
4,652
|
$
|
(2,311
|
)
|
$
|
2,341
|
||||
|
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.
|
Net
Interest Income
The
Company’s largest component contributing to net income is net interest income,
which is the difference between interest earned on earning assets (which are
primarily loans and investments) and interest paid on interest bearing
liabilities (which are primarily deposits accounts and other borrowings). The
volume of and yields earned on earning assets and the volume of and the rates
paid on interest bearing liabilities determine net interest income. Refer to
the
tables preceding this paragraph for additional detail. Interest earned and
interest paid is also affected by general economic conditions, particularly
changes in market interest rates, and by government policies and the action
of
regulatory authorities. Net interest income divided by average earning assets
is
referred to as net interest margin. For the years December 31, 2005, 2004 and
2003, the Company's net interest margin was 3.56%, 3.97% and 4.02%,
respectively.
Net
interest income during 2005, 2004 and 2003 totaled $25,373,000, $26,790,000
and
$24,975,000, respectively, representing a 5% decrease in 2005 from 2004 and
a 7%
increase in 2004 compared to 2003. Net interest income has fallen since 2004
as
rising market interest rates have caused interest expense to increase more
quickly than interest income. A higher volume of earning assets was the primary
reason for the increase in net interest income in 2004.
The
high
level of competition in the local markets and increasing market interest rates
will continue to put downward pressure on the net interest margin of the
Company. Currently, the Company’s largest market, Ames, Iowa, has eight banks,
three thrifts, four credit unions and several other financial investment
companies. Multiple banks are also located in the Company’s other communities
creating similarly competitive environments.
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 recorded a $331,000 provision for loan losses during 2005 compared
to
$479,000 in 2004 and $645,000 in 2003. Lower problem loans in 2005 compared
to
2004 was the primary reason for the lower provision expense in 2005. A lower
level of charge-offs in 2004 led the reduction in provision expense in 2004
compared to 2003. Refer to the Asset Quality and Credit Risk Management
discussion for additional details with regard to loan loss provision
expense.
Management
believes the allowance for loan losses to be adequate to absorb probable losses
in the current portfolio. This statement is based upon management's continuing
evaluation of inherent risks in the current loan portfolio, current levels
of
classified assets and general economic factors. The Company will continue to
monitor the allowance and make future adjustments to the allowance as conditions
dictate.
Noninterest
Income and Expense
Total
noninterest income is comprised primarily of fee-based revenues from trust
and
agency services, bank related service charges on deposit activities, net
securities gains generated primarily by the Company’s equity holdings, merchant
and ATM fees related to electronic processing of merchant and cash transactions
and secondary market income.
Noninterest
income during 2005, 2004 and 2003 totaled $5,613,000, $5,269,000 and $6,435,000,
respectively, representing a 7% increase in 2005 from 2004 and an 18% decrease
in 2004 from 2003. The increase in 2005 is the result of higher trust and net
securities gains with the decrease in 2004 the result of lower secondary market
income and net securities gains. The lower secondary market income in 2004
was
primarily attributed to a slow down in refinancing activity compared to 2003.
Trust income has increased as the result of additional assets under
management.
Noninterest
expense for the Company consists of all operating expenses other than interest
expense on deposits and other borrowed funds. Historically, the Company has
not
had any material expenses relating to discontinued operations, extraordinary
losses or adjustments from a change in accounting principles. Salaries and
employee benefits are the largest component of the Company’s operating expenses
and comprise 61% of noninterest expenses in 2005.
Noninterest
expense during 2005, 2004 and 2003 totaled $15,210,000, $14,935,000 and
$14,820,000, respectively, representing a 2% increase in 2005 versus 2004 and
a
1% increase in 2004 compared to 2003. Lower incentive compensation for senior
officers of the Company and Banks in 2005 contributed to the limited increase
in
noninterest expense. The retirement of several higher paid senior officers
allowed for stable non-interest expense for the year ended December 31, 2004
compared to the same period in 2003. The percentage of noninterest expense
to
average assets was 1.83% in 2005, compared to 1.88% and 2.04% during 2004 and
2003, respectively.
Provision
for Income Taxes
The
provision for income taxes for 2005, 2004 and 2003 was $3,836,000, $4,255,000
and $4,321,000, respectively. This amount represents an effective tax rate
of
25% during 2005, compared to 26% and 27% for 2004 and 2003, respectively. The
Company's marginal federal tax rate is currently 35%. The difference between
the
Company's effective and marginal tax rate is primarily related to investments
made in tax exempt securities. The average balance of tax exempt securities
in
2005, 2004, and 2003 totaled $126,323,000, $127,048,000, and $101,482,000,
respectively.
Balance
Sheet Review
The
Company’s assets are comprised primarily of loans and investment securities.
Average earning asset maturity or repricing dates are less than five years
for
the combined portfolios as the assets are funded for the most part by short
term
deposits with either immediate availability or less than one year average
maturities. This exposes the Company to risk with regard to changes in interest
rates that are more fully explained in Item 7A of this report “Quantitative and
Qualitative Disclosures about Market Risk”.
Total
assets decreased to $819,384,000 in 2005 compared to $839,753,000 in 2004,
a 2%
decrease. The mix of assets changed as maturing investments were reinvested
in
higher yielding loans. First National had a decline of $22,662,000 in total
assets that was anticipated as a local company had a significant level of
temporary construction funds invested with the bank as securities sold under
an
agreement to repurchase as of December 31, 2004 that were withdrawn in 2005.
Loan
Portfolio
Net
loans
for the year ended December 31, 2005, increased to $440,318,000 from
$411,639,000 as of December 31, 2004, an increase of 7%. The increase in loan
volume can be primarily attributed to growth in the commercial loan portfolio
resulting primarily from the combination of new borrowers and the purchase
of
commercial loans from other Iowa banks. Consumer and other loans increased
primarily as the result of several large loans to a municipality. Loans are
the
primary contributor to the Company’s revenues and cash flows. The average yield
on loans was 129 and 93 basis points higher in 2005 and 2004, respectively,
in
comparison to the average tax-equivalent investment portfolio yields.
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, 2005.
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Real
Estate
|
||||||||||||||||
|
Construction
|
$
|
23,973
|
$
|
21,042
|
$
|
13,126
|
$
|
13,518
|
$
|
12,677
|
||||||
|
1-4
family residential
|
102,043
|
97,612
|
84,645
|
81,239
|
84,379
|
|||||||||||
|
Commercial
|
153,920
|
160,176
|
150,723
|
136,351
|
117,211
|
|||||||||||
|
Agricultural
|
30,606
|
27,443
|
24,297
|
21,693
|
21,029
|
|||||||||||
|
Commercial
|
71,430
|
57,189
|
38,555
|
40,097
|
45,631
|
|||||||||||
|
Agricultural
|
32,216
|
30,713
|
27,815
|
26,022
|
27,367
|
|||||||||||
|
Consumer
and other
|
33,340
|
24,584
|
23,242
|
19,921
|
20,920
|
|||||||||||
|
Total
loans
|
447,528
|
418,759
|
362,403
|
338,841
|
329,214
|
|||||||||||
|
Deferred
loan fees, net
|
445
|
644
|
819
|
777
|
725
|
|||||||||||
|
Total
loans net of deferred fees
|
$
|
447,083
|
$
|
418,115
|
$
|
361,584
|
$
|
338,064
|
$
|
328,489
|
||||||
The
Company's loan portfolio consists of real estate loans, commercial loans,
agricultural loans and consumer loans. As of December 31, 2005, gross loans
totaled approximately $447 million, which equals approximately 67% of total
deposits and 55% of total assets. The Company’s peer group (consisting of 393
bank holding companies with total assets of $500 to $1,000 million) loan to
deposit ratio as of September 30, 2005 was a much higher 88%. The primary factor
relating to the lower loan to deposit ratio for the Company compared to peer
group averages is a more conservative underwriting philosophy. As of December
31, 2005, the majority of the loans were originated directly by the Banks to
borrowers within the Banks’ principal market areas. There are no foreign loans
outstanding during the years presented.
Real
estate loans include various types of loans for which the Banks hold real
property as collateral and consist of loans primarily on commercial properties
and single family residences. Real estate loans typically have fixed rates
for
up to five years, with the Company’s loan policy permitting a maximum fixed rate
maturity of up to 15 years. The majority of construction loan volume is to
contractors to construct commercial buildings and these loans generally have
maturities of up to 12 months. The Banks originate residential real estate
loans
for sale to the secondary market for a fee.
Commercial
loans consist primarily of loans to businesses for various purposes, including
revolving lines to finance current operations, floor-plans, inventory and
accounts receivable; capital expenditure loans to finance equipment and other
fixed assets; and letters of credit. These loans generally have short
maturities, have either adjustable or fixed rates and are unsecured or secured
by inventory, accounts receivable, equipment and/or real
estate.
Agricultural
loans play an important part in the Banks’ loan portfolios. Iowa is a major
agricultural state and is a national leader in both grain and livestock
production. The Banks play a significant role in their communities in financing
operating, livestock and real estate activities for area producers.
Consumer
loans include loans extended to individuals for household, family and other
personal expenditures not secured by real estate. The majority of the Banks’
consumer lending is for vehicles, consolidation of personal debts, household
appliances and improvements.
The
interest rates charged on loans vary with the degree of risk and the amount
and
maturity of the loan. Competitive pressures, market interest rates, the
availability of funds and government regulation further influence the rate
charged on a loan. The Banks follow a loan policy, which has been approved
by
both the board of directors of the Company and the Banks, and is overseen by
both Company and Bank management. These policies establish lending limits,
review and grading criteria and other guidelines such as loan administration
and
allowance for loan losses. Loans are approved by the Banks’ board of directors
and/or designated officers in accordance with respective guidelines and
underwriting policies of the Company. Credit limits generally vary according
to
the type of loan and the individual loan officer’s experience. Loans to any one
borrower are limited by applicable state and federal banking laws.
Maturities
and Sensitivities of Loans to Changes in Interest Rates as of December 31,
2005
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.
|
Within
one
year
|
After
one
year
but
within
five
years
|
After
five
years
|
Total
|
||||||||||
|
(dollars
in thousands)
|
|||||||||||||
|
Real
Estate
|
|||||||||||||
|
Construction
|
$
|
16,375
|
$
|
7,119
|
$
|
479
|
$
|
23,973
|
|||||
|
1-4
family residential
|
6,237
|
44,011
|
51,795
|
102,043
|
|||||||||
|
Commercial
|
5,157
|
119,340
|
29,423
|
153,920
|
|||||||||
|
Agricultural
|
1,433
|
5,406
|
23,767
|
30,606
|
|||||||||
|
Commercial
|
36,881
|
27,210
|
7,339
|
71,430
|
|||||||||
|
Agricultural
|
21,860
|
7,475
|
2,881
|
32,216
|
|||||||||
|
Consumer
and other
|
7,716
|
20,132
|
5,492
|
33,340
|
|||||||||
|
Total
loans
|
$
|
95,659
|
$
|
230,693
|
$
|
121,176
|
$
|
447,528
|
|||||
|
After
one
year
but
within
five
years
|
After
five
years
|
||||||
|
Loan
maturities after one year with:
|
|||||||
|
Fixed
rates
|
$
|
193,838
|
$
|
23,905
|
|||
|
Variable
rates
|
36,855
|
97,271
|
|||||
|
$
|
230,693
|
$
|
121,176
|
||||
Loans
Held For Sale
Mortgage
origination funding awaiting delivery to the secondary market totaled $981,000
and $234,000 as of December 31, 2005 and 2004, respectively. Residential
mortgage loans are originated by the Banks and sold to several secondary
mortgage market outlets based upon customer product preferences and pricing
considerations. The mortgages are sold in the secondary market to eliminate
interest rate risk and to generate secondary market fee income. It is not
anticipated at the present time that loans held for sale will become a
significant portion of total assets.
Investment
Portfolio
Total
investments as of December 31, 2005 were $333,510,000, a decrease of $29,949,000
or 8% from the prior year end. As of December 31, 2005 and 2004, the investment
portfolio comprised 41% and 43% of total assets, respectively.
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, 2005, 2004 and 2003, respectively. This portfolio
provides the Company with a significant amount of liquidity.
|
2005
|
2004
|
2003
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
U.S.
treasury securities
|
$
|
516
|
$
|
531
|
$
|
2,229
|
||||
|
U.S.
government agencies
|
134,288
|
137,634
|
118,637
|
|||||||
|
States
and political subdivisions
|
108,373
|
113,818
|
105,963
|
|||||||
|
Corporate
bonds
|
59,567
|
77,573
|
63,586
|
|||||||
|
Equity
securities
|
30,766
|
33,904
|
32,701
|
|||||||
|
Total
|
$
|
333,510
|
$
|
363,460
|
$
|
323,116
|
||||
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 Company’s investment policy with
the exception of the corporate debt obligations of one corporation that has
a
Moody’s sub investment quality rating of Ba1 as of December 31, 2005. These
corporate bonds had a fair market and book value as of December 31, 2005 of
$1,865,000 and $2,165,000, respectively. The Company does not consider the
corporate bonds to be other than temporarily impaired as of December 31, 2005.
As of December 31, 2005, 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, 2005,
2004, and 2003.
Investment
Maturities as of December 31, 2005
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.
|
Within
one
year
|
After
one
year
but
within
five
years
|
After
five
years
but
within
ten
years
|
After
ten
years
|
Total
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
U.S.
treasury
|
$
|
-
|
$
|
-
|
$
|
516
|
$
|
-
|
$
|
516
|
||||||
|
U.S.
government agencies
|
13,050
|
104,057
|
13,803
|
3,378
|
134,288
|
|||||||||||
|
States
and political subdivisions
|
6,192
|
35,105
|
47,989
|
19,087
|
108,373
|
|||||||||||
|
Corporate
bonds
|
13,894
|
38,218
|
7,455
|
-
|
59,567
|
|||||||||||
|
Total
|
$
|
33,136
|
$
|
177,380
|
$
|
69,763
|
$
|
22,465
|
$
|
302,744
|
||||||
|
Weighted
average yield
|
||||||||||||||||
|
U.S.
treasury
|
-
|
-
|
5.20
|
%
|
-
|
5.20
|
%
|
|||||||||
|
U.S.
government agencies
|
2.83
|
%
|
3.66
|
%
|
4.96
|
%
|
3.51
|
%
|
3.71
|
%
|
||||||
|
States
and political subdivisions*
|
4.18
|
%
|
5.61
|
%
|
6.64
|
%
|
6.33
|
%
|
6.12
|
%
|
||||||
|
Corporate
bonds
|
4.19
|
%
|
4.78
|
%
|
6.43
|
%
|
-
|
4.84
|
%
|
|||||||
|
Total
|
3.66
|
%
|
4.29
|
%
|
6.27
|
%
|
5.90
|
%
|
4.80
|
%
|
||||||
*Yields
on tax-exempt obligations of states and political subdivisions have been
computed on a tax-equivalent basis.
Deposits
Types
of
Deposits
Total
deposits equaled $668,342,000 and $658,176,000 as of December 31, 2005 and
2004,
respectively. The nominal increase of $10,166,000 can be attributed to deposit
growth at First National and State Bank. The deposit category seeing the largest
balance increases were time certificates of deposits over $100,000 as depositors
moved money from lower yielding non-maturing deposit accounts to higher yielding
certificates of deposit.
The
Company’s primary source of funds is customer deposits. The Company attempts to
attract noninterest-bearing deposits, which are a low-cost funding source.
In
addition, the Banks offer a variety of interest-bearing accounts designed to
attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank management
based on competitive market factors and the Company’s need for funds. While
nearly 59% 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, 2005, 2004 and 2003.
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||
|
Noninterest
bearing demand deposits
|
$
|
69,577
|
-
|
$
|
65,785
|
-
|
$
|
59,614
|
-
|
||||||||||
|
Interest
bearing demand deposits
|
154,156
|
1.63
|
%
|
154,332
|
0.80
|
%
|
130,138
|
0.70
|
%
|
||||||||||
|
Money
market deposits
|
141,492
|
2.12
|
%
|
146,479
|
1.25
|
%
|
143,478
|
1.20
|
%
|
||||||||||
|
Savings
deposits
|
27,686
|
0.90
|
%
|
28,599
|
0.47
|
%
|
25,269
|
0.50
|
%
|
||||||||||
|
Time
certificates < $100,000
|
173,966
|
3.18
|
%
|
173,581
|
2.87
|
%
|
170,534
|
3.21
|
%
|
||||||||||
|
Time
certificates > $100,000
|
90,687
|
3.41
|
%
|
70,076
|
2.51
|
%
|
65,759
|
2.75
|
%
|
||||||||||
|
$
|
657,564
|
$
|
638,852
|
$
|
594,792
|
||||||||||||||
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, 2005,
2004
and 2003.
|
2005
|
2004
|
2003
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
3
months or less
|
$
|
25,933
|
$
|
20,613
|
$
|
23,801
|
||||
|
Over
3 through 12 months
|
47,279
|
29,217
|
29,896
|
|||||||
|
Over
12 through 36 months
|
26,431
|
17,131
|
11,374
|
|||||||
|
Over
36 months
|
1,399
|
2,103
|
4,416
|
|||||||
|
Total
|
$
|
101,042
|
$
|
69,064
|
$
|
69,487
|
||||
Borrowed
Funds
Borrowed
funds that may be utilized by the Company are comprised of Federal Home Loan
Bank (FHLB) advances, federal funds purchased and repurchase agreements.
Borrowed funds are an alternative funding source to deposits and can be used
to
fund the Company’s assets and unforeseen liquidity needs. FHLB advances are
loans from the FHLB that can mature daily or have longer maturities for fixed
or
floating rates of interest. Federal funds purchased are borrowings from other
banks that mature daily. Securities sold under agreement to repurchase
(repurchase agreements) are similar to deposits as they are funds lent by
various Bank customers; however, the bank pledges investment securities to
secure such borrowings. The Company’s repurchase agreements normally reprice
daily.
The
following table summarizes the outstanding amount of, and the average rate
on,
borrowed funds as of December 31, 2005, 2004 and 2003.
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Balance
|
Average
Rate
|
Balance
|
Average
Rate
|
Balance
|
Average
Rate
|
||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||
|
|
|
||||||||||||||||||
|
Other
short-term borrowings
|
$
|
2,861
|
4.52
|
%
|
$
|
-
|
-
|
$
|
-
|
-
|
|||||||||
|
Federal
funds purchased and repurchase agreements
|
34,660
|
3.38
|
%
|
64,072
|
1.99
|
%
|
18,199
|
1.39
|
%
|
||||||||||
|
Total
|
$
|
37,521
|
3.46
|
%
|
$
|
64,072
|
1.99
|
%
|
$
|
18,199
|
1.39
|
%
|
|||||||
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,
2005, 2004 and 2003.
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||
|
Other
short-term borrowings
|
$
|
1,096
|
4.29
|
%
|
$
|
-
|
-
|
$
|
-
|
-
|
|||||||||
|
Federal
funds purchased & repurchase agreements
|
56,433
|
2.72
|
%
|
38,211
|
1.62
|
%
|
19,588
|
1.48
|
%
|
||||||||||
|
Total
|
$
|
57,529
|
2.75
|
%
|
$
|
38,211
|
1.62
|
%
|
$
|
19,588
|
1.48
|
%
|
|||||||
|
|
|
||||||||||||||||||
|
Maximum
Amount Outstanding during the year
|
|||||||||||||||||||
|
Other
short-term borrowings
|
$
|
5,000
|
$
|
-
|
$
|
-
|
|||||||||||||
|
Federal
funds purchased and repurchase agreements
|
70,489
|
65,391
|
22,728
|
||||||||||||||||
Off-Balance-Sheet
Arrangements
The
Company is party to financial instruments with off-balance-sheet risk in the
normal course of business. These financial instruments include commitments
to
extend credit and standby letters of credit. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet. For additional information, see footnote 10 of the “Notes to
Consolidated Statements”.
Contractual
Obligations
The
following table sets forth the balance of contractual obligations by maturity
period as of December 31, 2005 (in thousands).
|
Payments
due by period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
|||||||||||
|
FHLB
Advances
|
$
|
2,000
|
$
|
2,000
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Operating
Lease Obligation
|
105
|
21
|
42
|
42
|
-
|
|||||||||||
|
Purchase
Obligations
|
3,661
|
875
|
$
|
1,830
|
956
|
|||||||||||
|
Total
|
$
|
5,766
|
$
|
2,896
|
$
|
1,872
|
$
|
998
|
$
|
-
|
||||||
Purchase
obligations include data processing and Internet banking services contracts
that
include termination provisions that would accelerate all future payments in
the
event the Company changed service providers prior to the contracts’
expirations.
Asset
Quality Review and Credit Risk Management
The
Company’s credit risk is centered in the loan portfolio, which on December 31,
2005 totaled $440,318,000 as compared to $411,639,000 as of December 31, 2004,
an increase of 7%. Loans comprise 54% of total assets as of the end of 2005.
The
object in managing loan portfolio risk is to reduce the risk of loss resulting
from a customer’s failure to perform according to the terms of a transaction and
to quantify and manage credit risk on a portfolio basis. As the following chart
indicates, the Company’s credit risk management practices have resulted in a low
level of non-performing assets that total $2,431,000 as of December 31, 2005.
The Company’s level of problem assets as a percentage of assets of 0.30% as
December 31, 2005 compares favorably to the average for FDIC insured
institutions as of September 30, 2005 of 0.44%.
Non-performing
Assets
The
following table sets forth information concerning the Company's non-performing
assets for the past five years ending December 31, 2005.
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Non-performing
assets:
|
||||||||||||||||
|
Nonaccrual
loans
|
$
|
606
|
$
|
1,896
|
$
|
1,756
|
$
|
2,015
|
$
|
2,692
|
||||||
|
Loans
90 days or more past due and still accruing
|
83
|
80
|
431
|
394
|
797
|
|||||||||||
|
Total
non-performing loans
|
689
|
1,976
|
2,187
|
2,409
|
3,489
|
|||||||||||
|
Other
real estate owned
|
1,742
|
772
|
159
|
295
|
159
|
|||||||||||
|
Total
non-performing assets
|
$
|
2,431
|
$
|
2,748
|
$
|
2,346
|
$
|
2,704
|
$
|
3,648
|
||||||
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.
At
December 31, 2005 and 2004, the Company had impaired loans of approximately
$689,000 and $1,976,000, respectively. The allowance for loan losses related
to
these impaired loans was approximately $55,000 and $158,000 at December 31,
2005
and 2004, respectively. The average balances of impaired loans for the years
ended December 31, 2005 and 2004 were $1,644,708 and $2,373,465, respectively.
For the years ended December 31, 2005, 2004, and 2003 interest income which
would have been recorded under the original terms of such loans was
approximately $41,000, $239,000, and $179,000, respectively, with none, $211,000
and $177,000, respectively, recorded. Loans greater than 90 days past due and
still accruing interest were approximately $83,000 and $80,000 at December
31,
2005 and 2004, respectively. First National obtained title in 2005 to a
commercial property securing a large problem credit that accounts for the
decrease in nonaccrual loans and the increase in other real estate
owned.
Summary
of the Allowance for Loan Losses
The
provision for loan losses represents an expense charged against earnings to
maintain an adequate allowance for loan losses. The allowance for loan losses
is
management’s best estimate of probable losses inherent in the loan portfolio as
of the balance sheet date. Factors considered in establishing an appropriate
allowance include: an assessment of the financial condition of the borrower;
a
realistic determination of value and adequacy of underlying collateral; the
condition of the local economy and the condition of the specific industry of
the
borrower; an analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans.
The
adequacy of the allowance for loan losses is evaluated quarterly by management
and the respective Bank boards. This evaluation focuses on specific loan
reviews, changes in the type and volume of the loan portfolio given the current
and forecasted economic conditions and historical loss experience. Any one
of
the following conditions may result in the review of a specific loan: concern
about whether the customer’s cash flow or net worth are sufficient to repay the
loan; delinquent status; criticism of the loan in a regulatory examination;
the
accrual of interest has been suspended; or other reasons, including when the
loan has other special or unusual characteristics which warrant special
monitoring.
While
management uses available information to recognize losses on loans, further
reductions in the carrying amounts of loans may be necessary based on changes
in
local economic conditions. In addition, regulatory agencies, as an integral
part
of their examination process, periodically review the estimated losses on loans.
Such agencies may require the Company to recognize additional losses based
on
their judgment about information available to them at the time of their
examination.
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.
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Balance
at beginning of period
|
$
|
6,476
|
$
|
6,051
|
$
|
5,758
|
$
|
5,446
|
$
|
5,373
|
||||||
|
Charge-offs:
|
||||||||||||||||
|
Real
Estate
|
||||||||||||||||
|
Construction
|
-
|
-
|
24
|
-
|
-
|
|||||||||||
|
1-4
Family Residential
|
-
|
19
|
5
|
-
|
-
|
|||||||||||
|
Commercial
|
28
|
93
|
-
|
40
|
-
|
|||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Commercial
|
-
|
3
|
392
|
235
|
768
|
|||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Consumer
and other
|
119
|
115
|
43
|
155
|
83
|
|||||||||||
|
Total
Charge-offs
|
147
|
230
|
464
|
430
|
852
|
|||||||||||
|
Recoveries:
|
||||||||||||||||
|
Real
Estate
|
||||||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
1-4
Family Residential
|
-
|
-
|
-
|
20
|
-
|
|||||||||||
|
Commercial
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Commercial
|
33
|
13
|
100
|
14
|
8
|
|||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Consumer
and other
|
72
|
163
|
12
|
20
|
19
|
|||||||||||
|
Total
Recoveries
|
105
|
176
|
112
|
54
|
27
|
|||||||||||
|
Net
charge-offs
|
42
|
54
|
352
|
376
|
825
|
|||||||||||
|
Additions
charged to operations
|
331
|
479
|
645
|
688
|
898
|
|||||||||||
|
Balance
at end of period
|
$
|
6,765
|
$
|
6,476
|
$
|
6,051
|
$
|
5,758
|
$
|
5,446
|
||||||
|
Average
Loans Outstanding
|
$
|
435,997
|
$
|
385,347
|
$
|
349,812
|
$
|
317,521
|
$
|
341,440
|
||||||
|
Ratio
of net charge-offs during the period to average loans
outstanding
|
0.01
|
%
|
0.01
|
%
|
0.11
|
%
|
0.12
|
%
|
0.24
|
%
|
||||||
|
Ratio
of allowance for loan losses to total loans net of deferred
fees
|
1.51
|
%
|
1.55
|
%
|
1.67
|
%
|
1.70
|
%
|
1.65
|
%
|
||||||
The
allowance for loan losses increased to $6,765,000 at the end of 2005 in
comparison to the allowance of $6,476,000 at year end 2004. The increase can
be
primarily attributed to the growth in the in the Company’s commercial loan
portfolio at First National and United Bank. The increase in the reserve levels
in 2004 compared to 2003 relate primarily to general reserves established by
First National. The general reserve methodology has remained consistent for
the
five years presented.
General
reserves for loan categories normally range from 1.00 to 1.40% of the
outstanding loan balances. As loan volume increases, the general reserve levels
increase with that growth. As the previous table indicates, loan provisions
have
been trending downward since 2001 as the level of net charge-offs has declined.
The allowance relating to commercial real estate, 1-4 family residential and
commercial loans are the largest reserve components. Commercial real estate
loans have higher general reserve levels than 1-4 family and agricultural 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, 2005, commercial real estate loans have
general reserves of 1.15%. The estimation methods and assumptions used in
determining the allowance for the five years presented have remained fairly
consistent. The level of non performing loans has improved considerably in
2005
compared to 2004 as the result of one large credit being reclassified as other
real estate.
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, 2005 specific reserves increased $76,000 or 5% compared to year end 2004
levels as the volume of watch credits increased in 2005. As of December 31,
2004, specific reserves decreased $431,000 or 24% over year end 2003 as the
result of improved loan quality. As of December 31, 2003, specific reserves
increased $146,000 or 9% over year end 2002. In 2003, specific allocations
to
problem agricultural real estate loans was the largest contributor to the
increase in the specific reserve level when compared to year end 2002. 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 historically
had the largest impact on the reallocation of the reserve among different parts
of the portfolio.
Other
factors that are considered when determining the adequacy of the reserve include
loan concentrations, loan growth, the economic outlook and historical losses.
The Company’s concentration risks include geographic concentration in central
Iowa; the local economy’s dependence upon several large governmental entity
employers, including Iowa State University and the Iowa Department of
Transportation; and the health of Iowa’s agricultural sector that in turn, is
dependent on weather conditions and government programs. 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.
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||||||||||
|
Amount
|
%
*
|
Amount
|
%
*
|
Amount
|
%
*
|
Amount
|
%
*
|
Amount
|
%
*
|
||||||||||||||||||||||
|
Balance
at end of period applicable to:
|
|||||||||||||||||||||||||||||||
|
Real
Estate
|
|||||||||||||||||||||||||||||||
|
Construction
|
$
|
258
|
5.36
|
%
|
$
|
429
|
5.02
|
%
|
$
|
196
|
3.62
|
%
|
$
|
210
|
3.99
|
%
|
$
|
178
|
3.99
|
%
|
|||||||||||
|
1-4
family residential
|
1,127
|
22.80
|
%
|
1,021
|
23.31
|
%
|
948
|
23.36
|
%
|
892
|
23.98
|
%
|
980
|
23.98
|
%
|
||||||||||||||||
|
Commercial
|
2,534
|
34.39
|
%
|
2,676
|
38.25
|
%
|
2,663
|
41.59
|
%
|
2,453
|
40.24
|
%
|
1,704
|
40.24
|
%
|
||||||||||||||||
|
Agricultural
|
421
|
6.84
|
%
|
486
|
6.55
|
%
|
458
|
6.70
|
%
|
302
|
6.40
|
%
|
279
|
6.40
|
%
|
||||||||||||||||
|
Commercial
|
1,158
|
15.96
|
%
|
809
|
13.66
|
%
|
775
|
10.64
|
%
|
910
|
11.83
|
%
|
938
|
11.83
|
%
|
||||||||||||||||
|
Agricultural
|
511
|
7.20
|
%
|
360
|
7.33
|
%
|
488
|
7.68
|
%
|
504
|
7.68
|
%
|
457
|
7.68
|
%
|
||||||||||||||||
|
Consumer
and other
|
390
|
7.45
|
%
|
302
|
5.87
|
%
|
255
|
6.41
|
%
|
235
|
5.88
|
%
|
258
|
5.88
|
%
|
||||||||||||||||
|
Unallocated
|
366
|
|
393
|
|
268
|
|
252
|
|
652
|
||||||||||||||||||||||
|
$
|
6,765
|
100
|
%
|
$
|
6,476
|
100
|
%
|
$
|
6,051
|
100
|
%
|
$
|
5,758
|
100
|
%
|
$
|
5,446
|
100
|
%
|
||||||||||||
*
Percent
of loans in each category to total loans.
Liquidity
and Capital Resources
Liquidity
management is the process by which the Company, through its Banks’ Asset and
Liability Committees (ALCO), ensures that adequate liquid funds are available
to
meet its financial commitments on a timely basis, at a reasonable cost and
within acceptable risk tolerances. These commitments include funding credit
obligations to borrowers, funding of mortgage originations pending delivery
to
the secondary market, withdrawals by depositors, maintaining adequate collateral
for pledging for public funds, trust deposits and borrowings, paying dividends
to shareholders, payment of operating expenses, funding capital expenditures
and
maintaining deposit reserve requirements.
Liquidity
is derived primarily from core deposit growth and retention; principal and
interest payments on loans; principal and interest payments, sale, maturity
and
prepayment of investment securities; net cash provided from operations; and
access to other funding sources. Other funding sources include federal funds
purchased lines, Federal Home Loan Bank (FHLB) advances and other capital market
sources.
As
of
December 31, 2005, the level of liquidity and capital resources of the Company
remain at a satisfactory level and compare favorably to that of other FDIC
insured institutions. Management believes that the Company's liquidity sources
will be sufficient to support its existing operations for the foreseeable
future.
The
liquidity and capital resources discussion will cover the follows
topics:
|
Ÿ
|
Review
of the Company’s Current Liquidity
Sources
|
|
Ÿ
|
Review
of the Consolidated Statements of Cash Flows
|
|
Ÿ
|
Review
of Company Only Cash Flows
|
|
Ÿ
|
Review
of Commitments for Capital Expenditures, Cash Flow Uncertainties
and Known
Trends in Liquidity and Cash Flows
Needs
|
|
Ÿ
|
Capital
Resources
|
Review
of
the Company’s Current Liquidity Sources
Liquid
assets of cash on hand, balances due from other banks, federal funds sold and
interest-bearing deposits in financial institutions for December 31, 2005,
2004
and 2003 totaled $24,376,000, $48,199,000 and $58,725,000, respectively. The
lower balance of liquid assets as of December 31, 2005 relates to a lower level
of federal funds sold to other financial institutions.
Other
sources of liquidity available to the Banks include outstanding lines of credit
with the Federal Home Loan Bank of Des Moines, Iowa of $43,425,000 and federal
funds borrowing capacity at correspondent banks of $86,500,000. As of December
31, 2005, the Company had outstanding FHLB advances of $2,000,000, federal
funds
purchased of $13,000,000 and securities sold under agreement to repurchase
totaled $21,660,000, and treasury tax and loan option notes of $861,000.
Total
investments as of December 31, 2005 were $333,510,000 compared to $363,459,000
as of year end 2004. As of December 31, 2005 and 2004, the investment portfolio
as a percentage of total assets was 41% and 43%, respectively. This provides
the
Company with a significant amount of liquidity since all of the investments
are
classified as available for sale as of December 31, 2005 and 2004 and have
net
unrealized gains of $5,225,000 and $11,854,000, respectively.
The
investment portfolio serves an important role in the overall context of balance
sheet management in terms of balancing capital utilization and liquidity. The
decision to purchase or sell securities is based upon the current assessment
of
economic and financial conditions, including the interest rate environment,
liquidity and credit considerations. The portfolio’s scheduled maturities
represent a significant source of liquidity.
Review
of
the Consolidated Statements of Cash Flows
Operating
cash flows for December 31, 2005, 2004 and 2003 totaled $11,472,000, $13,169,000
and $14,828,000, respectively. The primary reason for the decrease in operating
cash flows in 2005 compared to 2004 was the use of cash to fund loans held
for
sale and lower net income. The decrease in operating cash flows in 2004 compared
to 2003 included a reduction in loans held for sale and an increase in other
assets in 2004. These decreases were offset by security gains realized in 2004
as compared to 2003 and an increase net income.
Net
cash
provided (used) in investing activities for December 31, 2005, 2004 and 2003
was
$14,558,000, ($103,647,000) and ($96,479,000), respectively. The net cash
provided from investing activities in 2005 was primarily proceeds from the
sale
or maturity of investment securities and federal funds sold that were utilized
to fund a lower level of securities sold under agreements to repurchase. The
largest investing activities in 2004 were the purchase of U.S. government agency
and corporate bonds and the funding of commercial operating and commercial
real
estate loans offset by the maturities, calls, and sales of securities available
for sale. U.S. government agency bonds, municipal bonds and commercial real
estate loans were the most significant investing activities in
2003.
Net
cash
(used in) provided by financing activities for December 31, 2005, 2004 and
2003
totaled ($26,697,000), $77,255,000 and $61,944,000, respectively. A decline
in
securities sold under agreements to repurchase was the primary use of financing
funds in 2005 and were the primary contributing factor to increase in financing
cash flows in 2004. Deposit growth was the primary source of cash flows for
2003. As of December 31, 2005, the Company did not have any external debt
financing, off balance sheet financing arrangements or derivative instruments
linked to its stock.
Review
of
Company Only Cash Flows
The
Company’s liquidity on an unconsolidated basis is heavily dependent upon
dividends paid to the Company by the Banks. The Company requires adequate
liquidity to pay its expenses and pay stockholder dividends. In 2005, dividends
from the Banks amounted to $8,634,000 compared to $8,384,000 in 2004. 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 and United Bank, as national banks, generally may pay dividends,
without obtaining the express approval of the Office of the Comptroller of
the
Currency, in an amount up to its retained net profits for the preceding two
calendar years plus retain net profits up to the date of any dividend
declaration in the current calendar year. Retained net profits, as defined
by
the OCC, consists of net income less dividends declared during the period.
Boone
Bank, Randall-Story Bank and State Bank are also restricted under Iowa law
to
paying dividends only out of their undivided profits. United Bank is not
expected to generate sufficient earnings to pay any dividends in 2006.
Additionally, the payment of dividends by the Banks is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and the Banks generally are prohibited from paying
any dividends if, following payment thereof, the Bank would be undercapitalized.
The
Company has unconsolidated interest bearing deposits and marketable investment
securities totaling $34,290,000 that are presently available to provide
additional liquidity to the Banks.
Review
of
Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends
in Liquidity and Cash Flows Needs
No
material capital expenditures or material changes in the capital resource mix
are anticipated at this time. Commitments to extend credit totaled $77,099,000
as of December 31, 2005 compared to a total of $65,894,000 at the end of 2004.
The timing of these credit commitments varies with the underlying borrowers;
however, the Company has satisfactory liquidity to fund these obligations as
of
December 31, 2005. The primary cash flow uncertainty would be a sudden decline
in deposits causing the Banks to liquidate securities. Historically, the Banks
have maintained an adequate level of short term marketable investments to fund
the temporary declines in deposit balances. There are no known trends in
liquidity and cash flow needs as of December 31, 2005 that are a concern to
management.
Capital
Resources
The
Company’s total stockholders’ equity decreased to $109,227,000 at December 31,
2005, from $110,924,000 at December 31, 2004. At December 31, 2005 and 2004,
stockholders’ equity as a percentage of total assets was 13.3% and 13.2%,
respectively. Total equity decreased due to depreciation in the Banks’
investment portfolios and higher dividends declared which was partially offset
by the retention of earnings. The capital levels of the Company currently exceed
applicable regulatory guidelines as of December 31, 2005.
On
June
15, 2005, shareholders of the Company approved an amendment to the Restated
Articles of Incorporation increasing the Company’s authorized common stock from
6 million to 18 million shares and reducing the par value of such common stock
from $5.00 to $2.00 per share. The purpose of the amendment was to provide
a
sufficient number of shares of authorized common stock to accommodate a 3-for-1
stock split previously approved by the Board of Directors of the Company on
May
11, 2005. The stock split was effective July 15, 2005 for holders of record
as
of July 1, 2005. Share and per share data for all periods presented have been
restated to reflect the stock split.
The
Board
of Directors of the Company approved a stock repurchase program on November
9,
2005. The Company has a strong capital position and this program provides an
opportunity to repurchase Company stock on the open market when it is deemed
to
be favorably priced for repurchase. The program authorizes the repurchase of
up
to 90,000 shares during the calendar year 2006, or approximately 1% of 9,419,271
shares of common stock presently outstanding. The repurchases will be made
in
open market transactions at the discretion of management using Company cash.
The
timing and actual number of shares purchased will depend on a variety of factors
such as price, the Company’s liquidity position and other market conditions. The
program may be limited or discontinued at any time without notice. The Company
did not repurchase any shares in 2005.
Interest
Rate Risk
Interest
rate risk refers to the impact that a change in interest rates may have on
the
Company’s earnings and capital. Management’s objectives are to control interest
rate risk and to ensure predictable and consistent growth of earnings and
capital. Interest rate risk management focuses on fluctuations in net interest
income identified through computer simulations to evaluate volatility, varying
interest rate, spread and volume assumptions. The risk is quantified and
compared against tolerance levels.
The
Company uses a third-party computer software simulation modeling program to
measure its exposure to potential interest rate changes. For various assumed
hypothetical changes in market interest rates, numerous other assumptions are
made such as prepayment speeds on loans, the slope of the Treasury yield curve,
the rates and volumes of the Company’s deposits and the rates and volumes of the
Company’s loans. This analysis measures the estimated change in net interest
income in the event of hypothetical changes in interest rates.
Another
measure of interest rate sensitivity is the gap ratio. This ratio indicates
the
amount of interest-earning assets repricing within a given period in comparison
to the amount of interest-bearing liabilities repricing within the same period
of time. A gap ratio of 1.0 indicates a matched position, in which case the
effect on net interest income due to interest rate movements will be minimal.
A
gap ratio of less than 1.0 indicates that more liabilities than assets reprice
within the time period and a ratio greater than 1.0 indicates that more assets
reprice than liabilities.
The
simulation model process provides a dynamic assessment of interest rate
sensitivity, whereas a static interest rate gap table is compiled as of a point
in time. The model simulations differ from a traditional gap analysis, as a
traditional gap analysis does not reflect the multiple effects of interest
rate
movement on the entire range of assets and liabilities and ignores the future
impact of new business strategies.
Inflation
The
primary impact of inflation on the Company’s operations is to increase asset
yields, deposit costs and operating overhead. Unlike most industries, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact
on
a financial institution’s performance than they would on non-financial
companies. Although interest rates do not necessarily move in the same direction
or to the same extent as the price of goods and services, increases in inflation
generally have resulted in increased interest rates. The effects of inflation
can magnify the growth of assets and, if significant, require that equity
capital increase at a faster rate than would be otherwise
necessary.
Forward-Looking
Statements and Business Risks
The
discussion in the foregoing Management Discussion and Analysis and elsewhere
in
this Report contains forward-looking statements about the Company, its business
and its prospects. Forward-looking statements can be identified by the fact
that
they do not relate strictly to historical or current facts. They often include
use of the words “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”
or words of similar meaning, or future or conditional verbs such as “will”,
“would”, “should”, “could” or “may”. Forward-looking statements, by their
nature, are subject to risks and uncertainties. A number of factors, many of
which are beyond the Company's control, could cause actual conditions, events
or
results to differ significantly from those described in the forward-looking
statements. Such risks and uncertainties with respect to the Company include,
but are not limited to, those related to the economic conditions, particularly
in the areas in which the Company and the Banks operate, competitive products
and pricing, fiscal and monetary policies of the U.S. government, changes in
governmental regulations affecting financial institutions, (including regulatory
fees and capital requirements), changes in prevailing interest rates, credit
risk management and asset/liability management, the financial and securities
markets and the availability of and costs associated with sources of
liquidity.
These
factors may not constitute all factors that could cause actual results to differ
materially from those discussed in any forward-looking statement. The Company
operates in a continually changing business environment and new facts emerge
from time to time. It cannot predict such factors nor can it assess the impact,
if any, of such factors on its financial position or its results of operations.
Accordingly, forward-looking statements should not be relied upon as a predictor
of actual results. The Company disclaims any responsibility to update any
forward-looking statement provided in this document.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
Company’s market risk is comprised primarily of interest rate risk arising from
its core banking activities of making loans and taking deposits. Interest rate
risk is the risk that changes in market interest rates may adversely affect
the
Company’s net interest income. Management continually develops and applies
strategies to mitigate this risk. Management does not believe that the Company’s
primary market risk exposure and how that exposure was managed in 2005 changed
when compared to 2004.
Based
on
a simulation modeling analysis performed as of December 31, 2005, 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, 2006
|
$
Change
|
%
Change
|
||||||
|
(dollars
in thousands)
|
|||||||
|
+200
Basis Points
|
(3,042
|
)
|
(12.6
|
)%
|
|||
|
+100
Basis Points
|
(1,431
|
)
|
(6.0
|
)%
|
|||
|
-100
Basis Points
|
1,307
|
5.5
|
%
|
||||
|
-200
Basis Points
|
2,160
|
9.1
|
%
|
||||
As
shown
above, at December 31, 2005, the estimated effect of an immediate 200 basis
point increase in interest rates would decrease the Company’s net interest
income by 12.6% or approximately $3,042,000 in 2006. The estimated effect of
an
immediate 200 basis point decrease in rates would increase the Company’s net
interest income by 9.1% or approximately $2,160,000 in 2006. 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, 2005. 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
months
|
Three
months
to
one
year
|
One
to
five
years
|
Over
five
years
|
Cumulative
Total
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Interest
- earning assets
|
||||||||||||||||
|
Interest-bearing
deposits with banks
|
$
|
4,383
|
$
|
1,500
|
$
|
100
|
-
|
$
|
5,983
|
|||||||
|
Federal
funds sold
|
300
|
-
|
-
|
-
|
300
|
|||||||||||
|
Investments
*
|
3,429
|
29,707
|
177,380
|
122,994
|
333,510
|
|||||||||||
|
Loans
|
121,063
|
26,078
|
260,141
|
40,247
|
447,529
|
|||||||||||
|
Loans
held for sale
|
981
|
981
|
||||||||||||||
|
Total
interest - earning assets
|
$
|
130,156
|
$
|
57,285
|
$
|
437,621
|
$
|
163,241
|
$
|
788,303
|
||||||
|
Interest
- bearing liabilities
|
||||||||||||||||
|
Interest
bearing demand deposits
|
$
|
151,681
|
-
|
-
|
-
|
$
|
151,681
|
|||||||||
|
Money
market and savings deposits
|
160,998
|
-
|
-
|
-
|
160,998
|
|||||||||||
|
Time
certificates < $100,000
|
25,552
|
66,550
|
88,364
|
-
|
180,466
|
|||||||||||
|
Time
certificates > $100,000
|
25,933
|
47,279
|
27,830
|
-
|
101,042
|
|||||||||||
|
Other
borrowed funds
|
35,521
|
-
|
-
|
-
|
35,521
|
|||||||||||
|
Total
interest - bearing liabilities
|
$
|
399,685
|
$
|
113,829
|
$
|
116,194
|
$
|
0
|
$
|
629,708
|
||||||
|
Interest
sensitivity gap
|
($269,529
|
)
|
($56,544
|
)
|
$
|
321,427
|
$
|
163,241
|
$
|
158,595
|
||||||
|
Cumulative
interest sensitivity gap
|
($269,529
|
)
|
($326,073
|
)
|
($4,646
|
)
|
$
|
158,595
|
$
|
158,595
|
||||||
|
Cumulative
interest sensitivity gap as a percent of total assets
|
-32.89
|
%
|
-39.79
|
%
|
-0.57
|
%
|
19.35
|
%
|
||||||||
*Investments
with maturities over 5 years include the market value of equity securities
of
$30,766.
As
of
December 31, 2005, 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.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Ames National Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. Ames National
Corporation’s internal control system was designed to provide reasonable
assurance to the company’s management and board of directors regarding the
preparation and fair presentation of published financial statements. Because
of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Ames
National Corporation’s management assessed the effectiveness of the company’s
internal control over financial reporting as of December 31, 2005. In making
this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment we determined that, as of December 31, 2005,
the company’s internal control over financial reporting is effective based on
those criteria.
Our
management’s assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2005 has been audited by McGladrey
& Pullen, LLP, an independent registered public accounting firm, as stated
in their report which appears herein.
| /s/ Daniel L. Krieger | |
|
Daniel
L. Krieger, Chairman and President
|
|
|
(Principal
Executive Officer)
|
|
| /s/ John P. Nelson | |
|
John
P. Nelson, Vice President
|
|
|
(Principal
Financial Officer)
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
Ames
National Corporation and Subsidiaries
Ames,
Iowa
We
have
audited the accompanying consolidated balance sheets of Ames National
Corporation and Subsidiaries as of December 31, 2005 and 2004, and the
related
consolidated statements of income, stockholders’ equity and cash flows for each
of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion of these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Ames National Corporation
and Subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period
ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Ames National Corporation
and subsidiaries’ internal control over financial reporting as of December 31,
2005, based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO),
and our report dated January 20, 2006 expressed an unqualified
opinion.
/s/
McGladrey & Pullen, LLP.
Des
Moines, Iowa
January
20, 2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Ames
National Corporation and Subsidiaries
Ames,
Iowa
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting that Ames National
Corporation maintained effective internal control over financial reporting
as of
December 31, 2005, based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Ames National Corporation’s management is responsible for maintaining effective
internal control over the financial reporting and for its assessment of
the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
the financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control,
and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for
our
opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Ames National Corporation maintained
effective internal control over financial reporting as of December 31,
2005 is
fairly stated, in all material respects, based on criteria established
in
Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also in our opinion, Ames National Corporation maintained, in all material
respects, effective internal control over financial reporting as of December
31,
2005, based on criteria established in Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Ames National Corporation
as of December 31, 2005 and 2004, and the related statements of income,
stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2005, and our report dated January 20, 2006,
expressed
an unqualified opinion.
/s/
McGladrey & Pullen, LLP.
Des
Moines, Iowa
January
20, 2006
CONSOLIDATED
BALANCE SHEETS
December
31, 2005 and 2004
|
ASSETS
|
2005
|
2004
|
|||||
|
Cash
and due from banks (Note 2)
|
$
|
18,092,139
|
$
|
18,759,086
|
|||
|
Federal
funds sold
|
300,000
|
19,865,000
|
|||||
|
Interest
bearing deposits in financial institutions
|
5,983,542
|
9,575,174
|
|||||
|
Securities
available-for-sale (Note 3 and 7)
|
333,510,152
|
363,459,462
|
|||||
|
Loans
receivable, net (Note 4 and 7)
|
440,317,685
|
411,638,565
|
|||||
|
Loans
held for sale
|
981,280
|
234,469
|
|||||
|
Bank
premises and equipment, net (Note 5)
|
11,030,840
|
8,790,636
|
|||||
|
Accrued
income receivable
|
6,633,795
|
6,262,424
|
|||||
|
Deferred
income taxes (Note 9)
|
343,989
|
-
|
|||||
|
Other
assets
|
2,190,652
|
1,167,971
|
|||||
|
Total
assets
|
$
|
819,384,074
|
$
|
839,752,787
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
LIABILITIES
|
|||||||
|
Deposits
(Note 6)
|
|||||||
|
Demand,
noninterest bearing
|
$
|
74,155,477
|
$
|
71,666,385
|
|||
|
NOW
accounts
|
151,680,984
|
172,313,429
|
|||||
|
Savings
and money market
|
160,998,014
|
174,358,165
|
|||||
|
Time,
$100,000 and over
|
101,042,024
|
69,063,977
|
|||||
|
Other
time
|
180,465,836
|
170,773,883
|
|||||
|
Total
deposits
|
668,342,335
|
658,175,839
|
|||||
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
34,659,983
|
64,072,475
|
|||||
|
Other
short-term borrowings (Note 7)
|
2,861,130
|
-
|
|||||
|
Dividend
payable
|
2,354,818
|
1,537,162
|
|||||
|
Deferred
income taxes (Note 9)
|
-
|
2,334,670
|
|||||
|
Accrued
expenses and other liabilities
|
1,938,507
|
2,708,701
|
|||||
|
Total
liabilities
|
710,156,773
|
728,828,847
|
|||||
|
COMMITMENTS
AND CONTINGENCIES (Note 10)
|
|||||||
|
STOCKHOLDERS'
EQUITY (Note 11)
|
|||||||
|
Common
stock, $2 par value, authorized 18,000,000 shares; 9,419,271 issued
and
outstanding at December 31, 2005 9,459,690 and 9,411,198 shares
issued and
outstanding 2004
|
18,838,542
|
18,919,380
|
|||||
|
Additional
paid-in capital
|
22,383,375
|
22,225,516
|
|||||
|
Retained
earnings
|
64,713,530
|
63,200,352
|
|||||
|
Treasury
stock, at cost; 48,492 shares at December 31, 2004
|
-
|
(889,020
|
)
|
||||
|
Accumulated
other comprehensive income, net unrealized gain on securities
available-for-sale
|
3,291,854
|
7,467,712
|
|||||
|
Total
stockholders' equity
|
109,227,301
|
110,923,940
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
819,384,074
|
$
|
839,752,787
|
|||
See
Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF INCOME
Years
Ended December 31, 2005, 2004 and 2003
|
|
2005
|
2004
|
2003
|
|||||||
|
Interest
and dividend income:
|
||||||||||
|
Loans,
including fees
|
$
|
26,979,358
|
$
|
22,872,764
|
$
|
22,197,335
|
||||
|
Securities:
|
||||||||||
|
Taxable
|
8,558,156
|
8,536,759
|
7,510,671
|
|||||||
|
Tax-exempt
|
4,190,268
|
4,274,033
|
3,604,641
|
|||||||
|
Federal
funds sold
|
130,182
|
159,438
|
628,203
|
|||||||
|
Dividends
|
1,447,663
|
1,510,665
|
1,372,890
|
|||||||
|
41,305,627
|
37,353,659
|
35,313,740
|
||||||||
|
Interest
expense:
|
||||||||||
|
Deposits
|
14,380,214
|
9,942,250
|
10,045,178
|
|||||||
|
Other
borrowed funds
|
1,552,894
|
621,077
|
293,604
|
|||||||
|
15,933,108
|
10,563,327
|
10,338,782
|
||||||||
|
Net
interest income
|
25,372,519
|
26,790,332
|
24,974,958
|
|||||||
|
Provision
for loan losses (Note 4)
|
331,282
|
479,355
|
645,447
|
|||||||
|
Net
interest income after provision for loan losses
|
25,041,237
|
26,310,977
|
24,329,511
|
|||||||
|
Noninterest
income:
|
||||||||||
|
Trust
department income
|
1,375,308
|
1,185,681
|
1,225,099
|
|||||||
|
Service
fees
|
1,796,503
|
1,813,795
|
1,513,964
|
|||||||
|
Securities
gains, net (Note 3)
|
795,780
|
324,030
|
1,395,320
|
|||||||
|
Gain
on sales of loans held for sale
|
606,277
|
610,077
|
1,155,311
|
|||||||
|
Merchant
and ATM fees
|
570,914
|
534,897
|
513,832
|
|||||||
|
Other
|
468,410
|
800,835
|
631,949
|
|||||||
|
Total
noninterest income
|
5,613,192
|
5,269,315
|
6,435,475
|
|||||||
|
Noninterest
expense:
|
||||||||||
|
Salaries
and employee benefits (Note 8)
|
9,208,902
|
9,019,139
|
9,044,896
|
|||||||
|
Data
processing
|
2,126,040
|
2,241,441
|
2,188,488
|
|||||||
|
Occupancy
expenses
|
1,148,738
|
1,048,323
|
1,088,438
|
|||||||
|
Other
operating expenses
|
2,726,222
|
2,626,451
|
2,497,692
|
|||||||
|
Total
noninterest expense
|
15,209,902
|
14,935,354
|
14,819,514
|
|||||||
|
Income
before income taxes
|
15,444,527
|
16,644,938
|
15,945,472
|
|||||||
|
Provision
for income taxes (Note 9)
|
3,835,992
|
4,255,392
|
4,320,787
|
|||||||
|
Net
income
|
$
|
11,608,535
|
$
|
12,389,546
|
$
|
11,624,685
|
||||
|
Basic
earnings per share (Note 1)
|
$
|
1.23
|
$
|
1.32
|
$
|
1.24
|
||||
See
Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2005, 2004 and 2003
|
Comprehensive
Income
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
Stockholders'
Equity
|
||||||||||||||||
|
Balance,
December 31, 2002
|
$
|
18,919,380
|
$
|
22,200,784
|
$
|
53,917,544
|
$
|
(1,333,640
|
)
|
$
|
7,818,788
|
$
|
101,522,856
|
|||||||||
|
Comprehensive
income:
|
|
|
|
|
|
|
||||||||||||||||
|
Net
income
|
$
|
11,624,685
|
-
|
-
|
11,624,685
|
-
|
-
|
11,624,685
|
||||||||||||||
|
Other
comprehensive income, unrealized gains on securities ,net of
reclassification adjustment, net of tax (Note 3)
|
1,097,153
|
-
|
-
|
-
|
-
|
1,097,153
|
1,097,153
|
|||||||||||||||
|
Total
comprehensive income
|
$
|
12,721,838
|
||||||||||||||||||||
|
Cash
dividends declared, $0.76 per share
|
-
|
-
|
(7,141,569
|
)
|
-
|
-
|
(7,141,569
|
)
|
||||||||||||||
|
Sale
of 12,213 shares of treasury stock
|
-
|
(2,035
|
)
|
-
|
223,905
|
-
|
221,870
|
|||||||||||||||
|
Balance,
December 31, 2003
|
$
|
18,919,380
|
$
|
22,198,749
|
$
|
58,400,660
|
$
|
(1,109,735
|
)
|
$
|
8,915,941
|
$
|
107,324,995
|
|||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
$
|
12,389,546
|
-
|
-
|
12,389,546
|
-
|
-
|
12,389,546
|
||||||||||||||
|
Other
comprehensive income, unrealized (losses) on securities, net of
reclassification adjustment, net of tax benefit (Note 3)
|
(1,448,229
|
)
|
-
|
-
|
-
|
-
|
(1,448,229
|
)
|
(1,448,229
|
)
|
||||||||||||
|
Total
comprehensive income
|
$
|
10,941,317
|
||||||||||||||||||||
|
Cash
dividends declared, $0.81 per share
|
-
|
-
|
(7,589,854
|
)
|
-
|
-
|
(7,589,854
|
)
|
||||||||||||||
|
Sale
of 12,039 shares of treasury stock
|
-
|
26,767
|
-
|
220,715
|
-
|
247,482
|
||||||||||||||||
|
Balance,
December 31, 2004
|
$
|
18,919,380
|
$
|
22,225,516
|
$
|
63,200,352
|
$
|
(889,020
|
)
|
$
|
7,467,712
|
$
|
110,923,940
|
|||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
$
|
11,608,535
|
-
|
-
|
11,608,535
|
-
|
-
|
11,608,535
|
||||||||||||||
|
Other
comprehensive income, unrealized (losses) on securities, net of
reclassification adjustment, net of tax benefit (Note 3)
|
(4,175,858
|
)
|
-
|
-
|
-
|
-
|
(4,175,858
|
)
|
(4,175,858
|
)
|
||||||||||||
|
Total
comprehensive income
|
$
|
7,432,677
|
||||||||||||||||||||
|
Cash
dividends declared, $1.00 per share
|
-
|
-
|
(9,417,253
|
)
|
-
|
-
|
(9,417,253
|
)
|
||||||||||||||
|
Retirement
of treasury stock
|
(96,984
|
)
|
(113,932
|
)
|
(678,104
|
)
|
889,020
|
-
|
||||||||||||||
|
Sale
of 8,073 shares of common stock
|
16,146
|
271,791
|
-
|
-
|
-
|
287,937
|
||||||||||||||||
|
Balance,
December 31, 2005
|
$
|
18,838,542
|
$
|
22,383,375
|
$
|
64,713,530
|
$
|
-
|
$
|
3,291,854
|
$
|
109,227,301
|
||||||||||
See
Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2005, 2004 and 2003
|
|
2005
|
2004
|
2003
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||
|
Net
income
|
$
|
11,608,535
|
$
|
12,389,546
|
$
|
11,624,685
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Provision
for loan losses
|
331,282
|
479,355
|
645,447
|
|||||||
|
Amortization
and accretion
|
478,244
|
683,012
|
563,612
|
|||||||
|
Depreciation
|
915,213
|
951,477
|
1,030,377
|
|||||||
|
Provision
for deferred taxes
|
(226,170
|
)
|
(53,448
|
)
|
(284,751
|
)
|
||||
|
Securities
gains, net
|
(795,778
|
)
|
(324,030
|
)
|
(1,395,320
|
)
|
||||
|
Change
in assets and liabilities:
|
||||||||||
|
(Increase)
decrease in loans held for sale
|
(675,561
|
)
|
624,670
|
1,854,307
|
||||||
|
(Increase)
decrease in accrued income receivable
|
(371,371
|
)
|
(420,177
|
)
|
6,770
|
|||||
|
(Increase)
decrease in other assets
|
(1,022,681
|
)
|
(835,415
|
)
|
250,293
|
|||||
|
Increase
(decrease) in accrued expenses and other liabilities
|
(770,194
|
)
|
(325,969
|
)
|
532,718
|
|||||
|
Net
cash provided by operating activities
|
9,471,519
|
13,169,021
|
14,828,138
|
|||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||
|
Purchase
of securities available-for-sale
|
(59,049,297
|
)
|
(163,349,539
|
)
|
(194,136,066
|
)
|
||||
|
Proceeds
from sale of securities available-for-sale
|
24,937,433
|
5,045,102
|
9,299,986
|
|||||||
|
Proceeds
from maturities and calls of securities available-for-sale
|
57,750,361
|
115,303,131
|
108,868,412
|
|||||||
|
Net
(increase) decrease in interest bearing deposits in financial
institutions
|
3,591,632
|
(3,211,636
|
)
|
(5,363,538
|
)
|
|||||
|
Net
decrease in federal funds sold
|
19,565,000
|
515,000
|
12,120,000
|
|||||||
|
Net
(increase) in loans
|
(29,081,652
|
)
|
(56,584,801
|
)
|
(26,585,515
|
)
|
||||
|
Purchase
of bank premises and equipment
|
(3,155,417
|
)
|
(1,364,306
|
)
|
(681,787
|
)
|
||||
|
Net
cash provided (used in) investing activities
|
14,558,060
|
(103,647,049
|
)
|
(96,478,508
|
)
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||
|
Increase
in deposits
|
10,166,496
|
38,627,312
|
68,926,148
|
|||||||
|
Increase
(decrease) in federal funds purchased and securities sold under
agreements
to repurchase
|
(29,412,492
|
)
|
45,874,072
|
(127,171
|
)
|
|||||
|
Proceeds
from other borrowing, net
|
2,861,130
|
-
|
-
|
|||||||
|
Dividends
paid
|
(8,599,597
|
)
|
(7,493,896
|
)
|
(7,077,117
|
)
|
||||
|
Proceeds
from issuance of stock
|
287,937
|
247,482
|
221,870
|
|||||||
|
Net
cash (used in) provided by financing activities
|
(24,696,526
|
)
|
77,254,970
|
61,943,730
|
||||||
|
Net
decrease in cash and cash equivalents
|
(666,947
|
)
|
(13,223,058
|
)
|
(19,706,640
|
)
|
||||
|
CASH
AND DUE FROM BANKS
|
||||||||||
|
Beginning
|
18,759,086
|
31,982,144
|
51,688,784
|
|||||||
|
Ending
|
$
|
18,092,139
|
$
|
18,759,086
|
$
|
31,982,144
|
||||
(Continued)
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
Years
Ended December 31, 2005, 2004 and 2003
|
|
2005
|
2004
|
2003
|
|||||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||||
|
Cash
payments for:
|
||||||||||
|
Interest
|
$
|
15,154,109
|
$
|
10,623,125
|
$
|
10,504,715
|
||||
|
Income
taxes
|
3,979,665
|
4,516,823
|
4,553,669
|
|||||||
See
Notes
to Consolidated Financial Statements.
Notes
to
Consolidated Financial Statements
|
Note
1.
|
Summary
of Significant Accounting
Policies
|
Description
of business:
Ames
National Corporation and subsidiaries (the Company) operates in the commercial
banking industry through its subsidiaries in Ames, Boone, Story City, Nevada
and
Marshalltown, Iowa. Loan and deposit customers are located primarily in Story,
Boone, Hamilton and Marshall Counties and adjacent counties in
Iowa.
Segment
information:
The
Company uses the “management approach” for reporting information about segments
in annual and interim financial statements. The management approach is based
on
the way the chief operating decision-maker organizes segments within a company
for making operating decisions and assessing performance. Based on the
“management approach” model, the Company has determined that its business is
comprised of one operating segment: banking. The banking segment generates
revenues through personal, business, agricultural and commercial lending,
management of the investment securities portfolio, providing deposit account
services and providing trust services.
Consolidation:
The
consolidated financial statements include the accounts of Ames National
Corporation (the Parent Company) and its wholly-owned subsidiaries, First
National Bank, Ames, Iowa; State Bank & Trust Co., Nevada, Iowa; Boone Bank
& Trust Co., Boone, Iowa; Randall-Story State Bank, Story City, Iowa; and
United Bank & Trust NA, Marshalltown, Iowa (collectively, the Banks). All
significant intercompany transactions and balances have been eliminated in
consolidation.
Use
of
estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
in
the near term relate to the determination of the allowance for loan losses
and
fair value of financial instruments.
Cash
and cash equivalents:
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand
and amounts due from banks. The Company reports net cash flows for customer
loan
transactions, deposit transactions and short-term borrowings with maturities
of
90 days or less.
Securities
available-for-sale:
The
Company classifies all securities as available for sale. Available for sale
securities are those the Company may decide to sell if needed for liquidity,
asset-liability management or other reasons. Available for sale securities
are
reported at fair value, with net unrealized gains and losses reported as other
comprehensive income or loss and as a separate component of shareholders equity,
net of tax.
Gains
and
losses on the sale of securities are determined using the specific
identification method based on amortized cost and are reflected in results
of
operation at the time of sale. Interest and dividend income, adjusted by
amortization of purchase premium or discount over the estimated life of the
security using the level yield method, is included in income as
earned.
Declines
in the fair value of available for sale securities below their cost that are
deemed to be other-than-temporary are reflected in earnings as realized losses.
In estimating other-than-temporary impairment losses, management considers
(1)
the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and
(3)
the intent and ability of the Company to retain its investment in the issuer
for
a period of time sufficient to allow for any anticipated recovery in fair
value.
Loans
held for sale:
Loans
held for sale are the loans the Banks have the intent to sell in the foreseeable
future. They are carried at the lower of aggregate cost or market value. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income. Gains and losses on sales of loans are recognized at
settlement dates and are determined by the difference between the sale proceeds
and the carrying value of the loans.
Loans:
Loans
are stated at the principal amount outstanding, net of deferred loan fees and
the allowance for loan losses. Interest on loans is credited to income as earned
based on the principal amount outstanding. The Banks’ policy is to discontinue
the accrual of interest income on any loan 90 days or more past due unless
the
loans are well collateralized and in the process of collection. Income on
nonaccrual loans is subsequently recognized only to the extent that cash
payments are received. Nonaccrual loans are returned to an accrual status when,
in the opinion of management, the financial position of the borrower indicates
there is no longer any reasonable doubt as to timely payment of principal or
interest.
Allowance
for loan losses:
The
allowance for loan losses is maintained at a level deemed appropriate by
management to provide for known and inherent risks in the loan portfolio. The
allowance is based upon a continuing review of past loan loss experience,
current economic conditions, the underlying collateral value securing the loans
and other adverse situations that may affect the borrower’s ability to repay.
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.
The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified either as doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value
or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based
on
historical loss experience adjusted for qualitative factors.
Smaller
balance homogeneous loans are evaluated for impairment in total. Such loans
include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile loans. Commercial
and
agricultural loans and mortgage loans secured by other properties are evaluated
individually for impairment when analysis of borrower operating results and
financial condition indicates that underlying cash flows of the borrower’s
business are not adequate to meet its debt service requirements, the loan is
evaluated for impairment. Often this is associated with a delay or shortfall
in
payments of 90 days or more. Nonaccrual loans are often also considered
impaired. Impaired loans, or portions thereof, are charged off when deemed
uncollectible.
Premises
and equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed using straight-line and accelerated methods
over the estimated useful lives of the respective assets. Depreciable lives
range from 3 to 7 years for equipment and 15 to 39 years for
premises.
Trust
department assets:
Property held for customers in fiduciary or agency capacities is not included
in
the accompanying consolidated balance sheets, as such items are not assets
of
the Banks.
Income
taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
The
Company files a consolidated federal income tax return, with each entity
computing its taxes on a separate company basis. For state tax purposes, the
Banks file franchise tax returns, while the Parent Company files a corporate
income tax return.
Comprehensive
income:
Accounting principles generally require that recognized revenue, expenses,
gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. Gains and losses on available-for-sale securities are
reclassified to net income as the gains or losses are realized upon sale of
the
securities. Other-than-temporary impairment charges are reclassified to net
income at the time of the charge.
Financial
Instruments with off-balance-sheet risk:
The
Company, in the normal course of business, makes commitments to make loans
which
are not reflected in the consolidated financial statements. A summary of these
commitments is disclosed in Note 8.
Transfers
of financial assets:
Transfers of financial assets are accounted for as sales, when control over
the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred costs, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Fair
value of financial instruments:
The
following methods and assumptions were used by the Company in estimating fair
value disclosures:
Cash
and due from banks, federal funds sold and interest-bearing deposits in
financial institutions:
The
recorded amount of these assets approximates fair value.
Securities
available-for-sale:
Fair
values of securities available-for-sale are based on bid prices published in
financial newspapers, bid quotations received from securities dealers, or quoted
market prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
Loans
held for sale:
The
fair value of loans held for sale is based on prevailing market
prices.
Loans:
The
fair value of loans is calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates, which reflect
the
credit and interest rate risk inherent in the loan. The estimate of maturity
is
based on the historical experience, with repayments for each loan classification
modified, as required, by an estimate of the effect of current economic and
lending conditions. The effect of nonperforming loans is considered in assessing
the credit risk inherent in the fair value estimate.
Deposit
liabilities:
Fair
values of deposits with no stated maturity, such as noninterest-bearing demand
deposits, savings and NOW accounts, and money market accounts, are equal to
the
amount payable on demand as of the respective balance sheet date. Fair values
of
certificates of deposit are based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The fair value estimates do not
include the benefit that results from the low-cost funding provided by the
deposit liabilities compared to the cost of borrowing funds in the
market.
Other
borrowings:
The
carrying amounts of federal funds purchased and securities sold under agreements
to repurchase approximate fair value because of the short-term nature of the
instruments.
Accrued
income receivable and accrued interest payable:
The
carrying amounts of accrued income receivable and interest payable approximate
fair value.
Commitments
to extend credit and standby letters of credit:
The
fair
values of commitments to extend credit and stand by letters of credit are based
on fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreement and credit worthiness of the
counterparties. The carry value and fair value of the commitments to extend
credit and standby letters of credit are not considered
significant.
Limitations:
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. Because no market
exists for a significant portion of the Company’s financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Earnings
per share:
Basic
earnings per share computations for the years ended December 31, 2005, 2004
and
2003, 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.
Stock
Split:
On June
15, 2005, shareholders of the Company approved an amendment to the Restated
Articles increasing the Company’s authorized common stock from 6 million to 18
million shares and reducing the par value of such common stock from $5.00 to
$2.00 per share. The purpose of the amendment was to provide a sufficient number
of shares of authorized common stock to accommodate a 3-for-1 stock split
previously approved by the Board of Directors of the Company on May 11, 2005.
The stock split was effective July 15, 2005 for holders of record as of July
1,
2005. Share and per share data for all periods presented have been restated
to
reflect the stock split.
The
following information was used in the computation of basic earnings per share
for the years ended December 31, 2005, 2004, and 2003.
|
2005
|
2004
|
2003
|
||||||||
|
Basic
earning per share computation:
|
||||||||||
|
Net
income
|
$
|
11,608,535
|
$
|
12,389,546
|
$
|
11,624,685
|
||||
|
Weighted
average common shares outstanding
|
9,415,599
|
9,405,705
|
9,393,672
|
|||||||
|
Basic
EPS
|
$
|
1.23
|
$
|
1.32
|
$
|
1.24
|
||||
New
Accounting Pronouncements
The
Financial Accounting Standards Board has issued Statement No. 154, Accounting
Changes and Error Corrections, a replacement of Accounting Principles Board
Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary
changes in accounting principles, and modifies the requirements for the
accounting for and reporting of a change in accounting principle. FASB believes
that Statement 154 improves financial reporting because its requirements enhance
the consistency of financial information between periods. The statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005 though earlier application is permitted.
The
adoption of these standards will only impact the Company’s financial statements
in the event there is a voluntary change in accounting principles that is not
anticipated as of December 31, 2005.
|
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
$5,086,000 and $7,562,000 at December 31, 2005 and 2004,
respectively.
|
Note
3.
|
Debt
and Equity
Securities
|
The
amortized cost of securities available for sale and their approximate fair
values at December 31, 2005 and 2004, are summarized below:
|
Amortized
Cost
|
Gros
Unrealized
Gains
|
Gross
Unrealized
(Losses)
|
Estimated
Fair
Value
|
||||||||||
|
2005:
|
|||||||||||||
|
U.S.
treasury
|
$
|
495,748
|
$
|
20,600
|
$
|
-
|
$
|
516,348
|
|||||
|
U.S.
government agencies
|
136,815,035
|
251,357
|
(2,778,021
|
)
|
134,288,371
|
||||||||
|
State
and political subdivisions
|
108,432,912
|
1,121,566
|
(1,181,983
|
)
|
108,372,495
|
||||||||
|
Corporate
bonds
|
59,523,220
|
936,527
|
(892,575
|
)
|
59,567,172
|
||||||||
|
Equity
securities
|
23,018,072
|
7,869,194
|
(121,500
|
)
|
30,765,766
|
||||||||
|
$
|
328,284,987
|
$
|
10,199,244
|
$
|
(4,974,079
|
)
|
$
|
333,510,152
|
|||||
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
(Losses)
|
|
Estimated
Fair
Value
|
|||||||
|
2004:
|
|||||||||||||
|
U.S.
treasury
|
$
|
495,040
|
$
|
35,859
|
$
|
-
|
$
|
530,899
|
|||||
|
U.S.
government agencies
|
138,024,045
|
627,981
|
(1,017,948
|
)
|
137,634,078
|
||||||||
|
State
and political subdivisions
|
112,004,478
|
2,391,038
|
(577,902
|
)
|
113,817,614
|
||||||||
|
Corporate
bonds
|
75,510,784
|
2,471,332
|
(408,929
|
)
|
77,573,187
|
||||||||
|
Equity
securities
|
25,571,604
|
8,332,080
|
-
|
33,903,684
|
|||||||||
|
$
|
351,605,951
|
$
|
13,858,290
|
$
|
(2,004,779
|
)
|
$
|
363,459,462
|
|||||
The
amortized cost and estimated fair value of debt securities available-for-sale
as
of December 31, 2004, are shown below by contractual maturity. Expected
maturities will differ from contractual maturities because issuers may have
the
right to call or prepay obligations with or without call or prepayment
penalties.
|
Amortized
Cost
|
Estimated
Fair
Value
|
||||||
|
Due
in one year or less
|
$
|
33,385,260
|
$
|
33,136,380
|
|||
|
Due
after one year through five years
|
179,946,679
|
177,380,246
|
|||||
|
Due
after five years through ten years
|
69,234,539
|
69,762,559
|
|||||
|
Due
after ten years
|
22,700,437
|
22,465,201
|
|||||
|
305,266,915
|
302,744,386
|
||||||
|
Equity
securities
|
23,018,072
|
30,765,766
|
|||||
|
$
|
328,284,987
|
$
|
333,510,152
|
||||
At
December 31, 2005 and 2004, securities with a carrying value of approximately
$152,169,000 and $173,765,000, respectively, were pledged as collateral on
public deposits, securities sold under agreements to repurchase and for other
purposes as required or permitted by law. Securities sold under agreements
to
repurchase are held by the Company’s safekeeping agent.
Gross
realized gains and gross realized losses on sales of available-for-sale
securities were $1,287,962 and $236,182 respectively, in 2005, $443,974 and
$119,944 respectively, in 2004, and $1,395,320 and none, respectively, in
2003.
Other-than-temporary
impairments recognized as a component of income were $256,000 in 2005 with
no
impairments recognized in 2004 and 2003.
The
components of other comprehensive income (loss) - net unrealized gains (losses)
on securities available-for-sale for the years ended December 31, 2005, 2004,
and 2003, were as follows:
|
2005
|
2004
|
2003
|
||||||||
|
Unrealized
holding gains (losses) arising during the period
|
$
|
(5,832,566
|
)
|
$
|
(1,974,746
|
)
|
$
|
3,136,832
|
||
|
Reclassification
adjustment for net gains realized in net
income
|
(795,780
|
)
|
(324,030
|
)
|
(1,395,320
|
)
|
||||
|
Net
unrealized gains (losses) before tax
effect
|
(6,628,346
|
)
|
(2,298,776
|
)
|
1,741,512
|
|||||
|
Tax
effect
|
2,452,488
|
850,547
|
(644,359
|
)
|
||||||
|
Other
comprehensive income
|
||||||||||
|
Net
unrealized gains (losses) on
securities
|
$
|
(4,175,858
|
)
|
$
|
(1,448,229
|
)
|
$
|
1,097,153
|
||
Unrealized
losses and fair value, aggregated by investment category and length of time
that
individual securities have been in a continuous unrealized loss position, as
of
December 31, 2005 and 2004 are summarized as follows:
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||
|
2005:
|
|||||||||||||||||||
|
Securities
available for sale:
|
|
|
|
|
|||||||||||||||
|
U.S.
government agencies
|
$
|
50,630,566
|
|
$
|
(845,216
|
)
|
$
|
75,540,778
|
$
|
(1,932,805
|
)
|
$
|
126,171,344
|
$
|
(2,778,021
|
)
|
|||
|
State
and political subsidivisions
|
36,928,098
|
(585,753
|
)
|
20,290,028
|
(596,230
|
)
|
57,218,126
|
(1,188,509
|
)
|
||||||||||
|
Corporate
obligations
|
6,025,437
|
(196,195
|
)
|
26,460,433
|
(696,380
|
)
|
32,485,870
|
(892,575
|
)
|
||||||||||
|
Equity
securities
|
1,956,000
|
(44,000
|
)
|
1,332,500
|
(77,500
|
)
|
3,288,500
|
(121,500
|
)
|
||||||||||
|
$
|
95,540,101
|
$
|
(1,671,164
|
)
|
$
|
123,623,739
|
$
|
(3,302,915
|
)
|
$
|
219,163,840
|
$
|
(4,980,605
|
)
|
|||||
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||
|
2004:
|
|||||||||||||||||||
|
Securities
available for sale:
|
|
|
|
|
|
||||||||||||||
|
U.S.
government agencies
|
$
|
81,532,939
|
$
|
(775,150
|
)
|
$
|
9,849,426
|
$
|
(242,798
|
)
|
$
|
91,382,365
|
$
|
(1,017,948
|
)
|
||||
|
State
and political subsidivisions
|
24,844,595
|
(296,117
|
)
|
10,701,463
|
(281,785
|
)
|
35,546,058
|
(577,902
|
)
|
||||||||||
|
Corporate
obligations
|
36,136,660
|
(408,929
|
)
|
-
|
-
|
36,136,660
|
(408,929
|
)
|
|||||||||||
|
$
|
142,514,194
|
$
|
(1,480,196
|
)
|
$
|
20,550,889
|
$
|
(524,583
|
)
|
$
|
163,065,083
|
$
|
(2,004,779
|
)
|
|||||
For
all
of the above investment securities, the unrealized losses are generally due
to
changes in interest rates or general market conditions, as such, are considered
to be temporary, by the Company.
|
Note
4.
|
Loans
Receivable
|
The
composition of loans receivable at December 31, 2005 and 2004 is as
follows:
|
2005
|
2004
|
||||||
|
Commercial
and agricultural
|
$
|
103,646,036
|
$
|
87,901,970
|
|||
|
Real
estate
|
310,542,833
|
306,272,605
|
|||||
|
Consumer
|
12,449,551
|
14,244,501
|
|||||
|
Other
|
20,890,051
|
10,339,393
|
|||||
|
447,528,471
|
418,758,469
|
||||||
|
Less:
|
|||||||
|
Allowance
for loan losses
|
(6,765,356
|
)
|
(6,475,530
|
)
|
|||
|
Deferred
loan fees
|
(445,430
|
)
|
(644,374
|
)
|
|||
|
$
|
440,317,685
|
$
|
411,638,565
|
||||
Changes
in the allowance for loan losses for the year ended December 31, 2005, 2004
and
2003 are as follows:
|
2005
|
2004
|
2003
|
||||||||
|
Balance,
beginning
|
$
|
6,475,530
|
$
|
6,050,989
|
$
|
5,757,694
|
||||
|
Provision
for loan losses
|
331,282
|
479,355
|
645,447
|
|||||||
|
Recoveries
of loans charged-off
|
105,400
|
174,703
|
111,926
|
|||||||
|
Loans
charged-off
|
(146,856
|
)
|
(229,517
|
)
|
(464,078
|
)
|
||||
|
Balance,
ending
|
$
|
6,765,356
|
$
|
6,475,530
|
$
|
6,050,989
|
||||
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, 2005 and 2004:
|
2005
|
2004
|
||||||
|
Balance,
beginning of year
|
$
|
28,655,993
|
$
|
10,991,284
|
|||
|
New
loans
|
13,201,498
|
17,173,833
|
|||||
|
Repayments
|
(13,140,392
|
)
|
(13,297,861
|
)
|
|||
|
Change
in status
|
(211,997
|
)
|
13,788,737
|
||||
|
Balance,
end of year
|
$
|
28,505,102
|
$
|
28,655,993
|
|||
At
December 31, 2005 and 2004, the Company had impaired loans of approximately
$689,000 and $1,977,000, respectively. The allowance for loan losses related
to
these impaired loans was approximately $55,000 and $158,000 at December 31,
2005
and 2004, respectively. The average balances of impaired loans for the years
ended December 31, 2005 and 2004 were $1,644,708 and $2,373,465, respectively.
For the years ended December 31, 2005, 2004, and 2003 interest income which
would have been recorded under the original terms of such loans was
approximately $41,000, $239,000, and $179,000 respectively, with $0, $211,000
and $177,000, respectively, recorded. Loans greater than 90 days past due and
still accruing interest were approximately $83,000 and $80,000 at December
31,
2005 and 2004, 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, 2005, there were no material commitments to lend additional funds
to customers whose loans were classified as impaired.
|
Note
5.
|
Bank
Premises and
Equipment
|
The
major
classes of bank premises and equipment and the total accumulated depreciation
as
of December 31, 2005 and 2004, are as follows:
|
2005
|
2004
|
||||||
|
Land
|
$
|
3,000,803
|
$
|
1,284,771
|
|||
|
Buildings
and improvements
|
10,734,396
|
9,889,939
|
|||||
|
Furniture
and equipment
|
6,378,610
|
6,041,317
|
|||||
|
20,113,809
|
17,216,027
|
||||||
|
Less
accumulated depreciation
|
9,082,969
|
8,425,391
|
|||||
|
$
|
11,030,840
|
$
|
8,790,636
|
||||
|
Note
6.
|
Deposits
|
At
December 31, 2005, the maturities of time deposits are as follows:
|
Years
ended December 31,
|
||||
|
2006
|
$
|
165,368,097
|
||
|
2007
|
74,360,848
|
|||
|
2008
|
27,453,029
|
|||
|
2009
|
6,643,282
|
|||
|
2010
|
7,682,604
|
|||
|
$
|
281,507,860
|
|||
Interest
expense on deposits is summarized as follows:
|
2005
|
2004
|
2003
|
||||||||
|
NOW
accounts
|
$
|
2,009,186
|
$
|
1,237,381
|
$
|
909,137
|
||||
|
Savings
and money market
|
3,745,885
|
1,972,211
|
1,849,238
|
|||||||
|
Time,
$100,000 and over
|
3,094,834
|
1,758,187
|
1,807,047
|
|||||||
|
Other
time
|
5,530,309
|
4,974,471
|
5,479,756
|
|||||||
|
$
|
14,380,214
|
$
|
9,942,250
|
$
|
10,045,178
|
|||||
|
Note
7.
|
Short-Term
Borrowings
|
Short-term
borrowings as of December 31, 2005 consisted of FHLB Advances, due in three
months or less, at an interest rate of 4.32%, and Treasury, Tax and Loan
option
notes. The FHLB advances are collateralized by certain 1-4 family loans and
the
option notes are secured by investment securities.
|
Note
8.
|
Employee
Benefit Plans
|
The
Company has a stock purchase plan with the objective of encouraging equity
interests by officers, employees, and directors of the Company and its
subsidiaries to provide additional incentive to improve banking performance
and
retain qualified individuals. The purchase price of the shares is the fair
market value of the stock based upon current market trading activity. The terms
of the plan provide for the issuance of up to 42,000 shares of common stock
per
year for a ten-year period commencing in 1999 and continuing through
2008.
The
Company has a qualified 401(k) profit-sharing plan. The Company matches employee
contributions up to a maximum of 2% of qualified compensation and also
contributes an amount equal to 5% of the participating employee’s compensation.
In addition, contributions can be made on a discretionary basis by the combined
Company on behalf of the employees. For the years ended December 31, 2005,
2004
and 2003, Company contributions to the merged plans were approximately $623,000,
$676,000, and $659,000, respectively. The plan covered substantially all
employees.
|
Note
9.
|
Income
Taxes
|
The
components of income tax expense for the year ended December 31, 2005, 2004
and
2003 are as follows:
|
2005
|
2004
|
2003
|
||||||||
|
Federal:
|
||||||||||
|
Current
|
$
|
3,282,266
|
$
|
3,493,176
|
$
|
3,752,585
|
||||
|
Deferred
|
(202,533
|
)
|
(48,519
|
)
|
(266,898
|
)
|
||||
|
3,079,733
|
3,444,657
|
3,485,687
|
||||||||
|
State:
|
||||||||||
|
Current
|
779,897
|
815,664
|
852,953
|
|||||||
|
Deferred
|
(23,638
|
)
|
(4,929
|
)
|
(17,853
|
)
|
||||
|
756,259
|
810,735
|
835,100
|
||||||||
|
Income
tax expense
|
$
|
3,835,992
|
$
|
4,255,392
|
$
|
4,320,787
|
||||
Total
income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to income before income taxes is a result of
the
following for the years ended December 31, 2005, 2004 and 2003:
|
2005
|
2004
|
2003
|
||||||||
|
Income
taxes at 35% federal tax rate
|
$
|
5,405,585
|
$
|
5,825,727
|
$
|
5,580,915
|
||||
|
Increase
(decrease) resulting from:
|
||||||||||
|
Tax-exempt
interest and dividends
|
(1,860,143
|
)
|
(1,870,264
|
)
|
(1,577,116
|
)
|
||||
|
State
taxes, net of federal tax benefit
|
460,694
|
522,929
|
548,897
|
|||||||
|
Other
|
(170,144
|
)
|
(223,000
|
)
|
(231,909
|
)
|
||||
|
Total
income tax expense
|
$
|
3,835,992
|
$
|
4,255,392
|
$
|
4,320,787
|
||||
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and deferred liabilities at December 31, 2005 and 2004,
are
as follows:
|
2005
|
2004
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Allowance
for loan losses
|
$
|
2,009,069
|
$
|
1,901,776
|
|||
|
Other
items
|
447,057
|
333,792
|
|||||
|
2,456,126
|
2,235,568
|
||||||
|
Deferred
tax liabilities:
|
|||||||
|
Net
unrealized gains on securities available for sale
|
(1,933,311
|
)
|
(4,385,799
|
)
|
|||
|
Other
|
(178,826
|
)
|
(184,439
|
)
|
|||
|
(2,112,137
|
)
|
(4,570,238
|
)
|
||||
|
Net
deferred tax assets (liabilities)
|
$
|
343,989
|
$
|
(2,334,670
|
)
|
||
At
December 31, 2005 and 2004, income taxes currently payable of approximately
$264,000 and $182,000, respectively, are included in accrued interest and other
liabilities.
|
Note
10.
|
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, 2005 and 2004 is as follows:
|
2005
|
2004
|
||||||
|
Commitments
to extend credit
|
$
|
77,099,000
|
$
|
65,894,000
|
|||
|
Standby
letters of credit
|
1,433,000
|
2,717,000
|
|||||
|
$
|
78,532,000
|
$
|
68,611,000
|
||||
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer’s creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension
of
credit, is based on management’s credit evaluation of the party.
Standby
letters of credit are conditional commitments issued by the Banks to guarantee
the performance of a customer to a third-party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies and is
required in instances which the Banks deem necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Banks would be required to fund the commitment. The maximum potential
amount of future payments the Banks could be required to make is represented
by
the contractual amount shown in the summary above. If the commitments were
funded, the Banks would be entitled to seek recovery from the customer. At
December 31, 2005 and 2004, no amounts have been recorded as liabilities for
the
Bank’s potential obligations under these guarantees.
In
the
normal course of business, the Company is involved in various legal proceedings.
In the opinion of management, any liability resulting from such proceedings
would not have a material adverse effect on the Company’s financial
statements.
Concentrations
of credit risk: The Banks originate real estate, consumer, and commercial loans,
primarily in Story, Boone, Hamilton and Marshall Counties, Iowa, and adjacent
counties. Although the Banks have diversified loan portfolios, a substantial
portion of their borrowers’ ability to repay loans is dependent upon economic
conditions in the Banks’ market areas.
|
Note
11.
|
Regulatory
Matters
|
The
Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -
and
possible additional discretionary -
actions
by regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company’s
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company’s capital amounts and
classification are also subject to regulatory accounting practices. The
Company’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and each subsidiary bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31,
2005 and 2004, that the Company and each subsidiary bank met all capital
adequacy requirements to which they are subject.
As
of
December 31, 2005, 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, 2005 and 2004 are
also presented in the table.
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||
|
As
of December 31, 2005:
|
|||||||||||||||||||
|
Total
capital (to risk-weighted assets):
|
|
|
|
|
|
||||||||||||||
|
Consolidated
|
$
|
112,700
|
18.9
|
%
|
$
|
47,680
|
8.0
|
%
|
|||||||||||
|
Boone
Bank & Trust
|
13,399
|
17.3
|
6,221
|
8.0
|
$
|
7,776
|
10.0
|
%
|
|||||||||||
|
First
National Bank
|
43,903
|
14.7
|
23,868
|
8.0
|
29,835
|
10.0
|
|||||||||||||
|
Randall-Story
State Bank
|
8,367
|
16.2
|
4,130
|
8.0
|
5,163
|
10.0
|
|||||||||||||
|
State
Bank & Trust
|
12,336
|
15.2
|
6,490
|
8.0
|
8,113
|
10.0
|
|||||||||||||
|
United
Bank & Trust
|
8,558
|
13.1
|
5,233
|
8.0
|
6,541
|
10.0
|
|||||||||||||
|
Tier
1 capital ( to risk-weighted assets):
|
|||||||||||||||||||
|
Consolidated
|
$
|
105,935
|
17.8
|
%
|
$
|
23,840
|
4.0
|
%
|
|||||||||||
|
Boone
Bank & Trust
|
12,441
|
16.0
|
3,111
|
4.0
|
$
|
4,666
|
6.0
|
%
|
|||||||||||
|
First
National Bank
|
40,352
|
13.5
|
11,934
|
4.0
|
17,901
|
6.0
|
|||||||||||||
|
Randall-Story
State Bank
|
7,721
|
15.0
|
2,065
|
4.0
|
3,098
|
6.0
|
|||||||||||||
|
State
Bank & Trust
|
11,428
|
14.1
|
3,245
|
4.0
|
4,868
|
6.0
|
|||||||||||||
|
United
Bank & Trust
|
7,740
|
11.8
|
2,617
|
4.0
|
3,925
|
6.0
|
|||||||||||||
|
Tier
1 capital ( to average-weighted assets):
|
|||||||||||||||||||
|
Consolidated
|
$
|
105,935
|
12.9
|
%
|
$
|
32,803
|
4.0
|
%
|
|||||||||||
|
Boone
Bank & Trust
|
12,441
|
11.4
|
4,374
|
4.0
|
$
|
5,467
|
5.0
|
%
|
|||||||||||
|
First
National Bank
|
40,352
|
9.8
|
16,406
|
4.0
|
20,508
|
5.0
|
|||||||||||||
|
Randall-Story
State Bank
|
7,721
|
11.0
|
2,810
|
4.0
|
3,513
|
5.0
|
|||||||||||||
|
State
Bank & Trust
|
11,428
|
9.8
|
4,643
|
4.0
|
5,803
|
5.0
|
|||||||||||||
|
United
Bank & Trust
|
7,740
|
8.2
|
3,778
|
4.0
|
4,722
|
5.0
|
|||||||||||||
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|||||||||||||||||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
As
of December 31, 2004:
|
|||||||||||||||||||
|
Total
capital (to risk-weighted assets):
|
|
|
|
|
|
||||||||||||||
|
Consolidated
|
$
|
109,931
|
18.6
|
%
|
$
|
47,274
|
8.0
|
%
|
|||||||||||
|
Boone
Bank & Trust
|
13,047
|
15.0
|
6,966
|
8.0
|
$
|
8,707
|
10.0
|
%
|
|||||||||||
|
First
National Bank
|
42,473
|
14.6
|
23,196
|
8.0
|
28,995
|
10.0
|
|||||||||||||
|
Randall-Story
State Bank
|
8,262
|
15.7
|
4,220
|
8.0
|
5,275
|
10.0
|
|||||||||||||
|
State
Bank & Trust
|
12,114
|
15.2
|
6,370
|
8.0
|
7,962
|
10.0
|
|||||||||||||
|
United
Bank & Trust
|
7,700
|
12.6
|
4,897
|
8.0
|
6,122
|
10.0
|
|||||||||||||
|
Tier
1 capital ( to risk-weighted assets):
|
|||||||||||||||||||
|
Consolidated
|
$
|
103,456
|
17.5
|
%
|
$
|
23,637
|
4.0
|
%
|
|||||||||||
|
Boone
Bank & Trust
|
12,092
|
13.9
|
3,483
|
4.0
|
$
|
5,224
|
6.0
|
%
|
|||||||||||
|
First
National Bank
|
39,119
|
13.5
|
11,598
|
4.0
|
17,397
|
6.0
|
|||||||||||||
|
Randall-Story
State Bank
|
7,602
|
14.4
|
2,110
|
4.0
|
3,165
|
6.0
|
|||||||||||||
|
State
Bank & Trust
|
11,227
|
14.1
|
3,185
|
4.0
|
4,777
|
6.0
|
|||||||||||||
|
United
Bank & Trust
|
7,065
|
11.5
|
2,449
|
4.0
|
3,673
|
6.0
|
|||||||||||||
|
Tier
1 capital ( to average-weighted assets):
|
|||||||||||||||||||
|
Consolidated
|
$
|
103,456
|
12.3
|
%
|
$
|
33,654
|
4.0
|
%
|
|||||||||||
|
Boone
Bank & Trust
|
12,092
|
10.6
|
4,580
|
4.0
|
$
|
5,726
|
5.0
|
%
|
|||||||||||
|
First
National Bank
|
39,119
|
9.3
|
16,911
|
4.0
|
21,139
|
5.0
|
|||||||||||||
|
Randall-Story
State Bank
|
7,602
|
10.5
|
2,892
|
4.0
|
3,614
|
5.0
|
|||||||||||||
|
State
Bank & Trust
|
11,227
|
9.4
|
4,794
|
4.0
|
5,992
|
5.0
|
|||||||||||||
|
United
Bank & Trust
|
7,065
|
8.2
|
3,458
|
4.0
|
4,322
|
5.0
|
|||||||||||||
|
Note
12.
|
Fair
Value of Financial
Instruments
|
The
estimated fair values of the Company’s financial instruments (as described in
Note 1) as of December 31, 2005 and 2004 were as follows:
|
2005
|
2004
|
||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and due from banks
|
$
|
18,092,139
|
$
|
18,092,139
|
$
|
18,759,086
|
$
|
18,759,086
|
|||||
|
Federal
funds sold
|
300,000
|
300,000
|
19,865,000
|
19,865,000
|
|||||||||
|
Interest-bearing
deposits
|
5,983,542
|
5,983,542
|
9,575,174
|
9,575,174
|
|||||||||
|
Securities
available-for-sale
|
333,510,152
|
333,510,152
|
363,459,462
|
363,459,462
|
|||||||||
|
Loans,
net
|
440,317,685
|
431,056,183
|
411,638,565
|
413,071,863
|
|||||||||
|
Loans
held for sale
|
981,280
|
981,280
|
234,469
|
234,469
|
|||||||||
|
Accrued
income receivable
|
6,633,795
|
6,633,795
|
6,262,424
|
6,262,424
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Deposits
|
$
|
668,342,335
|
$
|
667,871,250
|
$
|
658,175,839
|
$
|
659,865,147
|
|||||
|
Other
borrowings
|
37,521,113
|
37,521,113
|
64,072,475
|
64,072,475
|
|||||||||
|
Accrued
interest
|
2,081,020
|
2,081,020
|
1,302,021
|
1,302,021
|
|||||||||
|
Note
13.
|
Ames
National Corporation (Parent Company Only) Financial
Statements
|
Information
relative to the Parent Company’s balance sheets at December 31, 2005 and 2004,
and statements of income and cash flows for each of the years in the three-year
period ended December 31, 2005, is as follows:
CONDENSED
BALANCE SHEETS
December
31, 2005 and 2004
|
2005
|
2004
|
||||||
|
ASSETS
|
|||||||
|
Cash
and due from banks
|
$
|
8,153
|
$
|
6,983
|
|||
|
Interest-bearing
deposits in banks
|
1,616,488
|
2,718,126
|
|||||
|
Securities
available-for-sale
|
32,673,908
|
32,177,363
|
|||||
|
Investment
in bank subsidiaries
|
78,120,998
|
79,151,605
|
|||||
|
Loans
receivable, net
|
1,247,000
|
1,077,000
|
|||||
|
Premises
and equipment, net
|
781,431
|
439,059
|
|||||
|
Accrued
income receivable
|
237,888
|
160,537
|
|||||
|
Other
assets
|
235,584
|
142,938
|
|||||
|
Total
assets
|
$
|
114,921,450
|
$
|
115,873,611
|
|||
|
LIABILITIES
|
|||||||
|
Dividends
payable
|
$
|
2,354,818
|
$
|
1,537,162
|
|||
|
Deferred
income taxes
|
2,689,836
|
3,074,468
|
|||||
|
Accrued
expenses and other liabilities
|
649,495
|
338,041
|
|||||
|
Total
liabilities
|
5,694,149
|
4,949,671
|
|||||
|
STOCKHOLDERS'
EQUITY
|
|||||||
|
Common
stock
|
18,838,542
|
18,919,380
|
|||||
|
Additional
paid-in capital
|
22,383,375
|
22,225,516
|
|||||
|
Retained
earnings
|
64,713,530
|
63,200,352
|
|||||
|
Treasury
stock, at cost
|
|||||||
|
Accumulated
other comprehensive income
|
3,291,854
|
7,467,712
|
|||||
|
Total
equity
|
109,227,301
|
110,923,940
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
114,921,450
|
$
|
115,873,611
|
|||
CONDENSED
STATEMENTS OF INCOME
Years
Ended December 31, 2005, 2004 and 2003
|
2005
|
2004
|
2003
|
||||||||
|
Operating
income:
|
||||||||||
|
Equity
in net income of bank subsidiaries
|
$
|
10,660,583
|
$
|
11,857,298
|
$
|
10,440,180
|
||||
|
Interest
|
570,325
|
473,375
|
542,640
|
|||||||
|
Dividends
|
993,460
|
1,063,203
|
962,049
|
|||||||
|
Rents
|
35,665
|
70,425
|
140,147
|
|||||||
|
Securities
gains, net
|
1,130,072
|
308,273
|
1,207,735
|
|||||||
|
13,390,105
|
13,772,574
|
13,292,751
|
||||||||
|
Provision
for loan losses
|
-
|
16,000
|
(16,000
|
)
|
||||||
|
Operating
income after provision for loan
losses
|
13,390,105
|
13,756,574
|
13,308,751
|
|||||||
|
Operating
expenses:
|
1,696,570
|
1,517,028
|
1,379,066
|
|||||||
|
Income
before income taxes
|
11,693,535
|
12,239,546
|
11,929,685
|
|||||||
|
Income
tax expense (benefit)
|
85,000
|
(150,000
|
)
|
305,000
|
||||||
|
Net
income
|
$
|
11,608,535
|
$
|
12,389,546
|
$
|
11,624,685
|
||||
CONDENSED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2005, 2004 and 2003
|
2005
|
2004
|
2003
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||
|
Net
income
|
$
|
11,608,535
|
$
|
12,389,546
|
$
|
11,624,685
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
|
64,216
|
66,473
|
77,132
|
|||||||
|
Provision
for loan losses
|
-
|
16,000
|
(16,000
|
)
|
||||||
|
Amortization
and accretion, net
|
(5,757
|
)
|
(6,004
|
)
|
(8,014
|
)
|
||||
|
Provision
for deferred taxes
|
(50,652
|
)
|
-
|
(36,385
|
)
|
|||||
|
Securities
gains, net
|
(1,130,072
|
)
|
(308,273
|
)
|
(1,207,735
|
)
|
||||
|
Equity
in net income of bank subsidiaries
|
(10,660,583
|
)
|
(11,857,299
|
)
|
(10,440,180
|
)
|
||||
|
Dividends
received from bank subsidiaries
|
8,634,000
|
8,384,000
|
7,868,000
|
|||||||
|
(Increase)
decrease in accrued income receivable
|
(77,351
|
)
|
(9,202
|
)
|
61,798
|
|||||
|
(Increase)
decrease in other assets
|
(92,646
|
)
|
(135,740
|
)
|
148,587
|
|||||
|
Increase
(decrease) in accrued expense payable and other
liabilities
|
311,454
|
(350,540
|
)
|
336,997
|
||||||
|
Net
cash provided by operating activities
|
$
|
8,601,144
|
$
|
8,188,961
|
$
|
8,408,885
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||
|
Purchase
of securities available-for-sale
|
(8,893,910
|
)
|
(1,454,604
|
)
|
(7,292,720
|
)
|
||||
|
Proceeds
from sale of securities available-for-sale
|
7,830,546
|
4,200,716
|
4,067,605
|
|||||||
|
Proceeds
from maturities and calls of securities available-for-sale
|
800,000
|
519,223
|
2,170,435
|
|||||||
|
(Increase)
decrease in interest bearing deposits in banks
|
1,101,638
|
(1,129,131
|
)
|
(192,339
|
)
|
|||||
|
(Increase)
decrease in loans
|
(170,000
|
)
|
(1,093,000
|
)
|
722,968
|
|||||
|
Purchase
of bank premises and equipment
|
(406,588
|
)
|
(29,981
|
)
|
(34,976
|
)
|
||||
|
Investment
in bank subsidiaries
|
(550,000
|
)
|
(1,950,000
|
)
|
(1,000,000
|
)
|
||||
|
Net
cash (used in) investing activities
|
$
|
(288,314
|
)
|
$
|
(936,777
|
)
|
$
|
(1,559,027
|
)
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||
|
Dividends
paid
|
(8,599,597
|
)
|
(7,493,896
|
)
|
(7,077,117
|
)
|
||||
|
Proceeds
from issuance of stock
|
287,937
|
247,482
|
221,870
|
|||||||
|
Net
cash (used in) financing activities
|
$
|
(8,311,660
|
)
|
$
|
(7,246,414
|
)
|
$
|
(6,855,247
|
)
|
|
|
Net
increase (decrease) in cash and cash
equivalents
|
1,170
|
5,770
|
(5,389
|
)
|
||||||
|
CASH
AND DUE FROM BANKS
|
||||||||||
|
Beginning
|
6,983
|
1,213
|
6,602
|
|||||||
|
Ending
|
$
|
8,153
|
$
|
6,983
|
$
|
1,213
|
||||
|
Note
14.
|
Selected
Quarterly Financial Data
(Unaudited)
|
|
2005
|
|||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||
|
Total
interest income
|
$
|
9,943,736
|
$
|
10,227,074
|
$
|
10,534,838
|
$
|
10,599,979
|
|||||
|
Total
interest expense
|
3,348,899
|
3,862,127
|
4,174,670
|
4,547,412
|
|||||||||
|
Net
interest income
|
6,594,837
|
6,364,947
|
6,360,168
|
6,052,567
|
|||||||||
|
Provision
for loan losses
|
53,725
|
74,882
|
118,431
|
84,244
|
|||||||||
|
Net
income
|
3,013,924
|
2,968,312
|
2,917,376
|
2,708,923
|
|||||||||
|
Basic
and diluted earnings per common share
|
0.32
|
0.32
|
0.31
|
0.29
|
|||||||||
|
2004
|
|||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||
|
Total
interest income
|
$
|
8,914,804
|
$
|
9,109,031
|
$
|
9,323,847
|
$
|
10,005,977
|
|||||
|
Total
interest expense
|
2,391,174
|
2,451,952
|
2,662,249
|
3,057,952
|
|||||||||
|
Net
interest income
|
6,523,630
|
6,657,079
|
6,661,598
|
6,948,025
|
|||||||||
|
Provision
for loan losses
|
58,355
|
210,353
|
(63,820
|
)
|
274,467
|
||||||||
|
Net
income
|
2,964,542
|
2,862,039
|
3,372,387
|
3,190,578
|
|||||||||
|
Basic
and diluted earnings per common share
|
0.32
|
0.30
|
0.36
|
0.34
|
|||||||||
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On
February 8, 2006, the Audit Committee of the Company approved the dismissal
of
McGladrey & Pullen, LLP (“McGladrey”) as the Company’s independent
accountants. The dismissal was later ratified by the Board of Directors of
the
Company. The dismissal will be effective upon the issuance of McGladrey’s report
on the consolidated financial statements of the Company for the year ended
December 31, 2005.
The
audit
reports of McGladrey on the consolidated financial statements of the Company
for
the years ended December 31, 2005 and 2004 do not contain an adverse opinion
or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During
the audits of the financial statements for the years ended December 31, 2005
and
2004, there were no disagreements with McGladrey on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which agreement, if not resolved to McGladrey’s satisfaction, would
have caused McGladrey to make reference to the subject matter of the
disagreement in connection with its reports.
The
Company requested that McGladrey furnish it with a letter addressed to the
Securities and Exchange Commission (“SEC”) stating whether or not McGladrey
agreed with the above statements. A copy of McGladrey’s letter to the SEC dated
February 13, 2006 is filed as Exhibit 16 to a Form 8-K filed with the SEC on
February 13, 2006.
The
Audit
Committee of the Company approved the engagement of Clifton Gunderson, LLP
as
the Company’s new independent accountants effective with the completion of
December 31, 2005 audit. The engagement of Clifton Gunderson, LLP was later
ratified by the Board of Directors.
|
CONTROLS
AND PROCEDURES
|
As
of the
end of the period covered by this report, an evaluation was performed under
the
supervision and with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer of the effectiveness of the Company’s disclosure
controls and procedures (as defined in Exchange Act Rule 240.13a-15 (e)). Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that the Company’s current disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.
Management’s
annual report on internal control over financial reporting is contained in
Item
8 of this Report.
The
attestation report of the Company’s registered public accounting firm on
management’s assessment of the Company’s internal control over financial
reporting is contained in Item 8 of this Report.
There
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
|
OTHER
INFORMATION
|
None.
PART
III
|
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 26, 2006, as filed
with
the SEC on March 17, 2006 (the "Proxy Statement"), which information is
incorporated herein by this reference.
Executive
Officers
The
information required by Item 10 regarding the executive officers appears in
Item
1 of Part I of this Report under the heading “Executive Officers of the Company
and Banks”.
Section
16(a) Beneficial Ownership Reporting Compliance
Refer
to
the information under the caption “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement, which information is incorporated herein by
this reference.
Audit
Committee Financial Expert
The
Board
of Directors of the Company has determined that Warren R. Madden, a member
of
the Audit Committee, qualifies as an "audit committee financial expert" under
applicable SEC rules. The Board of Directors has further determined that Mr.
Madden qualifies as an "independent" director under applicable SEC rules and
the
corporate governance rules of the NASDAQ stock market. The Board's affirmative
determination was based, among other things, upon Mr. Madden's experience as
Vice President of Finance and Business of Iowa State University, a position
in
which he functions as the principal financial officer of the
university.
Code
of
Ethics
The
Company has adopted an Ethics and Confidentiality Policy that applies to all
directors, officers and employees of the Company, including the Chief Executive
Officer and the Chief Financial Officer of the Company. A copy of this policy
is
posted on the Company's website at www.amesnational.com.
In the
event that the Company makes any amendments to, or grants any waivers of, a
provision of the Ethics and Confidentiality Policy that requires disclosure
under applicable SEC rules, the Company intends to disclose such amendments
or
waiver and the reasons therefore on its website.
|
EXECUTIVE
COMPENSATION
|
Refer
to
the information under the caption “Executive Compensation” in the Proxy
Statement, which information is incorporated herein by this
reference.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
|
Refer
to
the information under the caption “Security Ownership of Management and Certain
Beneficial Owners” in the Proxy Statement, which information is incorporated
herein by this reference. The Company does not maintain any equity compensation
plans covering its officers or employees or the officers or employees of the
Banks.
|
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.
|
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
Refer
to
the information under the caption "Relationship with Independent Public
Accountants" in the Proxy Statement, which information is incorporated herein
by
this reference.
PART
IV
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
(a)
|
List
of Financial Statements and
Schedules.
|
|
1.
|
Financial
Statements
|
Reports
of McGladrey & Pullen, LLP, Independent Registered Public Accounting
Firm
Consolidated
Balance Sheets, December 31, 2005 and 2004
Consolidated
Statements of Income for the Years ended December 31, 2005, 2004 and
2003
Consolidated
Statements of Stockholders' Equity for the Years ended December 31, 2005, 2004
and 2003
Consolidated
Statements of Cash Flows for the Years ended December 31, 2005, 2004 and
2003
Notes
to
Consolidated Financial Statements
|
2.
|
Financial
Statement Schedules
|
All
schedules are omitted because they are not applicable or not required, or
because the required information is included in the consolidated financial
statements or notes thereto.
|
(b)
|
List
of Exhibits.
|
|
3.1
|
-
|
Restated
Articles of Incorporation of the Company, as amended (incorporated
by
reference to Exhibit 3.1 to Form 8-K as filed June 16,
2005)
|
|
3.2
|
-
|
Bylaws
of the Company as amended, (incorporated by reference to Exhibit
3.2 to
Form 8-K as filed June 16, 2005)
|
|
10.1
|
-
|
Management
Incentive Compensation Plan (incorporated by reference to Exhibit
10 filed
with the Company’s Annual Report on Form 10K for the year ended December
31, 2002)*
|
|
10.2
|
-
|
Stock
Purchase Plan, as Amended
|
|
16
|
-
|
Letter
regarding change in certifying Accountant (incorporated by reference
to
Exhibit 16 included with Form 8-K filed on February 13,
2006)
|
|
21
|
-
|
Subsidiaries
of the Registrant
|
|
23.1
|
-
|
Consent
of Independent Registered Public Accounting Firm
|
|
31.1
|
-
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
-
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
-
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
|
|
32.2
|
-
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section
1350
|
|
*
|
Indicates
a management compensatory plan or
arrangement.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on
its
behalf by the undersigned, thereunto duly authorized.
|
AMES
NATIONAL CORPORATION
|
|||
|
March
15, 2006
|
By:
|
/s/
Daniel L. Krieger
|
|
|
Daniel
L. Krieger, Chairman and President
|
|||
|
(Principal
Executive Officer)
|
|||
|
March
15, 2006
|
By:
|
/s/ John P. Nelson | |
|
John
P. Nelson, Vice President
|
|||
|
(Principal
Financial and Accounting Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on March 15, 2006.
|
/s/
Robert L. Cramer
|
||
|
Robert
L. Cramer, Director
|
||
|
/s/
Douglas C. Gustafson
|
||
|
|
Douglas
C. Gustafson, Director
|
|
|
/s/
Charles D. Jons
|
||
|
Charles
D. Jons, Director
|
||
|
/s/
Jami R. Larson II
|
||
|
Jami
R. Larson II, Director
|
||
|
/s/
Warren R. Madden
|
||
|
Warren
R. Madden, Director
|
||
|
/s/
Fred C. Samuelson
|
||
|
Fred
C. Samuelson, Director
|
||
|
/s/
Marvin J. Walter
|
||
|
Marvin
J. Walter, Director
|
||
EXHIBIT
INDEX
The
following exhibits are filed herewith:
|
Exhibit
No.
|
Description
|
|
|
-Stock
Purchase Plan, as amended
|
||
|
-Subsidiaries
of the Registrant
|
||
|
-Consent
of Independent Registered Public Accounting Firm.
|
||
|
-Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes
Oxley Act of 2002
|
||
|
-Certification
of Principal Financial Officer pursuant to Section 302 of the Sarbanes
Oxley Act of 2002
|
||
|
-Certification
of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
||
|
-Certification
of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
63
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