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 September 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 September 30, 2002 there were 1,433,816 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,
September 30, 2002 and December 31, 2001 3
Consolidated Condensed Statements of
Income, Three and Nine months Ended
September 30, 2002 and 2001 4
Consolidated Condensed Statements of
Cash Flows, Nine months Ended
September 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
Item 4. Controls and Procedures 14
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Section 302 Certifications 17-18
2
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
2002 2001
---------------------------
ASSETS
Cash and due from banks ................................ $ 18,215 $ 14,661
Interest-bearing deposits at financial institutions .... 1,800 1,620
Federal funds sold ..................................... 29,773 31,000
Investment securities available for sale ............... 39,099 44,466
Loans, net of allowance for loan
losses September 30, 2002, $3,348;
December 31, 2001, $3,182 ........................... 280,380 272,695
Bank premises and equipment, net ....................... 5,190 5,055
Accrued interest receivable ............................ 2,832 2,793
Life insurance contracts ............................... 3,904 3,361
Restricted investment securities ....................... 3,957 3,868
Other assets ........................................... 1,151 1,078
----------------------
TOTAL ASSETS ........................................ $ 386,301 $ 380,597
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 44,335 $ 42,165
Interest bearing deposits .............................. 231,692 225,359
----------------------
TOTAL DEPOSITS ...................................... 276,027 267,524
Notes payable .......................................... 3,300 5,419
Securities sold under agreements to
repurchase .......................................... 5,860 5,068
Federal Home Loan Bank advances ........................ 67,122 70,706
Treasury tax and loan open note ........................ 841 622
Company obligated mandatorily redeemable preferred
securities of subsidiary trust ....................... 4,000 4,000
Dividends payable ...................................... 326 331
Other liabilities ...................................... 1,920 1,645
----------------------
TOTAL LIABILITIES ................................... 359,396 355,315
----------------------
Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ........... 2,516 2,242
----------------------
STOCKHOLDERS' EQUITY
Common stock ........................................... 200 200
Additional paid-in capital ............................. 4,263 4,265
Retained earnings ...................................... 33,669 31,944
Accumulated other comprehensive income ................. 1,271 858
Less net cost of common shares acquired for the treasury (12,498) (11,985)
Less maximum cash obligation related to KSOP shares .... (2,516) (2,242)
----------------------
TOTAL STOCKHOLDERS' EQUITY .......................... 24,389 23,040
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $ 386,301 $ 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on loans:
Taxable ........................................... $ 4,925 $ 5,462 $14,752 $16,748
Nontaxable ........................................ 40 23 83 87
Interest on investment securities available for sale:
Taxable ........................................... 286 469 901 1,629
Nontaxable ........................................ 200 233 618 715
Interest on federal funds sold ...................... 113 149 390 509
Dividends on restricted investment securities ....... 31 34 88 132
Other ............................................... 12 25 56 41
-------------------------------------
Total interest income ............................... 5,607 6,395 16,888 19,861
-------------------------------------
INTEREST EXPENSE:
Interest on deposits ................................ 1,471 2,380 4,510 7,887
Interest on notes payable ........................... 62 103 245 330
Interest on other borrowed funds .................... 1,018 1,088 3,138 3,291
Interest on company obligated mandatorily
redeemable preferred securities of subsidiary trust 106 106 313 208
-------------------------------------
Total interest expense .............................. 2,657 3,677 8,206 11,716
-------------------------------------
Net interest income ................................. 2,950 2,718 8,682 8,145
Provision for loan losses .............................. 95 130 330 308
-------------------------------------
Net interest income after provision for
loan losses ....................................... 2,855 2,588 8,352 7,837
------------------------------------
Other income:
Trust department .................................... 92 93 299 279
Service fees ........................................ 406 342 1,112 995
Investment securities gains, net .................... 4 186 84 285
Other ............................................... 137 118 464 491
-------------------------------------
Total other income ................................ 639 739 1,959 2,050
-------------------------------------
Operating expenses:
Salaries and employee benefits ...................... 1,230 1,232 3,648 3,615
Occupancy expenses, net ............................. 160 168 497 547
Equipment expenses .................................. 157 158 520 456
Office supplies, printing, and postage .............. 77 70 268 278
Computer processing ................................. 99 94 365 316
Advertising and business promotion .................. 40 54 121 132
Other operating expenses ............................ 297 262 971 819
-------------------------------------
Total operating expenses ........................... 2,060 2,038 6,390 6,163
-------------------------------------
Income before income taxes .......................... $ 1,434 $ 1,289 $ 3,921 $ 3,724
Applicable income taxes ................................ 449 389 1,212 1,145
-------------------------------------
Net income ............................................. $ 985 $ 900 $ 2,709 $ 2,579
====================================
Net income per common share, basic and diluted ......... $ 0.69 $ 0.61 $ 1.88 $ 1.74
=====================================
Dividends declared per common share .................... $ 0.23 $ 0.22 $ 0.68 $ 0.66
=====================================
Comprehensive income ................................... $ 1,257 $ 1,135 $ 3,122 $ 3,470
=====================================
See Notes to Consolidated Condensed Financial Statements.
4
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 2002 and 2001
(In Thousands)
(Unaudited)
2002 2001
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 2,709 $ 2,579
Adjustments to reconcile net income to net cash provided by operating
activities:
Proceeds from real estate loans sold ........................................ 6,816 4,850
Real estate loans underwritten and sold ..................................... (6,731) (4,813)
Gains on real estate loans sold ............................................. (85) (37)
Provision for loan losses ................................................... 330 308
Investment securities gains, net ............................................ (84) (285)
Depreciation ................................................................ 424 475
Amortization of premiums and accretion of discounts
on investment securities available for sale, net .......................... 30 (19)
Net increase in other assets ................................................ (212) (336)
Net increase in other liabilities ........................................... 29 242
--------------------
Net cash provided by operating activities ...................................... $ 3,226 $ 2,964
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in interest-bearing deposits at financial institutions ....... $ (180) $ (1,398)
Net (increase) decrease in federal funds sold ............................... 1,227 (14,410)
Proceeds from sales, maturities, calls and paydowns of available
for sale securities ......................................................... 14,786 20,556
Purchases of available for sale securities .................................. (8,706) (5,063)
Net (increase) in loans ..................................................... (8,015) (6,376)
Purchases of bank premises and equipment .................................... (559) (549)
Purchases of life insurance contracts ....................................... (405) --
Increase in cash value of life insurance contracts .......................... (138) (132)
(Purchases) sales of restricted investment securities ....................... (89) 6
--------------------
Net cash (used in) investing activities ..................................... $ (2,079) $ (7,366)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing deposits ..................... $ 2,170 $ (8,683)
Net increase in interest bearing deposits ................................... 6,333 9,773
Net increase in securities sold under
agreements to repurchase .................................................. 792 211
Repayment of notes payable .................................................. (2,119) (686)
Net decrease in line of credit .............................................. -- (125)
Net increase in treasury tax and loan open note ............................. 219 1,051
Advances from Federal Home Loan Bank ........................................ 7,100 13,400
Payments of advances from Federal Home Loan Bank ............................ (10,684) (17,081)
Net proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trust ....................... -- 3,832
Cash dividends paid ......................................................... (989) (987)
Purchases of common stock for the treasury .................................. (520) (1,042)
Proceeds from issuance of common stock ...................................... 105 --
--------------------
Net cash provided by (used in) financing activities ......................... $ 2,407 $ (337)
--------------------
Net increase (decrease) in cash and due from banks .......................... 3,554 (4,739)
Cash and due from banks:
Beginning ................................................................... $ 14,661 $ 15,994
--------------------
Ending ...................................................................... $ 18,215 $ 11,255
====================
Supplemental Disclosures of Cash Flow Information, cash payments for:
Interest ................................................................. $ 8,250 $ 11,832
Income taxes ............................................................. 1,228 1,193
Supplemental Schedule of Noncash Investing and Financing Activities, change in
accumulated other comprehensive income, unrealized
gains on investment securities available for sale, net ....................... 413 891
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 nine months ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
Reclassifications:
Certain amounts in the prior year financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform with current
year presentations.
Note 2. Capital Stock and Earnings Per Share
Common shares and preferred stock authorized total 6,000,000 shares and 500,000
shares, respectively. Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Diluted earnings per share is arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period. The average number of shares
of common stock outstanding for the first three and nine months of 2002 and
2001, respectively, were 1,436,055 and 1,444,443, and 1,474,111 and 1,485,882,
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
Critical Accounting Policy:
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increass the complexity of
its loan portfolio, it will enhance its methodology accordingly, Management may
report a materially different amount for the provision for loan losses in the
statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis included in the "Results of Operations"
section relative to the provision for loan losses. Although management believes
the levels of the allowance as of September 30, 2002 and December 31, 2001 were
adequate to absorb losses inherent in the loan portfolio, a decline in local
economic conditions, or other factors, could result in increasing losses that
cannot be reasonably predicted at this time.
Results of Operations:
The Company recorded net income of $985,000 for the quarter ended September 30,
2002, compared with net income of $900,000 for the quarter ended September 30,
2001, an increase of $85,000 or 9.4%. The increase in net income was primarily
due to improved net interest income which was $232,000 or 8.5% greater the third
quarter of 2002 compared to the third quarter of 2001. Basic and diluted
earnings per share were $.69 during the third quarter of 2002 versus $.61 for
the same quarter in 2001, an increase of $.08 or 13.1%. The Company's return on
average assets for the quarter ended September 30, 2002 was 1.04% compared with
a return of .95% for the quarter ended September 30, 2001. The Company's return
on average equity was 15.62% and 15.50% for the three months ended September 30,
2002 and September 30, 2001, respectively.
Consolidated net income was $2,709,000 for the first nine months of 2002. This
was $130,000 or 5.0% more than for the comparable period last year. However, net
income per basic and diluted share for the first nine months of 2002 was $1.88
which was $.14 or 8.0% greater than the comparable period of the prior year. Net
interest income increased the first nine months of 2002 compared to the first
nine months of 2001 by $537,000 (6.6%), provision for loan losses increased
$22,000 (7.1%), securities gains decreased by $201,000 (70.5%), other income
increased by $110,000 (6.2%), operating expenses increased $227,000 (3.7%), and
income tax expense increased $67,000 (5.9%). The Company's return on average
assets for the nine months ended September 30, 2002 was .96% compared with a
return of .92% for the nine months ended September 30, 2001. The Company's
return on average equity was 15.2% and 15.3% for the nine months ended September
30, 2002 and September 30, 2001, respectively.
7
The distribution of average assets, liabilities and stockholders's equity and
interest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on a fully taxable equivalent basis using
statutory tax rates in effect for the year presented):
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
-------------------------- ------------------------- ------------------------- -------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------- ------------------------- ------------------------- --------------------------
Assets
Taxable loans, net . $275,265 $ 4,925 7.16% $275,446 $ 5,462 7.93% $274,173 $14,752 7.17% $274,649 $16,748 8.13%
Taxable investment
securities
available
for sale ......... 21,739 286.00 5.26% 29,702 469 6.32% 21,765 901.00 5.52% 34,273 1,629 6.34%
Nontaxable investment
securities and
loans ........... 20,027 364 7.26% 21,655 388 7.16% 19,597 1,062 7.23% 22,414 1,215 7.23%
Federal funds sold 27,505 113.00 1.64% 17,334 149 3.44% 32,107 390.00 1.62% 15,970 509 4.25%
Restricted invest-
ment securities . 3,931 31.00 3.15% 4,235 34 3.21% 3,897 88.00 3.01% 3,937 132 4.47%
Interest-bearing
deposits at
financial
institutions .... 1,530 12.00 3.14% 2,522 25 3.96% 1,922 56.00 3.88% 1,354 41 4.04%
------------------ ------------------ ----------------- -----------------
Total interest-
earning assets . 349,997 5,731 6.55% 350,894 6,527 7.44% 353,461 17,249 6.51% 352,597 20,274 7.67%
------- -------- -------- -------
Cash and due
from banks .. 13,076 12,376 12,759 12,008
Bank premises
and equipment 5,158 5,048 5,033 5,022
Life insurance
contracts ... 3,884 3,299 3,598 3,252
Other assets .. 4,076 3,548 3,915 3,845
-------- -------- -------- --------
Total .... $376,190 $375,165 $378,767 $376,724
======== ======== ======== ========
Liabilities
Deposits:
Interest-bearing
demand ......... $110,053 $ 355 1.29% $ 97,700 $ 498 1.99% $113,491 $ 1,160 1.37% $ 97,352 $ 1,962 2.69%
Time ............. 115,830 1,116 3.85% 130,166 1,883 5.79% 114,546 3,350 3.91% 134,082 5,925 5.91%
Notes payable ...... 3,300 62 7.37% 5,590 103 7.37% 4,435 245 7.37% 5,985 330 7.37%
Other borrowings ... 72,884 1,018 5.59% 71,100 1,088 6.12% 74,241 3,138 5.65% 70,858 3,291 6.21%
Company obligated
mandatorily
redeemable
preferred
securities ....... 4,000 106 10.37% 4,000 106 10.37% 4,000 313 10.32% 2,657 208 10.32%
---------------- ------------------ ----------------- -----------------
Total interest-
bearing
liabilities ..... 306,067 2,657 #DIV/0! 308,557 3,678 4.77% 310,713 8,206 #DIV/0! 310,935 11,716 5.04%
------- ----- ------ ------
Noninterest-
bearing deposits 41,127 38,935 40,350 39,110
Other liabilities . 1,728 2,519 1,634 1,987
-------- -------- -------- --------
Total liabilities 348,922 350,011 352,697 352,031
Redeemable common
stock held by KSOP 2,242 2,118 2,242 2,118
Stockholders' Equity .. 25,026 23,036 23,828 22,575
-------- -------- -------- --------
Total ...... $376,190 $375,165 $378,767 $376,724
======== ======== ======== ========
Net interest
earnings ........ $ 3,074 $ 2,849 $ 9,043 $ 8,558
======== ======== ======== =======
Net Annualized
Yield (net
interest
earnings
divided by
total interest-
earning
assets) ......... 3.51% 3.25% 3.41% 3.24%
======= ======= ======= =======
Nonaccruing loans are included in the average balance. Loan fees are not
material.
8
The net interest margin increased to 3.51% during the third quarter of 2002
compared to 3.25% during the third quarter of 2001. The return on average
interest-earning assets decreased 89 basis points (from 7.44% in 2001 to 6.55%
in 2002) and interest paid on average interest-bearing liabilities decreased 130
basis points (from 4.77% in 2001 to 3.47% in 2002).
The net interest margin increased to 3.41% during the first nine months of 2002
compared to 3.24% during the same period in 2001. Over the same time periods,
the return on average interest-earning assets decreased 116 basis points (from
7.67% in 2001 to 6.51% in 2002) and interest paid on average interest-bearing
liabilities decreased 151 basis points (from 5.04% in 2001 to 3.53% 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 nine 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 third 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. In the current interest rate environment,
when such investment securities mature or are sold, called, or otherwise paid
down, the reinvestment rate available is nearly always lower than the yield of
the liquidating security.
The usage of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk, tends
to increase overall interest expense. The Company reduced its reliance during
the first nine months of 2002 on such Federal Home Loan Bank advances as a
funding source. Total payments on advances of $10,684,000 exceeded $7,100,000 of
new advances resulting in a net reduction of $3,584,000. The interest expense
related to the Company Obligated Mandatorily Redeemable Preferred Securities was
incurred for the entire first nine months of 2002, compared to such expense
incurred for only slightly more than 180 days during the first nine 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 $95,000 for the three months ended September 30,
2002. This was $35,000 less than the third quarter of 2001. The first nine
months of 2002 provisions for loan losses totaled $330,000 or $22,000 more than
the same period last year. Net loan charge-offs through September 30, 2002
totaled $164,000 compared to net charge-offs of $381,000 for the first nine
months of 2001. Despite less net charge-offs through the first nine months of
2002 versus the first nine months of 2001, loan quality has been negatively
impacted by a variety of factors including, but not necessarily limited to, a
generally sluggish economy. The allowance for possible loan losses is maintained
at the level considered adequate by management of the Banks to provide for
probable losses in the existing loan portfolio. The allowance is increased by
provisions charged to operating expense and reduced by net charge-offs. In
determining the adequacy of the allowance balance the Banks make continuous
evaluations of the loan portfolio and related off-balance sheet commitments,
consider current economic conditions, the composition of the loan portfolio,
historical loan loss experience, review of specific problem loans, the estimated
net realizable value or the fair value of the underlying collateral, and other
factors.
9
Nonaccrual loans totaled $1,866,000 at September 30, 2002, an increase of
$1,060,000 or 132% from September 30, 2001. Other real estate owned totaled
$526,000, an increase of $305,000 or 138% from a year ago. Loans past due 90
days or more and still accruing totaled $240,000 which was $621,000 or 72% less
than a year earlier. The allowance for possible loan losses of $3,348,000
represents 1.2% of net loans and 127% of total nonaccrual loans, other real
estate owned, and loans past due 90 days or more and still accruing.
Other income results from the charges and fees collected by the Company from its
customers for various services performed, gross trust department revenue,
miscellaneous other income and gains (or losses) from the sale of investment
securities in the available for sale category. Total other income for the third
quarter of 2002, without gains on investment securities, was $635,000; $82,000
or 14.8% more than the third quarter of 2001. Investment securities gains during
the three months ended September 30, 2002 of $4,000 compare to gains of $186,000
for the three months ended September 30, 2001.
For the first three quarters of 2002 other income, without investment securities
gains, totaled 1,875,000 which was $110,000 or 6.2% 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 other income were less than last year. Investment securities gains
during the nine months ended September 30, 2002 of $84,000 compare to gains of
$285,000 for the nine months ended September 30, 2001.
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 September 30, 2002, salaries and employee benefits expense decreased
$2,000 or 0.2% as turnover resulted in some cost containment, occupancy and
equipment expenses decreased $9,000 or 2.8%, office supplies and related
expenses increased $7,000 or 10%, computer processing increased $5,000 or 5.3%
as additional costs associated with digital document imaging as well as disaster
recovery contracts were recognized. Finally, other operating expenses increased
$35,000 or 13.4% largely due to the impact of payments for consulting,
recruiting and Federal Reserve Bank processing. Total operating expenses
increased $22,000 or 1.1% during the third quarter of 2002 versus the same
quarter last year.
For the nine months ended September 30, 2002, salaries and employees benefits
increased $33,000 or 0.9% due to normal salary adjustments and higher health
care costs mitigated somewhat by employee turnover, occupancy expense decreased
$50,000 or 9.1% due mainly to lower utility costs and depreciation, equipment
expense increased $64,000 or 14.0% as costs associated with new computers and
item processing equipment were incurred, computer processing rose $49,000 or
15.5% as additional costs associated with digital document imaging as well as
disaster recovery contracts were recognized, and other operating expenses
increased $152,000 or 18.6% largely due to the impact of payments for consulting
and recruiting, Federal Reserve Bank processing, and insurance as well as costs
incurred carrying and disposing of other real estate. Total operating expenses
increased by $227,000 or 3.7% for the nine months ended September 30, 2002
compared to the same period last year.
Income tax expense for the quarter ended September 30, 2002 of $449,000
represented 31.3% of income before taxes, the comparable quarter last year was
30.2% of income before tax. Year-to-date 2002 tax expense was 30.9% 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 57.4% and 60.1% for the three and nine months ended September 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.
Discussion and Analysis of Financial Condition
The Company's total assets at September 30, 2002, were $386,301,000, an increase
of $5,704,000 or 1.5% from December 31, 2001. As of September 30, 2002, the
Company had $29,773,000 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.
10
Total available for sale securities decreased $5,367,000 or 12.1% during the
first nine months of 2002 to total $39,099,000 at September 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 nine 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 $4,013,000 have resulted in net gains recognized totaling $84,000.
Net loans totaled $280,380,000 at September 30, 2002, an increase of $7,685,000
or 2.8% 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 September 30, 2002, were $276,027,000, an increase of
$8,503,000 or 3.2% from the balance at December 31, 2001. Certificates of
deposit remain the largest single category of deposits representing on average
for the three months ended September 30, 2002, approximately 43% of total
deposits. Securities sold under agreements to repurchase increased $792,000 to
$5,860,000 and advances borrowed from the Federal Home Loan Bank decreased
$3,584,000 to total $67,122,000 at quarter end.
Notes payable totaled $3,300,000 at September 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 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.
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 September 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.
11
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.
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
September 30, 2002, were $276,027,000 or 71.5% of total liabilities and equity.
Federal funds sold overnight totaled $29,773,000 or 7.7% of September 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 $37,073,000 at quarter-end
included net unrealized gains of $2,026,000. 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 $1,349,000 (5.9%) during the nine months ended
September 30, 2002. This increase occurred despite purchases of treasury shares
totaling $520,000 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 September 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 ... 12.06% 8.00% 10.00%
Tier 1 capital to risk-weighted assets .. 10.82% 4.00% 6.00%
Tier 1 capital to average assets ........ 7.79% 4.00% 5.00%
12
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 plans to enhance its market presence in Muscatine, Iowa with a new
branch. This branch will be located on a major thoroughfare and retail area,
Highway 61, on the northeast side of Muscatine. The branch will offer a wide
variety of banking services in its 3,000 square feet of space. In addition to
consumer and real estate lending services, a traditional inside four person
teller line and four drive-up teller lanes, the branch will also offer
freestanding twenty-four hour ATM services. The total cost of this branch,
including site work and equipment, is currently projected at approximately
$1,500,000 ($380,000 of which was the land cost). Construction of this branch is
anticipated to be completed in late spring or early summer 2003.
The new branch discussed above will serve as a replacement for the current
rented branch facilities at the Muscatine Mall, approximately two miles
northeast of the main downtown bank building. In recent years, the Muscatine
Mall has lost numerous tenants resulting in lower customer traffic counts. The
current space allocated by the landlord to our bank has been deemed inadequate
by the Company to properly serve the long-term needs of our customers. This lack
of activity and adequate space at the Muscatine Mall was exacerbated by
difficulty in renegotiating a reasonable long-term lease with the landlord which
recognized the current state of affairs. Thus, the Company decided to build its
own branch in the strong and growing retail section of town described in the
previous paragraph.
Additionally, plans are in process to modernize and enhance the image of the
organization with a substantial remodeling of the main floor of the downtown
Muscatine primary bank building. This building was originally completed in 1979
and the main floor has not since been extensively renovated. Approximately
10,000 square feet of the total 36,000 square feet of this building are
scheduled to be remodeled. The total cost for this project is currently
projected at approximately $500,000 and is scheduled to be completed in late
winter or early spring 2003.
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 three quarters of 2002,
22,788 shares or 1.6% of the total shares outstanding as of December 31, 2001
were purchased for the treasury.
13
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 nine months
ended September 30, 2001 goodwill amortization of $14,000 and $42,000 was
recorded, respectively. This goodwill amortization resulted in a reduction of
earnings per share for the three and nine months ended September 30, 2001 of
$.01 and $.03, respectively.
"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.
Item 4. Controls and Procedures
During the 90-day period prior to the filing date of this report, management,
including the Company's Executive Vice President, Chief Operating Officer &
Treasurer and Vice Chairman of the Board, President and CEO, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon, and as of the date of that evaluation, management
concluded that the disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and therefore,
no corrective actions were taken.
14
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 September 30,
2002.
15
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)
November 13, 2002 /s/ D. Scott Ingstad
- ----------------- -------------------------------
Date D. Scott Ingstad, Vice Chairman
Of the Board, President and CEO
November 13, 2002 /s/ Kim K. Bartling
- ----------------- -------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
16
Section 302 Certification
I, Kim K. Bartling, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Iowa First Bancshares
Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 Signature: /s/ Kim K. Bartling
---------------------------------------------
Kim K. Bartling, Executive Vice President,
Chief Operating Officer & Treasurer
17
Section 302 Certification
I, D. Scott Ingstad, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Iowa First Bancshares
Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 Signature: /s/ D. Scott Ingstad
-------------------------------------------------
D. Scott Ingstad, Vice Chairman of the
Board, President, and Chief Executive Officer
18