UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended December 31, 2003 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from________________ to ___________________
Commission file number 2-89283
IOWA FIRST BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
An Iowa Corporation 42-1211285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 East Second Street, Muscatine, Iowa 52761
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (563) 263-4221
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
----- ------
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant, based upon the last known price at which the
common equity was sold, as of the last business day of the registrant's most
recently completed second fiscal quarter was $32,531,396.
As of February 28, 2004, 1,417,560 shares of the Registrant's common stock were
outstanding.
Documents incorporated by reference:
Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be
held in April 2004.
1
Annual Report on Form 10-K
Part I
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Item 1. Business
General. Iowa First Bancshares Corp. (the "Company"), is a bank holding company
headquartered in Muscatine, Iowa. The Company owns all the outstanding stock of
two national banks in Iowa, First National Bank of Muscatine and First National
Bank in Fairfield. Both banks are members of the Federal Reserve System with
depository accounts insured to the maximum amount permitted by law by the
Federal Deposit Insurance Corporation.
On a full-time equivalent basis, year-end employment for the Company and its
subsidiary banks totaled 125 employees. No one customer accounts for more than
3% of revenues, loans, or deposits.
First National Bank of Muscatine has a total of five locations in Muscatine,
Iowa. The 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,
money market and time 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.
Some of these other services include sweep accounts, lock-box deposits, debit
cards, credit-related insurance, internet banking, automated teller machines,
telephone banking, and brokerage services through a third-party arrangement. 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. See Note 9 in Item 8 of this Form
10-K for further discussion of these preferred securities.
The Company's primary business consists of attracting deposits from the public
or wholesale funding sources and investing those deposits and other funds in
loans and securities. The Company's results of operations are dependent
principally on net interest income, which is the difference between the interest
earned on its loans and securities and the interest paid on deposits and other
borrowings. Its operating results are affected by deposit service charge fees,
trust fees, revenue from other services provided and other income. Operating
expenses include employee compensation and benefits, occupancy and equipment
expense, data processing costs, advertising and business promotion expenses as
well as other general and administrative expenses. The Company's operating
results are also affected by economic and competitive conditions, especially
changes in interest rates, governmental policies and actions taken by regulatory
authorities.
Competition. The commercial banking business is highly competitive. Subsidiary
banks compete not only with other commercial banks, savings banks, mortgage
banking companies, credit unions and mutual funds, but also, insurance
companies, finance companies, brokerage firms, and a variety of other financial
services and advisory companies. Many of these competitors are not subject to
the same regulatory restrictions or requirements as banks and bank holding
companies. Many of the unregulated competitors compete across geographic
boundaries and provide customers access to attractive alternatives to banking
services. These competitive trends are likely to continue and may well increase.
The financial services industry is also subject to more competition as a result
of future technological advances which may assist more companies to provide
financial services.
Regulation. The operations of the Company and its subsidiary banks are affected
by state and federal legislative changes and by policies of various regulatory
authorities. The Company is a registered bank holding company under the Bank
Holding Company Act of 1956 (the "Act") and is subject to the supervision of,
and regulation by, the Board of Governors of the Federal Reserve System (the
"Board"). Under the Act, a bank holding company may engage in banking, managing
or controlling banks, furnishing or performing services for banks it controls,
and conducting activities that the Board has determined to be closely related to
banking.
National banks are subject to the supervision of, and are examined by, the
Office of the Comptroller of the Currency. Both subsidiary banks of the Company
are members of the Federal Deposit Insurance Corporation, and as such, are
subject to examination thereby. In practice, the primary federal regulator makes
regular examinations of each subsidiary bank subject to its regulatory review or
participates in joint examinations with other federal regulators. Areas subject
to regulation by these authorities include capital levels, the allowance for
possible loan losses, investments, loans, mergers, issuance of securities,
payment of dividends, establishment of branches, and many other aspects of
operations.
Statistical information called for by this Item is contained in the Company's
2003 Annual Report to Shareholders which is incorporated by reference.
2
Item 2. Properties
Since the Company commenced business, its principal executive office has been
located at 300 East Second Street, Muscatine, Iowa, which is the principal
office of First National Bank of Muscatine, a national banking association and a
wholly-owned subsidiary of the Company.
First National Bank of Muscatine conducts its operations from five facilities
located in Muscatine. The main bank is located at 300 East Second Street and is
a modern brick and steel building completed in 1979 containing 36,000 square
feet of floor space on three floors. The bank owns both the building and the
underlying real estate. All administrative and many sales functions of the bank
are conducted at its main office. Portions of the building are leased to
commercial tenants. A substantial remodeling of the main floor of the downtown
Muscatine primary bank building was completed in 2003.
During 1997, a branch was opened inside the then new Wal-Mart Supercenter
located on Highway 61 at Muscatine. This branch and the Wal-Mart Supercenter
were the first of their kind in Iowa. The bank operates this branch under a
five-year lease agreement with Wal-Mart, with two five-year renewal options.
Additionally, another new branch facility, which includes drive-through banking
services and is located across the alley from the main Muscatine banking
headquarters, was completed in the fall of 1997. This branch replaced a previous
downtown branch. The bank owns this facility and the underlying real estate.
The bank's Southside office at 608 Grandview Avenue is located two miles
southwest of the main bank. The office contains 3,600 square feet of floor space
and is located in a one-story steel frame, concrete block building. The facility
offers a walk-in lobby and three drive-up lanes. The building and underlying
real estate are owned by the bank. Portions of the building are leased to
commercial tenants.
The Company built a new branch during 2003 on a major thoroughfare and retail
area, Highway 61, on the northeast side of Muscatine. The branch offers a wide
variety of banking services in its 3,000 square feet of space. In addition to
consumer and real estate lending services, a traditional inside four-person
teller line and four drive-up teller lanes, the branch also offers freestanding
twenty-four hour ATM services. Construction of this branch was completed in May
2003. The building and underlying real estate are owned by the bank.
The new branch discussed above serves as a replacement for rented branch
facilities at the Muscatine Mall, approximately two miles northeast of the main
downtown bank building. In recent years, the Muscatine Mall has lost numerous
tenants resulting in lower customer traffic counts. Thus, the Company decided to
build its own branch in the strong and growing retail section of town described
above.
First National Bank in Fairfield conducts its operations from a modern brick and
steel building completed in 1968 containing 8,200 square feet of floor space on
two floors. The bank owns both the building and the underlying real estate.
Portions of the building are leased to commercial tenants. A three-lane drive-up
facility is located at the main bank. In the spring of 1997, a new 2,500 square
foot branch facility was opened at Fairfield, Iowa. The building, which is
located in a high traffic area in front of the local Wal-Mart store on Highway
34, contains several private offices for lending staff and management as well as
teller and deposit services, including several drive-through lanes.
Management believes all facilities are of sound construction, in good operating
condition, and are adequately equipped for carrying on the business of the
Company.
Item 3. Legal Proceedings
The Company has no pending legal proceedings which are material.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of the Company for a vote
during the fourth quarter of 2003.
3
Part II
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Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
The brokerage firms of Howe Barnes Investments, Inc., Hill, Thompson and Magid,
LP, and Monroe Securities, Inc. make a market for the Company's common stock.
Iowa First Bancshares Corp. common stock is traded on the Over-the-Counter
Bulletin Board market under the symbol "IFST". As of February 28, 2004, there
were 1,417,560 shares of the common stock outstanding.
High and low common stock prices and dividends paid for the last two years were:
2003 by Dividend
Quarters High Low Per Share
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First ............................ $ 31.00 $ 25.25 $ 0.2350
Second ........................... 26.45 26.15 0.2350
Third ............................ 29.00 27.50 0.2350
Fourth ........................... 32.00 29.00 0.2350
Total dividends paid ............. $ 0.94
2002 by ..................... Dividend
Quarters .................... High Low Per Share
- ---------------------------------------------------------------------
First ............................ $ 22.50 $ 20.40 $ 0.2275
Second ........................... 25.00 21.70 0.2275
Third ............................ 25.25 23.30 0.2275
Fourth ........................... 25.00 24.16 0.2275
Total dividends paid ............. $ 0.91
The above quotations were furnished by the brokerage firms that serve as market
makers for the Company's stock. The quotations represent prices between dealers
and do not include retail markup, markdown, or commissions.
Future dividends are dependent on future earnings, regulatory restrictions (see
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of this Form 10-K; and Note 10 to the Company's Consolidated
Financial Statements in the Company's 2003 Annual Report to Shareholders),
capital requirements, and the Company's financial condition.
As of February 28, 2004, the Company had approximately 340 shareholders of its
outstanding class of common stock. The Iowa First Bancshares Corp. Employee
Stock Ownership Plan with 401(k) Provisions is considered one shareholder as all
shares owned by this plan are voted by the trustees of said plan unless the vote
in question encompasses approval or disapproval of any corporate merger,
consolidation, dissolution, or similar transaction.
There were no repurchases of the Company's own stock during the fourth quarter
of 2003.
Item 6. Selected Financial Data
The "Selected Consolidated Financial Data" of Iowa First Bancshares Corp. set
forth on the following page is derived in part from, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes thereto. See Item 8 "Financial Statements and Supplementary Data." Results
for past periods are not necessarily indicative of results to be expected for
any future period.
4
Iowa First Bancshares Corp. and Subsidiaries
Selected Consolidated Financial Data
Balance Sheet (at year-end) 2003 2002 2001 2000 1999
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Net loans ...................................... $266,925,000 $273,922,000 $272,695,000 $270,539,000 $266,992,000
Allowance for loan losses ...................... 3,180,000 3,304,000 3,182,000 3,268,000 3,091,000
Deposits and securities sold under
agreements to repurchase ..................... 282,488,000 277,013,000 272,592,000 275,430,000 274,198,000
Federal Home Loan Bank advances ................ 52,071,000 64,609,000 70,706,000 71,531,000 64,621,000
Total assets ................................... 372,414,000 378,705,000 380,597,000 380,414,000 371,029,000
Redeemable common stock held by KSOP ........... 2,971,000 2,717,000 2,242,000 2,118,000 2,507,000
Stockholders' equity ........................... 25,437,000 24,313,000 23,040,000 21,632,000 18,686,000
Statement of Income (for the year)
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Net interest income ............................ $ 11,142,000 $ 11,601,000 $ 10,876,000 $ 11,495,000 $ 11,290,000
Provision for loan losses ...................... 645,000 440,000 366,000 429,000 406,000
Other income ................................... 2,897,000 2,664,000 2,800,000 2,237,000 1,967,000
Operating expenses ............................. 8,798,000 8,711,000 8,477,000 8,144,000 7,887,000
Income before income taxes ..................... 4,596,000 5,114,000 4,833,000 5,159,000 4,964,000
Income taxes ................................... 1,376,000 1,544,000 1,433,000 1,599,000 1,552,000
Net income ..................................... 3,220,000 3,570,000 3,400,000 3,560,000 3,412,000
Per Share Data
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Net income, basic and diluted .................. $ 2.27 $ 2.48 $ 2.30 $ 2.34 $ 2.23
Book value at year-end ......................... 17.94 17.07 15.82 14.34 12.16
Stock price at year-end (greater of bid or
appraised price) ............................. 29.15 26.50 22.25 22.00 27.00
Cash dividends declared during the year ........ 0.95 0.92 0.89 0.85 0.84
Cash dividends declared as a percentage
of net income .................................. 42% 37% 39% 36% 38%
Key Ratios
- --------------------------------------------------------------------------------------------------------------------------------
Return on average assets ....................... 0.83% 0.93% 0.90% 0.97% 0.96%
Return on average stockholders' equity ......... 12.86 14.87 14.96 17.76 18.81
Net interest margin-tax equivalent ............. 3.22 3.39 3.24 3.49 3.53
Average stockholders' equity to average
assets ....................................... 6.46 6.28 6.01 5.44 5.08
Total regulatory capital to risk-weighted assets 13.02 12.37 11.77 10.04 9.52
Efficiency ratio (all operating expenses,
excluding the provision for loan losses,
divided by the sum of net interest income
and other income) ............................ 62.67 61.07 61.98 59.30 59.49
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides additional information regarding our
operations for the years ended December 31, 2003, 2002, and 2001, and financial
condition for the years ended December 31, 2003 and 2002. This discussion should
be read in conjunction with "Selected Consolidated Financial Data" and our
consolidated financial statements and the accompanying notes thereto included
elsewhere in this document.
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.
5
Total average assets of the Company increased 1.4% in 2003, 1.2% in 2002, and
2.6% in 2001. 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):
2003 2002 2001
-----------------------------------------------------------------------------------
Average Average Average
Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------
Taxable loans, net ..................... $264,977 $ 17,216 6.50% $273,980 $ 19,533 7.13% $274,558 $ 21,909 7.98%
Taxable investment securities
available for sale ................... 21,813 973 4.46 22,312 1,171 5.25 32,116 2,034 6.33
Nontaxable investment securities
and loans ............................ 18,810 1,315 6.99 19,880 1,442 7.25 21,588 1,574 7.29
Federal funds sold ..................... 44,758 446 1.00 35,062 533 1.52 18,807 645 3.43
Restricted investment securities ....... 3,590 113 3.15 3,911 117 2.99 3,824 171 4.47
Interest-bearing deposits at
financial institutions ............... 5,564 143 2.57 1,880 71 3.78 948 44 4.64
------------------- ------------------ ------------------
Total interest-
earning assets ................. 359,512 20,206 5.62 357,025 22,867 6.40 351,841 26,377 7.50
-------- --------
Cash and due from banks ................ 14,286 13,159 12,042
Bank premises and equipment, net ....... 6,410 5,071 5,029
Life insurance contracts ............... 4,100 3,682 3,275
Other assets ........................... 3,539 3,568 5,745
-------- -------- --------
Total .......................... $387,847 $382,505 $377,932
======== ======== ========
Liabilities
Deposits:
Interest-bearing demand .............. $125,263 $ 944 0.75% $115,753 $ 1,514 1.31% $ 98,499 $ 2,497 0.03%
Time ................................. 114,526 3,760 3.28 115,267 4,413 3.83 131,735 7,340 5.57
Notes payable .......................... 3,147 150 4.77 4,160 307 7.38 5,769 424 7.35
Other borrowings ....................... 66,430 3,337 5.02 73,883 4,129 5.59 71,930 4,392 6.11
Junior subordinated debentures and
Company Obligated Mandatorily
Redeemable Preferred Securities ...... 4,125 426 10.32 4,000 413 10.32 3,033 313 10.32
------------------- ------------------ ------------------
Total interest-
bearing liabilities ............ 313,491 8,617 2.75 313,063 10,776 3.44 310,966 14,966 4.81
-------- ------- -------
Noninterest-bearing deposits ........... 44,637 41,128 39,461
Other liabilities ...................... 1,865 1,828 2,665
-------- -------- --------
Total liabilities .............. 359,993 356,019 353,092
-------- -------- --------
Redeemable common stock
held by KSOP ......................... 2,808 2,480 2,118
-------- -------- --------
Stockholders' Equity ................... 25,046 24,006 22,722
-------- -------- --------
Total .......................... $387,847 $382,505 $377,932
======== ======== ========
Net interest earnings .................. $ 11,589 $ 12,091 $ 11,411
======== ======== ========
Net yield (net interest earnings
divided by total interest-
earning assets) ................ 3.22% 3.39% 3.24%
====== ====== ======
<FN>
Nonaccruing loans are included in the average balance. Loan fees are not
material.
</FN>
6
The net interest margin decreased in 2003 (from 3.39% in 2002 to 3.22% in 2003).
The return on average interest-earning assets decreased 78 basis points (from
6.40% in 2002 to 5.62% in 2003) and interest paid on average interest-bearing
liabilities decreased 69 basis points (from 3.44% in 2002 to 2.75% in 2003).
Average interest-earning assets to total assets declined modestly in 2003 to
92.7% from 93.3% in 2002. This decrease was primarily due to a higher percentage
of total average assets invested in cash as well as bank premises and equipment
in 2003 compared to 2002. The Federal Reserve Bank Board and Chairman Greenspan
during 2003 continued to manage short-term interest rates at, or near, lows not
seen in decades. The prime lending rate, which began the year at 4.25%, ended
2003 at 4.00%.
During this period of low interest rates, increased emphasis has been given to
incorporating interest rate floors on selected commercial and agricultural
loans. During 2003 most, if not all, of such loans subject to interest rate
floors were actually paying the floor rate. This resulted in the rates received
on loans falling slightly less than the rates paid on interest-bearing
liabilities. Eventually, when market interest rates again rise, rates paid on
interest-bearing liabilities may, for a time, increase more than rates received
on loans. This outcome is possible due to the loans which are subject to floor
rate pricing lagging market interest rate increases until such time as the floor
rate has been exceeded. The extent of this impact will depend upon, among other
things, the amount and timing of eventual market interest rate hikes.
The net interest margin increased in 2002 (from 3.24% in 2001 to 3.39% in 2002).
The return on average interest-earning assets decreased 110 basis points (from
7.50% in 2001 to 6.40% in 2002) and interest paid on average interest-bearing
liabilities decreased 137 basis points (from 4.81% in 2001 to 3.44% in 2002).
Average interest-earning assets to total assets rose in 2002 to 93.3% from 93.1%
in 2001. The Federal Reserve Bank Board and Chairman Greenspan continued, albeit
at a much slower pace than 2001, to decrease short-term interest rates during
2002. The prime lending rate, which began 2002 at 4.75%, ended 2002 at 4.25%.
Critical Accounting Policy:
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision for loan losses in
the statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis section entitled "Financial Condition -
Allowance for Loan Losses". Although management believes the levels of the
allowance as of both December 31, 2003 and 2002 were adequate to absorb losses
inherent in the loan portfolio, a decline in local economic conditions, or other
factors, could result in increasing losses that cannot be reasonably predicted
at this time.
7
Financial Condition:
Total assets of Iowa First Bancshares Corp. decreased by $6,291,000 or 1.7% when
comparing December 31, 2003 and December 31, 2002 balances. On average for the
year 2003 assets increased $5,342,000 or 1.4%.
Cash, Interest-Bearing Deposits, and Federal Funds Sold
Cash and due from banks decreased by $4,295,000 or 24.9% to $12,988,000 at
December 31, 2003, from $17,283,000 at December 31, 2002. Cash and due from
banks represented both cash maintained at the Banks, as well as funds that
the Banks had deposited in other banks in the form of demand deposits.
Interest-bearing deposits at financial institutions increased $5,157,000 or
287.9% to $6,948,000 at December 31, 2003, from $1,791,000 at December 31,
2002. These deposits are primarily certificates of deposit at financial
institutions with the balance held at any individual bank maintained to not
exceed the insurance limits provided by the Federal Deposit Insurance
Corporation (FDIC). Some of these funds may also be held in interest-bearing
demand accounts at various banking institutions. The large increase in this
asset category during 2003 was the result of a management strategy to achieve
a higher yield on a portion of the Company's liquid assets than could be
earned investing in overnight federal funds sold, while maintaining a high
level of safety for principal and average maturities of less than two years.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds
sold increased $814,000 or 2.7% to $31,414,000 at December 31, 2003, from
$30,600,000 at December 31, 2002. As of December 31, 2003, federal funds sold
represented 8.4% of total assets. These federal funds can be used to fund
future loan demand, deposit or other liability outflows, investment
securities purchases, or various other purposes as identified by management.
Investment Securities
All the Banks' securities are maintained in the available for sale category
as the securities may be liquidated to provide cash for operating, investing,
or financing purposes. These securities are reported at fair value.
Investment securities decreased $938,000 or 2.5% to $37,157,000 at December
31, 2003, from $38,095,000 at December 31, 2002. The amortized cost of such
securities at December 31, 2003 and December 31, 2002 was $35,900,000 and
$36,339,000, respectively. The net decrease was the result of a number of
transactions in the securities portfolio. The Banks purchased additional
available for sale securities totaling $10,241,000 and recognized a net
decrease in unrealized gains on securities available for sale before
applicable income tax of $499,000. Securities sales totaled $516,000 and
paydowns, maturities, and calls were another $10,002,000. Additionally, the
investment securities portfolio realized net gains of $22,000 during 2003 and
net premium amortization of $184,000.
Rates received on taxable investment securities available for sale have
decreased ten basis points more than the rates paid on interest-bearing
liabilities (79 versus 69 basis points, respectively). Rates received on
nontaxable investment securities and loans have decreased only 26 basis
points compared to the 69 basis point decline in rates paid on
interest-bearing liabilities. This was due largely to a longer average
duration for nontaxable investment securities available for sale and loans
than the average duration for interest-bearing liabilities. In the current
interest rate environment, when investment securities mature or are sold,
called, or otherwise paid down, the reinvestment rate available is nearly
always lower than the yield of the liquidating security.
Investment securities as of December 31, 2003 were approximately 55% U.S.
government agency securities, 2% mortgage-backed securities, 40% state and
political subdivisions, and 3% corporate obligations. During 2003, management
continued to focus 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 2003 experienced a
continuation of historically low market interest rates. In an effort to
prudently maintain a competitive yield in the investment portfolio, over 95%
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, 3% was
invested in corporate obligations, which was less than the prior year in
recognition of the greater credit and event risk of such securities,
especially during challenging economic times.
8
Investment securities as of December 31, 2002 were approximately 48% U.S.
government agency securities, 1% mortgage-backed securities, 44% state and
political subdivisions, and 7% corporate obligations. During 2002, 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 2002 experienced
continuing market interest rate reductions with rates as low as any time in
several decades. To prudently maintain a competitive yield in the investment
portfolio, over 92% 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, 7% was
invested in corporate obligations.
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. 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.
The fair value of investment securities available for sale at the date
indicated are summarized as follows (dollar amounts in thousands):
December 31,
---------------------------------
2003 2002 2002
---------------------------------
U.S. Treasury ........................... $ -- $ -- $ 1,533
U.S. government agencies ................ 20,367 18,242 18,119
Mortgage-backed securities .............. 575 281 640
State and political subdivisions ........ 14,979 16,769 18,478
Corporate obligations ................... 1,236 2,803 5,696
---------------------------------
$37,157 $38,095 $44,466
=================================
The following table shows the maturities of investment securities available for
sale at December 31, 2003 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. government agencies ....... $ 7,624 5.56% $ 8,670 3.17% $ 4,073 3.43% $ -- --%
Mortgage-backed securities ..... 6 7.19 569 3.88 -- -- -- --
State and political subdivisions 1,573 7.15 7,075 7.39 4,266 7.42 2,065 7.48
Corporate obligations .......... 1,236 6.92 -- -- -- -- -- --
------- ------- ------- -------
$10,439 $16,314 $ 8,339 $ 2,065
======= ======= ======= =======
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, 2003, and
excluding the interest expense allocated to carry certain tax-exempt securities.
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk and as of December 31, 2003, no investment in a single
security, other than U.S. government agency securities, exceeded 10% of
stockholders' equity.
Loans
Gross loans outstanding at December 31, 2003 decreased $7,121,000 or 2.6% from
December 31, 2002. This decrease was the result of loan originations and
purchases unable to keep pace with loan repayments, sales, and net loan
charge-offs. Loans underwritten and sold to the secondary real estate market
totaled $25,595,000 during 2003.
9
The amounts of loans outstanding at the indicated dates is shown in the
following table according to the type of loans (dollar amounts in thousands):
December 31,
----------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------
Commercial ..................... $113,811 $109,045 $106,286 $103,340 $101,079
Agricultural ................... 25,154 28,185 27,926 28,000 27,810
Real estate, construction ...... 10,165 6,051 7,752 4,055 3,708
Real estate, mortgage .......... 102,893 113,295 110,931 109,557 105,068
Tax exempt, real estate mortgage 3,897 3,297 1,290 2,050 2,581
Installment .................... 13,891 17,118 21,401 26,611 29,774
Other .......................... 294 235 291 194 63
----------------------------------------------------
$270,105 $277,226 $275,877 $273,807 $270,083
====================================================
The following loan categories outstanding at December 31, 2003 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 ..................... $113,811 $ 36,640 $ 55,553 $ 21,618
Agricultural ................... 25,154 9,968 11,514 3,672
Real estate, construction ...... 10,165 6,754 2,147 1,264
--------------------------------------------
$149,130 $ 53,362 $ 69,214 $ 26,554
============================================
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 ................................... $52,391 $24,780
Agricultural ................................. 12,179 3,007
Real estate, construction .................... 3,356 55
------------------------
$67,926 $27,842
========================
During 2003 commercial loans increased by $4,766,000 or 4.4%, agricultural loans
decreased $3,031,000 or 10.8%, construction real estate loans increased by
$4,114,000 or 68.0%, mortgage real estate loans decreased by $10,402,000 or
9.2%, tax exempt real estate mortgage loans increased by $600,000 or 18.2%, and
installment and other loans decreased by $3,227,000 or 18.9%. Overall, loans
declined $7,121,000 or 2.6%. The increase in commercial loans and construction
real estate loans reflects management's focus on those particular lending areas
during the year, coupled with more construction activity in our markets. The
reduction in agricultural loans resulted from a few large loans paying down or
moving to another lender as well as charge-offs recognized during the year. The
decline in mortgage real estate loans was a direct result of the large volume of
customer refinancing during the year due to low interest rates which generated
sizeable sales of such loans to the secondary market. 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. As previously noted, the Company sells some
real estate loans to the secondary market resulting in increased fee income and
reduced interest rate risk. These sales of real estate loans, net of any gains
recognized upon sale, totaled $25,985,000, $20,203,000, and $8,145,000 for the
years ended December 31, 2003, 2002, and 2001, respectively. As of December 31,
2003, the Company's general legal lending limit was approximately $5,565,000.
For loans collateralized by marketable securities, the total legal limit was
approximately $9,275,000 as of December 31, 2003.
10
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,
------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------
Loans accounted for on a nonaccrual basis ...... $2,123 $1,730 $ 640 $ 785 $ 503
Accrual loans contractually past due
90 days or more .............................. 215 1,053 128 96 49
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 $2,123,000 at December 31, 2003, an increase of
$393,000 or 22.7% from December 31, 2002. Total nonaccrual and accrual loans
contractually past due 90 days or more were $2,338,000 at December 31, 2003, a
decrease of $445,000 or 16.0% from a year earlier. Compared to the average over
the past five years, nonaccrual loans at December 31, 2003 were $967,000 or
83.7% more than average. Total nonaccrual and accrual loans contractually past
due 90 days or more were $874,000 or 59.7% higher at December 31, 2003 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
$139,000, $100,000, and $63,000, would have been earned on the nonaccrual loans
had they been performing loans in accordance with their original terms during
2003, 2002, and 2001, respectively. The interest collected on loans designated
as nonaccrual loans and included in income for the years ended December 31,
2003, 2002, and 2001 was $78,000, $30,000, and $57,000, respectively.
As of December 31, 2003, the Company had loans totaling $6,310,000 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
$1,473,000 or 18.9% decrease from 2002. 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 $25,154,000 in total agricultural
loans and $8,612,000 in general warehousing and storage industry 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, 2003. 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,
marketing strategies and timing, consumer willingness to purchase, as well as
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,
technology 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. The national,
regional, State of Iowa, and Counties of Muscatine and Jefferson economic
activity and success levels dramatically influence the risk in each of the loan
portfolios.
Other real estate owned was none, $503,000, and $251,000 as of December 31,
2003, 2002, and 2001, respectively. Management expended considerable effort
during the year to sell all other real estate.
11
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, loan delinquencies, and the existing level of the allowance for loan
losses, (ii) a continuing review of problem loans and overall portfolio
composition and quality, (iii) regular examinations and appraisals of loan
portfolios conducted by federal supervisory authorities, (iv) current and
expected economic conditions, and (v) other factors that, in management's
judgment, deserved evaluation in estimating loan losses. 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, 2003. However,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional provisions for loan
losses in the future. Asset quality is a constant priority for the Company and
its subsidiary banks. Should the economic climate deteriorate, borrowers may
experience difficulty, and the level of non-performing loans, charge-offs, and
delinquencies could rise thus requiring further increases in the provision.
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):
2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------
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 ....... $ 172 39.54% $ 147 42.06% $ 111 40.68% $ 108 40.01% $ 99 38.90%
Construction ... -- 3.76 -- 2.18 -- 2.81 -- 1.48 -- 1.37
Commercial ....... 2,313 42.14 2,875 39.33 2,768 38.53 2,614 37.74 2,425 37.42
Agricultural ..... 556 9.31 111 10.17 89 10.12 280 10.23 269 10.29
Installment ...... 139 5.14 171 6.18 214 7.76 266 9.72 298 11.04
Other ............ -- 0.11 -- 0.08 -- 0.10 -- 0.82 -- 0.98
-------------------------------------------------------------------------------------------
$3,180 100.00% $3,304 100.00% $3,182 100.00% $3,268 100.00% $3,091 100.00%
===========================================================================================
Deposits
Total average deposits increased 4.5% in 2003, 1.0% in 2002, and 2.2% in 2001.
The average deposits are summarized below (dollar amounts in thousands):
2003 2002 2001
--------------------------------------------------------
Average Average Average
Interest Interest Interest
Expense Expense Expense
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------
Noninterest-bearing demand $ 44,637 --% $ 41,128 --% $ 39,461 --%
Savings .................. 24,248 0.5 22,032 1.0 20,339 1.8
Interest-bearing demand .. 101,015 0.8 93,721 1.4 78,160 2.7
Time ..................... 114,526 3.3 115,267 3.8 131,735 5.6
-------- -------- ---------
Total deposits ........... $284,426 $272,148 $ 269,695
======== ======== =========
12
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,
2003
------------
One to three months ...................................... $ 3,942
Three to six months ...................................... 3,715
Six to twelve months ..................................... 4,245
Over twelve months ....................................... 12,084
-------
$23,986
=======
RESULTS OF OPERATIONS:
Changes in Diluted Earnings Per Share
The decrease in diluted earnings per share between 2003 and 2002 amounted to
$.21. The major sources of change are presented in the following table:
2003 2002
----------------------
Net income per share, prior year ..................... $ 2.48 $ 2.30
Increase (decrease) attributable to:
Net interest income ................................ (0.32) 0.50
Provision for loan losses .......................... (0.14) (0.05)
Investment securities gains, net ................... (0.04) (0.17)
Other income ....................................... 0.20 0.08
Salaries and employee benefits ..................... (0.06) (0.01)
Other operating expenses ........................... -- (0.15)
Income taxes ....................................... 0.12 (0.08)
Change in average common shares outstanding ........ 0.03 0.06
----------------------
Net change ................................... (0.21) 0.18
----------------------
Net income per share, current year ............ $ 2.27 $ 2.48
======================
13
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, 2003 Year Ended December 31, 2002
----------------------------------------------------------------
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 ....................... $ (591) $(1,726) $(2,317) $ (47) $(2,329) $ (2,376)
Taxable investment securities
available for sale ................ (22) (176) (198) (622) (241) (863)
Nontaxable investment
securities and loans .............. (75) (52) (127) (124) (8) (132)
Federal funds sold .................. 95 (182) (87) 558 (670) (112)
Restricted investment securities (10) 6 (4) 4 (58) (54)
Interest-bearing deposits at
financial institutions ............ 95 (23) 72 43 (16) 27
----------------------------------------------------------------
Total interest income ......... (508) (2,153) (2,661) (188) (3,322) (3,510)
----------------------------------------------------------------
Interest expense:
Interest-bearing demand deposits .... 78 (648) (570) 429 (1,412) (983)
Interest-bearing time deposits ...... (19) (634) (653) (921) (2,006) (2,927)
Notes payable ....................... (48) (109) (157) (118) 1 (117)
Other borrowings .................... (371) (421) (792) 121 (384) (263)
Company obligated mandatorily
redeemable preferred securities ... 13 -- 13 100 -- 100
----------------------------------------------------------------
Total interest expense ........ (347) (1,812) (2,159) (389) (3,801) (4,190)
----------------------------------------------------------------
Change in net
interest earnings ............. $ (161) $ (341) $ (502) $ 201 $ 479 $ 680
=================================================================
Nonaccruing loans are included in the average balance. Loan fees are not
material.
14
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,
--------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------
Balance of allowance for loan
losses at beginning of year ............. $ 3,304 $ 3,182 $ 3,268 $ 3,091 $ 2,787
--------------------------------------------------------
Loans charged off:
Commercial and agricultural ............. 620 133 237 98 168
Mortgage ................................ 97 39 20 16 11
Installment ............................. 103 199 247 216 150
--------------------------------------------------------
Total loans charged off ........... 820 371 504 330 329
--------------------------------------------------------
Recoveries of loans previously charged off:
Commercial and agricultural ............. 4 6 6 19 172
Mortgage ................................ 1 -- -- 3 17
Installment ............................. 46 47 46 56 38
--------------------------------------------------------
Total recoveries .................. 51 53 52 78 227
--------------------------------------------------------
Net loans charged off (recovered) ......... 769 318 452 252 102
--------------------------------------------------------
Provisions for loan losses charged
to operating expense .................... 645 440 366 429 406
--------------------------------------------------------
Balance at end of year .................... $ 3,180 $ 3,304 $ 3,182 $ 3,268 $ 3,091
========================================================
Average net loans outstanding ............. $267,914 $276,454 $276,271 $272,425 $263,346
Ratio of net loan charge-offs
(recoveries) to average net
loans outstanding ....................... 0.29% 0.12% 0.16% 0.09% 0.04%
Allowance for loan losses as a
percentage of average net
loans outstanding ....................... 1.19 1.20 1.15 1.21 1.18
Coverage of net charge-offs by
year-end allowance for loan
losses .................................. 4.14 10.39 7.04 12.97 30.30
Operating Expenses
Operating expenses include all the costs incurred to operate the Company, except
for interest expense, the loan loss provision, and income taxes. A continuing
objective of the Company is to successfully control these overhead costs while
maintaining optimal productivity, efficiency, capacity, and quality service.
Salaries and benefits, the largest component of operating expenses, were
actively monitored and controlled during 2003. Total salaries and benefits of
$5,000,000 in 2003 increased only $87,000 or 1.8% from 2002. Occupancy expenses
increased to $707,000 during 2003, which represented a $33,000 or 4.9% increase
from 2002. This rise in occupancy costs was largely the result of opening a new
branch facility in Muscatine during the year. Equipment expenses were reduced to
$618,000; a $62,000 or 9.1% decline from 2002 as management focused on control
of this expense category. Office supplies, printing, and postage of $362,000 in
2003 were $20,000 or 5.8% more than 2002. Computer costs rose in 2003 to total
$526,000, a $20,000 or 4.0% increase from 2002. This cost increase was primarily
attributed to additional computer communications, recovery, and backup
expenditures, as well as new marketing applications. Advertising and business
promotion decreased $2,000 or 1.2% to total $168,000 in 2003 compared to 2002.
Finally, other operating expenses decreased $9,000 or 0.6% to $1,417,000 for
2003 compared to 2002. This decrease was due in large measure to management's
continual focus on expense control. Overall, operating expenses increased only
$87,000, or 1.0%, to total $8,798,000 versus $8,711,000 in 2002. The efficiency
ratio, defined as noninterest expense, excluding the provision for loan losses,
as a percent of net interest income plus noninterest income, was 62.7% in 2003.
This was higher than the efficiency ratio of 61.1% for the year ended December
31, 2002. The efficiency ratio was most impacted by lower net interest income in
2003 than 2002. As previously noted, the 2003 net interest income was $459,000
less than 2002, other income was $233,000 more in 2003 than 2002, and other
operating expenses were only $87,000 greater in 2003 than 2002.
15
Significant time and money was spent in 2002 and 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. It is
important for the Company to offer this service, however, to maintain a
satisfied customer base and market share with cross-selling opportunities for
other more profitable products and services. Salaries and benefits, the largest
component of operating expenses, were actively monitored and controlled during
2002. Total salaries and benefits of $4,913,000 in 2002 increased only $13,000
or .3% from 2001. Occupancy expenses decreased to $674,000 during 2002, a
$54,000 or 7.4% decline from 2001. Office supplies, printing, and postage of
$342,000 in 2002 was $34,000 or 9.0% less than 2001. Computer costs rose in 2002
to total $506,000, a $60,000 or 13.5% increase from 2001. This computer cost
increase was primarily attributed to additional costs associated with the
Company's relatively new digital document imaging as well as business continuity
contracts. Advertising and business promotion decreased $24,000 or 12.4% to
total $170,000 in 2002 compared to 2001. This decline was the result of a more
focused and shared approach to advertising by our subsidiary banks during 2002.
Finally, other operating expenses increased $300,000 or 26.6% to $1,426,000 for
2002 compared to 2001. This increase was largely due to the impact of costs
incurred for consulting, employee recruiting, Federal Reserve Bank processing,
losses incurred on other real estate, and insurance and bonds. Overall,
operating expenses increased $234,000 or 2.8% to total $8,711,000 versus
$8,477,000 in 2001. The efficiency ratio, defined as noninterest expense,
excluding the provision for loan losses, as a percent of net interest income
plus noninterest income, was 61.1% in 2002. This was an improvement from the
efficiency ratio of 62.0% for the year ended December 31, 2001.
Net Income
The Company's consolidated net income for the three years is as follows (dollar
amounts in thousands):
Year Ended December 31,
--------------------------------------
2003 2002 2001
--------------------------------------
Net income ..................... $3,220 $3,570 $3,400
======================================
Net income decreased $350,000 or 9.8% in 2003. The net interest income decreased
$459,000 or 4.0%. The provisions for loan losses increased $205,000 or 46.6% to
total $645,000 in 2003. Other income, without securities gains, grew $295,000 or
11.4%. Securities gains decreased to $22,000 in 2003 from $84,000 a year
earlier. Operating expenses rose $87,000 or 1.0% and income taxes decreased
$168,000 or 10.9%. The income tax expense decrease was attributed to lower net
income in 2003 than 2002 and a slight decrease in the effective tax rate for the
year ended December 31, 2003 of 29.9% compared to 30.2% the prior year.
Net income increased $170,000 or 5.0% in 2002. The net interest income increased
a strong $725,000 or 6.7%. The provisions for loan losses increased $74,000 to
total $440,000 in 2002. Other income, without securities gains, grew $111,000 or
4.5%. Securities gains decreased to $84,000 in 2002 from $331,000 a year
earlier. Operating expenses rose $234,000 or 2.8% and income taxes increased
$111,000 or 7.7%. Income tax expense increase was attributed to higher net
income in 2002 than 2001 and a slight increase in the effective tax for the year
ended December 31, 2002 of 30.2% compared to 29.7% the prior year.
Selected Consolidated Ratios:
Year Ended December 31,
--------------------------
2003 2002 2001
--------------------------
Percentage of net income to:
Average stockholders' equity ................... 12.86% 14.87% 14.96%
Average total assets ........................... 0.83 0.93 0.90
Percentage of average stockholders' equity to
average total assets ........................... 6.46 6.28 6.01
Dividend payout ratio, based on dividends
declared during the year ....................... 41.85 37.10 38.70
16
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, 2003
-----------------------------------------------------------------
Less Than 3-12 1-5 More Than Noninterest
3 Months Months Years 5 Years Bearing Total
-----------------------------------------------------------------
Assets:
Loans .................................. $ 44,947 $ 33,333 $144,228 $ 45,474 $ 2,123 $ 270,105
Investment securities .................. 3,569 6,870 16,314 10,404 -- 37,157
Other earning assets ................... 32,218 3,071 3,073 -- -- 38,362
Life insurance contracts ............... -- 4,254 -- -- -- 4,254
Restricted investment securities ....... -- 3,028 -- -- -- 3,028
Nonearning assets ...................... -- -- -- -- 19,508 19,508
-----------------------------------------------------------------
Total assets ..................... $ 80,734 $ 50,556 $163,615 $ 55,878 $ 21,631 $ 372,414
=================================================================
Liabilities and Equity:
Deposits ............................... $ 51,070 $ 93,597 $ 80,260 $ 5,100 $ 47,549 $277,576
Notes payable .......................... 2,700 -- -- -- -- 2,700
Securities sold under agreements
to repurchase and open note .......... 3,857 338 1,273 -- -- 5,468
FHLB advances .......................... 1,400 9,087 37,509 4,075 -- 52,071
Junior subordinated debentures ......... -- -- -- 4,125 -- 4,125
Other liabilities ...................... -- -- -- -- 2,066 2,066
Redeemable common stock held
by KSOP .............................. -- -- -- -- 2,971 2,971
Equity ................................. -- -- -- -- 25,437 25,437
----------------------------------------------------------------
Total liabilities and equity ..... $ 59,027 $103,022 $119,042 $ 13,300 $ 78,023 $372,414
================================================================
Repricing gap ............................ $ 21,707 $ 52,466 $ 44,573 $ 42,578 $(56,392) $ --
Cumulative repricing gap ................. 21,707 (30,759) 13,814 56,392 -- --
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, 20% of the savings and NOW
accounts are reflected in the less than 3 months category, 30% in the 3-12
months category, with the remainder in the 1-5 years category. Also, 25% 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 $4,943,000 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 2003, advances
totaling $12,500,000 were put back to the FHLB.
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, 2003, using the estimates
discussed above, rate sensitive liabilities exceeded rate sensitive assets
within a one-year period by $30,759,000 and, thus, the Company is theoretically
positioned to benefit from a fall in interest rates within the next year. This
compares to year-end 2002 rate sensitive liabilities exceeding rate sensitive
assets within a one-year period of $56,073,000.
17
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change.
Because the repricing gap position does not capture these risks, management
utilizes simulation modeling to measure and manage the rate sensitivity exposure
of earnings. The Company's simulation model provides a projection of the effect
on net interest income of various interest rate scenarios and balance sheet
strategies.
Liquidity:
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are varied,
but include general economic conditions, asset/liability mix, bank reputation,
future FDIC funding needs, changes in regulatory environment, and credit
standing. Assets which provide liquidity consist principally of loans, cash, and
due from banks, interest-bearing deposits at financial institutions, investment
securities, and short-term investments such as federal funds. Maturities of
securities 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, FHLB advances, and lines of
credit. 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 determinants of
the price which can be realized upon sale. Net cash provided by operating
activities totaled $6,329,000 in 2003 which compares to cash provided by
operating activities for the year ended December 31, 2002 of $4,477,000. The
Company generated significant operating cash from sales of its new production
and refinancing mortgage loans, non-cash provision for loan losses,
depreciation, deferred income taxes and declining accrued interest receivable.
Net cash used in investing activities totaled $1,211,000 for the year ended
December 31, 2003 as cash was used to purchase interest-bearing deposits at
financial institutions as well as bank premises and equipment. Cash was
generated by a reduction in loans outstanding. Net cash provided by investing
activities totaled $3,739,000 for the year ended December 31, 2002. During the
years ended December 31, 2003 and 2002 cash used in financing activities totaled
$9,413,000 and $5,594,000, respectively. The cash used during the year resulted
primarily from payments which exceeded new advances from the Federal Home Loan
Bank, payments which exceeded new funds from notes payable, a net decrease in
securities sold under agreements to repurchase, and cash dividends paid to
shareholders.
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, 2003 were $253,590,000 or 91.4% of total deposits and
68.1% of total liabilities, mezzanine capital, and equity.
At December 31, 2003, securities sold under agreements to repurchase and
treasury tax and loan open note funding sources totaled $5,468,000. Federal Home
Loan Bank advances totaled $52,071,000. At year-end total federal funds sold and
securities maturing within one year were $41,847,000 or 11.2% of total assets.
Both short-term and long-term liquidity are actively monitored and managed. The
Company had an unused secured line of credit totaling $1,700,000 at December 31,
2003.
Equity increased $1,124,000 during 2003 to total $25,437,000 at December 31,
2003.
At December 31, 2003, securities available for sale totaling $37,157,000
included $1,260,000 of gross unrealized gains and $3,000 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.
18
Off-Balance-Sheet Arrangements:
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,
----------------------------
2003 2002
----------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit ............... $43,843,000 $44,521,000
Standby letters of credit .................. 2,336,000 2,539,000
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 Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks hold collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the Banks would be required to fund the commitment. The maximum potential amount
of future payments the Banks could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded, the
Banks would be entitled to seek recovery from the customer. At December 31, 2003
and 2002 no amounts have been recorded as liabilities for the Banks' potential
obligations under these guarantees.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of none and $390,000 as of December 31, 2003 and
2002, respectively. These amounts are included in loans held for sale at the
respective balance sheet dates.
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.
Contractual Obligations:
The following table presents, as of December 31, 2003, significant fixed and
determinable contractual obligations to third parties by payments date (dollar
amounts in thousands):
Payments Due In
------------------------------------------------------
One Year One to Three to Over
Or Less Three Years Five Years Five Years Total
------------------------------------------------------
Deposits without a stated maturity ........... $166,163 $ -- $ -- $ -- $166,163
Certificates of deposit ...................... 57,365 36,081 12,867 5,100 111,413
Notes payable ................................ 600 1,200 900 -- 2,700
Securities sold under agreements to repurchase 3,639 1,273 -- -- 4,912
Federal Home Loan Bank advances (a) .......... 7,950 19,850 15,250 9,021 52,071
Treasury tax and loan open note .............. 556 -- -- -- 556
Junior subordinated debentures ............... -- -- -- 4,125 4,125
Purchase obligations (b) ..................... 462 924 693 -- 2,079
------------------------------------------------------
Total ................................ $236,735 $ 59,328 $ 29,710 $ 18,246 $344,019
======================================================
19
Each of the above obligations exclude accrued interest payable, as applicable.
1. Of the advances maturing after five years, $4,443,000 have options which
allow the Company the right, but not the obligation to "put" the advances
back to the Federal Home Loan Bank.
2. The Company's purchase obligations represent obligations under agreements
to purchase goods or services that are enforceable and legally binding on
the Company and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. The purchase
obligation amounts presented above primarily relate to certain contractual
payments for services provided for information technology. The actual
obligations paid may differ from these amounts due to the portion of such
payments which are variable in nature.
Capital:
As previously noted, stockholders' equity increased $1,124,000 or 4.6% in 2003.
The Company had net income of $3,220,000, a decrease in accumulated other
comprehensive income of $313,000, cash dividends declared totaling $1,344,000,
increase in obligation related to KSOP shares totaling $254,000, and net
treasury shares purchased of $185,000. Dividends to stockholders were declared
at a rate of $.95, $.92, and $.89 per share during the years ended December 31,
2003, 2002, and 2001, 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.
Current Accounting Developments:
The Financial Accounting Standards Board has issued Statement 149, Amendment of
Statement 133 on Derivative Instruments and Hedging. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. The Statement was effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Implementation of the Statement on
July 1, 2003 did not have a significant impact on the consolidated financial
statements.
The Financial Accounting Standards Board has issued Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and requires that certain freestanding financial instruments be
reported as liabilities in the balance sheet. For the Company, the Statement was
effective July 1, 2003 and implementation had no significant impact on the
consolidated financial statements.
The Financial Accounting Standard Board has issued Interpretation (FIN) 46,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 which, for the Company, is effective for the year ended
December 31, 2003. FIN 46 establishes accounting guidance for consolidation of
variable interest entities (VIE), that function to support the activities of the
primary beneficiary. The primary beneficiary of a VIE entity is the entity that
absorbs a majority of the VIE's expected losses, receives a majority of the
VIE's expected residual returns, or both, as a result of ownership, controlling
interest, contractual relationship or other business relationship with a VIE.
Prior to the implementation of FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. Under the provisions
of FIN 46 and FIN 46R, Iowa First Capital Trust I, a 100% owned subsidiary of
the Company, no longer meets the criteria for consolidation. FIN 46 was adopted
on a prospective basis on December 31, 2003. As a result, the 2003 balance sheet
includes $4,125,000 of junior subordinated debentures which, for prior periods
presented, is classified in the balance sheet as $4,000,000 of Company Obligated
Mandatorily Redeemable Preferred Securities, after a consolidation elimination
of $125,000. Additionally, the 2003 income statement includes $426,000 of
interest expense on junior subordinated debentures which, for prior periods
presented, is classified as $413,000 of interest expense on Company Obligated
Mandatorily Redeemable Preferred Securities, after a consolidation elimination
of $13,000.
20
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include
trust preferred securities in their Tier I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of this accounting change and, if necessary
or warranted, provide further appropriate guidance. No further guidance has been
issued to date and, as such, the $4 million in trust preferred securities issued
by Iowa First Capital Trust I, which are no longer included on the Company's
consolidated balance sheet, were included in Tier I capital for regulatory
capital purposes at December 31, 2003. There can be no assurance that the
Federal Reserve will continue to permit institutions to include trust preferred
securities in regulatory capital in the future. Assuming the Company was not
permitted to include these securities in regulatory capital at December 31,
2003, the Company would still exceed the regulatory required minimums for
capital adequacy purposes.
The Accounting Standards Executive Committee has issued Statement of Position
(SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. This Statement applies to all loans acquired in a transfer, including
those acquired in the acquisition of a bank or a branch, and provides that such
loans be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are less than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective for calendar year 2005 and, early adoption, although permitted, is not
planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
Forward-Looking Statements:
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "bode," "predict,"
"suggest," "appear," "plan," "intend," "estimate," "may," "will," "would,"
"could," "should" or other similar expressions. Additionally, all statements in
this document, including forward-looking statements, speak only as of the date
they are made, and the Company undertakes no obligation to update any statement
in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which
may be less favorable than expected and may result in, among other
things, a deterioration in the credit quality and value of the Company's
assets.
o The economic impact of the terrorist attacks that occurred on September
11, as well as any future threats and attacks, and the response of the
United States to any such threats and attacks.
o The effects of, and changes in, federal, state and local laws,
regulations and policies affecting banking, securities, insurance and
monetary and financial matters.
o The effects of changes in interest rates (including the effects of
changes in the rate of prepayments of the Company's assets) and the
policies of the Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions
as effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain
existing customers.
21
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such
as the Internet.
o Technological changes implemented by the Company and by other parties,
including third-party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to
the Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
0 The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives
and employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which
may be more difficult or expensive than expected.
o The costs, effects, and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
22
Quarterly Results of Operations (Unaudited):
In the fourth quarter of 2003, net income was $719,000, compared with $861,000
in the same period of 2002, a decrease of 16.5%. The net interest income during
the fourth quarter of 2003 was $2,712,000 compared with $2,919,000 for the
fourth quarter of 2002. The provision for loan losses in the fourth quarter of
2003 was $120,000 compared with $110,000 in 2002. Other income totaled $647,000
and $705,000 during the fourth quarter of 2003 and 2002, respectively. Other
operating expenses of $2,216,000 in the last quarter of 2003 compared with
$2,321,000 for the last quarter of 2002. Income tax expense was $304,000 and
$332,000 for the final quarter of 2003 and 2002, respectively.
Quarterly results of operations are as follows (dollar amounts in thousands):
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
------------------------------------------------
Total interest income ............................ $5,135 $5,090 $4,869 $4,665
Total interest expense ........................... 2,354 2,251 2,059 1,953
-------------------------------------------
Net interest income ............................... 2,781 2,839 2,810 2,712
Provision for loan losses ......................... 370 90 65 120
Other income ...................................... 647 765 838 647
Other expense ..................................... 2,200 2,180 2,202 2,216
-------------------------------------------
Income before income taxes ........................ 858 1,334 1,381 1,023
Applicable income taxes ........................... 241 390 441 304
-------------------------------------------
Net income ........................................ $ 617 $ 944 $ 940 $ 719
===========================================
Net income per share, basic and diluted ........... $ 0.43 $ 0.67 $ 0.66 $ 0.51
===========================================
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
------------------------------------------------
Total interest income ............................ $5,627 $5,654 $5,607 $5,489
Total interest expense ........................... 2,833 2,716 2,657 2,570
-------------------------------------------
Net interest income ............................... 2,794 2,938 2,950 2,919
Provision for loan losses ......................... 68 167 95 110
Other income ...................................... 679 641 639 705
Other expense ..................................... 2,176 2,154 2,060 2,321
-------------------------------------------
Income before income taxes ........................ 1,229 1,258 1,434 1,193
Applicable income taxes ........................... 374 389 449 332
-------------------------------------------
Net income ........................................ $ 855 $ 869 $ 985 $ 861
===========================================
Net income per share, basic and diluted ........... $ 0.59 $ 0.60 $ 0.69 $ 0.60
===========================================
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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 periodically 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.
23
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 changes 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, 2003, an analysis of the Banks' 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).
Change in Estimated Increase
Interest Estimated (Decrease) in NPV
-----------------------------------
Rates NPV Amount Amount Percent
- -------------------------------------------------------------------------
(Basis Points) (Dollars in Thousands)
+200 $ 21,566 $ (5,257) (20%)
+100 23,978 (2,845) (11)
- 26,823 - -
- -100 30,172 3,349 12
- -200 33,857 7,034 26
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, except commodity price risk to the extent such risk may
affect the agricultural loan portfolio.
24
Item 8. Financial Statements and Supplementary Data
IOWA FIRST BANCSHARES CORP.
Index to Consolidated Financial Statements
Independent Auditor's Report 26
Financial Statements
Consolidated balance sheets 27
Consolidated statements of income 28
Consolidated statements of changes in stockholders' equity 29
Consolidated statements of cash flows 30 - 31
Notes to consolidated financial statements 32 - 49
25
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, 2003 and 2002, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years ended December 31, 2003, 2002, and 2001. 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, 2003 and 2002, and the
results of their operations and their cash flows for the years ended December
31, 2003, 2002, and 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
- ---------------------------
Davenport, Iowa
January 16, 2004
McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation
of separate and independent legal entities.
26
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 2003 and 2002
Assets 2003 2002
- -----------------------------------------------------------------------------------------------------
Cash and due from banks (Note 1) ................................... $ 12,988,000 $ 17,283,000
Interest-bearing deposits at financial institutions ................ 6,948,000 1,791,000
Federal funds sold ................................................. 31,414,000 30,600,000
Investment securities available for sale (Note 3) .................. 37,157,000 38,095,000
Loans, net of allowance for loan losses 2003 $3,180,000;
2002 $3,304,000 (Notes 4, 8, and 15) ............................. 266,925,000 273,922,000
Bank premises and equipment, net (Note 5) .......................... 6,764,000 5,303,000
Accrued interest receivable ........................................ 2,231,000 2,672,000
Life insurance contracts ........................................... 4,254,000 3,953,000
Restricted investment securities ................................... 3,028,000 3,957,000
Other assets ....................................................... 705,000 1,129,000
------------------------------
Total assets ....................................................... $ 372,414,000 $ 378,705,000
==============================
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ............................................ $ 47,549,000 $ 45,293,000
Interest-bearing ............................................... 230,027,000 225,129,000
------------------------------
Total deposits (Note 6) .................................... 277,576,000 270,422,000
Notes payable (Note 7) ........................................... 2,700,000 3,300,000
Securities sold under agreements to repurchase (Note 8) .......... 4,912,000 6,591,000
Federal Home Loan Bank advances (Note 8) ......................... 52,071,000 64,609,000
Treasury tax and loan open note (Note 8) ......................... 556,000 785,000
Junior subordinated debentures (Note 9) .......................... 4,125,000 --
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures (Note 9) -- 4,000,000
Dividends payable ................................................ 343,000 335,000
Other liabilities ................................................ 1,723,000 1,633,000
------------------------------
Total liabilities .......................................... 344,006,000 351,675,000
------------------------------
Commitments and Contingencies (Note 14)
Redeemable Common Stock Held by Employee Stock Ownership
Plan with 401(k) provisions (KSOP) (Note 11) ..................... 2,971,000 2,717,000
------------------------------
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 1,832,429; shares outstanding 2003,
1,417,560; 2002, 1,424,445 ..................................... 200,000 200,000
Additional paid-in capital ....................................... 4,251,000 4,254,000
Retained earnings ................................................ 36,071,000 34,195,000
Accumulated other comprehensive income ........................... 788,000 1,101,000
Less cost of common shares acquired for the treasury
2003, 414,869; 2002, 407,984 ................................... (12,902,000) (12,720,000)
Less maximum cash obligation related to KSOP shares (Note 11) .... (2,971,000) (2,717,000)
------------------------------
Total stockholders' equity ................................. 25,437,000 24,313,000
------------------------------
Total liabilities and stockholders' equity ................. $ 372,414,000 $ 378,705,000
==============================
See Notes to Consolidated Financial Statements.
27
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
- -----------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans, including fees:
Taxable ............................................... $17,216,000 $19,533,000 $21,909,000
Nontaxable ............................................ 137,000 131,000 107,000
Investment securities available for sale:
Taxable ............................................... 973,000 1,171,000 2,034,000
Nontaxable ............................................ 731,000 821,000 932,000
Federal funds sold ...................................... 446,000 533,000 645,000
Restricted investment securities ........................ 113,000 117,000 171,000
Other ................................................... 143,000 71,000 44,000
---------------------------------------
Total interest and dividend income ................ 19,759,000 22,377,000 25,842,000
---------------------------------------
Interest expense:
Deposits ................................................ 4,704,000 5,927,000 9,837,000
Notes payable ........................................... 150,000 307,000 424,000
Other borrowed funds .................................... 3,337,000 4,129,000 4,392,000
Junior subordinated debentures .......................... 426,000 -- --
Company obligated mandatorily redeemable
preferred securities .................................. -- 413,000 313,000
---------------------------------------
Total interest expense ............................ 8,617,000 10,776,000 14,966,000
---------------------------------------
Net interest income ............................... 11,142,000 11,601,000 10,876,000
Provision for loan losses (Note 4) ........................ 645,000 440,000 366,000
---------------------------------------
Net interest income after provision for loan losses 10,497,000 11,161,000 10,510,000
---------------------------------------
Other income:
Trust department ........................................ 311,000 367,000 368,000
Service fees ............................................ 1,703,000 1,514,000 1,356,000
Investment securities gains, net ........................ 22,000 84,000 331,000
Gains on loans sold ..................................... 348,000 212,000 64,000
Other ................................................... 513,000 487,000 681,000
---------------------------------------
Total other income ................................ 2,897,000 2,664,000 2,800,000
---------------------------------------
Operating expenses:
Salaries and employee benefits .......................... 5,000,000 4,913,000 4,900,000
Occupancy expenses, net ................................. 707,000 674,000 728,000
Equipment expenses ...................................... 618,000 680,000 707,000
Office supplies, printing, and postage .................. 362,000 342,000 376,000
Computer costs .......................................... 526,000 506,000 446,000
Advertising and business promotion ...................... 168,000 170,000 194,000
Other operating expenses ................................ 1,417,000 1,426,000 1,126,000
---------------------------------------
Total operating expenses .......................... 8,798,000 8,711,000 8,477,000
---------------------------------------
Income before income taxes ........................ 4,596,000 5,114,000 4,833,000
Income taxes (Note 12) .................................... 1,376,000 1,544,000 1,433,000
---------------------------------------
Net income ........................................ $ 3,220,000 $ 3,570,000 $ 3,400,000
=======================================
Net income per common share, basic and diluted (Note 13) .. $ 2.27 $ 2.48 $ 2.30
Weighted average common shares, basic and diluted ......... 1,419,905 1,440,466 1,478,220
Dividends declared per share .............................. $ 0.95 $ 0.92 $ 0.89
See Notes to Consolidated Financial Statements.
28
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2003, 2002, and 2001
Accumulated Maximum
Other Cash
Additional Compre- Obligation Compre-
Common Paid-In Retained hensive Treasury Related to hensive
Stock Capital Earnings Income Stock KSOP Shares Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 . $200,000 $4,309,000 $29,852,000 $ 290,000 $(10,901,000) $(2,118,000) $21,632,000
Comprehensive income:
Net income ............. -- -- 3,400,000 -- -- -- $3,400,000 3,400,000
Other comprehensive
income, net of tax
(Note 2) ............. -- -- -- 568,000 -- -- 568,000 568,000
----------
Comprehensive income $3,968,000
==========
Cash dividends declared,
$.89 per share ........... -- -- (1,308,000) -- -- -- (1,308,000)
Purchase of 56,387 shares
of common stock for the
treasury ................. -- -- -- -- (1,227,000) -- (1,227,000)
Sale of 4,494 shares of
common stock to the KSOP . -- (44,000) -- -- 143,000 -- 99,000
Change related to KSOP shares
(Note 11) ................ -- -- -- -- -- (124,000) (124,000)
--------------------------------------------------------------------------- -----------
Balance, December 31, 2001 . 200,000 4,265,000 31,944,000 858,000 (11,985,000) (2,242,000) 23,040,000
Comprehensive income:
Net income ............. -- -- 3,570,000 -- -- -- $3,570,000 3,570,000
Other comprehensive
income, net of tax
(Note 2) ............. -- -- -- 243,000 -- -- 243,000 243,000
----------
Comprehensive income $3,813,000
==========
Cash dividends declared,
$.92 per share ......... -- -- (1,319,000) -- -- -- (1,319,000)
Purchase of 34,045 shares
of common stock for the
treasury ............... -- -- -- -- (800,000) -- (800,000)
Sale of 2,086 shares of
common stock to the
KSOP and others ........ -- (11,000) -- -- 65,000 -- 54,000
Change related to KSOP
shares (Note 11) ....... -- -- -- -- -- (475,000) (475,000)
-------------------------------------------------------------------------- -----------
Balance, December 31, 2002 . $200,000 $4,254,000 $34,195,000 $1,101,000 $(12,720,000) $(2,717,000) $24,313,000
Comprehensive income:
Net income ............. -- -- 3,220,000 -- -- -- $3,220,000 3,220,000
Other comprehensive
(loss), net of tax
(Note 2) ............. -- -- -- (313,000) -- -- (313,000) (313,000)
----------
Comprehensive income $2,907,000
==========
Cash dividends declared,
$.95 per share ......... -- -- (1,344,000) -- -- -- (1,344,000)
Purchase of 8,600 shares
of common stock for the
treasury ............... -- -- -- -- (235,000) -- (235,000)
Sale of 1,715 shares of
common stock to the KSOP -- (3,000) -- -- 53,000 -- 50,000
Change related to KSOP
shares (Note 11) ....... -- -- -- -- -- (254,000) (254,000)
--------------------------------------------------------------------------- -----------
Balance, December 31, 2003 . $200,000 $4,251,000 $36,071,000 $ 788,000 $(12,902,000) $(2,971,000) $25,437,000
=========================================================================== ===========
See Notes to Consolidated Financial Statements.
29
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .......................................... $ 3,220,000 $ 3,570,000 $ 3,400,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from loans sold .......................... 26,333,000 20,415,000 8,209,000
Loans underwritten ................................ (25,595,000) (20,593,000) (8,145,000)
Gains on loans sold ............................... (348,000) (212,000) (64,000)
Provision for loan losses ......................... 645,000 440,000 366,000
Investment securities gains, net .................. (22,000) (84,000) (331,000)
Depreciation ...................................... 523,000 537,000 647,000
Deferred income taxes ............................. 290,000 (37,000) (45,000)
Amortization of premiums and accretion
of discounts on investment securities,
net ............................................. 184,000 44,000 (31,000)
Changes in assets and liabilities:
Decrease in accrued interest receivable .......... 441,000 121,000 588,000
Net (increase) decrease in other assets .......... 672,000 397,000 (133,000)
Net (decrease) in other liabilities .............. (14,000) (121,000) (329,000)
-------------------------------------------
Net cash provided by operating
activities .................................... 6,329,000 4,477,000 4,132,000
-------------------------------------------
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits
at financial institutions ......................... (5,157,000) (171,000) (1,432,000)
Net (increase) decrease in federal funds sold ....... (814,000) 400,000 (16,350,000)
Proceeds from sales, maturities, calls, and
paydowns of securities available for sale ......... 10,518,000 16,320,000 26,482,000
Purchase of securities available for sale ........... (10,241,000) (9,520,000) (6,623,000)
Net (increase) decrease in loans .................... 5,839,000 (1,824,000) (2,773,000)
Purchases of bank premises and equipment ............ (1,984,000) (785,000) (766,000)
Purchases of life insurance contracts ............... (100,000) (405,000) --
Increase in cash value of life insurance
contracts ......................................... (201,000) (187,000) (177,000)
(Purchases) sales of restricted investment securities 929,000 (89,000) (37,000)
--------------------------------------------
Net cash provided by (used in) investing
activities .................................... $ (1,211,000) $ 3,739,000 $ (1,676,000)
--------------------------------------------
(Continued)
30
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
- -----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase (decrease) in noninterest-bearing
deposits ......................................... $ 2,256,000 $ 3,128,000 $ (6,484,000)
Net increase (decrease) in interest-bearing deposits 4,898,000 (230,000) 2,528,000
Repayment of notes payable ......................... (3,922,000) (2,119,000) (732,000)
Proceeds from note payable ......................... 3,322,000 -- --
Net increase (decrease) in line of credit .......... -- -- (125,000)
Net increase (decrease) in securities sold
under agreements to repurchase ................... (1,679,000) 1,523,000 1,118,000
Advances from Federal Home Loan Bank ............... 10,550,000 7,100,000 18,850,000
Payments of advances from Federal Home
Loan Bank ........................................ (23,088,000) (13,197,000) (19,675,000)
Net increase (decrease) in treasury tax and
loan open note ................................... (229,000) 163,000 (565,000)
Net proceeds from issuance of company
obligated mandatorily redeemable preferred
securities of subsidiary trust ................... -- -- 3,832,000
Cash dividends paid ................................ (1,336,000) (1,315,000) (1,309,000)
Purchases of common stock for the treasury ......... (235,000) (800,000) (1,227,000)
Proceeds from issuance of common stock ............. 50,000 153,000 --
--------------------------------------------
Net cash (used in) financing
activities ................................... (9,413,000) (5,594,000) (3,789,000)
--------------------------------------------
Net increase (decrease) in cash and
due from banks ............................... (4,295,000) 2,622,000 (1,333,000)
Cash and due from banks:
Beginning .......................................... 17,283,000 14,661,000 15,994,000
--------------------------------------------
Ending ............................................. $ 12,988,000 $ 17,283,000 $ 14,661,000
============================================
Supplemental Disclosures of Cash Flow
Information, cash payments for:
Interest ........................................... $ 8,750,000 $ 10,963,000 $ 15,452,000
Income taxes ....................................... 1,191,000 1,619,000 1,542,000
Supplemental Schedule of Noncash Investing
and Financing Activities:
Change in accumulated other comprehensive
income, unrealized gains (losses) on securities
available for sale, net .......................... (313,000) 243,000 568,000
(Increase) in maximum cash obligation related
to KSOP shares ................................... (254,000) (475,000) (124,000)
Due from KSOP for sale of common stock ............. -- -- 99,000
Transfers of loans to other real estate owned ...... 123,000 547,000 251,000
See Notes to Consolidated Financial Statements.
31
Iowa First Bancshares Corp. and Subsidiaries
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, money market, and time 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 accounting principles generally accepted in the United States of America,
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: As of and for the year ended December 31, 2003, the
accompanying consolidated financial statements include the accounts of the
Company and all wholly-owned subsidiaries, except Iowa First Capital Trust I,
which under current accounting rules, no longer meets the criteria for
consolidation. See further discussion in the Current Accounting Developments
section of this note. For prior periods presented, the accompanying consolidated
financial statements include the accounts of the Company and all of 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 $3,251,000 and $3,232,000 as of December 31, 2003 and 2002,
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, 2003 or 2002.
32
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 or lease's yield. The
Banks generally amortize these amounts over the contractual life. Direct loan
origination fees and costs related to loans sold to unrelated third parties are
recognized as income or expense in the current consolidated statements of
income. Commitment fees based upon a percentage of customers' unused lines of
credit and fees related to standby letters of credit are not significant.
Sales of loans: As part of its management of assets and liabilities, the Company
periodically sells residential real estate loans. Loans which are expected to be
sold in the foreseeable future are classified as held for sale and are recorded
at the lower of cost or estimated market value in the aggregate.
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 to pledge or
exchange the assets it received, and no condition both constrains the transferee
from taking advantage of its right to pledge or exchange and provides more than
a modest benefit to the transferor, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity or the ability to unilaterally cause the holder to
return specific assets.
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 their 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.
Other revenue recognition: Revenue from trust services and other service charges
and fees is recognized as the services are provided.
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.
33
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 are arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. There were no common stock equivalents outstanding during
the years ended December 31, 2003, 2002, and 2001.
Current accounting developments: The Financial Accounting Standards Board has
issued Statement 149, Amendment of Statement 133 on Derivative Instruments and
Hedging. This Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement No. 133. The
Statement was effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003.
Implementation of the Statement on July 1, 2003 did not have a significant
impact on the consolidated financial statements.
The Financial Accounting Standards Board has issued Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and requires that certain freestanding financial instruments be
reported as liabilities in the balance sheet. For the Company, the Statement was
effective July 1, 2003 and implementation had no significant impact on the
consolidated financial statements.
The Financial Accounting Standard Board has issued Interpretation (FIN) 46,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 which, for the Company, is effective for the year ended
December 31, 2003. FIN 46 establishes accounting guidance for consolidation of
variable interest entities (VIE), that function to support the activities of the
primary beneficiary. The primary beneficiary of a VIE entity is the entity that
absorbs a majority of the VIE's expected losses, receives a majority of the
VIE's expected residual returns, or both, as a result of ownership, controlling
interest, contractual relationship or other business relationship with a VIE.
Prior to the implementation of FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. Under the provisions
of FIN 46 and FIN 46R, Iowa First Capital Trust I, a 100% owned subsidiary of
the Company, no longer meets the criteria for consolidation. FIN 46 was adopted
on a prospective basis on December 31, 2003. As a result, the 2003 balance sheet
includes $4,125,000 of junior subordinated debentures which, for prior periods
presented, is classified in the balance sheet as $4,000,000 of Company Obligated
Mandatorily Redeemable Preferred Securities, after a consolidation elimination
of $125,000. Additionally, the 2003 income statement includes $426,000 of
interest expense on junior subordinated debentures which, for prior periods
presented, is classified as $413,000 of interest expense on Company Obligated
Mandatorily Redeemable Preferred Securities, after a consolidation elimination
of $13,000.
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include
trust preferred securities in their Tier I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of this accounting change and, if necessary
or warranted, provide further appropriate guidance. No further guidance has been
issued to date and, as such, the $4 million in trust preferred securities issued
by Iowa First Capital Trust I, which are no longer included on the Company's
consolidated balance sheet, were included in Tier I capital for regulatory
capital purposes at December 31, 2003. There can be no assurance that the
Federal Reserve will continue to permit institutions to include trust preferred
securities in regulatory capital in the future. Assuming the Company was not
permitted to include these securities in regulatory capital at December 31,
2003, the Company would still exceed the regulatory required minimums for
capital adequacy purposes.
34
The Accounting Standards Executive Committee has issued Statement of Position
(SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. This Statement applies to all loans acquired in a transfer, including
those acquired in the acquisition of a bank or a branch, and provides that such
loans be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are less than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective January 1, 2005 and, early adoption, although permitted, is not
planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
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, 2003
-----------------------------------------
Unrealized gains (losses) on securities
available for sale:
Unrealized holding (losses) arising during
the year ...................................... $ (477,000) $ (178,000) $ (299,000)
Less reclassification adjustment for gains
included in net income ........................ 22,000 8,000 14,000
-----------------------------------------
Other comprehensive (loss) ................ $ (499,000) $ (186,000) $ (313,000)
=========================================
Year Ended December 31, 2002
-----------------------------------------
Unrealized gains on securities available
for sale:
Unrealized holding gains arising during
the year ....................................... $ 473,000 $ 178,000 $ 295,000
Less reclassification adjustment for gains
included in net income ......................... 84,000 32,000 52,000
-----------------------------------------
Other comprehensive income ................. $ 389,000 $ 146,000 $ 243,000
=========================================
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
=========================================
35
Note 3. Investment Securities Available for Sale
The amortized cost and fair value of investment securities available for sale as
of December 31, 2003 and 2002 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------------------------------------------------
December 31, 2003
----------------------------------------------------------
U.S. government agencies ............. $ 20,095,000 $ 273,000 $ (1,000) $ 20,367,000
Mortgage-backed securities ........... 571,000 6,000 (2,000) 575,000
State and political subdivisions ..... 14,038,000 941,000 -- 14,979,000
Corporate obligations ................ 1,196,000 40,000 -- 1,236,000
-----------------------------------------------------------
$ 35,900,000 $ 1,260,000 $ (3,000) $ 37,157,000
===========================================================
December 31, 2002
-----------------------------------------------------------
U.S. government agencies ............. $ 17,591,000 $ 651,000 $ -- $ 18,242,000
Mortgage-backed securities ........... 268,000 13,000 -- 281,000
State and political subdivisions ..... 15,799,000 970,000 -- 16,769,000
Corporate obligations ................ 2,681,000 122,000 -- 2,803,000
-----------------------------------------------------------
$ 36,339,000 $ 1,756,000 $ -- $ 38,095,000
===========================================================
All securities which have unrealized losses as of December 31, 2003 have been in
that unrealized loss position for less than 12 months. Those securities include
U.S. government agencies with a fair value of $558,000 and unrealized losses of
$1,000 and mortgage-backed securities with a fair value of $444,000 and
unrealized losses of $2,000. For all of these investment securities, the
unrealized losses are generally due to changes in interest rates and, as such,
are considered to be temporary, by the Company.
The amortized cost and fair value of investment securities available for sale as
of December 31, 2003, 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 .................................... $10,242,000 $10,433,000
Due after one year through five years ...................... 15,165,000 15,745,000
Due after five years through ten years ..................... 7,995,000 8,339,000
Due after ten years ........................................ 1,927,000 2,065,000
------------------------
35,329,000 36,582,000
Mortgage-backed securities ................................. 571,000 575,000
------------------------
$35,900,000 $37,157,000
========================
Investment securities with a carrying value of $11,511,000 and $17,633,000 as of
December 31, 2003 and 2002, respectively, are pledged on securities sold under
agreements to repurchase, trust deposits, and for other purposes as required or
permitted by law.
All sales of securities during the years ended December 31, 2003, 2002, and 2001
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, 2003, 2002, and 2001:
2003 2002 2001
---------------------------------------
Proceeds from sales of securities .... $ 516,000 $ 4,013,000 $11,077,000
Gross gains from sales of securities . 22,000 86,000 332,000
Gross losses from sales of securities -- 2,000 1,000
36
Note 4. Loans
The composition of loans is summarized as follows:
December 31,
--------------------------
2003 2002
--------------------------
Commercial .......................................... $113,811,000 $109,045,000
Agricultural ........................................ 25,154,000 28,185,000
Real estate:
Construction ...................................... 10,165,000 6,051,000
Mortgage .......................................... 102,893,000 113,295,000
Tax exempt, mortgage .............................. 3,897,000 3,297,000
Installment ......................................... 13,891,000 17,118,000
Other ............................................... 294,000 235,000
--------------------------
Total loans ................................. 270,105,000 277,226,000
Less allowance for loan losses ...................... 3,180,000 3,304,000
--------------------------
$266,925,000 $273,922,000
==========================
Included in commercial loans above are general warehousing and storage industry
loans totaling $8,612,000 and $7,709,000 as of December 31, 2003 and 2002,
respectively.
Included in real estate mortgage loans above are loans held for sale of none and
$390,000 as of December 31, 2003 and 2002, respectively.
Loans considered to be impaired are as follows:
December 31,
-------------------------
2003 2002
-------------------------
Impaired loans for which an allowance has been
provided ....................................... $ 2,453,000 $ 2,095,000
=========================
Allowance provided for impaired loans, included
in the allowance for loan losses ............... $ 639,000 $ 410,000
=========================
There are no loans impaired for which an allowance has not been provided.
The average recorded investment in impaired loans during 2003 and 2002 was
$2,230,000 and $2,319,000, respectively. Interest income on impaired loans of
$66,000, $269,000, and $339,000 was recognized for cash payments received in
2003, 2002, and 2001, respectively.
Nonaccruing loans totaled $2,123,000 and $1,730,000 at December 31, 2003 and
2002, respectively. Interest income in the amount of $139,000, $100,000, and
$63,000 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, 2003, 2002, and 2001, respectively. The interest collected on loans
designated as nonaccrual loans and included in income for the years ended
December 31, 2003, 2002, and 2001 totaled $78,000, $30,000, and $57,000,
respectively.
Loans past due 90 days or more and still accruing interest totaled $215,000 and
$1,053,000 as of December 31, 2003 and 2002, respectively.
Changes in the allowance for loan losses are summarized as follows:
Year Ended December 31,
--------------------------------------
2003 2002 2001
--------------------------------------
Beginning balance .................... $3,304,000 $3,182,000 $3,268,000
Provisions charged to expense ...... 645,000 440,000 366,000
Recoveries ......................... 51,000 53,000 52,000
--------------------------------------
4,000,000 3,675,000 3,686,000
Loans charged off .................. 820,000 371,000 504,000
--------------------------------------
Ending balance ....................... $3,180,000 $3,304,000 $3,182,000
======================================
37
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 $39,149,000 and $28,170,000 as
of December 31, 2003 and 2002, respectively. Custodial escrow balances
maintained in connection with these loans were approximately $177,000 and
$133,000 as of December 31, 2003 and 2002, respectively. All loans sold are
without recourse.
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows:
Years of
Useful
Lives December 31,
--------------------------------------
2003 2002
--------------------------------------
Land ........................... $ 1,136,000 $ 1,136,000
Bank premises .................. 10-40 7,917,000 6,452,000
Leasehold improvements ......... 5-15 122,000 122,000
Furniture and equipment ........ 5-15 3,303,000 2,864,000
---------------------------
12,478,000 10,574,000
Accumulated depreciation ....... 5,714,000 5,271,000
---------------------------
$ 6,764,000 $ 5,303,000
===========================
Included in land at December 31, 2002 was $380,000 representing the cost of
property acquired for the purpose of construction of a new branch bank building.
Additionally, as of December 31, 2002, bank premises included $185,000 of
construction in process related to the construction of this new branch bank
building as well as the remodeling of one of the Company's main banking
facilities. During 2003 the construction of the new branch bank building and the
remodeling of the main bank facility were completed.
Note 6. Deposits
The composition of deposits is summarized as follows:
December 31,
----------------------------
2003 2002
----------------------------
Demand .................................. $100,662,000 $ 96,350,000
NOW accounts ............................ 40,699,000 35,246,000
Savings ................................. 24,802,000 22,584,000
Time certificates ....................... 111,413,000 116,242,000
----------------------------
$277,576,000 $270,422,000
============================
Included in interest-bearing deposits are certificates of deposit with a minimum
denomination of $100,000 totaling $23,986,000 and $27,322,000 as of December 31,
2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities of all certificates of deposit
are as follows:
Year ending December 31:
2004 $ 57,365,000
2005 26,124,000
2006 9,957,000
2007 8,196,000
2008 4,671,000
Thereafter 5,100,000
------------
$111,413,000
============
38
Note 7. Notes Payable
Notes payable are summarized as follows:
December 31,
-------------------------
2003 2002
-------------------------
Revolving note payable to a bank, interest
variable at Prime rate minus one percent with a
floor rate of 3.25% and a ceiling rate of 5.25%,
due May 1, 2008, with annual principal installments
of $600,000, secured by stock of subsidiary banks
of the Company. ................................... $ 2,700,000 $ --
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. ................................... -- 3,300,000
-------------------------
$2,700,000 $3,300,000
=========================
The Company's above-referenced revolving note payable includes an unused
$1,700,000 line of credit, in addition to the $2,700,000 balance outstanding, as
of December 31, 2003.
The notes payable include certain restrictive covenants regarding the Company's
net worth and regulatory capital.
Note 8. Other Borrowed Funds
Other borrowed funds consist of the following:
December 31,
-------------------------
2003 2002
-------------------------
Securities sold under agreements to repurchase ..... $ 4,912,000 $ 6,591,000
Federal Home Loan Bank advances .................... 52,071,000 64,609,000
Treasury tax and loan open note .................... 556,000 785,000
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, 2003, all but $1,273,000 of the
securities sold under agreements to repurchase mature within twelve months. Of
this $1,273,000, $716,000 matures within two years and the remaining $557,000
matures within three years. At December 31, 2002, all but $1,036,000 of the
securities sold under agreements to repurchase mature within twelve months. Of
this $1,036,000, $502,000 matures within two years and the remaining $534,000
matures within four years.
Additional information concerning securities sold under agreements to repurchase
follows:
December 31,
------------------------
2003 2002
------------------------
Daily average amount outstanding during the year .... $5,615,000 $5,845,000
Maximum outstanding as of any month-end ............. 6,685,000 7,349,000
Weighted average interest rate during the year ...... 2.06% 2.68%
Weighted average interest rate at the end of the
year .............................................. 1.74% 2.18%
Securities underlying the agreements at the end
of the year, carrying and fair value .............. $10,342,000 $10,734,000
39
Advances from the Federal Home Loan Bank as of December 31, 2003 and 2002 bear
interest and are due as follows:
December 31, 2003
------------------------
Weighted
Average
Interest
Rate at
Year-End Balance Due
------------------------
Year ending December 31:
2004 6.27% $ 7,950,000
2005 4.92 7,100,000
2006 4.93 12,750,000
2007 4.12 7,550,000
2008 4.50 7,700,000
Thereafter 5.42 9,021,000
-----------
$52,071,000
===========
Of the advances maturing after 2008, $4,443,000 have options which allow the
Company the right, but not the obligation, to "put" the advances back to the
Federal Home Loan Bank. The Company, during 2003, "put" back to the Federal Home
Loan Bank advances totaling $12,500,000. The Federal Home Loan Bank has the
option to call before maturity one advance totaling $500,000 with a stated
maturity after 2008. Given current interest rates, management believes it is
unlikely the Federal Home Loan Bank will call this advance prior to maturity.
December 31, 2002
------------------------
Weighted
Average
Interest
Rate at
Year-End Balance Due
----------------------
Year ending December 31:
2003 5.81% $ 9,050,000
2004 6.27 7,950,000
2005 5.19 6,500,000
2006 5.32 10,950,000
2007 4.75 4,950,000
Thereafter 5.79 25,209,000
------------
$ 64,609,000
============
First mortgage loans of approximately $78,540,000 and $90,526,000 as of December
31, 2003 and 2002, respectively, are pledged as collateral on Federal Home Loan
Bank advances.
The treasury tax and loan open note represents overnight borrowings from the
Federal Reserve Bank system. Note 9.
Junior Subordinated Debentures and Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures
Junior subordinated debentures:
Junior subordinated debentures are due to Iowa First Capital Trust I, a 100%
owned non-consolidated subsidiary of the Company. The debentures were issued in
2001 in conjunction with the Trust's issuance of 4,000 shares of Company
Obligated Mandatorily Redeemable Preferred Securities. The debentures bear the
same interest rate and terms as the preferred securities, detailed following.
The debentures are included on the balance sheet as liabilities; however for
regulatory purposes $4,000,000, representing the entire amount of the trust's
capital securities, is allowed in the calculation of Tier I capital. The
deconsolidation of trust preferred subsidiaries, such as Iowa First Capital
Trust I, under FIN 46R, has called into question the permissibility of including
these securities in regulatory capital in the future. See further information in
Note 1.
40
Company Obligated Mandatorily Redeemable Preferred Securities:
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, 2031. 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 consolidated 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. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Entities to maintain minimum amounts and ratios (set forth in the
following table) 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, 2003, that the
Entities meet all capital adequacy requirements to which they are subject.
As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately or well capitalized an institution 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 notification that management
believes have changed the Banks' categories.
41
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, 2003
Total Capital (to Risk-Weighted Assets):
Consolidated $34,375,000 13.0% $21,124,000 >8.0% N/A N/A
First National Bank of Muscatine 27,837,000 14.6 15,286,000 >8.0 $19,107,000 >10.0%
First National Bank in Fairfield 9,134,000 12.7 5,766,000 >8.0 7,208,000 >10.0
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated 31,195,000 11.8 10,562,000 >4.0 N/A N/A
First National Bank of Muscatine 25,447,000 13.3 7,643,000 >4.0 11,464,000 > 6.0
First National Bank in Fairfield 8,473,000 11.8 2,883,000 >4.0 4,325,000 > 6.0
Tier 1 Capital (to Average Assets):
Consolidated 31,195,000 8.2 15,274,000 >4.0 N/A N/A
First National Bank of Muscatine 25,447,000 9.1 11,161,000 >4.0 13,952,000 > 5.0
First National Bank in Fairfield 8,473,000 8.3 4,093,000 >4.0 5,116,000 > 5.0
- -
As of December 31, 2002 Total Capital
(to Risk-Weighted Assets):
Consolidated $ 32,808,000 12.4% $21,220,000 >8.0% N/A N/A
First National Bank of Muscatine 27,280,000 14.5 15,056,000 >8.0 $18,820,000 >10.0%
First National Bank in Fairfield 8,919,000 11.7 6,095,000 >8.0 7,619,000 >10.0
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated 29,504,000 11.1 10,610,000 >4.0 N/A N/A
First National Bank of Muscatine 24,925,000 13.2 7,528,000 >4.0 11,292,000 > 6.0
First National Bank in Fairfield 8,167,000 10.7 3,048,000 >4.0 4,572,000 > 6.0
Tier 1 Capital (to Average Assets):
Consolidated 29,504,000 7.5 15,659,000 >4.0 N/A N/A
First National Bank of Muscatine 24,925,000 8.7 11,426,000 >4.0 14,283,000 > 5.0
First National Bank in Fairfield 8,167,000 7.7 4,223,000 >4.0 5,279,000 > 5.0
Current banking law limits the amount of dividends banks can pay. As of December
31, 2003, amounts available for payment of dividends were $3,685,000 and
$395,000 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 101,915 shares of the Company as of
December 31, 2003 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, 2003, 2002,
and 2001 were $325,000, $319,000, and $320,000, 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, 2003, 101,915
shares held by the KSOP, at a fair value of $29.15 per share, have been
reclassified from stockholders' equity to mezzanine capital.
42
The Company has 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 in 2003 of $6,250 per participant) 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 contract purchased by the Company
related to the agreements. At December 31, 2003 the rate is 10%. Upon
retirement, the director or officer will receive the deferral balance in 180
equal monthly installments. During the years ended December 31, 2003, 2002, and
2001, the Company expensed $152,000, $134,000, and $124,000, respectively,
related to the agreements. As of December 31, 2003 and 2002 the liability
related to the agreements was $494,000 and $342,000, respectively. During the
years ended December 31, 2003, 2002, and 2001, total cash payouts pursuant to
the agreements totaled none, $35,000, and none, respectively.
Note 12. Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
-------------------------------------------
2003 2002 2001
-------------------------------------------
Currently paid or payable ....... $ 1,086,000 $ 1,581,000 $ 1,478,000
Deferred income taxes ........... 290,000 (37,000) (45,000)
-------------------------------------------
$ 1,376,000 $ 1,544,000 $ 1,433,000
===========================================
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,
-------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------
% Of % Of % Of
Dollar Pretax Dollar Pretax Dollar Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------------
Computed "expected" income tax
expense ......................... $ 1,609,000 35.0% $ 1,790,000 35.0% $ 1,692,000 35.0%
Effect of graduated tax rate ...... (46,000) (1.0) (51,000) (1.0) (48,000) (1.0)
Tax exempt interest and dividend
income, net ..................... (293,000) (6.4) (308,000) (6.0) (316,000) (6.5)
State income taxes, net ........... 152,000 3.3 169,000 3.3 159,000 3.3
Increase in cash surrender value of
life insurance contracts ........ (69,000) (1.5) (64,000) (1.2) (60,000) (1.2)
Other ............................. 23,000 0.5 8,000 0.1 6,000 0.1
-------------------------------------------------------------------------
$ 1,376,000 29.9% $ 1,544,000 30.2% $ 1,433,000 29.7%
=========================================================================
Net deferred taxes, included in other liabilities on the consolidated balance
sheets, consist of the following components as of December 31:
2003 2002
--------------------------
Deferred tax assets:
Allowance for loan losses .................... $ 500,000 $ 546,000
Deferred compensation ........................ 184,000 128,000
Other real estate owned ...................... -- 33,000
--------------------------
684,000 707,000
--------------------------
Deferred tax liabilities:
Securities available for sale ................ (469,000) (655,000)
Bank premises and equipment .................. (406,000) (116,000)
Unrealized bond accretion .................... (24,000) (47,000)
Net deferred loan origination fees ........... (64,000) (64,000)
--------------------------
(963,000) (882,000)
--------------------------
Net deferred tax (liabilities) ......... $(279,000) $(175,000)
==========================
43
The change in deferred income taxes was reflected in the financial statements as
follows for the years ended December 31, 2003, 2002, and 2001:
2003 2002 2001
------------------------------------
Provision for income taxes .............. $ 290,000 $ (37,000) $ (45,000)
Statement of stockholders' equity,
accumulated other comprehensive
income ................................ (186,000) 146,000 336,000
------------------------------------
$ 104,000 $ 109,000 $ 291,000
====================================
Note 13. Earnings Per Share
The following information was used in the computation of basic and diluted
earnings per share:
Year Ended December 31,
------------------------------------
2003 2002 2001
------------------------------------
Basic and diluted earnings, net income .. $3,220,000 $3,570,000 $3,400,000
====================================
Weighted average common shares
outstanding ........................... 1,419,905 1,440,466 1,478,220
====================================
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,
----------------------------
2003 2002
----------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit ................. $ 43,843,000 $ 44,521,000
Standby letters of credit .................... 2,336,000 2,539,000
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 Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks hold collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the Banks would be required to fund the commitment. The maximum potential amount
of future payments the Banks could be required to make is represented by the
contractual amount shown in the summary on the previous page. If the commitment
is funded, the Banks would be entitled to seek recovery from the customer. At
December 31, 2003 and 2002 no amounts have been recorded as liabilities for the
Banks' potential obligations under these guarantees.
44
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of none and $390,000 as of December 31, 2003 and
2002, respectively. These amounts are included in loans held for sale at the
respective balance sheet dates.
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 $26,714,000 and $30,552,000 as of December 31, 2003 and 2002,
respectively. 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.
Commitments: The Company has entered into contracts for information technology
services for the Banks. These contracts provide for payments of approximately
$462,000 in 2004, 2005, 2006, and 2007 and $231,000 in 2008. The actual amounts
paid may differ from these amounts due to the portion of such payments which are
variable in nature.
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, 2003, none of
these loans are classified as nonaccrual, past due, or restructured.
The activity in such loans during the years ended December 31, 2003 and 2002 is
as follows:
2003 2002
----------------------------
Balance, beginning ........... $ 13,475,000 $ 10,355,000
Additions .................. 7,872,000 8,633,000
Repayments ................. (7,542,000) (5,513,000)
----------------------------
Balance, ending .............. $ 13,805,000 $ 13,475,000
============================
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.
45
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, with maturities of one
month or less, equal their fair values. Fair values of interest-bearing
deposits at financial institutions with remaining maturities of over one
month are estimated using discounted cash flow analysis, using interest rates
currently available for similar instruments.
Federal funds sold: The carrying value for federal funds sold equals their
fair value.
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.
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 equals 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, junior subordinated debentures, and Company Obligated
Mandatorily Redeemable Preferred Securities: For notes payable, junior
subordinated debentures, 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. The fair value of securities sold under agreements to
repurchase with maturities of over one month is estimated using discounted
cash flow analysis, using interest rates available on similar borrowings.
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.
46
The carrying values and estimated fair values of financial instruments as of
December 31, 2003 and 2002 are summarized as follows:
2003 2002
---------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------------------------------------------------
Financial Assets:
Cash and due from banks ......... $ 12,988,000 $ 12,988,000 $ 17,283,000 $ 17,283,000
Interest-bearing deposits at
financial institutions ........ 6,948,000 6,963,000 1,791,000 1,798,000
Federal funds sold .............. 31,414,000 31,414,000 30,600,000 30,600,000
Investment securities
available for sale ............ 37,157,000 37,157,000 38,095,000 38,095,000
Loans, net of allowance ......... 266,925,000 272,905,000 273,922,000 280,424,000
Accrued interest receivable ..... 2,231,000 2,231,000 2,672,000 2,672,000
Restricted investment securities 3,028,000 3,028,000 3,957,000 3,957,000
Financial Liabilities:
Deposits ........................ 277,576,000 279,015,000 270,422,000 272,292,000
Notes payable ................... 2,700,000 2,702,000 3,300,000 3,336,000
Securities sold under
agreements to repurchase ...... 4,912,000 4,943,000 6,591,000 6,639,000
Federal Home Loan Bank
advances ...................... 52,071,000 54,621,000 64,609,000 67,604,000
Treasury tax and loan open
note .......................... 556,000 556,000 785,000 785,000
Junior subordinated debentures .. 4,125,000 4,714,000 -- --
Company obligated mandatorily
redeemable preferred securities -- -- 4,000,000 4,295,000
Accrued interest payable ........ 447,000 447,000 580,000 580,000
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 2003 2002
----------------------------
Cash ................................................. $ 348,000 $ 148,000
Investment in subsidiaries ........................... 35,258,000 34,743,000
Other assets ......................................... 228,000 236,000
----------------------------
Total assets ................................. $ 35,834,000 $ 35,127,000
============================
Liabilities and Stockholders' Equity
Liabilities:
Notes payable ...................................... $ 2,700,000 $ 3,300,000
Junior subordinated debentures ..................... 4,125,000 4,125,000
Other liabilities .................................. 601,000 672,000
----------------------------
7,426,000 8,097,000
----------------------------
Redeemable Common Stock Held by KSOP ................. 2,971,000 2,717,000
----------------------------
Stockholders' Equity:
Common stock ....................................... 200,000 200,000
Additional paid-in capital ......................... 4,251,000 4,254,000
Retained earnings .................................. 36,071,000 34,195,000
Accumulated other comprehensive income ............. 788,000 1,101,000
Less cost of common shares acquired for the treasury (12,902,000) (12,720,000)
Less maximum cash obligation related to KSOP shares (2,971,000) (2,717,000)
----------------------------
Total stockholders' equity ................... 25,437,000 24,313,000
----------------------------
Total liabilities and stockholders' equity ... $ 35,834,000 $ 35,127,000
============================
47
Note 17. Parent Company Only Condensed Financial Information (Continued)
Statements of Income
(Parent Company Only)
Year Ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
Operating revenue:
Dividends received from subsidiaries ......... $ 2,913,000 $ 3,013,000 $ 2,010,000
Management fees and other income ............. 338,000 327,000 393,000
-----------------------------------------
Total operating revenue ................ 3,251,000 3,340,000 2,403,000
Interest expense ............................... 576,000 733,000 747,000
Operating expenses ............................. 628,000 700,000 630,000
-----------------------------------------
Income before income tax (credits),
and equity in subsidiaries'
undistributed net income ............... 2,047,000 1,907,000 1,026,000
Applicable income tax (credits) ................ (345,000) (425,000) (417,000)
-----------------------------------------
2,392,000 2,332,000 1,443,000
Equity in subsidiaries' undistributed net income 828,000 1,238,000 1,957,000
-----------------------------------------
Net income ............................. $ 3,220,000 $ 3,570,000 $ 3,400,000
=========================================
48
Note 17. Parent Company Only Condensed Financial Information (Continued)
Statements of Cash Flows
(Parent Company Only)
Year Ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
Cash Flows from Operating Activities:
Net income ......................................... $ 3,220,000 $ 3,570,000 $ 3,400,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in subsidiaries' undistributed net
income ......................................... (828,000) (1,238,000) (1,957,000)
Amortization and depreciation .................... 14,000 17,000 15,000
Changes in assets and liabilities:
(Increase) in other assets ..................... (5,000) (26,000) (197,000)
Increase (decrease) in other liabilities ....... (79,000) 9,000 (77,000)
-----------------------------------------
Net cash provided by operating
activities ................................... 2,322,000 2,332,000 1,184,000
-----------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale -- -- 1,815,000
Purchase of securities available for sale .......... -- -- (1,815,000)
Purchases of equipment ............................. (1,000) -- --
Capital infusion, Iowa First Capital Trust I ....... -- -- (125,000)
-----------------------------------------
Net cash (used in) investing activities ...... (1,000) -- (125,000)
-----------------------------------------
Cash Flows from Financing Activities:
Repayment of notes payable ......................... (3,922,000) (2,119,000) (732,000)
Proceeds from note payable ......................... 3,322,000 -- --
Net (decrease) in line of credit ................... -- -- (125,000)
Proceeds from subordinated debentures .............. -- -- 4,125,000
Cash dividends paid ................................ (1,336,000) (1,315,000) (1,309,000)
Purchases of common stock for the treasury ......... (235,000) (800,000) (1,227,000)
Proceeds from issuance of common stock ............. 50,000 153,000 --
-----------------------------------------
Net cash provided by (used in)
financing activities ......................... (2,121,000) (4,081,000) 732,000
-----------------------------------------
Net increase (decrease) in cash .............. 200,000 (1,749,000) 1,791,000
Cash:
Beginning .......................................... 148,000 1,897,000 106,000
-----------------------------------------
Ending ............................................. $ 348,000 $ 148,000 $ 1,897,000
=========================================
49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9a. Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer (Chairman of the Board, President, and CEO) and principal
financial officer (Executive Vice President, Chief Operating Officer and
Treasurer), of the Company's disclosure controls and procedures [as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act)]. Based on this evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There was no change in
the Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information called for by this Item is set forth under the caption "Information
Concerning Nominees for Election as Directors" in the Company's 2003 Proxy
Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
The information called for by this Item is set forth under the captions
"Executive Compensation", "Performance Incentive Plans", "Executive Employment
Agreements" and "Deferred Compensation Agreements" in the Company's 2003 Proxy
Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information called for by this Item is set forth under the caption "Security
Ownership of Certain Beneficial Owners" and "Information Concerning Nominees for
Election as Directors" in the Company's 2003 Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. All such transactions are on substantially the same
terms, including interest rates on loans and collateral, as those prevailing at
the time for comparable transactions with others, and involve no more than the
normal risk of collectibility.
Item 14. Principal Accounting Fees and Services
Information called for by this Item is set forth under the caption "Audit and
Non-Audit Fees" in the Company's 2003 Proxy Statement, and is incorporated
herein by reference.
50
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports On Form 8-K
(a) Documents Filed with This Report:
(1) Financial Statements. The following consolidated financial
statements of the Company and its subsidiaries are incorporated by
reference from the 2003 Annual Report to Shareholders of the
Company:
Independent Auditor's Report
Consolidated balance sheets -- dated December 31, 2003 and 2002.
Consolidated statements of income -- years ended December 31,
2003, 2002, and 2001.
Consolidated statements of changes in stockholders' equity --
years ended December 31, 2003, 2002, and 2001.
Consolidated statements of cash flows - years ended December 31,
2003, 2002, and 2001.
Notes to consolidated financial statements.
(2) Financial Statement Schedules. All schedules are omitted because
they are not applicable, are not required, or because the required
information is included in the financial statements or the
accompanying notes thereto.
(3) Exhibits.
Exhibit Number Exhibit Description
-------------- --------------------------------------------
(3) Articles of Incorporation, as amended.
Incorporated by reference to Exhibit (3) to
the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(10a) Employment Agreement. Incorporated by
reference to Exhibit (10a) to the
registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(10b) Change in Control Employment Agreement.
Incorporated by reference to Exhibit (10b)
to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
1995.
(10c) Executive Deferred Compensation Agreement.
Incorporated by reference to Exhibit (10c)
to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
2000.
(10d) Director Deferred Fee Agreement.
Incorporated by reference to Exhibit (10d)
to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
2000.
(20) Registrant's Proxy Statement Dated March 18,
2004. Exhibit is being filed herewith.
(21) Subsidiaries of Registrant. Exhibit is
being filed herewith.
(31.1) Certification of Chief Financial Officer
pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 and Section
302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Executive Officer
pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 and Section
302 of the Sarbanes-Oxley Act of 2002.
51
Exhibit Number Exhibit Description
-------------- --------------------------------------------
(32.1) Certification of Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(32.2) Certification of Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99.1) Audit Committee Charter. Exhibit is being
filed herewith.
(99.4) Code of Ethical Conduct for Principal
Officers and Financial Managers. Exhibit is
being filed herewith.
(99.5) Code of Business Conduct and Ethics. Exhibit
is being filed herewith.
(99.6) Nominating and Corporate Governance
Committee Charter. Exhibit is being filed
herewith.
(b) Reports on Form 8-K.
On October 23, 2003, A Form 8-K was filed consisting of a News Release
announcing earnings for the Company for the three and nine months ended
September 30, 2003.
52
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
Date: March 17, 2004 /s/ D. Scott Ingstad
-------------- ------------------------------------------
D. Scott Ingstad
Chairman of the Board
President and Chief Executive Officer
Date: March 17, 2004 /s/ Kim K. Bartling
-------------- ------------------------------------------
Kim K. Bartling, Executive Vice President,
Chief Operating Officer, Treasurer and
Director (Principal Financial and
Accounting Officer)
We, the undersigned directors of Iowa First Bancshares Corp. hereby severally
constitute D. Scott Ingstad and Kim K. Bartling, and each of them, our true and
lawful attorneys with full power to them, and each of them, to sign for us and
in our name, the capacities indicated below, the Annual Report on Form 10-K of
Iowa First Bancshares Corp. for the fiscal year ended December 31, 2003, to be
filed herewith and any amendments to said Annual Report, and generally do all
such things in our name and behalf in our capacities as directors to enable Iowa
First Bancshares Corp. to comply with the provisions of the Securities Exchange
Act of 1934 as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or either of them, to said Annual Report on Form 10-K and
any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------------------------------------------------------
/s/ Roy J. Carver, Jr. Director February 19, 2004
- ----------------------- -----------------
Roy J. Carver, Jr.
/s/ Stephen R. Cracker Director February 19, 2004
- ----------------------- -----------------
Stephen R. Cracker
/s/ Larry L. Emmert Director February 19, 2004
- ----------------------- -----------------
Larry L. Emmert
/s/ Craig R. Foss Director February 19, 2004
- ----------------------- -----------------
Craig R. Foss
/s/ Donald R. Heckman Director February 19, 2004
- ----------------------- -----------------
Donald R. Heckman
/s/ David R. Housley Director February 19, 2004
- ----------------------- -----------------
David R. Housley
/s/ Victor G. McAvoy Director February 19, 2004
- ----------------------- -----------------
Victor G. McAvoy
/s/ John "Jay" S. McKee Director February 19, 2004
- ----------------------- -----------------
John "Jay" S. McKee
/s/ Richard L. Shepley Director February 19, 2004
- ----------------------- -----------------
Richard L. Shepley
/s/ Beverly J. White Director February 19, 2004
- ----------------------- -----------------
Beverly J. White
53