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 June 30, 2004
-------------
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ___________________ to _______________________
Commission file number 2-89283
------------------------------
IOWA FIRST BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF IOWA 42-1211285
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer of
incorporation or organization) Identification No.)
300 East Second Street
Muscatine, Iowa 52761
----------------------------------------
(Address of principal executive offices)
563-263-4221
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
At June 30, 2004 there were 1,387,779 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,
June 30, 2004 and December 31, 2003 3
Consolidated Condensed Statements of
Income, Three and Six Months Ended
June 30, 2004 and 2003 4
Consolidated Condensed Statements of
Cash Flows, Six Months Ended
June 30, 2004 and 2003 5
Notes to Consolidated Condensed
Financial Statements 6-7
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of
Operations 8-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 17
PART II Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
2004 2003
----------------------
ASSETS
Cash and due from banks ................................ $ 11,949 $ 12,988
Interest-bearing deposits at financial institutions .... 8,276 6,948
Federal funds sold ..................................... 24,445 31,414
Investment securities available for sale ............... 34,025 37,157
Loans, net of allowance for loan losses June 30, 2004,
$3,274; December 31, 2003, $3,180 .................... 280,472 266,925
Bank premises and equipment, net ....................... 6,789 6,764
Accrued interest receivable ............................ 2,151 2,231
Life insurance contracts ............................... 4,338 4,254
Restricted investment securities ....................... 2,800 3,028
Other assets ........................................... 697 705
----------------------
TOTAL ASSETS ................................... $ 375,942 $ 372,414
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 46,054 $ 47,549
Interest bearing deposits .............................. 238,957 230,027
----------------------
TOTAL DEPOSITS ................................. 285,011 277,576
Note payable ........................................... 2,800 2,700
Securities sold under agreements to
repurchase ........................................... 7,134 4,912
Federal Home Loan Bank advances ........................ 46,749 52,071
Treasury tax and loan open note ........................ 93 556
Junior subordinated debentures ......................... 4,125 4,125
Dividends payable ...................................... 337 343
Other liabilities ...................................... 1,565 1,723
----------------------
TOTAL LIABILITIES .............................. 347,814 344,006
----------------------
Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ......... 2,882 2,971
----------------------
STOCKHOLDERS' EQUITY
Common stock ........................................... 200 200
Additional paid-in capital ............................. 4,251 4,251
Retained earnings ...................................... 37,204 36,071
Accumulated other comprehensive income ................. 276 788
Less net cost of common shares acquired for the treasury (13,803) (12,902)
Less maximum cash obligation related to KSOP shares .... (2,882) (2,971)
----------------------
TOTAL STOCKHOLDERS' EQUITY ..................... 25,246 25,437
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 375,942 $ 372,414
======================
See notes to Consolidated Condensed Financial Statements.
3
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Condensed Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees:
Taxable ............................................. $ 4,060 $ 4,435 $ 8,133 $ 8,917
Nontaxable .......................................... 52 25 95 59
Investment securities available for sale:
Taxable ............................................. 175 247 376 503
Nontaxable .......................................... 166 183 337 376
Federal funds sold .................................... 75 141 157 258
Restricted investment securities ...................... 16 30 27 61
Other ................................................. 56 29 98 51
-------------------------------------
Total interest and dividend income .............. 4,600 5,090 9,223 10,225
-------------------------------------
INTEREST EXPENSE:
Deposits .............................................. 957 1,229 1,935 2,486
Note payable .......................................... 22 39 45 100
Other borrowed funds .................................. 627 876 1,296 1,806
Junior subordinated debentures ........................ 107 107 213 213
-------------------------------------
Total interest expense .......................... 1,713 2,251 3,489 4,605
-------------------------------------
Net interest income ............................. 2,887 2,839 5,734 5,620
Provision for loan losses ............................... 90 90 260 460
-------------------------------------
Net interest income after provision for
loan losses ..................................... 2,797 2,749 5,474 5,160
-------------------------------------
Other income:
Trust department ...................................... 95 95 187 190
Service fees .......................................... 485 415 914 763
Investment securities gains, net ...................... -- 12 33 22
Gains on loans sold ................................... 94 111 114 179
Corporate owned life insurance income ................. 43 54 89 108
Other ................................................. 127 78 199 150
-------------------------------------
Total other income .............................. 844 765 1,536 1,412
-------------------------------------
Operating expenses:
Salaries and employee benefits ........................ 1,275 1,218 2,550 2,484
Occupancy expenses, net ............................... 183 164 374 342
Equipment expenses .................................... 165 179 320 332
Office supplies, printing, and postage ................ 73 85 158 192
Computer costs ........................................ 131 135 260 265
Advertising and business promotion .................... 45 49 80 79
Other operating expenses .............................. 333 350 634 686
-------------------------------------
Total operating expenses ........................ 2,205 2,180 4,376 4,380
-------------------------------------
Income before income taxes ...................... $ 1,436 $ 1,334 $ 2,634 $ 2,192
Income taxes ............................................ 448 390 823 631
-------------------------------------
Net income ...................................... $ 988 $ 944 $ 1,811 $ 1,561
=====================================
Net income per common share, basic and diluted .......... $ 0.71 $ 0.67 $ 1.29 $ 1.10
=====================================
Dividends declared per common share ..................... $ 0.24 $ 0.24 $ 0.49 $ 0.47
=====================================
Comprehensive income .................................... $ 472 $ 1,015 $ 1,299 $ 1,637
=====================================
See notes to Consolidated Condensed Financial Statements
4
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For The Six Months Ended June 30, 2004 and 2003
(In Thousands)
(Unaudited)
2004 2003
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 1,811 $ 1,561
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from loans sold .......................................... 6,219 9,800
Loans underwritten ................................................ (6,254) (10,268)
Gains on loans sold ............................................... (114) (145)
Provision for loan losses ......................................... 260 460
Investment securities gains, net .................................. (33) (22)
Depreciation ...................................................... 284 259
Amortization of premiums and accretion of discounts
on investment securities available for sale, net ................ 114 95
Net decrease in accrued interest receivable ....................... 80 492
Net decrease in other assets ...................................... 102 27
Net increase in other liabilities ................................. 147 44
--------------------
Net cash provided by operating activities ................... $ 2,616 $ 2,303
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-bearing deposits at financial institutions $ (1,328) $ (4,850)
Net (increase) decrease in federal funds sold ..................... 6,969 (16,435)
Proceeds from sales of available for sale securities .............. 1,151 516
Proceeds from maturities, calls and paydowns of available for sale 12,037 4,251
Purchases of available for sale securities ........................ (10,954) (4,037)
Net (increase) decrease in loans .................................. (13,752) 2,692
Purchases of bank premises and equipment .......................... (309) (1,615)
Increase in cash value of life insurance contracts ................ (84) (100)
Proceeds from sales of restricted investment securities ........... 228 --
--------------------
Net cash (used in) investing activities ..................... $ (6,042) $(19,578)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits ........... $ (1,495) $ 853
Net increase in interest-bearing deposits ......................... 8,930 20,102
Net increase (decrease) in securities sold under
agreements to repurchase ........................................ 2,222 (1,588)
Net increase in line of credit .................................... 100 --
Repayment of note payable ......................................... -- (3,324)
Proceeds from note payable ........................................ -- 3,324
Net decrease in treasury tax and loan open note ................... (463) (88)
Advances from Federal Home Loan Bank .............................. -- 9,550
Payments of advances from Federal Home Loan Bank .................. (5,322) (14,407)
Cash dividends paid ............................................... (684) (670)
Purchases of common stock for the treasury ........................ (901) (107)
--------------------
Net cash provided by financing activities ................... $ 2,387 $ 13,645
--------------------
Net decrease in cash and due from banks .......................... (1,039) (3,630)
Beginning cash and due from banks ................................ $ 12,988 $ 17,283
--------------------
Ending cash and due from banks ................................... $ 11,949 $ 13,653
====================
Supplemental Disclosures of Cash Flow Information, cash payments for:
Interest .......................................................... $ 3,535 $ 4,676
Income taxes ...................................................... 689 697
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on investment securities available for sale, net . (512) 76
(Increase) in maximum cash obligations related to KSOP shares ..... 89 --
Transfers of loans to other real estate owned .................... 25 140
See notes to Consolidated Condensed Financial Statements.
5
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine (Muscatine) and First National
Bank in Fairfield (Fairfield). First National Bank of Muscatine has a total of
five locations in Muscatine, Iowa. First National Bank in Fairfield has two
locations in Fairfield, Iowa. Each bank is engaged in the general commercial
banking business and provides full service banking to individuals and
businesses, including checking, savings, money market and time deposit accounts,
commercial loans, consumer loans, real estate loans, safe deposit facilities,
transmitting of funds, trust services, and such other banking services as are
usual and customary for commercial banks. Some of these other services include
sweep accounts, lock-box deposits, debit cards, credit-related insurance,
internet banking, automated teller machines, telephone banking and investment
services through a third-party arrangement. The Company also owns the
outstanding stock of Iowa First Capital Trust I, which was capitalized in March
2001 for the purpose of issuing Company Obligated Mandatorily Redeemable
Preferred Securities.
Basis of Presentation:
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries, except Iowa First Capital Trust I, which under
current accounting rules, no longer meets the criteria for consolidation. The
consolidated financial statements are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2003
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and conform to predominant practices within the banking
industry. Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements. In the opinion of management, all adjustments and normal
recurring accruals considered necessary for a fair presentation of the results
of operations for the interim periods presented herein have been included.
Operating results for the three and six months ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
Reclassifications:
Certain amounts in the prior year financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform to current year
presentations.
Note 2. Capital Stock and Earnings Per Share
Common shares and preferred stock authorized total 6,000,000 shares and 500,000
shares, respectively. Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Diluted earnings per share is arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period. The average number of shares
of common stock outstanding for the three and six months ended June 30, 2004
were 1,398,886 and 1,406,240, respectively. The average number of shares of
common stock outstanding for the three and six months ended June 30, 2003 were
1,418,983 and 1,423,214, respectively. There were no common stock equivalents in
2004 or 2003.
Note 3. Commitments and Contingencies
The Banks are parties to financial instruments with off-balance-sheet risk made
in the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
6
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
Financial instruments whose contract June 30, December 31,
amounts represent credit risk: 2004 2003
- --------------------------------------------------------------------------------
Commitments to extend credit ............. $45,390,000 $43,843,000
Standby letters of credit ................ 1,956,000 2,336,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon and some of the commitments will be sold to other
financial intermediaries if drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks hold collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the Banks would be required to fund the commitment. The maximum potential amount
of future payments the Banks could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded, the
Banks would be entitled to seek recovery from the customer. At June 30, 2004 and
December 31, 2003 no amounts have been recorded as liabilities for the Banks'
potential obligations under these guarantees.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $80,000 and none as of June 30, 2004 and
December 31, 2003, respectively. These amounts, representing loans held for
sale, are included in loans at the respective balance sheet dates.
7
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations:
Quarter ended June 30, 2004 compared with quarter ended June 30, 2003:
The Company recorded net income of $988,000 for the quarter ended June 30, 2004,
compared with net income of $944,000 for the quarter ended June 30, 2003, an
increase of $44,000 or 4.7%. This increase in net income resulted from higher
net interest income, higher noninterest income, identical provision for loan
losses, and controlled noninterest expenses during the second quarter of 2004
compared to the second quarter of 2003.
Basic and diluted earnings per share were $.71 for the three months ended June
30, 2004, $.04 or 6.0% more than the same period in 2003. The Company's
annualized return on average assets for the second quarter of 2004 was 1.04%
compared to .95% during the second quarter of the prior year. The Company's
annualized return on average equity for the three months ended June 30, 2004 and
June 30, 2003 was 15.7% and 15.2%, respectively.
The distribution of average assets, liabilities and stockholders' equity and
interest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on fully taxable equivalent basis using
statutory tax rates in effect for the year presented):
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
------------------------------- ------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------
Assets
Taxable loans, net .................................. $268,798 $ 4,060 6.04% $270,395 $ 4,435 6.56%
Taxable investment securities available for sale .... 19,648 175 3.56% 21,903 247 4.51%
Nontaxable investment securities and loans .......... 19,186 330 6.89% 18,131 315 6.95%
Federal funds sold .................................. 33,716 75 0.89% 51,271 141 1.10%
Restricted investment securities .................... 2,897 16 2.21% 3,957 30 3.03%
Interest-bearing deposits at financial
institutions ...................................... 8,499 56 2.64% 5,166 29 2.25%
-------------------- -------------------
Total interest-earning assets ............... 352,744 4,712 5.34% 370,823 5,197 5.61%
-------- --------
Cash and due from banks ............................. 15,205 13,845
Bank premises and equipment, net .................... 6,748 6,498
Life insurance contracts ............................ 4,322 4,031
Other assets ........................................ 2,744 3,498
-------- --------
Total ....................................... $381,763 $398,695
======== ========
Liabilities
Deposits:
Interest-bearing demand ........................... $134,395 $ 192 0.57% $134,976 $ 274 0.81%
Time .............................................. 109,023 765 2.82% 114,833 955 3.34%
Note payable ........................................ 2,716 22 3.18% 3,300 39 4.73%
Other borrowings .................................... 54,259 627 4.64% 68,977 876 5.10%
Junior subordinated debentures ...................... 4,125 107 10.20% 4,125 107 10.20%
-------------------- --------
Total interest-bearing liabilities .......... 304,518 1,713 2.26% 326,211 2,251 2.77%
-------- -------
Noninterest-bearing deposits ........................ 46,997 42,811
Other liabilities ................................... 1,922 2,020
-------- --------
Total liabilities ........................... 353,437 371,042
Redeemable common stock held by KSOP ................ 3,072 2,717
Stockholders' Equity ................................ 25,254 24,936
-------- --------
Total ....................................... $381,763 $398,695
======== ========
Net interest earnings ............................... $ 2,999 $ 2,946
======== ========
Net Interest Margin (net interest earnings divided by
total interest-earning assets) .................... 3.41% 3.18%
====== ======
Nonaccruing loans are included in the average balance. Loan fees are not
material.
The net interest margin increased to 3.41% during the second quarter of 2004
compared to 3.18% during the second quarter of 2003. The return on average
interest-earning assets decreased 27 basis points (from 5.61% in 2003 to 5.34%
in 2004) and interest paid on average interest-bearing liabilities decreased 51
basis points (from 2.77% in 2003 to 2.26% in 2004).
8
The Federal Reserve Bank Board and Chairman Greenspan during all of 2003 and
through June 30, 2004, continued to manage short-term interest rates at, or
near, lows not seen in decades. The prime lending rate began 2003 at 4.25% and
ended the year at 4.00%, the same rate in effect as of June 30, 2004. This rate
was increased to 4.25% in early July, 2004, signaling a reversal of the Federal
Reserve Bank's accommodative monetary policy. During this period of historically
low interest rates, the Company has emphasized the utilization of interest rate
floors on selected commercial and agricultural loans. During the first two
quarters of 2004 and the entire year of 2003 most, if not all, of such loans
subject to interest rate floors were actually paying the floor rate. This,
coupled with a change in the mix of the loan portfolio, resulted in the rates
received on taxable loans during the second quarter of 2004, versus the second
quarter of 2003, declining the same amount as the rates paid on interest-bearing
liabilities (51 basis points). As market interest rates 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 future market interest rate hikes.
Rates received on taxable investment securities available for sale have
decreased during the second quarter of 2004, compared to the second quarter of
2003, at a faster pace than the rates paid on interest-bearing liabilities
(decreases of 95 basis points and 51 basis points, respectively). This is
largely due to maturities and early calls of taxable investment securities
coupled with reinvestment at appreciably lower interest rates. This portfolio,
however, with an average maturity of less than four years, had an interest rate
return during the quarter similar to that of five year treasury securities.
Rates received during the quarter ended June 30, 2004, versus the second quarter
of 2003, on nontaxable investment securities available for sale and loans
decreased at a much slower pace than the rates paid on interest-bearing
liabilities (decreases of 6 basis points and 51 basis points, respectively).
This was due largely to a longer average duration for nontaxable investment
securities available for sale and loans than the average duration for
interest-bearing liabilities. Most of the nontaxable investment securities
available for sale were purchased when market interest rates were higher than
rates currently available. In the current interest rate environment, when
taxable and nontaxable investment securities mature or are sold, called, or
otherwise paid down, the reinvestment rate available is nearly always lower than
the yield of the liquidating security.
The rate received on overnight federal funds sold to other banks decreased 21
basis points during the second quarter of 2004, compared to the same quarter of
2003. Given the Company's relatively large balance held in federal funds sold
(8.8% of quarterly average assets), this caused downward pressure on the net
interest income. As of June 30, 2004, total federal funds sold to total assets
had been reduced to 6.5%. These federal funds sold can be used to fund future
loan demand, deposit or other liability outflows, investment securities
purchases, or various other purposes as identified by management.
The rate earned on interest-bearing deposits at financial institutions
(primarily FDIC insured certificates of deposit) increased 39 basis points
during the second quarter of 2004 versus the same quarter of 2003, while the
average balance increased over $3,300,000. This asset category was emphasized as
it yielded 175 basis points over federal funds sold with little, if any, credit
risk. The average duration of interest-bearing deposits at financial
institutions was less than two years during the quarter ended June 30, 2004.
During this period of low market interest rates, the rates paid on
interest-bearing demand and time deposits were reduced 24 basis points and 52
basis points, respectively, when comparing the second quarters of 2004 and 2003.
The rate paid on the note payable outstanding declined a substantial 155 basis
points during the second quarter of 2004 compared to the same quarter of 2003.
This was the result of refinancing this debt with a different lender at far more
favorable terms. The impact at this refinancing was reflected the entire second
quarter of 2004, compared to only a portion of 2003.
The usage of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk,
tended to increase overall interest expense. The Company's average rate paid for
such Federal Home Loan Bank advances and other funds was reduced by 46 basis
points when comparing the second quarters of 2004 and 2003. Management has
noticeably reduced reliance on wholesale funding sources as evidenced by the
average balance in this category declining nearly $15 million during the second
quarter of 2004 compared to the second quarter of 2003.
9
Intense competition for all types of loans and deposits tends to limit the
Company's ability to control pricing and other terms when dealing with
customers. Despite these limitations, the Company was able to increase the
overall net interest margin to 3.41% during the three months ended June 30,
2004, compared to 3.18% for the same period last year.
Provisions for loan losses were $90,000 for the three months ended June 30, 2004
and June 30, 2003. Net loan charge-offs for the quarter ended June 30, 2004
totaled only $26,000 compared to net charge-offs of $54,000 for the same quarter
in 2003.
The allowance for possible loan losses is maintained at the level considered
adequate by management of the Banks to provide for probable losses in the
existing loan portfolio. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs. In determining the adequacy of
the allowance balance the Banks make continuous evaluations of the loan
portfolio and related off-balance sheet commitments, consider current economic
conditions, the composition of the loan portfolio, historical loan loss
experience, review of specific problem loans, the estimated net realizable value
or the fair value of the underlying collateral, and other factors. There can be
no assurance that loan losses will not exceed the estimated amounts or that the
company will not be required to make additional provisions for loan losses in
the future. Asset quality is a constant priority for the Company and its
subsidiary banks. Should the economic climate deteriorate, borrowers may
experience difficulty, and the level of non-performing, charge-offs, and
delinquencies could rise thus requiring further increases in the provision.
Nonaccrual loans totaled $1,962,000 at June 30, 2004, a decrease of $161,000 or
7.6% from December 31, 2003. There was no other real estate owned at June 30,
2004 or December 31, 2003. Loans past due 90 days or more and still accruing
totaled $203,000, which was $12,000 or 5.6% less than at year-end 2003. The
allowance for possible loan losses of $3,274,000 at June 30, 2004, represented
1.2% of gross loans and 151% of total nonaccrual loans, other real estate owned,
and loans past due 90 days or more and still accruing.
Other income results from the charges and fees collected by the Company from its
customers for various services performed, gross trust department revenue,
miscellaneous other income and gains (or losses) from the sale of investment
securities in the available for sale category and loans. Total other income for
the second quarter of 2004 was $844,000; $79,000 or 10.3% more than the second
quarter of 2003. Service fees, particularly on deposit accounts, were the
largest single area of growth in the other income category, exhibiting an
increase of $70,000 or 16.9%. Due to a significant reduction in loan
refinancings, gains on loans sold declined $42,000 or 37.8%. Finally,
miscellaneous other income rose $49,000 or 62.8%. The majority of this $49,000
increase in the second quarter of 2004 compared to the same quarter in 2003
resulted from a non-recurring revenue source.
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 June 30, 2004, salaries and employee benefits expense increased $57,000 or
4.7% due to normal raises, incentives and the rising cost of benefits. Occupancy
and equipment expenses increased very modestly by $5,000 or 1.5%. All other
operating expenses decreased $37,000 or 6.0% due largely to lower costs for
supplies, printing and postage, as well as loan related expenses and insurance.
Total operating expenses increased a very slight $25,000 or 1.1% during the
second quarter of 2004 versus the same quarter last year.
Income tax expense for the quarter ended June 30, 2004 of $448,000 represented
31.2% of income before taxes. For the comparable quarter last year income tax
expense was 29.2% of income before tax.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percent of net interest income plus noninterest income,
was 59.0% and 60.5% for the three months ended June 30, 2004 and 2003,
respectively. The primary reasons for this improvement in the efficiency ratio
are discussed previously in this report.
Results of Operations:
Six months ended June 30, 2004 compared with six months ended June 30, 2003
The Company recorded net income of $1,811,000 for the six months ended June 30,
2004, compared with net income of $1,561,000 for the two quarters ended June 30,
2003, an increase of $250,000 or 16.0%. This increase in net income resulted
from higher net interest income, higher noninterest income, lower provision for
loan losses, and tightly controlled noninterest expenses during the first two
quarters of 2004 compared to the same period during 2003.
Basic and diluted earnings per share were $1.29 for the six months ended June
30, 2004, $.19 or 17.3% more than the same period in 2003. The Company's
annualized return on average assets for the first two quarters of 2004 was .96%
compared to .80% during the same quarters of the prior year. The Company's
annualized return on average equity for the six months ended June 30, 2004 and
June 30, 2003 was 14.4% and 12.7%, respectively.
10
The distribution of average assets, liabilities and stockholders' equity and
interest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on fully taxable equivalent basis using
statutory tax rates in effect for the year presented):
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
-----------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------
Assets
Taxable loans, net ............................. $265,200 $ 8,133 6.13% $269,522 $ 8,917 6.62%
Taxable investment securities available for sale 19,844 376 3.79% 21,616 503 4.65%
Nontaxable investment securities and loans ..... 19,017 655 6.89% 18,750 659 7.03%
Federal funds sold ............................. 35,517 157 0.89% 47,207 258 1.09%
Restricted investment securities ............... 2,949 27 1.83% 3,957 61 3.08%
Interest-bearing deposits at financial
institutions ................................. 8,019 98 2.44% 4,490 51 2.27%
-------------------- -------------------
Total interest-earning assets ............. 350,546 9,446 5.39% 365,542 10,449 5.72%
-------- --------
Cash and due from banks ........................ 14,730 14,027
Bank premises and equipment, net ............... 6,747 6,129
Life insurance contracts ....................... 4,301 4,005
Other assets ................................... 2,705 3,744
-------- --------
Total ..................................... $379,029 $393,447
======== ========
Liabilities
Deposits:
Interest-bearing demand ...................... $130,235 $ 369 0.57% $126,382 $ 542 0.86%
Time ......................................... 109,531 1,566 2.88% 115,666 1,944 3.39%
Note payable ................................... 2,738 45 3.26% 3,300 100 6.06%
Other borrowings ............................... 55,673 1,296 4.70% 70,825 1,806 5.14%
Junior subordinated debentures ................. 4,125 213 10.26% 4,125 213 10.26%
-------------------- -------------------
Total interest-bearing liabilities ........ 302,302 3,489 2.33% 320,298 4,605 2.90%
-------- --------
Noninterest-bearing deposits ................... 46,440 43,720
Other liabilities .............................. 1,809 1,896
-------- --------
Total liabilities ......................... 350,551 365,914
Redeemable common stock held by KSOP ........... 3,038 2,717
Stockholders' Equity ........................... 25,440 24,816
-------- --------
Total ..................................... $379,029 $393,447
======== ========
Net interest earnings .......................... $ 5,957 $ 5,844
======== ========
Net Interest Margin (net interest earnings
divided by total interest-earning assets) ...... 3.40% 3.20%
====== ======
Nonaccruing loans are included in the average balance. Loan fees are not
material.
11
The net interest margin increased to 3.40% during the first two quarters of 2004
compared to 3.20% during the first two quarters of 2003. The return on average
interest-earning assets decreased 33 basis points (from 5.72% in 2003 to 5.39%
in 2004) and interest paid on average interest-bearing liabilities decreased 57
basis points (from 2.90% in 2003 to 2.33% in 2004).
Rates received during the first two quarters of 2004, compared to the same
quarters in 2003, on taxable loans decreased less than rates paid on
interest-bearing liabilities (decreases of 49 basis points and 57 basis points,
respectively).
Rates received on taxable investment securities available for sale have
decreased during the first six months of 2004, compared to the same period in
2003, at a faster pace than the rates paid on interest-bearing liabilities
(decreases of 86 basis points and 57 basis points, respectively). This is
largely due to maturities and early calls of taxable investment securities
coupled with reinvestment at appreciably lower interest rates. This portfolio,
however, with an average maturity of less than four years, had an interest rate
return during the first six months in excess of the interest return earned on
five year treasury securities.
Rates received during the first two quarters of 2004, versus the first two
quarters of 2003, on nontaxable investment securities available for sale and
loans decreased at a much slower pace than the rates paid on interest-bearing
liabilities (decreases of 14 basis points and 57 basis points, respectively).
This was due largely to a longer average duration for nontaxable investment
securities available for sale and loans than the average duration for
interest-bearing liabilities. Most of the nontaxable investment securities
available for sale were purchased when market interest rates were higher than
rates currently available. In the current interest rate environment, when
taxable and nontaxable investment securities mature or are sold, called, or
otherwise paid down, the reinvestment rate available is nearly always lower than
the yield of the liquidating security.
The rate received on overnight federal funds sold to other banks decreased 20
basis points during the first six months of 2004, compared to the same period in
2003. Given the Company's relatively large balance held in federal funds sold
(9.4% of year-to-date average assets), this caused downward pressure on the net
interest income. As of June 30, 2004, total federal funds sold to total assets
had been reduced to 6.5%. These federal funds sold can be used to fund future
loan demand, deposit or other liability outflows, investment securities
purchases, or various other purposes as identified by management.
The rate earned on interest-bearing deposits at financial institutions
(primarily FDIC insured certificates of deposit) increased 17 basis points
during the first six months of 2004 versus the first six months of 2003, while
the average balance increased over $3,500,000. This asset category was
emphasized as it yielded 155 basis points over federal funds sold with little,
if any, credit risk. The average duration of interest-bearing deposits at
financial institutions was less than two years during the six months ended June
30, 2004.
During this period of low market interest rates, the rates paid on
interest-bearing demand and time deposits were reduced 29 basis points and 51
basis points, respectively, when comparing the first two quarters of 2004 and
2003.
The rate paid on the note payable outstanding declined a remarkable 280 basis
points during the first six months of 2004 compared to the same period in 2003.
This was the result of refinancing this debt with a different lender at far more
favorable terms. The impact of this refinancing was reflected the entire second
quarter of 2004 compared to only a portion of 2003.
The usage of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk,
tended to increase overall interest expense. The Company's average rate paid for
such Federal Home Loan Bank advances and other funds was reduced by 44 basis
points when comparing the first two quarters of 2004 and 2003. Management has
noticeably reduced reliance on wholesale funding sources as evidenced by the
average balance in this category declining over $15 million during the first two
quarters of 2004 compared with 2003.
Intense competition for all types of loans and deposits tends to limit the
Company's ability to control pricing and other terms when dealing with
customers. Despite these limitations, the Company was able to increase the
overall net interest margin to 3.40% during the six months ended June 30, 2004,
compared to 3.20% for the same period last year.
Provisions for loan losses were $260,000 for the six months ended June 30, 2004,
compared to $460,000 for the six months ended June 30, 2003. Net loan
charge-offs for the two quarters ended June 30, 2004 totaled $166,000 compared
to net charge-offs of $409,000 for the same quarters in 2003. The loan losses in
2003 were primarily attributable to two agricultural loans at our Fairfield
subsidiary bank.
12
Other income results from the charges and fees collected by the Company from its
customers for various services performed, gross trust department revenue,
miscellaneous other income and gains (or losses) from the sale of investment
securities in the available for sale category and loans. Total other income for
the first six months of 2004 was $1,536,000; $124,000 or 8.8% more than the
first six months of 2003. Service fees, particularly on deposit accounts, were
the largest single area of growth in the other income category, exhibiting an
increase of $151,000 or 19.8%. Due to a significant reduction in loan
refinancings, gains on loans sold declined $65,000 or 36.3%. Finally,
miscellaneous other income rose $49,000 or 32.7%. The majority of this $49,000
increase in the first six months of 2004 compared to the same period in 2003
resulted from a non-recurring revenue source.
Operating expenses include all the costs incurred to operate the Company except
for interest expense, the loan loss provision and income taxes. For the two
quarters ended June 30, 2004, salaries and employee benefits expense increased
$66,000 or 2.7% due to normal raises, incentives and the rising cost of
benefits. Occupancy and equipment expenses increased $20,000 or 3.0%. All other
operating expenses decreased $102,000 or 8.3% due largely to lower costs for
supplies, printing, postage, loan related expenses, insurance, and final
settlement of a non-recurring liability at an amount approximately $20,000 more
advantageous to the Company than previously anticipated and accrued for. Total
operating expenses decreased a slight $4,000 or 0.1% during the first two
quarters of 2004 versus the same quarters last year.
Income tax expense for the first six months of 2004 was 31.3% of income before
tax. For the comparable period last year income tax expense was 28.8% of income
before tax.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percent of net interest income plus noninterest income,
was 60.2% and 62.3% for the six months ended June 30, 2004 and 2003,
respectively. The primary reasons for this improvement in the efficiency ratio
are discussed previously in this report.
Discussion and Analysis of Financial Condition
The Company's assets at June 30, 2004 totaled $375,942,000, an increase of
$3,528,000 or 1.0% from December 31, 2003. As of June 30, 2004, the Company had
$24,445,000 of federal funds sold compared to $31,414,000 at December 31, 2003.
Additionally, interest-bearing deposits at financial institutions (primarily
fully FDIC insured certificates of deposit) as well as some interest-bearing
demand accounts at various banking institutions totaled $8,276,000 versus
$6,948,000 at December 31, 2003. This increase was primarily the result of
higher yields available on such certificates of deposit than could be obtained
in the federal funds and treasury securities markets. Federal funds sold and
other liquid assets have been higher the past several quarters than the Company
would historically consider normal. These liquid assets may be used to fund
future loan growth, deposit or other liability outflows, purchases of investment
securities available for sale when interest rates again rise, or various other
purposes as identified by management.
Total available for sale securities decreased $3,132,000 or 8.4% during the
first six months of 2004 to total $34,025,000 at June 30, 2004. The Banks
emphasize purchase of securities with maturities of five years and less as such
purchases typically offer reasonable yields with limited credit risk as well as
limited interest rate risk. Additionally, selected securities with longer
maturities are owned in order to enhance overall portfolio yield without
significantly increasing risk. In the low interest rate environment which
continued during the first two quarters of 2004, the banks limited their
purchases of securities to less than the total of securities that were sold,
matured, called, or paid down. Furthermore, most of the securities that were
purchased had relatively short maturities or likely early call dates. Securities
sold thus far in 2004 totaled $1,151,000 and resulted in net gains recognized of
$33,000.
Net loans totaled $280,472,000 at June 30, 2004, an encouraging increase of
$13,547,000 or 5.1% from December 31, 2003. Competition for high-quality loans
remains intense in all loan categories. Refinancing of home loans continued,
albeit at a substantially slower pace than during the first two quarters of
2003. The Company sells many of these loans in the secondary market.
Consequently, the loans which are sold, as well as the loans remaining in the
Company's portfolio but refinanced at lower rates, combine to put downward
pressure on loan yields and the volume of home loans on the balance sheet.
13
Total deposits at June 30, 2004, were $285,011,000, an increase of $7,435,000 or
2.7% from the balance at December 31, 2003. Certificates of deposit represented
on average for the six months ended June 30, 2004, approximately 38% of total
deposits. Interest-bearing demand deposits, comprised of savings, money market
and NOW accounts, represented another 46% of average deposits. The final 16% of
average deposits were in noninterest-bearing accounts. Securities sold under
agreements to repurchase increased $2,222,000 to $7,134,000, and advances
borrowed from the Federal Home Loan Bank declined by $5,322,000 from year-end
2003, totaling $46,749,000 at quarter end.
The note payable balance of $2,800,000 at June 30, 2004, was $100,000 higher
than the December 31, 2003, balance due to short-term borrowing for holding
company cash flow management purposes. Repayment of this $100,000 short-term
borrowing is anticipated during the 3rd quarter of 2004. The next scheduled
annual principal payment of $600,000 is due at the end of the third quarter of
2004. This note was refinanced during the second quarter of 2003. The new
variable rate revolving five-year term note is priced at Prime less one percent,
with a floor of 3.25% and a ceiling of 5.25%, considerably lower than the prior
fixed rate of over 7.35%.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" refers to those assets and
liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative gap exists when
total interest-bearing liabilities are in excess of interest-earning assets.
Generally a positive repricing gap will result in increased net interest income
in a rising rate environment and decreased net interest income in a falling rate
environment. A negative repricing gap tends to produce increased net interest
income in a falling rate environment and decreased net interest income in a
rising rate environment. At June 30, 2004, rate sensitive liabilities exceeded
rate sensitive assets within a one year maturity range and, thus, the Company is
theoretically positioned to benefit from a decline in interest rates within the
next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change. Because the repricing gap position does not capture
these risks, Management utilizes simulation modeling to measure and manage the
rate sensitivity exposure of earnings. The Company's simulation model provides a
projection of the effect on net interest income of various interest rate
scenarios and balance sheet strategies.
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.
14
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 June
30, 2004, were $285,011,000 or 75.8% of total liabilities and equity.
Federal funds sold overnight totaled 24,445,000 or 6.5% of June 30, 2004 total
assets. These federal funds sold may be used to fund loans as well as deposit
withdrawals, or for other purposes as defined by management.
Securities available for sale with a fair value totaling $34,025,000 at
quarter-end included net unrealized gains of $440,000. These securities may be
sold in whole or in part to increase liquid assets, reposition the investment
portfolio, or for other purposes as defined by management.
Capital
Stockholders' equity decreased $47,000 (0.2%) and $191,000 (0.8%) during the
three and six months ended June 30, 2004, respectively. The year-to-date
decrease included net income of $1,811,000, decrease of $512,000 in accumulated
other comprehensive income, $678,000 of dividends declared to shareholders,
$901,000 of treasury share purchases and $89,000 decrease in the maximum
obligation related to KSOP shares.
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a consistent system for
comparing capital positions of financial institutions and to take into account
the different inherent risks among financial institutions' assets and
off-balance-sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.
A comparison of the Company's capital as of June 30, 2004 with the requirements
to be considered adequately capitalized is presented below.
For Capital
Actual Adequacy Purposes
-----------------------------
Total capital to risk-weighted assets ........ 12.7% 8.00%
Tier 1 capital to risk-weighted assets ....... 11.5% 4.00%
Tier 1 capital to average assets ............. 8.2% 4.00%
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Trends, Events or Uncertainties
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. 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.
15
The Company began construction during the second quarter of 2004 of a new branch
facility on the west side of Muscatine, Iowa. This branch is scheduled to be
completed before year-end 2004. The branch is anticipated to offer a wide array
of banking services and is located in a section of Muscatine in which the
Company has no current banking facilities. The total cost of this branch,
including the underlying real estate and equipment, is anticipated to be
approximately $900,000.
The Company has in the past purchased, and is authorized under an existing stock
repurchase plan to buy in the future, shares of its outstanding common stock for
the treasury as they become available. Pursuant to the stock repurchase plan
approved by the Board of Directors, 18,138 shares were purchased by the Company
during the second quarter of 2004 and 29,781 shares were purchased during the
first two quarters of 2004. See Part II, Item 2 of this Form 10-Q for further
detail regarding purchases of equity securities for the treasury.
Current Accounting Developments
The Financial Accounting Standard Board has issued Interpretation (FIN)46R,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 which, for the Company, was effective for the year
ended December 31, 2003. FIN 46R establishes accounting guidance for
consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46R, VIE's were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity.
Under the provisions of FIN 46R, Iowa First Capital Trust I, a 100% owned
subsidiary of the Company, no longer meets the criteria for consolidation. FIN
46 was adopted on a prospective basis on December 31, 2003. As a result, the
June 30, 2004 and December 31, 2003 balance sheets include $4,125,000 of junior
subordinated debentures which, in prior periods, was classified in the balance
sheet as $4,000,000 of Company Obligated Mandatorily Redeemable Preferred
Securities, after a consolidation elimination of $125,000. Additionally, the
June 30, 2004 and 2003 income statements include $213,000 of interest expense on
junior subordinated debentures which, for prior periods, was classified as
$207,000 of interest expense on Company Obligated Mandatorily Redeemable
Preferred Securities, after a consolidation elimination of $6,000.
On May 6, 2004 the Board of Governors of the Federal Reserve System (the
"Board") issued a Notice of Proposed Rulemaking in which it proposed to allow
the continued inclusion of trust preferred securities in the tier 1 capital of
bank holding company's cumulative perpetual preferred stock, trust preferred
securities and other minority interests to 25% of the company's core capital
elements, net of goodwill. Current regulations do not require the deduction of
goodwill. The proposal also provides that amounts of qualifying trust preferred
securities and certain minority interests in excess of the 25% limit may be
included in tier 2 capital, but would be limited, together with subordinated
debt and limited-life preferred stock, to 50% of tier 1 capital. The proposal
provides for a three-year transition period for bank holding companies to meet
these quantitative limitations. Implementation of the proposal, in its present
form, is not expected to have a material impact on the consolidated financial
statements.
"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 not limited to fluctuations in interest rates and in the economy;
the impact of laws and regulations applicable to the Company and changes
therein; the impact of accounting pronouncements applicable to the Company and
changes therein; competitive conditions in the markets in which the Company
operates, including competition from banking and non-banking companies with
substantially greater resources; the Company's ability to control the
composition of its loan portfolio without adversely affecting interest income;
the Company's dependence on third party suppliers; and the Company's ability to
respond to changes in technology. Readers of this Form 10-Q should therefore not
place undue reliance on forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in the quantitative and qualitative market risks
since the prior year-end. Such risks were described in the Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2003.
16
Item 4. Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer (Chairman of the Board, President and CEO) and principal
financial officer (Executive Vice President, Chief Operating Officer &
Treasurer), of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There was no change in
the Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has no legal proceedings which are deemed material.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
During the quarter ended June 30, 2004, the Company purchased its own
common stock, detailed as follows:
Total
Number of Maximum
Shares Number of
Purchased Shares That
Total As Part of May Yet Be
Number of Average Publicly Purchased
Shares Price Paid Announced Under The
Period Purchased Per Share Plan (1) Plan (1)
- ------------------------------------------------------------------------------------
April 1 - April 30, 2004 5,200 $30.70 5,200 33,110
May 1 - May 31, 2004 5,500 $31.20 5,500 27,610
June 1 - June 30, 2004 7,438 $31.00 7,438 30,172
(1) In May 2002, the Company's board of directors approved a stock repurchase
plan of up to 75,000 shares, or approximately 5.2% of the then outstanding
shares. The Company's board of directors in June 2004 increased this stock
repurchase plan by authorizing the purchase of an additional 10,000 shares.
This stock repurchase plan has no stated expiration date and is the
Company's only current, publicly-announced stock repurchase plan. The
Company anticipates future purchases under this stock repurchase plan.
The above table is required for any equity securities of the Company which have
been registered by the Company pursuant to section 12 of the Securities Exchange
Act of 1934. The Company has only filed a registration statement with the SEC
under the Securities Act of 1933 and, therefore, its equity securities are only
registered under section 15(d) of the Exchange Act. Thus, while the above table
is not required, it has been provided in the interest of high-quality
disclosure.
Item 3. Defaults Upon Senior Securities
There have been no defaults upon senior securities by the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the current
quarter.
Item 5. Other Information
There has been no new information not previously disclosed requiring disclosure
under this item.
17
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 31.1 - Certification pursuant to Rule 13a-15(e) and 15d-15(e)
Exhibit 31.2 - Certification pursuant to Rule 13a-15(e) and 15d-15(e)
Exhibit 32.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
A Form 8-K was filed on April 22, 2004 consisting of a press release
discussing financial results of the Company for the quarter ended March
31, 2004 as well as the shareholder dividend payable in April 2004.
A Form 8-K was filed on July 22, 2004 consisting of a press release
discussing financial results of the Company for the quarter and six
months ended June 30, 2004 as well as the shareholder dividend payable
in July 2004.
18
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
(Registrant)
August 13, 2004 /s/ D. Scott Ingstad
- --------------- -------------------------------
Date D. Scott Ingstad, Chairman of
the Board, President and CEO
August 13, 2004 /s/ Kim K. Bartling
- --------------- -------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
19