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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
--------------
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission file number 2-89283
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IOWA FIRST BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF IOWA 42-1211285
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer of
incorporation or organization) Identification No.)
300 East Second Street
Muscatine, Iowa 52761
----------------------------------------
(Address of principal executive offices)
563-263-4221
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_____
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes_____ No__X___
At March 31, 2003 there were 1,424,445 shares of the registrant's common stock
outstanding.
1
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE NO.
PART 1 Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets,
March 31, 2003 and December 31, 2002 3
Consolidated Condensed Statements of
Income, Three Months Ended March 31, 2003
and 2002 4
Consolidated Condensed Statements of Cash Flows,
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Item 4. Controls and Procedures 14
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Section 302 Certifications 16-17
2
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
2003 2002
------------------------
ASSETS
Cash and due from banks ................................ $ 17,065 $ 17,283
Interest-bearing deposits at financial institutions .... 5,580 1,791
Federal funds sold ..................................... 51,022 30,600
Investment securities available for sale ............... 38,259 38,095
Loans, net of allowance for loan losses March 31, 2003,
$3,319; December 31, 2002, $3,304 ................... 270,701 273,922
Bank premises and equipment, net ....................... 6,040 5,303
Accrued interest receivable ............................ 2,328 2,672
Life insurance contracts ............................... 4,003 3,953
Restricted investment securities ....................... 3,957 3,957
Other assets ........................................... 1,229 1,129
----------------------
TOTAL ASSETS ........................................ $ 400,184 $ 378,705
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 45,415 $ 45,293
Interest bearing deposits .............................. 246,882 225,129
----------------------
TOTAL DEPOSITS ...................................... 292,297 270,422
Note payable ........................................... 3,300 3,300
Securities sold under agreements to
repurchase .......................................... 6,012 6,591
Federal Home Loan Bank advances ........................ 64,610 64,609
Treasury tax and loan open note ........................ 495 785
Company obligated mandatorily redeemable preferred
securities of subsidiary trust ....................... 4,000 4,000
Dividends payable ...................................... 335 335
Other liabilities ...................................... 1,818 1,633
----------------------
TOTAL LIABILITIES ................................... 372,867 351,675
----------------------
Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ........... 2,717 2,717
----------------------
STOCKHOLDERS' EQUITY
Common stock ........................................... 200 200
Additional paid-in capital ............................. 4,254 4,254
Retained earnings ...................................... 34,477 34,195
Accumulated other comprehensive income ................. 1,106 1,101
Less net cost of common shares acquired for the treasury (12,720) (12,720)
Less maximum cash obligation related to KSOP shares .... (2,717) (2,717)
----------------------
TOTAL STOCKHOLDERS' EQUITY .......................... 24,600 24,313
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $ 400,184 $ 378,705
======================
See notes to Consolidated Condensed Financial Statements.
3
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
----------------
2003 2002
----------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees:
Taxable ............................................... $4,482 $4,877
Nontaxable ............................................ 34 19
Investment securities available for sale:
Taxable ............................................... 256 321
Nontaxable ............................................ 193 211
Federal funds sold ...................................... 117 149
Restricted investment securities ........................ 31 26
Other ................................................... 22 24
----------------
Total interest income .............................. 5,135 5,627
----------------
INTEREST EXPENSE:
Deposits ................................................ 1,257 1,544
Note payable ............................................ 61 108
Other borrowed funds .................................... 933 1,078
Company obligated mandatorily redeemable preferred
securities ............................................ 103 103
----------------
Total interest expense ............................. 2,354 2,833
----------------
Net interest income ................................ 2,781 2,794
Provision for loan losses .................................. 370 68
----------------
Net interest income after provision for
loan losses ........................................ 2,411 2,726
----------------
Other income:
Trust department ........................................ 95 104
Service fees ............................................ 348 331
Investment securities gains, net ........................ 10 72
Other ................................................... 194 149
----------------
Total other income ................................. 647 656
----------------
Operating expenses:
Salaries and employee benefits .......................... 1,266 1,225
Occupancy expenses, net ................................. 178 164
Equipment expenses ...................................... 153 186
Office supplies, printing, and postage .................. 107 91
Computer processing ..................................... 130 121
Advertising and business promotion ...................... 30 40
Other operating expenses ................................ 336 326
----------------
Total operating expenses ........................... 2,200 2,153
----------------
Income before income taxes ......................... $ 858 $1,229
Applicable income taxes .................................... 241 374
----------------
Net income ................................................. $ 617 $ 855
================
Net income per common share, basic and diluted ............. $ 0.43 $ 0.59
================
Dividends declared per common share ........................ $ 0.24 $ 0.23
================
Comprehensive income ....................................... $ 622 $ 719
================
See notes to Consolidated Condensed Financial Statements.
4
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For The Three Months Ended March 31, 2003 and 2002
(In Thousands)
(Unaudited)
2003 2002
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 617 $ 855
Adjustments to reconcile net income to net cash provided
by operating activities:
Proceeds from loans sold .................................................... 4,532 2,754
Loans underwritten .......................................................... (4,239) (2,729)
Gains on loans sold ......................................................... (68) (25)
Provision for loan losses ................................................... 370 68
Investment securities gains, net ............................................ (10) (72)
Depreciation ................................................................ 118 158
Amortization of premiums and accretion of discounts
on investment securities available for sale, net .......................... 39 6
Net decrease in accrued interest receivable ................................. 344 159
Net (increase) decrease in other assets ..................................... (100) 161
Net increase in other liabilities .......................................... 182 201
--------------------
Net cash provided by operating activities ...................................... $ 1,785 $ 1,536
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-bearing deposits at financial institutions ......... (3,789) $ (270)
Net increase in federal funds sold .......................................... (20,422) (11,800)
Proceeds from sales, maturities, calls and paydowns of available
for sale securities ......................................................... 1,893 7,887
Purchases of available for sale securities .................................. (2,078) (4,370)
Net (increase) decrease in loans ............................................ 2,626 (1,135)
Purchases of bank premises and equipment .................................... (855) (56)
Increase in cash value of life insurance contracts .......................... (50) (43)
--------------------
Net cash (used in) investing activities ..................................... $(22,675) $ (9,787)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing deposits ..................... $ 122 $ (67)
Net increase in interest bearing deposits ................................... 21,753 7,130
Net increase (decrease) in securities sold under
agreements to repurchase .................................................. (579) 656
Repayment of note payable ................................................... -- (47)
Net increase (decrease) in treasury tax and loan open note .................. (290) 374
Advances from Federal Home Loan Bank ........................................ 5,150 --
Payments of advances from Federal Home Loan Bank ............................ (5,149) (1,722)
Cash dividends paid ......................................................... (335) (331)
Proceeds from issuance of common stock ...................................... -- 105
--------------------
Net cash provided by financing activities ................................... $ 20,672 $ 6,098
--------------------
Net (decrease) in cash and due from banks ................................... (218) (2,153)
Cash and due from banks:
Beginning ................................................................... $ 17,283 $ 14,661
--------------------
Ending ...................................................................... $ 17,065 $ 12,508
====================
Supplemental Disclosures of Cash Flow Information, cash payments for:
Interest .................................................................... $ 2,285 $ 2,828
Income taxes ................................................................ -- --
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on investment securities available for sale, net .............. 5 (136)
See notes to Consolidated Condensed Financial Statements.
5
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine (Muscatine) and First National
Bank in Fairfield (Fairfield). First National Bank of Muscatine has a total of
five locations in Muscatine, Iowa. First National Bank in Fairfield has two
locations in Fairfield, Iowa. Each bank is engaged in the general commercial
banking business and provides full service banking to individuals and
businesses, including checking, savings, money market and time deposit accounts,
commercial loans, consumer loans, real estate loans, safe deposit facilities,
transmitting of funds, trust services, and such other banking services as are
usual and customary for commercial banks. Some of these other services include
sweep accounts, lock-box deposits, debit cards, credit-related insurance,
internet banking, automated teller machines, telephone banking and investment
services through a third-party arrangement. The Company also owns the
outstanding stock of Iowa First Capital Trust I, which was capitalized in March
2001 for the purpose of issuing Company Obligated Mandatorily Redeemable
Preferred Securities.
Basis of Presentation:
The consolidated financial statements of the Company and its subsidiaries are
unaudited and should be read in conjunction with the consolidated financial
statements contained in the 2002 Annual Report on Form 10-K. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and conform to predominant
practices within the banking industry. Management of the Company has made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
the consolidated financial statements. In the opinion of management, all
adjustments and normal recurring accruals considered necessary for a fair
presentation of the results of operations for the interim periods presented
herein have been included. Operating results for the three months ended March
31, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003.
Reclassifications:
Certain amounts in the prior year financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform to current year
presentations.
Note 2. Capital Stock and Earnings Per Share
Common shares and preferred stock authorized total 6,000,000 shares and 500,000
shares, respectively. Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Diluted earnings per share is arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period. The average number of shares
of common stock outstanding for the first three months of 2003 and 2002 were
1,424,445 and 1,456,473, respectively. There were no common stock equivalents in
2003 or 2002.
Note 3. Commitments and Contingencies
The Banks are parties to financial instruments with off-balance-sheet risk made
in the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
6
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
March 31, 2003 December 31, 2002
----------------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit ........... $39,452,000 $44,521,000
Standby letters of credit .............. 1,938,000 2,539,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon and some of the commitments will be sold to other
financial intermediaries if drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks hold collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the Banks would be required to fund the commitment. The maximum potential amount
of future payments the Banks could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded, the
Banks would be entitled to seek recovery from the customer. At March 31, 2003
and December 31, 2002 no amounts have been recorded as liabilities for the
Banks' potential obligations under these guarantees.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $165,000 and $390,000 as of March 31, 2003 and
December 31, 2002, respectively. These amounts are included in loans at the
respective balance sheet dates.
7
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
The Company recorded net income of $617,000 for the quarter ended March 31,
2003, compared with net income of $855,000 for the quarter ended March 31, 2002,
a decrease of $238,000 or 27.8%. This decrease in net income was primarily
attributable to additional provision for loan losses at our Fairfield subsidiary
bank. Several of Fairfield's agricultural borrowers experienced disappointing
financial results during 2002 which were communicated to the bank during the
first quarter of 2003, resulting in the aforementioned higher provision for loan
losses expense. Basic and diluted earnings per share were $.43 during the first
quarter of 2003 versus $.59 for the same quarter in 2002, a decrease of $.16 or
27.1%. The Company's annualized return on average assets for the quarter ended
March 31, 2003 was .65% compared with a return of .91% for the quarter ended
March 31, 2002. The Company's annualized return on average equity was 10.1% and
15.9% for the three months ended March 31, 2003 and March 31, 2002,
respectively.
The distribution of average assets, liabilities and stockholder's equity and
interest rates, as well as intenrest differential was as follows (dollar amounts
in thousands and income and rates on a fully taxable equivalent basis using
statutory tax rates in effect for the year presented):
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
---------------------------- ---------------------------
Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------
Assets
Taxable loans, net .................... $268,640 $ 4,482 6.67% $270,308 $4,877 7.22%
Taxable investment securities available
for sale ............................ 21,327 256 4.80% 22,377 321 5.74%
Nontaxable investment securities and
loans ............................... 19,377 344 7.10% 19,440 348 7.17%
Federal funds sold .................... 43,098 117 1.09% 38,274 149 1.56%
Restricted investment securities ...... 3,957 31 3.13% 3,867 26 2.69%
Interest-bearing deposits at financial
institutions ........................ 3,807 22 2.31% 1,801 24 5.33%
------------------- -----------------
Total interest-earning assets ... 360,206 5,252 5.83% 356,067 5,745 6.45%
Cash and due from banks 14,210 12,471
Bank premises and equipment, net 5,762 5,014
Life insurance contracts 3,978 3,387
Other assets 3,686 3,400
-------- --------
Total $387,842 $380,339
======== ========
Liabilities
Deposits:
Interest-bearing demand ............. $117,692 $ 268 0.92% $113,227 $ 402 1.44%
Time ................................ 116,508 989 3.44% 115,129 1,142 4.02%
Notes payable ....................... 3,300 61 7.39% 5,825 108 7.42%
Other borrowings .................... 72,567 933 5.22% 76,642 1,078 5.72%
Company obligated mandatorily
redeemable preferred securities ... 4,000 103 10.30% 4,000 103 10.30%
-------------------- -----------------
Total interest-bearning
liabilities ..................... 314,067 2,354 3.04% 314,823 2,833 3.65%
-------- ------
Noninterest-bearing deposits .......... 44,643 39,739
Other liabilities ..................... 2,056 1,667
-------- --------
Total liabilities ............... 360,766 356,229
Redeemable common stock held by KSOP .. 2,717 2,242
Stockholders' equity 24,359 21,868
-------- --------
Total $387,842 $380,339
======== ========
Net interest earnings ................. $ 2,898 $2,911
======= ======
Net annualized yield (net
interest earnings divided by
total interst-earning assets) ... 3.22% 3.27%
===== =====
8
Nonaccruing loans are included in the average balance. Loan fees are not
material.
The net interest margin decreased slightly to 3.22% during the first quarter of
2003 compared to 3.27% during the first quarter of 2002. The return on average
interest-earning assets decreased 62 basis points (from 6.45% in 2002 to 5.83%
in 2003) and interest paid on average interest-bearing liabilities decreased 61
basis points (from 3.65% in 2002 to 3.04% in 2003).
The prime lending rate began the year 2002 at 4.75% and ended 2002 lower at
4.25%, where it has remained for the first three months of 2003. During this
period of low interest rates, increased emphasis has been given to incorporating
interest rate floors on selected commercial and agricultural loans. During the
first quarter of 2003 most, if not all, of such loans subject to interest rate
floors were actually paying the floor rate. This resulted in the rates received
on taxable loans falling slightly less than the rates paid on interest-bearing
liabilities (55 basis points versus 61 basis points). Eventually, when market
interest rates again rise, rates paid on interest-bearing liabilities may, for a
time, increase more than rates received on taxable loans. This outcome is
possible due to the loans which are subject to floor rate pricing lagging market
interest rate increases until such time as the floor rate has been exceeded. The
extent of this impact will depend on the amount and timing of eventual market
interest rate hikes.
Rates received during the first quarter of 2003 on taxable investment securities
available for sale have decreased at a faster pace than the rates paid on
interest-bearing liabilities (decreases of 94 basis points and 61 basis points,
respectively). This is largely due to maturities and early calls of taxable
investment securities coupled with reinvestment at appreciably lower interest
rates.
Rates received during the first quarter of 2003 on nontaxable investment
securities available for sale and loans have decreased at a much slower pace
than the rates paid on interest-bearing liabilities (decreases of 7 basis points
and 61 basis points, respectively). This was due largely to a longer average
duration for nontaxable investment securities available for sale and loans than
the average duration for interest-bearing liabilities. Most of the nontaxable
investment securities available for sale were purchased when market interest
rates were higher than rates currently available. In the current interest rate
environment, when taxable and nontaxable investment securities mature or are
sold, called, or otherwise paid down, the reinvestment rate available is nearly
always lower than the yield of the liquidating security.
The usage of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk, tends
to increase overall interest expense. The Company's reliance remained nearly
unchanged during the first three months of 2003 on such Federal Home Loan Bank
advances as a funding source. Total payments on advances of $5,149,000 were
nearly identical to the $5,150,000 of new advances.
Intense competition for all types of loans and deposits tends to limit the
Company's ability to control pricing and other terms when dealing with
customers.
Provisions for loan losses were $370,000 for the three months ended March 31,
2003. This was $302,000 more than the first quarter of 2002. Net loan
charge-offs through March 31, 2003 totaled $355,000 compared to net charge-offs
of only $29,000 for the first three months of 2002. Loan quality has been
negatively impacted by a variety of factors including, but not necessarily
limited to, a generally sluggish economy. Specifically, the quality of the
agricultural loan portfolio at our Fairfield subsidiary bank has declined.
Various strategies are being analyzed and implemented by management in an effort
to improve the loan quality of the portfolio in question. While cautiously
optimistic as to the likelihood of positive results emanating from the
strategies being employed, management realizes that significantly improving loan
quality is not normally a quick process.
The allowance for possible loan losses is maintained at the level considered
adequate by management of the Banks to provide for probable losses in the
existing loan portfolio. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs. In determining the adequacy of
the allowance balance the Banks make continuous evaluations of the loan
portfolio and related off-balance sheet commitments, consider current economic
conditions, the composition of the loan portfolio, historical loan loss
experience, review of specific problem loans, the estimated net realizable value
or the fair value of the underlying collateral, and other factors.
9
Nonaccrual loans totaled $2,287,000 at March 31, 2003, an increase of $1,591,000
or 229% from March 31, 2002. Other real estate owned totaled $545,000, an
increase of $294,000 or 117% from a year ago. Loans past due 90 days or more and
still accruing totaled $614,000, which was $369,000 or 151% more than a year
earlier. The allowance for possible loan losses of $3,319,000 represented 1.2%
of gross loans and 96.3% of total nonaccrual loans, other real estate owned, and
loans past due 90 days or more and still accruing.
Other income results from the charges and fees collected by the Company from its
customers for various services performed, gross trust department revenue,
miscellaneous other income and gains (or losses) from the sale of investment
securities in the available for sale category. Total other income for the first
quarter of 2003, without gains on investment securities, was $637,000; $53,000
or 9.1% more than the first quarter of 2002.
Operating expenses include all the costs incurred to operate the Company except
for interest expense, the loan loss provision and income taxes. For the quarter
ended March 31, 2003, salaries and employee benefits expense increased $41,000
or 3.3% due principally to normal cost of living and merit raises, training time
for new employees and rising health care cost. Occupancy and equipment expenses
decreased $19,000 or 5.4% primarily as a result of lower depreciation charges.
Office supplies and related expenses increased a modest $16,000. Computer
processing increased $9,000 or 7.4% as additional costs associated with enhanced
communications and disaster recovery contracts were recognized. Finally, other
operating expenses increased $10,000 or 3.1% largely due to the impact of higher
insurance premiums and losses on improperly endorsed checks. Total operating
expenses increased $47,000 or 2.2% during the first quarter of 2003 versus the
same quarter last year.
Income tax expense for the quarter ended March 31, 2003 of $241,000 represented
28.1% of income before taxes. The comparable quarter last year was 30.4% of
income before tax. This decline in income tax expense as a percentage of income
before taxes is largely the result of a higher portion of pretax income
comprised of nontaxable income in 2003 than 2002.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percent of net interest income plus noninterest income,
was 64.2% and 62.4% for the three months ended March 31, 2003 and 2002,
respectively. The primary reasons for this change in the efficiency ratio are
discussed above.
Discussion and Analysis of Financial Condition
The Company's total assets at March 31, 2003, were $400,184,000, an increase of
$21,479,000 or 5.7% from December 31, 2002. As of March 31, 2003, the Company
had $51,022,000 of federal funds sold compared to $30,600,000 at December 31,
2002. Additionally, interest-bearing deposits at financial institutions
(primarily fully FDIC insured certificates of deposit with original maturities
of two years or less and interest-bearing demand accounts at various banking
institutions) totaled $5,580,000 versus $1,791,000 at December 31, 2002. This
increase was primarily the result of higher yields available on such
certificates of deposit than could be obtained in the federal funds market.
Federal funds sold and other liquid assets have been higher the past few
quarters than the Company would historically consider normal. These liquid
assets may be used to fund future loan growth, deposit or other liability
outflows, purchases of investment securities available for sale when interest
rates again rise, or various other purposes as identified by management.
Total available for sale securities increased $164,000 or 0.4% during the first
three months of 2003 to total $38,259,000 at March 31, 2003. The Banks emphasize
purchase of securities with maturities of five years and less as such purchases
typically offer reasonable yields with limited credit risk as well as limited
interest rate risk. Additionally, selected securities with longer maturities are
owned in order to enhance overall portfolio yield without significantly
increasing risk. In the low interest rate environment which continued during the
first three months of 2003, the banks limited their purchases of securities to
approximately the total of securities that were sold, matured, called, or paid
down. Furthermore, most of the securities that were purchased had relatively
short maturities or likely early call dates. Securities sold during the quarter
ended March 31, 2003 of $257,000 resulted in net gains recognized totaling
$10,000.
Net loans totaled $270,701,000 at March 31, 2003, a decrease of $3,221,000 or
1.2% from December 31, 2002. Competition for high-quality loans remains intense,
particularly in the small consumer and residential real estate loan categories.
10
Total deposits at March 31, 2003, were $292,297,000, an increase of $21,875,000
or 8.1% from the balance at December 31, 2002. Certificates of deposit
represented on average for the three months ended March 31, 2003, approximately
42% of total deposits. Interest-bearing demand deposits, comprised of savings,
money market and NOW accounts, represented another 42% of average deposits. The
final 16% of average deposits were in noninterest-bearing accounts. Securities
sold under agreements to repurchase decreased $579,000 to $6,012,000, and
advances borrowed from the Federal Home Loan Bank remained nearly identical to
year-end 2002, totaling $64,610,000 at quarter end.
Note payable of $3,300,000 at March 31, 2003, was unchanged from December 31,
2002. This note balloons during the second quarter of 2003 and will be
refinanced at a variable rate considerably lower than its current fixed rate of
over 7.35%. Indications are this variable rate revolving five-year term note
will be priced at Prime less one percent, with a floor of 3.25% and a ceiling of
5.25%.
On March 28, 2001, the Company issued 4,000 shares totaling $4,000,000 of
Company Obligated Mandatorily Redeemable Preferred Securities of Iowa First
Capital Trust I. The securities provide for cumulative cash distributions
calculated at a 10.18% annual rate. The Company may, at one or more times, defer
interest payments on the capital securities for up to 10 consecutive semi-annual
periods, but not beyond June 8, 2031.
At the end of the deferral period, all accumulated and unpaid distributions will
be paid. The capital securities will be redeemed on June 8, 2031; however, the
Company has the option to shorten the maturity date to a date not earlier than
June 8, 2011. The redemption price begins at 105.09% to par and is reduced 51
basis points each year until June 8, 2021 when the capital securities can be
redeemed at par. Holders of the capital securities have no voting rights, are
unsecured, and rank junior in priority of payment to all of the Company's
indebtedness and senior to the Company's capital stock. For regulatory purposes,
the entire amount of the capital securities is allowed in the calculation of
Tier 1 capital. The capital securities are included in the balance sheet as a
liability with the cash distributions included in interest expense.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" refers to those assets and
liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative gap exists when
total interest-bearing liabilities are in excess of interest-earning assets.
Generally a positive repricing gap will result in increased net interest income
in a rising rate environment and decreased net interest income in a falling rate
environment. A negative repricing gap tends to produce increased net interest
income in a falling rate environment and decreased net interest income in a
rising rate environment. At March 31, 2003, rate sensitive liabilities exceeded
rate sensitive assets within a one year maturity range and, thus, the Company is
theoretically positioned to benefit from a decline in interest rates within the
next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change.
Because the repricing gap position does not capture these risks, Management
utilizes simulation modeling to measure and manage the rate sensitivity exposure
of earnings. The Company's simulation model provides a projection of the effect
on net interest income of various interest rate scenarios and balance sheet
strategies.
11
Liquidity
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are varied,
but include general economic conditions, asset/liability mix, bank reputation,
future FDIC funding needs, changes in regulatory environment, and credit
standing. Assets which provide liquidity consist principally of loans, cash and
due from banks, interest-bearing deposits at financial institutions, investment
securities, and short-term investments such as federal funds. Maturities of
securities held for investment purposes and loan payments provide a constant
flow of funds available for cash needs. Additionally, liquidity can be gained by
the sale of loans or securities prior to maturity if such assets had previously
been designated as available for sale. Interest rates, relative to the rate paid
by the security or loan sold, along with the maturity of the security or loan,
are the major determinates of the price which can be realized upon sale.
The stability of the Company's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer deposits
tend to be small in size, diversified across a large base of individuals, and
are government insured to the extent permitted by law. Total deposits at March
31, 2003, were $292,297,000 or 73.0% of total liabilities and equity.
Federal funds sold overnight totaled $51,022,000 or 12.7% of March 31, 2003,
total assets. These federal funds sold may be used to fund loans as well as
deposit withdrawals, or for other purposes as defined by management.
Securities available for sale with a fair value totaling $38,259,000 at
quarter-end included net unrealized gains of $1,764,000. These securities may be
sold in whole or in part to increase liquid assets, reposition the investment
portfolio, or for other purposes as defined by management.
Capital
Stockholders' equity increased $287,000 (1.2%) during the three months ended
March 31, 2003. This increase included net income of $617,000, growth of $5,000
in accumulated other comprehensive income, and $335,000 of dividends declared to
shareholders.
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a consistent system for
comparing capital positions of financial institutions and to take into account
the different inherent risks among financial institutions' assets and
off-balance-sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.
A comparison of the Company's capital as of March 31, 2003 with the requirements
to be considered adequately capitalized and well capitalized is presented below.
For Capital
Actual Adequacy Purposes
Total capital to risk-weighted assets 12.3% 8.00%
Tier 1 capital to risk-weighted assets 11.1% 4.00%
Tier 1 capital to average assets 7.7% 4.00%
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
12
Trends, Events or Uncertainties
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. All such transactions are on substantially the same
terms, including interest rates on loans and collateral, as those prevailing at
the time for comparable transactions with others, involve no more than normal
risk of collectibility, and present no other unfavorable features.
In the normal course of business, the Banks are involved in various legal
proceedings. In the current opinion of management, any liability resulting from
such proceedings would not have a material effect on the Company's financial
statements.
A substantial first floor remodeling of the Muscatine subsidiary bank's main
bank building in downtown Muscatine, Iowa, recently has been completed on time
and budget.
Subsequent to March 31, 2003, in May 2003, the Company completed construction of
and opened a new branch, designed to enhance its market presence in Muscatine,
Iowa. This branch is located on a major thoroughfare and retail area, Highway
61, on the northeast side of Muscatine. The branch offers a wide variety of
banking services in its 3,000 square feet of space. In addition to deposit
products, the new branch also offers consumer and real estate lending services.
A traditional inside four person teller line and four drive-up teller lanes are
complemented by freestanding twenty-four hour ATM services.
The Company has in the past purchased, and is authorized under an existing stock
repurchase plan to buy in the future, shares of its outstanding common stock for
the treasury as they become available. However, pursuant to the stock repurchase
plan approved by the Board of Directors, no shares were purchased by the Company
during the first quarter of 2003.
Current Accounting Developments
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Implementation of the Statement is not expected
to have a material impact on the consolidated financial statements.
The Financial Accounting Standards Board has issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation were applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Implementation
of these provisions of the Interpretation had no impact on the Company's
consolidated financial statements. The disclosure requirements of the
Interpretation were effective for financial statements of interim or annual
periods ending after December 15, 2002, and were adopted in the consolidated
financial statements for December 31, 2002 and these interim financial
statements for the period ending March 31, 2003.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this report, the
matters described herein contain certain forward-looking statements with respect
to the Company's financial condition, results of operations and business. These
forward-looking statements are subject to certain risks and uncertainties, not
all of which can be predicted or anticipated. Factors that may cause actual
results to differ materially from those contemplated by the forward-looking
statements herein include market conditions as well as conditions affecting the
banking industry generally and factors having a specific impact on the Company,
including but limited to fluctuations in interest rates and in the economy; the
impact of laws and regulations applicable to the Company and changes therein;
the impact of accounting pronouncements applicable to the Company and changes
therein; competitive conditions in the markets in which the Company operates,
including competition from banking and non-banking companies with substantially
greater resources; the Company's ability to control the composition of its loan
portfolio without adversely affecting interest income; the Company's dependence
on third party suppliers; and the Company's ability to respond to changes in
technology. Readers of this Form 10-Q should therefore not place undue reliance
on forward-looking statements.
13
Item 4. Controls and Procedures
During the 90-day period prior to the filing date of this report, management,
including the Company's Executive Vice President, Chief Operating Officer &
Treasurer and Chairman of the Board, President and CEO, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon, and as of the date of that evaluation, management
concluded that the disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and therefore,
no corrective actions were taken.
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of the Company held at its offices on April 17, 2003, the
shareholders elected the following individuals to the Board of Directors for the
indicated terms:
Votes in Favor Votes Against Votes Abstain Term
- --------------------------------------------------------------------------------
Kim K. Bartling 1,220,442 0 3,510 3 Years
Larry L. Emmert 1,223,142 0 810 3 Years
David R. Housley 1,223,142 0 810 3 Years
Richard L. Shepley 1,222,179 0 1,773 3 Years
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 99.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
A Form 8-K was filed on January 22, 2003 and consisted of a press
release discussing financial results of the Company for the
quarter and year ended December 31, 2002.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
(Registrant)
May 15, 2003 /s/ D. Scott Ingstad
- ---------------- -------------------------------
Date D. Scott Ingstad, Chairman
Of the Board, President and CEO
May 15, 2003 /s/ Kim K. Bartling
- ---------------- -------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
15
Section 302 Certification
I, Kim K. Bartling, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Iowa First Bancshares
Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 Signature: /s/ Kim K. Bartling
--------------- ------------------------------------------
Kim K. Bartling, Executive Vice President,
Chief Operating Officer & Treasurer
16
Section 302 Certification
I, D. Scott Ingstad, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Iowa First Bancshares
Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 Signature: /s/ D. Scott Instad
------------- ---------------------------------------------
D. Scott Ingstad, Vice Chairman of the
Board, President, and Chief Executive Officer
17