IOWA FIRST BANCSHARES CORP.
ANNUAL REPORT
December 31, 1999
IOWA FIRST BANCSHARES CORP.
STOCKHOLDER INFORMATION AS OF DECEMBER 31, 1999
Market Makers
- -------------
A market for Iowa First Bancshares Corp. common stock is made by the brokerage
firms of Howe Barnes Investments, Inc., Bill Sammon (800-800-4693), and Mesirow
Financial, Inc., Mike Hagerty (888-701-7771 or 319-263-7771).
Stock Prices Information
- ------------------------
The table below shows the reported high and low bid prices of the common stock
during the years ended December 31, 1999 and 1998. The stock prices listed below
were obtained from the market makers or, as of each year-end, an independent
appraisal of the stock, if higher.
1999 High Low
- ---------------------------------------------
First Quarter ......... $ 32.50 $ 31.00
Second Quarter ........ 32.50 29.50
Third Quarter ......... 29.50 25.50
Fourth Quarter ........ 27.50 23.88
1998 High Low
- ---------------------------------------------
First Quarter ......... $ 31.25 $ 31.00
Second Quarter ........ 32.00 30.00
Third Quarter ......... 34.00 30.38
Fourth Quarter ........ 32.50 30.50
Annual Meeting of Stockholders
- ------------------------------
The Annual Meeting of the Stockholders of Iowa First Bancshares Corp. will be
held at 2:00 p.m., April 20, 2000 at the corporate offices located at 300 East
Second Street, Muscatine, Iowa 52761. Stockholders are encouraged to attend.
Annual Report on Form 10-K
- --------------------------
Copies of the Iowa First Bancshares Corp. annual report on Form 10-K and
exhibits, filed with the Securities and Exchange Commission, are available to
stockholders without charge by writing:
Iowa First Bancshares Corp.
300 East Second Street
Muscatine, Iowa 52761
Attention: Patricia R. Thirtyacre, Corporate Secretary
Investor Information
- --------------------
Stockholders, investors and analysts interested in additional information may
contact Mr. Kim K. Bartling, Executive Vice President, Chief Operating Officer
and Treasurer (319) 262-4216 or Mr. George A. Shepley, Chairman and Chief
Executive Officer (319) 262-4200.
To Our Shareholders:
Net income for the year ended December 31, 1999, was $3,412,000 or $2.23 per
share compared to $3,282,000 or $2.02 per share the prior year. Contributing to
the strong results were the sizable growth in both net interest income of
$599,000, 5.6%, and other noninterest income of $147,000, 7.8%. Management also
controlled noninterest expenses which grew only 4.0% during 1999. Noninterest
expenses other than salaries and employee benefits were aggressively managed,
resulting in an increase of only 1.7%.
As we have discussed in prior annual and quarterly communications to our fellow
shareholders, the Company has employed strategies which increase the financial
leverage of the balance sheet. These strategies coupled with record 1999 net
income, adjusted for nonrecurring items, resulted in an unprecedented high
return on average equity of 16.39% for the year ended December 31, 1999. We are
extremely pleased with the achievement of this new record for return on average
equity. While exciting in its own right, this was only one of numerous financial
performance records set by the Company during 1999. These records included:
o Highest net loans in the history of the Company ($267 million).
o Highest total assets in the history of the Company ($371 million).
o Highest total deposits in the history of the Company ($270 million).
o Highest net interest income in the history of the Company ($11.3 million).
o Highest other income in the history of the Company ($2.0 million).
o Highest net income, adjusted for nonrecurring items, in the history of the
Company ($3.4 million).
o Highest net income per fully diluted share in the history of the Company
($2.23).
These results were especially gratifying since they were accomplished during a
year noted for an unfavorable national interest rate trend and relatively low
farm commodity prices, both of which serve as additional challenges for a bank
holding company such as Iowa First Bancshares Corp.
Net loans grew from approximately $250 million to nearly $267 million during
1999, a $17 million or 6.8% increase. While loan totals were rising nicely,
problem loans (those on nonaccrual status or past due 90 days or more), actually
declined $451,000 or 45%. Despite this positive trend in problem loans and to be
prudent given the growth in total loans, the Company expensed $406,000 to
provision for possible loan losses which was nearly four times the amount of net
loan charge-offs recognized during 1999. Therefore, the total allowance for
possible loan losses grew more than $300,000 (10.9%) to total $3,091,000 as of
December 31, 1999.
In an effort to more efficiently and effectively utilize our facilities in
Fairfield, Iowa, the consumer loan department was relocated from the main
downtown bank facility to the branch which was built in 1997. This branch is in
a high traffic area of town in front of the local Wal-Mart store. We believe
this move will enable us to better serve our current and future customers.
Our branch office located in the Muscatine, Iowa, Wal-Mart Supercenter continued
to exceed our expectations in almost all aspects of its operations. The
relocation of the downtown branch in Muscatine has also been very well received
by our customers. These branches, in addition to our main bank and
long-established branch offices on the south side of Muscatine and at the
Muscatine Mall, enable us to serve our customers' financial needs in a
convenient, friendly, and professional manner. The highly skilled and dedicated
employees at all levels of the organization ensure customers receive excellent
service. Their abilities and efforts were the driving force behind the
record-breaking performance of the Company during 1999.
Despite the outstanding financial results, the price of Iowa First Bancshares
Corp. stock decreased over the last year to $27 per share (based on an
independent appraisal), a 12.9% decrease from the prior year-end. This $27 per
share represents a price to book value of 196% and a price to trailing twelve
months earnings of 12.1 times. While the Company's return on average equity and
dividend yield exceeded its peer group, the market valued Iowa First Bancshares
Corp.'s stock at a price earnings ratio less than this same peer group of banks.
It should be noted that bank stocks in general declined during 1999. Please
refer to the following graphs for a summary of the stock price performance and
earnings per share over the last several years.
The omitted graph reflects the closing stock price per share utilizing the
following data points:
1994 13.00
1995 16.67
1996 20.00
1997 28.75
1998 31.00
1999 27.00
The omitted graph reflects the fully diluted earnings per utilizing the
following data points:
1994 1.60
1995 1.71
1996 1.95
1997 1.82
1998 2.02
1999 2.23
The total annual investment return (loss) for the past one, three, and five-year
periods has been (10.2%), 13.8%, and 18.7%, respectively. The graphs below show
the growth in total assets and loans over the past several years.
The omitted graph reflects the total assets as of year end utilizing the
following data points:
(In Millions)
1994 253.8
1995 272.8
1996 280.5
1997 305.8
1998 345.4
1999 371.0
The omitted graph reflects the total loans as of year end utilizing the
following data points:
(In Millions)
1994 162.0
1995 169.3
1996 183.4
1997 208.7
1998 250.3
1999 267.0
Year-end 1999 total assets exceeded year-end 1994 total assets by $117,229,000
for total growth of 46.2%. Over the same time period, loans grew $104,977,000 or
64.8%.
Much has been written over recent quarters in the financial press regarding
technology in banking, and more specifically Internet banking, as well as
financial reform enacted by Congress. As management and the Board of Directors
assess the current position of Iowa First Bancshares Corp. and plan for the
future, these are among the issues and opportunities which are discussed,
analyzed, and if deemed appropriate, exploited for the benefit of our
shareholders.
As we look to 2000, there is, as always, much uncertainty in forecasting the
future direction of interest rates and the economy. The 2000 budgets for the
Company and its subsidiaries project relatively stable market interest rates and
a positive business climate. If rates or the economy vary significantly from
these assumptions, it will become more challenging to maintain or increase net
interest income, and consequently, net income.
On behalf of management and the Board of Directors, we thank you for your
investment in Iowa First Bancshares Corp. and your continued support. We look
forward to hearing from you should you have comments or questions.
/s/ George A. Shepley
--------------------------
George A. Shepley
Chairman & CEO
/s/ Kim K. Bartling
--------------------------
Kim K. Bartling
Executive Vice President
COO & Treasurer
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
BALANCE SHEET (at year end) 1999 1998 1997
- --------------------------------------------------------------------------------
Net loans ........................ $ 266,992,000 $ 250,318,000 $ 208,683,000
Allowance for loan losses ........ 3,091,000 2,787,000 2,604,000
Deposits and securities sold under
agreements to repurchase ...... 274,198,000 267,491,000 247,041,000
Federal Home Loan Bank advances .. 64,621,000 47,973,000 26,468,000
Total assets ..................... 371,029,000 345,411,000 305,783,000
Stockholders' equity ............. 21,193,000 20,309,000 28,625,000
STATEMENT OF INCOME (for the year)
- --------------------------------------------------------------------------------
Net interest income .............. $ 11,290,000 $ 10,691,000 $ 10,656,000
Provision for loan losses ........ 406,000 125,000 4,000
Other income ..................... 2,022,000 1,875,000 1,696,000
Other operating expense .......... 7,942,000 7,633,000 7,547,000
Income before income taxes ....... 4,964,000 4,808,000 4,801,000
Income taxes ..................... 1,552,000 1,526,000 1,521,000
Net income ....................... 3,412,000 3,282,000 3,280,000
PER SHARE DATA
- --------------------------------------------------------------------------------
Net income, basic ................ $ 2.23 $ 2.02 $ 1.86
Net income, diluted .............. 2.23 2.02 1.82
Book value at year-end ........... 13.79 13.25 15.62
Stock price at year-end (greater
of bid or appraised price) .... 27.00 31.00 28.75
Cash dividends declared during
the year ...................... 0.84 0.84 0.78
Cash dividends declared as a
percentage of net income ...... 38% 42% 43%
KEY RATIOS
- --------------------------------------------------------------------------------
Return on average assets ......... 0.96% 1.00% 1.13%
Return on average stockholders'
equity ........................ 16.39 14.18 12.33
Net interest margin-tax
equivalent .................... 3.53 3.65 4.11
Average stockholders' equity to
average assets ................ 5.83 7.02 9.16
Total capital to risk-weighted
assets ........................ 9.52 9.14 14.44
Efficiency ratio (all operating
expenses, excluding the provision
for loan losses, divided by the
sum of net interest income and
other income) ................. 59.66 60.75 61.10
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Iowa First Bancshares Corp.
Muscatine, Iowa
We have audited the accompanying consolidated balance sheets of Iowa First
Bancshares Corp. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years ended December 31, 1999, 1998, and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements 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 Iowa First
Bancshares Corp. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998, and 1997, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 21, 2000
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
- --------------------------------------------------------------------------------
Cash and due from banks (Note 1) ...................$ 15,149,000 $ 14,273,000
Interest-bearing deposits at financial
institutions .................................... 155,000 135,000
Investment securities available for sale (Note 3) .. 62,950,000 58,711,000
Federal funds sold and other overnight investments . 15,800,000 12,555,000
Loans, net of allowance for loan losses of
$3,091,000 in 1999 and $2,787,000 in 1998
(Note 4) ........................................ 266,992,000 250,318,000
Bank premises and equipment, net (Note 5) .......... 5,456,000 5,858,000
Accrued interest receivable ........................ 2,985,000 2,763,000
Other assets ....................................... 1,542,000 798,000
---------------------------
Total assets .........................$ 371,029,000 $ 345,411,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing ..........................$ 47,175,000 $ 44,430,000
Interest-bearing ............................. 222,397,000 217,416,000
----------------------------
Total deposits (Note 6) .............. 269,572,000 261,846,000
Notes payable (Note 7) .......................... 6,869,000 7,250,000
Securities sold under agreements to repurchase
(Note 8) ..................................... 4,626,000 5,645,000
Federal Home Loan Bank advances (Note 8) ........ 64,621,000 47,973,000
Dividends payable ............................... 321,000 320,000
Treasury tax and loan open note (Note 8) ........ 2,211,000 163,000
Other liabilities ............................... 1,616,000 1,905,000
----------------------------
Total liabilities .................... 349,836,000 325,102,000
----------------------------
Commitments and Contingencies (Note 13)
Stockholders' Equity (Note 9):
Preferred stock, stated value of $1.00 per
share; shares authorized 500,000; shares
issued none .................................. - - - -
Common stock, no par value; shares authorized
6,000,000; shares issued 1,832,429 ........... 200,000 200,000
Additional paid-in capital ...................... 4,349,000 4,408,000
Retained earnings ............................... 27,585,000 25,460,000
Accumulated other comprehensive income (loss),
net .......................................... (649,000) 708,000
Less cost of common shares acquired for the
treasury, 1999, 295,728; 1998, 300,005 ....... (10,292,000) (10,467,000)
----------------------------
Total stockholders' equity ........... 21,193,000 20,309,000
----------------------------
Total liabilities and stockholders'
equity ............................$ 371,029,000 $ 345,411,000
============================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
- --------------------------------------------------------------------------------
Interest income:
Interest and fees on loans:
Taxable ........................$ 20,972,000 $ 19,044,000 $ 16,464,000
Nontaxable ..................... 155,000 176,000 224,000
Interest and dividends on investment
securities available for sale:
Taxable ........................ 2,742,000 2,633,000 3,246,000
Nontaxable ..................... 865,000 848,000 732,000
Interest on federal funds sold and
other overnight investments .... 392,000 870,000 480,000
Other ............................. 1,000 19,000 12,000
-----------------------------------------
Total interest income ...... 25,127,000 23,590,000 21,158,000
-----------------------------------------
Interest expense:
Interest on deposits .............. 9,457,000 9,676,000 9,058,000
Interest on notes payable ......... 522,000 368,000 - -
Interest on other borrowed funds .. 3,858,000 2,855,000 1,444,000
-----------------------------------------
Total interest expense ..... 13,837,000 12,899,000 10,502,000
-----------------------------------------
Net interest income ........ 11,290,000 10,691,000 10,656,000
Provision for loan losses (Note 4) ... 406,000 125,000 4,000
-----------------------------------------
Net interest income after
provision for loan losses .. 10,884,000 10,566,000 10,652,000
-----------------------------------------
Other income:
Trust department .................. 351,000 343,000 328,000
Service fees ...................... 1,224,000 1,131,000 975,000
Investment securities gains, net .. 4,000 18,000 - -
Other ............................. 443,000 383,000 393,000
-----------------------------------------
Total other income ......... 2,022,000 1,875,000 1,696,000
-----------------------------------------
Operating expenses:
Salaries and employee benefits .... 4,577,000 4,323,000 4,276,000
Occupancy expenses, net ........... 701,000 700,000 699,000
Equipment expenses ................ 628,000 604,000 472,000
Office supplies, printing, and
postage ........................ 409,000 419,000 399,000
Computer costs .................... 440,000 407,000 414,000
Advertising and business
promotion ...................... 167,000 163,000 157,000
Other operating expenses .......... 1,020,000 1,017,000 1,130,000
-----------------------------------------
Total operating expenses ...$ 7,942,000 $ 7,633,000 $ 7,547,000
-----------------------------------------
Income before income taxes .$ 4,964,000 $ 4,808,000 $ 4,801,000
Income taxes (Note 11) ............... 1,552,000 1,526,000 1,521,000
-----------------------------------------
Net income .................$ 3,412,000 $ 3,282,000 $ 3,280,000
=========================================
Weighted average common shares ....... 1,531,391 1,628,447 1,758,883
Weighted average common and common
equivalent shares, assuming
dilution .......................... 1,531,391 1,628,447 1,801,022
Net income per common share (Note 12):
Basic .............................$ 2.23 $ 2.02 $ 1.86
=========================================
Diluted ...........................$ 2.23 $ 2.02 $ 1.82
=========================================
Dividends declared per share .........$ 0.84 $ 0.84 $ 0.78
=========================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998, and 1997
Common Stock Additional
----------------------- Paid-In Retained
Number Amount Capital Earnings
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ................................ 1,800,000 $ 200,000 $ 3,872,000 $ 21,621,000
Comprehensive income:
Net income .......................................... - - - - - - 3,280,000
Other comprehensive income, net of tax,
unrealized gains on securities available
for sale, net of reclassification
adjustment (Note 2) ............................... - - - - - - - -
Comprehensive income
Cash dividends declared, $.78 per share ................ - - - - - - (1,379,000)
Purchase of common stock for the treasury .............. - - - - - - - -
Sale of common stock to the ESOP ....................... 4,615 - - 120,000 - -
Issuance of 95,590 shares upon exercise of stock
options ............................................. 27,814 - - 448,000 - -
----------------------------------------------------
Balance, December 31, 1997 ................................ 1,832,429 $ 200,000 $ 4,440,000 $ 23,522,000
Comprehensive income:
Net income .......................................... - - - - - - 3,282,000
Other comprehensive income, net of tax,
unrealized gains on securities available for
sale, net of reclassification adjustment (Note 2) . - - - - - - - -
Comprehensive income
Cash dividends declared, $.84 per share ................ - - - - - - (1,344,000)
Purchase of common stock for the treasury .............. - - - - - - - -
Sale of common stock to the ESOP ....................... - - - - (32,000) - -
Other sales of common stock ............................ - - - - - - - -
----------------------------------------------------
Balance, December 31, 1998 ................................ 1,832,429 $ 200,000 $ 4,408,000 $ 25,460,000
Comprehensive income:
Net income .......................................... - - - - - - 3,412,000
Other comprehensive (loss), net of tax,
unrealized (losses) on securities available for
sale, net of reclassification adjustment (Note 2) . - - - - - - - -
Comprehensive income
Cash dividends declared, $.84 per share ................ - - - - - - (1,287,000)
Purchase of common stock for the treasury .............. - - - - - - - -
Sale of common stock to the ESOP ....................... - - - - (59,000) - -
----------------------------------------------------
Balance, December 31, 1999 ................................ 1,832,429 $ 200,000 $ 4,349,000 $ 27,585,000
====================================================
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Years Ended December 31, 1999, 1998 and 1997
Accumulated
Other
Compre-
hensive
Income Treasury Stock Compre-
--------------------- hensive
(Loss) Number Amount Income Total
-----------------------------------------------------------------
Balance, December 31, 1996 ................................$ 81,000 59,452 $ 576,000 $ 25,198,000
Comprehensive income:
Net income .......................................... - - - - - - $ 3,280,000 3,280,000
Other comprehensive income, net of tax,
unrealized gains on securities available
for sale, net of reclassification
adjustment (Note 2) ............................... 382,000 - - - - 382,000 382,000
-------------
Comprehensive income ........................ $ 3,662,000
=============
Cash dividends declared, $.78 per share ................ - - - - - - (1,379,000)
Purchase of common stock for the treasury .............. - - 8,324 174,000 (174,000)
Sale of common stock to the ESOP ....................... - - - - - - 120,000
Issuance of 95,590 shares upon exercise of stock
options ............................................. - - (67,776) (750,000) 1,198,000
--------------------------------------- -------------
Balance, December 31, 1997 ................................$ 463,000 - - $ - - $ 28,625,000
Comprehensive income:
Net income .......................................... - - - - - - $ 3,282,000 3,282,000
Other comprehensive income, net of tax,
unrealized gains on securities available for
sale, net of reclassification adjustment (Note 2) .. 245,000 - - - - 245,000 245,000
-------------
Comprehensive income ......................... $ 3,527,000
=============
Cash dividends declared, $.84 per share ................. - - - - - - (1,344,000)
Purchase of common stock for the treasury ............... - - 308,199 10,753,000 (10,753,000)
Sale of common stock to the ESOP ........................ - - (8,064) (282,000) 250,000
Other sales of common stock ............................. - - (130) (4,000) 4,000
-------------------------------------- -------------
Balance, December 31, 1998 ................................$ 708,000 300,005 $ 10,467,000 $ 20,309,000
Comprehensive income:
Net income .......................................... - - - - - - $ 3,412,000 3,412,000
Other comprehensive (loss), net of tax,
unrealized (losses) on securities available for
sale, net of reclassification adjustment (Note 2) . (1,357,000) - - - - (1,357,000) (1,357,000)
-------------
Comprehensive income ........................ $ 2,055,000
=============
Cash dividends declared, $.84 per share ................ - - - - - - (1,287,000)
Purchase of common stock for the treasury .............. - - 3,130 84,000 (84,000)
Sale of common stock to the ESOP ....................... - - (7,407) (259,000) 200,000
--------------------------------------- -------------
Balance, December 31, 1999 ................................$ (649,000) 295,728 $ 10,292,000 $ 21,193,000
======================================= =============
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................$ 3,412,000 $ 3,282,000 $ 3,280,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from loans sold to FHLMC ............. 2,093,000 925,000 572,000
Loans underwritten for FHLMC .................. (2,079,000) (918,000) (568,000)
Gains on loans sold to FHLMC .................. (14,000) (7,000) (4,000)
Provision for loan losses ..................... 406,000 125,000 4,000
Investment securities gains, net .............. (4,000) (18,000) - -
Depreciation .................................. 639,000 631,000 520,000
Deferred income taxes ......................... (125,000) 12,000 46,000
Amortization of premiums and accretion
of discounts on investment securities,
net ......................................... 131,000 134,000 188,000
Changes in assets and liabilities:
(Increase) in accrued interest receivable ... (222,000) (262,000) (168,000)
Net (increase) in other assets .............. (137,000) (271,000) (267,000)
Net increase (decrease) in other
liabilities .............................. 37,000 (73,000) (58,000)
--------------------------------------------
Net cash provided by operating
activities ............................ 4,137,000 3,560,000 3,545,000
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in interest-bearing deposits
at financial institutions ..................... (20,000) (48,000) 464,000
Net (increase) in federal funds sold and
other overnight deposits ...................... (3,245,000) (2,760,000) (2,532,000)
Proceeds from sales, maturities, calls, and
paydowns of available for sale securities ..... 19,115,000 22,161,000 26,578,000
Purchase of available for sale securities ........ (25,646,000) (15,100,000) (24,032,000)
Net (increase) in loans .......................... (17,080,000) (41,760,000) (25,249,000)
Purchases of bank premises and equipment ......... (237,000) (434,000) (2,049,000)
--------------------------------------------
Net cash (used in) investing
activities ............................$ (27,113,000) $ (37,941,000) $ (26,820,000)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-
bearing deposits ..............................$ 2,745,000 $ 6,218,000 $ (5,233,000)
Net increase in interest-bearing deposits ........ 4,981,000 12,846,000 9,663,000
Proceeds from notes payable ...................... 250,000 9,250,000 - -
Repayment of notes payable ....................... (631,000) (2,000,000) - -
Net increase (decrease) in securities sold
under agreements to repurchase ................ (1,019,000) 1,386,000 (1,194,000)
Net increase (decrease) in treasury tax and
loan open note ................................ 2,048,000 (1,293,000) (488,000)
Advances from Federal Home Loan Bank ............. 20,300,000 22,650,000 20,900,000
Payments of advances from Federal Home
Loan Bank ..................................... (3,652,000) (1,145,000) (1,905,000)
Cash dividends paid .............................. (1,286,000) (1,398,000) (1,336,000)
Purchases of common stock for the treasury ....... (84,000) (10,753,000) (174,000)
Issuance of common stock ......................... 200,000 254,000 1,318,000
--------------------------------------------
Net cash provided by financing
activities ............................ 23,852,000 36,015,000 21,551,000
--------------------------------------------
Net increase (decrease) in cash
and due from banks .................... 876,000 1,634,000 (1,724,000)
Cash and due from banks:
Beginning ........................................ 14,273,000 12,639,000 14,363,000
--------------------------------------------
Ending ...........................................$ 15,149,000 $ 14,273,000 $ 12,639,000
============================================
Supplemental Disclosures of Cash Flow
Information, cash payments for:
Interest .........................................$ 13,743,000 $ 12,965,000 $ 10,460,000
Income taxes ..................................... 1,671,000 1,400,000 1,655,000
Supplemental Schedule of Noncash Investing
and Financing Activities, change in
accumulated other comprehensive income,
unrealized gain (loss) on securities
available for sale, net .......................... (1,357,000) 245,000 382,000
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL SSTATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of
two national banks, First National Bank of Muscatine and First National Bank
in Fairfield. First National Bank of Muscatine has a total of five locations
in Muscatine, Iowa. First National Bank in Fairfield has two locations in
Fairfield, Iowa. Each bank is engaged in the general commercial banking
business and provides full service banking to individuals and businesses,
including checking, savings and other deposit accounts, commercial loans,
consumer loans, real estate loans, safe deposit facilities, transmitting of
funds, trust services, and such other banking services as are usual and
customary for commercial banks.
Significant accounting policies:
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount 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. A significant estimate which is particularly
susceptible to change in a short period of time relates to the determination
of the allowance for loan losses. Actual results could differ from those
estimates.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, First National Bank of Muscatine and First National Bank in
Fairfield (Banks). All material intercompany accounts and transactions have
been eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and
due from banks includes cash on-hand, amounts due from banks, and cash items
in process of clearing. Cash flows from interest-bearing deposits at
financial institutions, federal funds sold and other overnight investments,
loans, deposits, securities sold under agreements to repurchase, and treasury
tax and loan open note are reported net.
Cash and due from banks: The Banks are required by federal banking
regulations to maintain certain cash and due from bank reserves. The reserve
requirement was approximately $1,678,000 and $1,719,000 at December 31, 1999
and 1998, respectively.
Investment securities available for sale: Securities available for sale are
accounted for at fair value and the unrealized holding gains or losses are
presented as a separate component of accumulated other comprehensive income,
net of their deferred income tax effect.
Realized gains and losses, determined using the specific-identification
method, are included in earnings.
Declines in the fair value of individual available-for-sale securities below
their cost that are other than temporary would result in write-downs of the
individual securities to their fair value. The related write-downs would be
included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the expected life of the security. There were no investments held
to maturity or for trading purposes as of December 31, 1999 or 1998.
Loans: Loans are stated at the amount of unpaid principal, reduced by
unearned discount and an allowance for loan losses. The Banks record impaired
loans at the present value of expected future cash flows discounted at the
loan's effective interest rate, or as an expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when it is probable the creditor will be unable
to collect all contractual principal and interest payments due in accordance
with the terms of the loan agreement. The Banks recognize interest income on
impaired loans on a cash basis.
The allowance for loan losses is maintained at the level considered adequate
by management of the Banks to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. In determining the adequacy of the
allowance balance the Banks make continuous evaluations of the loan portfolio
and related off-balance sheet commitments, consider current economic
conditions, historical loan loss experience, review of specific problem loans
and other factors.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using the interest method. For all other loans, interest is
accrued daily on the outstanding balances. Accrual of interest is
discontinued on a loan when management believes, after considering collection
efforts and other factors, that the borrower's financial condition is such
that collection of interest is doubtful. Generally this occurs when the
collection of interest or principal has become 90 days past due.
Direct loan origination fees and costs are generally being deferred and the
net amounts amortized as an adjustment of the related loan's or lease's
yield. The Banks generally amortize these amounts over the contractual life.
Commitment fees based upon a percentage of customers' unused lines of credit
and fees related to standby letters of credit are not significant.
Bank premises and equipment: Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed primarily by the
straight-line method based on the estimated useful lives.
Other assets: Other real estate (ORE), which is included in other assets,
represents properties acquired through foreclosure, in-substance foreclosure
or other proceedings. ORE is recorded at the lower of the amount of the loan
or fair value of the properties. Any write-down to fair value at the time of
transfer to ORE is charged to the allowance for loan losses. Property is
evaluated regularly to ensure that the recorded amount is supported by the
current fair value. Subsequent write-downs to fair value are charged to
earnings.
Income taxes: The Company files its tax return on a consolidated basis with
its subsidiary banks. The entities follow the direct reimbursement method of
accounting for income taxes under which income taxes or credits which result
from the subsidiary banks' inclusion in the consolidated tax return are paid
to or received from the parent company.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Trust assets: Trust assets (other than cash deposits) held by the Banks in
fiduciary or agency capacities for its customers are not included in the
accompanying consolidated balance sheets since such items are not assets of
the Banks.
Earnings per share: Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding
for the respective period. Diluted earnings per share is arrived at by
dividing net income by the weighted average number of common stock and common
stock equivalents outstanding for the respective period.
Current accounting developments: The Financial Accounting Standards Board has
issued Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities" which is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. Management believes that adoption of this Statement will not
have an effect on the consolidated financial statements.
Note 2. Comprehensive Income
Comprehensive income is defined as the change in equity during a period from
transactions and other events from non-owner sources. Comprehensive income is
the total of net income and other comprehensive income, which for the Company is
comprised entirely of unrealized gains and losses on securities available for
sale.
Other comprehensive income is comprised
as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
---------------------------------------
Year Ended December 31, 1999
---------------------------------------
Unrealized (losses) on securities
available for sale:
Unrealized holding gains arising
during the year ..................$ (2,161,000) $ (807,000) $ (1,354,000)
Less, reclassification adjustment for
gains included in net income ...... 4,000 1,000 3,000
---------------------------------------
Other comprehensive (loss) .....$ (2,165,000) $ (808,000) $ (1,357,000)
=======================================
Year Ended December 31, 1998
---------------------------------------
Unrealized gains on securities available
for sale:
Unrealized holding gains arising
during the year ...................$ 410,000 $ 154,000 $ 256,000
Less, reclassification adjustment for
gains included in net income ...... 18,000 7,000 11,000
---------------------------------------
Other comprehensive income .....$ 392,000 $ 147,000 $ 245,000
=======================================
Year Ended December 31, 1997
---------------------------------------
Unrealized gains on securities available
for sale:
Unrealized holding gains arising
during the year ...................$ 608,000 $ 226,000 $ 382,000
Less, reclassification adjustment for
gains included in net income ...... - - - - - -
---------------------------------------
Other comprehensive income .....$ 608,000 $ 226,000 $ 382,000
=======================================
Note 3. Investment Securities Available For Sale
The amortized cost and fair value of investment securities available for sale as
of December 31, 1999 and 1998 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
December 31, 1999
--------------------------------------------------
U.S. Treasury securities .....$ 8,007,000 $ 16,000 $ (52,000) $ 7,971,000
U.S. government agencies ..... 26,769,000 33,000 (666,000) 26,136,000
Mortgage-backed securities ... 1,782,000 - - (25,000) 1,757,000
State and political
subdivisions .............. 19,197,000 70,000 (350,000) 18,917,000
Corporate obligations,
including stock ........... 8,230,000 1,000 (62,000) 8,169,000
--------------------------------------------------
$ 63,985,000 $ 120,000 $ (1,155,000) $ 62,950,000
==================================================
December 31, 1998
--------------------------------------------------
U.S. Treasury securities .....$ 11,500,000 $ 212,000 $ - - $ 11,712,000
U.S. government agencies ..... 17,732,000 286,000 (4,000) 18,014,000
Mortgage-backed securities ... 4,135,000 47,000 (1,000) 4,181,000
State and political
subdivisions .............. 18,083,000 562,000 (4,000) 18,641,000
Corporate obligations,
including stock ........... 6,131,000 32,000 - - 6,163,000
--------------------------------------------------
$ 57,581,000 $1,139,000 $ (9,000) $ 58,711,000
==================================================
The amortized cost and fair value of investment securities available for sale as
of December 31, 1999, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities for mortgage-backed securities
because the mortgages underlying the securities may be prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary. Stocks are also excluded from the maturity
categories as there is no fixed maturity date.
Amortized Fair
Cost Value
---------------------------
Securities available for sale:
Due in one year or less ..........................$ 9,842,000 $ 9,833,000
Due after one year through five years ............ 32,182,000 31,564,000
Due after five years through ten years ........... 12,728,000 12,481,000
Due after ten years .............................. 3,994,000 3,858,000
---------------------------
58,746,000 57,736,000
Mortgage-backed securities ....................... 1,782,000 1,757,000
Stock ............................................ 3,457,000 3,457,000
---------------------------
$ 63,985,000 $ 62,950,000
===========================
Investment securities with a carrying value of $18,429,000 and $18,085,000 as of
December 31, 1999 and 1998, respectively, are pledged on public deposits,
securities sold under agreements to repurchase, trust deposits and for other
purposes as required or permitted by law.
Proceeds from the sale of securities available for sale were $503,000 during
1999; $2,199,000 during 1998; and $7,125,000 during 1997. Gross gains and losses
realized on sales in 1999 were $4,000 and none, respectively. Gross gains and
losses realized on sales in 1998 were $21,000 and $3,000, respectively. Gross
gains and losses realized on sales in 1997 were $7,000 and $7,000, respectively.
Note 4. Loans
The composition of loans is summarized as follows:
December 31,
-----------------------------
1999 1998
-----------------------------
Commercial .......................................$ 101,079,000 $ 94,724,000
Agricultural ..................................... 27,810,000 26,685,000
Real estate:
Construction .................................. 3,708,000 2,598,000
Mortgage ...................................... 105,068,000 95,535,000
Tax exempt, mortgage .......................... 2,581,000 2,337,000
Installment ...................................... 29,814,000 31,268,000
Other ............................................ 63,000 100,000
-----------------------------
Total loans ........................ 270,123,000 253,247,000
Less:
Allowance for loan losses ..................... 3,091,000 2,787,000
Unearned discount ............................. 40,000 142,000
-----------------------------
$ 266,992,000 $ 250,318,000
=============================
Loans considered to be impaired are as follows:
December 31,
-----------------------------
1999 1998
-----------------------------
Impaired loans for which an allowance
has been provided .............................$ 367,000 $ 338,000
Impaired loans for which no allowance
has been provided ............................. 136,000 319,000
-----------------------------
Total loans determined to be impaired ......$ 503,000 $ 657,000
=============================
Allowance provided for impaired loans, included
in the allowance for loan losses ..............$ 80,000 $ 95,000
=============================
The average recorded investment in impaired loans during 1999 and 1998 was
$571,000 and $854,000, respectively. Interest income on impaired loans of
$23,000, $20,000, and $12,000 was recognized for cash payments received in 1999,
1998, and 1997, respectively.
Nonaccruing loans totaled $503,000 and $657,000 at December 31, 1999 and 1998,
respectively. Interest income in the amount of $42,000, $54,000, and $90,000
would have been earned on the nonaccrual loans had they been performing loans in
accordance with their original terms during the years ended December 31, 1999,
1998, and 1997, respectively. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 1999,
1998, and 1997 totaled $23,000, $20,000, and $12,000, respectively.
Changes in the allowance for loan losses are summarized as follows:
Year Ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
Beginning balance ..........................$ 2,787,000 $ 2,604,000 $ 2,803,000
Provisions charged to expense ........... 406,000 125,000 4,000
Recoveries .............................. 227,000 250,000 80,000
------------------------------------
3,420,000 2,979,000 2,887,000
Loans charged off ....................... 329,000 192,000 283,000
------------------------------------
Ending balance .............................$ 3,091,000 $ 2,787,000 $ 2,604,000
====================================
The Company retains mortgage loan servicing on loans sold into the secondary
market which are not included in the accompanying consolidated balance sheets.
The unpaid principal balance on these loans was $9,739,000 and $9,672,000 as of
December 31, 1999 and 1998, respectively. Custodial escrow balances maintained
in connection with these loans were approximately $76,000 and $67,000 as of
December 31, 1999 and 1998, respectively. All loans sold are without recourse.
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows:
Years of
Useful
Lives December 31,
-----------------------------------
1999 1998
-------------------------
Bank premises (including land of
$631,000 each year) ...................... 10-40 $ 6,934,000 $ 6,970,000
Leasehold improvements ...................... 5-15 201,000 201,000
Furniture and equipment ..................... 5-15 2,442,000 2,256,000
-------------------------
9,577,000 9,427,000
Accumulated depreciation .................... 4,121,000 3,569,000
-------------------------
$ 5,456,000 $ 5,858,000
=========================
Note 6. Deposits
The composition of deposits is summarized as follows:
December 31,
------------------------------
1999 1998
------------------------------
Demand ...........................................$ 86,951,000 $ 84,351,000
NOW accounts ..................................... 32,521,000 36,062,000
Savings .......................................... 20,642,000 21,965,000
Time certificates ................................ 129,458,000 119,468,000
------------------------------
$ 269,572,000 $ 261,846,000
==============================
Included in interest-bearing deposits are certificates of deposit with a minimum
denomination of $100,000 totaling $35,421,000 and $28,508,000 as of December 31,
1999 and 1998, respectively. Maturities of these certificates are summarized as
follows:
December 31,
------------------------------
1999 1998
------------------------------
One to three months ..............................$ 13,654,000 $ 9,818,000
Three to six months .............................. 9,200,000 5,839,000
Six to twelve months ............................. 7,649,000 7,230,000
Over twelve months ............................... 4,918,000 5,621,000
------------------------------
$ 35,421,000 $ 28,508,000
==============================
At December 31, 1999, the scheduled maturities of all certificates of deposit
are as follows:
Year ending December 31:
2000 .............................. $ 98,029,000
2001 .............................. 24,683,000
2002 .............................. 4,667,000
2003 .............................. 1,263,000
2004 .............................. 406,000
2005 and thereafter ............... 410,000
------------
$129,458,000
============
Note 7. Notes Payable Notes payable are summarized as follows:
December 31,
------------------------
1999 1998
------------------------
Term note payable to a bank, interest fixed for
three years at 1.5% plus adjusted interbank
rate (7.41% as of December 31, 1999), due
May 4, 2002, with quarterly principal and
interest payments of $77,000, secured by
stock of subsidiary banks of the Company ............$ 1,919,000 $ 1,750,000
Term note payable to a bank, interest fixed for
five years at 1.75% plus rate of five-year
U.S. Treasury note (7.36% as of December 31,
1999), due May 4, 2003, with annual principal
installments of $550,000, secured by stock of
subsidiary banks of the Company ..................... 4,950,000 5,500,000
------------------------
$ 6,869,000 $ 7,250,000
========================
The notes payable include certain restrictive covenants. The Company is in
compliance with these covenants as of December 31, 1999. For the year ended
December 31, 1998, the Company was in compliance or the covenants had been
waived as of March 1, 1999.
Notes payable are due as follows:
Year ending December 31:
2000 .............................. $ 718,000
2001 .............................. 732,000
2002 .............................. 2,119,000
2003 .............................. 3,300,000
------------
$ 6,869,000
============
Note 8. Other Borrowed Funds Other borrowed funds consist of the following:
December 31,
----------------------------
1999 1998
----------------------------
Securities sold under agreements to repurchase .....$ 4,626,000 $ 5,645,000
Federal Home Loan Bank advances .................... 64,621,000 47,973,000
Treasury tax and loan open note .................... 2,211,000 163,000
The treasury tax and loan open note represents overnight borrowings from the
Federal Reserve Bank system. The securities sold under agreements to repurchase
represent agreements with customers of the Banks which are collateralized with
securities of the Banks held by the Federal Home Loan Bank of Des Moines. The
Federal Home Loan Bank may sell, loan, or otherwise dispose of such securities
to other parties in the normal course of their operations with prior written
approval of the Banks, and have agreed to resell to the Banks substantially
identical securities at the maturities of the agreements. At December 31, 1999,
all but $757,000 of the securities sold under agreements to repurchase mature
within twelve months, with $757,000 maturing June 30, 2001.
The average and maximum amount outstanding along with the rates of interest
related to securities sold under agreements to repurchase are as follows:
1999 1998
----------------------------
Daily average amount outstanding during the year ...$ 4,988,000 $ 5,412,000
Maximum outstanding as of any month end ............ 6,063,000 6,388,000
Weighted average interest rate during the year ..... 4.84% 5.02%
Weighted average interest rate at the end of the
year ............................................ 4.99% 4.87%
Securities underlying the agreements at the end of
the year:
Carrying value ..................................$ 8,045,000 $ 10,698,000
Fair value ...................................... 8,045,000 10,698,000
Advances from the Federal Home Loan Bank as of December 31, 1999 bear interest
and are due as follows:
Interest Rate Balance Due
----------------------------------
Year ending December 31:
2000 ............................. 5.70% - 6.73% $ 7,650,000
2001 ............................. 5.32% - 7.09% 5,100,000
2002 ............................. 6.02% - 7.13% 6,950,000
2003 ............................. 5.52% - 6.67% 4,250,000
2004 ............................. 5.57% - 7.00% 4,350,000
2005 and thereafter .............. 5.00% - 7.39% 36,321,000
-------------
$64,621,000
=============
Nearly all of the advances maturing in 2005 and thereafter have options which
allow the Company the right, but not the obligation, to "put" the advances back
to the Federal Home Loan Bank.
As of December 31, 1998 advances from the Federal Home Loan Bank in the amount
of $47,973,000 had interest rates between 5.00% and 7.39% and various maturity
dates between 1999 and 2013.
First mortgage loans of approximately $91,181,000 and $61,995,000 as of December
31, 1999 and 1998, respectively, are pledged as collateral on Federal Home Loan
Bank advances.
Note 9. Regulatory Matters
The Company and Banks ("Entities") are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Entities' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Entities must meet specific capital guidelines that involve quantitative
measures of the Entities' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Entities' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Entities 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, 1999, that the
Entities meet all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency (OCC) categorized the Banks as well capitalized
under the regulatory framework for prompt corrective action. As of December 31,
1999 the Company is categorized as adequately capitalized. To be categorized as
adequately or well capitalized the Company and Banks must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since the OCC notification that
management believes have changed the Banks or Company's category.
The Company and Banks' actual capital amounts and ratios are presented in the
following table.
To be Well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------
As of December 31, 1999
Total Capital (to Risk Weighted Assets):
Consolidated .........................$ 24,394,000 9.5% $ 20,491,000 >8.0% $25,614,000 >10.0%
First National Bank of Muscatine ..... 22,959,000 12.4 14,802,000 >8.0 18,502,000 >10.0
First National Bank in Fairfield ..... 8,394,000 12.0 5,612,000 >8.0 7,014,000 >10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated ......................... 21,303,000 8.3 10,246,000 >4.0 15,369,000 >6.0
First National Bank of Muscatine ..... 20,645,000 11.2 7,401,000 >4.0 11,102,000 >6.0
First National Bank in Fairfield ..... 7,703,000 11.0 2,806,000 >4.0 4,209,000 >6.0
Tier 1 Capital (to Average Assets):
Consolidated ......................... 21,303,000 5.8 14,681,000 >4.0 18,351,000 >5.0
First National Bank of Muscatine ..... 20,645,000 7.6 10,834,000 >4.0 13,543,000 >5.0
First National Bank in Fairfield ..... 7,703,000 8.0 3,835,000 >4.0 4,794,000 >5.0
As of December 31, 1998
Total Capital (to Risk Weighted Assets):
Consolidated .........................$ 21,793,000 9.1% $ 19,069,000 >8.0% $23,836,000 >10.0%
First National Bank of Muscatine ..... 21,224,000 12.5 13,612,000 >8.0 17,015,000 >10.0
First National Bank in Fairfield ..... 7,810,000 11.7 5,360,000 >8.0 6,699,000 >10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated ......................... 19,006,000 8.0 9,534,000 >4.0 14,302,000 >6.0
First National Bank of Muscatine ..... 19,095,000 11.2 6,806,000 >4.0 10,209,000 >6.0
First National Bank in Fairfield ..... 7,301,000 10.9 2,680,000 >4.0 4,019,000 >6.0
Tier 1 Capital (to Average Assets):
Consolidated ......................... 19,006,000 5.6 13,697,000 >4.0 17,121,000 >5.0
First National Bank of Muscatine ..... 19,095,000 7.7 9,906,000 >4.0 12,383,000 >5.0
First National Bank in Fairfield ..... 7,301,000 7.7 3,771,000 >4.0 4,714,000 >5.0
Current banking law limits the amount of dividends banks can pay. As of December
31, 1999, amounts available for payment of dividends were $4,685,000 and
$580,000 for First National Bank of Muscatine and First National Bank in
Fairfield, respectively. Regardless of formal regulatory restrictions the Banks
may not pay dividends which would result in their capital levels being reduced
below the minimum requirements shown above.
Note 10. Employee Benefits
The Company and bank subsidiaries sponsor an Employee Stock Ownership Plan with
401(k) provisions. This plan owns 92,847 shares of the Company as of December
31, 1999 and covers substantially all employees who have worked at least 1,000
hours any year. An employee, upon termination of employment, has the option of
retaining ownership of shares vested pursuant to the plan or selling such shares
to the Company. The Company and subsidiary banks match 50% of the amount an
employee contributes to the plan up to a maximum of 6% of the employee's pay.
Additionally, the Company and subsidiary banks may make profit sharing
contributions to the plan which are allocated to the accounts of participants in
the plan on the basis of total relative compensation. The amounts expensed for
the years ended December 31, 1999, 1998, and 1997 were $302,000, $294,000, and
$279,000, respectively.
Note 11. Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
Currently paid or payable ..................$ 1,677,000 $ 1,514,000 $ 1,475,000
Deferred income taxes ...................... (125,000) 12,000 46,000
------------------------------------
$ 1,552,000 $ 1,526,000 $ 1,521,000
====================================
Income tax expense differs from the amount computed by applying the federal
income tax rate to income before income taxes. The reasons for this difference
are as follows:
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------
% Of % Of % Of
Dollar Pretax Dollar Pretax Dollar Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------
Computed "expected"
income tax expense .......... $ 1,737,000 35.0% $ 1,683,000 35.0% $ 1,680,000 35.0%
Effect of graduated tax rate ... (50,000) (1.0) (48,000) (1.0) (48,000) (1.0)
Tax exempt interest and
dividend income, net ........ (314,000) (6.3) (315,000) (6.6) (295,000) (6.1)
State income taxes, net ........ 164,000 3.3 159,000 3.3 158,000 3.3
Other .......................... 15,000 0.3 47,000 1.0 26,000 0.5
-------------------------------------------------------------------
$ 1,552,000 31.3% $ 1,526,000 31.7% $ 1,521,000 31.7%
===================================================================
Net deferred taxes, included in other assets or other liabilities on the
consolidated balance sheets, consist of the following components as of December
31:
1999 1998
-----------------------------
Deferred tax assets:
Allowance for loan losses .......................$ 380,000 $ 237,000
Other real estate owned ......................... 13,000 19,000
Securities available for sale ................... 386,000 - -
----------------------------
779,000 256,000
----------------------------
Deferred tax liabilities:
Securities available for sale ................... - - (422,000)
Bank premises and equipment ..................... (102,000) (97,000)
Unrealized bond accretion ....................... (16,000) (9,000)
Net deferred loan origination fees .............. (54,000) (54,000)
----------------------------
(172,000) (582,000)
----------------------------
Net deferred tax assets (liabilities) ........$ 607,000 $ (326,000)
============================
The net change in 1999 and 1998 deferred income taxes includes $808,000 and
$147,000, respectively, which is reflected in stockholders' equity.
Note 12. Earnings Per Share
The following information was used in the computation of basic and diluted
earnings per share:
Year Ended December 31,
-----------------------------------
1999 1998 1997
-----------------------------------
Basic and diluted earnings, net income ......$ 3,412,000 $ 3,282,000 $ 3,280,000
-----------------------------------
Weighted average common shares outstanding .. 1,531,391 1,628,447 1,758,883
Weighted average common shares issuable upon
conversion of stock options .............. - - - - 42,139
-----------------------------------
Weighted average common and common
equivalent shares ..................... 1,531,391 1,628,447 1,801,022
===================================
Note 13. Commitments and Contingencies
Financial instruments with off-balance-sheet risk: The Banks are parties to
financial instruments with off-balance-sheet risk made in the normal course of
business to meet the financing needs of their customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheets.
The Banks' 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 amounts of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
December 31,
----------------------------
1999 1998
----------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit ................... $ 34,986,000 $ 32,556,000
Standby letters of credit ...................... 992,000 1,470,000
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. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon and some of the commitments will be sold to other
financial intermediaries if drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's credit worthiness on a case-by-case basis.
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 and extend
for no more than one year. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers.
Concentration of credit risk: The Banks grant commercial, real estate, and
installment loans to customers in the Banks' primary market area which includes
Muscatine and Jefferson Counties in Iowa. The Banks have diversified loan
portfolios, as set forth in Note 4. The distribution of commitments to extend
credit and standby letters of credit approximates the distribution of loans
outstanding. The Banks' policies for requiring collateral are consistent with
prudent lending practices and anticipate the potential for economic
fluctuations. Collateral varies but may include accounts receivable, inventory,
property and equipment, residential real estate properties and income producing
commercial properties. It is the policy of the Banks to file financing
statements and mortgages covering collateral pledged.
Contingencies: In the normal course of business, the Banks are 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.
Note 14. Related Party Matters
Senior officers and directors of the Company and the Banks, principal holders of
equity securities of the Company and their associates were indebted to the Banks
for loans made in the ordinary course of business. As of December 31, 1999, none
of these loans are classified as nonaccrual, past due, or restructured.
The activity in such loans during the years ended December 31, 1999 and 1998 is
as follows:
1999 1998
----------------------------
Balance, beginning ................................ $ 8,692,000 $ 7,473,000
Additions ...................................... 13,240,000 11,773,000
Deductions (payments) .......................... (12,582,000) (10,554,000)
----------------------------
Balance, ending ................................... $ 9,350,000 $ 8,692,000
============================
Note 15. Fair Value of Financial Instruments
FASB Statement No. 107 "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments in the table below:
Cash and due from banks and interest-bearing deposits at financial
institutions: The carrying value for cash and due from banks and
interest-bearing deposits at financial institutions equal their fair values.
Investment securities available for sale: Fair values for investment
securities available for sale are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Federal funds sold and other overnight investments: The carrying value for
federal funds sold and other overnight investments equal their fair value.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for certain mortgage loans (i.e., one-to-four family
residential) are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. The fair values for other loans (i.e., commercial real
estate and rental property mortgage loans, commercial and industrial loans,
and agricultural loans) are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Accrued interest receivable and payable: The carrying value of accrued
interest receivable and payable represents its fair value.
Deposits: Fair values for demand deposits (i.e., interest and noninterest
checking, passbook savings, and certain types of money market accounts) are,
by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities of time deposits.
Notes payable: For variable rate notes payable, the carrying amount is a
reasonable estimate of fair value. For fixed rate notes payable, fair values
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on similar borrowings.
Securities sold under agreements to repurchase and treasury tax and loan open
note: For such short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Federal Home Loan Bank advances: The fair value is estimated using discounted
cash flow analysis, employing interest rates currently being quoted by the
Federal Home Loan Bank.
Commitments to extend credit and standby letters of credit: The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. As of December 31, 1999 and 1998, these
items are immaterial in nature.
Note 15. Fair Value of Financial Instruments (Continued)
The carrying amounts and fair values of financial instruments at December 31,
1999 and 1998 are summarized as follows:
Carrying Amounts Fair Values
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
Financial Assets:
Cash and due from banks ............... $ 15,149,000 $ 14,273,000 $ 15,149,000 $ 14,273,000
Interest-bearing deposits at
financial institutions ............. 155,000 135,000 155,000 135,000
Investment securities ................. 62,950,000 58,711,000 62,950,000 58,711,000
Federal funds sold .................... 15,800,000 12,555,000 15,800,000 12,555,000
Loans, net of allowance ............... 266,992,000 250,318,000 256,701,000 247,140,000
Accrued interest receivable ........... 2,985,000 2,763,000 2,985,000 2,763,000
Financial Liabilities:
Deposits .............................. $ 269,572,000 $ 261,846,000 $ 266,029,000 $ 259,073,000
Notes payable ......................... 6,869,000 7,250,000 6,694,000 7,250,000
Securities sold under
agreements to repurchase ........... 4,626,000 5,645,000 4,626,000 5,645,000
Federal Home Loan Bank
advances ........................... 64,621,000 47,973,000 61,548,000 49,320,000
Treasury tax and loan open
note ............................... 2,211,000 163,000 2,211,000 163,000
Accrued interest payable .............. 989,000 895,000 989,000 895,000
Note 16. Parent Company Only Condensed Financial Information
The following is condensed financial information of Iowa First Bancshares Corp.
(parent company only):
- --------------------------------------------------------------------------------
BALANCE SHEETS
(Parent Company Only)
December 31,
----------------------------
ASSETS 1999 1998
----------------------------
Cash ...............................................$ 406,000 $ 491,000
Investment in subsidiaries ......................... 28,238,000 27,699,000
Other assets ....................................... 62,000 37,000
----------------------------
Total assets .........................$ 28,706,000 $ 28,227,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable ...................................$ 6,869,000 $ 7,250,000
Other liabilities ............................... 644,000 668,000
----------------------------
7,513,000 7,918,000
----------------------------
STOCKHOLDERS' EQUITY:
Common stock .................................... 200,000 200,000
Additional paid-in capital ...................... 4,349,000 4,408,000
Retained earnings ............................... 27,585,000 25,460,000
----------------------------
32,134,000 30,068,000
Accumulated other comprehensive income (loss),
net .......................................... (649,000) 708,000
Less cost of common shares acquired for the
treasury ..................................... (10,292,000) (10,467,000)
----------------------------
Total stockholders' equity ................ 21,193,000 20,309,000
----------------------------
Total liabilities and stockholders'
equity ................................. $ 28,706,000 $ 28,227,000
============================
STATEMENTS OF INCOME
(Parent Company Only)
Year Ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
Operating revenue:
Dividends received from subsidiaries ....$ 2,050,000 $ 3,100,000 $ 800,000
Management fees and other income ........ 280,000 323,000 356,000
------------------------------------
Total operating revenue .............. 2,330,000 3,423,000 1,156,000
Interest expense ........................... 522,000 368,000 - -
Operating expenses ......................... 667,000 687,000 659,000
------------------------------------
Income before income tax (credits),
and equity in subsidiaries'
undistributed net income ............. 1,141,000 2,368,000 497,000
Applicable income tax (credits) ............ (375,000) (319,000) (180,000)
------------------------------------
1,516,000 2,687,000 677,000
Equity in subsidiaries' undistributed net
income .................................. 1,896,000 595,000 2,603,000
------------------------------------
Net income ........................$ 3,412,000 $ 3,282,000 $ 3,280,000
====================================
STATEMENTS OF CASH FLOWS
(Parent Company Only)
Year Ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
CASH FLOWS from OPERATING ACTIVITIES
Net income ..............................$ 3,412,000 $ 3,282,000 $ 3,280,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in subsidiaries' undistributed
net income ......................... (1,896,000) (595,000) (2,603,000)
Amortization and depreciation ........ 13,000 13,000 10,000
Change in assets and liabilities:
(Increase) decrease in other
assets .......................... (10,000) 17,000 (7,000)
Increase (decrease) in other
liabilities ..................... (23,000) (36,000) (101,000)
------------------------------------
Net cash provided by operating
activities ................... 1,496,000 2,681,000 579,000
------------------------------------
CASH FLOWS (USED IN) INVESTING Activities,
purchases of other assets ............... (29,000) - - (26,000)
------------------------------------
CASH FLOWS from FINANCING Activities
Proceeds from notes payable ............. 250,000 9,250,000 - -
Repayment of notes payable .............. (631,000) (2,000,000) - -
Cash dividends paid ..................... (1,287,000) (1,398,000) (1,336,000)
Purchases of common stock for the
treasury ............................. (84,000)(10,753,000) (174,000)
Issuance of common stock ................ 200,000 254,000 1,318,000
------------------------------------
Net cash (used in) financing
activities ........................ (1,552,000) (4,647,000) (192,000)
------------------------------------
Net increase (decrease) in cash ... (85,000) (1,966,000) 361,000
Cash:
Beginning ............................... 491,000 2,457,000 2,096,000
------------------------------------
Ending ..................................$ 406,000 $ 491,000 $ 2,457,000
====================================
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale .......$ 62,950,000 $ 58,711,000 65,496,000 $ 67,622,000 $ 60,728,000
Loans, net ..................................... 266,992,000 250,318,000 208,683,000 183,438,000 169,342,000
Total assets ................................... 371,029,000 345,411,000 305,783,000 280,461,000 272,830,000
Deposits ....................................... 269,572,000 261,846,000 242,782,000 238,352,000 235,953,000
Notes payable .................................. 6,869,000 7,250,000 - - - - - -
Other borrowings ............................... 71,458,000 53,781,000 32,183,000 14,870,000 11,737,000
Stockholders' equity ........................... 21,193,000 20,309,000 28,625,000 25,198,000 23,033,000
Interest income ................................ 25,127,000 23,590,000 21,158,000 20,032,000 18,942,000
Interest expense ............................... 13,837,000 12,899,000 10,502,000 9,598,000 9,051,000
Net interest income ............................ 11,290,000 10,691,000 10,656,000 10,434,000 9,891,000
Provision for loan losses ...................... 406,000 125,000 4,000 160,000 45,000
Investment securities gains, net ............... 4,000 18,000 - - 4,000 3,000
Other income ................................... 2,018,000 1,857,000 1,696,000 1,760,000 1,573,000
Operating expenses ............................. 7,942,000 7,633,000 7,547,000 6,857,000 6,877,000
Income before income taxes ..................... 4,964,000 4,808,000 4,801,000 5,181,000 4,545,000
Income taxes ................................... 1,552,000 1,526,000 1,521,000 1,716,000 1,495,000
Net income ..................................... 3,412,000 3,282,000 3,280,000 3,465,000 3,050,000
Per common share (*): Net income:
Basic ....................................$ 2.23 $ 2.02 $ 1.86 $ 2.02 $ 1.77
Diluted .................................. 2.23 2.02 1.82 1.95 1.71
Cash dividends declared ..................... 0.84 0.84 0.78 0.68 0.53
Cash dividends declared as a percentage of
net income ................................ 38% 42% 43% 35% 31%
Weighted average common shares ................. 1,531,391 1,628,447 1,758,883 1,712,574 1,724,028
Weighted average common and common equivalent
shares, assuming dilution ................... 1,531,391 1,628,447 1,801,022 1,776,680 1,779,021
*All per share and weighted average common share information has been adjusted
to reflect the three-for-one stock split which occurred in July 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Iowa First Bancshares Corp. (Company) is a bank holding company providing bank
and bank related services through its wholly-owned subsidiaries, First National
Bank of Muscatine (Muscatine) and First National Bank in Fairfield (Fairfield).
Total average assets of the Company increased 8.4% in 1999, 13.5% in 1998, and
6.0% in 1997. The distribution of average assets, liabilities and stockholders'
equity and interest rates, and interest differential was as follows (dollar
amounts in thousands and income and rates on a fully taxable equivalent basis
using statutory tax rates in effect for the year presented):
1999 1998 1997
------------------------------ ----------------------------- -----------------------------
Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
Taxable loans, net ..................$ 260,993 $ 20,972 8.04% $ 228,491 $ 19,044 8.33% $ 190,778 $ 16,464 8.63%
Taxable investment securities
available for sale ................ 45,286 2,742 6.05 42,694 2,633 6.17 53,114 3,246 6.11
Nontaxable investment securities and
loans ............................ 20,893 1,545 7.39 20,374 1,552 7.62 18,431 1,448 7.86
Federal funds sold and other
overnight investments ............. 7,736 393 5.08 16,083 889 5.53 8,628 492 5.70
--------------------- --------------------- ---------------------
Total interest-earning assets . 334,908 25,652 7.66 307,642 24,118 7.84 270,951 21,650 7.99
---------- ---------- ----------
Cash and due from banks ............. 12,587 12,462 11,254
Bank premises and equipment, net .... 5,662 5,976 5,316
Other assets ........................ 4,064 3,511 2,863
---------- ---------- ----------
Total .........................$ 357,221 $ 329,591 $ 290,384
========== ========== ==========
LIABILITIES
Deposits:
Interest-bearing demand ..........$ 97,230 $ 2,980 3.06 $ 95,243 $ 2,996 3.15 $ 87,926 $ 2,686 3.05
Time ............................. 124,722 6,477 5.19 120,762 6,680 5.53 114,805 6,372 5.55
Notes payable ....................... 7,051 522 7.40 5,040 368 7.30 - - - - - -
Other borrowings .................... 62,685 3,858 6.15 45,762 2,855 6.24 22,909 1,444 6.30
--------------------- --------------------- ---------------------
Total interest-bearing
liabilities ................... 291,688 13,837 4.74 266,807 12,899 4.83 225,640 10,502 4.65
---------- ---------- ----------
Noninterest-bearing deposits ........ 42,526 37,756 35,930
Other liabilities ................... 2,191 1,879 2,212
---------- ---------- ----------
Total liabilities ............. 336,405 306,442 263,782
STOCKHOLDERS' EQUITY ................ 20,816 23,149 26,602
---------- ---------- ----------
Total .........................$ 357,221 $ 329,591 $ 290,384
========== ========== ==========
Net interest earnings ............... $ 11,815 $ 11,219 $ 11,148
========== ========== ==========
Net yield (net interest earnings
divided by total interest-
earning assets) ............... 3.53% 3.65% 4.11%
======== ======== ========
The net interest margin decreased in 1999 (from 3.65% in 1998 to 3.53% in 1999).
The return on average interest-earning assets decreased eighteen basis points
(from 7.84% in 1998 to 7.66% in 1999) and interest paid on average
interest-bearing liabilities decreased nine basis points (from 4.83% in 1998 to
4.74% in 1999). Average interest-earning assets to total assets increased in
1999 to 93.75% from 93.34% in 1998. The Company has been successful in growing
earning assets, especially taxable loans, however, competition limits the net
interest earnings achievable from such growth.
The net interest margin decreased in 1998 (from 4.11% in 1997 to 3.65% in 1998).
The return on average interest-earning assets decreased fifteen basis points
(from 7.99% in 1997 to 7.84% in 1998) and interest paid on average
interest-bearing liabilities increased eighteen basis points (from 4.65% in 1997
to 4.83% in 1998). Average interest-earning assets to total assets remained the
same in 1998 as 1997 at 93.3%.
The net interest margin decreased in 1997 (from 4.25% in 1996 to 4.11% in 1997).
The return on average interest-earning assets decreased one basis point (from 8%
in 1996 to 7.99% in 1997) and interest paid on average interest-bearing
liabilities increased sixteen basis points (from 4.49% in 1996 to 4.65% in
1997). Average interest-earning assets to total average assets decreased to
93.3% during 1997 compared to 93.4% the previous year.
FINANCIAL CONDITION:
Investment Securities
---------------------
Investment securities at December 31, 1999 were approximately 13% U.S.
Treasury securities, 41% U.S. government agency securities, 3%
mortgage-backed securities, 30% states and political subdivisions, and 13%
corporate obligations. The reduction in percentage of total investment
securities represented by U.S. Treasury securities and mortgage-backed
securities is due to management's assessment that better value can be
achieved with U.S. government agencies, states and political subdivisions,
and corporate obligations. These three categories accounted for 84% of the
total investment securities at December 1999 compared to 73% the prior year.
The bond market experienced one of its worst performing years in decades,
with yields at year-end appreciably higher than those available at the
beginning of the year.
Investment securities at December 31, 1998 were approximately 20% U.S.
Treasury securities, 31% U.S. government agency securities, 7%
mortgage-backed securities, 32% states and political subdivisions, and 10%
corporate obligations. The reduction from 14% last year to 7% in 1998 for
mortgage-backed securities coupled with the increase from 27% to 32% for
states and political subdivisions reflects management's analysis of relative
value in the current interest rate and overall market conditions.
Investment securities at December 31, 1997 were approximately 20% U.S.
Treasury securities, 29% U.S. government agency securities, 14%
mortgage-backed securities, 27% states and political subdivisions, and 10%
corporate obligations. The 1997 increase in the portfolio percentage devoted
to states and political subdivisions securities reflected the higher yields
which were available on these types of investments compared to treasuries and
agencies.
The fair value of investment securities available for sale at the date
indicated are summarized as follows (dollar amounts in thousands):
December 31,
------------------------------
1999 1998 1997
------------------------------
U.S. Treasury ....................................$ 7,971 $ 11,712 $ 13,099
U.S. government agencies ......................... 26,136 18,014 19,019
Mortgage-backed securities ....................... 1,757 4,181 9,272
State and political subdivisions ................. 18,917 18,641 17,829
Corporate obligations, including stock ........... 8,169 6,163 6,277
------------------------------
$ 62,950 $ 58,711 $ 65,496
==============================
The following table shows the maturities of investment securities available
for sale at December 31, 1999 and the weighted average yields of such
securities (dollar amounts in thousands):
After One, But After Five, But After Ten Years
Within one Year Within Five Years Within Ten Years or Nonmaturing
-------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------
U.S. Treasury ....................... $ 3,979 5.73% $ 3,992 5.81% $ - - - -% $ - - - -%
U.S. government agencies ............ 2,387 5.87 18,615 6.07 4,572 6.31 562 5.81
Mortgage-backed securities .......... 216 5.74 1,541 6.56 - - - - - - - -
States and political subdivisions ... 1,887 7.70 5,835 6.60 7,909 7.40 3,286 7.38
Corporate obligations, including
stock ............................. 1,580 6.39 3,122 6.36 - - - - 3,467 6.33
--------- --------- --------- ---------
$ 10,049 $ 33,105 $ 12,481 $ 7,315
========= ========= ========= =========
The weighted average yields in the previous table are calculated on the basis
of the carrying value and effective yields weighted for the scheduled
maturity of each security. Weighted average yields on tax exempt securities
have been computed on a fully taxable equivalent basis using the federal
statutory tax rate of 34%, the rate in effect for the year ended December 31,
1999, and excluding the interest expense allocated to carry certain
tax-exempt securities. All stock is included in the after ten years or
nonmaturing category.
In 1999, the yield on taxable investment securities decreased twelve basis
points due to reinvesting matured, called, and sold securities in investments
yielding less than the taxable investments removed from the balance sheet.
The 1999 yield on nontaxable investment securities and loans decreased 23
basis points largely as a result of normal maturation of relatively high
yield nontaxable investment securities and loans with reinvestment in
obligations of states and political subdivisions at rates higher than other
comparable investment securities but lower than the matured nontaxable
securities and loans had yielded.
At December 31, 1999, no state or political subdivision securities amortized
cost or market value exceeded 10% of stockholders' equity.
Loans
-----
Loans outstanding (net of unearned discount) at December 31, 1999 increased
6.7% from December 31, 1998.
The amounts of loans outstanding, net of unearned discount, at the indicated
dates is shown in the following table according to the type of loans (dollar
amounts in thousands):
December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------
Commercial ...........................$ 101,079 $ 94,724 $ 79,968 $ 73,681 $ 62,399
Agricultural ......................... 27,810 26,685 20,494 17,555 16,792
Real estate, construction ............ 3,708 2,598 2,120 2,970 1,187
Real estate, mortgage ................ 105,068 95,535 76,904 60,241 56,475
Tax exempt, real estate mortgage ..... 2,581 2,337 3,118 3,485 3,735
Installment, net of unearned ......... 29,774 31,126 28,227 28,100 30,359
discount
Lease financing, net ................. - - - - - - - - 369
Other ................................ 63 100 456 209 335
------------------------------------------------------
$ 270,083 $ 253,105 $ 211,287 $ 186,241 $ 171,651
======================================================
The following loan categories outstanding at December 31, 1999 mature as
follows (dollar amounts in thousands):
After One
Year, But
Amount One Year Within After
Of Loans Or Less Five Years Five Years
------------------------------------------------
Commercial .....................$ 101,079 $ 50,175 $ 31,180 $ 19,724
Agricultural ................... 27,810 14,966 6,353 6,491
Real estate, construction ...... 3,708 3,570 82 56
------------------------------------------------
$ 132,597 $ 68,711 $ 37,615 $ 26,271
================================================
The interest rates on the amount due after one year that are fixed or adjustable
are as follows (dollar amounts in thousands):
Fixed Adjustable
-----------------------------
Commercial ........................................ $ 39,580 $ 11,324
Agricultural ...................................... 11,528 1,316
Real estate, construction ......................... 138 - -
-----------------------------
$ 51,246 $ 12,640
=============================
During 1999 commercial loans increased by $6,355,000 or 6.7%, construction
real estate loans increased by $1,110,000 or 42.7%, mortgage real estate
loans increased by $9,533,000 or 10.0%, agricultural loans increased
$1,125,000 or 4.2%, and net installment loans decreased by $1,352,000 or
4.3%. Overall loan growth of $16,978,000 or 6.7% was quite strong, however,
competition from other lenders resulted in lower margins on this growth.
Management continues to search for quality growth in all loan categories. The
Company sells some real estate loans to the secondary market resulting in
increased fee income and reduced interest rate risk.
Loan Risk Elements Nonaccrual, Past Due and Restructured Loans
--------------------------------------------------------------
The following table presents information concerning the aggregate amount of
nonperforming loans. Nonperforming loans comprise (a) loans accounted for on
a nonaccrual basis; (b) accruing loans contractually past due 90 days or more
as to interest or principal payments (but not included in the nonaccrual
loans in (a) above); and (c) other loans whose terms have been renegotiated
to provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower (exclusive of loans
in (a) or (b) above) (dollar amounts in thousands):
December 31,
----------------------------------------
1999 1998 1997 1996 1995
----------------------------------------
Loans accounted for on
a nonaccrual basis ..................$ 503 $ 657 $ 1,144 $ 855 $ 883
Accrual loans contractually
past due 90 days or more ............. 49 346 459 329 111
Loans whose terms have been renegotiated
to provide a reduction or deferral
of interest or principal because of a
deterioration in the financial
position of the borrower ............ - - - - - - 381 - -
Total nonaccrual loans were $503,000 at December 31, 1999, a decrease of
$154,000 or 23.4% from December 31, 1998. Total nonaccrual and accrual loans
contractually past due 90 days or more were $552,000 at December 31, 1999, a
decrease of $451,000 or 45.0% from a year earlier.
When the full collectibility of principal or interest on any loan is
considered doubtful, previously accrued but uncollected interest remains as
accrued if the principal and interest is protected by sound collateral value
based upon a current independent, qualified appraisal. In practice, in the
vast majority of cases, the interest accrued but uncollected on loans
transferred to nonaccrual status is charged-off at the time of transfer.
Interest in the amounts of $42,000, $54,000, and $90,000 would have been
earned on the nonaccrual loans had they been performing loans in accordance
with their original terms during 1999, 1998, and 1997, respectively. The
interest collected on loans designated as nonaccrual loans and included in
income for the years ended December 31, 1999, 1998, and 1997 was $23,000,
$20,000, and $12,000, respectively.
As of December 31, 1999, the Company had loans totaling $8,601,000 in
addition to those listed as nonaccrual, past due or renegotiated that were
identified by the Banks' internal asset rating systems as classified assets.
This represents a $2,729,000 or 46.4% increase from 1998. The Company is not
aware of any single loan or group of loans, other than these and those
reflected above, of which full collectibility cannot reasonably be expected.
Management has committed resources and is focusing its attention on efforts
designed to control the amount of classified assets. The Company has
$27,810,000 in total agricultural loans outstanding. The Company does not
have any other substantial portion of its loans concentrated in one or a few
industries nor does it have any foreign loans outstanding as of December 31,
1999. The Company's loans are heavily concentrated geographically in the Iowa
counties of Muscatine and Jefferson.
In general, the agricultural loan portfolio risk is dependent on factors such
as governmental policies, weather conditions, agricultural commodities prices
and the mix of grain and livestock raised. Commercial loan risk can also vary
widely from period to period and is particularly sensitive to changing
business and economic conditions as well as governmental policies. Consumer
(installment and real estate mortgage) loan risk is substantially influenced
by employment opportunities in the markets served by the Company.
Other real estate owned was $601,000, $408,000, and $9,000 as if December 31,
1999, 1998, and 1997, respectively.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is established through charges to earnings in
the form of provisions for loan losses. Loan losses or recoveries are charged
or credited directly to the allowance for loan losses. The provision for loan
losses is determined based upon an evaluation of a number of factors by
management of the Banks including (i) loss experience in relation to
outstanding loans and the existing level of the allowance for loan losses,
(ii) a continuing review of problem loans and overall portfolio quality,
(iii) regular examinations and appraisals of loan portfolios conducted by
federal supervisory authorities, and (iv) current and expected economic
conditions. The allowance for loan losses decreased $217,000 in 1995 as net
charge-offs exceeded provisions for loan losses. In 1996, the allowance for
loan losses increased $494,000 as a result of provisions of $160,000 and net
recoveries totaling $334,000. In 1997, the allowance for loan losses
decreased $199,000 as net charge-offs exceeded provisions for loan losses. In
1998, the allowance for loan losses increased $183,000 as a result of
provisions of $125,000 and net recoveries of $58,000. In 1999, the allowance
for loan losses increased $304,000 due to provisions of $406,000 and net
charge-offs of $102,000. The provision was increased during 1999 as a result
of the strong loan growth enjoyed by the Company. Another factor in favor of
increasing the provision was the low agricultural commodity prices and
related uncertainty in the agricultural sector. To date, no significant
losses have been experienced in this area. Management of the Banks continues
to review the loan portfolios and believes the allowance for loan losses is
adequate to absorb losses of existing loans which may become uncollectible.
The Banks allocate the allowance for loan losses according to the amount
deemed to be necessary to provide for possible losses being incurred within
the categories of loans set forth in the table below. The amount of such
components of the allowance for loan losses and the ratio of loans in such
categories to total loans outstanding are as follows (dollar amounts in
thousands):
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------
Allow- Percent Allow- Percent Allow- Percent Allow- Percent Allow- Percent
ance of Loans ance of Loans ance of Loans ance of Loans ance of Loans
For To For To For To For To For To
Loan Total Loan Total Loan Total Loan Total Loan Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
- ----------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Mortgage ................ $ 99 38.90% $ 95 37.75% $ 84 36.39% $ 134 32.35% $ 124 32.90%
Construction ............ - - 1.37 - - 1.03 - - 1.00 - - 1.59 - - 0.69
Commercial ................. 1,935 37.42 1,787 37.42 1,726 37.85 1,837 39.56 1,342 36.35
Agricultural ............... 269 10.29 248 10.54 249 9.70 264 9.43 133 9.78
Installment ................ 788 11.04 657 12.30 545 13.36 568 15.09 710 17.69
Lease financing and other .. - - 0.02 - - 0.04 - - 0.22 - - 0.11 - - 0.41
Tax exempt, real estate
mortgage ................. - - 0.96 - - 0.92 - - 1.48 - - 1.87 - - 2.18
------------------------------------------------------------------------------------------------
$ 3,091 100.00% $ 2,787 100.00% $ 2,604 100.00% $ 2,803 100.00% $ 2,309 100.00%
================================================================================================
Deposits
--------
Total average deposits increased 4.2% in 1999, 6.3% in 1998, and .9% in 1997.
The average deposits are summarized below (dollar amounts in thousands):
1999 1998 1997
--------------------------------------------------------
Average Average Average
Interest Interest Interest
Expense Expense Expense
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------
Noninterest-bearing
demand ..............$ 42,526 - -% $ 37,756 - -% $ 35,930 - -%
Savings ................ 21,742 2.3 22,054 2.5 21,733 2.5
Interest-bearing demand 75,488 3.3 73,189 3.3 66,193 3.2
Time ................... 124,722 5.2 120,762 5.5 114,805 5.6
--------- --------- ---------
Total deposits ...$ 264,478 $ 253,761 $ 238,661
========= ========= =========
Included in interest-bearing time deposits are certificates of deposit with a
minimum denomination of $100,000, with scheduled maturities as follows
(dollar amounts in thousands):
Year Ended December 31,
----------------------------
1999 1998
----------------------------
One to three months ........................ $ 13,654 $ 9,818
Three to six months ........................ 9,200 5,839
Six to twelve months ....................... 7,649 7,230
Over twelve months ......................... 4,918 5,621
----------------------------
$ 35,421 $ 28,508
============================
RESULTS OF OPERATIONS:
- ---------------------
Changes in Diluted Earnings Per Share
-------------------------------------
The increase in diluted earnings per share between 1999 and 1998 amounted to
$.21. During 1998 the Company purchased approximately 16.5% of the
outstanding common shares of Iowa First Bancshares Corp. from the largest
shareholder and his related interests. This reduction in average common
shares outstanding had a $.20 per share positive impact on earnings per
share. The major sources of change are presented in the following table:
1999 1998
--------------------
Net income per share, prior year .....................$ 2.02 $ 1.82
--------------------
Increase (decrease) attributable to:
Net interest income ............................... 0.39 0.02
Provision for loan losses ......................... (0.18) (0.07)
Other income ...................................... 0.10 0.11
Salaries and employee benefits .................... (0.17) (0.03)
Other operating expenses .......................... (0.04) (0.03)
Income taxes ...................................... (0.02) - -
Change in average common shares outstanding ....... 0.13 0.20
---------------------
Net change ............................. 0.21 0.20
---------------------
Net income per share, current year .....$ 2.23 $ 2.02
=====================
Net Interest Income
- -------------------
The following table sets forth a summary of the changes in interest earned
and paid resulting from changes in volume and rates. Changes attributable to
both rate and volume which cannot be segregated have been allocated to the
change due to volume (dollar amounts in thousands and income on a fully
taxable equivalent basis using statutory rates in effect for year
presented):
Year Ended December 31, 1999 Year Ended December 31, 1998
--------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------ ------------------
Average Average Total Average Average Total
Balance Rate Change Balance Rate Change
-------------------------------------------------------
Interest income:
Taxable loans ....................$ 2,685 $ (757) $ 1,928 $ 3,265 $ (685) $ 2,580
Taxable investment securities
available for sale ............ 163 (54) 109 (634) 21 (613)
Nontaxable investment
securities and loans .......... 41 (48) (7) 155 (51) 104
Federal funds sold and other ..... (461) (35) (496) 426 (29) 397
-------------------------------------------------------
Total interest
income ................ 2,428 (894) 1,534 3,212 (744) 2,468
-------------------------------------------------------
Interest expense:
Interest-bearing demand deposits . 72 (88) (16) 224 86 310
Interest-bearing time deposits ... 221 (424) (203) 332 (24) 308
Notes payable .................... 147 7 154 368 - - 368
Other borrowings ................. 1,059 (56) 1,003 1,438 (27) 1,411
-------------------------------------------------------
Total interest
expense ............... 1,499 (561) 938 2,362 35 2,397
-------------------------------------------------------
Change in net
interest earnings .....$ 929 $ (333) $ 596 $ 850 $ (779) $ 71
=======================================================
Nonaccruing loans are included in the average balance. Loan fees are not
material.
Provision for Loan Losses
The following table summarizes average loan balances at the end of each year;
changes in the allowance for loan losses arising from loans charged off and
recoveries on loans previously charged off by loan category; and the
provisions for loan losses which have been charged to operating expense
(dollar amounts in thousands):
Year Ended December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------
Balance of allowance for loan
losses at beginning of year ............$ 2,787 $ 2,604 $ 2,803 $ 2,309 $ 2,526
--------------------------------------------------
Loans charged off:
Commercial and agricultural ............ 168 5 163 24 240
Mortgage ............................... 11 18 4 2 27
Installment ............................ 150 169 116 136 171
--------------------------------------------------
Total loans charged off ..... 329 192 283 162 438
--------------------------------------------------
Recoveries of loans previously charged off:
Commercial and agricultural ............ 172 176 36 400 120
Mortgage ............................... 17 11 7 49 23
Installment ............................ 38 63 37 47 33
--------------------------------------------------
Total recoveries ............ 227 250 80 496 176
--------------------------------------------------
Net loans charged off (recovered) ......... 102 (58) 203 (334) 262
--------------------------------------------------
Provisions for loan losses charged
to operating expense ................... 406 125 4 160 45
--------------------------------------------------
Balance at end of year ....................$ 3,091 $ 2,787 $ 2,604 $ 2,803 $ 2,309
==================================================
Average taxable loans outstanding .........$ 260,993 $ 228,491 $ 190,778 $ 168,970 $ 162,432
Ratio of net loan charge-offs (recoveries)
to average taxable loans outstanding .. 0.04% (0.03) 0.11% (0.20) 0.16%
Allowance for loan losses as a
percentage of average taxable
loans outstanding ...................... 1.18 1.22 1.36 1.66 1.42
Coverage of net charge-offs by allowance
for loan year-end losses ............... 30.30 N/A 12.83 N/A 8.81
Operating Expenses
------------------
A continuing objective of the Company is to manage overhead costs while
maintaining optimal productivity, efficiency, capacity, and quality service.
New branch facilities opened during 1997 in Fairfield and Muscatine. These
new facilities coupled with an increased sales focus are necessary to
position our banks for the future in meeting the intense competition that
banks face for loans, deposits, and other banking services. Additionally, the
strong local and regional economics intensified the challenge to find, hire,
train, and retain talented employees. Due to these and other factors,
salaries and benefits increased $254,000 or 5.9% in 1999 compared to 1998.
Our efficiency ratio of 59.7% in 1999 compares favorably to 60.8% in 1998.
Computer expenses increased $33,000 or 8.1%. Overall, operating expenses
increased $309,000 or 4.0%.
Net Income
----------
The Company's consolidated net income for the three years is as follows
(dollar amounts in thousands):
Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
Net income ......................... $ 3,412 $ 3,282 $ 3,280
=====================================
Net income increased $130,000 or 4.0% in 1999. The net interest income
increased $599,000 or 5.6%. Net interest income without the additional
interest expense on notes payable would have increased $753,000 or 6.8%. The
provision for loan losses increased from $125,000 in 1998 to $406,000 in
1999. Other income increased $147,000 or 7.8% and operating expenses
increased $309,000 or 4.0%. Income taxes increased only $26,000.
Net income increased $2,000 or .1% in 1998. The net interest income increased
$35,000 or .3%. The net interest income without the interest expense on the
new notes payable would have increased $403,000 or 3.8%. The provision for
loan losses increased from $4,000 in 1997 to $125,000 in 1998. Other income
increased $179,000 or 10.6% and operating expenses increased $86,000 or 1.1%.
Income taxes increased only $5,000.
Net income decreased $185,000 or 5.3% in 1997. This decrease resulted from
improvement in net interest income of $222,000 or 2.1%, reduction of $156,000
or 97.5% in provisions for loan losses, a reduction in other income totaling
$68,000 or 3.9%, an increase of $690,000 or 10.1% in operating expenses, and
a decrease of $195,000 or 11.4% in income taxes.
Selected Consolidated Ratios
----------------------------
Year Ended December 31,
-----------------------------
1999 1998 1997
-----------------------------
Percentage of net income to:
Average stockholders' equity ................ 16.39% 14.18% 12.33%
Average total assets ........................ 0.96 1.00 1.13
Percentage of average stockholders'
equity to average total assets .............. 5.83 7.02 9.16
Dividend payout ratio .......................... 37.66 41.58 42.86
Interest Rate Sensitivity and Risk Management
---------------------------------------------
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitivity" refers to those assets
and liabilities which are "sensitive" to fluctuations in rates and yields.
When interest rates move, earnings may be affected in many ways. Interest
rates on assets and liabilities may change at different times or by different
amounts. Maintaining a proper balance between rate sensitive earning assets
and rate sensitive liabilities is the principal function of asset and
liability management of a banking organization.
The following table shows the interest rate sensitivity position at several
repricing intervals (dollar amounts in thousands):
Repricing Maturities at December 31, 1999
-------------------------------------------------------------
Less Than 3-12 1-5 More Than Noninterest
3 Months Months Years 5 Years Bearing Total
------------------------------------------------------------
Assets:
Loans ..........................$ 62,227 $ 18,839 $ 93,940 $ 94,574 $ 503 $ 270,083
Investment securities .......... 2,037 11,489 32,686 16,728 10 62,950
Other earning assets ........... 15,955 - - - - - - - - 15,955
Nonearning assets .............. - - - - - - - - 22,041 22,041
------------------------------------------------------------
Total .......................$ 80,219 $ 30,328 $ 126,626 $ 111,302 $ 22,554 $ 371,029
============================================================
Liabilities and Equity:
Deposits .......................$ 59,699 $ 107,103 $ 55,595 $ - - $ 47,175 $ 269,572
Notes payable .................. - - 710 6,159 - - - - 6,869
Securities sold under agreements
to repurchase and TT & L .... 5,754 326 757 - - - - 6,837
FHLB advances .................. 5,137 10,415 40,980 8,089 - - 64,621
Other liabilities .............. - - - - - - - - 1,937 1,937
Equity ......................... - - - - - - - - 21,193 21,193
------------------------------------------------------------
Total liabilities and
equity ...................$ 70,590 $ 118,554 $ 103,491 $ 8,089 $ 70,305 $ 371,029
============================================================
Repricing gap .....................$ 9,629 $ (88,226)$ 23,135 $ 103,213 $ (47,751)$ - -
Cumulative repricing gap .......... 9,629 (78,597) (55,462) 47,751 - - - -
The data in this table incorporates the contractual repricing characteristics
as well as an estimate of the actual repricing characteristics of the
Company's assets and liabilities. Based on the estimate, twenty percent of
the savings and NOW accounts are reflected in the less than 3 months
category, thirty percent in the 3-12 months category, with the remainder in
the 1-5 years category. Also, twenty-five percent of the money market
accounts are reflected in the less than 3 months category with the remainder
in the 3-12 months category.
FHLB advances in the 1-5 year repricing category include $20,830,000 of
advances with actual maturities in the greater than 5 year category. These
advances have options associated with them which allow the Company to "put"
the advances back to the FHLB at a date substantially earlier than the stated
maturity. The Company may utilize this put option if deemed appropriate, or
hold such advances until maturity. As part of the Company's overall interest
rate risk management, these puts are analyzed and used when advantageous.
A positive repricing gap for a given period exists when total
interest-earning assets exceed total interest-bearing liabilities and a
negative repricing gap exists when total interest-bearing liabilities are in
excess of interest-earning assets. Generally a positive repricing gap will
result in increased net interest income in a rising rate environment and
decreased net interest income in a falling rate environment. A negative
repricing gap tends to produce increased net interest income in a falling
rate environment and decreased net interest income in a rising rate
environment. At December 31, 1999, using the estimates discussed above, rate
sensitive liabilities exceeded rate sensitive assets within a one year period
by $78,597,000 and, thus, the Company is positioned to benefit from a fall in
interest rates within the next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate
risk remains in the form of prepayment risk of assets and liabilities, timing
lags in adjusting certain assets and liabilities that have varying
sensitivities to market interest rates, and basis risk. Basis risk refers to
the possibility that the repricing behavior of variable-rate assets could
differ from the repricing characteristics of liabilities which reprice in the
same time period. Even though these assets are match-funded, the spread
between asset yields and funding costs could change.
Because the repricing gap position does not capture these risks, management
utilizes simulation modeling to measure and manage the rate sensitivity
exposure of earnings. The Company's simulation model provides a projection of
the effect on net interest income of various interest rate scenarios and
balance sheet strategies.
Interest Rate Risk Management
-----------------------------
The Company's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest
income. Similarly, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could
result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Since 1990, management's
asset/liability committee has met monthly to review the Company's interest
rate risk position and profitability, and to make or recommend adjustments
for consideration by the Board of Directors. Management also reviews the
Banks' securities portfolio, formulates investment strategies, and oversees
the timing and implementation of transactions to assure attainment of the
Board's objectives in the most effective manner. Notwithstanding the
Company's interest rate risk management activities, the potential for
changing interest rates is an uncertainty that can have an adverse effect on
net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while maintaining or
enhancing net interest margins. At times, depending on the level of general
interest rates, the relationship between long- and short-term interest rates,
market conditions and competitive factors, the Board and management may
determine to increase the Company's interest rate risk position somewhat in
order to increase its net interest margin. The Company's results of
operations and net portfolio values remain vulnerable to increases in
interest rates and to fluctuations in the difference between long- and
short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance-sheet contracts. The following table sets forth,
at December 31, 1999, an analysis of the Bank's interest rate risk as
measured by the estimated changes in NPV resulting from instantaneous and
sustained parallel shifts in the yield curve (+ or - 200 basis points,
measured in 100 basis point increments).
Estimated Increase
Change in (Decrease) in NPV
Interest Estimated --------------------
Rates NPV Amount Amount Percent
---------------------------------------------------------
(Basis Points) (Dollars in Thousands)
+200 $ 14,002 $ (7,327) (34)%
+100 17,593 (3,736) (18)
- - 21,329 - - - -
-100 25,227 3,896 18
-200 29,267 7,938 37
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Liquidity
---------
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are
varied, but include general economic conditions, asset/liability mix, bank
reputation, future FDIC funding needs, changes in regulatory environment, and
credit standing. Assets which provide liquidity consist principally of loans,
cash and due from banks, investment securities, and short-term investments
such as federal funds. Maturities of securities held for investment purposes
and loan payments provide a constant flow of funds available for cash needs.
Liquidity also can be gained by the sale of loans or securities, which were
previously designated as available for sale, prior to maturity. Interest
rates, relative to the rate paid by the security or loan sold, along with the
maturity of the security or loan, are the major determinates of the price
which can be realized upon sale. Net cash provided by operating activities
totaled $4,137,000 in 1999 which compares to cash provided by operating
activities for the year ended December 31, 1998 of $3,560,000. The Company
continues to generate operating cash from sales of its mortgage loans. Net
cash used in investing activities totaled $27,113,000 for the year ended
December 31, 1999 and $37,941,000 for the year ended December 31, 1998.
During the years ended December 31, 1999 and 1998 cash provided by financing
activities totaled $23,852,000 and $36,015,000, respectively. The increase in
cash provided during the year resulted primarily from increases in deposits
and advances from the Federal Home Loan Bank.
The stability of the Company's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer
deposits tend to be small in size, diversified across a large base of
individuals, and are government insured to the extent permitted by law. Total
deposits under $100,000 at December 31, 1999 were $234,151,000 or 86.9% of
total deposits and 63.1% of total liabilities and equity.
Equity decreased in significance as a funding source, falling $8,316,000
during 1998 to total $20,309,000. Most of this decrease was the result of
treasury stock purchases totaling $10,753,000. At December 31, 1999,
securities sold under agreements to repurchase and treasury tax and loan open
note funding sources totaled $6,837,000. Federal Home Loan Bank advances
totaled $64,621,000. At year-end total federal funds sold and securities
maturing within one year were $25,633,000 or 6.9% of total assets. Both
short-term and long-term liquidity are actively reviewed and managed.
Equity increased $884,000 during 1999 to total $21,193,000 at December 31,
1999.
At December 31, 1999, securities available for sale totaling $62,950,000
included $120,000 of gross unrealized gains and $1,155,000 of gross
unrealized losses. These securities may be sold in whole or part to increase
liquid assets, reposition the investment portfolio, or for other purposes as
defined by management.
Capital
-------
Stockholders' equity increased $884,000, 4.4% in 1999. The Company had net
income of $3,412,000, unrealized losses on securities available for sale of
$1,357,000, cash dividends declared totaling $1,287,000, and net treasury
shares sold of $116,000. Dividends to stockholders were declared at a rate of
$.84, $.84, and $.78 per share during the years ended December 31, 1999,
1998, and 1997, respectively.
Year 2000
---------
The Year 2000 Issue is the result of computer programs using two-digits
instead of four-digits to represent the year. These computer systems, if not
renovated, will be unable to interpret dates past 1999, which could cause a
system failure or other computer errors, leading to a disruption in
operations. The Company developed a five-phase program for year 2000
compliance, as outlined by the Federal Financial Institutions Examination
Council (FFIEC) in a supervisory letter. These phases are Awareness,
Assessment, Renovation, Validation, and Implementation.
Subsequent to December 31, 1999, the transition into the year 2000 occurred
and no problems were experienced. The Company continues to monitor its
computer systems to ensure they are operating properly.
The Year 2000 Issue also has a potential impact on the Company's borrowing
customers and their ability to repay. Loan officers have been in constant
communication with key bank borrowing customers to evaluate any problems
related to computer and other system malfunction as a result of the Year 2000
Issue. To date, we have not been advised of any material year 2000 related
problems by our customers.
Impact of Inflation and Changing Prices
---------------------------------------
The financial statements and related data presented herein have been prepared
in terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates have a more significant impact on a financial institution's performance
than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price
of goods and services. In the current interest rate environment, liquidity
and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
Effect of FASB Statements
-------------------------
The Financial Accounting Standards Board has issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Management
believes that adoption of this Statement will not have an effect on the
consolidated financial statements.
Quarterly Results of Operations (Unaudited)
-------------------------------------------
In the fourth quarter of 1999, net income was $849,000, compared with
$797,000 in the same period of 1998, an increase of 6.5%. The net interest
income during the fourth quarter of 1999 was $2,839,000 compared with
$2,707,000 for the fourth quarter of 1998. The provision for loan losses in
the fourth quarter of 1999 was $150,000 compared with $45,000 in 1998. Other
income totaled $544,000 and $507,000 during the fourth quarter of 1999 and
1998, respectively. Other operating expenses of $2,004,000 in the last
quarter of 1999 compare with $1,988,000 for the last quarter of 1998. Income
tax expense was $380,000 and $384,000 for the final quarter of 1999 and 1998,
respectively.
Quarterly results of operations are as follows (dollar amounts in thousands):
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------------------------------------------------
Total interest income .........$ 6,022 $ 6,202 $ 6,384 $ 6,519
Total interest expense ........ 3,268 3,402 3,487 3,680
-----------------------------------------------
Net interest income ............ 2,754 2,800 2,897 2,839
Provision for loan losses ...... 54 112 90 150
Other income ................... 455 490 533 544
Other expense .................. 1,972 1,913 2,053 2,004
-----------------------------------------------
Income before income taxes ..... 1,183 1,265 1,287 1,229
Applicable income taxes ........ 374 390 408 380
-----------------------------------------------
Net income .....................$ 809 $ 875 $ 879 $ 849
===============================================
Net income per share:
Basic .......................$ 0.53 $ 0.57 $ 0.57 $ 0.56
===============================================
Diluted .....................$ 0.53 $ 0.57 $ 0.57 $ 0.56
===============================================
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------------------------------------------
Total interest income .........$ 5,571 $ 5,933 $ 5,995 $ 6,091
Total interest expense ........ 2,899 3,282 3,334 3,384
-----------------------------------------------
Net interest income ............ 2,672 2,651 2,661 2,707
Provision for loan losses ...... 18 26 36 45
Other income ................... 416 465 487 507
Other expense .................. 1,833 1,882 1,930 1,988
-----------------------------------------------
Income before income taxes ..... 1,237 1,208 1,182 1,181
Applicable income taxes ........ 397 368 377 384
-----------------------------------------------
Net income .....................$ 840 $ 840 $ 805 $ 797
===============================================
Net income per share:
Basic .......................$ 0.46 $ 0.51 $ 0.53 $ 0.52
===============================================
Diluted .....................$ 0.46 $ 0.51 $ 0.53 $ 0.52
===============================================
IOWA FIRST BANCSHARES CORP.
DIRECTORS AS OF DECEMBER 31, 1999
---------------------------------
George A. Shepley Craig R. Foss
Chairman of the Board and CEO President
Iowa First Bancshares Corp. Foss, Kuiken, and Gookin,
Chairman of the Board P.C.
First National Bank of Muscatine Donald R. Heckman
Chairman of the Board Investor
First National Bank in Fairfield Factory Manager - Retired
H.J. Heinz Co.
D. Scott Ingstad
Vice Chairman of the Board and President Dean H. Holst
Iowa First Bancshares Corp. Director
Vice Chairman of the Board, President Iowa First Bancshares Corp.
and CEO Director, President and CEO
First National Bank of Muscatine First National Bank in
Fairfield
Kim K. Bartling
Director, Executive Vice President, David R. Housley
Chief Operating Officer and President
Treasurer Iowa First Bancshares Doran and Ward Printing Co.
Corp.
Director, Executive Vice President
and CFO
First National Bank of Muscatine Victor G. McAvoy
Director President
First National Bank in Fairfield Muscatine Community College
Roy J. Carver, Jr. John "Jay" S. McKee
Chairman of the Board Vice President of Finance
Carver Pump Company McKee Button Company
Larry L. Emmert Beverly J. White
President Director and Vice President
Hoffmann, Inc. Quality Foundry Co.
OFFICERS AS OF DECEMBER 31, 1999
--------------------------------
George A. Shepley Patricia R. Thirtyacre
Chairman of the Board Corporate Secretary
Chief Executive Officer
Teresa A. Carter
D. Scott Ingstad Internal Audit Manager
Vice Chairman of the Board
President Kim K. Strause
Assistant Auditor
Kim K. Bartling
Executive Vice President
Chief Operating Officer
Treasurer
IOWA FIRST BANCSHARES CORP.
Subsidiary Bank Directors as of December 31, 1999
-------------------------------------------------
FIRST NATIONAL BANK OF MUSCATINE FIRST NATIONAL BANK IN FAIRFIELD
George A. Shepley George A. Shepley
Chairman of the Board and CEO Chairman of the Board and CEO
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Chairman of the Board Chairman of the Board
First National Bank of Muscatine First National Bank of Muscatine
Chairman of the Board Chairman of the Board
First National Bank in Fairfield First National Bank in Fairfield
D. Scott Ingstad Dean H. Holst
Vice Chairman of the Board and Director
President Iowa First Bancshares Corp.
Iowa First Bancshares Corp. Director, President and CEO
Vice Chairman of the Board, President, First National Bank in Fairfield
and CEO
First National Bank of Muscatine
Kim K. Bartling Kim K. Bartling
Director, Executive Vice President, Director, Executive Vice President,
Chief Operating Officer, Treasurer Chief Operating Officer and
Iowa First Bancshares Corp. Treasurer
Director, Executive Vice President and Iowa First Bancshares Corp.
CFO Director, Executive Vice President
First National Bank of Muscatine and CFO
Director First National Bank of Muscatine
First National Bank in Fairfield Director
First National Bank in Fairfield
Larry L. Emmert Stephen R. Cracker
President Director, Executive Vice President
Hoffmann, Inc. First National Bank in Fairfield
Donald R. Heckman Craig R. Foss
Investor President
Factory Manager - Retired Foss, Kuiken & Gookin PC
H.J. Heinz Co.
Thomas S. Gamrath
David R. Housley Vice President & Treasurer
President Gamrath-Doyle & Associates, Inc.
Doran and Ward Printing Co.
John R. Hammes
Victor G. McAvoy President and General Manager
President Jefferson County Equipment Co.
Muscatine Community College
Marvin L. Nelson
John "Jay" S. McKee President
Vice President of Finance The Nelson Company, Inc.
McKee Button Company
C. Gene Parker
Beverly J. White Agriculturalist
Director and Vice President
Quality Foundry Co.