UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2005
------------------
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]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
At November 10, 2005, there were 1,382,669 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,
September 30, 2005 and December 31, 2004 3
Consolidated Condensed Statements of
Income, Three and Nine Months Ended
September 30, 2005 and 2004 4
Consolidated Condensed Statements of
Cash Flows, Nine Months Ended
September 30, 2005 and 2004 5
Notes to Consolidated Condensed
Financial Statements 6-7
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of
Operations 8-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 16
PART II Other Information
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use
Of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 18
2
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
2005 2004
---------------------------
ASSETS
Cash and due from banks ............................ $ 18,928 $ 14,730
Interest-bearing deposits at financial institutions 5,911 8,395
Federal funds sold ................................. 3,075 12,300
Investment securities available for sale ........... 33,763 30,325
Loans, net of allowance for loan losses
September 30, 2005, $3,465; December 31,
2004, $3,385 ..................................... 292,147 280,899
Bank premises and equipment, net ................... 7,198 7,411
Accrued interest receivable ........................ 2,472 2,046
Life insurance contracts ........................... 4,572 4,438
Restricted investment securities ................... 2,783 2,659
Other assets ....................................... 1,261 980
----------------------
TOTAL ASSETS ............................... $ 372,110 $ 364,183
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ....................... $ 53,321 $ 50,070
Interest bearing deposits .......................... 230,514 227,665
----------------------
TOTAL DEPOSITS ............................. 283,835 277,735
Note payable ....................................... 1,700 2,100
Securities sold under agreements to
repurchase ....................................... 7,689 5,885
Federal Home Loan Bank advances .................... 41,686 42,916
Treasury tax and loan open note .................... 48 74
Junior subordinated debentures ..................... 4,125 4,125
Dividends payable .................................. 346 345
Other liabilities .................................. 2,178 1,769
----------------------
TOTAL LIABILITIES .......................... 341,607 334,949
----------------------
Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ..... 3,566 3,517
----------------------
STOCKHOLDERS' EQUITY
Common stock ....................................... 200 200
Additional paid-in capital ......................... 4,255 4,255
Retained earnings .................................. 39,909 38,416
Accumulated other comprehensive income ............. 106 330
Less cost of common shares acquired for the treasury (13,967) (13,967)
Less maximum cash obligation related to KSOP shares (3,566) (3,517)
----------------------
TOTAL STOCKHOLDERS' EQUITY ................. 26,937 25,717
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . $ 372,110 $ 364,183
======================
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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees:
Taxable ................................... $ 4,506 $ 4,127 $12,995 $12,260
Nontaxable ................................ 67 59 198 154
Investment securities available for sale:
Taxable ................................... 175 141 499 517
Nontaxable ................................ 134 163 423 500
Federal funds sold .......................... 58 63 355 220
Restricted investment securities ............ 6 18 58 45
Interest bearing deposits and other ......... 57 60 175 158
-------------------------------------
Total interest and dividend income .... 5,003 4,631 14,703 13,854
-------------------------------------
INTEREST EXPENSE:
Deposits .................................... 1,266 963 3,608 2,898
Note payable ................................ 28 24 77 69
Other borrowed funds ........................ 539 580 1,647 1,876
Junior subordinated debentures .............. 106 106 319 319
-------------------------------------
Total interest expense ................ 1,939 1,673 5,651 5,162
-------------------------------------
Net interest income ................... 3,064 2,958 9,052 8,692
Provision for loan losses ..................... 90 120 390 380
-------------------------------------
Net interest income after provision for
loan losses ........................... 2,974 2,838 8,662 8,312
-------------------------------------
Other income:
Trust department ............................ 99 95 296 282
Service fees ................................ 540 535 1,500 1,449
Investment securities gains, net ............ -- 12 -- 45
Gains on loans sold ......................... 44 23 153 137
Life insurance contracts .................... 46 43 143 132
Other ....................................... 66 87 219 286
-------------------------------------
Total other income .................... 795 795 2,311 2,331
-------------------------------------
Operating expenses:
Salaries and employee benefits .............. 1,413 1,325 4,122 3,875
Occupancy expenses, net ..................... 202 195 598 569
Equipment expenses .......................... 185 155 518 475
Office supplies, printing, and postage ...... 82 79 256 237
Computer costs .............................. 138 126 400 386
Advertising and business promotion .......... 51 41 145 121
Going private transaction expenses .......... 98 -- 98 --
Other operating expenses .................... 364 318 1,148 952
-------------------------------------
Total operating expenses .............. 2,533 2,239 7,285 6,615
-------------------------------------
Income before income taxes ............ $ 1,236 $ 1,394 $ 3,688 $ 4,028
Income taxes .................................. 394 424 1,157 1,247
-------------------------------------
Net income ............................ $ 842 $ 970 $ 2,531 $ 2,781
=====================================
Net income per common share, basic and diluted $ 0.61 $ 0.70 $ 1.83 $ 1.99
=====================================
Dividends declared per common share ........... $ 0.25 $ 0.24 $ .75 $ .73
=====================================
Comprehensive income .......................... $ 779 $ 1,188 $ 2,307 $ 2,487
=====================================
See notes to Consolidated Condensed Financial Statements.
4
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For The Nine Months Ended September 30, 2005 and 2004
(In Thousands)
(Unaudited)
2005 2004
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 2,531 $ 2,781
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from loans sold ......................................... 8,907 7,649
Loans underwritten ............................................... (8,320) (7,512)
Gains on loans sold .............................................. (153) (137)
Provision for loan losses ........................................ 390 380
Investment securities gains, net ................................. -- (45)
Depreciation ..................................................... 482 427
Amortization of premiums and accretion of discounts
on investment securities available for sale, net ............... 209 153
Net increase in accrued interest receivable ...................... (426) (79)
Net (increase) decrease in other assets .......................... (25) 44
Net increase in other liabilities ................................ 543 297
--------------------
Net cash provided by operating activities .................. $ 4,138 $ 3,958
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits
at financial institutions ...................................... $ 2,484 (1,465)
Net decrease in federal funds sold ............................... 9,225 8,507
Proceeds from sales of available for sale securities ............. -- 2,548
Proceeds from maturities, calls and paydowns of available for sale 5,047 14,276
securities
Purchases of available for sale securities ....................... (9,052) (11,448)
Net increase in loans ............................................ (12,328) (8,871)
Purchases of bank premises and equipment ......................... (269) (614)
Increase in cash value of life insurance contracts ............... (134) (124)
Net (purchases) sales of restricted investment securities ........ (124) 340
--------------------
Net cash provided by (used in) investing activities ........ $ (5,151) $ 3,149
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits ..................... $ 3,251 $ 2,476
Net increase in interest-bearing deposits ........................ 2,849 3,171
Net increase in securities sold under agreements to repurchase ... 1,804 1,953
Proceeds from note payable ....................................... 1,700 --
Repayment of note payable ........................................ (2,100) (600)
Net decrease in treasury tax and loan open note .................. (26) (474)
Advances from Federal Home Loan Bank ............................. 4,000 --
Payments of advances from Federal Home Loan Bank ................. (5,230) (9,113)
Cash dividends paid .............................................. (1,037) (1,021)
Purchases of common stock for the treasury ....................... -- (1,111)
--------------------
Net cash provided by (used in) financing activities ........ $ 5,211 $ (4,719)
--------------------
Net increase in cash and due from banks ............................ 4,198 2,388
Beginning cash and due from banks .................................. $ 14,730 $ 12,988
--------------------
Ending cash and due from banks ..................................... $ 18,928 $ 15,376
====================
Supplemental Disclosures of Cash Flow Information,
cash payments for:
Interest ......................................................... $ 5,472 $ 5,116
Income taxes ..................................................... 1,119 1,156
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in accumulated other comprehensive income, unrealized
(losses) on investment securities available for sale, net ........ (224) (294)
(Increase) in maximum cash obligations related to KSOP shares .... (49) (200)
Transfers of loans to other real estate owned .................... 256 90
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 and First National Bank in
Fairfield. First National Bank of Muscatine has six 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 accounts of the Company and
all wholly-owned subsidiaries, except Iowa First Capital Trust I, which does not
meet the criteria for consolidation. The consolidated financial statements are
unaudited and should be read in conjunction with the consolidated financial
statements contained in the 2004 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 and nine months ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
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 shares of common stock and common stock
equivalents outstanding for the respective period. The average number of shares
of common stock outstanding for the three and nine months ended September 30,
2005 was 1,382,669. The average number of shares of common stock outstanding for
the three and nine months ended September 30, 2004 were 1,384,640 and 1,399,040,
respectively. There were no common stock equivalents in 2005 or 2004.
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.
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
represent credit risk:
September 30, December 31,
2005 2004
------------------------------
Commitments to extend credit ............. $50,572,000 $40,467,000
Standby letters of credit ................ 2,400,000 1,121,000
6
The commitments to extend credit above are net of participations sold to other
banks. Total participations sold to other banks related to the commitments to
extend credit were $14,144,000 and $18,143,000 at September 30, 2005 and
December 31, 2004, respectively.
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 September 30,
2005 and December 31, 2004 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 $434,000 as of September 30, 2005 and
December 31, 2004, respectively. These amounts are classified as loans held for
sale and are included in loans at the respective balance sheet dates.
Note 4. Potential Change in Corporate Structure
On July 22, 2005, the Company's board of directors announced a plan to
suspend its obligation to file reports with the Securities and Exchange
Commission, by means of a 1-for-1,000 reverse split of the Company's common
stock, followed immediately by a 1,000-for-1 forward split. The effect of this
transaction would be to reduce the number of shareholders of record to less than
300, thereby suspending the Company's obligation to file reports with the SEC.
Shareholders with less than 1,000 shares of common stock, held of record in
their name, immediately before the split will receive a cash payment equal to
$38.00 per pre-split share. Shareholders with 1,000 or more shares of record in
their name immediately before the split will continue to hold the same number of
shares after completion of the split transaction. The proposed split transaction
is subject to approval by the holders of a two-thirds majority of the issued and
outstanding shares of the Company's common stock. Shareholders will be asked to
approve the split transaction at a special meeting of shareholders scheduled for
November 22, 2005. Based upon shareholders of record as of September 30, 2005,
we expect the cash payment for repurchase of shares from non-continuing
shareholders to be approximately $2,478,000 and the professional fees and other
expenses related to the split transaction to total approximately $185,000. The
Company anticipates funding this transaction with external debt. A line of
credit has been established, effective September 29, 2005, which, after a draw
period of several months, will be converted to a five-year loan with a ten-year
amortization period, bearing interest at the prime rate less 1.25%, with a
ceiling of 6.5%. Principal payments will be made on a semi-annual basis with
interest paid quarterly. This loan is secured by 100% of the outstanding stock
of the Banks.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations:
Quarter ended September 30, 2005 compared with quarter ended September 30, 2004:
The Company recorded net income of $842,000 for the quarter ended September 30,
2005, compared with net income of $970,000 for the quarter ended September 30,
2004, a decrease of $128,000 or 13.2%. This decrease in net income resulted from
increased operating expenses which more than offset improved net interest income
and a lower provision for loan losses.
Basic and diluted earnings per share were $.61 for the three months ended
September 30, 2005, $.09 or 12.9% less than the same period in 2004. The
Company's annualized return on average assets for the third quarter of 2005 was
..90% compared to 1.05% during the third quarter of the prior year. The Company's
annualized return on average equity for the three months ended September 30,
2005 and September 30, 2004 was 12.5% and 15.1%, respectively.
The distribution of average assets, liabilities and stockholders' equity and
interest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on fully taxable equivalent basis using
statutory tax rates in effect for the year presented):
Three Months Ended Three Months Ended
September 30, 2005 September 30, 2004
--------------------------------- -------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------
Assets
Taxable loans, net ............................. $282,984 $ 4,506 6.37% $271,686 $ 4,127 6.08%
Taxable investment securities available for sale 22,865 175 3.06 18,111 141 3.11
Nontaxable investment securities and loans ..... 17,404 305 7.01 19,425 336 6.93
Federal funds sold ............................. 6,914 58 3.36 18,451 63 1.37
Restricted investment securities ............... 2,692 6 0.89 2,751 18 2.62
Interest-bearing deposits at financial
institutions ................................. 6,520 57 3.50 8,614 60 2.79
-------------------- -------------------
Total interest-earning assets .......... 339,379 5,107 6.02% 339,038 4,745 5.60%
-------- --------
Cash and due from banks ........................ 17,051 14,757
Bank premises and equipment, net ............... 7,258 6,811
Life insurance contracts ....................... 4,555 4,360
Other assets ................................... 3,139 2,827
-------- --------
Total .................................. $371,382 $367,793
======== ========
Liabilities
Deposits:
Interest-bearing demand ....................... $119,047 $ 398 1.33% $121,063 $ 206 0.68%
Time .......................................... 110,591 868 3.11 107,736 757 2.79
Note payable ................................... 2,100 28 5.22 2,724 24 3.41
Other borrowings ............................... 50,003 539 4.27 51,799 580 4.44
Junior subordinated debentures ................. 4,125 106 10.32 4,125 106 10.32
-------------------- -------------------
Total interest-bearing liabilities ..... 285,866 1,939 2.69% 287,447 1,673 2.31%
-------- --------
Noninterest-bearing deposits ................... 53,022 49,417
Other liabilities .............................. 2,129 2,389
-------- --------
Total liabilities ...................... 341,017 339,253
Redeemable common stock held by KSOP ........... 3,544 3,057
Stockholders' Equity ........................... 26,821 25,483
-------- --------
Total .................................. $371,382 $367,793
======== ========
Net interest earnings .......................... $ 3,168 $ 3,072
======== ========
Net interest margin (net interest earnings
divided by total interest-earning assets) .... 3.70% 3.59%
====== ======
Nonaccruing loans are included in the average balance of loans. Loan fees are
not material.
8
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
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 as well as the Management's Discussion and Analysis section
presented elsewhere herein. Although management believes the levels of the
allowance as of both September 30, 2005 and December 31, 2004 were adequate to
absorb probable losses 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.
The net interest margin increased to 3.70% during the third quarter of 2005
compared to 3.59% during the third quarter of 2004. The return on average
interest-earning assets increased 42 basis points (from 5.60% in 2004 to 6.02%
in 2005) while interest paid on average interest-bearing liabilities increased
38 basis points (from 2.31% in 2004 to 2.69% in 2005).
The Federal Reserve increased interest rates five times during the last seven
months of 2004 and two more times during each of the first two quarters of 2005
as well as three times in the third quarter of 2005. Correspondingly, the prime
lending rate, which was 4.00% at the beginning of 2004, increased to 6.75% by
September 30, 2005. Over the past few years, the Company emphasized utilization
of interest rate floors on selected commercial and agricultural loans. During
2004 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 all of 2004 falling slightly less than the rates paid on
interest-bearing liabilities (38 basis points and 42 basis points,
respectively). As market interest rates have risen, rates received on taxable
loans have increased 29 basis points while rates paid on interest-bearing
liabilities have increased 38 basis points when comparing the third quarters of
2005 and 2004. This result occurred due, in large measure, 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 and the loan repricing date met.
Additionally, the mix of loans comprising the taxable loan portfolio, and
pricing of new loan volume compared to existing loan rates, impact the overall
yield earned. The extent of impact these items will have in the future will
depend upon, among other things, the amount and timing of future market interest
rate hikes and competitive pressures.
Rates received on taxable investment securities available for sale decreased
during the third quarter of 2005, compared to the third quarter of 2004, by 5
basis points. Over the same time period, rates paid on interest-bearing
liabilities increased 38 basis points. This was 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 only approximately two years, may be able to reprice higher if
market interest rates remain at their current level or experience further
increases.
Rates received during the quarter ended September 30, 2005, versus the same
quarter of 2004, on nontaxable investment securities available for sale and on
nontaxable loans increased 8 basis points while rates paid on interest-bearing
liabilities increased 38 basis points. Most of the nontaxable investment
securities available for sale were purchased when market interest rates were
higher than rates currently available, despite recent interest rate hikes. In
the current interest rate environment, when nontaxable investment securities
mature or are sold, called, or otherwise paid down, the reinvestment rate
available is frequently lower than the yield of the liquidating security.
9
The rate received on overnight federal funds sold to other banks increased 199
basis points during the third quarter of 2005, compared to the same quarter of
2004. This increase was primarily attributable to the monetary policy shift of
the Federal Reserve which has caused overnight federal funds rates to
significantly rise. For the quarter ended September 30, 2005, average federal
funds sold to total average assets had been reduced to 1.9% from 5.0% during the
same quarter in 2004. 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) increased 71 basis points
during the third quarter of 2005 versus the same quarter of 2004, while the
average balance decreased $2,094,000. This asset category yielded 14 basis
points over federal funds sold with little, if any, credit risk. The average
maturity of interest-bearing deposits at financial institutions was
approximately one year during the quarter ended September 30, 2005.
During this period of rising market interest rates, the rates paid on
interest-bearing demand deposits rose 65 basis points. In contrast, the rates
paid on time deposits increased only 32 basis points when comparing the third
quarters of 2005 and 2004 as time deposits tend to reprice higher at a slower
pace than interest-bearing demand deposits due to their longer maturities.
The rate paid on the note payable outstanding increased 181 basis points during
the third quarter of 2005 compared to the same quarter last year. This was the
result of numerous increases over the past twelve months in the prime lending
rate to which the note payable rate is tied.
The use of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk,
tended to represent a relatively higher cost of funds than deposits for the
Company. The Company's average rate paid for such Federal Home Loan Bank
advances and other funds, however, was reduced by 17 basis points when comparing
the third quarters of 2005 and 2004. Management reduced reliance on wholesale
funding sources as evidenced by the average balance in this category declining
nearly $1.8 million during the third quarter of 2005 compared to the third
quarter of 2004.
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 3.70% during the three months ended September 30,
2005, compared to 3.59% for the same period last year.
Provisions for loan losses were $90,000 and $120,000 for the three months ended
September 30, 2005 and September 30, 2004, respectively. Net loan charge-offs
for the quarter ended September 30, 2005 totaled $80,000 compared to net
charge-offs of $24,000 for the same quarter in 2004.
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, gains (or losses) from the sale of investment
securities in the available for sale category and loans, as well as income from
corporate owned life insurance. Total other income for the third quarter of 2005
was $795,000, identical to the third quarter of 2004. Service fees, particularly
on deposit accounts, were the largest single component of the other income
category, totaling $540,000 or $5,000 more than the same quarter last year.
Trust department income rose $4,000 or 4.2% and gains on loans sold increased
$21,000 or 91.3%. Income on corporate owned life insurance increased $3,000 or
7.0%. Finally, miscellaneous other income decreased $21,000 or 24.1% due
primarily to a non-recurring revenue item recognized in 2004. No securities
gains were recognized during the third quarter of 2005 compared to $12,000 for
the same quarter of 2004.
Operating expenses include all of the costs incurred to operate the Company
except for interest expense, the loan loss provision and income taxes. For the
quarter ended September 30, 2005, salaries and employee benefits, the largest
component of operating expenses, increased $88,000 or 6.6% due to normal raises,
incentives and the rising cost of health care. Additionally, a new branch was
opened in December 2004, with its related operating expenses, including salaries
and benefits being reflected in 2005. Occupancy and equipment expenses increased
$37,000 or 10.6% as depreciation and property taxes rose. All other operating
expenses increased $169,000 or 30.0% due in large measure to the new branch
discussed above, expenses totaling $98,000 related to the suspension of report
filing obligations with the SEC, and normal cost increases in various other
expense categories. Excluding the suspension of report filing obligations with
the SEC expenses, this category of other operating expenses increased $71,000 or
12.6%. Total operating expenses increased $294,000 or 13.1% during the third
quarter of 2005 versus the same quarter last year. Excluding the suspension of
report filing obligations with the SEC expenses, total operating expenses
increased $196,000 or 8.8%. Increased costs of regulatory compliance in general,
and the Sarbanes Oxley Act of 2002 in particular, as well as technology spending
continue to challenge the Company in its effort to control expenses while
maintaining strong productivity, efficiency, capacity and high quality customer
service.
10
Income tax expense for the quarter ended September 30, 2005 of $394,000
represented 31.9% of income before taxes. For the comparable quarter last year,
income tax expense was 30.4% of income before tax.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percentage of net interest income plus noninterest income,
was 65.6% and 59.7% for the three months ended September 30, 2005 and 2004,
respectively. The primary reasons for this change in the efficiency ratio were
the overhead expenses associated with the new branch, costs of suspension of
report filing obligations with the SEC, increased regulatory compliance costs,
the cost of technology, and the other reasons discussed previously in this
report.
Results of Operations:
Nine months ended September 30, 2005 compared with nine months ended September
30, 2004
The Company recorded net income of $2,531,000 for the nine months ended
September 30, 2005, compared with net income of $2,781,000 for the first nine
months of 2004, a decrease of $250,000 or 9.0%. This decrease in net income
resulted primarily from higher operating expenses more than offsetting an
increase in net interest income.
Basic and diluted earnings per share were $1.83 for the nine months ended
September 30, 2005, $.16 or 8.0% less than the same period in 2004. The
Company's annualized return on average assets for the first three quarters of
2005 was .90% compared to .99% during the same period of the prior year. The
Company's annualized return on average equity for the nine months ended
September 30, 2005 and September 30, 2004 was 12.8% and 14.6%, respectively.
The distribution of average assets, liabilities and stockholders' equity and
interest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on fully taxable equivalent basis using
statutory tax rates in effect for the year presented):
Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004
--------------------------------- --------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------
Assets
Taxable loans, net ............................. $278,091 $ 12,995 6.23% $267,378 $ 12,260 6.11%
Taxable investment securities available for sale 22,112 499 3.01% 19,262 517 3.58%
Nontaxable investment securities and loans ..... 18,136 941 6.92% 19,154 991 6.90%
Federal funds sold ............................. 17,615 355 2.69% 29,787 220 0.98%
Restricted investment securities ............... 2,685 58 2.88% 2,883 45 2.08%
Interest-bearing deposits at financial
institutions ................................. 7,442 175 3.14% 8,218 158 2.56%
-------------------- -------------------
Total interest-earning assets .......... 346,081 15,023 5.79% 346,682 14,191 5.46%
-------- --------
Cash and due from banks ........................ 16,232 14,739
Bank premises and equipment, net ............... 7,294 6,766
Life insurance contracts ....................... 4,509 4,321
Other assets ................................... 2,878 2,921
-------- --------
Total .................................. $376,994 $375,429
======== ========
Liabilities
Deposits:
Interest-bearing demand ...................... $125,189 $ 1,148 1.23% $127,155 $ 575 0.60%
Time ......................................... 109,796 2,460 3.00% 108,928 2,323 2.85%
Note payable ................................... 2,100 77 4.84% 2,728 69 3.31%
Other borrowings ............................... 51,378 1,647 4.28% 54,372 1,876 4.61%
Junior subordinated debentures ................. 4,125 319 10.32% 4,125 319 10.32%
-------------------- -------------------
Total interest-bearing liabilities ..... 292,588 5,651 2.58% 297,308 5,162 2.32%
-------- --------
Noninterest-bearing deposits ................... 52,235 47,440
Other liabilities .............................. 2,188 2,128
-------- --------
Total liabilities ...................... 347,011 346,876
Redeemable common stock held by KSOP ........... 3,587 3,074
Stockholders' Equity ........................... 26,396 25,479
-------- --------
Total .................................. $376,994 $375,429
======== ========
Net interest earnings .......................... $ 9,372 $ 9,029
======== ========
Net interest margin (net interest earnings
divided by total interest-earning assets) ...... 3.62% 3.48%
====== ======
Nonaccruing loans are included in the average balance. Loan fees are not
material.
11
The net interest margin increased to 3.62% during the first three quarters of
2005 compared to 3.48% during the same period of 2004. The return on average
interest-earning assets increased 33 basis points (from 5.46% in 2004 to 5.79%
in 2005) and interest paid on average interest-bearing liabilities increased 26
basis points (from 2.32% in 2004 to 2.58% in 2005).
Rates received during the first three quarters of 2005, compared to the same
period in 2004, on taxable loans increased less than rates paid on
interest-bearing liabilities (increases of twelve and 26 basis points,
respectively).
Rates received on taxable investment securities available for sale decreased
during the first nine months of 2005, compared to the same period in 2004, by 57
basis points. This was 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 only approximately
two years, may be able to reprice higher if market interest rates remain at
their current level or experience further increases.
Rates received during the first nine months of 2005, versus the same period of
2004, on nontaxable investment securities available for sale and on nontaxable
loans increased two basis points while rates paid on interest-bearing
liabilities increased 26 basis points. Most of the nontaxable investment
securities available for sale were purchased when market interest rates were
higher than rates currently available, despite recent interest rate hikes. In
the current interest rate environment, when nontaxable investment securities
mature or are sold, called, or otherwise paid down, the reinvestment rate
available is frequently lower than the yield of the liquidating security.
The rate received on overnight federal funds sold to other banks increased 171
basis points during the first nine months of 2005, compared to the same period
in 2004. This increase was primarily attributable to the monetary policy of the
Federal Reserve which has caused overnight federal funds rates to significantly
rise. 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) increased 58 basis points
during the first nine months of 2005 versus the first nine months of 2004. This
asset category yielded 45 basis points over federal funds sold with little, if
any, credit risk. The average maturity of interest-bearing deposits at financial
institutions was less than one and one-half years during the nine months ended
September 30, 2005.
During this period of rising interest rates, the rates paid on interest-bearing
demand deposits rose 63 basis points when comparing the first three quarters of
2005 and 2004. Over the same comparison period, rates paid on time deposits
increased only 15 basis points as time deposits tend to reprice higher at a
slower pace than interest-bearing demand deposits due to their longer
maturities.
The rate paid on the note payable outstanding increased 153 basis points during
the first nine months of 2005 compared to the same period in 2004. This was the
result of numerous increases during the last twelve months in the prime lending
rate to which the note payable rate is tied.
The use 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 33 basis
points when comparing the first nine months of 2005 and 2004. Management reduced
reliance on wholesale funding sources as evidenced by the average balance in
this category declining nearly $3.0 million during the first nine months of 2005
compared with 2004.
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 3.62% during the nine months ended September 30,
2005, compared to 3.48% for the same period last year.
Provisions for loan losses were $390,000 for the nine months ended September 30,
2005, compared to $380,000 for the nine months ended September 30, 2004. Net
loan charge-offs for the first nine months of 2005 totaled $310,000 compared to
net charge-offs of $190,000 for the same period in 2004. Most of the net loan
charge-offs in 2005 were attributable to one borrower.
12
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 nine months of 2005 was $2,311,000, which was $20,000 or 0.9% less
than the first nine months of 2004. Service fees, particularly on deposit
accounts, were the largest single area of growth in the other income category,
exhibiting an increase of $51,000 or 3.5%. Trust department income grew $14,000
or 5.0%; gains on loans sold increased $16,000 or 11.7%; and income on corporate
owned life insurance rose $11,000 or 8.3%. Finally, miscellaneous other income
declined $67,000 or 23.4% due in large measure to a non-recurring revenue item
recognized in 2004. No securities gains were recognized during the first nine
months of 2005 compared to $45,000 of such gains in 2004.
Operating expenses include all of the costs incurred to operate the Company
except for interest expense, the loan loss provision and income taxes. For the
nine months ended September 30, 2005, salaries and employee benefits, the
largest component of operating expenses, increased $247,000 or 6.4% due to
normal raises, incentives and the rising cost of benefits. Additionally, a new
branch was opened in December 2004, with its related operating expenses
including salaries and benefits being reflected in the first nine months of
2005. Occupancy and equipment expenses increased $72,000 or 6.9%. All other
operating expenses increased $351,000 or 20.7% due in large measure to the new
branch discussed above, expenses totaling $98,000 related to suspension of
report filing obligations with the SEC, normal cost increases in various other
expense categories, as well as the final settlement in the first quarter of 2004
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 increased $670,000 or 10.1% during the first nine months of
2005 versus the same period the prior year. Excluding the suspension of report
filing obligations with the SEC expenses, total operating expenses increased
$572,000 or 8.7%. Increased costs of regulatory compliance in general, and the
Sarbanes Oxley Act of 2002 in particular, as well as technology spending
continue to challenge the Company in its effort to control expenses while
maintaining strong productivity, efficiency, capacity and high quality customer
service.
Income tax expense for the first nine months of 2005 was 31.4% of income before
tax. For the comparable period last year income tax expense was 31.0% of income
before tax.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percentage of net interest income plus noninterest income,
was 64.1% and 60.0% for the nine months ended September 30, 2005 and 2004,
respectively. The primary reasons for this change in the efficiency ratio were
the overhead expenses associated with the new branch, costs of the suspension of
report filing obligations with the SEC, increased regulatory compliance costs,
the cost of technology, and the other reasons discussed previously in this
report.
Discussion and Analysis of Financial Condition
The Company's assets at September 30, 2005 totaled $372,110,000, an increase of
$7,927,000 or 2.2% from December 31, 2004. As of September 30, 2005, the Company
had $3,075,000 of federal funds sold compared to $12,300,000 at December 31,
2004. This decrease in federal funds sold resulted primarily from growth in
deposits and securities sold under agreements to repurchase which was less than
the growth in loans and investments available for sale (see below for further
discussion). These liquid assets, federal funds sold, may be used to fund future
loan growth, deposit or other liability outflows, purchases of investment
securities available for sale, or for various other purposes as identified by
management.
At September 30, 2005, 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
$5,911,000 versus $8,395,000 at December 31, 2004. This decline was chiefly due
to the yield spreads available on new interest-bearing deposits being less than
Company established target spreads to alternative investments. Another reason
for this decline in interest-bearing deposits at financial institutions was
growth in the loan portfolio which required funding sources.
Total available for sale securities increased $3,438,000 or 11.3% during the
first nine months of 2005 to total $33,763,000 at September 30, 2005. 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 rising interest rate environment which
continued during the first three quarters of 2005, the subsidiary banks
purchased more securities than the total of securities that were sold, matured,
called, or paid down. However, most of the securities that were purchased had
rather short maturities or likely early call dates. Securities sold during the
first three quarters of 2005 and 2004 totaled none and $2,548,000, respectively,
and resulted in net gains recognized of none and $45,000, respectively.
13
Net loans totaled $292,147,000 at September 30, 2005, an increase of $11,248,000
or 4.0% from December 31, 2004. Competition for high-quality loans remains
intense in all loan categories. The Company's proceeds from sales of real estate
loans in the secondary market for the first three quarters of 2005 totaled
$8,907,000, an increase of $1,258,000 or 16.5% compared to the same period in
2004.
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, management makes continuous evaluations of the loan
portfolio and related off-balance sheet commitments and considers current
economic conditions, the composition of the loan portfolio, historical loan loss
experience, the 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 $2,110,000 at September 30, 2005, an increase of
$442,000 or 26.5% from December 31, 2004. This increase was primarily related to
three loan relationships at our Fairfield subsidiary bank which were moved to
nonaccrual status during 2005. Management is closely monitoring these, and all
other, nonaccrual loan relationships. There was a total of $294,000 other real
estate owned at September 30, 2005 compared to $77,000 at December 31, 2004.
Loans past due 90 days or more and still accruing totaled $92,000, which was
$115,000 or 55.6% less than at year-end 2004. The allowance for possible loan
losses of $3,465,000 at September 30, 2005, represented 1.2% of gross loans and
139% of total nonaccrual loans, other real estate owned, and loans past due 90
days or more and still accruing. At December 31, 2004, the allowance for
possible loan losses of $3,385,000 represented 1.2% of gross loans and 173% of
total nonaccrual loans, other real estate owned, and loans past due 90 days or
more and still accruing.
Total deposits at September 30, 2005, were $283,835,000, an increase of
$6,100,000 or 2.2% from the balance at December 31, 2004. Certificates of
deposit represented on average for the nine months ended September 30, 2005,
approximately 38% of total deposits. Interest-bearing demand deposits, comprised
of savings, money market and NOW accounts, represented another 44% of average
deposits. The final 18% of average deposits were in noninterest-bearing
accounts. Securities sold under agreements to repurchase increased $1,804,000
(30.7%) to total $7,689,000 as more corporate dollars were directed to this
category. Advances borrowed from the Federal Home Loan Bank declined by
$1,230,000 from year end 2004, totaling $41,686,000 at quarter end, as
management has put less emphasis on this funding source for intermediate and
long-term needs. At September 30, 2005, however, short-term liquidity !dvances
totaling $4,000,000 were outstanding with the Federal Home Loan Bank.
The note payable balance of $1,700,000 at September 30, 2005, decreased $400,000
from the balance at December 31, 2004. Effective as of the end of September
2005, the note payable was refinanced with a different lender. A total of
$6,500,000 is available under this borrowing facility, $1,500,000 of which was
drawn to repay existing indebtedness, $200,000 of which was drawn to fund
operating expenses, with the remainder available to fund the costs associated
with suspension of report filing obligations with the SEC discussed elsewhere in
this document and other filings with the Securities and Exchange Commission.
After a draw period of several months this line of credit will be converted to a
five-year loan with a ten-year amortization period, bearing interest at the
prime rate less 1.25%, with a ceiling of 6.5%. Principal payments will be made
on a semi-annual basis with interest paid quarterly. This loan is secured by
100% of the outstanding stock of the Banks.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" refers to those assets and
liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative gap exists when
total interest-bearing liabilities are in excess of interest-earning assets.
Generally a positive repricing gap will result in increased net interest income
in a rising rate environment and decreased net interest income in a falling rate
environment. A negative repricing gap tends to produce increased net interest
income in a falling rate environment and decreased net interest income in a
rising rate environment. At September 30, 2005, 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.
14
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 held for investment purposes and loan payments provide a constant
flow of funds available for cash needs. Additionally, liquidity can be gained by
the sale of loans or securities prior to maturity if such assets had previously
been designated as available for sale. Interest rates, relative to the rate paid
by the security or loan sold, along with the maturity of the security or loan,
are the major determinates of the price which can be realized upon sale.
The stability of the Company's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer deposits
tend to be small in size, diversified across a large base of individuals, and
are government insured to the extent permitted by law. Total deposits at
September 30, 2005, were $283,835,000 or 76.3% of total liabilities and equity.
Federal funds sold overnight totaled $3,075,000 or .8% of September 30, 2005
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 $33,763,000 at
quarter-end included net unrealized gains of approximately $169,000. These
securities may be sold in whole or in part to increase liquid assets, reposition
the investment portfolio, or for other purposes as defined by management.
Capital
Stockholders' equity increased $1,220,000 (4.7%) during the nine months ended
September 30, 2005. The year-to-date increase included net income of $2,531,000,
the decrease of $224,000 in accumulated other comprehensive income, $1,038,000
of dividends declared to shareholders, and the $49,000 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 September 30, 2005 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 9.2% 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.
15
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Trends, Events or Uncertainties
Officers and directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. In the opinion of management, 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. One such loan relationship, however, which resulted in
year-to-date through September 30, 2005 net charge-off of $279,000, was with a
related party of a subsidiary bank director.
Special Note Concerning Forward-Looking Statements
This document contains, and future oral and written statements of the Company
and its management may contain, forward-looking statements within the meaning of
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," "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.
A number of factors, many of which are beyond the ability of the Company to
control or predict, could cause actual results to differ materially from those
in its forward-looking statements. These factors include, among others, the
following: (i) the strength of the local and national economy; (ii) the economic
impact of any future terrorist threats or attacks; (iii) changes in state and
federal laws, regulations and governmental policies concerning the Company's
general business; (iv) changes in interest rates and prepayment rates of the
Company's assets; (v) increased competition in the financial services sector and
the inability to attract new customers; (vi) changes in technology and the
ability to develop and maintain secure and reliable electronic systems; (vii)
the loss of key executives or employees; (viii) changes in consumer spending;
(ix) unexpected results of acquisitions; (x) unexpected outcomes of existing or
new litigation involving the Company; (xi) changes in accounting policies and
practices; and (xii) the successful completion of the "going private"
transaction that was announced on July 22, 2005 which will be voted on at a
special shareholders meeting scheduled for November 22, 2005. 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 additional factors that could
materially affect the Company's financial results, is included in the Company's
filings with the Securities and Exchange Commission.
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, 2004.
Item 4. 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 disclosure controls or 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 disclosure
controls or internal control over financial reporting.
16
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
Part II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On July 22, 2005, the Company's board of directors announced a plan to suspend
its obligation to file reports with the Securities and Exchange Commission, by
means of a 1-for-1,000 reverse split of the Company's common stock, followed
immediately by a 1,000-for-1 forward split. The effect of this transaction would
be to reduce the number of shareholders of record to less than 300, thereby
suspending the Company's obligation to file reports with the SEC. Shareholders
with less than 1,000 shares of common stock, held of record in their name,
immediately before the split will receive a cash payment equal to $38.00 per
pre-split share. Shareholders with 1,000 or more shares of record in their name
immediately before the split will continue to hold the same number of shares
after completion of the split transaction. The proposed split transaction is
subject to approval by the holders of a two-thirds majority of the issued and
outstanding shares of the Company's common stock. Shareholders will be asked to
approve the split transaction at a special meeting of shareholders scheduled for
November 22, 2005. Based upon shareholders of record as of September 30, 2005,
we expect the cash payment for repurchase of shares from non-continuing
shareholders to be approximately $2,478,000 and the professional fees and other
expenses related to the split transaction to total approximately $185,000. The
Company anticipates funding this transaction with external debt. A line of
credit has been established, effective September 29, 2005, which, after a draw
period of several months, will be converted to a five-year loan with a ten-year
amortization period, bearing interest at the prime rate less 1.25%, with a
ceiling of 6.5%. Principal payments will be made on a semi-annual basis with
interest paid quarterly. This loan is secured by 100% of the outstanding stock
of the Banks.
Item 6. Exhibits
(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
17
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
(Registrant)
November 14, 2005 /s/ D. Scott Ingstad
- ----------------- -------------------------------
Date D. Scott Ingstad, Chairman of
the Board, President and CEO
November 14, 2005 /s/ Kim K. Bartling
- ----------------- -------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
18