UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2004
--------------
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)
STATE OF IOWA 42-1211285
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer of
incorporation or organization) Identification No.)
300 East Second Street
Muscatine, Iowa 52761
----------------------------------------
(Address of principal executive offices)
563-263-4221
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
At March 31, 2004 there were 1,405,917 shares of the registrant's common stock
outstanding.
1
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE NO.
PART 1 Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets,
March 31, 2004 and December 31, 2003 3
Consolidated Condensed Statements of Income,
Three Months Ended March 31, 2004 and 2003 4
Consolidated Condensed Statements of Cash Flows,
Three Months Ended March 31, 2004 and 2003 5
Notes to Consolidated Condensed Financial
Statements 6-7
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of
Operations 8-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Controls and Procedures 14
PART II Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
2004 2003
----------------------
ASSETS
Cash and due from banks ................................ $ 14,957 $ 12,988
Interest-bearing deposits at financial institutions .... 8,551 6,948
Federal funds sold ..................................... 44,775 31,414
Investment securities available for sale ............... 32,875 37,157
Loans, net of allowance for loan losses March 31, 2004,
$3,210; December 31, 2003, $3,180 .................... 269,794 266,925
Bank premises and equipment, net ....................... 6,763 6,764
Accrued interest receivable ............................ 2,053 2,231
Life insurance contracts ............................... 4,298 4,254
Restricted investment securities ....................... 2,962 3,028
Other assets ........................................... 789 705
----------------------
TOTAL ASSETS ........................................ $ 387,817 $ 372,414
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 46,368 $ 47,549
Interest bearing deposits .............................. 247,043 230,027
----------------------
TOTAL DEPOSITS ...................................... 293,411 277,576
Note payable ........................................... 2,700 2,700
Securities sold under agreements to
repurchase .......................................... 6,089 4,912
Federal Home Loan Bank advances ........................ 50,592 52,071
Treasury tax and loan open note ........................ 111 556
Junior subordinated debentures ......................... 4,125 4,125
Dividends payable ...................................... 341 343
Other liabilities ...................................... 1,894 1,723
---------------------
TOTAL LIABILITIES ................................... 359,263 344,006
---------------------
Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ........... 3,261 2,971
---------------------
STOCKHOLDERS' EQUITY
Common stock ........................................... 200 200
Additional paid-in capital ............................. 4,251 4,251
Retained earnings ...................................... 36,553 36,071
Accumulated other comprehensive income ................. 792 788
Less net cost of common shares acquired for the treasury (13,242) (12,902)
Less maximum cash obligation related to KSOP shares .... (3,261) (2,971)
----------------------
TOTAL STOCKHOLDERS' EQUITY .......................... 25,293 25,437
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $ 387,817 $ 372,414
======================
See Notes to Consolidated Condensed Financial Statements.
3
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Condensed Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
------------------
2004 2003
------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees:
Taxable ................................................. $4,073 $4,482
Nontaxable .............................................. 43 34
Investment securities available for sale:
Taxable ................................................. 201 256
Nontaxable .............................................. 171 193
Federal funds sold ........................................ 82 117
Restricted investment securities .......................... 11 31
Other ..................................................... 42 22
---------------
Total interest and dividend income ..................... 4,623 5,135
---------------
INTEREST EXPENSE:
Deposits .................................................. 978 1,257
Note payable .............................................. 23 61
Other borrowed funds ...................................... 669 930
Junior subordinated debentures ............................ 106 106
---------------
Total interest expense .................................. 1,776 2,354
---------------
Net interest income ....................................... 2,847 2,781
Provision for loan losses .................................... 170 370
---------------
Net interest income after provision for
loan losses ............................................. 2,677 2,411
---------------
Other income:
Trust department .......................................... 92 95
Service fees .............................................. 429 348
Investment securities gains, net .......................... 33 10
Gains on loans sold ....................................... 20 68
Other ..................................................... 118 126
---------------
Total other income ...................................... 692 647
---------------
Operating expenses:
Salaries and employee benefits ............................ 1,275 1,266
Occupancy expenses, net ................................... 191 178
Equipment expenses ........................................ 155 153
Office supplies, printing, and postage .................... 85 107
Computer costs ............................................ 129 130
Advertising and business promotion ........................ 35 30
Other operating expenses .................................. 301 336
---------------
Total operating expenses ................................ 2,171 2,200
---------------
Income before income taxes ................................ $1,198 $ 858
Income taxes ................................................. 375 241
---------------
Net income ................................................... $ 823 $ 617
===============
Net income per common share, basic and diluted ............... $ 0.58 $ 0.43
===============
Dividends declared per common share .......................... $ 0.24 $ 0.24
===============
Comprehensive income ......................................... $ 827 $ 622
===============
See Notes to Consolidated Condensed Financial Statements.
4
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For The Three Months Ended March 31, 2004 and 2003
(In Thousands)
(Unaudited)
2004 2003
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................... $ 823 $ 617
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from loans sold .......................................... 2,872 4,532
Loans underwritten ................................................ (2,972) (4,239)
Gains on loans sold ............................................... (20) (68)
Provision for loan losses ......................................... 170 370
Investment securities gains, net .................................. (33) (10)
Depreciation ...................................................... 140 118
Amortization of premiums and accretion of discounts
on investment securities available for sale, net ................ 69 39
Net decrease in accrued interest receivable ....................... 178 344
Net (increase) in other assets .................................... (59) (100)
Net increase in other liabilities ................................. 169 182
--------------------
Net cash provided by operating activities ............................ $ 1,337 $ 1,785
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-bearing deposits at financial institutions $ (1,603) $ (3,789)
Net increase in federal funds sold ................................ (13,361) (20,422)
Proceeds from sales of available for sale securities .............. 1,151 257
Proceeds from maturities, calls and paydowns of available
for sale securities ............................................. 6,135 1,636
Purchases of available for sale securities ........................ (3,034) (2,078)
Net (increase) decrease in loans .................................. (2,944) 2,626
Purchases of bank premises and equipment .......................... (139) (855)
Increase in cash value of life insurance contracts ................ (44) (50)
Proceeds from sales of restricted investment securities ........... 66 --
--------------------
Net cash (used in) investing activities ........................... $(13,773) $(22,675)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits ........... $ (1,181) $ 122
Net increase in interest-bearing deposits ......................... 17,016 21,753
Net increase (decrease) in securities sold under
agreements to repurchase ........................................ 1,177 (579)
Net (decrease) in treasury tax and loan open note ................. (445) (290)
Advances from Federal Home Loan Bank .............................. -- 5,150
Payments of advances from Federal Home Loan Bank .................. (1,479) (5,149)
Cash dividends paid ............................................... (343) (335)
Purchases of common stock for the treasury ........................ (340) --
--------------------
Net cash provided by financing activities ......................... $ 14,405 $ 20,672
--------------------
Net increase (decrease) in cash and due from banks ................ 1,969 (218)
Beginning cash and due from banks ................................. $ 12,988 $ 17,283
--------------------
Ending cash and due from banks .................................... $ 14,957 $ 17,065
====================
Supplemental Disclosures of Cash Flow Information, cash payments for:
Interest ....................................................... $ 1,711 $ 2,285
Income taxes ................................................... 150 --
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in accumulated other comprehensive income, unrealized
gains on investment securities available for sale, net ........... 4 5
(Increase) in maximum cash obligations related to KSOP shares ...... (290) --
Transfer of loans to other real estate owned ....................... 25 --
See notes to Consolidated Condensed Financial Statements.
5
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine (Muscatine) and First National
Bank in Fairfield (Fairfield). First National Bank of Muscatine has a total of
five locations in Muscatine, Iowa. First National Bank in Fairfield has two
locations in Fairfield, Iowa. Each bank is engaged in the general commercial
banking business and provides full service banking to individuals and
businesses, including checking, savings, 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 investment
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.
Basis of Presentation:
The consolidated financial statements include the acounts 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. The
consolidated financial statements are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2003
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and conform to predominant practices within the banking
industry. Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements. In the opinion of management, all adjustments and normal
recurring accruals considered necessary for a fair presentation of the results
of operations for the interim periods presented herein have been included.
Operating results for the three months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.
Reclassifications:
Certain amounts in the prior year financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform to current year
presentations.
Note 2. Capital Stock and Earnings Per Share
Common shares and preferred stock authorized total 6,000,000 shares and 500,000
shares, respectively. Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Diluted earnings per share is arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period. The average number of shares
of common stock outstanding for the three months ended March 31, 2004 and 2003
were 1,413,594 and 1,424,445, respectively. There were no common stock
equivalents in 2004 or 2003.
Note 3. Commitments and Contingencies
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.
6
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.
Financial instruments whose contract amounts March 31, December 31,
represent credit risk: 2004 2003
---------------------------
Commitments to extend credit $46,109,000 $43,843,000
Standby letters of credit 2,336,000 2,336,000
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 March 31, 2004
and December 31, 2003 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 $120,000 and none as of March 31, 2004 and
December 31, 2003, respectively. These amounts, representing loans held for
sale, are included in loans at the respective balance sheet dates.
7
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Quarter ended March 31, 2004 compared with quarter ended March 31, 2003:
The Company recorded net income of $823,000 for the quarter ended March 31,
2004, compared with net income of $617,000 for the quarter ended March 31, 2003,
an increase of $206,000 or 33.4%. This increase in net income resulted from
higher net interest income, lower provision for loan losses, higher noninterest
income, and slightly lower noninterest expenses during the first quarter of 2004
compared to the first quarter of 2003.
Basic and diluted earnings per share were $.58 for the three months ended March
31, 2004, $.15 or 34.9% more than the same period in 2003. The Company's
annualized return on average assets for the first quarter of 2004 was .89%
compared to .65% during the first quarter of the prior year. The Company's
annualized return on average equity for the three months ended March 31, 2004
and March 31, 2003 was 13.0% and 10.3%, respectively.
The distribution of average assets, liabilities and stockholder's equity and
interest rates, as well as 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):
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------------------ --------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------
Assets
Taxable loans, net ............................. $261,603 $ 4,073 6.23% $268,640 $ 4,482 6.67%
Taxable investment securities available
for sale ..................................... 20,040 201 4.01% 21,327 256 4.80%
Nontaxable investment securities and
loans ........................................ 18,848 324 6.88% 19,377 344 7.10%
Federal funds sold ............................. 37,318 82 0.88% 43,098 117 1.09%
Restricted investment securities ............... 3,002 11 1.47% 3,957 31 3.13%
Interest-bearing deposits at financial
institutions ................................. 7,538 42 2.23% 3,807 22 2.31%
-------------------- --------------------
Total interest earning assets ............ 348,349 4,733 5.43% 360,206 5,252 5.83%
-------- --------
Cash and due from banks ........................ 14,255 14,210
Bank premises and equipment, net ............... 6,745 5,762
Life insurance contracts ....................... 4,281 3,978
Other assets ................................... 2,934 3,686
-------- --------
Total .................................... $376,564 $387,842
======== ========
Liabilities:
Deposits:
Interest-bearing demand ...................... $126,074 $ 178 0.57% $117,692 $ 268 0.92%
Time ......................................... 110,039 800 2.95% 116,508 989 3.44%
Note payable ................................... 2,760 23 3.33% 3,300 61 7.39%
Other borrowings ............................... 57,087 669 4.75% 72,567 930 5.20%
Junior subordinated debentures ................. 4,125 106 10.32% 4,125 106 10.32%
-------------------- --------------------
Total interest-bearing liabilities ....... 300,085 1,776 2.40% 314,192 2,354 3.04%
-------- --------
Noninterest-bearing deposits ................... 45,884 44,643
Other liabilities .............................. 1,902 1,931
-------- --------
Total liabilities ........................ 347,871 360,766
Redeemable common stock held by KSOP ........... 3,065 2,717
Stockholders' Equity ............................. 25,628 24,359
-------- --------
Total .................................... $376,564 $387,842
======== ========
Net interest earnings .................... $ 2,957 $ 2,898
======== ========
Net Interest Margin (net interest earnings
divided by total interest-earning assets) 3.40% 3.22%
====== ======
<FN>
Nonaccruing loans are included in the average balance. Loan fees are not material.
</FN>
8
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
The net interest margin increased to 3.40% during the first quarter of 2004
compared to 3.22% during the first quarter of 2003. The return on average
interest-earning assets decreased 40 basis points (from 5.83% in 2003 to 5.43%
in 2004) and interest paid on average interest-bearing liabilities decreased 64
basis points (from 3.04% in 2003 to 2.40% in 2004).
The Federal Reserve Bank Board and Chairman Greenspan during all of 2003 and
through March 31, 2004, continued to manage short-term interest rates at, or
near, lows not seen in decades. The prime lending rate began 2003 at 4.25% and
ended the year at 4.00%, the same rate in effect as of March 31, 2004. During
this period of historically low interest rates, the Company has emphasized the
utilization of interest rate floors on selected commercial and agricultural
loans. During the first quarter of 2004 and 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 taxable loans during the first quarter of
2004, versus the first quarter of 2003, falling somewhat less than the rates
paid on interest-bearing liabilities (44 basis points versus 64 basis points).
Eventually, when market interest rates again rise, rates paid on
interest-bearing liabilities may, for a time, increase more than rates received
on taxable 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 on the
amount and timing of eventual market interest rate hikes.
Rates received on taxable investment securities available for sale have
decreased during the first quarter of 2004, compared to the first quarter of
2003, at a faster pace than the rates paid on interest-bearing liabilities
(decreases of 79 basis points and 64 basis points, respectively). This is
largely due to maturities and early calls of taxable investment securities
coupled with reinvestment at appreciably lower interest rates. This portfolio,
however, with an average maturity of less than four years, had an interest rate
return during the quarter similar to that of ten year treasury securities.
Rates received during the quarter ended March 31, 2004, versus the first quarter
of 2003, on nontaxable investment securities available for sale and loans
decreased at a much slower pace than the rates paid on interest-bearing
liabilities (decreases of 22 basis points and 64 basis points, respectively).
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. Most of the nontaxable investment securities
available for sale were purchased when market interest rates were higher than
rates currently available. In the current interest rate environment, when
taxable and nontaxable 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.
The rate received on overnight federal funds sold to other banks decreased 21
basis points during the first quarter of 2004, compared to the first quarter of
2003. Given the Company's relatively large balance held in federal funds sold
(11.5% of quarter-end assets), this served to diminish the net interest income.
These federal funds sold can be used to fund future loan demand, deposit or
other liability outflows, investment securities purchases, or various other
purposes as identified by management.
The rate earned on interest-bearing deposits at financial institutions
(primarily FDIC insured certificates of deposit) decreased only 8 basis points
during the first quarter of 2004 versus the first quarter of 2003, while the
average balance increased over $3,700,000. Despite the slight decline in rate
received, this asset category was increased because it yielded 135 basis points
over federal funds sold with little, if any, credit risk. The average duration
of interest-bearing deposits at financial institutions was less than two years
during the quarter ended March 31, 2004.
The rate paid on the note payable outstanding declined a significant 406 basis
points during the first quarter of 2004 compared to the same quarter of 2003.
This was the result of refinancing this debt with a different lender at far more
favorable terms.
The usage of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk,
tended to increase overall interest expense. The Company's average rate paid for
such Federal Home Loan Bank advances and other funds was reduced by 45 basis
points when comparing the first quarters of 2004 and 2003. Management has
noticeably reduced reliance on wholesale funding sources as evidenced by the
average balance in this category declining over $15 million during the first
quarter of 2004 compared to the first quarter of 2003.
Intense competition for all types of loans and deposits tends to limit the
Company's ability to control pricing and other terms when dealing with
customers. Despite these limitations, the Company was able to increase the
overall net interest margin to 3.40% during the three months ended March 31,
2004, compared to 3.22% for the same period last year.
9
Provisions for loan losses were $170,000 for the three months ended March 31,
2004. This was $200,000 less than the first quarter of 2003. Net loan
charge-offs for the quarter ended March 31, 2004 totaled $140,000 compared to
net charge-offs of $355,000 for the same quarter in 2003. The loan losses in
2003 were primarily attributable to two agricultural loans at our Fairfield
subsidiary bank, and do not appear to represent an overall deterioration in the
quality of the loan portfolio.
The allowance for possible loan losses is maintained at the level considered
adequate by management of the Banks to provide for probable losses in the
existing loan portfolio. 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, the composition of the loan portfolio, historical loan loss
experience, review of specific problem loans, the estimated net realizable value
or the fair value of the underlying collateral, and other factors. There can be
no assurance that loan 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, charge-offs, and
delinquencies could rise thus requiring further increases in the provision.
Nonaccrual loans totaled $2,539,000 at March 31, 2004, an increase of $416,000
or 19.6% from December 31, 2003. Other real estate owned totaled $25,000,
compared to none at December 31, 2003. Loans past due 90 days or more and still
accruing totaled $397,000, which was $182,000 or 84.7% more than at year-end
2003. The allowance for possible loan losses of $3,210,000, at March 31, 2004,
represented 1.2% of gross loans and 108% of total nonaccrual loans, other real
estate owned, and loans past due 90 days or more and still accruing.
Other income results from the charges and fees collected by the Company from its
customers for various services performed, gross trust department revenue,
miscellaneous other income and gains (or losses) from the sale of investment
securities in the available for sale category and loans. Total other income for
the first quarter of 2004 was $692,000; $45,000 or 7.0% more than the first
quarter of 2003. Service fees, particularly on deposit accounts, were the
largest single area of growth in the other income category.
Operating expenses include all the costs incurred to operate the Company except
for interest expense, the loan loss provision and income taxes. For the quarter
ended March 31, 2004, salaries and employee benefits expense increased a very
modest $9,000 or 0.7% as management controlled employee raises, hiring and
turnover. Also, retirement of one key employee assisted in controlling salaries
and benefits. Additionally, health care costs, while rising much faster than
inflation, did not rise as much as in recent years. Occupancy and equipment
expenses increased $15,000 or 4.5% as a new branch facility was in operation for
the entire quarter ended March 31, 2004, but was not yet operating in the first
quarter of last year. All other operating expenses decreased $53,000 or 8.8% due
largely to lower costs for supplies, printing, and postage, as well as a final
settlement of a non-recurring liability at an amount approximately $20,000 more
advantageous to the Company than previously anticipated and accrued for. Total
operating expenses decreased $29,000 or 1.3% during the first quarter of 2004
versus the same quarter last year.
Income tax expense for the quarter ended March 31, 2004 of $375,000 represented
31.3% of income before taxes. The comparable quarter last year was 28.1% of
income before tax. This increase in income taxes as a percentage of income
before taxes is mostly the result of a higher portion of pretax income comprised
of nontaxable income in 2003 than 2004.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percent of net interest income plus noninterest income,
was 61.3% and 64.2% for the three months ended March 31, 2004 and 2003,
respectively. The primary reasons for this change in the efficiency ratio are
discussed previously in this report.
Discussion and Analysis of Financial Condition
The Company's assets at March 31, 2004 totaled $387,817,000, an increase of
$15,403,000 or 4.1% from December 31, 2003. As of March 31, 2004, the Company
had $44,775,000 of federal funds sold compared to $31,414,000 at December 31,
2003. Additionally, interest-bearing deposits at financial institutions
(primarily fully FDIC insured certificates of deposit) as well as some
interest-bearing demand accounts at various banking institutions totaled
$8,551,000 versus $6,948,000 at December 31, 2003. This increase was primarily
the result of higher yields available on such certificates of deposit than could
be obtained in the federal funds and treasury securities markets. Federal funds
sold and other liquid assets have been higher the past several quarters than the
Company would historically consider normal. These liquid assets may be used to
fund future loan growth, deposit or other liability outflows, purchases of
investment securities available for sale when interest rates again rise, or
various other purposes as identified by management.
10
Total available for sale securities decreased $4,282,000 or 11.5% during the
first three months of 2004 to total $32,875,000 at March 31, 2004. The Banks
emphasize purchase of securities with maturities of five years and less as such
purchases typically offer reasonable yields with limited credit risk as well as
limited interest rate risk. Additionally, selected securities with longer
maturities are owned in order to enhance overall portfolio yield without
significantly increasing risk. In the low interest rate environment which
continued during the first three months of 2004, the banks limited their
purchases of securities to less than the total of securities that were sold,
matured, called, or paid down. Furthermore, most of the securities that were
purchased had relatively short maturities or likely early call dates. Securities
sold thus far in 2004 totaled $1,151,000 and resulted in net gains recognized of
$33,000.
Net loans totaled $269,794,000 at March 31, 2004, an increase of $2,869,000 or
1.1% from December 31, 2003. Competition for high-quality loans remains intense
in all loan categories. Refinancing of home loans continued, fueled by
historically low interest rates, albeit at a slower pace than during the first
quarter of 2003. The Company sells many of these loans in the secondary market.
Consequently, the loans which are sold, as well as the loans remaining in the
Company's portfolio but refinanced at lower rates, combine to put downward
pressure on loan yields and the volume of home loans on the balance sheet.
Total deposits at March 31, 2004, were $293,411,000, an increase of $15,835,000
or 5.7% from the balance at December 31, 2003. Certificates of deposit
represented on average for the three months ended March 31, 2004, approximately
39% of total deposits. Interest-bearing demand deposits, comprised of savings,
money market and NOW accounts, represented another 45% of average deposits. The
final 16% of average deposits were in noninterest-bearing accounts. Securities
sold under agreements to repurchase increased $1,177,000 to $6,089,000, and
advances borrowed from the Federal Home Loan Bank declined by $1,479,000 from
year-end 2003, totaling $50,592,000 at quarter end.
The note payable balance of $2,700,000 at March 31, 2004, was unchanged from the
December 31, 2003 balance. The next annual principal payment of $600,000 is
scheduled for the third quarter of 2004. This note was refinanced during the
second quarter of 2003. The new variable rate revolving five-year term note is
priced at Prime less one percent, with a floor of 3.25% and a ceiling of 5.25%,
considerably lower than the prior fixed rate of over 7.35%.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" refers to those assets and
liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative gap exists when
total interest-bearing liabilities are in excess of interest-earning assets.
Generally a positive repricing gap will result in increased net interest income
in a rising rate environment and decreased net interest income in a falling rate
environment. A negative repricing gap tends to produce increased net interest
income in a falling rate environment and decreased net interest income in a
rising rate environment. At March 31, 2004, rate sensitive liabilities exceeded
rate sensitive assets within a one year maturity range and, thus, the Company is
theoretically positioned to benefit from a decline in interest rates within the
next year.
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.
11
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 held for investment purposes and loan payments provide a constant
flow of funds available for cash needs. Additionally, liquidity can be gained by
the sale of loans or securities prior to maturity if such assets had previously
been designated as available for sale. Interest rates, relative to the rate paid
by the security or loan sold, along with the maturity of the security or loan,
are the major determinates of the price which can be realized upon sale.
The stability of the Company's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer deposits
tend to be small in size, diversified across a large base of individuals, and
are government insured to the extent permitted by law. Total deposits at March
31, 2004, were $293,411,000 or 75.7% of total liabilities and equity.
Federal funds sold overnight totaled $44,775,000 or 11.5% of March 31, 2004
total assets. These federal funds sold may be used to fund loans as well as
deposit withdrawals, or for other purposes as defined by management.
Securities available for sale with a fair value totaling $32,875,000 at
quarter-end included net unrealized gains of $1,263,000. These securities may be
sold in whole or in part to increase liquid assets, reposition the investment
portfolio, or for other purposes as defined by management.
Capital
Stockholders' equity decreased $144,000 (0.6%) during the three months ended
March 31, 2004. The year-to-date decrease included net income of $823,000,
increase of $4,000 in accumulated other comprehensive income, $341,000 of
dividends declared to shareholders, $340,000 of treasury share purchases and
$290,000 increase in the maximum obligation related to KSOP shares.
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a consistent system for
comparing capital positions of financial institutions and to take into account
the different inherent risks among financial institutions' assets and
off-balance-sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.
A comparison of the Company's capital as of March 31, 2004 with the requirements
to be considered adequately capitalized is presented below.
For Capital
Actual Adequacy Purposes
-----------------------------
Total capital to risk-weighted assets ...... 12.9% 8.00%
Tier 1 capital to risk-weighted assets ..... 11.7% 4.00%
Tier 1 capital to average assets ........... 8.3% 4.00%
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
12
Trends, Events or Uncertainties
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. All such transactions are on substantially the same
terms, including interest rates on loans and collateral, as those prevailing at
the time for comparable transactions with others, involve no more than normal
risk of collectibility, and present no other unfavorable features.
In the normal course of business, the Banks are involved in various legal
proceedings. In the current opinion of management, any liability resulting from
such proceedings would not have a material effect on the Company's financial
statements.
The Company has in the past purchased, and is authorized under an existing stock
repurchase plan to buy in the future, shares of its outstanding common stock for
the treasury as they become available. Pursuant to the stock repurchase plan
approved by the Board of Directors, 11,643 shares were purchased by the Company
during the first quarter of 2004. See Part II, Item 2 of this Form 10-Q for
further detail regarding purchases of equity securities for the treasury.
Current Accounting Developments
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, was 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, VIE's 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 March 31, 2004 and December 31, 2003 balance sheets include
$4,125,000 of junior subordinated debentures which, in prior periods, was
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 March 31, 2004 and 2003 income statements include $106,000 of
interest expense on junior subordinated debentures which, for prior periods, was
classified as $103,000 of interest expense on Company Obligated Mandatorily
Redeemable Preferred Securities, after a consolidation elimination of $3,000.
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 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 both March 31, 2004 and 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 March 31, 2004, 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.
13
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this report, the
matters described herein contain certain forward-looking statements with respect
to the Company's financial condition, results of operations and business. These
forward-looking statements are subject to certain risks and uncertainties, not
all of which can be predicted or anticipated. Factors that may cause actual
results to differ materially from those contemplated by the forward-looking
statements herein include market conditions as well as conditions affecting the
banking industry generally and factors having a specific impact on the Company,
including but limited to fluctuations in interest rates and in the economy; the
impact of laws and regulations applicable to the Company and changes therein;
the impact of accounting pronouncements applicable to the Company and changes
therein; competitive conditions in the markets in which the Company operates,
including competition from banking and non-banking companies with substantially
greater resources; the Company's ability to control the composition of its loan
portfolio without adversely affecting interest income; the Company's dependence
on third party suppliers; and the Company's ability to respond to changes in
technology. Readers of this Form 10-Q should therefore not place undue reliance
on forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in the quantitative and qualitative market risks
since the prior year-end. Such risks were described in the Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2003.
Item 4. Disclosure 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 &
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 (the
"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 II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has no legal proceedings which are deemed material.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
During the quarter ended March 31, 2004 the Company purchased its own common
stock, detailed as follows:
Total
Number of Maximum
Shares Number of
Purchased Shares That
Total As Part of May Yet Be
Number of Average Publicly Purchased
Shares Price Paid Announced Under The
Period Purchased Per Share Plan (1) Plan (1)
- ----------------------------------------------------------------------------------------
Jan. 1 - Jan. 31, 2004 None N/A None 49,953
Feb. 1 - Feb. 29, 2004 None N/A None 49,953
Mar. 1 - Mar. 31, 2004 11,643 $29.17 11,643 38,310
<FN>
(1) In May 2002, the Company's board of directors approved a stock repurchase
plan of up to 75,000 shares, or approximately 5.2% of the then outstanding
shares. This stock repurchase plan has no stated expiration date and is the
Company's only current, publicly-announced stock repurchase plan. The
Company anticipates future purchases under this stock repurchase plan.
</FN>
14
The above table is required for any equity securities of the Company which have
been registered by the Company pursuant to section 12 of the Securities Exchange
Act of 1934. The Company has only filed a registration statement with the SEC
under the Securities Act of 1933 and, therefore, its equity securities are only
registered under section 15(d) of the Exchange Act. Thus, while the above table
is not required, it has been provided in the interest of high-quality
disclosure.
Item 3. Defaults Upon Senior Securities
There have been no defaults upon senior securities by the Company.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held at its offices on April 15, 2004, the
shareholders elected the following individuals to the Board of Directors for the
indicated terms:
Votes in Favor Votes Withheld Term
-------------------------------------------
Roy J. Carver, Jr. 1,123,063 2,739 3 Years
Stephen R. Cracker 1,125,208 594 3 Years
Dr. Victor G. McAvoy 1,124,038 1,764 3 Years
John "Jay" S. McKee 1,125,208 594 3 Years
Item 5. Other Information
There has been no new information not previously disclosed requiring disclosure
under this item.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 31.1 - Certification pursuant to Rule 13a-15(e) and
15d-15(e)
Exhibit 31.2 - Certification pursuant to Rule 13a-15(e) and
15d-15(e)
Exhibit 32.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
A Form 8-k was filed on January 28, 2004 and consisted of a press
release discussing finacnial results of the Company for the
quarter and year ended December 31, 2003.
A Form 8-K was filed on April 22, 2004 and consisted of a
press release discussing financial results of the Company for
the first quarter ended March 31, 2004, as well as the
shareholder dividend payable in April 2004.
15
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
(Registrant)
May 14, 2004 /s/ D. Scott Ingstad
- ------------ -------------------------------
Date D. Scott Ingstad, Chairman of
the Board, President and CEO
May 14, 2004 /s/ Kim K. Bartling
- ------------ -------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
16