UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2001
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission file number 2-89283
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IOWA FIRST BANCSHARES CORP.
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(Exact name of registrant as specified in its charter)
STATE OF IOWA 42-1211285
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(State or other jurisdiction (IRS Employer of
incorporation or organization) Identification No.)
300 East Second Street
Muscatine, Iowa 52761
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(Address of principal executive offices)
319-263-4221
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO_____
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At September 30, 2001 there were 1,460,510 shares of the registrant's common
stock outstanding.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE NO.
PART 1 Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets,
September 30, 2001 and December 31, 2000
Consolidated Condensed Statements of
Income, Three and Nine months Ended
September 30, 2001 and 2000
Consolidated Condensed Statements of
Cash Flows, Nine months Ended
September 30, 2001 and 2000
Notes to Consolidated Condensed
Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
2001 2000
---------------------------
ASSETS
Cash and due from banks ................................ $ 11,255 $ 15,994
Interest-bearing deposits at financial institutions .... 1,586 188
Investment securities available for sale ............... 49,289 63,059
Federal funds sold ..................................... 29,060 14,650
Loans, net of allowance for loan
losses September 30, 2001, $3,195; December 31,
2000, $3,268 ........................................ 276,607 270,539
Bank premises and equipment, net ....................... 5,010 4,936
Life insurance contracts ............................... 3,316 3,184
Restricted investment securities ....................... 3,825 3,831
Other assets ........................................... 4,009 4,033
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TOTAL ASSETS ........................................ $ 383,957 $ 380,414
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 39,966 $ 48,649
Interest bearing deposits .............................. 232,604 222,831
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TOTAL DEPOSITS ...................................... 272,570 271,480
Notes payable .......................................... 5,465 6,276
Securities sold under agreements to
repurchase .......................................... 4,161 3,950
Federal Home Loan Bank advances ........................ 67,850 71,531
Treasury tax and loan open note ........................ 2,238 1,187
Company obligated mandatorily redeemable preferred
securities of subsidiary trust ....................... 4,000 --
Other liabilities ...................................... 2,471 2,240
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TOTAL LIABILITIES ................................... 358,755 356,664
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Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ........... 2,118 2,118
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STOCKHOLDERS' EQUITY
Common stock ........................................... 200 200
Additional paid-in capital ............................. 4,309 4,309
Retained earnings ...................................... 31,455 29,852
Accumulated other comprehensive income ................. 1,181 290
Less net cost of common shares acquired for the treasury (11,943) (10,901)
Less maximum cash obligation related to KSOP shares .... (2,118) (2,118)
----------------------
TOTAL STOCKHOLDERS' EQUITY .......................... 23,084 21,632
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $ 383,957 $ 380,414
======================
See Notes to Consolidated Condensed Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
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INTEREST INCOME:
Interest and fees on loans .......................... $ 5,485 $ 5,840 $16,835 $17,079
Interest on investment securities available for sale 702 944 2,344 2,779
Interest on federal funds sold ...................... 149 22 509 193
Dividends on restricted investment securities ....... 34 67 132 184
Other ............................................... 25 -- -- 41
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Total interest income ............................... $ 6,395 $ 6,873 $19,861 $20,235
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INTEREST EXPENSE:
Interest on deposits ................................ $ 2,380 $ 2,674 $ 7,887 $ 7,715
Interest on notes payable ........................... 103 117 330 365
Interest on other borrowed funds .................... 1,088 1,276 3,291 3,475
Interest on company obligated mandatorily
redeemable preferred securities of subsidiary trust 103 -- 208 --
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Total interest expense .............................. $ 3,674 $ 4,067 $11,716 $11,555
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Net interest income ................................. $ 2,721 $ 2,806 $ 8,145 $ 8,680
Provision for loan losses .............................. 130 125 308 284
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Net interest income after provision for
loan losses ....................................... $ 2,591 $ 2,681 $ 7,837 $ 8,396
Investment securities gains ............................ 186 -- 285 8
Other income ........................................... 598 543 1,810 1,623
Other expense .......................................... 2,086 2,082 6,208 6,100
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Income before income taxes .......................... $ 1,289 $ 1,142 $ 3,724 $ 3,927
Applicable income taxes ................................ 389 340 1,145 1,225
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Net income ............................................. $ 900 $ 802 $ 2,579 $ 2,702
=====================================
Net income per common share, basic and diluted ......... $ 0.61 $ 0.53 $ 1.74 $ 1.77
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Dividends declared per common share .................... $ 0.22 $ 0.21 $ 0.66 $ 0.63
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Comprehensive income ................................... $ 1,135 $ 1,242 $ 3,470 $ 3,130
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See Notes to Consolidated Condensed Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 2001 and 2000
(In Thousands)
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 2,579 $ 2,702
Adjustments to reconcile net income to net cash provided by
operating activities:
Proceeds from real estate loans sold ............................ 4,850 1,192
Real estate loans underwritten and sold ......................... (4,813) (1,185)
Gains on real estate loans sold ................................. (37) (7)
Provision for possible loan losses .............................. 308 284
Investment securities (gains), net .............................. (285) (8)
Depreciation .................................................... 475 479
Amortization of premiums and accretion of discounts
on investment securities available for sale, net .............. (19) 5
Net (increase) in other assets .................................. (336) (550)
Net increase in other liabilities ............................... 242 201
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Net cash provided by operating activities .......................... $ 2,964 $ 3,113
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CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in interest bearing deposits at
financial institutions ........................................ $ (1,398) $ (504)
Net (increase) decrease in federal funds sold ................... (14,410) 9,950
Proceeds from sales, maturities, calls and paydowns of available
for sale securities ............................................. 20,556 8,654
Purchases of available for sale securities ...................... (5,063) (11,805)
Net (increase) in loans ......................................... (6,376) (4,817)
Purchases of bank premises and equipment ........................ (549) (103)
Increase in cash value of life insurance contracts .............. (132) (3,139)
Net (purchases) sales of restricted investment securities ....... 6 (358)
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Net cash (used in) investing activities ......................... $ (7,366) $ (2,122)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in noninterest bearing deposits .................. $ (8,683) $ (6,632)
Net increase in interest bearing deposits ....................... 9,773 3,237
Net increase (decrease) in securities sold under
agreements to repurchase ...................................... 211 (453)
Repayment of notes payable ...................................... (686) (676)
Net increase (decrease) in line of credit ....................... (125) 25
Net increase (decrease) in treasury tax and loan open note ...... 1,051 (281)
Advances from Federal Home Loan Bank ............................ 13,400 15,350
Payments of advances from Federal Home Loan Bank ................ (17,081) (12,097)
Net proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trust ........... 3,832 --
Cash dividends paid ............................................. (987) (965)
Purchases of common stock for the treasury ...................... (1,042) (456)
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Net cash (used in) financing activities ......................... $ (337) $ (2,948)
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Net (decrease) in cash and due from banks ....................... (4,739) (1,957)
Cash and due from banks:
Beginning ....................................................... $ 15,994 $ 15,149
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Ending .......................................................... $ 11,255 $ 13,192
====================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest ...................................................... $ 11,832 $ 11,064
Income taxes .................................................. 1,193 1,390
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in accumulated other comprehensive income, unrealized
gains on securities available for sale, net ...................... 891 428
See Notes to Consolidated Condensed Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 (Muscatine) and First National
Bank in Fairfield (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. The Company also owns the outstanding stock of
Iowa First Capital Trust I, which was capitalized in March 2001 for the purpose
of issuing Company Obligated Mandatorily Redeemable Preferred Securities.
Reclassifications:
Certain amounts in the prior year financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform with current
year presentations.
Note 2. Capital Stock and Earnings Per Share
Common shares and preferred stock authorized total 6,000,000 shares and 500,000
shares, respectively. 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. The average number of shares
of common stock outstanding for the first nine months of 2001 and 2000 were
1,485,882 and 1,529,158, respectively. There were no common stock equivalents in
2001 or 2000.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Discussion and Analysis of Financial Condition
The Company's total assets at September 30, 2001, were $383,957,000. Muscatine's
total assets were $284,341,000 which reflects a $3,387,000 (1.2%) increase from
December 31, 2000, total assets. Fairfield's total assets were $97,337,000 at
September 30, 2001, which is a decrease of $1,596,000 (1.6%) when compared to
December 31, 2000, total assets. Total consolidated assets increased by 0.9%
during the first nine months of 2001. Compared to September 30, 2000, however,
total consolidated assets have increased $12,545,000 (3.4%).
Net loans totaled $276,607,000 at September 30, 2001. Net loans at Muscatine
increased by $6,524,000 (3.3%) during the first nine months. Net loans decreased
at Fairfield by $456,000 (0.6%) during the first nine months. Consolidated net
loans increased by $6,068,000 (2.2%) year-to-date.
Total available for sale securities decreased $13,770,000 during the first nine
months of 2001 while federal funds sold increased $14,410,000. The Banks
emphasize purchase of securities with maturities of five years and less as such
purchases offer reasonable yields with little credit risk as well as limited
interest rate risk. Additionally, selected securities with longer maturities are
owned in order to enhance overall portfolio yield without significantly
increasing risk. In the current historically low interest rate environment, the
banks have purchased few securities, and those that have been purchased have had
relatively short maturities. Securities sold during the year of $9,159,000 have
resulted in gains recognized totaling $285,000.
Total deposits at September 30, 2001, were $272,570,000. Deposits, net of
intercompany deposits, at Muscatine increased $5,162,000 (2.7%) from the prior
year end. Fairfield's total deposits decreased $4,072,000 (5.0%) during the same
period. This represents a combined deposit increase of nearly $1.1 million
(0.4%) for the Company during the first nine months of 2001. Additionally,
securities sold under agreements to repurchase increased $211,000 to $4.2
million and advances borrowed from the Federal Home Loan Bank decreased
$3,681,000 to total $67.9 million at quarter end.
On March 28, 2001, the Company issued 4,000 shares totaling $4,000,000 of
Company Obligated Mandatorily Redeemable Preferred Securities of Iowa First
Capital Trust I. The securities provide for cumulative cash distributions
calculated at a 10.18% annual rate. The Company may, at one or more times, defer
interest payments on the capital securities for up to 10 consecutive semi-annual
periods, but not beyond June 8, 2036. At the end of the deferral period, all
accumulated and unpaid distributions will be paid. The capital securities will
be redeemed on June 8, 2031; however, the Company has the option to shorten the
maturity date to a date not earlier than June 8, 2011. The redemption price
begins at 105.09% to par and is reduced 51 basis points each year until June 8,
2021 when the capital securities can be redeemed at par. Holders of the capital
securities have no voting rights, are unsecured, and rank junior in priority of
payment to all of the Company's indebtedness and senior to the Company's capital
stock. For regulatory purposes, the entire amount of the capital securities is
allowed in the calculation of Tier 1 capital. The capital securities are
included in the balance sheet as a liability with the cash distributions
included in interest expense.
Results of Operation
Consolidated net income was $900,000, or $.61 per share, for the third quarter
of 2001. This was $98,000 or 12.2% more than the same period last year. Net
interest income declined from the third quarter of 2000 to the third quarter of
2001 by $85,000 (3.0%), provision for loan losses increased $5,000 (4.0%),
securities gains increased by $186,000, other income increased by $55,000
(10.1%), and operating expenses increased only $4,000 (0.2%). For the first nine
months of 2001, net income was $2,579,000 which represented $123,000 or 4.6%
less than the same period last year. Net income per share for the first nine
months of 2001 was $1.74 which represented $.03 or 1.7% less than the prior
year.
Management had expressed concern for several quarters as to the ability to
continue increasing net interest income each successive quarter. Net interest
income did indeed decline during the first three quarters of 2001 compared to
2000. The prime lending rate dropped a precipitous 350 basis points during the
first nine months of 2001. This rapid, substantial decline in the prime lending
rate caused downward pressure on the Company's net interest margin.
Additionally, the usage of wholesale funding sources, while mitigating
intermediate and long-term interest rate risk, increases interest expense. The
interest expense associated with the debt incurred to purchase treasury shares
and the interest expense related to the aforementioned Company Obligated
Mandatorily Redeemable Preferred Securities also add pressure to the net
interest income. Finally, the intense competition for all types of loans and
deposits limits the Company's ability to control pricing and other terms when
dealing with customers.
Provisions for loan losses were $130,000 and $308,000, respectively, for the
three and nine months ended September 30, 2001. This was $5,000 more than the
third quarter of 2000 and $24,000 more than the first nine months of 2000. Net
loan charge-offs through September 30, 2001 totaled $381,000 compared to net
charge-offs of $123,000 for the first three quarters of 2000.
Nonaccrual loans totaled $806,000 at September 30, 2001, $295,000 more than the
end of the third quarter in 2000. Other real estate owned totaled $221,000, a
reduction of $197,000 from a year ago, and loans past due 90 days or more and
still accruing totaled $861,000 which was $392,000 more than at the end of the
third quarter of 2000. The reserve for loan losses of $3,195,000 represents 1.2%
of net loans and 169% of total nonaccrual loans, other real estate owned, and
loans past due 90 days or more and still accruing.
The efficiency ratio, defined as noninterest expense as a percent of net
interest income plus noninterest income, was 60.6% for the first nine months of
2001 compared to 59.5% for all of 2000. The primary reason for this change is
the reduced net interest income.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" 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.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative 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 September 30, 2001, rate sensitive liabilities
exceeded rate sensitive assets within a one year maturity range and, thus, the
Company is theoretically positioned to benefit from a decline in interest rates
within the next year. However, over shorter periods of three to six months,
rising rates tend to be more beneficial for the Company.
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.
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.
Additionally, liquidity can be gained by the sale of loans or securities prior
to maturity if such assets had previously been designated as available for sale.
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.
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 at
September 30, 2001, were $272,570,000 or 71% of total liabilities and equity.
Securities available for sale with a cost totaling $47,407,000 at quarter-end
included net unrealized gains of $1,882,000. These securities may be sold in
whole or in part to increase liquid assets, reposition the investment portfolio,
or for other purposes as defined by Management.
Capital
Stockholders' equity increased $1,452,000 (6.7%) during the nine months ended
September 30, 2001.
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a consistent system for
comparing capital positions of financial institutions and to take into account
the different inherent risks among financial institutions' assets and
off-balance-sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a Financial Institution to maintain capital at higher levels.
A comparison of the Company's capital as of September 30, 2001 with the
requirements to be considered adequately capitalized is presented below.
For Capital
Actual Adequacy Purposes
- --------------------------------------------------------------------------------
Tier 1 risk-based capital 10.25% 4.00%
Total risk-based capital 11.43% 8.00%
Tier 1 leverage ratio 7.37% 4.00%
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results 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.
Trends, Events or Uncertainties
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. All such transactions are on substantially the same
terms, including interest rates on loans and collateral, as those prevailing at
the time for comparable transactions with others, involve no more than normal
risk of collectibility, and present no other unfavorable features.
In the normal course of business, the Banks are involved in various legal
proceedings. In the current opinion of management, any liability resulting from
such proceedings would not have a material effect on the Company's financial
statements.
The Company has in the past purchased shares of its outstanding common stock for
the treasury as they become available. During the third quarter of 2001, the
Company announced an expanded stock repurchase plan authorizing up to $2.2
million for the repurchase of common shares. This is approximately $1.0 million
more than has been invested pursuant to the previously authorized stock
repurchase plan.
In July 2001, the Financial Accounting Standards Board issued Statement 141,
"Business Combinations" and Statement 142, "Goodwill and Other Intangible
Assets". Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. For the Company, the provisions of the Statements are
generally effective January 1, 2002. The Company's financial statements will be
impacted in that yearly goodwill amortization expense of approximately $56,000
will no longer be recorded.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
OTHER INFORMATION
ITEM 6. Exhibits and reports on Form 8-K.
Reports on Form 8-K. No Form 8-K has been
filed for the quarter
ended September 30, 2001.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
(Registrant)
November 14, 2001 /s/ George A. Shepley
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Date George A. Shepley, Chairman of
the Board
November 14, 2001 /s/ Kim K. Bartling
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Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer