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, 2002
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 [ ]
At June 30, 2002 there were 1,437,416 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, 2002 and December 31, 2001 3
Consolidated Condensed Statements of
Income, Three and Six Months Ended
June 30, 2002 and 2001 4
Consolidated Condensed Statements of
Cash Flows, Six Months Ended
June 30, 2002 and 2001 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7 - 13
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
2002 2001
----------------------
ASSETS
Cash and due from banks ................................ $ 14,536 $ 14,661
Interest-bearing deposits at financial institutions .... 2,148 1,620
Federal funds sold ..................................... 25,585 31,000
Investment securities available for sale ............... 38,215 44,466
Loans, net of allowance for loan losses June 30, 2002,
$3,314; December 31, 2001, $3,182 .................... 278,093 272,695
Bank premises and equipment, net ....................... 4,903 5,055
Accrued interest receivable ............................ 2,390 2,793
Life insurance contracts ............................... 3,854 3,361
Restricted investment securities ....................... 3,911 3,868
Other assets ........................................... 1,172 1,078
----------------------
TOTAL ASSETS ................................... $ 374,807 $ 380,597
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 42,185 $ 42,165
Interest bearing deposits .............................. 225,390 225,359
----------------------
TOTAL DEPOSITS ................................. 267,575 267,524
Notes payable .......................................... 3,300 5,419
Securities sold under agreements to
repurchase ........................................... 4,913 5,068
Federal Home Loan Bank advances ........................ 66,057 70,706
Treasury tax and loan open note ........................ 917 622
Company obligated mandatorily redeemable preferred
securities of subsidiary trust ....................... 4,000 4,000
Dividends payable ...................................... 327 331
Other liabilities ...................................... 1,654 1,645
----------------------
TOTAL LIABILITIES .............................. 348,743 355,315
----------------------
Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ......... 2,242 2,242
----------------------
STOCKHOLDERS' EQUITY
Common stock ........................................... 200 200
Additional paid-in capital ............................. 4,263 4,265
Retained earnings ...................................... 33,010 31,944
Accumulated other comprehensive income ................. 999 858
Less net cost of common shares acquired for the treasury (12,408) (11,985)
Less maximum cash obligation related to KSOP shares .... (2,242) (2,242)
----------------------
TOTAL STOCKHOLDERS' EQUITY ..................... 23,822 23,040
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 374,807 $ 380,597
======================
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,
2002 2001 2002 2001
--------------------------------------
INTEREST INCOME:
Interest and fees on loans:
Taxable ........................................... $ 4,950 $ 5,632 $ 9,827 $11,286
Nontaxable ........................................ 24 30 43 64
Interest on investment securities available for sale:
Taxable ........................................... 294 531 615 1,160
Nontaxable ........................................ 207 239 418 482
Interest on federal funds sold ...................... 128 201 277 360
Dividends on restricted investment securities ....... 31 45 57 98
Other ............................................... 20 16 44 16
-------------------------------------
Total interest income ............................... 5,654 6,694 11,281 13,466
-------------------------------------
INTEREST EXPENSE:
Interest on deposits ................................ 1,495 2,718 3,039 5,507
Interest on notes payable ........................... 75 107 183 227
Interest on other borrowed funds .................... 1,041 1,061 2,120 2,203
Interest on company obligated mandatorily
redeemable preferred securities of subsidiary trust 105 105 207 105
-------------------------------------
Total interest expense .............................. 2,716 3,991 5,549 8,042
-------------------------------------
Net interest income ................................. 2,938 2,703 5,732 5,424
Provision for loan losses .............................. 167 139 235 178
-------------------------------------
Net interest income after provision for
loan losses ....................................... 2,771 2,564 5,497 5,246
-------------------------------------
Other income:
Trust department .................................... 103 93 207 186
Service fees ........................................ 372 343 706 653
Investment securities gains, net .................... 8 38 80 99
Other ............................................... 158 219 327 373
-------------------------------------
Total other income ................................ 641 693 1,320 1,311
-------------------------------------
Operating expenses:
Salaries and employee benefits ...................... 1,193 1,202 2,418 2,383
Occupancy expenses, net ............................. 170 179 337 379
Equipment expenses .................................. 177 153 363 298
Office supplies, printing, and postage .............. 95 101 191 208
Computer processing ................................. 130 111 266 222
Advertising and business promotion .................. 40 41 81 78
Other operating expenses ............................ 349 278 674 554
-------------------------------------
Total operating expenses ........................... 2,154 2,065 4,330 4,122
-------------------------------------
Income before income taxes .......................... $ 1,258 $ 1,192 $ 2,487 $ 2,435
Applicable income taxes ................................ 389 365 763 756
-------------------------------------
Net income ............................................. $ 869 $ 827 $ 1,724 $ 1,679
=====================================
Net income per common share, basic and diluted ......... $ 0.60 $ 0.56 $ 1.19 $ 1.13
=====================================
Dividends declared per common share .................... $ 0.23 $ 0.22 $ 0.46 $ 0.44
=====================================
Comprehensive income ................................... $ 1,146 $ 809 $ 1,865 $ 2,335
=====================================
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, 2002 and 2001
(In Thousands)
2002 2001
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................. $ 1,724 $ 1,679
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from real estate loans sold .................................... 3,970 3,029
Real estate loans underwritten and sold ................................. (3,927) (3,005)
Gains on real estate loans sold ......................................... (43) (24)
Provision for loan losses ............................................... 235 178
Investment securities gains, net ........................................ (80) (99)
Depreciation ............................................................ 311 315
Amortization of premiums and accretion of discounts
on investment securities available for sale, net ...................... 14 (11)
Net decrease in other assets ............................................ 56 267
Net increase in other liabilities ....................................... 77 91
--------------------
Net cash provided by operating activities .................................. $ 2,337 $ 2,420
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in interest-bearing deposits at financial institution .... $ (528) $ (471)
Net (increase) decrease in federal funds sold ........................... 5,415 (175)
Proceeds from sales, maturities, calls and paydowns of available
for sale securities ................................................... 14,534 13,476
Purchases of available for sale securities .............................. (7,990) (4,552)
Net (increase) in loans ................................................. (5,633) (9,598)
Purchases of bank premises and equipment ................................ (159) (385)
Increase in cash value of life insurance contracts ...................... (493) (88)
Purchases of restricted investment securities ........................... (43) (4)
--------------------
Net cash provided by (used in) investing activities ..................... $ 5,103 $ (1,797)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing deposits ................. $ 20 $ (9,749)
Net increase in interest bearing deposits ............................... 31 8,215
Net increase (decrease) in securities sold under
agreements to repurchase .............................................. (155) 241
Repayment of notes payable .............................................. (2,119) (640)
Net decrease in line of credit .......................................... -- (125)
Net increase in treasury tax and loan open note ......................... 295 1,192
Advances from Federal Home Loan Bank .................................... 1,000 5,650
Payments of advances from Federal Home Loan Bank ........................ (5,649) (13,306)
Net proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trust ................... -- 3,832
Cash dividends paid ..................................................... (663) (660)
Purchases of common stock for the treasury .............................. (430) (476)
Proceeds from issuance of common stock .................................. 105 --
---------------------
Net cash (used in) financing activities ................................. $ (7,565) $ (5,826)
--------------------
Net (decrease) in cash and due from banks ............................... (125) (5,203)
Cash and due from banks:
Beginning ............................................................... $ 14,661 $ 15,994
--------------------
Ending .................................................................. $ 14,536 $ 10,791
====================
Supplemental Disclosures of Cash Flow Information, cash payments for:
Interest ............................................................. $ 5,669 $ 8,152
Income taxes ......................................................... 721 739
Supplemental Schedule of Noncash Investing and Financing Activities,
change in accumulated other comprehensive income, unrealized
gains on investment securities available for sale, net ................... 141 656
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 brokerage
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 2001 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, 2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002.
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 six months of 2002 and 2001 were
1,448,637 and 1,491,767, respectively. There were no common stock equivalents in
2002 or 2001.
6
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Discussion and Analysis of Financial Condition
The Company's total assets at June 30, 2002, were $374,807,000, a decrease of
$5,790,000 or 1.5% from December 31, 2001. As of June 30, 2002, the Company had
$25,585,000 of federal funds sold compared to $31,000,000 at December 31, 2001.
Federal funds sold and other liquid assets have been higher the past few
quarters than the Company would historically consider normal. This is due to the
low interest rate environment coupled with managements' strategy to maintain
liquidity for future loan growth and purchases of investment securities
available for sale when interest rates again rise.
Total available for sale securities decreased $6,251,000 during the first six
months of 2002 to total $38,215,000 at June 30, 2002. 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 experienced during the
first six months of 2002, the banks purchased fewer securities 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 during the current year of $3,849,000 have
resulted in net gains recognized totaling $80,000.
Net loans totaled $278,093,000 at June 30, 2002, an increase of $5,398,000 or
2.0% from December 31, 2001. Competition for high-quality loans remains intense,
particularly in the small consumer and residential real estate loan categories.
Total deposits at June 30, 2002, were $267,575,000, nearly identical to the
balance at December 31, 2001. Certificates of deposit remain the largest single
category of deposits representing on average for the three months ended June 30,
2002, approximately 42% of total deposits. Securities sold under agreements to
repurchase decreased $155,000 to $4.9 million and advances borrowed from the
Federal Home Loan Bank decreased $4,649,000 to total $66.0 million at quarter
end.
Notes payable totaled $3,300,000 at June 30, 2002, or $2,119,000 less than at
December 31, 2001. This decrease resulted from regularly scheduled principal
payments as well as a $1,522,000 payoff of one of the Company's loans at its
balloon date.
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, 2036. 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.
Results of Operations:
The Company recorded net income of $869,000 for the quarter ended June 30, 2002,
compared with net income of $827,000 for the quarter ended June 30, 2001, an
increase of $42,000 or 5.1%. The increase in net income was primarily due to
improved net interest income which was $235,000 or 8.7% greater the second
quarter of 2002 compared to the second quarter of 2001. Diluted earnings per
share were $.60 during the second quarter of 2002 and $.56 for the same quarter
in 2001, an increase of $.04 or 7.1%. The Company's return on average assets for
the quarter ended June 30, 2002 was .92% compared with a return of .87% for the
quarter ended June 30, 2001. The Company's return on average equity was 14.6%
and 14.4% for the three months ended June 30, 2002 and June 30, 2001,
respectively.
7
Consolidated net income was $1,724,000 for the first six months of 2002. This
was $45,000 or 2.7% more than for the comparable period last year. However, net
income per share for the first six months of 2002 was $1.19 which was $.06 or
5.3% greater than the comparable period of the prior year. Net interest income
increased the first six months of 2002 compared to the first two quarters of
2001 by $308,000 (5.7%), provision for loan losses increased $57,000 (32.0%),
securities gains decreased by $19,000 (19.2%), other income increased by $28,000
(2.3%), operating expenses increased $208,000 (5.0%), and income tax expense
increased $7,000 (0.9%). The Company's return on average assets for the six
months ended June 30, 2002 was .91% compared with a return of .89% for the six
months ended June 30, 2001. The Company's return on average equity was 14.7% and
14.5% for the six months ended June 30, 2002 and June 30, 2001, respectively.
The distribution of average assets, liabilities and stockholders' equity and
intrest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on a fully taxable equivalent basis using
staturory tax rates in effect for the year presented):
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------------ ------------------------ ------------------------- ---------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------
Assets
Taxable loans, net .... $276,891 $4,950 7.15% $275,885 $5,632 8.17% $273,617 $9,827 7.18% $274,244 $11,266 8.23%
Taxable investment
securities available
for sale ............ 21,182 294 5.55% 34,908 531 6.08% 21,777 615 5.65% 38,331 1,160 6.05%
Nontaxable investment
securities and loans 19,319 350 7.25% 22,687 408 7.19% 19,379 698 7.21% 22,800 827 7.26%
Federal funds sold .... 30,658 128 1.67% 19,265 201 4.17% 34,445 277 1.61% 15,277 360 4.71%
Restricted investment
securities .......... 3,890 31 3.19% 2,308 45 7.80% 3,879 57 2.94% 3,067 98 6.39%
Interest-bearing
deposits at financial
institutions ........ 2,188 20 3.66% 1,585 16 4.04% 2,662 44 3.31% 800 16 4.00%
---------------- ---------------- ---------------- -----------------
Total interest-
earning assets .. 354,128 5,773 6.52% 356,638 6,833 7.66% 355,759 11,518 6.48% 354,519 13,747 7.76%
------ ------ ------ ------
Cash and due from banks 13,449 11,957 13,143 11,821
Bank premises and
equipment, net ...... 4,913 5,071 4,958 5,021
Life insurance
contracts ........... 3,518 3,250 3,453 3,228
Other assets .......... 3,391 5,094 3,459 4,523
-------- -------- -------- --------
Total ........... $379,399 $382,010 $380,772 $379,112
======== ======== ======== ========
Liabilities
Deposits:
Interest-bearing
deposits .......... $117,229 $ 402 1.37% $100,161 $ 709 2.83% $115,239 $ 804 1.40% $971,174 $1,464 3.01%
Time ................ 112,671 1,093 3.88% 136,969 2,009 5.87% 113,893 2,235 3.92% 136,073 4,043 5.94%
Notes payable ......... 4,050 75 7.36% 5,825 107 7.35% 4,950 183 7.37% 6,175 227 7.35%
Other borrowings ...... 73,237 1,041 5.69% 68,831 1,061 6.17% 74,930 2,120 5.66% 70,737 2,203 6.23%
Company obligated
mandatorily redeemable
preferred securities 4,000 105 10.34% 4,000 105 10.34% 4,000 207 10.27% 2,050 105 10.18%
---------------- ---------------- ---------------- -----------------
Total .......... 311,187 2,716 3.49% 315,786 3,991 5.06% 313,012 5,549 3.55% 312,209 8,042 5.15%
Noninterest-bearning
deposits ........... 40,235 38,670 39,988 39,165
Other liabilities .... 1,958 2,402 2,034 2,417
-------- -------- -------- -------
Total
liabilities .... 353,380 356,858 355,034 353,791
Redeemable common
stock held by
KSOP ............... 2,242 2,118 2,242 2,118
Stockholders' equity ... 23,777 23,034 23,496 23,203
-------- -------- -------- --------
Total .......... $379,399 $382,010 $380,772 $379,112
======== ======== ======== ========
Net interest earnings .. $3,057 $2,842 $5,969 $5,705
====== ====== ====== ======
Net annualized yield (net
interest earnings
divided by total
interest-earning
assets) .............. 3.45% 3.19% 3.36% 3.22%
===== ===== ===== =====
Nonaccruing loans are included in the average balance. Loan fees are not
material.
8
The net interest margin increased to 3.45% during the second quarter of 2002
compared to 3.19% during the second quarter of 2001. The return on average
interest-earning assets decreased 114 basis points (from 7.66% in 2001 to 6.52%
in 2002) and interest paid on average interest-bearing liabilities decreased 157
basis points (from 5.06% in 2001 to 3.49% in 2002). The net interest margin
increased to 3.36% during the first six months of 2002 compared to 3.22% during
the same period in 2001. Over the same time periods, the return on average
interest-earning assets decreased 128 basis points (from 7.76% in 2001 to 6.48%
in 2002) and interest paid on average interest-bearing liabilities decreased 160
basis points (from 5.15% in 2001 to 3.55% in 2002).
The Federal Reserve Bank Board and Chairman Greenspan reduced short-term
interest rates an amazing eleven times during 2001. The prime lending rate,
which began the year 2001 at 9.50%, ended 2001 at only 4.75%; where it has
remained for the first six months of 2002. 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 second quarter of 2002
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 loans falling less
than the rates paid on interest-bearing liabilities. Eventually, when market
interest rates again rise, rates paid on interest-bearing liabilities may, for a
time, increase more than rates received on 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 on investment securities available for sale have decreased less
than the rates paid on interest-bearing liabilities. This was due largely to a
longer average duration for investment securities available for sale than the
average duration for interest-bearing liabilities. Most of the investment
securities available for sale were purchased when market interest rates were
higher than rates currently available.
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 reduced its reliance on such
Federal Home Loan Bank advances as a funding source by $4,649,000 during the
first two quarters of 2002. The interest expense related to the aforementioned
Company Obligated Mandatorily Redeemable Preferred Securities was incurred for
the entire first six months of 2002, compared to such expense incurred for only
slightly more than ninety days during the first six months of 2001. 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 $167,000 for the three months ended June 30,
2002. This was $28,000 more than the second quarter of 2001. The first six
months of 2002 provisions for loan losses totaled $235,000 or $57,000 more than
the same period last year. Net loan charge-offs through June 30, 2002 totaled
$103,000 compared to net charge-offs of $263,000 for the first six months of
2001. 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.
Nonaccrual loans totaled $1,414,000 at June 30, 2002, an increase of $718,000
from the first quarter of 2002 and an increase of $815,000 from June 30, 2001.
Other real estate owned totaled $535,000, an increase of $284,000 from the prior
quarter and an increase of $359,000 from a year ago. Loans past due 90 days or
more and still accruing totaled $145,000 which was $100,000 less than at the end
of the prior quarter and $366,000 less than a year earlier. The allowance for
possible loan losses of $3,314,000 represents 1.2% of net loans and 158% of
total nonaccrual loans, other real estate owned, and loans past due 90 days or
more and still accruing.
9
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 second
quarter of 2002 was $641,000 or 7.5% less than the second quarter of 2001. For
the first two quarters of 2002, other income totaled 1,320,000 or 0.7% greater
than the same period last year. Service fee income and trust department income
were higher than the prior year while gains on investment securities available
for sale and miscellaneous income were less than last year.
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, 2002, salaries and employee benefits expense decreased $9,000 or
0.7% as turnover resulted in some savings, equipment expenses increased $24,000
or 15.7% as costs associated with new computers and item processing equipment
were incurred, computer processing increased $19,000 or 17.1% as additional
costs associated with digital document imaging as well as disaster recovery
contracts were recognized. Finally, other operating expenses increased $71,000
or 25.5% largely due to the impact of payments for consulting, Federal Reserve
Bank processing, and insurance as well as costs incurred carrying and disposing
of other real estate.
For the six months ended June 30, 2002, salaries and employees benefits
increased $35,000 or 1.5% due to normal salary adjustments and higher health
care costs mitigated somewhat by employee turnover, occupancy expense decreased
$42,000 or 11.1% due mainly to lower utility costs, equipment expense increased
$65,000 or 21.8% as costs associated with new computers and item processing
equipment were incurred, computer processing rose $44,000 or 19.8% as additional
costs associated with digital document imaging as well as disaster recovery
contracts were recognized, and other operating expenses increased $120,000 or
21.7% largely due to the impact of payments for consulting, Federal Reserve Bank
processing, and insurance as well as costs incurred carrying and disposing of
other real estate. Total operating expenses increased by $208,000 or 5.0% for
the six months ended June 30, 2002 compared to the same period last year.
Income tax expense for the quarter ended June 30, 2002 of $389,000 represented
30.9% of income before taxes, the comparable quarter last year was 30.6% of
income before tax. Year-to-date 2002 tax expense was 30.7% of income before tax.
The efficiency ratio, defined as noninterest expense as a percent of net
interest income plus noninterest income, was 60.2% and 61.4% for the three and
six months ended June 30, 2002, respectively. The efficiency ratio for all of
2001 was 62.2%. The primary reason for this improvement in 2002 is the increase
in net interest income.
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, 2002, 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.
10
Because the repricing gap position does not capture these risks, Management
utilizes simulation modeling to measure and manage the rate sensitivity exposure
of earnings. The Company's simulation model provides a projection of the effect
on net interest income of various interest rate scenarios and balance sheet
strategies.
Liquidity
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are varied,
but include general economic conditions, asset/liability mix, bank reputation,
future FDIC funding needs, changes in regulatory environment, and credit
standing. Assets which provide liquidity consist principally of loans, cash and
due from banks, investment securities, and short-term investments such as
federal funds. Maturities of securities held for investment purposes and loan
payments provide a constant flow of funds available for cash needs.
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 June
30, 2002, were $267,575,000 or 71.4% of total liabilities and equity.
Federal funds sold overnight totaled $25,585,000 or 6.8% of June 30, 2002, 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 cost totaling $36,621,000 at quarter-end
included net unrealized gains of $1,594,000. 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 $782,000 (3.4%) during the six months ended June
30, 2002. This increase occurred despite net purchases of treasury shares
totaling $423,000 over the same period.
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, 2002 with the requirements
to be considered adequately capitalized and well capitalized is presented below.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------
Total capital to risk-weighted assets 12.03% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 10.79% 4.00% 6.00%
Tier 1 capital to average assets 7.57% 4.00% 5.00%
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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.
The Company has in the past purchased shares of its outstanding common stock for
the treasury as they become available. During the second quarter of 2002, the
Board of Directors rescinded the prior stock repurchase plan and approved a new
stock repurchase plan authorizing up to 75,000 shares of its outstanding common
stock to be purchased for the treasury. During the first two quarters of 2002,
over 19,000 shares or 1.3% of the total shares outstanding as of December 31,
2001 were purchased for the treasury.
Current Accounting Developments
In July 2001, the Financial Accounting Standards Board issued Statement 141,
"Business Combinations" and Statement 142, "Goodwill and Other Intangible
Assets". Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. For the Company, the provisions of the Statements were
generally effective January 1, 2002. Implementation of the Statements had no
impact on the financial statements, except that annual goodwill amortization
expense of $56,000 will no longer be recorded. For the three and six months
ended June 30, 2001 goodwill amortization of $14,000 and $28,000 was recorded,
respectively. This goodwill amortization resulted in a reduction of earnings per
share for the three and six months ended June 30, 2001 of $.01 and $.02,
respectively.
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"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
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
OTHER INFORMATION
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.
No Form 8-K has been filed for the quarter ended June 30, 2002.
14
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 14, 2002 /s/ D. Scott Ingstad
- ---------------- ---------------------------------------------------
Date D. Scott Ingstad, Vice Chairman of the Board
President and CEO
August 14, 2002 /s/ Kim K. Bartling
- ---------------- ---------------------------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
15