To the Stockholders
Iowa First Bancshares Corp.
Muscatine, Iowa
For the full year of 1995, net income reached record levels of $3,050,000 or
$5.11 per share. This represents a $175,000 or 6.1% increase over 1994 net
income. Consolidated net income for the quarter ended December 31, 1995, totaled
$750,000 compared to $670,000 during the same quarter last year.
Contributing to the record performance was an increase in net interest income
and management's success in their continuing efforts to control operating
expenses. Net interest income for 1995 was $9,891,000 which represents a
$188,000 (1.9%) increase over 1994. Operating expenses decreased $264,000 or
3.7% in 1995. During the third quarter, a refund was received from the FDIC for
overpayments of previously submitted deposit insurance premiums by the banking
industry, including our subsidiary banks, to the Bank Insurance Fund (BIF). The
refunds to our banks totaled over $130,000 before income tax consequences.
Additionally, future BIF premium rates were reduced approximately 80% for our
banks. FDIC insurance expense was $260,000 less than the prior year. Continuing
asset quality enhancement resulted in a modest provision for loan losses of only
$45,000 which was $20,000 lower than a year earlier. Further evidence of the
results of expense control is found in the efficiency ratio at year-end of 60.0%
versus 64.0% and 62.7% for 1993 and 1994, respectively. An explanation of what
constitutes the efficiency ratio can be found under key ratios on page three.
Nonperforming loans consisting of nonaccrual loans and loans 90 days past due
totaled $994,000, a decrease of $398,000 or 28.6% from a year earlier.
The improvement noted above resulted in return on average equity for the year of
14.0% contrasted to 14.8% for the prior year. Return on average assets was 1.18%
for 1995 compared to 1.12% in 1994. Please refer to the Management's Discussion
and Analysis section beginning on page of this report for a more detailed
analysis of important issues and trends.
Of particular significance was the higher volume of loans which reached a net of
$169,342,000 at year-end, an increase of $7,327,000 (4.5%) over the prior year.
Both subsidiaries enjoyed excellent loan growth despite intense competition for
all types of loans. Total deposits and repurchase agreements at December 31,
1995, were $242,767,000, $11,496,000 higher than the previous year total of
$231,271,000. Total shareholder equity at the end of 1995 was $23,033,000, an
increase of 11.4% over 1994.
There continues to be little trading activity in Iowa First Bancshares Corp.
stock. A recent independent appraisal of the Company valued the stock at $50 per
share, approximately 124% of book value at December 31, 1995. At year-end, the
employee stock ownership plan owned 25,428 shares or 4.4% of the Company. The
ongoing program of purchasing treasury shares continues; at December 31, 1995,
shares representing 4.7% of the Company's issued shares had been purchased.
Please refer to the following graph for a summary of the stock price performance
over the last few years. The Board of Directors approved cash dividend payouts
during 1995 of approximately $1,072,000, further evidence of the Director's
commitment to enhance the return to stockholders consistent with prudent
administration of the Company. The graph below summarizes the cash dividends
paid for the past several years.
The total annual investment return (change in stock price plus dividends) for
the past one, three, and five-year periods have been 32%, 34%, and 31%,
respectively.
While record financial results achieved during 1995 were partially a function of
continued favorable interest rates and reduction in FDIC insurance expense,
special recognition for the overall performance of the Banks is attributable to
the excellent management at the respective banking subsidiaries.
As we look to 1996, there is, as always, much uncertainty in forecasting the
future direction of interest rates. The 1996 budgets for the Company and its
subsidiaries project relatively stable market interest rates which will add
pressure to the net interest margin, and consequently, earnings.
Your continued support and confidence is appreciated.
/s/ George A. Shepley
George A. Shepley
Chairman & CEO
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
BALANCE SHEET (at year end) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Net loans $ 169,342,000 $ 162,015,000 $ 154,706,000
Allowance for loan losses 2,309,000 2,526,000 2,654,000
Deposits and securities sold under agreements
to repurchase 242,767,000 231,271,000 234,941,000
Total assets 272,830,000 253,800,000 257,403,000
Stockholders' equity 23,033,000 20,672,000 18,748,000
STATEMENT OF INCOME (for the year)
- ------------------------------------------------------------------------------------------------------------
Net interest income $ 9,891,000 9,703,000 $ 9,519,000
Provision for loan losses 45,000 65,000 56,000
Other income 1,576,000 1,682,000 1,699,000
Other operating expense 6,877,000 7,141,000 7,175,000
Income before income taxes and cumulative
effect of a change in accounting
principle 4,545,000 4,179,000 3,987,000
Income taxes 1,495,000 1,304,000 1,319,000
Income before cumulative effect of a change
in accounting principle 3,050,000 2,875,000 2,668,000
Cumulative effect of a change in accounting
principle 0 0 300,000
Net income 3,050,000 2,875,000 2,968,000
PER SHARE DATA
- ------------------------------------------------------------------------------------------------------------
Net income, primary $ 5.14 $ 4.90 $ 5.21 *
Net income, fully diluted 5.11 4.90 5.21 *
Book value at year-end 40.27 35.79 32.93
Stock price at year-end (greater of bid or
appraised price) 50.00 39.00 34.00
Cash dividends declared during the year 1.60 1.35 1.15
Cash dividends declared as a percentage of
net income 31% 28% 22%
KEY RATIOS
- ------------------------------------------------------------------------------------------------------------
Return on average assets 1.18% 1.12% 1.17% *
Return on average stockholders' equity 13.97 14.82 16.95 *
Net interest margin-tax equivalent 4.28 4.22 4.19
Average stockholders' equity to average assets 8.44 7.54 6.89
Total capital to risk-based assets 15.12 14.68 13.38
Efficiency ratio (all operating expenses,
excluding the provision for loan
losses, divided by the sum of net interest income
and other income) 59.97 62.72 63.96
<FN>
Cumulative effect of a change in accounting principle increased income per
share, return on average assets, and return on average stockholders' equity
$.53, .12% and 1.71%, respectively.
</FN>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Iowa First Bancshares Corp.
Muscatine, Iowa
We have audited the accompanying consolidated balance sheets of Iowa First
Bancshares Corp. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 1995, 1994, and 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Iowa First
Bancshares Corp. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years ended December
31, 1995, 1994, and 1993, in conformity with generally accepted accounting
principles.
Davenport, Iowa
January 31, 1996
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 10,963,000 $ 11,720,000
Investment securities held to maturity (Note 2) 0 53,659,000
Investment securities available for sale (Note 2) 60,728,000 15,791,000
Federal funds sold and other overnight investments 24,700,000 3,337,000
Loans, net (Note 3) 169,342,000 162,015,000
Bank premises and equipment, net (Note 4) 4,342,000 4,545,000
Accrued interest receivable 2,283,000 2,038,000
Other assets 472,000 695,000
-----------------------------------
Total assets $ 272,830,000 $ 253,800,000
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 35,076,000 $ 35,336,000
Interest-bearing 200,877,000 193,687,000
-----------------------------------
Total deposits (Note 5) 235,953,000 229,023,000
Securities sold under agreements to repurchase (Note 6) 6,814,000 2,248,000
Federal Home Loan Bank advances (Note 6) 3,398,000
Dividends payable 246,000 401,000
Treasury tax and loan open note (Note 6) 1,525,000
Other liabilities 1,861,000 1,456,000
-----------------------------------
Total liabilities 249,797,000 233,128,000
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Note 7)
Preferred stock, stated value of $1.00 per share; shares authorized 1995 and
1994, 500,000; shares issued 1995 and 1994 none 0 0
Common stock, no par value; shares authorized 1995 and 1994,
2,000,000; shares issued 1995 and 1994, 600,000 200,000 200,000
Additional paid-in capital 3,800,000 3,800,000
Retained earnings 19,326,000 17,193,000
-----------------------------------
23,326,000 21,193,000
Unrealized gains (losses) on securities available for sale, net 229,000 (233,000)
Less cost of common shares acquired for the treasury, 1995,
28,079 and 1994, 22,399 522,000 288,000
-----------------------------------
Total stockholders' equity 23,033,000 20,672,000
-----------------------------------
Total liabilities and stockholders' equity $ 272,830,000 $ 253,800,000
===================================
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994, and 1993
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans:
Taxable $ 14,322,000 $ 12,499,000 $ 12,050,000
Nontaxable 322,000 372,000 439,000
Interest on investment securities:
Taxable 3,189,000 3,619,000 4,064,000
Nontaxable 520,000 350,000 227,000
Interest on federal funds sold and other overnight
investments 588,000 297,000 389,000
Interest on deposits at financial institutions
and other interest income 1,000 18,000 31,000
-----------------------------------------------------
Total interest income 18,942,000 17,155,000 17,200,000
-----------------------------------------------------
Interest expense:
Interest on deposits 8,727,000 7,264,000 7,414,000
Interest on securities sold under agreements
to repurchase and other interest expense 324,000 139,000 114,000
Interest on note payable 0 49,000 153,000
-----------------------------------------------------
Total interest expense 9,051,000 7,452,000 7,681,000
-----------------------------------------------------
Net interest income 9,891,000 9,703,000 9,519,000
Provision for loan losses (Note 3) 45,000 65,000 56,000
-----------------------------------------------------
Net interest income after provision
for loan losses 9,846,000 9,638,000 9,463,000
-----------------------------------------------------
Other income:
Trust department 308,000 273,000 269,000
Service fees 941,000 970,000 968,000
Investment securities gains, net 3,000 9,000 0
Other 324,000 430,000 462,000
-----------------------------------------------------
Total other income 1,576,000 1,682,000 1,699,000
-----------------------------------------------------
Operating expenses:
Salaries and employee benefits 4,012,000 3,995,000 3,822,000
Occupancy expenses, net 526,000 548,000 521,000
Equipment expenses 422,000 410,000 437,000
Office supplies and postage 371,000 342,000 369,000
Computer costs 340,000 382,000 383,000
FDIC insurance 265,000 525,000 556,000
Legal fees 21,000 26,000 28,000
Other operating expenses 920,000 913,000 1,059,000
-----------------------------------------------------
Total operating expenses $ 6,877,000 $ 7,141,000 $ 7,175,000
-----------------------------------------------------
Income before income taxes
and cumulative effect of a change
in accounting principle $ 4,545,000 $ 4,179,000 $ 3,987,000
Income taxes (Note 9) 1,495,000 1,304,000 1,319,000
-----------------------------------------------------
Income before cumulative effect of a change in
accounting principle 3,050,000 2,875,000 2,668,000
Cumulative effect of a change in accounting
principle 0 0 300,000
-----------------------------------------------------
Net income $ 3,050,000 $ 2,875,000 $ 2,968,000
=====================================================
Weighted average common and common equivalent
shares 593,007 586,735* 570,085*
Weighted average common and common equivalent
shares, assuming full dilution 596,641 586,735* 570,085*
Earnings per common and common equivalent
share:
Primary:
Income before cumulative effect of change in
accounting principle $ 5.14 $ 4.90* $ 4.68*
Cumulative effect on prior years of change in
accounting for income taxes 0 0 0.53*
-----------------------------------------------------
Net income $ 5.14 $ 4.90* $ 5.21*
=====================================================
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994, and 1993
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
Fully diluted:
Income before cumulative effect of change in
accounting principle $ 5.11 $ 4.90* $ 4.68*
Cumulative effect on prior years of change in
accounting for income taxes 0 0 0.53*
-----------------------------------------------------
Net income $ 5.11 $ 4.90* $ 5.21*
=====================================================
Dividends declared per share $ 1.60 $ 1.35 $ 1.15
<FN>
*Excludes the effects of common stock equivalents as resulting dilution was
less than 3%.
</FN>
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994, and 1993
Unrealized
Gain
(Loss) on
Securities
Common Stock Additional Treasury Stock Available
----------------- Paid-In Retained ------------------ For Sale,
Number Amount Capital Earnings Number Amount Net Total
------------------------------------------------------------------------------------------
Balance, December 31, 1992 600,000 $ 200,000 $ 3,800,000 $ 12,779,000 27,362 $ 500,000 $ 0 $16,279,000
Net income 0 0 0 2,968,000 0 0 0 2,968,000
Cash dividends declared, $1.15
per share 0 0 0 (655,000) 0 0 0 (655,000)
Purchase of common stock for the
treasury 0 0 0 0 8,265 227,000 0 (227,000)
Sale of common stock from the
treasury to the ESOP 0 0 0 0 (5,000) (135,000) 0 135,000
Unrealized gain on securities
available for sale, net 0 0 0 0 0 0 248,000 248,000
-----------------------------------------------------------------------------------------------
Balance, December 31, 1993 600,000 200,000 3,800,000 15,092,000 30,627 592,000 248,000 18,748,000
Net income 0 0 0 2,875,000 0 0 0 2,875,000
Cash dividends declared, $1.35
per share 0 0 0 (774,000) 0 0 0 (774,000)
Purchase of common stock for the
treasury 0 0 0 0 900 32,000 0 (32,000)
Sale of common stock from the
treasury to the ESOP 0 0 0 0 (9,128) (336,000) 0 336,000
Change in unrealized (loss)
on securities available for
sale, net 0 0 0 0 0 0 (481,000) (481,000)
------------------------------------------------------------------------------------------------
Balance, December 31, 1994 600,000 200,000 3,800,000 17,193,000 22,399 288,000 (233,000) 20,672,000
Net income 0 0 0 3,050,000 0 0 0 3,050,000
Cash dividends declared, $1.60
per share 0 0 0 (917,000) 0 0 0 (917,000)
Purchase of common stock for the
treasury 0 0 0 0 6,680 261,000 0 (261,000)
Issuance of 1,000 shares of
treasury stock upon exercise
of stock options 0 0 0 0 (1,000) (27,000) 0 27,000
Change in unrealized gain on
securities available for
sale, net 0 0 0 0 0 0 462,000 462,000
--------------------------------------------------------------------------------------------------
Balance, December 31, 1995 600,000 $ 200,000 $ 3,800,000 $ 19,326,000 28,079 $ 522,000 $ 229,000 $ 23,033,000
==================================================================================================
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994, and 1993
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,050,000 $ 2,875,000 $ 2,968,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from loans sold to FHLMC 2,972,000 2,932,000 6,010,000
Loans underwritten for FHLMC (2,962,000) (2,901,000) (5,954,000)
Gains on loans sold to FHLMC (10,000) (31,000) (56,000)
Provision for loan losses 45,000 65,000 56,000
Investment securities gains, net (3,000) (9,000) 0
Depreciation 371,000 407,000 462,000
Deferred income taxes 2,000 (5,000) 207,000
Amortization of premiums and accretion of
discounts on loans and investment
securities, net 251,000 426,000 350,000
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable (245,000) (20,000) 118,000
Net (increase) decrease in other assets (37,000) (177,000) 226,000
(Decrease) in other liabilities (250,000) (477,000) (425,000)
-----------------------------------------------------
Net cash provided by operating
activities 3,184,000 3,085,000 3,962,000
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold and
other overnight deposits (21,363,000) 9,093,000 3,020,000
Proceeds from maturities and paydowns of
investment securities 0 0 33,199,000
Proceeds from sales of investment securities 0 0 1,026,000
Purchases of investment securities 0 0 (32,576,000)
Proceeds from maturities and paydowns of held
to maturity securities 13,464,000 12,295,000 0
Proceeds from sales, maturities, and paydowns
of available for sale securities 11,946,000 16,586,000 0
Purchase of held to maturity securities (1,860,000) (11,922,000) 0
Purchase of available for sale securities (13,961,000) (13,684,000) 0
Proceeds from sale of other real estate owned 260,000 114,000 75,000
Net (increase) in loans (7,372,000) (7,374,000) (15,527,000)
Purchases of bank premises and equipment (168,000) (193,000) (267,000)
-----------------------------------------------------
Net cash provided by (used in)
investing activities $ (19,054,000)$ 4,915,000 $ (11,050,000)
-----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing
deposits $ (260,000)$ 690,000 $ 3,833,000
Net increase (decrease) in interest-bearing
deposits 7,190,000 (5,080,000) 2,034,000
Net increase (decrease) in securities sold under
agreements to repurchase 4,566,000 720,000 (168,000)
Proceeds from TT&L borrowings 1,525,000 0 0
Proceeds from FHLB advances 3,398,000 0 0
Principal payments on note payable (1,300,000) (1,700,000)
Cash dividends paid (1,072,000) (714,000) (600,000)
Reissuance of treasury stock 27,000 336,000 135,000
Purchases of common stock for the treasury (261,000) (32,000) (227,000)
-----------------------------------------------------
Net cash provided by (used in)
financing activities 15,113,000 (5,380,000) 3,307,000
-----------------------------------------------------
Net increase (decrease) in cash and
due from banks (757,000) 2,620,000 (3,781,000)
Cash and due from banks:
Beginning 11,720,000 9,100,000 12,881,000
-----------------------------------------------------
Ending $ 10,963,000 $ 11,720,000 $ 9,100,000
=====================================================
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994, and 1993
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 8,890,000 7,371,000 $ 7,831,000
Income taxes 1,147,000 870,000 1,216,000
Supplemental Schedule of Noncash Investing and
Financing Activities:
Securities available for sale adjustment, net 462,000 (481,000) 248,000
Investment securities transferred from held to
maturity portfolio to available for sale portfolio,
at fair value 41,603,000 0 0
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business, Accounting Estimates, and
Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. is a bank holding company providing bank and bank
related services through its subsidiaries.
Accounting estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant accounting policies:
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, First National Bank of Muscatine and First National Bank in
Fairfield (Banks). All material intercompany accounts and transactions have
been eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and
due from banks include cash on-hand and amounts due from banks. Cash flows
from demand deposits, NOW accounts, savings accounts, and federal funds sold
are reported net, since their original maturities are less than three months.
Cash flows are also reported net for securities sold under agreements to
repurchase, Federal Home Loan Bank advances, TT&L open note, certificates of
deposits, and loans.
Cash and due from banks: The Banks are required by federal banking
regulations to maintain certain cash and due from bank reserves. The reserve
requirement was approximately $1,750,000 at December 31, 1995.
Investment securities: Prior to January 1, 1994, all debt securities were
carried at amortized cost. Effective January 1, 1994, the Company adopted
FASB Statement No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" and classified investments as held to maturity or available for
sale. Investment securities held to maturity are those debt securities that
the Banks have the ability and intent to hold until maturity regardless of
changes in market conditions, liquidity needs or changes in general economic
conditions. Such securities are carried at cost adjusted for amortization of
premiums and accretion of discounts computed by the interest method over
their contractual lives. If the ability or intent to hold to maturity is not
present for certain specified securities, such securities are considered
available for sale as the Banks intend to hold them for an indefinite period
of time but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Banks' assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains or losses are reported as increases
or decreases in stockholders' equity, net of the related deferred tax effect.
There were no investments held for trading purposes as of December 31, 1995
or 1994. Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
Pursuant to a FASB Special Report "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities" the
Company transferred at fair value all investment securities from held to
maturity to available for sale prior to December 31, 1995.
Loans and direct lease financing: Loans are stated at the amount of unpaid
principal, reduced by unearned discount and an allowance for loan losses. The
Bank records impaired loans at the present value of expected future cash
flows discounted at the loan's effective interest rate, or as an expedient,
at the loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. A loan is impaired when it is probable the
creditor will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
The allowance for loan losses is maintained at the level considered adequate
by management of the Banks to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. In determining the adequacy of the
allowance balance the Banks make continuous evaluations of the loan portfolio
and related off-balance sheet commitments, consider current economic
conditions, historical loan loss experience, review of specific problem loans
and other factors.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using the interest method. For all other loans, interest is
accrued daily on the outstanding balances. Accrual of interest is
discontinued on a loan when management believes, after considering collection
efforts and other factors, that the borrower's financial condition is such
that collection of interest is doubtful. Generally this occurs when the
collection of interest or principal has become 90 days past due.
The leasing operations consist principally of the leasing of various types of
transportation equipment. All of the leases are classified and accounted for
as direct financing leases.
Under the direct financing method of accounting for leases, the total net
rentals receivable under the lease contracts and the estimated unguaranteed
residual value of the leased equipment, net of unearned income, are recorded
as a net investment in direct financing leases and the unearned income is
recognized each month as it is earned so as to provide a constant periodic
rate of return on the unrecovered investment.
Direct loan and lease origination fees and costs are generally being deferred
and the net amount amortized as an adjustment of the related loan's or
lease's yield. The Banks generally amortize these amounts over the
contractual life. Commitment fees based upon a percentage of customers'
unused lines of credit and fees related to standby letters of credit are not
significant.
Bank premises and equipment: Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed primarily by the
straight-line method based on the estimated useful lives.
Other assets: Other real estate (ORE), which is included in other assets,
represents properties acquired through foreclosure, in-substance foreclosure
or other proceedings. ORE is recorded at the lower of the amount of the loan
or fair value of the properties. Any write-down to fair value at the time of
transfer to ORE is charged to the allowance for loan losses. Property is
evaluated regularly to ensure that the recorded amount is supported by the
current fair value.
Income taxes: The Company files its tax return on a consolidated basis with
its subsidiary banks. The entities follow the direct reimbursement method of
accounting for income taxes under which income taxes or credits which result
from the subsidiary banks' inclusion in the consolidated tax return are paid
to or received from the parent company.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Effective January 1, 1993, the Company adopted FAS 109. The cumulative effect
of that change in the method of accounting for income taxes at January 1,
1993 was $300,000 and is included in the statement of income.
Deferred income taxes have not been provided on the equity in undistributed
net income of the subsidiaries as the entities file a consolidated income tax
return.
Trust assets: Trust assets (other than cash deposits) held by the Banks in
fiduciary or agency capacities for its customers are not included in the
accompanying consolidated balance sheets since such items are not assets of
the Banks.
Earnings per share: Primary earnings per share are 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 computations
prior to December 31, 1994 were based on weighted average common stock
outstanding only because the dilutive effect of the common stock equivalents
was not material.
Current accounting developments: The Financial Accounting Standards Board has
issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" which becomes effective for
years beginning after December 15, 1995. The Statement generally requires
long-lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, an impairment is recognized. Management believes that adoption
of this Statement will not have a material effect on the Company's
consolidated financial statements.
The Financial Accounting Standards Board has issued Statement No. 122
"Accounting for Mortgage Servicing Rights" which becomes effective for years
beginning after December 15, 1995. This Statement amends FASB Statement No.
65 "Accounting for Certain Mortgage Banking Activities" to require that an
entity recognize as separate assets rights to service mortgage loans for
others, however those rights are acquired. An entity that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells or securitizes those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. If it is not practicable to estimate the fair values
separately, the entire cost of purchasing or originating the loans should be
allocated to the mortgage loans (without the mortgage servicing rights) and
no cost should be allocated to the mortgage servicing rights. This Statement
also requires that an entity assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. Neither the Company
nor the Banks have addressed the potential future impact of this Statement on
the consolidated financial statements.
Note 2. Investment Securities
The amortized cost and fair value of investment securities as of December 31,
1995 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------------
Securities available for sale:
U.S. Treasury securities $ 20,081,000 $ 196,000 $ (20,000) $ 20,257,000
U.S. government agencies 16,914,000 144,000 (59,000) 16,999,000
Mortgage-backed securities 7,562,000 6,000 (27,000) 7,541,000
State and political subdivisions 11,364,000 113,000 (1,000) 11,476,000
Corporate obligations 4,443,000 12,000 0 4,455,000
---------------------------------------------------------------
$ 60,364,000 $ 471,000 $ (107,000) $ 60,728,000
===============================================================
The amortized cost and fair value of investment securities as of December 31,
1994 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------------
Securities held to maturity:
U.S. Treasury securities $ 20,190,000 $ 0 $ (612,000) $ 19,578,000
U.S. government agencies 13,221,000 20,000 (359,000) 12,882,000
Mortgage-backed securities 5,941,000 0 (289,000) 5,652,000
State and political subdivisions 9,323,000 2,000 (314,000) 9,011,000
Corporate obligations 4,984,000 0 (85,000) 4,899,000
---------------------------------------------------------------
$ 53,659,000 $ 22,000 $ (1,659,000) $ 52,022,000
===============================================================
Securities available for sale:
U.S. Treasury securities $ 11,457,000 $ 11,000 $ (281,000) $ 11,187,000
U.S. government agencies 4,201,000 0 (67,000) 4,134,000
Mortgage-backed securities 502,000 0 (32,000) 470,000
---------------------------------------------------------------
$ 16,160,000 $ 11,000 $ (380,000) $ 15,791,000
===============================================================
The amortized cost and fair value of investment securities as of December 31,
1995, by contractual maturity, are shown below. Most mortgage-backed securities
are included in the one year through five year maturity category.
Amortized Fair
Cost Value
-------------------------------
Securities available for sale:
Due in one year or less $ 17,922,000 $ 17,964,000
Due after one year through five years 35,548,000 35,844,000
Due after five years through ten years 5,739,000 5,765,000
Due after ten years 1,155,000 1,155,000
------------------------------
$ 60,364,000 $ 60,728,000
==============================
Investment securities with a carrying value of $31,963,000 as of December 31,
1995 are pledged on public deposits, trust deposits and for other purposes as
required by law.
Investment securities with a carrying value of $9,917,000 as of December 31,
1995 are pledged as collateral for securities sold under agreements to
repurchase.
Proceeds from the sale of securities were $5,507,000 during 1995, $11,775,000
during 1994, and $1,026,000 during 1993. All 1995, 1994, and 1993 sales were
from securities identified as available for sale. Securities called by the
issuer totaled $356,000, $1,188,000, and $6,000,000 for 1995, 1994, and 1993,
respectively. Gross gains and losses realized on sales in 1995 were $30,000 and
$27,000, respectively. Gross gains and losses realized on sales in 1994 were
$67,000 and $58,000, respectively. Gross gains and losses realized on sales in
1993 were none.
The Company transferred securities with an amortized cost of $41,391,000 and an
unrealized gain of $212,000 from the held to maturity portfolio to the available
for sale portfolio prior to December 31, 1995, based on management's
reassessment of their previous designations of securities giving consideration
to liquidity needs, management of interest rate risk and other factors.
Note 3. Loans
The composition of loans is summarized as follows:
December 31,
----------------------------------
1995 1994
----------------------------------
Commercial $ 62,399,000 $ 55,948,000
Agricultural 16,792,000 15,264,000
Real estate:
Construction 1,187,000 1,192,000
Mortgage 56,475,000 53,447,000
Tax exempt, mortgage 3,735,000 4,201,000
Installment 32,972,000 36,634,000
Lease financing, net 369,000 919,000
Other 335,000 74,000
----------------------------------
Total loans 174,264,000 167,679,000
Less:
Allowance for loan losses 2,309,000 2,526,000
Unearned discount 2,613,000 3,138,000
----------------------------------
$ 169,342,000 $ 162,015,000
==================================
Loans considered to be impaired under the provisions of FAS No. 114 as of
December 31, 1995 are as follows:
Impaired loans for which an allowance has been provided $ 368,000
Impaired loans for which no allowance has been provided 515,000
------------
Total loans determined to be impaired $ 883,000
============
Allowance provided for impaired loans, included in the
allowance for loan losses $ 47,000
============
The average recorded investment in impaired loans during the year ended December
31, 1995 was $985,000 with interest income recognized on those loans of $26,000.
The cash basis interest income recognized from impaired loans was $26,000 during
the year ended December 31, 1995.
Nonaccruing loans totaled $883,000 and $1,201,000 at December 31, 1995 and 1994,
respectively. Interest income in the amount of $74,000, $109,000, and $133,000
would have been earned on the nonaccrual loans had they been performing loans in
accordance with their original terms during the years ended December 31, 1995,
1994, and 1993, respectively. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 1995,
1994, and 1993 totaled $26,000, none, and none, respectively.
Changes in the allowance for loan losses are summarized as follows:
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------------------------------------
Beginning balance $ 2,526,000 $ 2,654,000 $ 2,734,000
Provisions charged to expense 45,000 65,000 56,000
Recoveries 176,000 225,000 136,000
---------------------------------------
2,747,000 2,944,000 2,926,000
Loans charged off 438,000 418,000 272,000
---------------------------------------
Ending balance $ 2,309,000 $ 2,526,000 $ 2,654,000
=======================================
The allowance for loan losses for income tax purposes is $1,841,000 and
$2,013,000 as of December 31, 1995 and 1994, respectively. The amounts that were
deducted for income tax purposes for the years ended December 31, 1995, 1994,
and 1993 were $92,000, $151,000, and $5,000, respectively, which were the
maximum allowable deductions as computed by the experience method.
The Company retains mortgage loan servicing on loans sold into the secondary
market which are not included in the accompanying consolidated balance sheets.
The unpaid principal balance on these loans was $11,044,000 as of December 31,
1995 and $9,097,000 as of December 31, 1994. Custodial escrow balances
maintained in connection with these loans were approximately $61,000 and $51,000
at December 31, 1995 and 1994, respectively. All loans sold are without
recourse.
Note 4. Bank Premises and Equipment
Bank premises and equipment are summarized as follows:
Years of December 31,
Useful ------------------------------
Lives 1995 1994
------------------------------------------
Bank premises (including land of $537,000) 10-40 $ 6,232,000 $ 6,232,000
Leasehold improvements 5-15 80,000 80,000
Furniture and equipment 5-15 1,576,000 1,434,000
------------------------------
7,888,000 7,746,000
Accumulated depreciation 3,546,000 3,201,000
------------------------------
$ 4,342,000 $ 4,545,000
==============================
Note 5. Deposits
The composition of deposits is summarized as follows:
December 31,
-----------------------------
1995 1994
-----------------------------
Demand ...........................................$ 70,877,000 $ 72,087,000
NOW accounts ..................................... 32,502,000 33,523,000
Savings .......................................... 22,494,000 24,087,000
Time certificates ................................ 110,080,000 99,326,000
-----------------------------
$ 235,953,000 $ 229,023,000
=============================
Included in interest-bearing deposits as of December 31, 1995 are certificates
of deposit totaling $22,445,000 that are $100,000 or greater. Maturities of
these certificates are as follows:
One to three months $ 10,023,000
Three to six months 3,687,000
Six to twelve months 4,894,000
Over twelve months 3,841,000
---------------
$ 22,445,000
===============
Note 6. Other Borrowings
Company borrowings consist of the following:
Securities sold under agreements to repurchase $ 6,814,000
Federal Home Loan Bank advances 3,398,000
Treasury tax and loan open note 1,525,000
Securities sold under agreements to repurchase totaled $6,814,000 at December
31, 1995. The average and maximum amount outstanding along with the rates of
interest related to securities sold under agreements to repurchase (dollar
amounts in thousands) at December 31, 1995 are as follows:
Daily average amount outstanding during the year $ 3,451
Maximum outstanding as of any month end 6,814
Weighted average interest rate during the year 5.81%
Weighted average interest rate at the end of the year 5.26
Advances from the Federal Home Loan Bank as of December 31, 1995 bear interest
and are due as follows:
Interest Rate Balance Due
----------------------------------
Year ending December 31:
1998 5.8% $ 300,000
2000 6.15% to 6.52% 1,900,000
2002 6.43% 150,000
2005 6.50% to 6.65% 500,000
Amortizing through 2015 6.79% 548,000
-----------------
$ 3,398,000
=================
First mortgage loans of approximately $38,500,000 and investment securities of
$2,000,000 as of December 31, 1995 are pledged as collateral on these advances.
Note 7. Regulatory Capital Requirements
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 more consistent system for
comparing capital positions of financial institutions and to take into account
the different 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 December 31, 1995 with the minimum
requirements is presented below.
Minimum
Actual Requirements
---------------------------
Tier 1 risk-based capital 13.75% 4.00%
Total risk-based capital 15.12 8.00
Tier 1 leverage ratio 8.53 3.00
According to FDIC capital guidelines, the Company is considered to be well
capitalized.
Current banking law limits the amount of dividends banks can pay. As of December
31, 1995, amounts available for payment of dividends were $2,179,000 and
$713,000 for First National Bank of Muscatine and First National Bank in
Fairfield, respectively. Regardless of formal regulatory restrictions the Banks
may not pay dividends which would result in their capital levels being reduced
below the minimum requirements shown above.
Note 8. Employee Benefits
The Company and bank subsidiaries sponsor an Employee Stock Ownership Plan with
401(k) provisions. This plan covers substantially all full-time employees who
have completed a six month period of employment. The Company and subsidiary
banks match 50% of the amount an employee contributes to the plan up to a
maximum of 6% of the employee's pay. Additionally the Company and subsidiary
banks may make optional contributions to the plan which are allocated to the
accounts of participants in the plan on the basis of total relative
compensation. The amounts expensed for the years ended December 31, 1995, 1994,
and 1993 were $262,000, $303,000, and $289,000, respectively.
The Company has an Incentive Stock Option and Nonstatutory Stock Option Plan
(hereinafter "Plan") for directors and senior officers. The purpose of the Plan
is to promote the interests of the Company and its stockholders by strengthening
its ability to attract and retain key officers and directors by furnishing
additional incentives whereby such officers and directors may be encouraged to
acquire, or to increase their acquisition of, the Company's common stock, thus
maintaining their personal and proprietary interest in the Company's continued
success and progress. The Plan is administered by the Human Resource Committee
of the Company. The Company granted options covering 50,250 shares on January 1,
1993. Since inception of the plan, options covering 1,000 shares have been
exercised and options covering 1,500 shares have been forfeited. Options
exercisable at December 31, 1995 cover 28,250 shares. Options granted for 47,750
shares are outstanding as of December 31, 1995. The option price is 100% of the
fair market value of the common stock ($27 per share) of the Company at the
grant date. All options granted under the Plan vest ratably over five years and
must be exercised within five years of the grant date. The Company retains Right
of First Refusal on all shares issued pursuant to the Plan.
Note 9. Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
------------------------------------------
1995 1994 1993
------------------------------------------
Currently paid or payable ....... $ 1,493,000 $ 1,309,000 $ 1,112,000
Deferred income taxes ........... 2,000 (5,000) 207,000
-----------------------------------------
$ 1,495,000 $ 1,304,000 $ 1,319,000
=========================================
Income tax expense differs from the amount computed by applying the federal
income tax rate to income before income taxes. The reasons for this difference
are as follows:
Year Ended December 31,
---------------------------------------------------------------------
1995 1994 1993
---------------------------------------------------------------------
% Of % Of % Of
Dollar Pretax Dollar Pretax Dollar Pretax
Amount Income Amount Income Amount Income
---------------------------------------------------------------------
Computed "expected"
income tax expense $ 1,591,000 35.0% $ 1,463,000 35.0% $ 1,395,000 35.0%
Effect of graduated tax rate (45,000) (1.0) (42,000) (1.0) (40,000) (1.0)
Tax exempt interest
income, net (260,000) (5.7) (230,000) (5.5) (233,000) (5.8)
State income taxes, net 150,000 3.3 137,000 3.3 129,000 3.2
Other 59,000 1.3 (24,000) (0.6) 68,000 1.7
---------------------------------------------------------------------
$ 1,495,000 32.9% $ 1,304,000 31.2% $ 1,319,000 33.1%
=====================================================================
Net deferred taxes, included in other assets or other liabilities on the
consolidated balance sheets, consist of the following components as of December
31:
1995 1994
-------------------------------
Deferred tax assets:
Allowance for loan losses $ 174,000 $ 191,000
Securities available for sale 0 136,000
Net deferred loan origination fees 0 7,000
-------------------------------
174,000 334,000
-------------------------------
Deferred tax liabilities:
Direct lease financing (243,000) (283,000)
Securities available for sale (136,000) 0
Bank premises and equipment (13,000) (26,000)
Unrealized bond accretion (21,000) (5,000)
Net deferred loan origination fees (11,000) 0
-------------------------------
(424,000) (314,000)
-------------------------------
Net deferred tax assets (liabilities) $ (250,000) $ 20,000
===============================
The net change in 1995 and 1994 deferred income taxes includes $272,000 and
$277,000, respectively, which is reflected in stockholders' equity.
Note 10. Commitments and Contingencies
Financial instruments with off-balance sheet risk: The Banks are parties to
financial instruments with off-balance sheet risk made in the normal course of
business to meet the financing needs of their customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheets.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance sheet instruments.
Contract
Amount
-----------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit ........................... $18,157,000
Standby letters of credit .............................. 517,000
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 source 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 credit worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third-party. Those guarantees are
primarily issued to support public and private borrowing arrangements and extend
for no more than one year. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers.
Concentration of credit risk: The Banks grant commercial, real estate,
installment, and agricultural loans to customers in the Banks' primary market
area which includes Muscatine and Jefferson Counties in Iowa. The Banks have
diversified loan portfolios, as set forth in Note 3. The Banks' policies for
requiring collateral are consistent with prudent lending practices and
anticipate the potential for economic fluctuations. Collateral varies but may
include accounts receivable, inventory, property and equipment, residential real
estate properties and income producing commercial properties. It is the Banks'
policies to file financing statements and mortgages covering collateral pledged.
Contingencies: In the normal course of business, the Banks are involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
Note 11. Related Party Matters
Senior officers and directors of the Company and the Banks, principal holders of
equity securities of the Company and their associates were indebted to the Banks
for loans made in the ordinary course of business. As of December 31, 1995, none
of these loans are classified as nonaccrual, past due, restricted or considered
potential problems.
The activity in such loans during the years ended December 31 are as follows:
1995 1994
-----------------------------
Balance, beginning .............. $ 6,256,000 $ 6,108,000
Additions .................... 7,521,000 6,790,000
Deductions (payments) ........ (6,804,000) (6,642,000)
-----------------------------
Balance, ending ................. $ 6,973,000 $ 6,256,000
=============================
Note 12. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments in the table below:
Cash and due from banks: The carrying amounts reported in the balance sheets
for cash and due from banks approximate their fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Federal funds sold and other overnight investments: The carrying amounts
reported in the balance sheets for federal funds sold and other overnight
investments approximate their fair value.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for certain mortgage loans (i.e., one-to-four family
residential) are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. The fair values for other loans (i.e., commercial real
estate and rental property mortgage loans, commercial and industrial loans,
and agricultural loans) are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Deposit liabilities: The fair values disclosed for demand deposits (i.e.,
interest and noninterest checking, passbook savings, and certain types of
money market accounts ) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities of time
deposits.
Securities sold under agreements to repurchase and treasury tax and loan open
note: For such short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Federal Home Loan Bank advances: The fair value is estimated using discounted
cash flow analysis, employing interest rates currently being quoted by the
Federal Home Loan Bank.
Commitments to extend credit and standby letters of credit: The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. As of December 31,1995, these items are
immaterial in nature.
The carrying amounts and fair values of financial instruments at December 31,
1995 and 1994 are summarized as follows:
Carrying Amounts Fair Values
-------------------------------------------------------------------
1995 1994 1995 1994
-------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 10,963,000 $ 11,720,000 $ 10,963,000 $ 11,720,000
Investment securities 60,728,000 69,450,000 60,728,000 67,813,000
Federal funds sold 24,700,000 3,337,000 24,700,000 3,337,000
Loans receivable 171,651,000 164,541,000 171,724,000 164,393,000
Less allowance for loan losses 2,309,000 2,526,000 2,309,000 2,526,000
Loans, net of allowance 169,342,000 162,015,000 169,415,000 161,867,000
Financial Liabilities:
Deposits $ 235,953,000 $ 229,023,000 $ 233,519,000 $ 228,187,000
Securities sold under
agreements to repurchase 6,814,000 2,248,000 6,814,000 2,248,000
Federal Home Loan Bank
advances 3,398,000 0 3,418,000 0
Treasury tax and loan open
note 1,525,000 0 1,525,000 0
Note 13. Parent Company Only Condensed Financial
Information
The following is condensed financial information of Iowa First Bancshares Corp.
(parent company only):
BALANCE SHEETS
(Parent Company Only)
December 31,
--------------------------------
1995 1994
--------------------------------
ASSETS
Cash $ 1,287,000 $ 1,034,000
Investment in subsidiaries 22,405,000 20,421,000
Other assets 23,000 28,000
-------------------------------
Total assets $ 23,715,000 $ 21,483,000
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES, other liabilities $ 682,000 $ 811,000
--------------------------------
STOCKHOLDERS' EQUITY
Common stock 200,000 200,000
Additional paid-in capital 3,800,000 3,800,000
Retained earnings 19,326,000 17,193,000
------------------------------
23,326,000 21,193,000
Unrealized gains (losses) on securities
available for sale, net 229,000 (233,000)
Less net cost of common shares acquired
for the treasury 522,000 288,000
-----------------------------
Total stockholders' equity 23,033,000 20,672,000
-----------------------------
Total liabilities and
stockholders' equity $ 23,715,000 $ 21,483,000
=============================
STATEMENTS OF INCOME
(Parent Company Only)
Year Ended December 31,
------------------------------------------
1995 1994 1993
------------------------------------------
Operating revenue:
Dividends received from subsidiaries $ 1,750,000 $ 2,250,000 $ 2,750,000
Management fees and other income 321,000 294,000 258,000
------------------------------------------
Total operating revenue 2,071,000 2,544,000 3,008,000
Operating expenses 639,000 652,000 755,000
------------------------------------------
Income before income tax (credits),
equity in subsidiaries' undistributed net
income, and cumulative effect of a change
in accounting principle 1,432,000 1,892,000 2,253,000
Applicable income tax (credits) (96,000) (156,000) (160,000)
----------------------------------------
1,528,000 2,048,000 2,413,000
Equity in subsidiaries' undistributed net income 1,522,000 827,000 385,000
----------------------------------------
Income before cumulative effect of a
change in accounting principle 3,050,000 2,875,000 2,798,000
Cumulative effect of a change in accounting
principle 0 0 170,000
---------------------------------------
Net income $ 3,050,000 $ 2,875,000 $ 2,968,000
=======================================
STATEMENTS OF CASH FLOWS
(Parent Company Only)
Year Ended December 31,
----------------------------------------------
1995 1994 1993
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,050,000 $ 2,875,000 $ 2,968,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in subsidiaries' undistributed net
(income) (1,522,000) (827,000) (385,000)
Amortization and depreciation 8,000 8,000 8,000
Change in assets and liabilities:
Decrease in other assets 0 0 10,000
Increase (decrease) in other liabilities 26,000 167,000 (151,000)
-----------------------------------------------
Net cash provided by operating
activities 1,562,000 2,223,000 2,450,000
-----------------------------------------------
CASH FLOWS (USED IN) INVESTING ACTIVITIES,
purchases of other assets (3,000) 0 0
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable 0 (1,300,000) (1,700,000)
Cash dividends paid (1,072,000) (714,000) (600,000)
Reissuance of treasury stock 27,000 336,000 135,000
Purchases of common stock for the treasury (261,000) (32,000) (227,000)
-----------------------------------------------
Net cash (used in) financing
activities (1,306,000) (1,710,000) (2,392,000)
-----------------------------------------------
Net increase in cash 253,000 513,000 58,000
Cash:
Beginning 1,034,000 521,000 463,000
-----------------------------------------------
Ending $ 1,287,000 $ 1,034,000 $ 521,000
===============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash payments for:
Interest $ 0 $ 66,000 $ 168,000
Income taxes (118,000) (329,000) (212,000)
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Year Ended December 31,
-----------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Investment securities * $ 0 $ 0 $ 0 $ 75,644,000 $ 56,158,000
Investment securities held to maturity * 0 53,659,000 54,371,000 0 0
Investment securities available for sale * 60,728,000 15,791,000 19,522,000 0 0
Loans, net 169,342,000 162,015,000 154,706,000 139,234,000 135,680,000
Total assets 272,830,000 253,800,000 257,403,000 251,097,000 235,072,000
Deposits 235,953,000 229,023,000 233,413,000 227,546,000 213,333,000
Note payable 0 0 1,300,000 3,000,000 3,742,000
Other borrowings 11,737,000 2,248,000 0 0 0
Stockholders' equity 23,033,000 20,672,000 18,748,000 16,279,000 14,641,000
Interest income 18,942,000 17,155,000 17,200,000 18,271,000 20,557,000
Interest expense 9,051,000 7,452,000 7,681,000 9,286,000 12,293,000
Net interest income 9,891,000 9,703,000 9,519,000 8,985,000 8,264,000
Provision for loan losses 45,000 65,000 56,000 278,000 503,000
Investment securities gains (losses), net 3,000 9,000 0 148,000 (405,000)
Other income 1,573,000 1,673,000 1,699,000 1,534,000 1,424,000
Operating expenses 6,877,000 7,141,000 7,175,000 6,998,000 6,968,000
Income before income taxes (credits) and cumulative
effect of a change in accounting principle 4,545,000 4,179,000 3,987,000 3,391,000 1,812,000
Income taxes (credits) 1,495,000 1,304,000 1,319,000 1,141,000 (242,000)
Income before cumulative effect of a change in
accounting principle 3,050,000 2,875,000 2,668,000 2,250,000 2,054,000
Cumulative effect of a change in accounting principle 0 0 300,000 0 0
Net income 3,050,000 2,875,000 2,968,000 2,250,000 2,054,000
Per common share:
Income before cumulative effect of a change in
accounting principle:
Primary $ 5.14 $ 4.90 $ 4.68 $ 3.92 $ 3.52
Fully dilutive 5.11 4.90 4.68 3.92 3.52
Cumulative effect of a change in accounting
principle 0 0 0.53 0 0
Net income:
Primary 5.14 4.90 5.21 3.92 3.52
Fully dilutive 5.11 4.90 5.21 3.92 3.52
Cash dividends declared 1.60 1.35 1.15 0.85 0.42
Cash dividends declared as a percentage of net
income 31% 28% 22% 22% 12%
Weighted average common and common equivalent shares 593,007 586,597 569,812 574,353 584,149
Weighted average number of shares of common stock and
common stock equivalents outstanding during the year 596,641 586,597 569,812 574,353 584,149
<FN>
* Reflects adoption of FASB Statement No. 115 in 1993, see notes to
consolidated financial statements for further explanation.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Iowa First Bancshares Corp. (Company) is a bank holding company providing bank
and bank related services through its wholly-owned subsidiaries, First National
Bank of Muscatine (Muscatine) and First National Bank in Fairfield (Fairfield).
Total average assets of the Company increased .6% in 1995, increased 1.2% in
1994, and increased 5.3% in 1993. The distribution of average assets,
liabilities and stockholders' equity and interest rates, and interest
differential was as follows (dollar amounts in thousands and income and rates on
a fully taxable equivalent basis using statutory tax rates in effect for the
year presented):
1995 1994 1993
----------------------------- -------------------------- -------------------------------
Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Taxable loans, net $ 162,432 $ 14,322 8.82% $153,547 $ 12,499 8.14% $139,292 $ 12,050 8.65%
Taxable investment securities
held to maturity 36,475 2,103 5.77 45,516 2,531 5.56 73,067 4,087 5.59
Taxable investment securities
available for sale 17,331 1,086 6.27 20,045 1,088 5.43 149 8 5.37
Nontaxable investment
securities and loans 14,878 1,276 8.58 12,220 1,094 8.95 10,000 1,009 10.09
Federal funds sold and
other overnight investments 10,072 589 5.85 7,610 315 4.14 13,071 389 2.98
-------------------- ------------------ --------------------
Total interest-earning
assets 241,188 19,376 8.03 238,938 17,527 7.34 235,579 17,543 7.45
--------- -------- ---------
Cash and due from banks 10,336 10,855 10,910
Bank premises and equipment, net 4,447 4,677 4,848
Other assets 2,695 2,739 2,869
--------- -------- --------
Total $ 258,666 $257,209 $254,206
========= ======== ========
LIABILITIES
Deposits:
Interest-bearing demand $ 93,534 $ 2,951 3.16 $101,614 2,741 2.70 $100,147 2,745 2.74
Time 104,657 5,776 5.52 100,319 4,523 4.51 101,543 4,670 4.60
Other borrowings 5,685 324 5.70 2,829 139 4.91 2,578 114 4.42
Note payable 0 0 0 723 49 6.78 2,511 152 6.05
-------------------- ------------------ -------------------
Total interest-bearing
liabilities 203,876 9,051 4.44 205,485 7,452 3.63 206,779 7,681 3.71
-------- -------- --------
Noninterest-bearing deposits 31,290 30,829 28,111
Other liabilities 1,664 1,496 1,804
--------- -------- --------
Total liabilities 236,830 237,810 236,694
STOCKHOLDERS' EQUITY 21,836 19,399 17,512
--------- -------- --------
Total $ 258,666 $257,209 $254,206
========= ======== ========
Net interest earnings $ 10,325 $ 10,075 $ 9,862
========== ======== ========
Net yield (net
interest earnings
divided by total
interest-earning
assets) 4.28% 4.22% 4.19%
====== ====== ======
The net interest margin increased in 1995 (from 4.22% in 1994 to 4.28% in 1995).
The return on average interest-earning assets increased 69 basis points (from
7.34% in 1994 to 8.03% in 1995) and interest paid on average interest-bearing
liabilities increased 81 basis points (from 3.63% in 1994 to 4.44% in 1995).
Average interest earning assets to total average assets increased to 93.2%
during 1995 compared to 92.9% the previous year.
The net interest margin increased slightly in 1994 (4.19% in 1993 and 4.22% in
1994). The return on average interest-bearing assets decreased 11 basis points
(from 7.45% in 1993 to 7.34% in 1994) while interest paid on average
interest-bearing liabilities decreased 8 basis points (from 3.71% in 1993 to
3.63% in 1994). Overall market interest rates rose considerably during 1994 as
evidenced by the prime lending rate increasing from 6% at the beginning of 1994
to 8.5% by December 31, 1994. The 1994 difference of 3 basis points less decline
in rates on average interest-bearing liabilities than return on average
interest-bearing assets compares to a 1993 difference of 4 basis points more
decline in rates on average interest-bearing liabilities than return on average
interest-bearing assets.
FINANCIAL CONDITION:
Investment Securities
Investment securities at December 31, 1995 were 33% U.S. Treasury securities,
28% U.S. government agency securities, 13% mortgage-backed securities, 19%
states and political subdivisions, and 7% corporate obligations. This
emphasis on U.S. Treasury and U.S. government agency securities resulted from
management's emphasis on high credit quality security purchases. The 1995
increase in the portfolio percentage devoted to states and political
subdivisions reflects the higher yields, on a tax equivalent basis, which
were available on this type of investment as compared to treasuries and
agencies.
The mix of investment securities at year-end 1994 was U.S. Treasury
securities 45% of total investments, U.S. government agency securities 25%,
mortgage-backed securities 9%, states and political subdivisions 14%, and
corporate obligations 7%.
The amortized cost of investment securities held to maturity and fair value
of investment securities available for sale at the date indicated are
summarized as follows (dollar amounts in thousands):
December 31,
-----------------------------
1995 1994 1993
-----------------------------
Securities held to maturity:
U.S. Treasury $ 0 $ 20,190 $ 27,261
U.S. government agencies 0 13,221 11,595
Mortgage-backed securities 0 5,941 7,782
States and political subdivisions 0 9,323 5,482
Corporate obligations 0 4,984 2,251
----------------------------
$ 0 $ 53,659 $ 54,371
============================
Securities available for sale:
U.S. Treasury $ 20,257 $ 11,187 $ 13,448
U.S. government agencies 16,999 4,134 5,587
Mortgage-backed securities 7,541 470 487
State and political subdivisions 11,476 0 0
Corporate obligations 4,455 0 0
----------------------------
$ 60,728 $ 15,791 $ 19,522
============================
The following table shows the maturities of investment securities available for
sale at December 31, 1995 and the weighted average yields of such securities
(dollar amounts in thousands):
After One, But After Five, But
Within One Year Within Five Years Within Ten Years After Ten Years
------------------ ----------------- ----------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------
Investment securities available for sale:
U.S. Treasury $ 7,053 6.28% $ 13,204 5.92% $ 0 0% $ 0 0%
U.S. government agencies 7,198 6.08 7,084 6.22 1,768 6.53 949 6.97
Mortgage-backed securities 209 8.19 6,825 5.94 507 6.83 0 0
States and political subdivisions 715 7.12 7,075 7.53 3,490 7.04 196 6.96
Corporate obligations 2,789 5.69 1,656 6.06 0 0 10 0
-------- --------- -------- --------
$ 17,964 $ 35,844 $ 5,765 $ 1,155
======== ========= ======== ========
The weighted average yields in the previous tables are calculated on the basis
of the carrying value and effective yields weighted for the scheduled maturity
of each security. Weighted average yields on tax exempt securities have been
computed on a fully taxable equivalent basis using the federal statutory tax
rate of 34%, the rate in effect for the year ended December 31, 1995, and
excluding the interest expense allocated to carry certain tax-exempt securities.
In 1995, the yield on nontaxable investment securities and loans decreased 37
basis points largely as a result of normal maturation of relatively high yield
nontaxable loans with reinvestment in obligations of states and political
subdivisions at rates higher than other comparable investment securities but
appreciably lower than the amortizing nontaxable loans.
In 1993, approximately $1,000,000 of securities designated as available for sale
were sold with no gain or loss recognized. At December 31, 1993 securities with
an amortized cost of $19,140,000 and net unrealized gains of $382,000 were
designated available for sale. At December 31, 1994, securities with an
amortized cost of $16,160,000 and net unrealized losses of $369,000 were
designated available for sale. During December 1995, all securities that had
previously been classified as held to maturity were reclassified as available
for sale in response to a one-time opportunity to do so offered by the Financial
Accounting Standards Board to all organizations utilizing FAS 115. This change
in classification affords management more flexibility managing the portfolio in
the future. At December 31, 1995, no state or political subdivision securities
amortized cost or market value exceeded 10% of stockholders' equity.
Loans
Loans outstanding at December 31, 1995 increased 4.3% from December 31, 1994.
The amounts of loans outstanding, net of unearned discount, at the indicated
dates is shown in the following table according to the type of loans (dollar
amounts in thousands):
December 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------------------------------
Commercial $ 62,399 $ 55,948 $ 54,994 $ 48,675 $ 48,584
Agricultural 16,792 15,264 14,139 13,774 14,522
Real estate, construction 1,187 1,192 2,341 2,026 2,243
Real estate, mortgage 56,475 53,447 46,306 46,562 45,861
Tax exempt, real estate
mortgage 3,735 4,201 5,013 5,377 6,000
Installment, net of
unearned discount 30,359 33,496 32,770 24,144 19,346
Lease financing, net 369 919 1,718 1,293 1,518
Other 335 74 79 117 197
------------------------------------------------------------------------------
$ 171,651 $ 164,541 $ 157,360 $ 141,968 $ 138,271
------------------------------------------------------------------------------
The following loan categories outstanding at December 31, 1995 mature as
follows (dollar amounts in thousands):
After One
Year, But
Amount One Year Within After
Of Loans Or Less Five Years Five Years
---------------------------------------------------------------
Commercial $ 62,399 $ 37,228 $ 19,371 $ 5,800
Agricultural 16,792 11,251 5,193 348
Real estate, construction 1,187 1,164 23 0
---------------------------------------------------------------
$ 80,378 $ 49,643 $ 24,587 $ 6,148
===============================================================
The interest rates on the amount due after one year are fixed or adjustable
as follows (dollar amounts in thousands):
Fixed Adjustable
------------------------------
Commercial $ 19,926 $ 5,245
Agricultural 5,014 527
Real estate, construction 23 0
------------------------------
$ 24,963 $ 5,772
==============================
During 1995, commercial loans increased by $6,451,000, construction real
estate loans decreased by $5,000, mortgage real estate loans increased by
$3,028,000 (after approximately $3,000,000 were sold to the secondary market)
and net installment loans decreased by $3,137,000. Management continues to
search for quality growth in all loan categories. The Company's focus on, and
expertise in, the secondary market for real estate loans increased
substantially over the past three years and is expected to continue as a
profitable, expanding line of business in the future.
We believe that some competitors are extending loans that exceed prudent
loan-to-value ratios and are offering terms, rates, and conditions that are
imprudent this late in the current economic cycle. Asset quality, however,
remains a priority for the Company as management believes that strong asset
quality is the foundation for strength in any financial institution and
future growth and profitability is dependent upon the ability to maintain and
enhance that quality.
Loan Risk Elements Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning the aggregate amount of
nonperforming loans. Nonperforming loans comprise (a) loans accounted for on
a nonaccrual basis; (b) accruing loans contractually past due 90 days or more
as to interest or principal payments (but not included in the nonaccrual
loans in (a) above; and (c) other loans whose terms have been renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower (exclusive of loans
in (a) or (b) above) (dollar amounts in thousands):
December 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------------------------------
Loans accounted for on
a nonaccrual basis $ 883 $ 1,201 $ 1,705 $ 1,623 $ 2,004
Accrual loans
contractually past due
90 days or more 111 191 133 94 435
Loans whose terms have
been renegotiated to
provide a reduction
or deferral of
interest or principal
because of a
deterioration in the
financial position of
the borrower 0 0 0 0 650
Total nonaccrual loans were $883,000 at December 31, 1995, a decrease of
$318,000 or 26% from December 31, 1994. Total nonaccrual and accrual loans
contractually past due 90 days or more were $994,000 at December 31, 1995, a
decrease of $398,000 or 29% from a year earlier.
When the full collectibility of principal or interest on any loan is
considered doubtful, previously accrued but uncollected interest remains as
accrued if the principal and interest is protected by sound collateral value
based upon a current independent, qualified appraisal. In practice, in the
vast majority of cases, the interest accrued but uncollected on loans
transferred to nonaccrual status is charged-off at the time of transfer.
Interest income in the amount of $74,000 would have been earned on the
nonaccrual loans had they been performing loans in accordance with their
original terms during 1995. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 1995
and 1994 was $26,000 and none, respectively.
As of December 31, 1995, the Company had loans totaling $4,674,000 in
addition to those listed as nonaccrual, past due or renegotiated that were
identified by the Banks' internal asset rating systems as classified assets.
This represents a $1,343,000 or 40% increase from 1994. The Company is not
aware of any single loan or group of loans, other than these and those
reflected above, of which full collectibility cannot reasonably be expected.
The Company has $16,792,000 in total agricultural loans outstanding. The
Company does not have any other substantial portion of its loans concentrated
in one or a few industries nor does it have any foreign loans outstanding as
of December 31, 1995. The Company's loans are heavily concentrated
geographically in the Iowa counties of Muscatine and Jefferson.
In general, the agricultural loan portfolio risk is dependent on factors such
as governmental policies, weather conditions, agricultural commodities prices
and the mix of grain and livestock raised. Despite severe, and much
publicized, flooding during 1993 in and around the market areas served by the
Banks the agricultural loan portfolio has not experienced significant quality
deterioration. Commercial loan risk can also vary widely from period to
period and is particularly sensitive to changing business and economic
conditions as well as governmental policies. Consumer loan risk is
substantially influenced by employment opportunities in the markets served by
the Company.
Other real estate owned was $106,000, $187,000, and $30,000 at December 31,
1995, 1994, and 1993, respectively.
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in
the form of provisions for loan losses. Loan losses or recoveries are charged
or credited directly to the allowance for loan losses. The provision for loan
losses is determined based upon an evaluation of a number of factors by
management of the Banks including (i) loss experience in relation to
outstanding loans and the existing level of the allowance for loan losses,
(ii) a continuing review of problem loans and overall portfolio quality,
(iii) regular examinations and appraisals of loan portfolios conducted by
federal supervisory authorities, and (iv) current and expected economic
conditions. The allowance for loan losses decreased $659,000 during 1991
largely due to charging off specific problem loans which were reserved for in
1990. In 1992 the allowance for loan losses increased $143,000 as provisions
for loan losses and recoveries exceeded charge-offs. The allowance for loan
losses decreased $80,000, $128,000 and $217,000 in 1993, 1994, and 1995,
respectively, as net charge-offs exceeded provisions for loan losses.
Management of the Banks continues to review the loan portfolios and believes
the allowance for loan losses is adequate to absorb losses of existing loans
which may become uncollectible.
The Banks allocate the allowance for loan losses according to the amount
deemed to be necessary to provide for possible losses being incurred within
the categories of loans set forth in the table below. The amount of such
components of the allowance for loan losses and the ratio of loans in such
categories to total loans outstanding are as follows (dollar amounts in
thousands):
1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------
Allowance Ratio Allowance Ratio Allowance Ratio AlLowance Ratio Allowance Ratio
For To For To For To For To For To
Loan Loans Loan Loans Loan Loans Loan Loans Loans Loans
Losses Total Losses Total Losses Total Losses Total Losses Total
-----------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Mortgage $ 124 32.90% $ 141 32.49% $ 161 29.43% $ 259 32.74% $ 155 33.17%
Construction 0 0.69 0 0.72 0 1.49 0 1.42 0 1.62
Commercial 1,342 36.35 1,714 34.05 1,873 34.95 1,935 34.46 1,913 35.28
Agricultural 133 9.78 282 9.28 308 8.99 306 10.08 313 10.50
Installment 710 17.69 389 20.36 312 20.82 234 16.61 210 13.99
Lease financing and other 0 0.41 0 0.56 0 1.13 0 0.91 0 1.10
Tax exempt, real estate mortgage 0 2.18 0 2.55 0 3.19 0 3.78 0 4.34
----------------------------------------------------------------------------------------
$ 2,309 100.00% $ 2,526 100.00% $ 2,654 100.00% $ 2,734 100.00% $ 2,591 100.00%
=========================================================================================
Deposits
Total average deposits decreased 1.4% in 1995, increased 1.3% in 1994, and
increased 5.1% in 1993. The average deposits are summarized below (dollar
amounts in thousands):
1995 1994 1993
-------------------------------------------------------------------------
Average Average Average
Interest Interest Interest
Expense Expense Expense
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------
Noninterest-bearing
demand $ 31,290 - % $ 30,829 - % $ 28,111 - %
Savings 23,501 2.6 24,550 2.4 24,209 2.6
Interest-bearing
demand 70,033 3.3 77,064 2.8 75,938 2.8
Time 104,657 5.5 100,319 4.5 101,543 4.6
---------- ----------- ----------------
Total deposits $ 229,481 $ 232,762 $ 229,801
========== =========== ----------------
The maturity of time certificates of deposit of $100,000 or more outstanding at
December 31, 1995 is as follows (dollar amounts in thousands):
Maturing In
- ---------------------------------------------------------------------------
Total Less Than 3 to 6 6 to 12 Over 12
Outstanding 3 Months Months Months Months
- ---------------------------------------------------------------------------
$ 22,445 $ 10,023 $ 3,687 $ 4,894 $ 3,841
===========================================================================
Note Payable - Bank Stock Debt
The note payable, bank stock debt, was incurred in mid 1984 to acquire all of
the stock in the Fairfield subsidiary bank. The maximum outstanding balance is
as follows (dollar amounts in thousands):
Year Ended December 31,
-----------------------------------------------
1995 1994 1993
-----------------------------------------------
Maximum outstanding during the year $ 0 $ 1,300 $ 3,000
Weighted average interest rate at the end
of the year 0 % 0 % 6.0%
At December 31, 1995, the Company has no outstanding note payable. The Company
maintains a line-of-credit totaling $1,000,000 at Marshall & Ilsley Bank,
Milwaukee, Wisconsin collateralized by the outstanding stock of First National
Bank of Muscatine and First National Bank in Fairfield.
RESULTS OF OPERATIONS:
Changes in Fully Diluted Earnings Per Share
The increase in fully diluted earnings per share between 1995 and 1994 amounted
to $.21. The major sources of change are presented in the following table:
1995 1994
--------------------------------
Net income per share, prior year $ 4.90 $ 5.21
--------------------------------
Increase (decrease) attributable to:
Net interest income 0.32 0.31
Provision for loan losses 0.03 (0.02)
Investment securities gains and losses, net (0.01) 0.02
Other income (0.17) (0.04)
Salaries and employee benefits (0.03) (0.29)
FDIC insurance 0.44 0.05
Other operating expenses 0.04 0.30
Income taxes (0.32) 0.03
Change in average common shares outstanding (0.09) (0.16)
Cumulative effect of a change in accounting principle 0 (0.51)
--------------------------------
Net change 0.21 (0.31)
--------------------------------
Net income per share, current year $ 5.11 $ 4.90
================================
Net Interest Income
The following table sets forth a summary of the changes in interest earned and
paid resulting from changes in volume and rates. Changes attributable to both
rate and volume which cannot be segregated have been allocated proportionately
to the change due to volume and the change due to rate (dollar amounts in
thousands and income on a fully taxable equivalent basis using statutory rates
in effect for year presented):
Year Ended December 31, 1995 Year Ended December 31, 1994
---------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
--------------------- --------------------
Average Average Total Average Average Total
Balance Rate Change Balance Rate Change
---------------------------------------------------------------------
Interest income:
Taxable loans $ 718 $ 1,105 $ 1,823 $ 1,232 $ (783) $ 449
Taxable investment
securities held to
maturity (505) 77 (428) (1,542) (14) (1,556)
Taxable investment
securities available for
sale (148) 146 (2) 1,068 12 1,080
Nontaxable investment
securities and loans 237 (55) 182 224 (139) 85
Federal funds sold 102 172 274 (162) 88 (74)
---------------------------------------------------------------------
Total interest
income 404 1,445 1,849 820 (836) (16)
---------------------------------------------------------------------
Interest expense:
Interest-bearing deposits (24) 1,487 1,463 11 (162) (151)
Other borrowings 140 45 185 11 14 25
Note payable (49) 0 (49) (108) 5 (103)
---------------------------------------------------------------------
Total interest
expense 67 1,532 1,599 (86) (143) (229)
---------------------------------------------------------------------
Change in net
interest earnings $ 337 $ (87) $ 250 906 $ (693) $ 213
=====================================================================
Nonaccruing loans are included in the average balance. Loan fees are not
material.
Provision for Loan Losses
The following table summarizes loan balances at the end of each year; changes in
the allowance for loan losses arising from loans charged off and recoveries on
loans previously charged off by loan category; and the provisions for loan
losses which have been charged to operating expense (dollar amounts in
thousands):
Year Ended December 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------------------------------------------------
Balance of allowance for loan
losses at beginning of year $ 2,526 $ 2,654 $ 2,734 $ 2,591 $ 3,250
-------------------------------------------------------------
Loans charged off:
Commercial and agricultural 240 189 130 241 1,274
Mortgage 27 2 25 22 114
Installment 171 227 117 129 90
-------------------------------------------------------------
Total loans charged
off 438 418 272 392 1,478
-------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial and agricultural 120 188 95 240 276
Mortgage 23 15 22 4 19
Installment 33 22 19 32 21
-------------------------------------------------------------
Total recoveries 176 225 136 276 316
-------------------------------------------------------------
Net loans charged off 262 193 136 116 1,162
-------------------------------------------------------------
Less adjustments 0 0 0 19 0
-------------------------------------------------------------
Provisions for loan losses charged
to operating expense 45 65 56 278 503
-------------------------------------------------------------
Balance at end of year $ 2,309 $ 2,526 $ 2,654 $ 2,734 $ 2,591
=============================================================
Average taxable loans outstanding $ 162,432 $ 153,547 $ 139,292 $ 132,214 $ 132,915
=============================================================
Ratio of net loan charge-offs to
average taxable loans out-
standing 0.16% 0.13% 0.10% 0.09% 0.87%
Allowance for loan losses as a
percentage of average taxable
loans outstanding 1.42 1.65 1.91 2.07 1.95
Coverage of net charge-offs by
year-end allowance for loan
losses 8.81 13.09 19.51 23.57 2.23
Operating Expenses
A continuing objective of the Company's management is to contain overhead costs
while maintaining optimal productivity, efficiency, and quality service.
Operating expenses decreased $264,000 or 3.7% from 1994 to 1995 after decreasing
$34,000 the previous year. Salaries and employee benefits increased only $17,000
or .4% in 1995. Occupancy and equipment expenses decreased $10,000 or 1.0%,
computer costs decreased $42,000 or 11% due in part to a refund from prior
years, FDIC insurance costs dropped $260,000 or 50% due to refunds of previously
paid premiums coupled with an 80% reduction in premiums instituted by the FDIC
during 1995, and legal fees declined $5,000 or 19.2%. Other operating expenses
increased $7,000 or .8% due to management's emphasis on controlling expenses.
Most expense categories were also reduced or held to modest increases in 1994
and 1993.
Net Income
The Company's consolidated net income for the three years is as follows (dollar
amounts in thousands):
Year Ended December 31,
------------------------------------
1995 1994 1993
------------------------------------
Net income $ 3,050 $ 2,875 $ 2,968
====================================
As shown above, net income increased $175,000 or 6.1% in 1995. This increase
resulted from improvement in net interest income of $188,000 or 1.9%,
reduction of $20,000 or 30.8% in provisions for loan losses, a reduction in
other income totaling $106,000 or 6.3% despite an increase in trust income of
$35,000 or 12.8%, a decrease of $264,000 or 3.7% in operating expenses, and
an increase of $191,000 or 14.6% in income taxes.
As shown above, net income decreased $93,000 in 1994. This decrease resulted
primarily from improvement in 1994 net interest income of $184,000 or 1.9%,
and the $300,000 cumulative effect of a change in accounting principle
recognized in 1993. Most other income and expense categories were quite
similar to the prior year or discussed in the preceding section of this
report.
Selected Consolidated Ratios
Year Ended December 31,
--------------------------------------
1995 1994 1993
--------------------------------------
Percentage of net income to:
Average stockholders' equity 13.97% 14.82% 16.95%
Average total assets 1.18 1.12 1.17
Percentage of average stockholders' equity to average total assets 8.44 7.54 6.89
Percentage of note payable to equity at year-end 6.93
Dividends declared as a percentage of net income 31.31 27.55 22.07
Before the cumulative effect of a change in accounting principle the percentage
of net income to average stockholders' equity and average total assets for 1993
were 15.24% and 1.05%, respectively.
Interest Rate Sensitivity and Risk Management
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitivity" refers to those assets
and liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
The following table shows the interest rate sensitivity position at several
repricing intervals (dollar amounts in thousands):
Repricing Maturities at December 31, 1995
------------------------------------------------------------------------------------
Less Than 3-12 1-5 More Than Noninterest
3 Months Months Years 5 Years Bearing Total
------------------------------------------------------------------------------------
Assets:
Loans $ 53,947 $ 30,846 $ 71,040 $ 14,935 $ 883 $ 171,651
Investment
securities 6,976 10,988 35,844 5,950 970 60,728
Other earnings
assets 24,700 0 0 0 0 24,700
Nonearning
assets 0 0 0 0 15,751 15,751
------------------------------------------------------------------------------------
Total
assets $ 85,623 $ 41,834 $ 106,884 $ 20,885 $ 17,604 $ 272,830
------------------------------------------------------------------------------------
Liabilities and
Equity:
Deposits $ 46,284 $ 92,155 $ 62,431 $ 0 $ 35,083 $ 235,953
Securities
sold
under
agreements
to 5,309 938 567 0 0 6,814
repurchase
Other
purchased
funds 1,525 0 2,200 1,198 0 4,923
Other 0 0 0 0 2,107 2,107
liabilities
Equity 0 0 0 0 23,033 23,033
------------------------------------------------------------------------------------
Total
liabilities
and equity $ 53,118 $ 93,093 $ 65,198 $ 1,198 $ 60,223 $ 272,830
------------------------------------------------------------------------------------
Repricing gap $ 32,505 $ (51,259) $ 41,686 $ 19,687 $ (42,619) $ 0
Cumulative
repricing gap 32,505 (18,754) 22,932 42,619 0 0
The data in this table incorporates the contractual repricing characteristics as
well as an estimate of the actual repricing characteristics of the Company's
assets and liabilities. Based on the estimate, twenty percent of the savings and
NOW accounts are reflected in the less than 3 months category, thirty percent in
the 3-12 months category, with the remainder in the 1-5 year category. Also,
twenty-five percent of the money market accounts are reflected in the less than
3 months category with the remainder in the 3-12 months category.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative repricing gap
exists when total interest-bearing liabilities are in excess of interest-earning
assets. Generally a positive repricing gap will result in increased net interest
income in a rising rate environment and decreased net interest income in a
falling rate environment. A negative repricing gap tends to produce increased
net interest income in a falling rate environment and decreased net interest
income in a rising rate environment. At December 31, 1995, using the estimates
discussed above, rate sensitive liabilities exceeded rate sensitive assets
within a one year period by $18,754,000 and, thus, the Company is positioned to
benefit from a fall in interest rates within the next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change.
Because the repricing gap position does not capture these risks, management
utilizes simulation modeling to measure and manage the rate sensitivity exposure
of earnings. The Company's simulation model provides a projection of the effect
on net interest income of various interest rate scenarios and balance sheet
strategies.
Liquidity
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are varied,
but include general economic conditions, asset/liability mix, bank reputation,
future FDIC funding needs, changes in regulatory environment, and credit
standing. Assets which provide liquidity consist principally of loans, cash and
due from banks, investment securities, and short-term investments such as
federal funds. Maturities of securities held for investment purposes and loan
payments provide a constant flow of funds available for cash needs. Liquidity
also can be gained by the sale of loans or securities, which were previously
designated as available for sale, prior to maturity. Interest rates, relative to
the rate paid by the security or loan sold, along with the maturity of the
security or loan, are the major determinates of the price which can be realized
upon sale.
The stability of the Comapny's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer deposits
tend to be small in size, diversified across a large base of individuals, and
are government insured to the extent permitted by law. Total deposits under
$100,000 at December 31, 1995 were $213,508,000 or 90% of total deposits and 78%
of total liabilities and equity.
The Company's note payable was completely paid off during 1994. Equity has
increased in significance as a funding source, increasing $2,361,000 during
1995. At year-end total federal funds sold and securities maturing within one
year were $42,664,000 or 15.6% of total assets. Both short-term and long-term
liquidity are actively reviewed and managed.
At December 31, 1995, securities available for sale totaling $60,728,000
included $471,000 of gross unrealized gains and $107,000 of gross unrealized
losses. These securities may be sold in whole or part to increase liquid assets,
reposition the investment portfolio, or for other purposes as defined by
management.
Capital
Stockholders' equity increased $2,361,000 (11.4%) in 1995. Dividends to
stockholders were declared at a rate of $1.60, $1.35, and $1.15 per share during
the years ended December 31, 1995, 1994, and 1993, respectively.
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 more consistent system for
comparing capital positions of financial institutions and to take into account
the different 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 December 31, 1995 with the minimum
requirements is presented below.
Minimum
Require-
Actual ments
-------------------------
Tier 1 risk-based capital 13.75% 4.00%
Total risk-based capital 15.12 8.00
Tier 1 leverage ratio 8.53 3.00
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services. In the current interest rate environment, liquidity and the maturity
structure of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels.
Effect of FASB Statements
The Financial Accounting Standards Board has issued Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" which becomes effective for years beginning after December 15,
1995. The Statement generally requires long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment is recognized. Management
believes that adoption of this Statement will not have a material effect on the
Company's consolidated financial statements.
The Financial Accounting Standards Board has issued Statement No. 122
"Accounting for Mortgage Servicing Rights" which becomes effective for years
beginning after December 15, 1995. This Statement amends FASB Statement No. 65
"Accounting for Certain Mortgage Banking Activities" to require that an entity
recognize as separate assets rights to service mortgage loans for others,
however those rights are acquired. An entity that acquires mortgage servicing
rights retained should allocate the total cost of the mortgage loans to the
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values. If it is not practicable to estimate the fair values separately,
the entire cost of purchasing or originating the loans should be allocated to
the mortgage loans (without the mortgage servicing rights) and no cost should be
allocated to the mortgage servicing rights. This Statement also requires that an
entity assess its capitalized mortgage servicing rights for impairment based on
the fair value of those rights. Neither the Company nor the Banks have addressed
the potential future impact of this Statement on the consolidated financial
statements.
Fourth Quarter Results
In the fourth quarter of 1995, net income was $750,000, compared with $670,000
in the same period of 1994. The net interest income during the fourth quarter of
1995 was $2,539,000 compared with $2,458,000 for the fourth quarter of 1994. The
provision for possible loan losses was $15,000 in the fourth quarter of 1995
versus $20,000 in 1994. Other income totaled $444,000 and $352,000 during the
fourth quarter of 1995 and 1994, respectively. Other operating expenses of
$1,769,000 in the last quarter of 1995 compare with $1,788,000 for the last
quarter of 1994. Income tax expense increased to $449,000 for the final quarter
of 1995 versus $332,000 for the last quarter of 1994.
IOWA FIRST BANCSHARES CORP.
DIRECTORS AS OF DECEMBER 31, 1995
George A. Shepley Donald R. Heckman
Chairman of the Board, President and Factory Manager - Retired
CEO H.J. Heinz Co.
Iowa First Bancshares Corp.
Chairman of the Board Dean H. Holst
First National Bank of Muscatine Director
Chairman of the Board Iowa First Bancshares Corp.
First National Bank in Fairfield Director, President and CEO
First National Bank in Fairfield
Kim K. Bartling
Director, Senior Vice President, CFO and D. Scott Ingstad
Treasurer, Iowa First Bancshares Corp. Director
Director, Senior Vice President and CFO Iowa First Bancshares Corp.
First National Bank of Muscatine Director, President and CEO
Director First National Bank of Muscatine
First National Bank in Fairfield
Victor G. McAvoy
Roy J. Carver, Jr. President
Chairman of the Board Muscatine Community College
Carver Pump Company
Carl J. Spaeth
Larry L. Emmert President
President Cabe Corporation
Hoffmann, Inc.
Beverly J. White
Craig R. Foss Director and Vice President
President Quality Foundry Co.
Foss, Kuiken, and Gookin, P.C.
OFFICERS AS OF DECEMBER 31, 1995
George A. Shepley Patricia R. Thirtyacre
Chairman of the Board Corporate Secretary
President
CEO Sandra K. Roenfeldt
Internal Audit Manager
Kim K. Bartling
Senior Vice President Teresa A. Carter
Chief Financial Officer Assistant Auditor
Treasurer
IOWA FIRST BANCSHARES CORP.
Subsidiary Bank Directors as of December 31, 1995
FIRST NATIONAL BANK OF MUSCATINE FIRST NATIONAL BANK IN FAIRFIELD
George A. Shepley George A. Shepley
Chairman of the Board, President and CEO Chairman of the Board, President and CEO
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Chairman of the Board Chairman of the Board
First National Bank of Muscatine First National Bank of Muscatine
Chairman of the Board Chairman of the Board
First National Bank in Fairfield First National Bank in Fairfield
D. Scott Ingstad Dean H. Holst
Director Director
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Director, President and CEO Director, President and CEO
First National Bank of Muscatine First National Bank in Fairfield
Kim K. Bartling Kim K. Bartling
Director, Senior Vice President, CFO Director, Senior Vice President,
and Treasurer CFO and Treasurer
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Director, Senior Vice President & CFO Director, Senior Vice President & CFO
First National Bank of Muscatine First National Bank of Muscatine
Director Director
First National Bank in Fairfield First National Bank in Fairfield
Larry L. Emmert Stephen R. Cracker
President Director, Executive Vice President
HOFFMANN, Inc. First National Bank in Fairfield
Donald R. Heckman Craig R. Foss
Factory Manager - Retired Attorney at Law
H.J. Heinz Co. Foss, Kuiken & Gookin PC
Victor G. McAvoy Thomas S. Gamrath
President Vice President & Treasurer
Muscatine Community College Gamrath-Doyle & Associates, Inc.
Carl J. Spaeth Charles A. Handy, DDS
President
Cabe Corporation Donald L. Johnson
Farmer
Beverly J. White
Director and Vice President H. Roy Lamansky
Quality Foundry Co. Jefferson County Board of Supervisors
Marvin L. Nelson
President
The Nelson Company, Inc.