Exhibit 13
IOWA FIRST BANCSHARES CORP.
ANNUAL REPORT
DECEMBER 31, 2001
Contents
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STOCKHOLDER INFORMATION
LETTER TO OUR STOCKHOLDERS
SELECTED CONSOLIDATED FINANCIAL DATA
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INDEPENDENT AUDITOR'S REPORT
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of changes in stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BOARD OF DIRECTORS
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IOWA FIRST BANCSHARES CORP.
STOCKHOLDER INFORMATION AS OF DECEMBER 31, 2001
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 Sandler
O'Neill & Partners, L.P. (800-635-6860). The Company's stock trades on the
Over-the-Counter Bulletin Board under the symbol IFST.
Stock Prices Information
The table below shows the reported high and low bid prices of the common stock
during the years ended December 31, 2001 and 2000. 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.
2001 High Low
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First Quarter ............................ $ 23.75 $ 19.13
Second Quarter ........................... 22.60 18.88
Third Quarter ............................ 21.75 19.75
Fourth Quarter ........................... 22.50 20.10
2000 High Low
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First Quarter ............................ $ 24.00 $ 22.13
Second Quarter ........................... 23.00 22.00
Third Quarter ............................ 23.00 18.00
Fourth Quarter ........................... 23.00 18.50
Annual Meeting of Stockholders
The Annual Meeting of the Stockholders of Iowa First Bancshares Corp. will be
held at 2:00 p.m., April 18, 2002 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 (563) 262-4216 or Mr. George A. Shepley, Chairman (563) 262-4200.
To Our Shareholders:
We are pleased to report that net income for the year ended December 31, 2001,
was $3,400,000. This represents earnings of $2.30 per share compared to $2.34
per share the prior year, a slight decrease of $.04 per share or 1.7%. The net
income of $3,400,000, while not a continuation of our four-year trend of
increasing earnings, was not entirely disappointing. Given the extremely
volatile financial markets in general, and interest rates in particular, the
Company's management is not dissatisfied with these results. The Federal Reserve
Bank Board reduced rates eleven times during the year with the prime lending
rate declining from 9.5% at the beginning of 2001 to 4.75% at year-end. These
significant rate decreases, coupled with the market uncertainties created by the
September 11 terrorist attacks and their aftermath as well as the much
publicized anthrax-laden letters, combined to make 2001 a challenging year not
only for America but also for businesses operating in this environment.
Iowa First Bancshares Corp. is pleased to report that despite these serious
challenges, the Company achieved a return on average equity of 15%.
Additionally, in a year when both the Dow Jones Industrial Average and the
NASDAQ had negative total returns and the Russell 2000 returned only slightly
over 1%, Iowa First's total positive return (including dividends) was in excess
of 5%.
In recognition of the Company's continued financial progress, the Board of
Directors voted to increase the quarterly dividend by 3.4% beginning with the
dividend paid in January 2002. This new quarterly cash dividend results in a
yield of 4.1% based on the Company's year-end 2001 stock price.
The Company's average assets grew 2.6% during 2001. Average taxable loans and
deposits increased a modest 1.6% and 2.2%, respectively, during 2001. However,
average stockholders' equity expanded 13.3%. The end result is a Company with a
stronger balance sheet as evidenced by a higher percentage of equity to total
assets. As of December 31, 2001, the Company meets all requirements to be
considered well capitalized under banking rules and regulations with total
capital and tier 1 capital to risk weighted assets of 11.8% and 10.6%,
respectively. These percentages are substantially higher than the required
minimum of 8% and 4%, respectively.
Asset quality remains good at year-end 2001. The allowance for possible loan
losses totaling $3,182,000 is equal to 1.2% of net loans outstanding.
In addition to increasing dividends, Iowa First Bancshares Corp. continued
purchasing shares for the treasury. During 2001, over 56,000 shares were
purchased for a total cost of approximately $1,200,000. This strategy serves to
enhance earnings per share and return on stockholders' equity. The Company
anticipates continuing its share repurchase program from time to time as shares
become available. These share repurchases are possible due to the strong capital
base and cash flow of Iowa First Bancshares Corp.
The Company, on March 28, 2001, issued $4,000,000 of financial instruments
commonly referred to as "Trust Preferred Securities". The advantages of these
securities to the Company include: (1) a stated life of 30 years with earlier
call options at the discretion of Iowa First Bancshares Corp. with no principal
payments due until maturity; (2) all interest paid on these securities is tax
deductible; (3) the $4,000,000 is included in capital for regulatory purposes
but not for other accounting purposes (thus return on stockholders' equity is
not diluted); and (4) this capital is available to leverage future asset growth.
The issuance of these trust preferred securities is a significant event for Iowa
First Bancshares Corp. as they represent a substantial new source of
semi-permanent, tax deductible, regulatory capital which is not dilutive to
common stockholders.
An exciting, new, state-of-the art Internet banking product was introduced by
the Company in the latter part of 2000. This convenient, additional delivery
channel for providing financial services was actively marketed during 2001, with
over 1,000 users signed up by December 31, 2001. Businesses and individual
customers alike enjoy and appreciate the convenience, safety, and speed of
banking on the Internet.
We also made major expenditures in 2001 to expand and improve our backroom
processing. This further enhanced our ability to provide quick, accurate,
customer-oriented products and services. We rolled out fully imaged statements
which were very well received by the vast majority of our customers. We also are
continuing a review of our branch network and planning modifications which
should further our goal of providing the best service and convenience to our
customers.
Dean Holst announced his retirement effective December 31, 2001, after 17 years
as President and CEO of our subsidiary bank in Fairfield, Iowa. Dean was an
officer of the Bank for 28 years; he also served many years as a Director of the
Fairfield bank and Iowa First Bancshares Corp. Dean will remain on the Board of
Directors of the Fairfield bank. We thank Dean for his years of dedicated
service and leadership, and look forward to his continued counsel as a member of
the Bank Board.
Steve Cracker, a 22-year officer of First National Bank in Fairfield, was
promoted to President and CEO effective January 1, 2002. Prior to this
promotion, Steve was Executive Vice President and Chief Operating Officer of the
Bank. Given Steve's extensive experience and familiarity with the local
customers and all aspects of the lending and operations functions, we are
excited by the future prospects for our Fairfield bank.
As always, the success of the Company is a tribute to the effective execution of
our business plans by the Boards of Directors, management, and staff. We are
very proud of our dedicated, customer-focused team of financial services
professionals. We also thank all our stockholders for your continued support. We
look forward to hearing from you should you have any questions or comments.
/s/ George A. Shepley
---------------------------------------
George A. Shepley
Chairman
/s/ Kim K. Bartling
---------------------------------------
Kim K. Bartling
Executive Vice President
COO & Treasurer
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
BALANCE SHEET (at year-end) 2001 2000 1999 1998 1997
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Net loans ...................................... $272,695,000 $270,539,000 $266,992,000 $250,318,000 $208,683,000
Allowance for loan losses ...................... 3,182,000 3,268,000 3,091,000 2,787,000 2,604,000
Deposits and securities sold under
agreements to repurchase ....................... 272,592,000 275,430,000 274,198,000 267,491,000 247,041,000
Federal Home Loan Bank advances ................ 70,706,000 71,531,000 64,621,000 47,973,000 26,468,000
Total assets ................................... 380,597,000 380,414,000 371,029,000 345,411,000 305,783,000
Redeemable common stock held by KSOP ........... 2,242,000 2,118,000 2,507,000 2,845,000 2,177,000
Stockholders' equity ........................... 23,040,000 21,632,000 18,686,000 17,464,000 26,448,000
STATEMENT OF INCOME (for the year)
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Net interest income ............................ $ 10,876,000 $ 11,495,000 $ 11,290,000 $ 10,691,000 10,656,000
Provision for loan losses ...................... 366,000 429,000 406,000 125,000 4,000
Other income ................................... 2,868,000 2,293,000 2,022,000 1,875,000 1,696,000
Other operating expenses ....................... 8,545,000 8,200,000 7,942,000 7,633,000 7,547,000
Income before income taxes ..................... 4,833,000 5,159,000 4,964,000 4,808,000 4,801,000
Income taxes ................................... 1,433,000 1,599,000 1,552,000 1,526,000 1,521,000
Net income ..................................... 3,400,000 3,560,000 3,412,000 3,282,000 3,280,000
PER SHARE DATA
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Net income, basic .............................. $ 2.30 $ 2.34 $ 2.23 $ 2.02 $ 1.86
Net income, diluted ............................ 2.30 2.34 2.23 2.02 1.82
Book value at year-end ......................... 15.82 14.34 12.16 11.40 14.43
Stock price at year-end (greater of bid or
appraised price) ............................... 22.25 22.00 27.00 31.00 28.75
Cash dividends declared during the year ........ 0.89 0.85 0.84 0.84 0.78
Cash dividends declared as a percentage
of net income .................................. 39% 36% 38% 42% 42%
KEY RATIOS
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Return on average assets ....................... 0.90% 0.97% 0.96% 1.00% 1.13%
Return on average stockholders' equity ......... 14.96 17.76 18.81 15.90 13.25
Net interest margin-tax equivalent ............. 3.24 3.49 3.53 3.65 4.11
Average stockholders' equity to average
assets ....................................... 6.01 5.44 5.08 6.26 8.53
Total regulatory capital to risk-weighted assets 11.77 10.04 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) ............................ 62.17 59.47 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, 2001 and 2000, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years ended December 31, 2001, 2000, and 1999. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial 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, 2001 and 2000, and the
results of their operations and their cash flows for the years ended December
31, 2001, 2000, and 1999, in conformity with accounting principles generally
accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 17, 2002
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS 2001 2000
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Cash and due from banks (Note 1) ............................................... $ 14,661,000 $ 15,994,000
Interest-bearing deposits at financial institutions ............................ 1,620,000 188,000
Federal funds sold ............................................................. 31,000,000 14,650,000
Investment securities available for sale (Notes 3 and 8) ....................... 44,466,000 63,059,000
Loans, net of allowance for loan losses 2001, $3,182,000;
2000, $3,268,000 (Notes 4, 8, and 15) ........................................ 272,695,000 270,539,000
Bank premises and equipment, net (Note 5) ...................................... 5,055,000 4,936,000
Accrued interest receivable .................................................... 2,793,000 3,381,000
Life insurance contracts ....................................................... 3,361,000 3,184,000
Restricted investment securities ............................................... 3,868,000 3,831,000
Other assets ................................................................... 1,078,000 652,000
------------------------------
Total assets ................................................................... $ 380,597,000 $ 380,414,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
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Liabilities:
Deposits:
Noninterest-bearing ........................................................ $ 42,165,000 $ 48,649,000
Interest-bearing ........................................................... 225,359,000 222,831,000
------------------------------
Total deposits (Note 6) ................................................ 267,524,000 271,480,000
Notes payable (Note 7) ....................................................... 5,419,000 6,276,000
Securities sold under agreements to repurchase (Note 8) ...................... 5,068,000 3,950,000
Federal Home Loan Bank advances (Note 8) ..................................... 70,706,000 71,531,000
Treasury tax and loan open note (Note 8) ..................................... 622,000 1,187,000
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures (Note 9) ........... 4,000,000 --
Dividends payable ............................................................ 331,000 332,000
Other liabilities ............................................................ 1,645,000 1,908,000
------------------------------
Total liabilities ...................................................... 355,315,000 356,664,000
------------------------------
Commitments and Contingencies (Note 14)
Redeemable Common Stock Held by Employee Stock Ownership
Plan with 401(k) provisions (KSOP) (Note 11) ................................. 2,242,000 2,118,000
------------------------------
Stockholders' Equity (Note 10):
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 2001
and 2000 1,832,429; shares outstanding 2001, 1,456,404; 2000, 1,508,297 .... 200,000 200,000
Additional paid-in capital ................................................... 4,265,000 4,309,000
Retained earnings ............................................................ 31,944,000 29,852,000
Accumulated other comprehensive income, net .................................. 858,000 290,000
Less cost of common shares acquired for the treasury
2001, 376,025; 2000, 324,132 ............................................... (11,985,000) (10,901,000)
Less maximum cash obligation related to KSOP shares (Note 11) ................ (2,242,000) (2,118,000)
------------------------------
Total stockholders' equity ............................................. 23,040,000 21,632,000
------------------------------
Total liabilities and stockholders' equity ............................. $ 380,597,000 $ 380,414,000
==============================
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
- ------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans:
Taxable .......................................... $21,909,000 $22,815,000 $20,972,000
Nontaxable ....................................... 107,000 148,000 155,000
Interest on investment
securities available for sale:
Taxable .......................................... 2,034,000 2,748,000 2,556,000
Nontaxable ....................................... 932,000 959,000 865,000
Interest on federal funds sold ....................... 645,000 385,000 392,000
Dividends on restricted investment securities ........ 171,000 251,000 186,000
Other ................................................ 44,000 -- 1,000
---------------------------------------
Total interest income ........................ 25,842,000 27,306,000 25,127,000
---------------------------------------
Interest expense:
Interest on deposits ............................... 9,837,000 10,626,000 9,457,000
Interest on notes payable .......................... 424,000 482,000 522,000
Interest on other borrowed funds ................... 4,392,000 4,703,000 3,858,000
Interest on company obligated mandatorily redeemable
preferred securities ............................. 313,000 -- --
---------------------------------------
Total interest expense ....................... 14,966,000 15,811,000 13,837,000
---------------------------------------
Net interest income .......................... 10,876,000 11,495,000 11,290,000
Provision for loan losses (Note 4) ................... 366,000 429,000 406,000
---------------------------------------
Net interest income after
provision for loan losses .................... 10,510,000 11,066,000 10,884,000
---------------------------------------
Other income:
Trust department ................................... 368,000 382,000 351,000
Service fees ....................................... 1,356,000 1,303,000 1,224,000
Investment securities gains, net ................... 331,000 13,000 4,000
Other .............................................. 813,000 595,000 443,000
---------------------------------------
Total other income ........................... 2,868,000 2,293,000 2,022,000
---------------------------------------
Operating expenses:
Salaries and employee benefits ..................... 4,900,000 4,755,000 4,577,000
Occupancy expenses, net ............................ 740,000 727,000 701,000
Equipment expenses ................................. 707,000 616,000 628,000
Office supplies, printing, and postage ............. 397,000 386,000 409,000
Computer costs ..................................... 481,000 430,000 440,000
Advertising and business promotion ................. 194,000 180,000 167,000
Other operating expenses ........................... 1,126,000 1,106,000 1,020,000
---------------------------------------
Total operating expenses ..................... $ 8,545,000 $ 8,200,000 $ 7,942,000
---------------------------------------
(Continued)
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
- ------------------------------------------------------------------------------------------------
Income before income taxes .................. $ 4,833,000 $ 5,159,000 $ 4,964,000
Income taxes (Note 12) .............................. 1,433,000 1,599,000 1,552,000
---------------------------------------
Net income .................................. $ 3,400,000 $ 3,560,000 $ 3,412,000
=======================================
Weighted average common shares, basic and
diluted ........................................... 1,478,220 1,524,473 1,531,391
=======================================
Net income per common share, basic and
diluted (Note 13) ................................. $ 2.30 $ 2.34 $ 2.23
=======================================
Dividends declared per share ........................ $ 0.89 $ 0.85 $ 0.84
=======================================
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended Decemberm 31, 2001, 2000, and 1999
Accumulated
Other
Compre-
Common Stock Additional hensive Treasury Stock
-------------------- Paid-In Retained Income ------------------------
Number Amount Capital Earnings (Loss) Number Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ................ 1,832,429 $200,000 $4,408,000 $25,460,000 $ 708,000 300,005 $(10,467,000)
Comprehensive income:
Net income ........................... -- -- -- 3,412,000 -- -- --
Other comprehensive (loss), net of tax
(Note 2) ........................... -- -- -- -- (1,357,000) -- --
Comprehensive income ..............
Cash dividends declared, $.84 per share .. -- -- -- (1,287,000) -- -- --
Purchase of common stock for the treasury -- -- -- -- -- 3,130 (84,000)
Sale of common stock to the KSOP ......... -- -- (59,000) -- -- (7,407) 259,000
Change related to KSOP shares (Note 11) .. -- -- -- -- -- -- --
--------------------------------------------------------------------------------------
Balance, December 31, 1999 ................. 1,832,429 200,000 4,349,000 27,585,000 (649,000) 295,728 (10,292,000)
Comprehensive income:
Net income ............................. -- -- -- 3,560,000 -- -- --
Other comprehensive income, net of tax
(Note 2) ............................. -- -- -- -- 939,000 -- --
Comprehensive income ...............
Cash dividends declared, $.85 per share .. -- -- -- (1,293,000) -- -- --
Purchase of common stock for the treasury -- -- -- -- -- 31,813 (724,000)
Sale of common stock to the KSOP ......... -- -- (40,000) -- -- (3,409) 115,000
Change related to KSOP shares (Note 11) .. -- -- -- -- -- -- --
--------------------------------------------------------------------------------------
Balance, December 31, 2000 ................. 1,832,429 200,000 4,309,000 29,852,000 290,000 324,132 (10,901,000)
Comprehensive income:
Net income ............................. -- -- -- 3,400,000 -- -- --
Other comprehensive income, net of tax
(Note 2) ............................. -- -- -- -- 568,000 -- --
Comprehensive income ...............
Cash dividends declared, $.89 per share .. -- -- -- (1,308,000) -- -- --
Purchase of common stock for the treasury -- -- -- -- -- 56,387 (1,227,000)
Sale of common stock to the KSOP ......... -- -- (44,000) -- -- (4,494) 143,000
Change related to KSOP shares (Note 11) .. -- -- -- -- -- -- --
--------------------------------------------------------------------------------------
Balance, December 31, 2001 ................. 1,832,429 $200,000 $4,265,000 $31,944,000 $ 858,000 376,025 $(11,985,000)
======================================================================================
(Continue)
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continuted)
Years Ended December 31, 2001, 2000, and 1999
Maximum
Cash
Obligation Compre-
Related to hensive
KSOP Shares Income Total
- --------------------------------------------------------------------------------------------
Balance, December 31, 1998 ................ $ (2,845,000) $ 17,464,000
Comprehensive income:
Net income ............................ -- $ 3,412,000 3,412,000
Other comprehensive (loss), net of tax
(Note 2) ............................ -- (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 -- (84,000)
Sale of common stock to the KSOP ........ -- 20,000
Change related to KSOP shares (Note 11) . 338,000 338,000
------------ ------------
Balance, December 31, 1999 ................ (2,507,000) 18,686,000
Comprehensive income:
Net income ............................ -- $ 3,560,000 3,560,000
Other comprehensive income, net of tax
(Note 2) ............................ -- 939,000 939,000
------------
Comprehensive income .............. $ 4,499,000
============
Cash dividends declared, $.85 per share . -- (1,293,000)
Purchase of common stock for the treasury -- (724,000)
Sale of common stock to the KSOP ........ -- 75,000
Change related to KSOP shares (Note 11) . 389,000 389,000
------------ ------------
Balance, December 31, 2000 ................ (2,118,000) 21,632,000
Comprehensive income:
Net income ............................ -- $ 3,400,000 3,400,000
Other comprehensive income, net of tax
(Note 2) ............................ -- 568,000 568,000
------------
Comprehensive income .............. $ 3,968,000
============
Cash dividends declared, $.89 per share . -- (1,308,000)
Purchase of common stock for the treasury -- (1,227,000)
Sale of common stock to the KSOP ........ -- 99,000
Change related to KSOP shares (Note 11) . (124,000) (124,000)
------------ ------------
Balance, December 31, 2001 ................ $ (2,242,000) $ 23,040,000
============ ============
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
- ----------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .................................. $ 3,400,000 $ 3,560,000 $ 3,412,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from real estate loans sold ...... 8,209,000 2,095,000 2,093,000
Real estate loans underwritten and sold ... (8,145,000) (2,084,000) (2,079,000)
Gains on real estate loans sold ........... (64,000) (11,000) (14,000)
Provision for loan losses ................. 366,000 429,000 406,000
Investment securities gains, net .......... (331,000) (13,000) (4,000)
Depreciation .............................. 647,000 636,000 639,000
Deferred income taxes ..................... (45,000) (177,000) (125,000)
Amortization of premiums and accretion
of discounts on investment securities,
net ..................................... (31,000) 12,000 131,000
Changes in assets and liabilities:
(Increase) decrease in accrued interest
receivable ............................. 588,000 (396,000) (222,000)
Net (increase) decrease in other assets .. (384,000) 508,000 (137,000)
Net increase (decrease) in other
liabilities ............................ (329,000) 292,000 37,000
--------------------------------------------
Net cash provided by operating
activities ............................ 3,881,000 4,851,000 4,137,000
--------------------------------------------
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits
at financial institutions ................. (1,432,000) (33,000) (20,000)
Net (increase) decrease in federal funds sold (16,350,000) 1,150,000 (3,245,000)
Proceeds from sales, maturities, calls, and
paydowns of securities available for sale . 26,482,000 11,254,000 19,115,000
Purchase of securities available for sale ... (6,623,000) (13,331,000) (24,757,000)
Net increase in loans ....................... (2,522,000) (3,976,000) (17,080,000)
Purchases of bank premises and equipment .... (766,000) (116,000) (237,000)
Purchases of life insurance contracts ....... -- (3,110,000) --
Increase in cash value of life insurance
contracts ................................. (177,000) (74,000) --
Purchases of restricted investment securities (37,000) (364,000) (889,000)
--------------------------------------------
Net cash (used in) investing
activities ............................ $ (1,425,000) $ (8,600,000) $(27,113,000)
--------------------------------------------
(Continued)
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
- --------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase (decrease) in noninterest-bearing
deposits ...................................... $ (6,484,000) $ 1,474,000 $ 2,745,000
Net increase in interest-bearing deposits ....... 2,528,000 434,000 4,981,000
Proceeds from notes payable ..................... -- -- 250,000
Repayment of notes payable ...................... (732,000) (718,000) (631,000)
Net increase (decrease) in line of credit ....... (125,000) 125,000 --
Net increase (decrease) in securities sold
under agreements to repurchase ................ 1,118,000 (676,000) (1,019,000)
Net increase (decrease) in treasury tax and
loan open note ................................ (565,000) (1,024,000) 2,048,000
Advances from Federal Home Loan Bank ............ 18,850,000 16,100,000 20,300,000
Payments of advances from Federal Home
Loan Bank ..................................... (19,675,000) (9,190,000) (3,652,000)
Net proceeds from issuance of Company
obligated mandatorily redeemable preferred
securities of subsidiary trust ................ 3,832,000 -- --
Cash dividends paid ............................. (1,309,000) (1,282,000) (1,286,000)
Purchases of common stock for the treasury ...... (1,227,000) (724,000) (84,000)
Proceeds from issuance of common stock .......... -- 75,000 200,000
--------------------------------------------
Net cash provided by (used in)
financing activities ...................... (3,789,000) 4,594,000 23,852,000
--------------------------------------------
Net increase (decrease) in cash and
due from banks ............................ (1,333,000) 845,000 876,000
Cash and due from banks:
Beginning ....................................... 15,994,000 15,149,000 14,273,000
--------------------------------------------
Ending .......................................... $ 14,661,000 $ 15,994,000 $ 15,149,000
============================================
Supplemental Disclosures of Cash Flow
Information, cash payments for:
Interest ........................................ $ 15,452,000 $ 15,547,000 $ 13,743,000
Income taxes .................................... 1,542,000 1,903,000 1,671,000
Supplemental Schedule of Noncash Investing
and Financing Activities:
Change in accumulated other comprehensive
income, unrealized gains (losses) on securities
available for sale, net ....................... 568,000 939,000 (1,357,000)
(Increase) decrease in maximum cash obligation
related to KSOP shares ........................ (124,000) 389,000 338,000
Due from KSOP for sale of common stock .......... 99,000 -- --
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED 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 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. 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.
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. Actual results could differ from those
estimates. The allowance for loan losses is inherently subjective, as it
requires material estimates that are susceptible to significant change. The
fair value disclosure of financial instruments is an estimate that can be
computed within a range.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. 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 the cash
items in process of clearing. Cash flows from interest-bearing deposits at
financial institutions, federal funds sold, loans, deposits, securities sold
under agreements to repurchase, revolving line of credit, and the 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 $1,668,000 and $1,610,000 at December 31, 2001
and 2000, 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, 2001 or 2000.
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 are probable. 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.
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.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit, including standby
letters of credit. Such financial instruments are recorded when they are
funded.
Transfers of financial assets: Transfers of financial assets are accounted
for as sales, only when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to
repurchase them before their maturity.
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.
Life insurance contracts: Life insurance contracts are stated at cash
surrender value.
Restricted investment securities: Restricted investment securities represent
Federal Home Loan Bank and Federal Reserve Bank common stock. The stock is
carried at cost.
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.
Common stock held by KSOP: The Company's maximum cash obligation related to
these shares is classified outside stockholders' equity because the shares
are not readily traded and could be put to the Company for cash.
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: In July 2001, the FASB issued Statement No.
141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement No. 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 No. 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 effective January 1, 2002.
Implementation of Statement No. 141 will have no immediate impact on the
Company's financial statements. Implementation of Statement No. 142 will
impact the Company's financial statements in that yearly goodwill
amortization expense of approximately $56,000 will no longer be recorded.
The FASB has issued Statement No. 143, Accounting for Asset Retirement
Obligations, and Statement No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. Statement No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. Statement No. 144 supersedes FASB Statement
No. 121 and the accounting and reporting provisions of APB Opinion No. 30.
Statement No. 144 establishes a single accounting model for long-lived assets
to be disposed of by sale which includes measuring a long-lived asset
classified as held for sale at the lower of its carrying amount or its fair
value less costs to sell and to cease depreciation/amortization. For the
Company, the provisions of Statements Nos. 143 and 144 are effective January
1, 2003 and January 1, 2002, respectively. Implementation of the Statements
is not expected to have a material impact on the Company's 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, 2001
-----------------------------------------
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year . $ 1,235,000 $ 459,000 $ 776,000
Less, reclassification adjustment for gains
included in net income ......................... 331,000 123,000 208,000
-----------------------------------------
Other comprehensive income ................. $ 904,000 $ 336,000 $ 568,000
=========================================
Year Ended December 31, 2000
-----------------------------------------
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year . $ 1,511,000 $ 564,000 $ 947,000
Less, reclassification adjustment for gains
included in net income ......................... 13,000 5,000 8,000
-----------------------------------------
Other comprehensive income ................. $ 1,498,000 $ 559,000 $ 939,000
=========================================
Year Ended December 31, 1999
-----------------------------------------
Unrealized gains (losses) on securities
available for sale:
Unrealized holding (losses) 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)
=========================================
Note 3. Investment Securities Available for Sale
The amortized cost and fair value of investment securities available for sale as
of December 31, 2001 and 2000 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
December 31, 2001
-----------------------------------------------------------
U.S. Treasury securities ............. $ 1,506,000 $ 27,000 $ -- $ 1,533,000
U.S. government agencies ............. 17,481,000 641,000 (3,000) 18,119,000
Mortgage-backed securities ........... 625,000 15,000 -- 640,000
State and political subdivisions ..... 17,952,000 538,000 (12,000) 18,478,000
Corporate obligations ................ 5,535,000 161,000 -- 5,696,000
-----------------------------------------------------------
$ 43,099,000 $ 1,382,000 $ (15,000) $ 44,466,000
===========================================================
December 31, 2000
-----------------------------------------------------------
U.S. Treasury securities ............. $ 6,002,000 $ 37,000 $ (3,000) $ 6,036,000
U.S. government agencies ............. 29,279,000 150,000 (114,000) 29,315,000
Mortgage-backed securities ........... 1,297,000 5,000 (3,000) 1,299,000
State and political subdivisions ..... 20,901,000 409,000 (65,000) 21,245,000
Corporate obligations ................ 5,117,000 58,000 (11,000) 5,164,000
-----------------------------------------------------------
$ 62,596,000 $ 659,000 $ (196,000) $ 63,059,000
===========================================================
The amortized cost and fair value of investment securities available for sale as
of December 31, 2001, 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.
Amortized Fair
Cost Value
---------------------------
Securities available for sale:
Due in one year or less ........................ $10,893,000 $11,025,000
Due after one year through five years .......... 22,502,000 23,446,000
Due after five years through ten years ......... 7,430,000 7,670,000
Due after ten years ............................ 1,649,000 1,685,000
---------------------------
42,474,000 43,826,000
Mortgage-backed securities ..................... 625,000 640,000
---------------------------
$43,099,000 $44,466,000
===========================
Investment securities with a carrying value of $16,359,000 and $20,918,000 as of
December 31, 2001 and 2000, respectively, are pledged on securities sold under
agreements to repurchase, Federal Home Loan Bank advances, trust deposits, and
for other purposes as required or permitted by law.
All sales of securities during the years ended December 31, 2001, 2000, and 1999
were from securities identified as available for sale. Information on proceeds
received, as well as the gross gains and losses from the sale of those
securities is as follows for the years ended December 31, 2001, 2000, and 1999:
2001 2000 1999
---------------------------------------
Proceeds from sales of securities .... $11,077,000 $ 23,000 $ 503,000
Gross gains from sales of securities . 332,000 13,000 4,000
Gross losses from sales of securities 1,000 -- --
Note 4. Loans
The composition of loans is summarized as follows:
December 31,
-------------------------------
2001 2000
-------------------------------
Commercial ............................... $106,286,000 $103,340,000
Agricultural ............................. 27,926,000 28,000,000
Real estate:
Construction ........................... 7,752,000 4,055,000
Mortgage ............................... 110,931,000 109,557,000
Tax exempt, mortgage ................... 1,290,000 2,050,000
Installment .............................. 21,401,000 26,611,000
Other .................................... 291,000 194,000
-------------------------------
Total loans ...................... 275,877,000 273,807,000
Less allowance for loan losses ........... 3,182,000 3,268,000
-------------------------------
$272,695,000 $270,539,000
===============================
Loans considered to be impaired are as follows:
December 31,
-----------------------
2001 2000
-----------------------
Impaired loans for which an allowance has been
provided ........................................... $3,125,000 $ 484,000
=======================
Allowance provided for impaired loans, included in the
allowance for loan losses .......................... $ 257,000 $ 48,000
=======================
The average recorded investment in impaired loans during 2001 and 2000 was
$3,462,000 and $518,000, respectively. Interest income on impaired loans of
$339,000, $9,000, and $17,000 was recognized for cash payments received in 2001,
2000, and 1999, respectively.
Nonaccruing loans totaled $640,000 and $785,000 at December 31, 2001 and 2000,
respectively. Interest income in the amount of $63,000, $47,000, and $65,000
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, 2001,
2000, and 1999, respectively. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 2001,
2000, and 1999 totaled $57,000, $14,000, and $23,000, respectively.
Changes in the allowance for loan losses are summarized as follows:
Year Ended December 31,
--------------------------------------
2001 2000 1999
--------------------------------------
Beginning balance .................... $3,268,000 $3,091,000 $2,787,000
Provisions charged to expense ...... 366,000 429,000 406,000
Recoveries ......................... 52,000 78,000 227,000
--------------------------------------
3,686,000 3,598,000 3,420,000
Loans charged off .................. 504,000 330,000 329,000
--------------------------------------
Ending balance ....................... $3,182,000 $3,268,000 $3,091,000
======================================
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 $14,021,000 and $8,453,000 as of
December 31, 2001 and 2000, respectively. Custodial escrow balances maintained
in connection with these loans were approximately $88,000 and $64,000 as of
December 31, 2001 and 2000, respectively. All loans sold are without recourse.
There were no loans held for sale as of December 31, 2001 and 2000.
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows:
Years of
Useful
Lives December 31,
----------------------------------
2001 2000
-------------------------
Bank premises (including land 2001,
$756,000; 2000, $631,000) .......... 10-40 $ 7,021,000 $ 6,907,000
Leasehold improvements ............... 5-15 201,000 206,000
Furniture and equipment .............. 5-15 3,079,000 2,498,000
-------------------------
10,301,000 9,611,000
Accumulated depreciation ............. 5,246,000 4,675,000
-------------------------
$ 5,055,000 $ 4,936,000
=========================
Note 6. Deposits
The composition of deposits is summarized as follows:
December 31,
----------------------------------
2001 2000
----------------------------------
Demand ............................. $ 95,819,000 $ 89,824,000
NOW accounts ....................... 32,948,000 30,878,000
Savings ............................ 20,478,000 19,499,000
Time certificates .................. 118,279,000 131,279,000
----------------------------------
$267,524,000 $271,480,000
==================================
Included in interest-bearing deposits are certificates of deposit with a minimum
denomination of $100,000 totaling $27,947,000 and $33,359,000 as of December 31,
2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of all certificates of deposit
are as follows:
Year ending December 31:
2002 $ 64,397,000
2003 34,812,000
2004 9,986,000
2005 3,188,000
2006 5,720,000
2007 and thereafter 176,000
------------------
$ 118,279,000
==================
Note 7. Notes Payable
Notes payable are summarized as follows:
December 31,
-----------------------
2001 2000
-----------------------
Term note payable to a bank, interest fixed at 7.41%,
due May 4, 2002, with quarterly principal and interest
payments of $77,000, secured by stock
of subsidiary banks of the Company ........................ $1,569,000 $1,751,000
Term note payable to a bank, interest fixed at 7.36%,
due May 4, 2003, with annual principal installments of
$550,000, secured by stock of subsidiary banks
of the Company ............................................ 3,850,000 4,400,000
Line of credit payable to a bank, $2,000,000 maximum balance,
interest floating and paid quarterly at prime rate
(4.75% as of December 31, 2001), due May 4, 2002,
with no scheduled annual principal payments,
secured by stock of subsidiary banks of the Company ....... -- 125,000
-----------------------
$5,419,000 $6,276,000
=======================
The notes payable include certain restrictive covenants regarding the Company's
net worth and regulatory capital.
Notes payable are due as follows:
Year ending December 31:
2002 $ 2,119,000
2003 3,300,000
-----------
$ 5,419,000
===========
Note 8. Other Borrowed Funds
Other borrowed funds consist of the following:
December 31,
--------------------------
2001 2000
--------------------------
Securities sold under agreements to repurchase ... $ 5,068,000 $ 3,950,000
Federal Home Loan Bank advances .................. 70,706,000 71,531,000
Treasury tax and loan open note .................. 622,000 1,187,000
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, 2001, all but $1,318,000 of the
securities sold under agreements to repurchase mature within twelve months. Of
this $1,318,000, $1,011,000 matures within 2 years and the remaining $307,000
matures within 2 1/2 years.
The average and maximum amount outstanding along with the rates of interest
related to securities sold under agreements to repurchase are as follows:
December 31,
---------------------------
2001 2000
---------------------------
Daily average amount outstanding during the year .. $ 4,464,000 $ 4,192,000
Maximum outstanding as of any month-end ........... 5,068,000 4,790,000
Weighted average interest rate during the year .... 4.11% 5.47%
Weighted average interest rate at the end of the
year ............................................ 2.78% 5.62%
Securities underlying the agreements at the end
of the year, carrying and fair value ............ $10,935,000 $ 9,268,000
Advances from the Federal Home Loan Bank as of December 31, 2001 bear interest
and are due as follows:
Interest Rate Balance Due
----------------------------------------
Year ending December 31:
2002 6.02% - 7.39% $ 11,850,000
2003 4.39% - 7.11% 8,050,000
2004 3.83% - 7.36% 7,950,000
2005 3.87% - 7.20% 5,950,000
2006 4.17% - 7.05% 10,200,000
2007 and thereafter 4.46% - 7.30% 26,706,000
------------
$ 70,706,000
============
Over 69% of the advances maturing in 2007 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, 2000 advances from the Federal Home Loan Bank in the amount
of $71,531,000 had interest rates between 5.00% and 7.41% and various maturity
dates between 2000 and 2013.
First mortgage loans of approximately $92,380,000 and $95,730,000 as of December
31, 2001 and 2000, respectively, are pledged as collateral on Federal Home Loan
Bank advances. Additionally, investment securities totaling none and $6,007,000
as of December 31, 2001 and 2000, respectively, are pledged as collateral on
Federal Home Loan Bank advances.
Note 9. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures
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.
Note 10. 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, 2001, that the
Entities meet all capital adequacy requirements to which they are subject.
As of December 31, 2001, 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,
2001 the Company is also categorized as well capitalized based on management's
calculations. 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, 2001
Total Capital (to Risk Weighted Assets):
Consolidated ........................... $31,181,000 11.8% $ 21,188,000 >8.0% $ 26,485,000 >10.0%
First National Bank of Muscatine ....... 26,231,000 13.6 15,390,000 >8.0 19,237,000 >10.0
First National Bank in Fairfield ....... 8,690,000 12.4 5,592,000 >8.0 6,989,000 >10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated ........................... 27,999,000 10.6 10,594,000 >4.0 15,891,000 > 6.0
First National Bank of Muscatine ....... 23,825,000 12.4 7,695,000 >4.0 11,542,000 > 6.0
First National Bank in Fairfield ....... 8,030,000 11.5 2,796,000 >4.0 4,194,000 > 6.0
Tier 1 Capital (to Average Assets):
Consolidated ........................... 27,999,000 7.4 15,117,000 >4.0 18,896,000 > 5.0
First National Bank of Muscatine ....... 23,825,000 8.5 11,167,000 >4.0 13,959,000 > 5.0
First National Bank in Fairfield ....... 8,030,000 8.3 3,887,000 >4.0 4,859,000 > 5.0
As of December 31, 2000
Total Capital (to Risk Weighted Assets):
Consolidated ........................... $26,245,000 10.0% $ 20,911,000 >8.0% $ 26,138,000 >10.0%
First National Bank of Muscatine ....... 24,127,000 12.8 15,123,000 >8.0 18,904,000 >10.0
First National Bank in Fairfield ....... 8,772,000 12.2 5,746,000 >8.0 7,183,000 >10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated ........................... 22,978,000 8.8 10,456,000 >4.0 15,683,000 > 6.0
First National Bank of Muscatine ....... 21,761,000 11.5 7,562,000 >4.0 11,343,000 > 6.0
First National Bank in Fairfield ....... 8,079,000 11.2 2,873,000 >4.0 4,310,000 > 6.0
Tier 1 Capital (to Average Assets):
Consolidated ........................... 22,978,000 6.1 15,055,000 >4.0 18,919,000 > 5.0
First National Bank of Muscatine ....... 21,761,000 7.8 11,197,000 >4.0 13,996,000 > 5.0
First National Bank in Fairfield ....... 8,079,000 8.3 3,872,000 >4.0 4,840,000 > 5.0
Current banking law limits the amount of dividends banks can pay. As of December
31, 2001, amounts available for payment of dividends were $4,729,000 and
$728,000 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 11. Employee Benefits
The Company and bank subsidiaries sponsor an Employee Stock Ownership Plan with
401(k) provisions (KSOP). This plan owns 100,750 shares of the Company as of
December 31, 2001 and covers substantially all employees who have reached the
age of 21 and worked at least 1,000 hours any year. 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, 2001, 2000,
and 1999 were $320,000, $321,000, and $302,000, respectively.
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. Since the shares of common stock held by the KSOP are not readily
traded, the Company has reflected the maximum cash obligation related to those
securities outside of stockholders' equity. As of December 31, 2001, 100,750
shares held by the KSOP, at a fair value of $22.25 per share, have been
reclassified from stockholders' equity to mezzanine capital.
During the year ended December 31, 2000, the Company entered into deferred
compensation agreements with certain directors and executive officers of the
Company and Banks. Under the provisions of the agreements the directors and
officers may defer a portion of their compensation each year. Based upon
individual performance, if Board established performance targets are met, a
match of up to 50% of the officers deferrals (with an annual cap of $6,250 per
participant for the first two years) may be paid by the Company. Related to the
agreements, the Company has purchased various life insurance contracts. Interest
on deferrals is computed at an annual rate equal to the taxable equivalent
(determined using the Company's highest marginal tax bracket) of the highest
yielding insurance contracts purchased by the Company related to the agreements.
At December 31, 2001 the rate is 11%. Upon retirement, the director/officer will
receive the deferral balance in 180 equal monthly installments. During the years
ended December 31, 2001 and 2000, the Company expensed $124,000 and $119,000,
respectively, related to the agreements. As of December 31, 2001 and 2000 the
liability related to the agreements was $243,000 and $119,000, respectively.
Note 12. Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
-------------------------------------------
2001 2000 1999
-------------------------------------------
Currently paid or payable ...... $ 1,478,000 $ 1,776,000 $ 1,677,000
Deferred income taxes .......... (45,000) (177,000) (125,000)
-------------------------------------------
$ 1,433,000 $ 1,599,000 $ 1,552,000
===========================================
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,
----------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
% Of % Of % Of
Dollar Pretax Dollar Pretax Dollar Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------------
Computed "expected" income tax
expense ......................... $ 1,692,000 35.0% $ 1,806,000 35.0% $ 1,737,000 35.0%
Effect of graduated tax rate ...... (48,000) (1.0) (52,000) (1.0) (50,000) (1.0)
Tax exempt interest and dividend
income, net ..................... (316,000) (6.5) (324,000) (6.3) (314,000) (6.3)
State income taxes, net ........... 159,000 3.3 170,000 3.3 164,000 3.3
Increase in cash surrender value of
life insurance contracts ........ (60,000) (1.2) (25,000) (0.5) -- --
Other ............................. 6,000 0.1 24,000 0.5 15,000 0.3
----------------------------------------------------------------------
$ 1,433,000 29.7% $ 1,599,000 31.0% $ 1,552,000 31.3%
======================================================================
Net deferred taxes, included in other assets or other liabilities on the
consolidated balance sheets, consist of the following components as of December
31:
2001 2000
------------------------
Deferred tax assets:
Allowance for loan losses ...................... $ 500,000 $ 510,000
Deferred compensation .......................... 91,000 44,000
------------------------
591,000 554,000
------------------------
Deferred tax liabilities:
Securities available for sale .................. (509,000) (173,000)
Bank premises and equipment .................... (66,000) (71,000)
Unrealized bond accretion ...................... (45,000) (39,000)
Net deferred loan origination fees ............. (37,000) (46,000)
------------------------
(657,000) (329,000)
------------------------
Net deferred tax assets (liabilities) .... $ (66,000) $ 225,000
========================
The net change in 2001 and 2000 deferred income taxes includes $336,000 and
$559,000, respectively, which is reflected in stockholders' equity.
Note 13. Earnings Per Share
The following information was used in the computation of basic and diluted
earnings per share:
Year Ended December 31,
------------------------------------
2001 2000 1999
------------------------------------
Basic and diluted earnings, net income .. $3,400,000 $3,560,000 $3,412,000
====================================
Weighted average common shares
outstanding ........................... 1,478,220 1,524,473 1,531,391
Weighted average common shares issuable
upon conversion of stock options ...... -- -- --
------------------------------------
Weighted average common
and common equivalent
shares .......................... 1,478,220 1,524,473 1,531,391
====================================
Note 14. 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,
--------------------------
2001 2000
--------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit ................... $40,989,000 $35,983,000
Standby letters of credit ...................... 1,913,000 1,121,000
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 creditworthiness 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.
Aside from cash on-hand and in-vault, the Company's cash is maintained at
correspondent banks. The total amount of cash on deposit, certificates of
deposit, and federal funds sold with correspondent banks exceeded federal
insured limits by $30,385,000 as of December 31, 2001. In the opinion of
management, no material risk of loss exists due to the correspondent banks'
financial condition and the fact they are all well capitalized.
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 15. 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. Such loans are on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. As of December 31, 2001, none of these
loans are classified as nonaccrual, past due, or restructured.
The activity in such loans during the years ended December 31, 2001 and 2000 is
as follows:
2001 2000
---------------------------------
Balance, beginning ................... $ 10,049,000 $ 9,350,000
Additions .......................... 5,451,000 6,858,000
Deductions (payments) .............. (5,145,000) (6,159,000)
---------------------------------
Balance, ending ...................... $ 10,355,000 $ 10,049,000
=================================
Note 16. 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: The carrying value for federal funds sold 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.
Fair values for all other 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.
Restricted investment securities: The carrying value of restricted investment
securities represents their 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 and Company obligated mandatorily redeemable preferred
securities: For variable rate notes payable, the carrying amount is a
reasonable estimate of fair value. For fixed rate notes payable and Company
obligated mandatorily redeemable preferred securities, 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 of Federal Home Loan Bank
advances is estimated using a discounted cash flow analysis, employing
interest rates currently being quoted by the Federal Home Loan Bank on
similar borrowings.
Commitments to extend credit and standby letters of credit: The fair value of
these commitments is not material.
The carrying amounts and fair values of financial instruments at December 31,
2001 and 2000 are summarized as follows:
Carrying Amounts Fair Values
---------------------------------------------------------
2001 2000 2001 2000
---------------------------------------------------------
Financial Assets:
Cash and due from banks ......... $ 14,661,000 $ 15,994,000 $ 14,661,000 $ 15,994,000
Interest-bearing deposits at
financial institutions ........ 1,620,000 188,000 1,620,000 188,000
Investment securities
available for sale ............ 44,466,000 63,059,000 44,466,000 63,059,000
Federal funds sold and
other overnight investments ... 31,000,000 14,650,000 31,000,000 14,650,000
Loans, net of allowance ......... 272,695,000 270,539,000 274,544,000 267,553,000
Accrued interest receivable ..... 2,793,000 3,381,000 2,793,000 3,381,000
Restricted investment securities 3,868,000 3,831,000 3,868,000 3,831,000
Financial Liabilities:
Deposits ........................ $267,524,000 $271,480,000 $269,207,000 $271,621,000
Notes payable ................... 5,419,000 6,276,000 5,561,000 6,261,000
Securities sold under
agreements to repurchase ...... 5,068,000 3,950,000 5,068,000 3,950,000
Federal Home Loan Bank
advances ...................... 70,706,000 71,531,000 73,061,000 71,252,000
Treasury tax and loan open
note .......................... 622,000 1,187,000 622,000 1,187,000
Company obligated mandatorily
redeemable preferred securities 4,000,000 -- 4,100,000 --
Accrued interest payable ........ 767,000 1,253,000 767,000 1,253,000
Note 17. 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 2001 2000
----------------------------
Cash ................................................. $ 1,897,000 $ 106,000
Investment in subsidiaries ........................... 33,262,000 30,612,000
Other assets ......................................... 326,000 45,000
----------------------------
Total assets ................................. $ 35,485,000 $ 30,763,000
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable ...................................... $ 5,419,000 $ 6,276,000
Subordinated debentures ............................ 4,125,000 --
Other liabilities .................................. 659,000 737,000
----------------------------
10,203,000 7,013,000
-----------------------------
Redeemable Common Stock Held by KSOP ................. 2,242,000 2,118,000
-----------------------------
Stockholders' Equity:
Common stock ....................................... 200,000 200,000
Additional paid-in capital ......................... 4,265,000 4,309,000
Retained earnings .................................. 31,944,000 29,852,000
Accumulated other comprehensive income, net ........ 858,000 290,000
Less cost of common shares acquired for the treasury (11,985,000) (10,901,000)
Less maximum cash obligation related to KSOP shares (2,242,000) (2,118,000)
----------------------------
Total stockholders' equity ................... 23,040,000 21,632,000
----------------------------
Total liabilities and stockholders' equity ... $ 35,485,000 $ 30,763,000
============================
================================================================================
STATEMENTS OF INCOME
(Parent Company Only)
Year Ended December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
Operating revenue:
Dividends received from subsidiaries ......... $ 2,010,000 $ 2,650,000 $ 2,050,000
Management fees and other income ............. 393,000 275,000 280,000
-----------------------------------------
Total operating revenue ................ 2,403,000 2,925,000 2,330,000
Interest expense ............................... 747,000 482,000 522,000
Operating expenses ............................. 630,000 699,000 667,000
-----------------------------------------
Income before income tax (credits),
and equity in subsidiaries'
undistributed net income ............... 1,026,000 1,744,000 1,141,000
Applicable income tax (credits) ................ (417,000) (381,000) (375,000)
-----------------------------------------
1,443,000 2,125,000 1,516,000
Equity in subsidiaries' undistributed net income 1,957,000 1,435,000 1,896,000
-----------------------------------------
Net income ............................. $ 3,400,000 $ 3,560,000 3,412,000
=========================================
================================================================================
STATEMENTS OF CASH FLOWS
(Parent Company Only)
Year Ended December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
Cash Flows from Operating Activities:
Net income ......................................... $ 3,400,000 $ 3,560,000 $ 3,412,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in subsidiaries' undistributed net
income ......................................... (1,957,000) (1,435,000) (1,896,000)
Investment securities gains, net ................. -- (13,000) --
Amortization and depreciation .................... 15,000 15,000 13,000
Changes in assets and liabilities:
(Increase) in other assets ..................... (197,000) (8,000) (38,000)
Increase (decrease) in other liabilities ....... (77,000) 82,000 (25,000)
-----------------------------------------
Net cash provided by operating
activities ................................... 1,184,000 2,201,000 1,466,000
-----------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale 1,815,000 23,000 --
Purchase of securities available for sale .......... (1,815,000) -- --
Capital infusion, Iowa First Capital Trust I ....... (125,000) -- --
-----------------------------------------
Net cash provided by (used in)
investing activities ......................... (125,000) 23,000 --
-----------------------------------------
Cash Flows from Financing Activities:
Proceeds from notes payable ........................ -- -- 250,000
Repayment of notes payable ......................... (732,000) (718,000) (631,000)
Net increase (decrease) in line of credit .......... (125,000) 125,000 --
Proceeds from subordinated debentures .............. 4,125,000 -- --
Cash dividends paid ................................ (1,309,000) (1,282,000) (1,286,000)
Purchases of common stock for the treasury ......... (1,227,000) (724,000) (84,000)
Proceeds from issuance of common stock ............. -- 75,000 200,000
-----------------------------------------
Net cash provided by (used in)
financing activities ......................... 732,000 (2,524,000) (1,551,000)
-----------------------------------------
Net increase (decrease) in cash .............. 1,791,000 (300,000) (85,000)
Cash:
Beginning .......................................... 106,000 406,000 491,000
-----------------------------------------
Ending ............................................. $ 1,897,000 $ 106,000 $ 406,000
=========================================
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), First National Bank in Fairfield (Fairfield), and
Iowa First Capital Trust I.
Total average assets of the Company increased 2.6% in 2001, 3.1% in 2000, and
8.4% in 1999. 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):
2001 2000 1999
-----------------------------------------------------------------------------------------
Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------------
Taxable loans, net ..................... $274,558 $ 21,909 7.98% $270,116 $ 22,815 8.45% $260,993 $ 20,972 8.04%
Taxable investment securities
available for sale ................... 32,116 2,034 6.33 43,293 2,748 6.35 42,323 2,556 6.04
Nontaxable investment securities
and loans ............................ 21,588 1,574 7.29 22,086 1,677 7.59 20,893 1,545 7.39
Federal funds sold ..................... 18,807 645 3.43 6,154 385 6.26 7,736 392 5.08
Restricted investment securities ....... 3,824 171 4.47 3,668 251 6.84 2,963 186 6.28
Interest-bearing deposits at
financial institutions ............... 948 44 4.64 -- -- -- 25 1 4.00
------------------- ------------------- -------------------
Total interest-
earning assets ................. 351,841 26,377 7.50 345,317 27,876 8.07 334,933 25,652 7.66
-------- -------- --------
Cash and due from banks ................ 12,042 12,006 12,562
Bank premises and equipment, net ....... 5,029 5,203 5,662
Life insurance contracts ............... 3,275 1,484 --
Other assets ........................... 5,745 4,371 4,064
-------- -------- --------
Total .......................... $377,932 $368,381 $357,221
======== ======== ========
LIABILITIES
Deposits:
Interest-bearing demand .............. $ 98,499 $ 2,497 2.53% $ 94,940 $ 3,281 3.46% $ 97,230 $ 2,980 3.06%
Time ................................. 131,735 7,340 5.57 128,378 7,345 5.72 124,722 6,477 5.19
Notes payable .......................... 5,769 424 7.35 6,431 482 7.50 7,051 522 7.40
Other borrowings ....................... 71,930 4,392 6.11 73,802 4,703 6.37 62,685 3,858 6.15
Company obligated mandatorily
redeemable preferred securities ...... 3,058 313 10.24 -- -- -- -- -- --
------------------- ------------------- -------------------
Total interest-
bearing liabilities ............ 310,991 14,966 4.81 303,551 15,811 5.21 291,688 13,837 4.74
-------- -------- --------
Noninterest-bearing deposits ........... 39,461 40,685 42,526
Other liabilities ...................... 2,640 1,783 2,191
-------- -------- --------
Total liabilities .............. 353,092 346,019 336,405
-------- -------- --------
Redeemable common stock
held by KSOP ......................... 2,118 2,312 2,676
-------- -------- --------
STOCKHOLDERS' EQUITY ................... 22,722 20,050 18,140
-------- -------- --------
Total .......................... $377,932 $368,381 $357,221
======== ======== ========
Net interest earnings .................. $ 11,411 $ 12,065 $ 11,815
======== ======== ========
Net yield (net interest earnings
divided by total interest-
earning assets) ................ 3.24% 3.49% 3.53%
======== ======== ========
Nonaccruing loans are included in the average balance. Loan fees are not
material.
The net interest margin decreased in 2001 (from 3.49% in 2000 to 3.24% in 2001).
The return on average interest-earning assets decreased 57 basis points (from
8.07% in 2000 to 7.50% in 2001) and interest paid on average interest-bearing
liabilities decreased 40 basis points (from 5.21% in 2000 to 4.81% in 2001).
Average interest-earning assets to total assets declined in 2001 to 93.1% from
93.7% in 2000. The Federal Reserve Bank Board and Chairman Greenspan decreased
short-term interest rates an amazing 11 times during 2001. The prime lending
rate, which began the year at 9.5%, ended 2001 at only 4.75%. This dramatic
reduction in interest rates was a major contributing factor to the decline in
the net interest margin.
The net interest margin decreased slightly in 2000 (from 3.53% in 1999 to 3.49%
in 2000). The return on average interest-earning assets increased 41 basis
points (from 7.66% in 1999 to 8.07% in 2000) and interest paid on average
interest-bearing liabilities increased 47 basis points (from 4.74% in 1999 to
5.21% in 2000). Average interest-earning assets to total assets remained stable
in 2000 at 93.7%. The Company has been successful in growing earning assets,
especially taxable loans. Competition, however, limits the net interest earnings
achievable from such growth.
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 18 basis points (from
7.84% in 1998 to 7.66% in 1999) and interest paid on average interest-bearing
liabilities decreased 9 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.
FINANCIAL CONDITION:
Investment Securities
Investment securities as of December 31, 2001 were approximately 3% U.S.
Treasury securities, 41% U.S. government agency securities, 1% mortgage-backed
securities, 42% state and political subdivisions, and 13% corporate obligations.
During 2001, management again focused the investment securities portfolio in the
U.S. government agency as well as state and political subdivisions categories.
These investment types earn a "spread" over U.S. Treasury securities thus
offering an opportunity to increase after-tax income. The year 2001 was marked
by tremendous market interest rate reductions. In an effort to prudently
maintain a competitive yield in the investment portfolio, over 80% of the total
portfolio was invested in relatively highly rated U.S. government agency
securities and state and political subdivisions. Additionally, to increase total
return of the investment portfolio, 13% was invested in corporate obligations,
with the concomitant credit and event risk.
Investment securities as of December 31, 2000 were approximately 10% U.S.
Treasury securities, 46% U.S. government agency securities, 2% mortgage-backed
securities, 34% states and political subdivisions, and 8% corporate obligations.
During 2000, management again focused the investment securities portfolio in the
U.S. government agency as well as states and political subdivisions categories.
These investment types earn a "spread" over U.S. Treasury securities thus
offering an opportunity to increase after-tax income.
Investment securities at December 31, 1999 were approximately 13% U.S. Treasury
securities, 44% U.S. government agency securities, 3% mortgage-backed
securities, 32% state and political subdivisions, and 8% 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 could be achieved with U.S. government agencies,
state and political subdivisions, and corporate obligations. These three
categories accounted for 84% of the total investment securities at December 1999
compared to 71% the prior year. The bond market experienced one of its worst
performing years in decades during 1999, with yields at year-end appreciably
higher than those available at the beginning of the year.
The fair value of investment securities available for sale at the date indicated
are summarized as follows (dollar amounts in thousands):
December 31,
---------------------------------
2001 2000 1999
---------------------------------
U.S. Treasury ........................... $ 1,533 $ 6,036 $ 7,971
U.S. government agencies ................ 18,119 29,315 26,136
Mortgage-backed securities .............. 640 1,299 1,757
State and political subdivisions ........ 18,478 21,245 18,917
Corporate obligations ................... 5,696 5,164 4,702
---------------------------------
$44,466 $63,059 $59,483
=================================
The following table shows the maturities of investment securities available for
sale at December 31, 2001 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 .................. $ 1,533 5.86% $ -- - % $ -- - % $ -- - %
U.S. government agencies ....... 5,080 5.69 12,537 5.91 502 5.92 -- --
Mortgage-backed securities ..... 196 6.78 444 6.25 -- -- -- --
State and political subdivisions 1,582 6.39 8,043 7.05 7,168 7.72 1,685 7.97
Corporate obligations .......... 2,830 3.93 2,866 7.31 -- -- -- --
------- ------- ------- -------
$11,221 $23,890 $ 7,670 $ 1,685
======= ======= ======= -======
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, 2001, and
excluding the interest expense allocated to carry certain tax-exempt securities.
In 2001, the yield on taxable investment securities decreased only 2 basis
points despite nearly unprecedented overall rate declines in the market. This
was due to actively monitoring and managing the taxable investment securities
portfolio. The 2001 yield on nontaxable investment securities and loans
decreased 30 basis points largely as a result of normal maturation of relatively
higher yielding nontaxable investment securities and loans with reinvestment in
obligations of state 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, 2001, no investment in a single issue exceeded 10% of
stockholders' equity.
Loans
Loans outstanding at December 31, 2001 increased .8% from December 31, 2000.
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,
----------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------
Commercial .......................... $106,286 $103,340 $101,079 $ 94,724 $ 79,968
Agricultural ........................ 27,926 28,000 27,810 26,685 20,494
Real estate, construction ........... 7,752 4,055 3,708 2,598 2,120
Real estate, mortgage ............... 110,931 109,557 105,068 95,535 76,904
Tax exempt, real estate mortgage .... 1,290 2,050 2,581 2,337 3,118
Installment, net of unearned discount 21,401 26,611 29,774 31,126 28,227
Other ............................... 291 194 63 100 456
----------------------------------------------------
$275,877 $273,807 $270,083 $253,105 $211,287
====================================================
The following loan categories outstanding at December 31, 2001 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 ..................... $106,286 $ 46,899 $ 47,289 $ 12,098
Agricultural ................... 27,926 15,378 7,543 5,005
Real estate, construction ...... 7,752 5,461 1,295 996
--------------------------------------------
$141,964 $ 67,738 $ 56,127 $ 18,099
============================================
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 ................................... $51,098 $ 8,289
Agricultural ................................. 11,844 704
Real estate, construction .................... 2,239 52
----------------------
$65,181 $ 9,045
======================
During 2001 commercial loans increased by $2,946,000 or 2.9%, construction real
estate loans increased by $3,699,000 or 91.2%, mortgage real estate loans
increased by $1,374,000 or 1.3%, agricultural loans decreased $74,000 or .3%,
and installment loans decreased by $5,210,000 or 19.6%. Overall loan growth
totaled $2,070,000 or .8%. The reduction in installment loans is largely
attributable to very low, including 0%, financing of new automobiles by the
financing arms of the major auto companies. Additionally, national financial
companies offer rates and other terms which our management believes would be
imprudent to match. Management continues to search for quality growth in all
loan categories while remaining vigilant in maintaining high credit standards.
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,
------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------
Loans accounted for on a nonaccrual basis ...... $ 640 $ 785 $ 503 $ 657 $1,144
Accrual loans contractually past due
90 days or more .............................. 128 96 49 346 459
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 ........... -- -- -- -- --
Total nonaccrual loans were $640,000 at December 31, 2001, a decrease of
$145,000 or 18.5% from December 31, 2000. Total nonaccrual and accrual loans
contractually past due 90 days or more were $768,000 at December 31, 2001, a
decrease of $113,000 or 12.8% from a year earlier. Compared to the average over
the past five years, nonaccrual loans at December 31, 2001 were $106,000 or
14.2% less than average. Total nonaccrual and accrual loans contractually past
due 90 days or more were $193,000 or 20.1% less at December 31, 2001 than the
average for these categories over the past five years.
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
$63,000, $47,000, and $65,000 would have been earned on the nonaccrual loans had
they been performing loans in accordance with their original terms during 2001,
2000, and 1999, respectively. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 2001,
2000, and 1999 was $57,000, $14,000, and $23,000, respectively.
As of December 31, 2001, the Company had loans totaling $10,074,000 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
$300,000 or 3.1% increase from 2000. 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 $27,926,000 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, 2001. 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 $251,000, $101,000, and $601,000 as of December 31,
2001, 2000, and 1999, 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. 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 year-end 2000 allowance for loan
losses increased $177,000 as provisions of $429,000 exceeded net charge-offs of
$252,000. The year-end 2001 allowance for loan losses decreased $86,000 with
provisions totaling $366,000 being less than the $452,000 of net charge-offs.
Management of the Banks continues to review the loan portfolios and believes the
allowance for loan losses provides for losses that are probable as of December
31, 2001.
The Banks allocate the allowance for loan losses according to the amount deemed
to be necessary to provide for probable 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):
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------
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 ....... $ 111 40.68% $ 108 40.01% $ 99 38.90% $ 95 37.75% $ 84 36.39%
Construction ... -- 2.81 -- 1.48 -- 1.37 -- 1.03 -- 1.00
Commercial ....... 1,321 38.53 1,982 37.74 1,935 37.42 1,787 37.42 1,726 37.85
Agricultural ..... 89 10.12 280 10.23 269 10.29 248 10.54 249 9.70
Installment ...... 1,661 7.76 898 9.72 788 11.04 657 12.30 545 13.36
Other ............ -- 0.10 -- 0.82 -- 0.98 -- 0.96 -- 1.70
-----------------------------------------------------------------------------------------------
$3,182 100.00% $3,268 100.00% $3,091 100.00% $2,787 100.00% $2,604 100.00%
===============================================================================================
Deposits
Total average deposits increased 2.2% in 2001, decreased 0.2% in 2000, and
increased 4.2% in 1999. The average deposits are summarized below (dollar
amounts in thousands):
2001 2000 1999
------------------------------------------------------------------
Average Average Average
Interest Interest Interest
Expense Expense Expense
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------
Noninterest-bearing demand $ 39,461 --% $ 40,685 --% $ 42,526 --%
Savings .................. 20,339 1.8 20,566 2.3 21,742 2.3
Interest-bearing demand .. 78,160 2.7 74,374 3.8 75,488 3.3
Time ..................... 131,735 5.6 128,378 5.7 124,722 5.2
-------- -------- --------
Total deposits ... $269,695 $264,003 $264,478
======== ======== ========
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,
-------------------------
2001 2000
-------------------------
One to three months ........................ $10,337 $10,740
Three to six months ........................ 3,534 5,112
Six to twelve months ....................... 4,517 12,286
Over twelve months ......................... 9,559 5,221
-------------------------
$27,947 $33,359
=========================
RESULTS OF OPERATIONS:
Changes in Diluted Earnings Per Share
The decrease in diluted earnings per share between 2001 and 2000 amounted to
$.04. The major sources of change are presented in the following table:
2001 2000
--------------------
Net income per share, prior year ....................... $ 2.34 $ 2.23
--------------------
Increase (decrease) attributable to:
Net interest income .................................. (0.42) 0.13
Provision for loan losses ............................ 0.04 (0.01)
Investment securities gains, net ..................... 0.22 0.01
Other income ......................................... 0.17 0.17
Salaries and employee benefits ....................... (0.10) (0.12)
Other operating expenses ............................. (0.13) (0.05)
Income taxes ......................................... 0.11 (0.03)
Change in average common shares outstanding .......... 0.07 0.01
--------------------
Net change ..................................... (0.04) 0.11
--------------------
Net income per share, current year ............. $ 2.30 $ 2.34
====================
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, 2001 Year Ended December 31, 2000
--------------------------------------------------------------
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 .................. $ 384 $(1,290) $ (906) $ 736 $ 1,107 $ 1,843
Taxable investment securities
available for sale ........... (708) (6) (714) 58 134 192
Nontaxable investment
securities and loans ......... (38) (65) (103) 88 44 132
Federal funds sold ............. 792 (532) 260 (81) 74 (7)
Restricted investment securities 10 (90) (80) 44 21 65
Interest-bearing deposits at
financial institutions ....... 44 -- 44 -- (1) (1)
--------------------------------------------------------------
Total interest
income ................... 484 (1,983) (1,499) 845 1,379 2,224
--------------------------------------------------------------
Interest expense:
Interest-bearing demand deposits 132 (916) (784) (79) 380 301
Interest-bearing time deposits . 193 (198) (5) 188 680 868
Notes payable .................. (49) (9) (58) (46) 6 (40)
Other borrowings ............... 77 (75) 2 683 162 845
--------------------------------------------------------------
Total interest
expense .................. 353 (1,198) (845) 746 1,228 1,974
--------------------------------------------------------------
Change in net
interest earnings ........ $ 131 $ (785) $ (654) $ 99 $ 151 $ 250
==============================================================
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,
--------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------
Balance of allowance for loan
losses at beginning of year ............. $ 3,268 $ 3,091 $ 2,787 $ 2,604 $ 2,803
--------------------------------------------------------------
Loans charged off:
Commercial and agricultural ............. 237 98 168 5 163
Mortgage ................................ 20 16 11 18 4
Installment ............................. 247 216 150 169 116
--------------------------------------------------------------
Total loans charged off ........... 504 330 329 192 283
--------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial and agricultural ............. 6 19 172 176 36
Mortgage ................................ -- 3 17 11 7
Installment ............................. 46 56 38 63 37
--------------------------------------------------------------
Total recoveries .................. 52 78 227 250 80
--------------------------------------------------------------
Net loans charged off (recovered) ......... 452 252 102 (58) 203
--------------------------------------------------------------
Provisions for loan losses charged
to operating expense .................... 366 429 406 125 4
--------------------------------------------------------------
Balance at end of year .................... $ 3,182 $ 3,268 $ 3,091 $ 2,787 $ 2,604
==============================================================
Average net loans outstanding ............. $ 276,271 $ 272,425 $ 263,346 $ 231,016 $ 194,050
Ratio of net loan charge-offs (recoveries)
to average net loans outstanding ....... 0.16% 0.09% 0.04% (0.03%) 0.10%
Allowance for loan losses as a percentage
of average net loans outstanding ........ 1.15 1.21 1.18 1.21 1.34
Coverage of net charge-offs by year-end
allowance for loan losses ............... 7.04 12.97 30.30 N/A 12.83
Operating Expenses
A continuing objective of the Company is to manage overhead costs while
maintaining optimal productivity, efficiency, capacity, and quality service.
Significant time and money was spent in 2001 to maintain and enhance our
state-of-the-art Internet banking solution for our customers. While
enthusiastically embraced by our target segment of customers, these necessary
expenditures will likely not be recovered for some time in the future as most
competitors charge little, if anything, for Internet banking services.
Additionally, in 2001 substantial expenditures of financial and human resources
were allocated to plan, implement, and market electronic imaging services to all
of the Company's depositors. Once again, this service improvement was
well-received by our customer base. Due to these and other factors, salaries and
benefits increased $145,000 or 3.0% in 2001 compared to 2000. Equipment expenses
increased $91,000 or 14.8% and computer costs rose $51,000 or 11.9%. Our
efficiency ratio of 62.2% in 2001 compares to 59.5% in 2000. Overall, operating
expenses increased $345,000 or 4.2%.
Net Income
The Company's consolidated net income for the three years is as follows (dollar
amounts in thousands):
Year Ended December 31,
--------------------------------------
2001 2000 1999
--------------------------------------
Net income ..................... $3,400 $3,560 $3,412
======================================
Net income decreased $160,000 or 4.5% in 2001. The net interest income decreased
$619,000 or 5.4%. The provisions for loan losses decreased $63,000 to total
$366,000 in 2001. Other income, without securities gains, grew $257,000 or a
strong 11.3%. Securities gains increased to $331,000 in 2001 from $13,000 a year
earlier. Operating expenses rose $345,000 or 4.2% and income taxes decreased
$166,000 or 10.4%.
Net income increased $148,000 or 4.3% in 2000. The net interest income increased
$205,000 or 1.8%. The provisions for loan losses increased $23,000 to total
$429,000 in 2000. Other income grew $271,000 or a strong 13.4%. Operating
expenses rose $258,000 or 3.2% and income taxes increased $47,000 or 3.0%.
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.
SELECTED CONSOLIDATED RATIOS:
Year Ended December 31,
--------------------------
2001 2000 1999
--------------------------
Percentage of net income to:
Average stockholders' equity ................... 14.96% 17.76% 18.81%
Average total assets ........................... 0.90 0.97 0.96
Percentage of average stockholders' equity to
average total assets ........................... 6.01 5.44 5.08
Dividend payout ratio, based on dividends
declared during the year ....................... 38.59 36.32 37.66
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, 2001
-----------------------------------------------------------------------
Less Than 3-12 1-5 More Than Noninterest
3 Months Months Years 5 Years Bearing Total
-----------------------------------------------------------------------
Assets:
Loans .............................. $ 56,610 $ 25,473 $ 131,900 $ 61,255 $ 639 $ 275,877
Investment securities .............. 5,189 6,032 23,890 9,355 -- 44,466
Other earning assets ............... 31,000 4,981 -- -- -- 35,981
Restricted investment securities ... -- 3,868 -- -- -- 3,868
Nonearning assets .................. -- -- -- -- 20,405 20,405
-----------------------------------------------------------------------
Total assets ................. $ 92,799 $ 40,354 $ 155,790 $ 70,610 $ 21,044 $ 380,597
=======================================================================
Liabilities and Equity:
Deposits ........................... $ 53,355 $ 94,128 $ 77,876 $ -- $ 42,165 $ 267,524
Notes payable ...................... 47 2,072 3,300 -- -- 5,419
Securities sold under agreements
to repurchase and open note ...... 4,327 276 1,087 -- -- 5,690
FHLB advances ...................... 2,450 9,400 50,653 8,203 -- 70,706
Company obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
subordinated debentures .......... -- -- -- 4,000 -- 4,000
Other liabilities .................. -- -- -- -- 1,976 1,976
Redeemable common stock held
by KSOP .......................... -- -- -- -- 2,242 2,242
Equity ............................. -- -- -- -- 23,040 23,040
-----------------------------------------------------------------------
Total liabilities and equity $ 60,179 $ 105,876 $ 132,916 $ 12,203 $ 69,423 $ 380,597
======================================================================
Repricing gap ........................ $ 32,620 $ (65,522) $ 22,874 $ 58,407 $ 48,379 $ --
Cumulative repricing gap ............. 32,620 (32,902) (10,028) 48,379 -- --
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 repricing category with the remainder in the 3-12 months category.
FHLB advances in the 1-5 year repricing category include $18,503,000 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. During 2001, approximately
$9,000,000 of advances were put back to the FHLB in order for the Company to
reduce its funding costs.
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, 2001, using the estimates
discussed above, rate sensitive liabilities exceeded rate sensitive assets
within a one-year period by $32,902,000 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. Management's asset/liability
committee meets 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, 2001, 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 $ 18,303 $ (2,453) (12%)
+100 19,479 (1,277) (6)
- 20,756 - -
- -100 21,952 1,196 6
- -200 23,636 2,880 14
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 $3,881,000 in 2001
which compares to cash provided by operating activities for the year ended
December 31, 2000 of $4,851,000. The Company continues to generate operating
cash from sales of its mortgage loans. Net cash used in investing activities
totaled $1,425,000 for the year ended December 31, 2001 and $8,600,000 for the
year ended December 31, 2000. Federal funds sold were increased substantially
and securities available for sale were sold, matured, called, and paid down much
faster than they were replaced. During the years ended December 31, 2001 and
2000 cash provided by (used in) financing activities totaled $(3,789,000) and
$4,594,000, respectively. The cash used during the year resulted primarily from
decreases in deposits.
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, 2001 were $239,577,000 or 89.6% of total deposits and
62.9% of total liabilities, mezzanine capital, and equity.
At December 31, 2001, securities sold under agreements to repurchase and
treasury tax and loan open note funding sources totaled $5,690,000. Federal Home
Loan Bank advances totaled $70,706,000. At year-end total federal funds sold and
securities maturing within one year were $42,221,000 or 11.0% of total assets.
Both short-term and long-term liquidity are actively monitored and managed.
Equity increased $1,408,000 during 2001 to total $23,040,000 at December 31,
2001. Additionally, $4,000,000 of trust preferred securities were issued during
2001 which count as regulatory capital.
At December 31, 2001, securities available for sale totaling $44,466,000
included $1,382,000 of gross unrealized gains and $15,000 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:
As previously noted, stockholders' equity increased $1,408,000 or 6.5% in 2001.
The Company had net income of $3,400,000, an increase in unrealized gains on
securities available for sale of $568,000, cash dividends declared totaling
$1,308,000, increase in obligation related to KSOP shares totaling $124,000, and
net treasury shares purchased of $1,128,000. Dividends to stockholders were
declared at a rate of $.89, $.85, and $.84 per share during the years ended
December 31, 2001, 2000, and 1999, respectively.
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:
Current accounting developments: In July 2001, the FASB issued Statement No.
141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible
Assets. Statement No. 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 No. 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 effective January 1, 2002. Implementation of Statement No. 141
will have no immediate impact on the Company's financial statements.
Implementation of Statement No. 142 will impact the Company's financial
statements in that yearly goodwill amortization expense of approximately $56,000
will no longer be recorded.
The FASB has issued Statement No. 143, Accounting for Asset Retirement
Obligations, and Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Statement No. 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Statement No. 144 supersedes FASB Statement No. 121 and the
accounting and reporting provisions of APB Opinion No. 30. Statement No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale which includes measuring a long-lived asset classified as held for sale at
the lower of its carrying amount or its fair value less costs to sell and to
cease depreciation/amortization. For the Company, the provisions of Statements
Nos. 143 and 144 are effective January 1, 2003 and January 1, 2002,
respectively. Implementation of the Statements is not expected to have a
material impact on the Company's financial statements.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
In the fourth quarter of 2001, net income was $821,000, compared with $858,000
in the same period of 2000, a decrease of 4.3%. The net interest income during
the fourth quarter of 2001 was $2,731,000 compared with $2,815,000 for the
fourth quarter of 2000. The provision for loan losses in the fourth quarter of
2001 was $58,000 compared with $145,000 in 2000. Other income totaled $773,000
and $662,000 during the fourth quarter of 2001 and 2000, respectively. Other
operating expenses of $2,337,000 in the last quarter of 2001 compared with
$2,100,000 for the last quarter of 2000. Income tax expense was $288,000 and
$374,000 for the final quarter of 2001 and 2000, respectively.
Quarterly results of operations are as follows (dollar amounts in thousands):
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
------------------------------------------------
Total interest income .................... $6,772 $6,694 $6,395 $5,981
Total interest expense ................... 4,051 3,991 3,674 3,250
-------------------------------------------
Net interest income ....................... 2,721 2,703 2,721 2,731
Provision for loan losses ................. 39 139 130 58
Other income .............................. 618 693 784 773
Other expense ............................. 2,057 2,065 2,086 2,337
-------------------------------------------
Income before income taxes ................ 1,243 1,192 1,289 1,109
Applicable income taxes ................... 391 365 389 288
-------------------------------------------
Net income ................................ $ 852 $ 827 $ 900 $ 821
===========================================
Net income per share, basic and diluted ... $ 0.57 $ 0.56 $ 0.61 $ 0.56
===========================================
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
------------------------------------------------
Total interest income ................... $6,544 $6,818 $6,873 $7,071
Total interest expense .................. 3,655 3,833 4,067 4,256
-------------------------------------------
Net interest income ...................... 2,889 2,985 2,806 2,815
Provision for loan losses ................ 42 117 125 145
Other income ............................. 524 564 543 662
Other expense ............................ 2,083 1,935 2,082 2,100
-------------------------------------------
Income before income taxes ............... 1,288 1,497 1,142 1,232
Applicable income taxes .................. 404 481 340 374
-------------------------------------------
Net income ............................... $ 884 $1,016 $ 802 $ 858
===========================================
Net income per share, basic and diluted .. $ 0.58 $ 0.66 $ 0.53 $ 0.57
===========================================
IOWA FIRST BANCSHARES CORP.
DIRECTORS AS OF DECEMBER 31, 2001
- --------------------------------------------------------------------------------
George A. Shepley Craig R. Foss
Chairman of the Board President
Iowa First Bancshares Corp. Foss, Kuiken, Gookin, and Cochran, P.C.
Chairman of the Board Vice Chairman of the Board
First National Bank of Muscatine First National Bank in Fairfield
Chairman of the Board
First National Bank in Fairfield Donald R. Heckman
Investor
D. Scott Ingstad Factory Manager - Retired
Vice Chairman of the Board, President, and CEO H.J. Heinz Co.
Iowa First Bancshares Corp.
Vice Chairman of the Board, President and CEO Dean H. Holst *
First National Bank of Muscatine Director
Iowa First Bancshares Corp.
Kim K. Bartling Director, President and CEO
Director, Executive Vice President, Chief First National Bank in Fairfield
Operating Officer and Treasurer
Iowa First Bancshares Corp. David R. Housley
Director, Executive Vice President and CFO President
First National Bank of Muscatine Doran and Ward Printing Co.
Director
First National Bank in Fairfield Victor G. McAvoy
President
Roy J. Carver, Jr. Muscatine Community College
Chairman of the Board
Carver Pump Company John "Jay" S. McKee
Vice President of Finance
Larry L. Emmert McKee Button Company
President
Hoffmann, Inc. Beverly J. White
Director and Vice President
Quality Foundry Co.
OFFICERS AS OF DECEMBER 31, 2001
George A. Shepley Patricia R. Thirtyacre
Chairman of the Board Corporate Secretary
D. Scott Ingstad Teresa A. Carter
Vice Chairman of the Board Internal Audit Manager
Chief Executive Officer
President Dee Gerdts
Assistant Auditor
Kim K. Bartling
Executive Vice President
Chief Operating Officer
Treasurer
<FN>
* Effective December 31, 2001, Mr. Holst retired from his duties as Director
of Iowa First Bancshares Corp. and President and CEO of First National Bank
in Fairfield.
</FN>
IOWA FIRST BANCSHARES CORP.
Subsidiary Bank Directors as of December 31, 2001
FIRST NATIONAL BANK OF MUSCATINE FIRST NATIONAL BANK IN FAIRFIELD
George A. Shepley George A. Shepley
Chairman of the Board Chairman of the Board
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, President, and CEO Director
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Vice Chairman of the Board, President, and CEO Director, President and CEO
First National Bank of Muscatine First National Bank in Fairfield
Kim K. Bartling Kim K. Bartling
Director, Executive Vice President, Chief Director, Executive Vice President, Chief
Operating Officer and Treasurer Operating Officer and Treasurer
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Director, Executive Vice President and CFO Director, Executive Vice President and CFO
First National Bank of Muscatine First National Bank of Muscatine
Director Director
First National Bank in Fairfield First National Bank in Fairfield
Larry L. Emmert Stephen R. Cracker **
President Director, Executive Vice President, and Chief Operating Officer
Hoffmann, Inc. First National Bank in Fairfield
Donald R. Heckman Allen D. Ehret
Investor President and CEO
Factory Manager - Retired The Dexter Company
H.J. Heinz Co.
Craig R. Foss
David R. Housley President
President Foss, Kuiken, Gookin, and Cochran, P.C.
Doran and Ward Printing Co. Vice Chairman of the Board
First National Bank in Fairfield
Victor G. McAvoy
President Thomas S. Gamrath
Muscatine Community College Vice President & Treasurer
Gamrath-Doyle & Associates, Inc.
John "Jay" S. McKee
Vice President of Finance John R. Hammes
McKee Button Company President and General Manager
Jefferson County Equipment Co.
Beverly J. White
Director and Vice President Marvin L. Nelson
Quality Foundry Co. President
The Nelson Company, Inc.
C. Gene Parker
Agriculturalist
<FN>
* Effective December 31, 2001, Mr. Holst retired from his duties as Director
of Iowa First Bancshares Corp. and President and CEO of First National Bank
in Fairfield.
** As of January 1, 2002, Mr. Cracker's title was changed to President and CEO
of First National Bank in Fairfield.
</FN>