IOWA FIRST BANCSHARES CORP.
ANNUAL REPORT
DECEMBER 31, 1997
IOWA FIRST BANCSHARES CORP.
STOCKHOLDER INFORMATION AS OF DECEMBER 31, 1997
Market Makers
A market for Iowa First Bancshares Corp. common stock is made by the brokerage
firms of Piper Jaffray, Inc. and Howe Barnes Investments, Inc.
Stock Prices Information
The table below shows the reported high and low bid prices of the common stock
during the years ended December 31, 1997 and 1996. The stock prices listed below
were obtained from the market makers or, as of each year-end, an independent
appraisal of the stock, if higher. All stock prices reflect a three-for-one
stock split which occurred in July 1996.
1997 High Low
- ------------------------ - -------- - ------
First Quarter 25.50 20.50
Second Quarter 27.50 25.50
Third Quarter 27.50 27.50
Fourth Quarter 30.00 27.00
1996 High Low
- ------------------------ - -------- - -------
First Quarter 16.67 16.50
Second Quarter 16.92 16.67
Third Quarter 16.25 16.25
Fourth Quarter 20.00 16.25
Annual Meeting of Stockholders
The Annual Meeting of the Stockholders of Iowa First Bancshares Corp. will be
held at 2:00 p.m., April 16, 1998 at the corporate offices located at 300 East
Second Street, Muscatine, Iowa 52761. Stockholders are encouraged to attend.
Annual Report on Form 10-K
Copies of the Iowa First Bancshares Corp. annual report on Form 10-K and
exhibits, filed with the Securities and Exchange Commission, are available to
stockholders without charge by writing:
Iowa First Bancshares Corp.
300 East Second Street
Muscatine, Iowa 52761
Attention: Patricia R. Thirtyacre, Corporate Secretary
Investor Information
Stockholders, investors and analysts interested in additional information may
contact Mr. Kim K. Bartling, Executive Vice President, Chief Operating Officer
and Treasurer (319) 262-4216 or Mr. George A. Shepley, Chairman and Chief
Executive Officer (319) 262-4200.
To Our Shareholders:
Earnings for the year 1997 totaled $3,280,000 or $1.82 per share. This
represents a $185,000 or 5.3% decrease from 1996 net income. Consolidated net
income for the quarter ended December 31, 1997, totaled $834,000 compared to
$815,000 during the same quarter last year.
At first glance, the decrease in net income from 1996 to 1997 may appear
troubling. Upon further analysis, however, it is clear that 1997 results were
quite acceptable and included the building blocks for future growth. Record
earnings in 1996 included $150,000 of after-tax nonrecurring income. Conversely,
in 1997, net income was reduced by approximately $100,000 due to expenses
related to a problem loan; management believes these expenses may be partially
or wholly recovered in a future year. Adjusting for these unusual items the past
two years, net income increased slightly in 1997.
In our continuing efforts to better serve our current and potential customers,
in May 1997, a new branch facility was opened at Fairfield, Iowa. The building,
which is located in a high traffic area in front of the local Wal-Mart store,
contains several private offices for lending staff and management as well as
teller and deposit services, including several drive-through lanes.
In June, we also opened a branch inside the new Wal-Mart Superstore located at
Muscatine, Iowa. Our branch and the Wal-Mart Superstore were the first of their
kind in Iowa. Additionally, another new branch facility, which includes
drive-through banking services and is located across the alley from our main
Muscatine banking headquarters, was completed in the fall of 1997. This branch
replaced the previous downtown branch. We are quite pleased not only with the
location, quality, and usefulness of these new facilities but also the talented,
customer-focused, experienced, and dedicated employees staffing them.
During 1997, significant resources were also devoted to expanding and enhancing
our sales culture from one of relatively passive, customer order processing to
one of active, consultative employee interactions with the customer so as to
better serve the customer's financial needs and goals. Other major expenditures
included installing and becoming proficient with new item processing equipment
and a new local area network computer system as well as additional computer
hardware and software.
These major physical improvements and increased sales focus are necessary to
position our banks for the future in meeting the intense competition that banks
face for loans, deposits, and other banking services. These enhancements, while
necessary, do come at a price. Our efficiency ratio of 61.1% in 1997 compares to
56.2% in 1996. More specifically, occupancy expenses increased $120,000 or 20.7%
and equipment expenses increased $99,000 or 26.5%. Overall, operating expenses
increased $690,000 which is 10.1% greater than the prior year. This higher
expense total is, in large measure, attributable to the new infrastructure added
or improved upon in 1997 as well as training for our employees to allow for
future growth of the Company's assets and earnings. Important to remember is the
fact that operating expenses in 1997 were only $372,000 or 5.2% greater than
1993 operating expenses, however, December 31, 1993, total assets of Iowa First
Bancshares Corp. were $48,380,000 or 18.8% less than year-end 1997. Net income
before a change in accounting principle increased 22.9% over the same time
period. Thus, the growth rate in assets over this time period has outpaced the
growth rate in operating expenses by 3.6 to 1, and the growth rate in net income
has outpaced the growth rate in operating expenses by 4.4 to 1.
The earnings noted above resulted in return on average equity for the year of
12.3% contrasted to 14.5% for the prior year. Return on average assets was 1.13%
for 1997 compared to 1.26% in 1996. Please refer to the Management's Discussion
and Analysis section of this report for a more detailed analysis of important
issues and trends.
We are very pleased to note that total assets of the Company exceeded
$300,000,000 for the first time during 1997 and also ended the year above this
level. Total assets grew $25,322,000 during 1997, a 9.0% increase. Of particular
importance to our success in 1997 was an increase in loan volume. Net loans of
$208,683,000 at year-end increased $25,245,000 or 13.8% over the prior year.
This strong loan growth occurred despite intense competition for all types of
loans. Loan quality is good as evidenced by total nonaccrual loans of $1,144,000
which was less than .6% of net loans at December 31, 1997. Net loans charged off
represented only .11% of average taxable loans outstanding during 1997. Total
deposits and repurchase agreements at December 31, 1997, were $247,041,000; this
was $3,236,000 higher than the previous year total. More emphasis was placed on
wholesale funding from the Federal Home Loan Bank to assist in management of
interest rate risk as evidenced by the increase of nearly $19,000,000 to
$26,468,000 in this funding category. Total shareholder equity at the end of
1997 was $28,625,000, an increase of 13.6% over 1996.
The bid price of Iowa First Bancshares Corp. stock at December 31, 1997, was
$28.75, a 43.8% increase from the prior year-end. This price, which reflects the
three-for-one stock split that occurred in July 1996, represents a price to book
value of 184% and a price to trailing twelve months earnings of 15.8 times.
Please refer to the following graph for a summary of the stock price performance
over the last few years.
The omitted graphical presentation reflected the stock price per share for the
period December 31, 1993 through 1997. The data points used in the graph were as
follows:
1993 1994 1995 1996 1997
----------------------------------------------
Dollars Per Share ....... $11.33 $13.00 $16.67 $20.00 $28.75
All prices are stock split adjusted and are the highest outside broker bid or,
beginning 12/31/93, the appraisal price if higher.
The Board of Directors declared cash dividends during 1997 of $1,379,000, or
17.9% greater than 1996, further evidence of the Directors' commitment to
enhance the return to stockholders consistent with prudent administration of the
Company. The graph below summarizes the cash dividend declared per share for the
past several years.
The omitted graphical presentation reflected the cash dividends per share for
the period December 31, 1993 through 1997. The data points used in the graph
were as follows:
1993 1994 1995 1996 1997
-----------------------------------------------
Cash dividends per share $.03833 $0.4500 $0.5333 $0.6800 $0.7800
All figures are stock split adjusted and reflected the three-for-one stock split
which occurred in July 1996.
The total annual investment return (change in stock price plus dividends) for
the past one, three, and five-year periods has been 48%, 33%, and 32%,
respectively.
As we look to 1998, there is, as always, much uncertainty in forecasting the
future direction of interest rates and the economy. The 1998 budgets for the
Company and its subsidiaries project relatively stable market interest rates and
a positive business climate. If rates or the economy vary significantly from
these assumptions, it will become more challenging to maintain or increase net
interest income, and consequently, net income.
Increasing our market share and delivery systems is extremely important to the
long-term success of the Company. We are constantly looking for new, exciting,
and profitable business opportunities either through purchasing existing
organizations or expanding upon our internal strengths. Given the current high
prices of acquisition targets in the banking industry, we are focusing our
efforts on expanding our existing franchise and purchasing treasury stock as it
becomes available from time-to-time on the market. We believe such investing in
our own Company to be a prudent use of excess cash flow which should help
enhance shareholder value.
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) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans ........................................................ $208,683,000 $183,438,000 $169,342,000
Allowance for loan losses ........................................ 2,604,000 2,803,000 2,309,000
Deposits and securities sold under agreements to repurchase ...... 247,041,000 243,805,000 242,767,000
Federal Home Loan Bank advances .................................. 26,468,000 7,473,000 3,398,000
Total assets ..................................................... 305,783,000 280,461,000 272,830,000
Stockholders' equity ............................................. 28,625,000 25,198,000 23,033,000
STATEMENT OF INCOME (for the year)
Net interest income .............................................. $ 10,656,000 $ 10,434,000 $ 9,891,000
Provision for loan losses ........................................ 4,000 160,000 45,000
Other income ..................................................... 1,696,000 1,764,000 1,576,000
Other operating expense .......................................... 7,547,000 6,857,000 6,877,000
Income before income taxes ....................................... 4,801,000 5,181,000 4,545,000
Income taxes ..................................................... 1,521,000 1,716,000 1,495,000
Net income ....................................................... 3,280,000 3,465,000 3,050,000
PER SHARE DATA
Net income, basic ................................................ $ 1.86 $ 2.02 $ 1.77
Net income, diluted .............................................. 1.82 1.95 1.71
Book value at year-end ........................................... 15.62 14.48 13.42
Stock price at year-end (greater of bid or appraised price) ...... 28.75 20.00 16.67
Cash dividends declared during the year .......................... 0.78 0.68 0.53
Cash dividends declared as a percentage of net income ............ 43% 35% 31%
KEY RATIOS
Return on average assets ......................................... 1.13% 1.26% 1.18%
Return on average stockholders' equity ........................... 12.33 14.46 13.97
Net interest margin-tax equivalent ............................... 4.11 4.25 4.28
Average stockholders' equity to average assets ................... 9.16 8.75 8.44
Total capital to risk-weighted assets ............................ 14.44 14.20 15.12
Efficiency ratio (all operating expenses, excluding the
provision for loan losses, divided by the sum of net interest
income and other income) ...................................... 61.10 56.21 59.97
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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 1997, 1996, and 1995. 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, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997, 1996, and 1995, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 23, 1998
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Cash and due from banks ............................................................... $ 12,639,000 $ 14,363,000
Interest-bearing deposits at financial institutions ................................... 87,000 551,000
Investment securities available for sale (Note 2) ..................................... 65,496,000 67,622,000
Federal funds sold and other overnight investments .................................... 9,795,000 7,263,000
Loans, net (Note 3) ................................................................... 208,683,000 183,438,000
Bank premises and equipment, net (Note 4) ............................................. 6,055,000 4,526,000
Accrued interest receivable ........................................................... 2,501,000 2,333,000
Other assets .......................................................................... 527,000 365,000
---------------------------
Total assets ............................................................ $305,783,000 $280,461,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ............................................................. $ 38,212,000 $ 43,445,000
Interest-bearing ................................................................ 204,570,000 194,907,000
---------------------------
Total deposits (Note 5) ................................................. 242,782,000 238,352,000
Securities sold under agreements to repurchase (Note 6) ............................ 4,259,000 5,453,000
Federal Home Loan Bank advances (Note 6) ........................................... 26,468,000 7,473,000
Dividends payable .................................................................. 374,000 331,000
Treasury tax and loan open note (Note 6) ........................................... 1,456,000 1,944,000
Other liabilities .................................................................. 1,819,000 1,710,000
---------------------------
Total liabilities ....................................................... 277,158,000 255,263,000
---------------------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (Note 7)
Preferred stock, stated value of $1.00 per share; shares authorized 1997 and
1996, 500,000; shares issued 1997 and 1996, none ................................ - - - -
Common stock, no par value; shares authorized 1997, 6,000,000; 1996,
2,000,000; shares issued 1997, 1,832,429; 1996, 1,800,000 ....................... 200,000 200,000
Additional paid-in capital ......................................................... 4,440,000 3,872,000
Retained earnings .................................................................. 23,522,000 21,621,000
---------------------------
28,162,000 25,693,000
Unrealized gains on securities available for sale, net ............................. 463,000 81,000
Less cost of common shares acquired for the treasury, 1997,
none; 1996, 59,452 .............................................................. - - 576,000
---------------------------
Total stockholders' equity .............................................. 28,625,000 25,198,000
---------------------------
Total liabilities and stockholders' equity .............................. $305,783,000 $280,461,000
===========================
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans:
Taxable .................................................. $ 16,464,000 $ 14,981,000 $ 14,322,000
Nontaxable ............................................... 224,000 264,000 322,000
Interest and dividends on investment securities:
Taxable .................................................. 3,246,000 3,237,000 3,189,000
Nontaxable ............................................... 732,000 605,000 520,000
Interest on federal funds sold and other
overnight investments .................................... 480,000 921,000 588,000
Other ....................................................... 12,000 24,000 1,000
----------------------------------------------
Total interest income ............................ 21,158,000 20,032,000 18,942,000
----------------------------------------------
Interest expense:
Interest on deposits ........................................ 9,058,000 8,980,000 8,727,000
Interest on other borrowed funds ............................ 1,444,000 618,000 324,000
----------------------------------------------
Total interest expense ........................... 10,502,000 9,598,000 9,051,000
----------------------------------------------
Net interest income .............................. 10,656,000 10,434,000 9,891,000
Provision for loan losses (Note 3) ............................. 4,000 160,000 45,000
----------------------------------------------
Net interest income after
provision for loan losses ........................ 10,652,000 10,274,000 9,846,000
----------------------------------------------
Other income:
Trust department ............................................ 328,000 340,000 308,000
Service fees ................................................ 975,000 1,017,000 941,000
Investment securities gains, net ............................ - - 4,000 3,000
Other ....................................................... 393,000 403,000 324,000
----------------------------------------------
Total other income ............................... 1,696,000 1,764,000 1,576,000
----------------------------------------------
Operating expenses:
Salaries and employee benefits .............................. 4,276,000 4,077,000 4,012,000
Occupancy expenses, net ..................................... 699,000 579,000 526,000
Equipment expenses .......................................... 472,000 373,000 422,000
Office supplies and postage ................................. 399,000 399,000 371,000
Computer costs .............................................. 414,000 374,000 340,000
FDIC insurance .............................................. 30,000 8,000 265,000
Legal fees .................................................. 55,000 36,000 21,000
Other operating expenses .................................... 1,202,000 1,011,000 920,000
----------------------------------------------
Total operating expenses ......................... $ 7,547,000 $ 6,857,000 $ 6,877,000
----------------------------------------------
Income before income taxes ....................... $ 4,801,000 $ 5,181,000 $ 4,545,000
Income taxes (Note 9) .......................................... 1,521,000 1,716,000 1,495,000
----------------------------------------------
Net income ....................................... $ 3,280,000 $ 3,465,000 $ 3,050,000
==============================================
Weighted average common shares ................................. 1,758,883 1,712,574 1,724,028
Weighted average common and common
equivalent shares, assuming dilution ........................ 1,801,022 1,776,680 1,779,021
Net income per common share:
Basic ....................................................... $ 1.86 $ 2.02 $ 1.77
==============================================
Diluted ..................................................... $ 1.82 $ 1.95 $ 1.71
==============================================
Dividends declared per share ................................... $ 0.78 $ 0.68 $ 0.53
==============================================
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996, and 1995
Unrealized
Gain
(Loss) On
Securities
Common Stock Additional Available Treasury Stock
-------------------- Paid-In Retained For ------------------
Number Amount Capital Earnings Sale, Net Number Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ......... 1,800,000 $200,000 $3,800,000 $17,193,000 $(233,000) 67,197 $288,000 $20,672,000
Net income ...................... - - - - - - 3,050,000 - - - - - - 3,050,000
Cash dividends declared, $.53
per share ..................... - - - - - - (917,000) - - - - (917,000)
Purchase of common stock
for the treasury ............. - - - - - - - - - - 20,040 261,000 (261,000)
Issuance of 3,000 shares of
treasury stock upon
exercise of stock options .... - - - - - - - - - - (3,000) (27,000) 27,000
Change in unrealized (loss) on
securities available for sale,
net .......................... - - - - - - - - 462,000 - - - - 462,000
---------------------------------------------------------------------------------------------
Balance, December 31, 1995 ......... 1,800,000 $200,000 $3,800,000 $19,326,000 $ 229,000 84,237 $522,000 $23,033,000
Net income ...................... - - - - - - 3,465,000 - - - - - - 3,465,000
Cash dividends declared,
$.68 per share ............... - - - - - - (1,170,000) - - - - - - (1,170,000)
Purchase of common stock
for the treasury ............. - - - - - - - - - - 25,500 483,000 (483,000)
Sale of common stock from the
treasury to the ESOP ......... - - - - 50,000 - - - - (4,400) (38,000) 88,000
Issuance of 45,885 shares
of treasury stock upon
exercise of stock options .... - - - - 22,000 - - - - (45,885) (391,000) 413,000
Change in unrealized gain
on securities available
for sale, net ................ - - - - - - - - (148,000) - - - - (148,000)
---------------------------------------------------------------------------------------------
Balance, December 31, 1996 ......... 1,800,000 $200,000 $3,872,000 $21,621,000 $ 81,000 59,452 $ 576,000 $25,198,000
Net income ...................... - - - - - - 3,280,000 - - - - - - 3,280,000
Cash dividends declared,
$.78 per share ............... - - - - - - (1,379,000) - - - - - - (1,379,000)
Purchase of common stock
for the treasury ............. - - - - - - - - - - 8,324 174,000 (174,000)
Sale of common stock
to the ESOP .................. 4,615 - - 120,000 - - - - - - - - 120,000
Issuance of 95,590 shares upon
exercise of stock options .... 27,814 - - 448,000 - - - - (67,776) (750,000) 1,198,000
Change in unrealized gain
on securities available
for sale, net ................ - - - - - - - - 382,000 - - - - 382,000
---------------------------------------------------------------------------------------------
Balance, December 31, 1997 ......... 1,832,429 $200,000 $4,440,000 $23,522,000 $463,000 - - $ - - $28,625,000
=============================================================================================
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 3,280,000 $ 3,465,000 $ 3,050,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from loans sold to FHLMC .................... 572,000 5,526,000 2,972,000
Loans underwritten for FHLMC ......................... (568,000) (5,515,000) (2,962,000)
Gains on loans sold to FHLMC ......................... (4,000) (11,000) (10,000)
Provision for loan losses ............................ 4,000 160,000 45,000
Investment securities gains, net ..................... - - (4,000) (3,000)
Depreciation ......................................... 520,000 376,000 371,000
Deferred income taxes ................................ 46,000 (269,000) 2,000
Amortization of premiums and accretion of discounts
on investment securities, net ...................... 188,000 223,000 251,000
Change in assets and liabilities:
(Increase) in accrued interest ..................... (168,000) (50,000) (245,000)
Net (increase) decrease in other assets ............ (267,000) 212,000 (37,000)
Increase (decrease) in other liabilities ........... (58,000) 99,000 (250,000)
-----------------------------------------------
Net cash provided by operating activities ... 3,545,000 4,212,000 3,184,000
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits at financial institutions ................... 464,000 (551,000) - -
Net (increase) decrease in federal funds sold
and other overnight deposits ......................... (2,532,000) 17,437,000 (21,363,000)
Proceeds from maturities and paydowns of
held to maturity securities .......................... - - - - 13,464,000
Proceeds from sales, maturities, and
paydowns of available for sale securities ............ 26,578,000 21,167,000 11,946,000
Purchase of held to maturity securities ................. - - - - (1,860,000)
Purchase of available for sale securities ............... (24,032,000) (28,514,000) (13,961,000)
Proceeds from sale of other real estate owned ........... - - - - 260,000
Net (increase) in loans ................................. (25,249,000) (14,256,000) (7,372,000)
Purchases of bank premises and equipment ................ (2,049,000) (560,000) (168,000)
------------------------------------------------
Net cash (used in) investing activities ...... $(26,820,000) $ (5,277,000) $(19,054,000)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits . $ (5,233,000) $ 8,369,000 $ (260,000)
Net increase (decrease) in interest-bearing deposits .... 9,663,000 (5,970,000) 7,190,000
Net increase (decrease) in securities sold
under agreements to repurchase ....................... (1,194,000) (1,361,000) 4,566,000
Net increase (decrease) in treasury tax and
loan open note ....................................... (488,000) 419,000 1,525,000
Advances from Federal Home Loan Bank .................... 18,995,000 4,075,000 3,398,000
Cash dividends paid ..................................... (1,336,000) (1,085,000) (1,072,000)
Purchases of common stock for the treasury .............. (174,000) (483,000) (261,000)
Issuance of common stock ................................ 1,318,000 501,000 27,000
------------------------------------------------
Net cash provided by financing activities .... 21,551,000 4,465,000 15,113,000
------------------------------------------------
Net increase (decrease) in cash
and due from banks ........................... (1,724,000) 3,400,000 (757,000)
Cash and due from banks:
Beginning ............................................... 14,363,000 10,963,000 11,720,000
------------------------------------------------
Ending .................................................. $ 12,639,000 $ 14,363,000 $ 10,963,000
================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Information:
Cash payments for:
Interest ............................................. $ 10,460,000 $ 9,596,000 $ 8,890,000
Income taxes ......................................... 1,283,000 1,483,000 1,147,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Securities available for sale adjustment, net ........... 382,000 (148,000) 462,000
Investment securities transferred from held to
maturity portfolio to available for sale
portfolio, at fair value ............................. - - - - 41,603,000
See Notes to Consolidated Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine and First National Bank in
Fairfield. First National Bank of Muscatine has a total of five locations in
Muscatine, Iowa. First National Bank in Fairfield has two locations in
Fairfield, Iowa. Each bank is engaged in the general commercial banking business
and provides full service banking to individuals and businesses, including
checking, savings and other deposit accounts, commercial loans, consumer loans,
real estate loans, safe deposit facilities, transmitting of funds, trust
services, and such other banking services as are usual and customary for
commercial banks.
Significant accounting policies:
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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, including cash items
in process of clearing. Cash flows from demand deposits, NOW accounts, savings
accounts, federal funds sold, interest bearing deposits at financial
institutions, securities sold under agreements to repurchase, Federal Home Loan
Bank advances, treasury tax and loan open note, certificates of deposits, and
loans are reported net.
Cash and due from banks: The Banks are required by federal banking regulations
to maintain certain cash and due from bank reserves. The reserve requirement was
approximately $1,651,000 and $1,625,000 at December 31, 1997 and 1996,
respectively.
Investment securities available for sale: Securities available for sale are
accounted for at fair value and the unrealized holding gains or losses are
presented as a separate component of stockholders' equity, net of their deferred
income tax effect.
Realized gains and losses, determined using the specific-identification method,
are included in earnings.
Declines in the fair value of individual available-for-sale securities below
their cost that are other than temporary would result in write-downs of the
individual securities to their fair value. The related write-downs would be
included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity. There were no investments held to maturity
or for trading purposes as of December 31, 1997 or 1996.
Pursuant to a FASB Special Report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" the Banks
transferred at fair value all investment securities from held to maturity to
available for sale prior to December 31, 1995.
Loans: Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. The Banks record impaired loans at
the present value of expected future cash flows discounted at the loan's
effective interest rate, or as an expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent. A
loan is impaired when it is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement.
The 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.
Direct loan 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.
Trust assets: Trust assets (other than cash deposits) held by the Banks in
fiduciary or agency capacities for its customers are not included in the
accompanying consolidated balance sheets since such items are not assets of the
Banks.
Earnings per share: Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Dilutive earnings per share is arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period. All prior year per share data
has been restated to comply with Financial Accounting Standards Board Statement
No. 128 "Earnings Per Share".
Current accounting developments: The Financial Accounting Standards Board has
issued Statement No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" and Statement No. 127 "Deferral of
the Effective Date of Certain Provisions of Statement No. 125". Statement No.
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. Statement No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The provisions of Statement
No. 125 applicable to servicing of financial assets were effective for servicing
of financial assets occurring after December 31, 1996. Adoption of these
provisions of the Statement did not have a material effect on the Company's
financial statements. The provisions of Statement No. 125 applicable to
transfers of financial assets and extinguishment of liabilities are effective
for transfers and extinguishments occurring after December 31, 1997. Management
believes that adoption of these provisions of the Statement will not have a
material effect on the Company's financial statements.
The Financial Accounting Standards Board has issued Statement No. 130 "Reporting
Comprehensive Income" which is effective for fiscal years beginning after
December 15, 1997. This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The purpose of reporting comprehensive
income is to disclose a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The Company
will be required to disclose comprehensive income. Currently, the Company's
comprehensive income would include net income and the change in unrealized gain
on securities available for sale, net.
The Financial Accounting Standards Board has issued Statement No. 131
"Disclosure about Segments of an Enterprise and Related Information" which is
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Management believes that adoption of this Statement will not have a
material effect on the Company's financial statements.
Note 2. Investment Securities Available For Sale
The amortized cost and fair value of investment securities available for sale as
of December 31, 1997 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------
U.S. Treasury securities ...................... $12,985,000 $ 124,000 $ (10,000) $13,099,000
U.S. government agencies ...................... 18,845,000 189,000 (15,000) 19,019,000
Mortgage-backed securities .................... 9,241,000 48,000 (17,000) 9,272,000
State and political subdivisions .............. 17,437,000 399,000 (7,000) 17,829,000
Corporate obligations ......................... 6,250,000 28,000 (1,000) 6,277,000
---------------------------------------------------
$64,758,000 $ 788,000 $ (50,000) $65,496,000
===================================================
The amortized cost and fair value of investment securities available for sale as
of December 31, 1996 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------
U.S. Treasury securities ............................... $20,985,000 $ 124,000 $ (71,000) $21,038,000
U.S. government agencies ............................... 15,822,000 93,000 (43,000) 15,872,000
Mortgage-backed securities ............................. 9,889,000 11,000 (62,000) 9,838,000
State and political subdivisions ....................... 13,448,000 141,000 (62,000) 13,527,000
Corporate obligations .................................. 7,348,000 8,000 (9,000) 7,347,000
---------------------------------------------------------
$67,492,000 $ 377,000 $ (247,000) $67,622,000
=========================================================
The amortized cost and fair value of investment securities available for sale as
of December 31, 1997, by contractual maturity, are shown below. Most
mortgage-backed securities are included in the one year through five year
maturity category as the vast majority mature within such period. Stock
investments in the Federal Reserve Bank and Federal Home Loan Bank are included
in the due after ten years category.
Amortized Fair
Cost Value
-------------------------
Securities available for sale:
Due in one year or less ..................... $14,910,000 $14,937,000
Due after one year through five years ....... 32,276,000 32,599,000
Due after five years through ten years ...... 11,425,000 11,689,000
Due after ten years ......................... 6,147,000 6,271,000
-------------------------
$64,758,000 $65,496,000
=========================
Investment securities with a carrying value of $20,638,000 and $37,670,000 as of
December 31, 1997 and 1996 are pledged on public deposits, securities sold under
agreements to repurchase, trust deposits and for other purposes as required by
law.
Proceeds from the sale of securities were $7,125,000 during 1997, $1,005,000
during 1996, and $5,507,000 during 1995. All sales were from securities
identified as available for sale. Securities called by the issuer totaled
$1,037,000, $1,600,000, and $356,000, for 1997, 1996, and 1995, respectively.
Gross gains and losses realized on sales in 1997 were $7,000 and $7,000,
respectively. Gross gains and losses realized on sales in 1996 were $4,000 and
none, respectively. Gross gains and losses realized on sales in 1995 were
$30,000 and $27,000, respectively.
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,
-------------------------
1997 1996
-------------------------
Commercial ......................................... $79,968,000 $73,681,000
Agricultural ....................................... 20,494,000 17,555,000
Real estate:
Construction .................................... 2,120,000 2,970,000
Mortgage ........................................ 76,904,000 60,241,000
Tax exempt, mortgage ............................ 3,118,000 3,485,000
Installment ........................................ 28,686,000 29,126,000
Other .............................................. 456,000 209,000
--------------------------
Total loans .......................... 211,746,000 187,267,000
Less:
Allowance for loan losses ....................... 2,604,000 2,803,000
Unearned discount ............................... 459,000 1,026,000
--------------------------
$208,683,000 $183,438,000
==========================
Loans considered to be impaired under the provisions of FAS No. 114, as amended
by FAS No. 118, are as follows:
December 31,
-----------------------
1997 1996
-----------------------
Impaired loans for which an allowance has been provided ........ $ 702,000 $ 254,000
Impaired loans for which no allowance has been provided ........ 442,000 601,000
-----------------------
Total loans determined to be impaired ............ $1,144,000 $ 855,000
=======================
Allowance provided for impaired loans, included in the allowance
for loan losses ............................................. $ 99,000 $ 25,000
=======================
The average recorded investment in impaired loans during 1997 and 1996 was
$1,203,000 and $861,000, respectively. Interest income on impaired loans of
$12,000 and $19,000 was recognized for cash payments received in 1997 and 1996,
respectively.
Nonaccruing loans totaled $1,144,000 and $855,000 at December 31, 1997 and 1996,
respectively. Interest income in the amount of $90,000, $66,000, and $74,000
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, 1997,
1996, and 1995, respectively. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 1997,
1996, and 1995 totaled $12,000, $19,000, and $26,000, respectively.
Changes in the allowance for loan losses are summarized as follows:
Year Ended
December 31,
----------------------------------
1997 1996 1995
----------------------------------
Beginning balance .............. $2,803,000 $2,309,000 $2,526,000
Provisions charged to expense 4,000 160,000 45,000
Recoveries .................. 80,000 496,000 176,000
----------------------------------
2,887,000 2,965,000 2,747,000
Loans charged off ........... 283,000 162,000 438,000
----------------------------------
Ending balance ................. $2,604,000 $2,803,000 $2,309,000
==================================
The Company retains mortgage loan servicing on loans sold into the secondary
market which are not included in the accompanying consolidated balance sheets.
The unpaid principal balance on these loans was $13,319,000 as of December 31,
1997, $14,735,000 as of December 31, 1996, and $11,044,000 as of December 31,
1995. Custodial escrow balances maintained in connection with these loans were
approximately $77,000, $89,000, and $61,000 at December 31, 1997, 1996, and
1995, 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 1997 1996
--------------------------------
Bank premises (including land of $596,000) .... 10-40 $7,291,000 $6,630,000
Leasehold improvements ........................ 5-15 201,000 80,000
Furniture and equipment ....................... 5-15 2,818,000 1,650,000
-----------------------
10,310,000 8,360,000
Accumulated depreciation ...................... 4,255,000 3,834,000
-----------------------
$6,055,000 $4,526,000
=======================
Note 5. Deposits
The composition of deposits is summarized as follows:
December 31,
---------------------------
1997 1996
---------------------------
Demand ...................................... $ 74,434,000 $ 74,849,000
NOW accounts ................................ 31,666,000 31,112,000
Savings ..................................... 21,007,000 22,005,000
Time certificates ........................... 115,675,000 110,386,000
---------------------------
$242,782,000 $238,352,000
===========================
Included in interest-bearing deposits are certificates of deposit with a minimum
denomination of $100,000 totaling $23,590,000 and $20,557,000 as of December 31,
1997 and 1996, respectively. Maturities of these certificates are summarized as
follows:
December 31,
-------------------------
1997 1996
-------------------------
One to three months ........................ $ 6,640,000 $ 7,409,000
Three to six months ........................ 4,864,000 2,628,000
Six to twelve months ....................... 8,446,000 5,970,000
Over twelve months ......................... 3,640,000 4,550,000
-------------------------
$23,590,000 $20,557,000
=========================
At December 31, 1997, the scheduled maturities of all certificates of deposit
are as follows:
Year ending December 31:
1998 ................................................ $ 89,057,000
1999 ................................................ 20,150,000
2000 ................................................ 3,916,000
2001 ................................................ 793,000
2002 and thereafter ................................. 1,759,000
------------
$115,675,000
============
Note 6. Other Borrowed Funds
Borrowings consist of the following:
December 31,
--------------------------
1997 1996
--------------------------
Securities sold under agreements to repurchase $ 4,259,000 $ 5,453,000
Federal Home Loan Bank advances .............. 26,468,000 7,473,000
Treasury tax and loan open note .............. 1,456,000 1,944,000
The treasury tax and loan open note represents overnight borrowings from the
Federal Reserve Bank system. The securities sold under agreements to repurchase
represent agreements with customers of the Banks which are collateralized with
securities of the Banks held by the Federal Home Loan Bank of Des Moines. The
Federal Home Bank may sell, loan, or otherwise dispose of such securities to
other parties in the normal course of their operations with prior written
approval of the Banks, and have agreed to resell to the Banks substantially
identical securities at the maturities of the agreements. At December 31, 1997,
all but $1,309,000 of the securities sold under agreements to repurchase mature
within twelve months, with $639,000 maturing June 30, 1999 and $670,000 maturing
June 30, 2001.
The average and maximum amount outstanding along with the rates of interest
related to securities sold under agreements to repurchase are as follows:
1997 1996
-----------------------
Daily average amount outstanding during the year ........... $4,061,000 $ 5,658,000
Maximum outstanding as of any month end .................... 4,754,000 6,545,000
Weighted average interest rate during the year ............. 4.98% 4.70%
Securities underlying the agreements at the end of the year:
Carrying value .......................................... $9,088,000 $10,491,000
Fair value .............................................. 9,167,000 10,515,000
Advances from the Federal Home Loan Bank as of December 31, 1997 bear interest
and are due as follows:
Interest Rate Balance Due
---------------------------------
Year ending December 31:
1998 5.80% $ 300,000
1999 6.99% 250,000
2000 5.70% to 6.73% 3,150,000
2001 5.32% to 7.09% 3,100,000
2002 6.14% to 7.13% 4,750,000
2003 and thereafter 5.83% to 7.19% 3,700,000
Amortizing through 2012 6.29% to 7.39% 11,218,000
-----------
$26,468,000
===========
Nearly all of the advances amortizing through 2012 have options which allow the
Company the right, but not the obligation, to "put" the advances back to the
Federal Home Loan Bank.
First mortgage loans of approximately $39,702,000 as of December 31, 1997 are
pledged as collateral on these advances.
Note 7. Regulatory Matters
The Company and Banks ("Entities") are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Entities' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Entities must meet specific capital guidelines that involve quantitative
measures of the Entities' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Entities' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Entities to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Entities meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Banks must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions' category.
The Entities' actual capital amounts and ratios are presented in the following
table.
To be Well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
As of December 31, 1997
Total Capital (to Risk Weighted
Assets):
Consolidated ................... $30,106,000 14.4% $16,683,000 >8.0% $20,853,000 >10.0%
First National Bank of Muscatine 19,625,000 13.4 11,696,000 >8.0 14,620,000 >10.0
First National Bank in Fairfield 8,472,000 14.4 4,716,000 >8.0 5,894,000 >10.0
Tier Capital (to Risk Weighted
Assets):
Consolidated ................... 27,502,000 13.2 8,342,000 >4.0 12,512,000 > 6.0
First National Bank of Muscatine 17,794,000 12.2 5,848,000 >4.0 8,772,000 > 6.0
First National Bank in Fairfield 7,953,000 13.5 2,358,000 >4.0 3,537,000 > 6.0
Tier 1 Capital (to Average Assets):
Consolidated ................... 27,502,000 9.1 12,138,000 >4.0 15,172,000 > 5.0
First National Bank of Muscatine 17,794,000 8.2 8,637,000 >4.0 10,797,000 > 5.0
First National Bank in Fairfield 7,953,000 9.3 3,435,000 >4.0 4,294,000 > 5.0
As of December 31, 1996
Total Capital (to Risk Weighted
Assets):
Consolidated ................... $26,779,000 14.2% $15,139,000 >8.0% $18,924,000 >10.0%
First National Bank of Muscatine 17,578,000 13.7 10,298,000 >8.0 12,873,000 >10.0
First National Bank in Fairfield 7,709,000 13.4 4,604,000 >8.0 5,754,000 >10.0
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated ................... 24,408,000 12.9 7,570,000 >4.0 11,354,000 > 6.0
First National Bank of Muscatine 15,961,000 12.4 5,149,000 >4.0 7,724,000 > 6.0
First National Bank in Fairfield 7,124,000 12.4 2,302,000 >4.0 3,453,000 > 6.0
Tier 1 Capital (to Average Assets):
Consolidated ................... 24,408,000 8.8 11,065,000 >4.0 13,831,000 > 5.0
First National Bank of Muscatine 15,961,000 8.3 7,659,000 >4.0 9,573,000 > 5.0
First National Bank in Fairfield 7,124,000 8.5 3,350,000 >4.0 4,187,000 > 5.0
Current banking law limits the amount of dividends banks can pay. As of December
31, 1997, amounts available for payment of dividends were $4,242,000 and
$1,671,000 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 owns 83,706 shares of the Company as of December
31, 1997 and covers substantially all employees who work at least 1,000 hours
per year. An employee, upon termination of employment, has the option of
retaining ownership of shares vested pursuant to the Plan or selling such shares
to the Company. The Company and subsidiary banks match 50% of the amount an
employee contributes to the Plan up to a maximum of 6% of the employee's pay.
Additionally, the Company and subsidiary banks may make profit sharing
contributions to the Plan which are allocated to the accounts of participants in
the Plan on the basis of total relative compensation. The amounts expensed for
the years ended December 31, 1997, 1996, and 1995 were $279,000, $266,000, and
$262,000, respectively.
The Company had an Incentive Stock Option and Nonstatutory Stock Option Plan
(hereinafter "Plan") for directors and senior officers. The purpose of the Plan
was 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 was administered by the Human Resource
Committee of the Company. The Plan terminated on December 31, 1997.
The option price was 100% of the fair market value of the common stock ($9 per
share) of the Company at the grant date. All options granted under the Plan
vested ratably over five years and were required to be exercised within five
years of the grant date. The Company retains Right of First Refusal on all
shares issued pursuant to the Plan. The activity of the Plan for the years ended
December 31, 1997, 1996, and 1995 was as follows:
Number of Shares
-------------------------------
1997 1996 1995
-------------------------------
Options, beginning of year ............. 97,365 143,250 150,750
Terminated and canceled ............. 1,875 -- 4,500
Exercised ........................... 95,490 45,885 3,000
-------------------------------
Options, end of year ................... - - 97,365 143,250
===============================
Options exercisable, end of year ....... - - 68,115 84,750
===============================
All figures in the above schedule have been adjusted to reflect the
three-for-one stock split which occurred in July 1996.
Note 9. Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
------------------------------------
1997 1996 1995
------------------------------------
Currently paid or payable ............. $1,475,000 $1,985,000 $1,493,000
Deferred income taxes ................. 46,000 (269,000) 2,000
------------------------------------
$1,521,000 $1,716,000 $1,495,000
====================================
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,
--------------------------------------------------------------
1997 1996 1995
----------------- ------------------- --------------------
% Of % Of % Of
Dollar Pretax Dollar Pretax Dollar Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------
Computed "expected"
income tax expense ...... $1,680,000 35.0% $1,813,000 35.0% $1,591,000 35.0%
Effect of graduated tax rate (48,000) (1.0) (52,000) (1.0) (45,000) (1.0)
Tax exempt interest
income, net ............. (295,000) (6.1) (269,000) (5.2) (260,000) (5.7)
State income taxes, net .... 158,000 3.3 171,000 3.3 150,000 3.3
Other ...................... 26,000 0.5 53,000 1.0 59,000 1.3
----------------------------------------------------------------
$1,521,000 31.7% $1,716,000 33.1% $1,495,000 32.9%
================================================================
Net deferred taxes, included in other assets or other liabilities on the
consolidated balance sheets, consist of the following components as of December
31:
1997 1996
---------------------
Deferred tax assets:
Allowance for loan losses ...................... $202,000 $226,000
---------------------
Deferred tax liabilities:
Securities available for sale .................. (275,000) (49,000)
Bank premises and equipment .................... (32,000) (5,000)
Unrealized bond accretion ...................... (29,000) (22,000)
Net deferred loan origination fees ............. (33,000) (45,000)
----------------------
(369,000) (121,000)
----------------------
Net deferred tax assets (liabilities) $(167,000) 105,000
======================
The net change in 1997 and 1996 deferred income taxes includes $226,000 and
$86,000, respectively, which is reflected in stockholders' equity.
Note 10. Earnings Per Share
The following information was used in the computation of basic and diluted
earnings per share:
Year Ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
Basic and diluted earnings, net income ......... $3,280,000 $3,465,000 $3,050,000
==================================
Weighted average common shares outstanding ..... 1,758,883 1,712,574 1,724,028
Weighted average common shares issuable upon
conversion of stock options ................. 42,139 64,106 54,993
----------------------------------
Weighted average common and common
equivalent shares ................ $1,801,022 $1,776,680 $1,779,021
==================================
Note 11. 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 ................................... $28,653,000
Standby letters of credit ...................................... 1,258,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon and some of the commitments will be sold to other
financial intermediaries if drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's 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 12. 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, 1997, 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, 1997 and 1996 are
as follows:
1997 1996
--------------------------
Balance, beginning ........................ $ 7,084,000 $ 6,973,000
Additions .............................. 11,385,000 10,091,000
Deductions (payments) .................. (10,996,000) (9,980,000)
-------------------------
Balance, ending ........................... $ 7,473,000 $ 7,084,000
=========================
Note 13. Fair Value of Financial Instruments
FASB Statement No. 107 "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments in the table below:
Cash and due from banks and interest-bearing deposits at financial institutions:
The carrying amounts reported in the balance sheets for cash and due from banks
and interest-bearing deposits at financial institutions 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.
Accrued interest receivable and payable: The fair value of accrued interest
receivable and payable is considered to approximate its carrying value.
Deposits: Fair values for demand deposits (i.e., interest and noninterest
checking, passbook savings, and certain types of money market accounts ) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities of time deposits.
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, 1997 and 1996, these items are immaterial
in nature.
The carrying amounts and fair values of financial instruments at December 31,
1997 and 1996 are summarized as follows:
Fair Values Carrying Amounts
------------------------------------------------------
1997 1996 1997 1996
------------------------------------------------------
Financial Assets:
Cash and due from banks .... $ 12,639,000 $ 14,363,000 $ 12,639,000 $ 14,363,000
Interest-bearing deposits at
financial institutions .. 87,000 551,000 87,000 551,000
Investment securities ...... 65,496,000 67,622,000 65,496,000 67,622,000
Federal funds sold ......... 9,795,000 7,263,000 9,795,000 7,263,000
Loans, net of allowance .... 208,683,000 183,438,000 205,748,000 182,071,000
Accrued interest payable ... 2,501,000 2,333,000 2,501,000 2,333,000
Financial Liabilities:
Deposits ................... $242,782,000 $238,352,000 $237,410,000 $235,688,000
Securities sold under
agreements to repurchase 4,259,000 5,453,000 4,259,000 5,453,000
Federal Home Loan Bank
advances ................ 26,468,000 7,473,000 25,951,000 7,501,000
Treasury tax and loan open
note .................... 1,456,000 1,944,000 1,456,000 1,944,000
Accrued interest payable ... 961,000 919,000 961,000 919,000
Note 14. 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,
-------------------------
1997 1996
-------------------------
ASSETS
Cash ................................................ $ 2,457,000 $ 2,096,000
Investment in subsidiaries .......................... 26,859,000 23,874,000
Other assets ........................................ 67,000 44,000
-------------------------
Total assets .......................... $29,383,000 $26,014,000
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES, other liabilities ..................... $ 758,000 $ 816,000
-------------------------
STOCKHOLDERS' EQUITY:
Common stock ..................................... 200,000 200,000
Additional paid-in capital ....................... 4,440,000 3,872,000
Retained earnings ................................ 23,522,000 21,621,000
-------------------------
28,162,000 25,693,000
Unrealized gains on securities available
for sale, net ................................. 463,000 81,000
Less cost of common shares acquired for the
treasury ...................................... - - 576,000
-------------------------
Total stockholders' equity ............ 28,625,000 25,198,000
-------------------------
Total liabilities and stockholders'
equity .............................. $29,383,000 $26,014,000
=========================
STATEMENTS OF INCOME
(Parent Company Only)
Year Ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
Operating revenue:
Dividends received from subsidiaries ......... $ 800,000 $2,000,000 $1,750,000
Management fees and other income ............. 356,000 305,000 321,000
----------------------------------
Total operating revenue ........... 1,156,000 2,305,000 2,071,000
Operating expenses .............................. 659,000 613,000 639,000
----------------------------------
Income before income tax (credits),
and equity in subsidiaries'
undistributed net income .......... 497,000 1,692,000 1,432,000
Applicable income tax (credits) ................. (180,000) (155,000) (96,000)
----------------------------------
677,000 1,847,000 1,528,000
Equity in subsidiaries' undistributed net income 2,603,000 1,618,000 1,522,000
----------------------------------
Net income ........................ $3,280,000 $3,465,000 $3,050,000
==================================
STATEMENTS OF CASH FLOWS
(Parent Company Only)
Year Ended December 31,
---------------------------------------
1997 1996 1995
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................. $ 3,280,000 $ 3,465,000 $ 3,050,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in subsidiaries' undistributed net
income ................................. (2,603,000) (1,618,000) (1,522,000)
Amortization and depreciation ............ 10,000 10,000 8,000
Change in assets and liabilities:
(Decrease) in other assets ............. (7,000) - - - -
Increase (decrease) in other liabilities (101,000) 50,000 26,000
---------------------------------------
Net cash provided by operating
activities ....................... 579,000 1,907,000 1,562,000
---------------------------------------
CASH FLOWS (USED IN) INVESTING ACTIVITIES,
purchases of other assets ................... (26,000) (31,000) (3,000)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid ......................... (1,336,000) (1,085,000) (1,072,000)
Purchases of common stock for the treasury .. (174,000) (483,000) (261,000)
Issuance of common stock .................... 1,318,000 501,000 27,000
---------------------------------------
Net cash (used in) financing
activities ....................... (192,000) (1,067,000) (1,306,000)
---------------------------------------
Net increase in cash ............. 361,000 809,000 253,000
Cash:
Beginning ................................... 2,096,000 1,287,000 1,034,000
---------------------------------------
Ending ...................................... $ 2,457,000 $ 2,096,000 $ 1,287,000
=======================================
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------
Investment securities held to maturity * ....... $ - - $ - - $ - - $ 53,659,000 $ 54,371,000
Investment securities available for sale * ..... 65,496,000 67,622,000 60,728,000 15,791,000 19,522,000
Loans, net ..................................... 208,683,000 183,438,000 169,342,000 162,015,000 154,706,000
Total assets ................................... 305,783,000 280,461,000 272,830,000 253,800,000 257,403,000
Deposits ....................................... 242,782,000 238,352,000 235,953,000 229,023,000 233,413,000
Note payable ................................... - - - - - - - - 1,300,000
Other borrowings ............................... 32,183,000 14,870,000 11,737,000 2,248,000 - -
Stockholders' equity ........................... 28,625,000 25,198,000 23,033,000 20,672,000 18,748,000
Interest income ................................ 21,158,000 20,032,000 18,942,000 17,155,000 17,200,000
Interest expense ............................... 10,502,000 9,598,000 9,051,000 7,452,000 7,681,000
Net interest income ............................ 10,656,000 10,434,000 9,891,000 9,703,000 9,519,000
Provision for loan losses ...................... 4,000 160,000 45,000 65,000 56,000
Investment securities gains, net ............... - - 4,000 3,000 9,000 - -
Other income ................................... 1,696,000 1,760,000 1,573,000 1,673,000 1,699,000
Operating expenses ............................. 7,547,000 6,857,000 6,877,000 7,141,000 7,175,000
Income before income taxes and cumulative
effect of a change in accounting
principle ................................... 4,801,000 5,181,000 4,545,000 4,179,000 3,987,000
Income taxes ................................... 1,521,000 1,716,000 1,495,000 1,304,000 1,319,000
Income before cumulative effect of a change in
accounting principle ........................ 3,280,000 3,465,000 3,050,000 2,875,000 2,668,000
Cumulative effect of a change in accounting
principle ................................... - - - - - - - - 300,000
Net income ..................................... 3,280,000 3,465,000 3,050,000 2,875,000 2,968,000
Per common share (**):
Income before cumulative effect of a change
in accounting principle:
Basic .................................... $ 1.86 $ 2.02 $ 1.77 $ 1.63 $ 1.56
Diluted .................................. 1.82 1.95 1.71 1.60 1.55
Cumulative effect of a change in accounting
principle, basic and diluted ............. - - - - - - - - 0.18
Net income:
Basic .................................... 1.86 2.02 1.77 1.63 1.74
Diluted .................................. 1.82 1.95 1.71 1.60 1.73
Cash dividends declared ..................... 0.78 0.68 0.53 0.45 0.38
Cash dividends declared as a percentage of
net income ................................ 43% 35% 31% 28% 22%
Weighted average common shares ................. 1,758,883 1,712,574 1,724,028 1,760,205 1,710,255
Weighted average number of shares of common
stock and common stock equivalents
outstanding during the year ................. 1,801,022 1,776,680 1,779,021 1,797,872 1,718,189
<FN>
* Reflects adoption of FASB Statement No. 115 in 1993, see notes to
consolidated financial statements for further explanation.
** All per share and weighted average common share information has been
adjusted to reflect the three-for-one stock split which occurred in July
1996.
</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 6.0% in 1997, 5.9% in 1996, and
.6% in 1995. 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):
1997 1996 1995
-------------------------- --------------------------- ----------------------------
Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
Taxable loans, net ................. $190,778 $16,464 8.63 $168,970 $ 14,981 8.87% $162,432 $ 14,322 8.82%
Taxable investment securities held
to maturity ...................... - - - - -- - - - - -- 36,475 2,103 5.77
Taxable investment securities
available for sale ............... 53,114 3,246 6.11 53,531 3,237 6.05 17,331 1,086 6.27
Nontaxable investment securities and
loans ........................... 18,431 1,448 7.86 16,442 1,317 8.01 14,878 1,276 8.58
Federal funds sold and other
overnight investments ............ 8,628 492 5.70 16,902 945 5.59 10,072 589 5.85
------------------- ------------------- --------------------
Total interest-earning assets 270,951 21,650 7.99 255,845 20,480 8.00 241,188 19,376 8.03
------- ------- -------
Cash and due from banks ............ 11,254 11,110 10,336
Bank premises and equipment, net ... 5,316 4,298 4,447
Other assets ....................... 2,863 2,674 2,695
-------- -------- --------
Total ........................ $290,384 $273,927 $258,666
======== ======== ========
LIABILITIES
Deposits:
Interest-bearing demand ......... $ 87,926 2,686 3.05 $ 91,735 2,803 3.06 $ 93,534 $ 2,951 3.16
Time ............................ 114,805 6,372 5.55 110,732 6,177 5.58 104,657 5,776 5.52
Other borrowings ................... 22,909 1,444 6.30 11,435 618 5.40 5,685 324 5.70
------------------- ------------------- --------------------
Total interest-bearing .......
liabilities ................ 225,640 10,502 4.65 213,902 9,598 4.49 203,876 9,051 4.44
------- ------- -------
Noninterest-bearing deposits ....... 35,930 34,106 31,290
Other liabilities .................. 2,212 1,960 1,664
-------- -------- --------
Total liabilities ............ 263,782 249,968 236,830
STOCKHOLDERS' EQUITY ............... 26,602 23,959 21,836
-------- -------- --------
Total ........................ $290,384 $273,927 $258,666
======== ======== ========
Net interest earnings .............. $11,148 $10,882 $10,325
======= ======= =======
Net yield (net interest
earnings divided by total
interest-earning assets) ..... 4.11% 4.25% 4.28%
===== ===== =====
The net interest margin decreased in 1997 (from 4.25% in 1996 to 4.11% in 1997).
The return on average interest-earning assets decreased one basis point (from 8%
in 1996 to 7.99% in 1997) and interest paid on average interest-bearing
liabilities increased 16 basis points (from 4.49% in 1996 to 4.65% in 1997).
Average interest earning assets to total average assets decreased to 93.3%
during 1997 compared to 93.4% the previous year.
The net interest margin decreased in 1996 (from 4.28% in 1995 to 4.25% in 1996).
The return on average interest-earning assets decreased three basis points (from
8.03% in 1995 to 8.00% in 1996) and interest paid on average interest-bearing
liabilities increased five basis points (from 4.44% in 1995 to 4.49% in 1996).
Average interest earning assets to total average assets increased to 93.4%
during 1996 compared to 93.2% the previous year.
FINANCIAL CONDITION:
Investment Securities
Investment securities at December 31, 1997 were approximately 20% U.S. Treasury
securities, 29% U.S. government agency securities, 14% mortgage-backed
securities, 27% states and political subdivisions, and 10% corporate
obligations. The 49% in U.S. Treasury and U.S. government agency securities are
a result of management's emphasis on high credit quality security purchases.
Investment securities at December 31, 1996 were approximately 31% U.S. Treasury
securities, 23% U.S. government agency securities, 15% mortgage-backed
securities, 20% states and political subdivisions, and 11% corporate
obligations. The 1997 increase in the portfolio percentage devoted to states and
political subdivisions securities reflects the higher yields which were
available on these types of investments compared to treasuries and agencies.
The fair value of investment securities available for sale at the date indicated
are summarized as follows (dollar amounts in thousands):
December 31,
----------------------------
1997 1996 1995
----------------------------
U.S. Treasury ............................ $13,099 $21,038 $20,257
U.S. government agencies ................. 19,019 15,872 16,999
Mortgage-backed securities ............... 9,272 9,838 7,541
State and political subdivisions ......... 17,829 13,527 11,476
Corporate obligations .................... 6,277 7,347 4,455
----------------------------
$65,496 $67,622 $60,728
============================
The following table shows the maturities of investment securities available for
sale at December 31, 1997 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
--------------------------------------------------------------------
U.S. Treasury ................... $ 4,501 6.45 $ 8,598 6.21 $ - - - -% $ - - - -%
U.S. government agencies ........ 1,501 5.40 9,072 6.36 5,584 6.93 2,862 6.92
Mortgage-backed securities ...... 3,011 5.82 6,261 6.61 - - - - - - - -
States and political subdivisions 2,365 7.31 5,950 7.12 6,105 7.55 3,409 7.88
Corporate obligations ........... 3,559 5.39 2,718 6.48 - - - - - - - -
------- ------- ------- -------
$14,937 $32,599 $11,689 $ 6,271
======= ======= ======= =======
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, 1997, and
excluding the interest expense allocated to carry certain tax-exempt securities.
In 1997, the yield on taxable investment securities increased six basis points
due to reinvesting matured, called, and sold securities in investments yielding
more than the taxable investments removed from the balance sheet. The 1997 yield
on nontaxable investment securities and loans decreased 15 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 lower than the amortizing
nontaxable loans.
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 afforded
management more flexibility in managing the portfolio. At December 31, 1997, no
state or political subdivision securities amortized cost or market value
exceeded 10% of stockholders' equity.
Loans
Loans outstanding (net of unearned discount) at December 31, 1997 increased
13.4% from December 31, 1996.
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,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
Commercial ..................... $ 79,968 $ 73,681 $ 62,399 $ 55,948 $ 54,994
Agricultural ................... 20,494 17,555 16,792 15,264 14,139
Real estate, construction ...... 2,120 2,970 1,187 1,192 2,341
Real estate, mortgage .......... 76,904 60,241 56,475 53,447 46,306
Tax exempt, real estate mortgage 3,118 3,485 3,735 4,201 5,013
Installment, net of unearned
discount ..................... 28,227 28,100 30,359 33,496 32,770
Lease financing, net ........... - - - - 369 919 1,718
Other .......................... 456 209 335 74 79
----------------------------------------------------
$211,287 $186,241 $171,651 $164,541 $157,360
====================================================
The following loan categories outstanding at December 31, 1997 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 ...................... $ 79,968 $ 45,226 $ 23,794 $ 10,948
Agricultural .................... 20,494 13,551 5,370 1,573
Real estate, construction ....... 2,120 1,918 107 95
-------------------------------------------
$102,582 $ 60,695 $ 29,271 $ 12,616
===========================================
The interest rates on the amount due after one year are fixed or adjustable as
follows (dollar amounts in thousands):
Fixed Adjustable
-------------------
Commercial ............................................... $27,887 $ 6,855
Agricultural ............................................. 5,682 1,261
Real estate, construction ................................ 202 - -
-----------------
$33,771 $ 8,116
=================
During 1997 commercial loans increased by $6,287,000 or 8.5%, construction real
estate loans decreased by $850,000 or 28.6%, mortgage real estate loans
increased by $16,663,000 or 27.7%, agricultural loans increased $2,939,000 or
16.7% and net installment loans increased by $127,000 or .5%. Management
continues to search for quality growth in all loan categories. The Company
continued to sell some real estate loans to the secondary market during 1997,
however management determined a higher return could be generated by keeping more
of the long term fixed rate real estate loans on the Company's balance sheet.
The Company anticipates continuing to sell some of these loans to the secondary
market, but most will likely be retained internally with the inherent interest
rate risk being mitigated with advances from the Federal Home Loan Bank as well
as other funding sources.
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,
--------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------
Loans accounted for on
a nonaccrual basis .......... $1,144 $ 855 $ 883 $1,201 $1,705
Accrual loans
contractually past due
90 days or more ............. 459 329 111 191 133
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 ................ - - 381 - - - - - -
Total nonaccrual loans were $1,144,000 at December 31, 1997, an increase of
$289,000 or 34% from December 31, 1996. Total nonaccrual and accrual loans
contractually past due 90 days or more were $1,603,000 at December 31, 1997, an
increase of $419,000 or 35% from a year earlier. Additionally, loans
renegotiated due to a deterioration in the financial position of the borrower
totaled none and $381,000 at year-ends 1997 and 1996, respectively.
When the full collectibility of principal or interest on any loan is considered
doubtful, previously accrued but uncollected interest remains as accrued if the
principal and interest is protected by sound collateral value based upon a
current independent, qualified appraisal. In practice, in the vast majority of
cases, the interest accrued but uncollected on loans transferred to nonaccrual
status is charged-off at the time of transfer. Interest in the amounts of
$90,000, $66,000, and $74,000 would have been earned on the nonaccrual loans had
they been performing loans in accordance with their original terms during 1997,
1996, and 1995, respectively. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 1997,
1996, and 1995 was $12,000, $19,000, and $26,000, respectively.
As of December 31, 1997, the Company had loans totaling $7,061,000 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
$650,000 or 8% decrease from 1996. The Company is not aware of any single loan
or group of loans, other than these and those reflected above, of which full
collectibility cannot reasonably be expected. Management has committed resources
and is focusing its attention on efforts designed to control the amount of
classified assets. The Company has $20,494,000 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, 1997. The Company's loans are heavily
concentrated geographically in the Iowa counties of Muscatine and Jefferson.
In general, the agricultural loan portfolio risk is dependent on factors such as
governmental policies, weather conditions, agricultural commodities prices and
the mix of grain and livestock raised. Commercial loan risk can also vary widely
from period to period and is particularly sensitive to changing business and
economic conditions as well as governmental policies. Consumer (installment and
real estate mortgage) loan risk is substantially influenced by employment
opportunities in the markets served by the Company.
Other real estate owned was $9,000, none, and $106,000 at December 31, 1997,
1996, and 1995, 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 $128,000 and $217,000 in 1994 and 1995, respectively,
as net charge-offs exceeded provisions for loan losses. In 1996, the allowance
for loan losses increased $494,000 as a result of provisions of $160,000 and net
recoveries totaling $334,000. In 1997, the allowance for loan losses decreased
$199,000 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):
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
Allowance Of Loans Allowance Of Loans Allowance Of Loans Allowance Of Loans Allowance Of Loans
For Loan To Total For Loan To Total For Loan To Total For Loan To Total For Loan To Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
--------------------------------------------------------------------------------------------------------
Real estate loans:
Mortgage ............... $ 84 36.39% $ 134 32.35% $ 124 32.90% $ 141 32.48% $ 161 29.43%
Construction ........... - - 1.00 - - 1.59 - - 0.69 - - 0.72 - - 1.49
Commercial ................ 1,726 37.85 1,837 39.56 1,342 36.35 1,714 34.05 1,873 34.95
Agricultural .............. 249 9.70 264 9.43 133 9.78 282 9.28 308 8.99
Installment ............... 545 13.36 568 15.09 710 17.69 389 20.36 312 20.82
Lease financing and other . - - 0.22 - - 0.11 - - 0.41 - - 0.56 - - 1.13
Tax exempt, real estate
mortgage ............... - - 1.48 - - 1.87 - - 2.18 - - 2.55 - - 3.19
------------------------------------------------------------------------------------------------------
$2,604 100.00% $2,803 100.00% $2,309 100.00% $2,526 100.00% $2,654 100.00%
======================================================================================================
Deposits
Total average deposits increased .9% in 1997, increased 3.1% in 1996, and
decreased 1.4% in 1995. The average deposits are summarized below (dollar
amounts in thousands):
1997 1996 1995
---------------------- -------------------- --------------------
Average Average Average
Interest Interest Interest
Expense Expense Expense
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------
Noninterest-bearing
demand .......... $ 35,930 --% $ 34,106 --% $ 31,290 --%
Savings ............ 21,733 2.5 23,244 2.5 23,501 2.6
Interest-bearing
demand .......... 66,193 3.2 68,491 3.2 70,033 3.3
Time ............... 114,805 5.6 110,732 5.6 104,657 5.5
-------- -------- --------
Total deposits $238,661 $236,573 $229,481
======== ======== ========
Included in interest-bearing time deposits is certificates of deposit with a
minimum denomination of $100,000 as follows (dollar amounts in thousands):
Year Ended December 31,
-------------------------
1997 1996
-------------------------
One to three months ........................ $ 6,640 $ 7,409
Three to six months ........................ 4,864 2,628
Six to twelve months ...................... 8,446 5,970
Over twelve months ......................... 3,640 4,550
-------------------------
$23,590 $20,557
=========================
RESULTS OF OPERATIONS:
Changes in Diluted Earnings Per Share
The decrease in diluted earnings per share between 1997 and 1996 amounted to
$.14 The major sources of change are presented in the following table (all
figures have been adjusted to reflect the three-for-one stock split which
occurred in July 1996):
1997 1996
----------------
Net income per share, prior year ..................... $ 1.95 $ 1.71
----------------
Increase (decrease) attributable to:
Net interest income ............................... 0.12 0.30
Provision for loan losses ......................... 0.09 (0.06)
Other income ...................................... (0.04) 0.11
Salaries and employee benefits .................... (0.11) (0.04)
FDIC insurance .................................... (0.01) 0.14
Other operating expenses .......................... (0.26) (0.10)
Income taxes ...................................... 0.11 (0.12)
Change in average common shares outstanding ....... (0.03) 0.01
----------------
Net change ............................. (0.13) 0.24
----------------
Net income per share, current year ..... $ 1.82 $ 1.95
================
Net Interest Income
The following table sets forth a summary of the changes in interest earned and
paid resulting from changes in volume and rates. Changes attributable to both
rate and volume which cannot be segregated have been allocated to the change due
to volume (dollar amounts in thousands and income on a fully taxable equivalent
basis using statutory rates in effect for year presented):
Year Ended Year Ended
December 31, 1997 December 31, 1996
---------------------------- ---------------------------
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 ................ $ 1,941 $ (458) $1,483 $ 575 $ 84 $ 659
Taxable investment
securities held to
maturity .................. - - - - - - (2,103) - - (2,103)
Taxable investment
securities available for
sale ...................... (23) 32 9 2,269 (118) 2,151
Nontaxable investment
securities and loans ...... 159 (28) 131 135 (94) 41
Federal funds sold and other . (462) 9 (453) 400 (44) 356
------------------------------------------------------
Total interest
income ............ 1,615 (445) 1,170 1,276 (172) 1,104
------------------------------------------------------
Interest expense:
Interest-bearing demand
deposits ................... (108) (9) (117) (56) (92) (148)
Interest-bearing time deposits 229 (34) 195 335 66 401
Other borrowings ............. 620 206 826 328 (34) 294
------------------------------------------------------
Total interest
expense ........... 741 163 904 607 (60) 547
------------------------------------------------------
Change in net
interest earnings . $ 874 $ (608) $ 266 $ 669 $ (112) $ 557
======================================================
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,
-----------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------
Balance of allowance for loan
losses at beginning of year ..................... $ 2,803 $ 2,309 $ 2,526 $ 2,654 $ 2,734
-----------------------------------------------------
Loans charged off:
Commercial and agricultural ..................... 163 24 240 189 130
Mortgage ........................................ 4 2 27 2 25
Installment ..................................... 116 136 171 227 117
-----------------------------------------------------
Total loans charged off .............. 283 162 438 418 272
-----------------------------------------------------
Recoveries of loans previously charged off:
Commercial and agricultural ..................... 36 400 120 188 95
Mortgage ........................................ 7 49 23 15 22
Installment ..................................... 37 47 33 22 19
-----------------------------------------------------
Total recoveries ..................... 80 496 176 225 136
-----------------------------------------------------
Net loans charged off (recovered) .................. 203 (334) 262 193 136
-----------------------------------------------------
Provisions for loan losses charged
to operating expense ............................ 4 160 45 65 56
-----------------------------------------------------
Balance at end of year ............................. $ 2,604 $ 2,803 $ 2,309 $ 2,526 $ 2,654
=====================================================
Average taxable loans outstanding .................. $190,778 $168,970 $162,432 $153,547 $139,292
=====================================================
Ratio of net loan charge-offs
(recoveries) to average taxable
loans outstanding .............................. (0.11%) (0.20%) 0.16% 0.13% 0.10%
Allowance for loan losses as a
percentage of average taxable
loans outstanding ............................... 1.36 1.66 1.42 1.65 1.91
Coverage of net charge-offs by
year-end allowance for loan
losses .......................................... 12.83 N/A 8.81 13.09 19.51
Operating Expenses
A continuing objective of the Company is to manage overhead costs while
maintaining optimal productivity, efficiency, capacity, and quality service. The
new branch facilities opened during 1997 in Fairfield and Muscatine and
increased sales focus are necessary to position our banks for the future in
meeting the intense competition that banks face for loans, deposits, and other
banking services. These enhancements, while necessary, do come at a price. Our
efficiency ratio of 61.1% in 1997 compares to 56.2% in 1996. More specifically,
occupancy expenses increased $120,000 or 20.7% and equipment expenses increased
$99,000 or 26.5%. Overall, operating expenses increased $690,000 which is 10.1%
greater than the prior year. This higher expense total is, in large measure,
attributable to the new infrastructure added or improved upon in 1997 as well as
training for our employees to allow for future growth of the Company's assets
and earnings. Important to remember is the fact that operating expenses in 1997
were only $372,000 or 5.2% greater than 1993 operating expenses, however,
December 31, 1993, total assets of Iowa First Bancshares Corp. were $48,380,000
or 18.8% less than year-end 1997. Net income before a change in accounting
principle increased 22.9% over the same time period. Thus, the growth rate in
assets over this time period has outpaced the growth rate in operating expenses
by 3.6 to 1, and the growth rate in net income has outpaced the growth rate in
operating expenses by 4.4 to 1.
Net Income
The Company's consolidated net income for the three years is as follows (dollar
amounts in thousands):
Year Ended December 31,
--------------------------
1997 1996 1995
--------------------------
Net income ................. $3,280 $3,465 $3,050
==========================
Net income decreased $185,000 or 5.3% in 1997. This decrease resulted from
improvement in net interest income of $222,000 or 2.1%, reduction of $156,000 or
97.5% in provisions for loan losses, a reduction in other income totaling
$68,000 or 3.9%, an increase of $690,000 or 10.1% in operating expenses, and a
decrease of $195,000 or 11.4% in income taxes.
Net income increased $415,000 or 13.6% in 1996. The net interest income
increased $543,000 or 5.5%, provision for loan losses increased $115,000, other
income rose $188,000 or 11.9%, operating expenses decreased $20,000 or .3%, and
income taxes increased $221,000 or 14.8%.
Selected Consolidated Ratios
Year Ended December 31,
------------------------
1997 1996 1995
------------------------
Percentage of net income to:
Average stockholders' equity .............. 12.33% 14.46% 13.97%
Average total assets ...................... 1.13 1.26 1.18
Percentage of average stockholders' equity to
average total assets ...................... 9.16 8.75 8.44
Dividend payout ratio ........................ 42.86 34.87 30.99
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, 1997
----------------------------------------------------------------
Less Than 3-12 1-5 More Than Interest
3 Months Months Years 5 Years Bearing Total
----------------------------------------------------------------
Assets:
Loans ........................... $ 52,225 $ 27,064 $ 85,973 $ 44,881 $ 1,144 $211,287
Investment securities ........... 5,574 9,363 32,599 17,950 10 65,496
Other earning assets ............ 9,882 - - - - - - - - 9,882
Nonearning assets ............... - - - - - - - - 19,118 19,118
----------------------------------------------------------------
Total ........................ $ 67,681 $ 36,427 $118,572 $ 62,831 $ 20,272 $305,783
================================================================
Liabilities and Equity:
Deposits ........................ $ 43,123 $110,059 $ 51,386 $ - - $ 38,214 $242,782
Securities sold under agreements
to repurchase and TT&L ....... 4,406 - - 1,309 - - - - 5,715
FHLB advances ................... - - 300 22,368 3,800 - - 26,468
Other liabilities ............... - - - - - - - - 2,193 2,193
Equity .......................... - - - - - - - - 28,625 28,625
----------------------------------------------------------------
Total liabilities and equity $ 47,529 $110,359 $ 75,063 $ 3,800 $ 69,032 $305,783
================================================================
Repricing gap ...................... $ 20,152 $(73,932) $ 43,509 $ 59,031 $(48,760) $ - -
Cumulative repricing gap ........... 20,152 (53,780) (10,271) 48,760 - - - -
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, 1997, using the estimates
discussed above, rate sensitive liabilities exceeded rate sensitive assets
within a one year period by $53,780,000 and, thus, the Company is positioned to
benefit from a fall in interest rates within the next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change.
Because the repricing gap position does not capture these risks, management
utilizes simulation modeling to measure and manage the rate sensitivity exposure
of earnings. The Company's simulation model provides a projection of the effect
on net interest income of various interest rate scenarios and balance sheet
strategies.
Interest Rate Risk Management
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Since 1990, management's
asset/liability committee has met monthly to review the Company's interest rate
risk position and profitability, and to make or recommend adjustments for
consideration by the Board of Directors. Management also reviews the Bank's
securities portfolio, formulates investment strategies, and oversees the timing
and implementation of transactions to assure attainment of the Board's
objectives in the most effective manner. Notwithstanding the Company's interest
rate risk management activities, the potential for changing interest rates is an
uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while maintaining or
enhancing net interest margins. At times, depending on the level of general
interest rates, the relationship between long- and short-term interest rates,
market conditions and competitive factors, the Board and management may
determine to increase the Company's interest rate risk position somewhat in
order to increase its net interest margin. The Company's results of operations
and net portfolio values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long- and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance sheet contracts. The following table sets forth, at
December 31, 1997, an analysis of the Bank's interest rate risk as measured by
the estimated changes in NPV resulting from instantaneous and sustained parallel
shifts in the yield curve (+ or - 400 basis points, measured in 100 basis point
increments).
Estimated Increase
Change In (Decrease) in NPV
Interest Estimated -----------------------
Rates NPV Amount Amount Percent
----------------------------------------------------
(Basis Points) (Dollars in Thousands)
+400 $ 13,873 $ (10,922) (44)%
+300 16,530 (8,265) (33)
+200 19,187 (5,608) (22)
+100 21,918 (2,877) (12)
- - 24,795 - - - -
-100 27,848 3,053 12
-200 31,093 6,298 25
-300 34,864 10,069 41
-400 39,075 14,280 58
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Liquidity
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are varied,
but include general economic conditions, asset/liability mix, bank reputation,
future FDIC funding needs, changes in regulatory environment, and credit
standing. Assets which provide liquidity consist principally of loans, cash and
due from banks, investment securities, and short-term investments such as
federal funds. Maturities of securities held for investment purposes and loan
payments provide a constant flow of funds available for cash needs. Liquidity
also can be gained by the sale of loans or securities, which were previously
designated as available for sale, prior to maturity. Interest rates, relative to
the rate paid by the security or loan sold, along with the maturity of the
security or loan, are the major determinates of the price which can be realized
upon sale.
The stability of the Company's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer deposits
tend to be small in size, diversified across a large base of individuals, and
are government insured to the extent permitted by law. Total deposits under
$100,000 at December 31, 1997 were $219,192,000 or 90.3% of total deposits and
71.7% of total liabilities and equity.
Equity has increased in significance as a funding source, increasing $3,427,000
during 1997 to total $28,625,000. Securities sold under agreements to repurchase
and treasury tax and loan open note funding sources totaled $5,715,000. Longer
term Federal Home Loan Bank advances totaled $26,468,000. At year-end total
federal funds sold and securities maturing within one year were $24,705,00 or
8.1% of total assets. Both short-term and long-term liquidity are actively
reviewed and managed.
At December 31, 1997, securities available for sale totaling $65,496,000
included $788,000 of gross unrealized gains and $50,000 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 $3,427,000 (13.6%) in 1997. Dividends to
stockholders were declared at a rate of $ .78, $.68, and $.53 per share during
the years ended December 31, 1997, 1996, and 1995, respectively.
Year 2000
The "Year 2000 Issue" is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Bank's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, calculate interest
accruals, or engage in similar normal business activities.
Management has commenced preparation for the "Year 2000" in terms of reviewing,
identifying, correcting and testing any potential risk exposures associated with
the inability of certain computer hardware and software components to function
into the new millennium. In addition to evaluating the year 2000 readiness of
internal systems, management is also taking steps to ascertain the readiness of
major vendors and significant borrowers to identify and reduce potential risk
exposures to the Company caused by their year 2000 compatibility issues.
Based on the review of the computer systems, management does not believe the
cost of remediation will be material to the Bank's financial statements. All
mission critical systems are expected to be year 2000 compliant by June 30,
1999.
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, 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" and Statement No. 127 "Deferral of the Effective Date of Certain
Provisions of Statement No. 125". Statement No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. Statement No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The provisions of Statement No. 125 applicable to
servicing of financial assets were effective for servicing of financial assets
occurring after December 31, 1996. Adoption of these provisions of the Statement
did not have a material effect on the Company's financial statement. The
provisions of Statement No. 125 applicable to transfers of financial assets and
extinguishment of liabilities are effective for transfers and extinguishments
occurring after December 31, 1997. Management believes that adoption of these
provisions of the Statement will not have a material effect on the Company's
financial statements.
The Financial Accounting Standards Board has issued Statement No. 130 "Reporting
Comprehensive Income" which is effective for fiscal years beginning after
December 15, 1997. This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The purpose of reporting comprehensive
income is to disclose a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The Company
will be required to disclose comprehensive income. Currently, the Company's
comprehensive income would include net income and the change in unrealized gain
on securities available for sale, net.
The Financial Accounting Standards Board has issued Statement No. 131
"Disclosure about Segments of an Enterprise and Related Information" which is
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Management believes that adoption of this Statement will not have a
material effect on the Company's financial statements.
Quarterly Results of Operations (Unaudited)
In the fourth quarter of 1997, net income was $834,000, compared with $815,000
in the same period of 1996, an increase of 2.3%. The net interest income during
the fourth quarter of 1997 was $2,737,000 compared with $2,661,000 for the
fourth quarter of 1996. There was no provision for possible loan losses in the
fourth quarter of 1997 versus $60,000 in 1996. Other income totaled $438,000 and
$441,000 during the fourth quarter of 1997 and 1996, respectively. Other
operating expenses of $1,966,000 in the last quarter of 1997 compare with
$1,839,000 for the last quarter of 1996. Income tax expense was $375,000 and
$388,000 for the final quarter of 1997 and 1996, respectively. Quarterly results
of operations are as follows (dollar amounts in thousands):
Quarter Ended
--------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------------------------------------------------
Total interest income .................... $4,982 $5,247 $5,348 $5,581
Total interest expense ................... 2,383 2,592 2,683 2,844
-----------------------------------------------
Net interest income ....................... 2,599 2,655 2,665 2,737
Provision for loan losses ................. 3 1 - - - -
Other income .............................. 405 422 431 438
Other expense ............................. 1,721 1,840 2,020 1,966
-----------------------------------------------
Income before income taxes ................ 1,280 1,236 1,076 1,209
Applicable income taxes ................... 406 399 341 375
-----------------------------------------------
Net income ................................ $ 874 $ 837 $ 735 $ 834
===============================================
Net income per share:
Basic .................................. $ 0.50 $ 0.47 $ 0.42 $ 0.47
===============================================
Diluted ................................ $ 0.49 $ 0.46 $ 0.41 $ 0.46
===============================================
Quarter Ended
---------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
---------------------------------------------------
Total interest income .................... $4,902 $5,133 $4,952 $5,045
Total interest expense ................... 2,429 2,444 2,341 2,384
-----------------------------------------------
Net interest income ....................... 2,473 2,689 2,611 2,661
Provision for loan losses ................. 15 25 60 60
Other income .............................. 387 483 453 441
Other expense ............................. 1,671 1,662 1,685 1,839
-----------------------------------------------
Income before income taxes ................ 1,174 1,485 1,319 1,203
Applicable income taxes ................... 382 510 436 388
-----------------------------------------------
Net income ................................ $ 792 $ 975 $ 883 $ 815
===============================================
Net income per share:
Basic .................................. $ 0.46 $ 0.57 $ 0.52 $ 0.47
===============================================
Diluted ................................ $ 0.45 $ 0.55 $ 0.50 $ 0.45
===============================================
IOWA FIRST BANCSHARES CORP.
DIRECTORS AS OF DECEMBER 31, 1997
George A. Shepley Donald R. Heckman
Chairman of the Board and CEO Investor
Iowa First Bancshares Corp. Factory Manager - Retired
Chairman of the Board H.J. Heinz Co.
First National Bank of Muscatine
Chairman of the Board Dean H. Holst
First National Bank in Fairfield Director
Iowa First Bancshares Corp.
Kim K. Bartling Director, President and CEO
Director, Executive Vice President, Chief First National Bank in Fairfield
Operating Officer and Treasurer
Iowa First Bancshares Corp. D. Scott Ingstad
Director, Executive Vice President and CFO Director and President
First National Bank of Muscatine Iowa First Bancshares Corp.
Director Director, President and CEO
First National Bank in Fairfield First National Bank of Muscatine
Roy J. Carver, Jr.
Chairman of the Board Victor G. McAvoy
Carver Pump Company President
Muscatine Community College
Larry L. Emmert
President Carl J. Spaeth
Hoffmann, Inc. President
Cabe Corporation
Craig R. Foss
President Beverly J. White
Foss, Kuiken, and Gookin, P.C. Director and Vice President
Quality Foundry Co.
OFFICERS AS OF DECEMBER 31, 1997
George A. Shepley Patricia R. Thirtyacre
Chairman of the Board Corporate Secretary
Chief Executive Officer
Teresa A. Carter
D. Scott Ingstad Internal Audit Manager
President
Kim K. Strause
Kim K. Bartling Assistant Auditor
Executive Vice President
Chief Operating Officer
Treasurer
IOWA FIRST BANCSHARES CORP.
Subsidiary Bank Directors as of December 31, 1997
FIRST NATIONAL BANK OF MUSCATINE FIRST NATIONAL BANK IN FAIRFIELD
George A. Shepley George A. Shepley
Chairman of the Board and CEO Chairman of the Board 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 and President 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, Executive Vice President, Chief Director, Executive Vice President, Chief
Operating Officer and Treasurer Operating Officer and Treasurer
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Director, Executive Vice President and CFO Director, Executive Vice President and CFO
First National Bank of Muscatine First National Bank of Muscatine
Director Director
First National Bank in Fairfield First National Bank in Fairfield
Larry L. Emmert Stephen R. Cracker
President Director, Executive Vice President
Hoffmann, Inc. First National Bank in Fairfield
Donald R. Heckman Craig R. Foss
Investor President
Factory Manager - Retired Foss, Kuiken & Gookin PC
H.J. Heinz Co.
Thomas S. Gamrath
Victor G. McAvoy Vice President & Treasurer
President Gamrath-Doyle & Associates, Inc.
Muscatine Community College
Donald L. Johnson
Carl J. Spaeth Farmer
President
Cabe Corporation H. Roy Lamansky
Farmer - Retired
Beverly J. White
Director and Vice President Marvin L. Nelson
Quality Foundry Co. President
The Nelson Company, Inc.
C. Gene Parker
Agriculturalist