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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2003
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________________ to ___________________
Commission file number 2-89283
------------------------------
IOWA FIRST BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF IOWA 42-1211285
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer of
incorporation or organization) Identification No.)
300 East Second Street
Muscatine, Iowa 52761
----------------------------------------
(Address of principal executive offices)
563-263-4221
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
At September 30, 2003 there were 1,415,845 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, 2003 and December 31, 2002 3
Consolidated Condensed Statements of
Income, Three and Nine Months Ended
September 30, 2003 and 2002 4
Consolidated Condensed Statements of
Cash Flows, Nine Months Ended
September 30, 2003 and 2002 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of
Operations 7-18
Item 4. Controls and Procedures 18
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
2003 2002
---------------------------
ASSETS
Cash and due from banks ................................ $ 16,485 $ 17,283
Interest-bearing deposits at financial institutions .... 6,471 1,791
Federal funds sold ..................................... 41,840 30,600
Investment securities available for sale ............... 37,090 38,095
Loans, net of allowance for loan losses September 30,
2003, $3,382; December 31, 2002, $3,304 .............. 262,607 273,922
Bank premises and equipment, net ....................... 6,664 5,303
Accrued interest receivable ............................ 2,427 2,672
Life insurance contracts ............................... 4,204 3,953
Restricted investment securities ....................... 3,253 3,957
Other assets ........................................... 825 1,129
------------------------
TOTAL ASSETS ........................................ $ 381,866 $ 378,705
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 46,036 $ 45,293
Interest bearing deposits .............................. 236,528 225,129
------------------------
TOTAL DEPOSITS ...................................... 282,564 270,422
Note payable ........................................... 2,700 3,300
Securities sold under agreements to repurchase ......... 5,717 6,591
Federal Home Loan Bank advances ........................ 56,293 64,609
Treasury tax and loan open note ........................ 382 785
Company obligated mandatorily redeemable preferred
securities of subsidiary trust ....................... 4,000 4,000
Dividends payable ...................................... 333 335
Other liabilities ...................................... 1,805 1,633
------------------------
TOTAL LIABILITIES ................................... 353,794 351,675
------------------------
Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ......... 2,811 2,717
------------------------
STOCKHOLDERS' EQUITY
Common stock ........................................... 200 200
Additional paid-in capital ............................. 4,254 4,254
Retained earnings ...................................... 35,695 34,195
Accumulated other comprehensive income ................. 878 1,101
Less net cost of common shares acquired for the treasury (12,955) (12,720)
Less maximum cash obligation related to KSOP shares .... (2,811) (2,717)
------------------------
TOTAL STOCKHOLDERS' EQUITY .......................... 25,261 24,313
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $ 381,866 $ 378,705
========================
See notes to Consolidated Condensed Financial Statements.
3
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------------------ ------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees:
Taxable ................................. $ 4,267 $ 4,925 $13,184 $14,752
Nontaxable .............................. 33 40 92 83
Investment securities available for sale:
Taxable ................................. 236 286 739 901
Nontaxable .............................. 180 200 556 618
Federal funds sold ........................ 91 113 349 390
Restricted investment securities .......... 28 31 89 88
Other ..................................... 34 12 85 56
-------------------------------------
Total interest income .................. 4,869 5,607 15,094 16,888
-------------------------------------
INTEREST EXPENSE:
Deposits .................................. 1,128 1,471 3,614 4,510
Note payable .............................. 27 62 127 245
Other borrowed funds ...................... 797 1,018 2,610 3,138
Company obligated mandatorily redeemable
preferred securities ................... 107 106 313 313
-------------------------------------
Total interest expense .................. 2,059 2,657 6,664 8,206
-------------------------------------
Net interest income ....................... 2,810 2,950 8,430 8,682
Provision for loan losses .................... 65 95 525 330
-------------------------------------
Net interest income after provision for
loan losses ............................. 2,745 2,855 7,905 8,352
-------------------------------------
Other income:
Trust department .......................... 98 92 288 299
Service fees .............................. 467 406 1,230 1,112
Investment securities gains, net .......... 0 4 22 84
Gains on loans sold ....................... 180 42 325 85
Other ..................................... 93 140 385 379
-------------------------------------
Total other income ...................... 838 684 2,250 1,959
-------------------------------------
Operating expenses:
Salaries and employee benefits ............ 1,260 1,230 3,744 3,648
Occupancy expenses, net ................... 180 166 522 497
Equipment expenses ........................ 136 157 468 520
Office supplies, printing, and postage .... 86 87 278 268
Computer processing ....................... 131 128 396 365
Advertising and business promotion ........ 45 40 124 121
Other operating expenses .................. 364 297 1,050 971
-------------------------------------
Total operating expenses ................. 2,202 2,105 6,582 6,390
-------------------------------------
Income before income taxes ................ $ 1,381 $ 1,434 $ 3,573 $ 3,921
Applicable income taxes ...................... 441 449 1,072 1,212
-------------------------------------
Net income ................................... $ 940 $ 985 $ 2,501 $ 2,709
=====================================
Net income per common share, basic and diluted $ 0.66 $ 0.69 $ 1.76 $ 1.88
=====================================
Dividends declared per common share .......... $ 0.24 $ 0.23 $ 0.71 $ 0.68
=====================================
Comprehensive income ......................... $ 641 $ 1,257 $ 2,278 $ 3,122
======================================
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, 2003 and 2002
(In Thousands)
(Unaudited)
2003 2002
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 2,501 $ 2,709
Adjustments to reconcile net income to net cash provided by
operating activities:
Proceeds from loans sold .................................................... 22,980 6,816
Loans underwritten .......................................................... (22,714) (6,731)
Gains on loans sold ........................................................ (325) (85)
Provision for loan losses ................................................... 525 330
Investment securities gains, net ............................................ (22) (84)
Depreciation ................................................................ 384 424
Amortization of premiums and accretion of discounts
on investment securities available for sale, net .......................... 130 30
Net (increase) decrease in accrued interest receivable ...................... 245 (39)
Net (increase) decrease in other assets ..................................... 304 (173)
Net increase in other liabilities .......................................... 305 29
--------------------
Net cash provided by operating activities ...................................... $ 4,313 $ 3,226
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in interest-bearing deposits at financial instititions ....... $ (4,680) $ (180)
Net (increase) decrease in federal funds sold ............................... (11,240) 1,227
Proceeds from sales, maturities, calls and paydowns of available
for sale securities ......................................................... 6,999 14,786
Purchases of available for sale securities .................................. (6,458) (8,706)
Net (increase) decrease in loans ............................................ 10,849 (8,015)
Purchases of bank premises and equipment .................................... (1,745) (559)
Purchases of life insurance contracts ....................................... (100) (405)
Increase in cash value of life insurance contracts .......................... (151) (138)
(Purchases) sales of restricted investment securities ....................... 704 (89)
--------------------
Net cash (used in) investing activities ..................................... $ (5,822) $ (2,079)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest bearing deposits ................................ $ 743 $ 2,170
Net increase in interest bearing deposits ................................... 11,399 6,333
Net increase (decrease) in securities sold under
agreements to repurchase .................................................. (874) 792
Repayment of note payable ................................................... (3,922) (2,119)
Proceeds from note payable .................................................. 3,322 --
Net increase (decrease) in treasury tax and loan open note .................. (403) 219
Advances from Federal Home Loan Bank ........................................ 9,550 7,100
Payments of advances from Federal Home Loan Bank ............................ (17,866) (10,684)
Cash dividends paid ......................................................... (1,003) (989)
Purchases of common stock for the treasury .................................. (235) (520)
Proceeds from issuance of common stock ...................................... -- 105
--------------------
Net cash provided by financing activities ................................... $ 711 $ 2,407
--------------------
Net increase (decrease) in cash and due from banks .......................... (798) 3,554
Cash and due from banks:
Beginning ................................................................... $ 17,283 $ 14,661
--------------------
Ending ...................................................................... $ 16,485 $ 18,215
====================
Supplemental Disclosures of Cash Flow Information, cash payments for:
Interest ................................................................. $ 6,668 $ 8,250
Income taxes ............................................................. 983 1,228
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on investment securities available for sale, net .............. (223) 413
See notes to Consolidated Condensed Financial Statements.
5
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine (Muscatine) and First National
Bank in Fairfield (Fairfield). First National Bank of Muscatine has a total of
five locations in Muscatine, Iowa. First National Bank in Fairfield has two
locations in Fairfield, Iowa. Each bank is engaged in the general commercial
banking business and provides full service banking to individuals and
businesses, including checking, savings, money market and time deposit accounts,
commercial loans, consumer loans, real estate loans, safe deposit facilities,
transmitting of funds, trust services, and such other banking services as are
usual and customary for commercial banks. Some of these other services include
sweep accounts, lock-box deposits, debit cards, credit-related insurance,
internet banking, automated teller machines, telephone banking and investment
services through a third-party arrangement. The Company also owns the
outstanding stock of Iowa First Capital Trust I, which was capitalized in March
2001 for the purpose of issuing Company Obligated Mandatorily Redeemable
Preferred Securities.
Basis of Presentation:
The consolidated financial statements of the Company and its subsidiaries are
unaudited and should be read in conjunction with the consolidated financial
statements contained in the 2002 Annual Report on Form 10-K. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and conform to predominant
practices within the banking industry. Management of the Company has made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
the consolidated financial statements. In the opinion of management, all
adjustments and normal recurring accruals considered necessary for a fair
presentation of the results of operations for the interim periods presented
herein have been included. Operating results for the three and nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003.
Reclassifications:
Certain amounts in the prior year financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform to current year
presentations.
Note 2. Capital Stock and Earnings Per Share
Common shares and preferred stock authorized total 6,000,000 shares and 500,000
shares, respectively. Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Diluted earnings per share is arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period. The average number of shares
of common stock outstanding for the three and nine months ended September 30,
2003 were 1,417,345 and 1,421,258, respectively. The average number of shares of
common stock outstanding for the three and nine months ended September 30, 2002
were 1,436,055 and 1,444,443 respectively. There were no common stock
equivalents in 2003 or 2002.
Note 3. Commitments and Contingencies
The Banks are parties to financial instruments with off-balance-sheet risk made
in the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
September 30, December 31,
2003 2002
----------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit .................. $47,561,000 $44,521,000
Standby letters of credit ..................... 2,336,000 2,539,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon and some of the commitments will be sold to other
financial intermediaries if drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks hold collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the Banks would be required to fund the commitment. The maximum potential amount
of future payments the Banks could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded, the
Banks would be entitled to seek recovery from the customer. At September 30,
2003 and December 31, 2002 no amounts have been recorded as liabilities for the
Banks' potential obligations under these guarantees.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $449,000 and $390,000 as of September 30, 2003
and December 31, 2002, respectively. These amounts are included in loans at the
respective balance sheet dates.
Results of Operations:
Quarter ended September 30, 2003 compared with quarter ended September 30, 2002:
The Company recorded net income of $940,000 for the quarter ended September 30,
2003, compared with net income of $985,000 for the quarter ended September 30,
2002, a decrease of $45,000 or 4.6%. This decrease in net income resulted
primarily from lower net interest income and higher noninterest expense during
the third quarter of 2003 compared to the third quarter of 2002. This
unfavorable comparison of net interest income and noninterest expense for the
third quarter of 2003 with the same period in 2002 was partially offset by lower
provision for loan losses and higher noninterest income.
7
Basic and diluted earnings per share were $.66 for the three months ended
September 30, 2003, $.03 or 4.3% less than the same period in 2002. The
Company's annualized return on average assets for the third quarter of 2003 was
..98% compared to 1.05% during the third quarter of the prior year. The Company's
annualized return on average equity for the three months ended September 30,
2003 and September 30, 2002 was 15.0% and 15.7%, respectively.
The distribution of average assets, liabilities and stockholders' equity and
interest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on a fully taxable equivalent basis using
statutory rates in effect for the year presented):
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
------------------------ ------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------
Assets
Taxable loans, net .... $263,024 $ 4,267 6.49% $275,265 $ 4,925 7.16%
Taxable investment
securities available
for sale ............ 21,582 236 4.37% 21,739 286 5.26%
Nontaxable investment
securities and loans 18,556 323 6.96% 20,027 364 7.27%
Federal funds sold .... 40,833 91 0.89% 27,505 113 1.64%
Restricted investment
securities .......... 3,313 28 3.38% 3,931 31 3.15%
Interest-bearing
deposits at financial
institutions ........ 6,318 34 2.15% 1,530 12 3.14%
----------------- -----------------
Total interest-
earning assets .. 353,626 4,979 5.63% 349,997 5,731 6.55%
------ -------
Cash and due from banks 14,322 13,076
Bank premises and
equipment, net ...... 6,641 5,158
Life insurance
contracts ........... 4,151 3,884
Other assets .......... 3,353 4,075
-------- --------
Total ........... $382,093 $376,190
======== ========
Liabilities
Deposits:
Interest-bearing
demand ............ $121,652 $ 199 0.65% $110,053 $ 355 1.29%
Time ................ 113,914 929 3.23% 115,830 1,116 3.82%
Note payable .......... 3,293 27 3.25% 3,300 62 7.35%
Other borrowings ...... 63,998 797 4.94% 72,884 1,018 5.54%
Company obligated
mandatorily redeemable
preferred securities 4,000 107 10.43% 4,000 106 10.37%
----------------- ----------------
Total interest-
bearing
liabilities .... 306,857 2,059 2.66% 306,067 2,657 3.44%
Noninterest-bearing
deposits ........... 45,289 41,127
Other liabilities .... 2,007 1,728
-------- --------
Total
liabilities .... 354,153 348,922
Redeemable common
stock held by
KSOP ............... 2,868 2,242
Stockholders' equity ... 25,072 25,026
-------- --------
Total .......... $382,093 $376,190
======== ========
Net interest earnings .. $ 2,920 $3,074
======= ======
Net interest margin (net
interest earnings
divided by total
interest-earning
assets) .............. 3.30% 3.51%
===== =====
8
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
The net interest margin continues to be pressured as evidenced by a decrease to
3.30% during the third quarter of 2003 compared to 3.51% during the third
quarter of 2002. The return on average interest-earning assets decreased 92
basis points (from 6.55% in 2002 to 5.63% in 2003) and interest paid on average
interest-bearing liabilities decreased 78 basis points (from 3.44% in 2002 to
2.66% in 2003).
The prime lending rate began the year 2002 at 4.75% and ended 2002 lower at
4.25%; it subsequently dropped to 4.00% as of late June 2003, where it has since
remained. This is the lowest prime lending rate in several decades. During this
period of historically low interest rates, increased emphasis has been given to
incorporating interest rate floors on selected commercial and agricultural
loans. During the first three quarters of 2003 most, if not all, of such loans
subject to interest rate floors were actually paying the floor rate. This
resulted in the rates received on taxable loans during the third quarter of
2003, compared to the third quarter of 2002, falling somewhat less than the
rates paid on interest-bearing liabilities (67 basis points versus 78 basis
points). Eventually, when market interest rates again rise, rates paid on
interest-bearing liabilities may, for a time, increase more than rates received
on taxable loans. This outcome is possible due to the loans which are subject to
floor rate pricing lagging market interest rate increases until such time as the
floor rate has been exceeded. The extent of this impact will depend on the
amount and timing of eventual market interest rate hikes.
Rates received on taxable investment securities available for sale have
decreased during the third quarter of 2003 versus the same quarter of 2002 at a
faster pace than the rates paid on interest-bearing liabilities (decreases of 89
basis points and 78 basis points, respectively). This is largely due to
maturities and early calls of taxable investment securities coupled with
reinvestment at appreciably lower interest rates. This portfolio, however, with
an average maturity of less than four years, had an interest rate return during
the quarter similar to that of ten year treasury securities.
Rates received during the quarter ended September 30, 2003 compared to the
quarter ended September 30, 2002 on nontaxable investment securities available
for sale and loans decreased at a much slower pace than the rates paid on
interest-bearing liabilities (decreases of 31 basis points and 78 basis points,
respectively). This was due largely to a longer average duration for nontaxable
investment securities available for sale and loans than the average duration for
interest-bearing liabilities. Most of the nontaxable investment securities
available for sale were purchased when market interest rates were higher than
rates currently available. In the current interest rate environment, when
taxable and nontaxable investment securities mature or are sold, called, or
otherwise paid down, the reinvestment rate available is nearly always lower than
the yield of the liquidating security.
The rate received on overnight federal funds sold decreased 75 basis points
during the third quarter of 2003 compared to the same period in 2002. Given the
Company's relatively large balance held in federal funds sold, this served to
reduce the net interest income. The Company anticipates utilizing a substantial
portion of this short-term liquidity to reduce its reliance on wholesale funding
sources, purchase investment securities and other safe, relatively short-term
assets as well as, if the appropriate opportunities exist, to fund loan growth.
The rate earned on interest-bearing deposits at financial institutions
(primarily FDIC insured certificates of deposit maturing in one to three years)
decreased 99 basis points during the third quarter of 2003 versus the third
quarter of 2002, while the average balance increased over $4,700,000. Despite
the decrease in rate received, this asset category was increased because it
yielded 126 basis points over federal funds sold with little, if any, credit
risk.
The rate paid on the note payable outstanding declined a significant 410 basis
points during the third quarter of 2003 compared to the same quarter of 2002.
This was the result of refinancing this debt with a different lender at more
favorable terms.
The usage of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk, tends
to increase overall interest expense. The Company's average rate paid for such
Federal Home Loan Bank advances and other funds was reduced by 59 basis points
when comparing the third quarters of 2003 and 2002.
9
Intense competition for all types of loans and deposits tends to limit the
Company's ability to control pricing and other terms when dealing with
customers.
Provisions for loan losses were $65,000 for the three months ended September 30,
2003. This was $30,000 less than the third quarter of 2002. Net loan charge-offs
for the quarter ended September 30, 2003 totaled $37,000 compared to net
charge-offs of $61,000 for the same quarter in 2002.
Loan quality has been negatively impacted by a variety of factors including, but
not necessarily limited to, a generally sluggish economy. Specifically, the
quality of the agricultural loan portfolio at the Company's Fairfield subsidiary
bank has declined, resulting in a larger than normal provision for loan losses
in the first quarter of 2003.
Various strategies are being implemented by management in an effort to improve
the loan quality of the portfolio in question. These strategies include
attempting to obtain government guarantees for portions of certain identified
loans, increasing monitoring efforts over the loan portfolio in general and past
due loans in particular, as well as a renewed focus on taking appropriate
corrective actions with borrowers who are not fulfilling their contractual
obligations. While cautiously optimistic as to the likelihood of positive
results emanating from the strategies being employed, management realizes that
significantly improving loan quality is not normally a quick process.
The allowance for possible loan losses is maintained at the level considered
adequate by management of the Banks to provide for probable losses in the
existing loan portfolio. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs. In determining the adequacy of
the allowance balance the Banks make continuous evaluations of the loan
portfolio and related off-balance sheet commitments, consider current economic
conditions, the composition of the loan portfolio, historical loan loss
experience, review of specific problem loans, the estimated net realizable value
or the fair value of the underlying collateral, and other factors.
Nonaccrual loans totaled $2,426,000 at September 30, 2003, an increase of
$560,000 or 30.0% from September 30, 2002. Other real estate owned totaled
$174,000, a decrease of $352,000 or 66.9% from a year ago. Loans past due 90
days or more and still accruing totaled $577,000, which was $337,000 or 140%
more than a year earlier. The allowance for possible loan losses of $3,382,000
represented 1.3% of gross loans and 106% of total nonaccrual loans, other real
estate owned, and loans past due 90 days or more and still accruing.
Other income results from the charges and fees collected by the Company from its
customers for various services performed, gross trust department revenue,
miscellaneous other income and gains (or losses) from the sale of investment
securities in the available for sale category and loans. Total other income for
the third quarter of 2003, without gains on investment securities, was $838,000;
$158,000 or 23.2% more than the third quarter of 2002. Gains on loan sold
accounted for $138,000 of this total increase of $158,000
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, 2003, salaries and employee benefits expense increased
$30,000 or 2.4% due principally to normal cost of living and merit raises,
training time for new employees and rising health care cost. Occupany and
equipment expenses decreased $7,000 or 2.2%. Other operating expenses increased
$67,000 or 22.5% due largely to fees paid for product and other consulting
services, write-down of the carrying value of other real estate owned, increased
insurance costs as well as increased credit checking and other loan underwriting
related costs. Total operating expenses increased $97,000 or 4.6% during the
third quarter of 2003 versus the same quarter last year.
Income tax expense for the quarter ended September 30, 2003 of $441,000
represented 31.9% of income before taxes. The comparable quarter last year was
31.3% of income before tax.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percent of net interest income plus noninterest income,
was 60.4% and 57.4% for the three months ended September 30, 2003 and 2002,
respectively. The primary reasons for this change in the efficiency ratio are
discussed previously in this report.
10
Results of Operations:
Nine months ended September 30, 2003 compared with nine months ended September
30, 2002:
The Company recorded net income of $2,501,000 for the nine months ended
September 30, 2003, compared with net income of $2,709,000 for the same period
in 2002, a decrease of $208,000 or 7.7%. This decrease in net income was
attributable to lower net interest income for the first three quarters of 2003
compared to the same period in 2002. Net interest income declined $252,000 or
2.9% over this time frame. Additionally, provisions for loan losses during the
first nine months of 2003 were $525,000, which was $195,000 or 59.1% greater
than experienced in 2002. Increases in other operating expenses of $192,000 or
3.0% were more than offset by increases in other income totaling $291,000 or
14.9%.
Basic and diluted earnings per share were $1.76 for the nine months ended
September 30, 2003, $.12 or 6.4% less than the same period in 2002. The
Company's annualized return on average assets for the first three quarters of
2003 was .86% compared to .96% during the same quarters of the prior year. The
Company's annualized return on average equity for the nine months ended
September 30, 2003 and September 30, 2002 was 13.4% and 15.2%, respectively.
11
The distribution of average assets, liabilities and stockholders' equity and
interest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on a fully taxable equivalent basis using
statutory rates in effect for the year presented):
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
------------------------ ------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------
Assets
Taxable loans, net .... $267,332 $13,184 6.58% $274,173 $14,752 7.17%
Taxable investment
securities available
for sale ............ 21,605 739 4.56% 21,765 901 5.52%
Nontaxable investment
securities and loans 18,685 982 7.01% 19,597 1,062 7.23%
Federal funds sold .... 45,059 349 1.03% 32,107 390 1.62%
Restricted investment
securities .......... 3,740 89 3.17% 3,897 88 3.01%
Interest-bearing
deposits at financial
institutions ........ 5,106 85 2.22% 1,922 56 3.88%
----------------- -----------------
Total interest-
earning assets .. 361,527 15,428 5.69% 353,461 17,249 6.51%
------ -------
Cash and due from banks 14,127 12,759
Bank premises and
equipment, net ...... 6,302 5,033
Life insurance
contracts ........... 4,054 3,598
Other assets .......... 3,580 3,916
-------- --------
Total ........... $398,590 $378,767
======== ========
Liabilities
Deposits:
Interest-bearing
demand . .......... $124,788 $ 741 0.79% $113,491 $1,160 1.37%
Time ................ 115,075 2,873 3.34% 114,546 3,350 3.91%
Note payable .......... 3,298 127 5.08% 4,435 245 7.37%
Other borrowings ...... 68,525 2,610 5.09% 74,241 3,138 5.65%
Company obligated
mandatorily redeemable
preferred securities 4,000 313 10.32% 4,000 313 10.32%
----------------- ----------------
Total interest-
bearing
liabilities .... 315,686 6,664 2.82% 310,713 8,206 3.52%
Noninterest-bearing
deposits ........... 44,250 40,350
Other liabilities .... 1,984 1,634
-------- --------
Total
liabilities .... 361,920 352,697
Redeemable common
stock held by
KSOP ............... 2,767 2,242
Stockholders' equity ... 24,903 23,828
-------- --------
Total .......... $389,590 $378,767
======== ========
Net interest earnings .. $ 8,764 $9,043
======= ======
Net interest margin
(net interest
earnings divided by
total nterest-earning
assets) .............. 3.23% 3.41%
===== =====
12
The net interest margin declined to 3.23% from 3.41% when comparing the nine
month periods ended September 30, 2003 and September 30, 2002, respectively. The
return on average interest-earning assets decreased 82 basis points (from 6.51%
in 2002 to 5.69% in 2003) and interest paid on average interest-bearing
liabilities decreased 70 basis points (from 3.52% in 2002 to 2.82% in 2003).
The rates received on taxable loans during the first nine months of 2003,
compared to the first nine months of 2002, declined somewhat less than the rates
paid on interest-bearing liabilities (59 basis points versus 70 basis points).
Eventually, when market interest rates again rise, rates paid on
interest-bearing liabilities may, for a time, increase more than rates received
on taxable loans. This outcome is possible due to the loans which are subject to
floor rate pricing lagging market interest rate increases until such time as the
floor rate has been exceeded. The extent of this impact will depend on the
amount and timing of eventual market interest rate hikes.
Rates received on taxable investment securities available for sale decreased
during the first three quarters of 2003 versus the same quarters of 2002 at a
faster pace than the rates paid on interest-bearing liabilities (decreases of 96
basis points and 70 basis points, respectively). This is largely due to
maturities and early calls of taxable investment securities coupled with
reinvestment at appreciably lower interest rates. This portfolio, however, with
an average maturity of less than four years, had an interest rate return during
the first three quarters of 2003 higher than that of ten year treasury
securities.
Rates received during the three quarters ended September 30, 2003 compared to
the three quarters ended September 30, 2002 on nontaxable investment securities
available for sale and loans decreased at a much slower pace than the rates paid
on interest-bearing liabilities (decreases of 22 basis points and 70 basis
points, respectively). This was due largely to a longer average duration for
nontaxable investment securities available for sale and loans than the average
duration for interest-bearing liabilities. Most of the nontaxable investment
securities available for sale were purchased when market interest rates were
higher than rates currently available. In the current interest rate environment,
when taxable and nontaxable investment securities mature or are sold, called, or
otherwise paid down, the reinvestment rate available is nearly always lower than
the yield of the liquidating security.
The rate received on overnight federal funds sold decreased 59 basis points
during the three quarters ended September 30, 2003 compared to the same period
in 2002. Given the Company's relatively large balance held in federal funds
sold, this served to reduce the net interest income. The Company anticipates
utilizing a substantial portion of this short-term liquidity to reduce its
reliance on wholesale funding sources, purchase investment securities and other
safe, relatively short-term assets as well as, if the appropriate opportunities
exist, to fund loan growth.
The rate earned on interest-bearing deposits at financial institutions
(primarily FDIC insured certificates of deposit maturing in one to three years)
decreased 166 basis points during the first three quarters of 2003 versus the
same period in 2002. Despite the decrease in rate received, this asset category
was increased because it yielded 119 basis points over federal funds sold with
little, if any, credit risk.
The rate paid on the note payable outstanding declined a significant 229 basis
points during the three quarters ended September, 30, 2003 compared to the same
period in 2002. This was the result of refinancing this debt with a different
lender at more favorable terms.
The usage of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk, tends
to increase overall interest expense. The Company's average rate paid for such
funds was reduced by 56 basis points when comparing the first three quarters of
2003 with 2002.
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 $525,000 for the nine months ended September 30,
2003. This was $195,000 more than the provision for loan losses during the first
nine months of 2002. Net loan charge-offs for the nine month period ended
September 30, 2003 totaled $446,000 compared to net charge-offs of $164,000 for
the same time frame in 2002.
13
As previously discussed, various strategies are being implemented by management
in an effort to improve loan quality. These strategies include attempting to
obtain government guarantees for portions of certain identified loans,
increasing monitoring efforts over the loan portfolio in general and past due
loans in particular, as well as a renewed focus on taking appropriate corrective
actions with borrowers who are not fulfilling their contractual obligations.
While cautiously optimistic as to the likelihood of positive results emanating
from the strategies being employed, management realizes that significantly
improving loan quality is not normally a quick process.
Other income results from the charges and fees collected by the Company from its
customers for various services performed, gross trust department revenue,
miscellaneous other income and gains (or losses) from the sale of investment
securities in the available for sale category and loans. Total other income for
the first nine months of 2003, without gains on investment securities, was
$2,228,000; $353,000 or 18.8% more than the same period in 2002. The majority of
this increase, or $240,000, was due to increases in gains on loans sold. This
increase resulted from larger numbers of home refinancings and home purchases,
due to historically low interest rates, and the subsequent sale of most of these
loans into the secondary market.
Operating expenses include all the costs incurred to operate the Company except
for interest expense, the loan loss provision and income taxes. For the three
quarters ended September 30, 2003 compared to the three quarters ended September
30, 2002, salaries and employee benefits expense increased $96,000 or 2.6% due
principally to normal cost of living and merit raises, training time for new
employees and rising health care cost. Occupancy and equipment expenses
decreased $27,000 or 2.7%. Office supplies and related expenses increased
$10,000 or 3.7% and computer processing increased $31,000 or 8.5% as additional
costs associated with enhanced communications, backup, marketing applications
and disaster recovery contracts were recognized. Finally, other operating
expenses increased $79,000 or 8.1% due largely to fees paid for product and
other consulting services, write-down of the carrying value of other real estate
owned, increased insurance costs as well as increased credit checking and other
loan underwriting related costs. Total operating expenses increased $192,000 or
3.0% during the first three quarters of 2003 versus the same time frame last
year.
Income tax expense for the nine months ended September 30, 2003 of $1,072,000
was $140,000 or 11.6% less than the prior year. This decrease was primarily
attributable to decreased net income generated in 2003 than 2002, and a
reduction in the effective tax rate for 2003 of 30.0% versus 30.9% in 2002.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percent of net interest income plus noninterest income,
was 61.6% and 60.1% for the nine months ended September 30, 2003 and 2002,
respectively. The primary reasons for this change in the efficiency ratio are
discussed above.
Discussion and Analysis of Financial Condition
The Company's assets at September 30, 2003 totaled $381,866,000, an increase of
$3,161,000 or 0.8% from December 31, 2002. As of September 30, 2003, the Company
had $41,840,000 of federal funds sold compared to $30,600,000 at December 31,
2002. Additionally, interest-bearing deposits at financial institutions
(primarily fully FDIC insured certificates of deposit with original maturities
of three years or less and interest-bearing demand accounts at various banking
institutions) totaled $6,471,000 versus $1,791,000 at December 31, 2002. This
increase was primarily the result of higher yields available on such
certificates of deposit than could be obtained in the federal funds and treasury
securities markets. Federal funds sold and other liquid assets have been higher
the past several quarters than the Company would historically consider normal.
These liquid assets may be used to fund future loan growth, deposit or other
liability outflows, purchases of investment securities available for sale when
interest rates again rise, or various other purposes as identified by
management.
Total available for sale securities decreased $1,005,000 or 2.6% during the
first nine months of 2003 to total $37,090,000 at September 30, 2003. The Banks
emphasize purchase of securities with maturities of five years and less as such
purchases typically offer reasonable yields with limited credit risk as well as
limited interest rate risk. Additionally, selected securities with longer
maturities are owned in order to enhance overall portfolio yield without
significantly increasing risk. In the low interest rate environment which
continued during the first nine months of 2003, the banks limited their
purchases of securities to somewhat less than the total of securities that were
sold, matured, called, or paid down. Furthermore, most of the securities that
were purchased had relatively short maturities or likely early call dates.
Securities sold thus far in 2003 totaled $516,000 and resulted in net gains
recognized of $22,000.
14
Net loans totaled $262,607,000 at September 30, 2003, a decrease of $11,315,000
or 4.1% from December 31, 2002. Competition for high-quality loans remains
intense in all loan categories. Refinancing of home loans continued at a rapid
pace, fueled by historically low interest rates, during the third quarter of
2003. The Company sells many of these loans in the secondary market.
Consequently, the loans which are sold, as well as the loans remaining in the
Company's portfolio but refinanced at lower rates, combine to put pressure on
loan yields and the volume of home loans on the balance sheet.
Total deposits at September 30, 2003, were $282,564,000, an increase of
$12,142,000 or 4.5% from the balance at December 31, 2002. Certificates of
deposit represented on average for the nine months ended September 30, 2003,
approximately 41% of total deposits. Interest-bearing demand deposits, comprised
of savings, money market and NOW accounts, represented another 44% of average
deposits. The final 15% of average deposits were in noninterest-bearing
accounts. Securities sold under agreements to repurchase decreased $874,000 to
$5,717,000, and advances borrowed from the Federal Home Loan Bank declined by
$8,316,000 from year-end 2002, totaling $56,293,000 at quarter end.
The note payable balance of $2,700,000 at September 30, 2003, was $600,000 less
than the December 31, 2002 balance. This note was refinanced during the second
quarter of 2003. The new variable rate revolving five-year term note is priced
at Prime less one percent, with a floor of 3.25% and a ceiling of 5.25%,
considerably lower than the prior fixed rate of over 7.35%.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" refers to those assets and
liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative gap exists when
total interest-bearing liabilities are in excess of interest-earning assets.
Generally a positive repricing gap will result in increased net interest income
in a rising rate environment and decreased net interest income in a falling rate
environment. A negative repricing gap tends to produce increased net interest
income in a falling rate environment and decreased net interest income in a
rising rate environment. At September 30, 2003, rate sensitive liabilities
exceeded rate sensitive assets within a one year maturity range and, thus, the
Company is theoretically positioned to benefit from a decline in interest rates
within the next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change.
Because the repricing gap position does not capture these risks, Management
utilizes simulation modeling to measure and manage the rate sensitivity exposure
of earnings. The Company's simulation model provides a projection of the effect
on net interest income of various interest rate scenarios and balance sheet
strategies.
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.
15
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, 2003, were $282,564,000 or 74.0% of total liabilities and equity.
Federal funds sold overnight totaled $41,840,000 or 11.0% of September 30, 2003
total assets. These federal funds sold may be used to fund loans as well as
deposit withdrawals, or for other purposes as defined by management.
Securities available for sale with a fair value totaling $37,090,000 at
quarter-end included net unrealized gains of $1,400,000. 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 $87,000 (0.3%) and $948,000 (3.9%) during the
three and nine months ended September 30, 2003, respectively. The year-to-date
increase included net income of $2,501,000, reduction of $223,000 in accumulated
other comprehensive income, $1,001,000 of dividends declared to shareholders,
$235,000 of treasury share purchases and $94,000 increase in the maximum
obligation related to KSOP shares.
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a consistent system for
comparing capital positions of financial institutions and to take into account
the different inherent risks among financial institutions' assets and
off-balance-sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.
A comparison of the Company's capital as of September 30, 2003 with the
requirements to be considered adequately capitalized is presented below.
For Capital
Actual Adequacy Purposes
-----------------------------
Total capital to risk-weighted assets .... 13.0% 8.00%
Tier 1 capital to risk-weighted assets ... 11.7% 4.00%
Tier 1 capital to average assets ......... 8.1% 4.00%
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Trends, Events or Uncertainties
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. All such transactions are on substantially the same
terms, including interest rates on loans and collateral, as those prevailing at
the time for comparable transactions with others, involve no more than normal
risk of collectibility, and present no other unfavorable features.
In the normal course of business, the Banks are involved in various legal
proceedings. In the current opinion of management, any liability resulting from
such proceedings would not have a material effect on the Company's financial
statements.
The Company has in the past purchased, and is authorized under an existing stock
repurchase plan to buy in the future, shares of its outstanding common stock for
the treasury as they become available. Pursuant to the stock repurchase plan
approved by the Board of Directors, 8,600 shares were purchased by the Company
during the first three quarters of 2003.
16
Current Accounting Developments
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement was effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Implementation of the Statement on
July 1, 2003 did not have a significant impact on the consolidated financial
statements.
The Financial Accounting Standards Board has issued Statement 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and requires that certain freestanding financial instruments be
reported as liabilities in the balance sheet. Depending on the type of financial
instrument, it is required to be accounted for at either fair value or the
present value of future cash flows determined at each balance sheet date with
the change in that value reported as interest expense in the income statement.
Prior to the application of Statement No. 150, either those financial
instruments were not required to be recognized, or if recognized were reported
in the balance sheet as equity and changes in the value of those instruments
were normally not recognized in net income. For the Company, the Statement was
effective July 1, 2003 and implementation had no significant impact on the
consolidated financial statements.
The Financial Accounting Standard Board has issued Interpretation (FIN) No. 46
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51." FIN 46 establishes accounting guidance for
consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46, VIEs were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity. The provisions of FIN 46 are effective for the first period ending after
December 15, 2003.
The Company expects to adopt FIN 46 in connection with its consolidated
financial statements for the year ended December 31, 2003. In its current form,
FIN 46 may require the Company to de-consolidate its investment in Iowa First
Capital Trust I in future financial statements. The potential de-consolidation
of subsidiary trusts of bank holding companies formed in connection with the
issuance of trust preferred securities, like Iowa First Capital Trust I, appears
to be an unintended consequence of FIN 46. It is currently unknown if, or when,
the FASB will address this issue. In July 2003, the Board of Governors of the
Federal Reserve System issued a supervisory letter instructing bank holding
companies to continue to include the trust preferred securities in their Tier I
capital for regulatory capital purposes until notice is given to the contrary.
The Federal Reserve intends to review the regulatory implications of any
accounting treatment changes and, if necessary or warranted, provide further
appropriate guidance. There can be no assurance that the Federal Reserve will
continue to permit institutions to include trust preferred securities in Tier I
capital for regulatory capital purposes. As of September 30, 2003, assuming the
Company was not permitted to include the $4 million in trust preferred
securities issued by Iowa First Capital Trust I in its Tier 1 capital, the
Company would still exceed the regulatory required minimums for capital adequacy
purposes.
Management continues to monitor the interpretations of FIN 46, and its
application to various transaction types and structures, as they evolve.
17
"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. Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer (Chairman of the Board, President and CEO) and principal
financial officer (Executive Vice President, Chief Operating Officer &
Treasurer), of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There was no change in
the Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
18
Part II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 31.1 - Certification pursuant to Rule 13a-15(e) and 15d-15(e)
Exhibit 31.2 - Certification pursuant to Rule 13a-15(e) and 15d-15(e)
Exhibit 32.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
A Form 8-K was filed on July 22, 2003 and consisted of a press release
discussing financial results of the Company for the quarter and
year-to-date ended June 30, 2003, as well as the shareholder dividend
payable in July 2003.
19
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 14, 2003 /s/ D. Scott Ingstad
- ----------------- -------------------------------
Date D. Scott Ingstad, Chairman of
the Board, President and CEO
November 14, 2003 /s/ Kim K. Bartling
- ----------------- -------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
20