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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 2004 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________________ to _____________________.
Commission file number 2-89283
IOWA FIRST BANCSHARES CORP.
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(Exact name of registrant as specified in its charter)
An Iowa Corporation 42-1211285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 East Second Street, Muscatine, Iowa 52761
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (563) 263-4221
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant, based upon the last known price at which the
common equity was sold, as of the last business day of the registrant's most
recently completed second fiscal quarter was $36,074,246.
As of February 28, 2005, 1,382,669 shares of the Registrant's common stock were
outstanding.
Documents incorporated by reference:
Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be
held in April 2005.
1
Annual Report on Form 10-K
Part I
Item 1. Business
General. Iowa First Bancshares Corp. (the "Company"), is a bank holding company
headquartered in Muscatine, Iowa. The Company owns all the outstanding stock of
two national banks in Iowa, First National Bank of Muscatine and First National
Bank in Fairfield (the "Banks"). Both banks are members of the Federal Reserve
System with depository accounts insured to the maximum amount permitted by law
by the Federal Deposit Insurance Corporation.
On a full-time equivalent basis, year-end employment for the Company and its
subsidiary banks totaled 130 employees.
First National Bank of Muscatine has a total of six locations in Muscatine,
Iowa. The 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. See Note 9 in Item 8 of this Form
10-K for further discussion of these preferred securities.
The Company's primary business consists of attracting deposits from the public
or wholesale funding sources and investing those deposits and other funds in
loans and securities. The Company's results of operations are dependent
principally on net interest income, which is the difference between the interest
earned on its loans and securities and the interest paid on deposits and other
borrowings. Its operating results are affected by deposit service charge fees,
trust fees, revenue from other services provided and other income. Operating
expenses include employee compensation and benefits, occupancy and equipment
expense, data processing costs, advertising and business promotion expenses as
well as other general and administrative expenses. The Company's operating
results are also affected by economic and competitive conditions, especially
changes in interest rates, governmental policies and actions taken by regulatory
authorities.
Competition. The commercial banking business is highly competitive. The Banks
compete not only with other commercial banks, savings banks, mortgage banking
companies, credit unions and mutual funds, but also, insurance companies,
finance companies, brokerage firms, and a variety of other financial services
and advisory companies. Many of these competitors are not subject to the same
regulatory restrictions or requirements as banks and bank holding companies.
Many of the unregulated competitors compete across geographic boundaries and
provide customers access to attractive alternatives to banking services. These
competitive trends are likely to continue and may well increase. The financial
services industry is also subject to more competition as a result of future
technological advances which may assist more companies to provide financial
services.
Supervision and Regulation
General. Financial institutions, their holding companies and their affiliates
are extensively regulated under federal and state law. As a result, the growth
and earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Office of the Comptroller of the Currency
(the "OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve") and the Federal Deposit Insurance Corporation (the "FDIC").
Furthermore, taxation laws administered by the Internal Revenue Service and
state taxing authorities and securities laws administered by the Securities and
Exchange Commission (the "SEC") and state securities authorities have an impact
on the business of the Company. The effect of these statutes, regulations and
regulatory policies may be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and
amounts of investments, reserve requirements, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors of the
Banks, rather than shareholders.
2
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those statutes, regulations and regulatory
policies that are described. As such, the following is qualified in its entirety
by reference to applicable law. Any change in applicable statutes, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
The Company
General. The Company, as the sole shareholder of the Banks, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). In accordance with the Federal Reserve policy,
the Company is expected to act as a source of financial strength to the Banks
and to commit resources to support the Banks in circumstances where the Company
might not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank
holding company is to control and manage banks. The BHCA generally requires the
prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank
holding company. Subject to certain conditions (including deposit concentration
limits established by the BHCA), the Federal Reserve may allow a bank holding
company to acquire banks located in any state of the United States. In approving
interstate acquisitions, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may be
held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located
(provided that those limits do not discriminate against out-of-state depository
institutions or their holding companies) and state laws that require that the
target bank has been in existence for a minimum period of time (not to exceed
five years) before being acquired by an out-of-state bank holding company.
The BHCA generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
This authority would permit the Company to engage in a variety of
banking-related businesses, including the operation of a thrift, consumer
finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant
banking and any other activity that the Federal Reserve, in consultation with
the Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. As of
the date of this filing, the Company has neither applied for nor received
approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed to
exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances at
10% ownership.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels, a bank
holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
3
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based
requirement expressed as a percentage of total assets weighted according to
risk; and (ii) a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio
of Tier 1 capital to total assets of 3% for the most highly rated companies,
with a minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain loan servicing rights and purchased
credit card relationships). Total capital consists primarily of Tier 1 capital
plus certain other debt and equity instruments that do not qualify as Tier 1
capital and a portion of the Company's allowance for loan losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels. As of December 31, 2004, the Company had
regulatory capital in excess of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its shareholders
may be affected by both general corporate law considerations and policies of the
Federal Reserve applicable to bank holding companies. As an Iowa corporation,
the Company is subject to the limitations of the Iowa Business Corporation Act
(the "IBCA"). The IBCA allows the Company to pay dividends only if: (i) doing so
would not prevent the Company from paying its debts as they become due in the
ordinary course; or (ii) the Company's total assets would be greater than the
sum of its total liabilities and (unless the articles of incorporation permit
otherwise) the Company's total assets would be greater than the amount that
would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose rights are superior to those receiving the distribution.
Additionally, policies of the Federal Reserve caution that a bank holding
company should not pay cash dividends that exceed its net income or that can
only be funded in ways that weaken the bank holding company's financial health,
such as by borrowing. The Federal Reserve also possesses enforcement powers over
bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
Federal Securities Regulation. The Company's common stock is registered with the
SEC. Consequently, the Company is subject to various rules, regulations and
restrictions of the SEC.
The Banks.
General. The Banks are national banks, chartered by the OCC under the National
Bank Act. The deposit accounts of the Banks are insured by the FDIC's Bank
Insurance Fund ("BIF"), and the Banks are members of the Federal Reserve System.
As national banks, the Banks are subject to the examination, supervision,
reporting and enforcement requirements of the OCC, the chartering authority for
national banks. The FDIC, as administrator of the BIF, also has regulatory
authority over the Banks.
Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations until the final maturity of such obligations in 2019. These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance
4
Supervisory Assessments. National banks are required to pay supervisory
assessments to the OCC to fund the operations of the OCC. The amount of the
assessment is calculated using a formula that takes into account the bank's size
and its supervisory condition (as determined by the composite rating assigned to
the bank as a result of its most recent OCC examination).
Capital Requirements. Banks are generally required to maintain capital levels in
excess of other businesses. The OCC has established the following minimum
capital standards for national banks, such as the Banks: (i) a leverage
requirement consisting of a minimum ratio of Tier 1 capital to total assets of
3% for the most highly-rated banks with a minimum requirement of at least 4% for
all others; and (ii) a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8% and a minimum ratio
of Tier 1 capital to total risk-weighted assets of 4%. For purposes of these
capital standards, the components of Tier 1 capital and total capital are the
same as those for bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, regulations of the OCC
provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities.
Further, federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria that determines a bank holding company's
eligibility to operate as a financial holding company is a requirement that all
of its financial institution subsidiaries be "well-capitalized." Under the
regulations of the OCC, in order to be "well-capitalized" a financial
institution must maintain a ratio of total capital to total risk-weighted assets
of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6%
or greater and a ratio of Tier 1 capital to total assets of 5% or greater.
Federal law also provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized," in each case
as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include: (i)
requiring the institution to submit a capital restoration plan; (ii) limiting
the institution's asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii)
requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2004: (i) the Banks were not subject to a directive from the
OCC to increase their capital to an amount in excess of the minimum regulatory
capital requirements; (ii) the Banks exceeded their minimum regulatory capital
requirements under OCC capital adequacy guidelines; and (iii) the Banks were
"well-capitalized," as defined by OCC regulations.
Dividends. The primary source of funds for the Company is dividends from the
Banks. Under the National Bank Act, a national bank may pay dividends out of its
undivided profits in such amounts and at such times as the bank's board of
directors deems prudent. Without prior OCC approval, however, national banks may
not pay dividends in any calendar year that, in the aggregate, exceed the bank's
year-to-date net income plus the bank's retained net income for the two
preceding years.
The payment of dividends by any financial institution is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and a financial institution generally is prohibited
from paying any dividends if, following payment thereof, the institution would
be undercapitalized. As described above, the Banks exceeded their minimum
capital requirements under applicable guidelines as of December 31, 2004. As of
December 31, 2004, approximately $2.8 million was available to be paid as
dividends by the Banks. Notwithstanding the availability of funds for dividends,
however, the OCC may prohibit the payment of any dividends by the Banks if the
OCC determines such payment would constitute an unsafe or unsound practice.
5
Insider Transactions. The Banks are subject to certain restrictions imposed by
federal law on extensions of credit to the Company, on investments in the stock
or other securities of the Company and the acceptance of the stock or other
securities of the Company as collateral for loans made by the Banks. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to their directors and officers, to the directors and officers of
the Company, to principal stockholders of the Company, and to "related
interests" of such directors, officers and principal stockholders. In addition,
federal law and regulations may affect the terms upon which any person, who is a
director or officer of the Company or the Banks or a principal stockholder of
the Company, may obtain credit from banks with which the Banks maintain
correspondent relationships.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. National banks headquartered in Iowa, such as the Banks,
have the same branching rights in Iowa as banks chartered under Iowa law,
subject to OCC approval. Iowa law grants Iowa-chartered banks the authority to
establish branches anywhere in the State of Iowa, subject to receipt of all
required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states
subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is permitted only in those
states that authorize such expansion.
Financial Subsidiaries. Under Federal law and OCC regulations, national banks
are authorized to engage, through "financial subsidiaries," in any activity that
is permissible for a financial holding company and any activity that the
Secretary of the Treasury, in consultation with the Federal Reserve, determines
is financial in nature or incidental to any such financial activity, except (i)
insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company
portfolio investments and (iv) merchant banking. The authority of a national
bank to invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Banks have neither applied for nor
received approval to establish any financial subsidiaries.
Federal Reserve System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts). These reserve requirements are subject to annual adjustment by the
Federal Reserve. The Banks are in compliance with the foregoing requirements.
Statistical information called for by this Item is contained in the Company's
2004 Annual Report to Shareholders which is incorporated by reference.
Item 2. Properties
Since the Company commenced business, its principal executive office has been
located at 300 East Second Street, Muscatine, Iowa, which is the principal
office of First National Bank of Muscatine, a national banking association and a
wholly-owned subsidiary of the Company.
6
First National Bank of Muscatine conducts its operations from six facilities
located in Muscatine. The main bank is located at 300 East Second Street and is
a modern brick and steel building completed in 1979 containing 36,000 square
feet of floor space on three floors. The Bank owns both the building and the
underlying real estate. All administrative and many sales functions of the Bank
are conducted at its main office. Portions of the building are leased to
commercial tenants. A substantial remodeling of the main floor of the downtown
Muscatine primary bank building was completed in 2003.
During 1997, a branch was opened inside the then new Wal-Mart Supercenter
located on Highway 61 at Muscatine. This branch and the Wal-Mart Supercenter
were the first of their kind in Iowa. The Bank operates this branch under a
five-year lease agreement with Wal-Mart, with two five-year renewal options.
Additionally, another new branch facility, which includes drive-through banking
services and is located across the alley from the main Muscatine banking
headquarters, was completed in the fall of 1997. This branch replaced a previous
downtown branch. The Bank owns this facility and the underlying real estate.
The Bank's Southside office at 608 Grandview Avenue is located two miles
southwest of the main bank. The office contains 3,600 square feet of floor space
and is located in a one-story steel frame, concrete block building. The facility
offers a walk-in lobby and three drive-up lanes. The building and underlying
real estate are owned by the Bank. Portions of the building are leased to
commercial tenants.
The Company built a new branch during 2003 on a major thoroughfare and retail
area, Highway 61, on the northeast side of Muscatine. This branch served as a
replacement for rented branch facilities at the Muscatine Mall, also located on
the northeast side of Muscatine. The new branch offers 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 also offers freestanding twenty-four hour ATM
services. Construction of this branch was completed in May 2003. The building
and underlying real estate are owned by the Bank.
First National Bank of Muscatine constructed, and opened as of December 2004,
another new branch facility. This approximately 2,000 square foot branch,
located on the economically vibrant west side of Muscatine, offers a wide array
of banking services. The Bank owns this facility and the underlying real estate.
First National Bank in Fairfield conducts its operations from a modern brick and
steel building completed in 1968 containing 8,200 square feet of floor space on
two floors. The Bank owns both the building and the underlying real estate.
Portions of the building are leased to commercial tenants. A three-lane drive-up
facility is located at the main bank. In the spring of 1997, a new 2,500 square
foot branch facility was opened at Fairfield, Iowa. The building, which is
located in a high traffic area in front of the local Wal-Mart store on Highway
34, contains several private offices for lending staff and management as well as
teller and deposit services, including several drive-through lanes.
Management believes all facilities are of sound construction, in good operating
condition, and are adequately equipped for carrying on the business of the
Company.
Item 3. Legal Proceedings
Management is not aware of any pending material litigation against the Company
or the Banks.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of the Company for a vote
during the fourth quarter of 2004.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The brokerage firms of Howe Barnes Investments, Inc., Hill, Thompson and Magid,
LP, and Monroe Securities, Inc. make a market for the Company's common stock.
Iowa First Bancshares Corp. common stock is traded on the Over-the-Counter
Bulletin Board market under the symbol "IFST". As of February 28, 2005, there
were 1,382,669 shares of common stock outstanding.
7
High and low common stock prices and dividends paid for the last two years were:
2004 by Dividend
Quarters High Low Per Share
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First ............................ $ 32.00 $ 27.75 $ 0.2425
Second ........................... 40.00 30.00 0.2425
Third ............................ 35.00 30.00 0.2425
Fourth ........................... 37.00 32.00 0.2425
Total dividends paid ............. $ 0.97
2003 by Dividend
Quarters High Low Per Share
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First ............................ $ 31.00 $ 25.25 $ 0.2350
Second ........................... 26.45 26.15 0.2350
Third ............................ 29.00 27.50 0.2350
Fourth ........................... 32.00 29.00 0.2350
Total dividends paid ............. $ 0.94
The above quotations were furnished by the brokerage firms that serve as market
makers for the Company's stock. The quotations represent prices between dealers
and do not include retail markup, markdown, or commissions.
Future dividends are dependent on future earnings, regulatory restrictions (see
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of this Form 10-K; and Note 10 to the Company's Consolidated
Financial Statements in the Company's 2004 Annual Report to Shareholders),
capital requirements, and the Company's financial condition.
As of February 28, 2005, the Company had approximately 327 shareholders of its
outstanding class of common stock. The Iowa First Bancshares Corp. Employee
Stock Ownership Plan with 401(k) Provisions is considered one shareholder as all
shares owned by this plan are voted by the trustees of said plan unless the vote
in question encompasses approval or disapproval of any corporate merger,
consolidation, dissolution, or similar transaction.
There were no repurchases of the Company's own stock during the fourth quarter
of 2004.
Item 6. Selected Financial Data
The "Selected Consolidated Financial Data" of Iowa First Bancshares Corp. set
forth on the following page is derived in part from, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes thereto. See Item 8 "Financial Statements and Supplementary Data." Results
for past periods are not necessarily indicative of results to be expected for
any future period.
8
Iowa First Bancshares Corp. and Subsidiaries
Selected Consolidated Financial Data
Balance Sheet (at year-end) 2004 2003 2002 2001 2000
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Net loans ...................................... $280,899,000 $266,925,000 $273,922,000 $272,695,000 $270,539,000
Allowance for loan losses ...................... 3,385,000 3,180,000 3,304,000 3,182,000 3,268,000
Deposits and securities sold under
agreements to repurchase ....................... 283,620,000 282,488,000 277,013,000 272,592,000 275,430,000
Federal Home Loan Bank advances ................ 42,916,000 52,071,000 64,609,000 70,706,000 71,531,000
Total assets ................................... 364,183,000 372,414,000 378,705,000 380,597,000 380,414,000
Redeemable common stock held by KSOP ........... 3,517,000 2,971,000 2,717,000 2,242,000 2,118,000
Stockholders' equity ........................... 25,717,000 25,437,000 24,313,000 23,040,000 21,632,000
Statement of Income (for the year)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income ............................ $ 11,657,000 $ 11,142,000 $ 11,601,000 $ 10,876,000 $ 11,495,000
Provision for loan losses ...................... 410,000 645,000 440,000 366,000 429,000
Other income ................................... 3,164,000 2,897,000 2,664,000 2,800,000 2,237,000
Operating expenses ............................. 9,054,000 8,798,000 8,711,000 8,477,000 8,144,000
Income before income taxes ..................... 5,357,000 4,596,000 5,114,000 4,833,000 5,159,000
Income taxes ................................... 1,654,000 1,376,000 1,544,000 1,433,000 1,599,000
Net income ..................................... 3,703,000 3,220,000 3,570,000 3,400,000 3,560,000
Per Share Data
- -------------------------------------------------------------------------------------------------------------------------------
Net income, basic and diluted .................. $ 2.66 $ 2.27 $ 2.48 $ 2.30 $ 2.34
Book value at year-end ......................... 18.60 17.94 17.07 15.82 14.34
Stock price at year-end (greater of bid or
appraised price) ............................. 36.05 29.15 26.50 22.25 22.00
Cash dividends declared during the year ........ 0.98 0.95 0.92 0.89 0.85
Cash dividends declared as a percentage
of net income ................................ 37% 42% 37% 39% 36%
Key Ratios
- --------------------------------------------------------------------------------------------------------------------------------
Return on average assets ....................... 0.99% 0.83% 0.93% 0.90% 0.97%
Return on average stockholders' equity ......... 14.49 12.86 14.87 14.96 17.76
Net interest margin-tax equivalent ............. 3.50 3.22 3.39 3.24 3.49
Average stockholders' equity to average
assets ....................................... 6.82 6.46 6.28 6.01 5.44
Total regulatory capital to risk-weighted assets 13.38 13.02 12.37 11.77 10.04
Efficiency ratio (all operating expenses,
excluding the provision for loan losses,
divided by the sum of net interest income
and other income) ............................ 61.09 62.67 61.07 61.98 59.30
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides additional information regarding our
operations for the years ended December 31, 2004, 2003, and 2002, and financial
condition for the years ended December 31, 2004 and 2003. This discussion should
be read in conjunction with "Selected Consolidated Financial Data" and our
consolidated financial statements and the accompanying notes thereto included
elsewhere in this document.
Iowa First Bancshares Corp. (Company) is a bank holding company providing bank
and bank related services through its wholly-owned subsidiaries, First National
Bank of Muscatine (Muscatine), First National Bank in Fairfield (Fairfield), and
Iowa First Capital Trust I.
Total average assets of the Company decreased 3.3% in 2004, after increasing
1.4% in 2003 and 1.2% in 2002. The distribution of average assets, liabilities
and stockholders' equity and interest rates, and 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):
2004 2003 2002
-------------------------------------------------------------------------------------------
Average Average Average
Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------
Taxable loans, net ................... $267,869 $ 16,403 6.12% $264,977 $ 17,216 6.50% $273,980 $ 19,533 7.13%
Taxable investment securities
available for sale ................. 18,801 649 3.45 21,813 973 4.46 22,312 1,171 5.25
Nontaxable investment securities
and loans .......................... 19,179 1,321 6.89 18,810 1,315 6.99 19,880 1,442 7.25
Federal funds sold ................... 28,688 341 1.19 44,758 446 1.00 35,062 533 1.52
Restricted investment securities ..... 2,829 65 2.30 3,590 113 3.15 3,911 117 2.99
Interest-bearing deposits at
financial institutions ............. 8,336 219 2.63 5,564 143 2.57 1,880 71 3.78
-------------------- ---------------- -------------------
Total interest-
earning assets ............... 345,702 18,998 5.50 359,512 20,206 5.62 357,025 22,867 6.40
-------- ------- -------
Cash and due from banks .............. 14,986 14,286 13,159
Bank premises and equipment, net ..... 6,854 6,410 5,071
Life insurance contracts ............. 4,342 4,100 3,682
Other assets ......................... 3,020 3,539 3,568
-------- -------- --------
Total ........................ $374,904 $387,847 $382,505
======== ======== ========
Liabilities
Deposits:
Interest-bearing demand ............ $126,986 $ 860 0.68% $125,263 $ 944 0.75% $115,753 $ 1,514 1.31%
Time ............................... 108,988 3,092 2.84 114,526 3,760 3.28 115,267 4,413 3.83
Notes payable ........................ 2,570 90 3.50 3,147 150 4.77 4,160 307 7.38
Other borrowings ..................... 53,081 2,424 4.57 66,430 3,337 5.02 73,883 4,129 5.59
Junior subordinated debentures and
company obligated mandatorily
redeemable preferred securities .... 4,125 426 10.32 4,125 426 10.32 4,000 413 10.32
-------------------- ------------------- --------------------
Total interest-
bearing liabilities .......... 295,750 6,892 2.33 313,491 8,617 2.75 313,063 10,776 3.44
-------- -------- --------
Noninterest-bearing deposits ......... 48,153 44,637 41,128
Other liabilities .................... 2,373 1,865 1,828
-------- -------- --------
Total liabilities ............ 346,276 359,993 356,019
-------- -------- --------
Redeemable common stock
held by KSOP ....................... 3,074 2,808 2,480
-------- -------- --------
Stockholders' Equity ................. 25,554 25,046 24,006
-------- -------- --------
Total ........................ $374,904 $387,847 $382,505
======== ======== ========
Net interest earnings ................ $ 12,106 $ 11,589 $ 12,091
======== ======== ========
Net interest margin (net
interest earnings divided by
total interest-earning
assets) ...................... 3.50% 3.22% 3.39%
====== ====== ======
Nonaccruing loans are included in the average balance. Loan fees are not
material.
10
The net interest margin increased in 2004 (from 3.22% in 2003 to 3.50% in 2004).
The return on average interest-earning assets decreased 12 basis points (from
5.62% in 2003 to 5.50% in 2004) and interest paid on average interest-bearing
liabilities decreased 42 basis points (from 2.75% in 2003 to 2.33% in 2004).
Average interest-earning assets to total assets declined in 2004 to 92.2% from
92.7% in 2003. This decrease was primarily due to a higher percentage of total
average assets invested in cash as well as bank premises and equipment in 2004
compared to 2003. The Federal Reserve Bank Board and Chairman Greenspan during
2004 began increasing rates, although average short-term interest rates
continued near lows not seen in decades. Nonetheless, the prime lending rate,
which began the year at 4.00%, ended 2004 at 5.25%.
During this period of relatively low interest rates, increased emphasis has been
given to incorporating interest rate floors on selected commercial and
agricultural loans. During 2004 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 slightly less than the rates paid on
interest-bearing liabilities. As 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 upon, among other
things, the amount and timing of eventual market interest rate hikes.
The net interest margin decreased in 2003 (from 3.39% in 2002 to 3.22% in 2003).
The return on average interest-earning assets decreased 78 basis points (from
6.40% in 2002 to 5.62% in 2003) and interest paid on average interest-bearing
liabilities decreased 69 basis points (from 3.44% in 2002 to 2.75% in 2003).
Average interest-earning assets to total assets declined modestly in 2003 to
92.7% from 93.3% in 2002. This decrease was primarily due to a higher percentage
of total average assets invested in cash as well as bank premises and equipment
in 2003 compared to 2002. The Federal Reserve Bank Board and Chairman Greenspan
during 2003 continued to manage short-term interest rates at, or near, lows not
seen in decades. The prime lending rate, which began the year at 4.25%, ended
2003 at 4.00%.
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 increases 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 section entitled "Financial Condition -
Allowance for Loan Losses". Although management believes the levels of the
allowance as of both December 31, 2004 and 2003 were adequate to absorb probable
losses 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.
Financial Condition:
Total assets of Iowa First Bancshares Corp. decreased by $8,231,000 or 2.2% when
comparing December 31, 2004 and December 31, 2003 balances. On average for the
year 2004 assets decreased $12,943,000 or 3.3%.
Cash, Interest-Bearing Deposits, and Federal Funds Sold
Cash and due from banks increased by $1,742,000 or 13.4% to $14,730,000 at
December 31, 2004, from $12,988,000 at December 31, 2003. Cash and due from
banks represented both cash maintained at the Banks, as well as funds that the
Banks had deposited in other banks in the form of demand deposits.
11
Interest-bearing deposits at financial institutions increased $1,447,000 or
20.8% to $8,395,000 at December 31, 2004, from $6,948,000 at December 31, 2003.
These deposits are primarily certificates of deposit at financial institutions
with the balance held at any individual bank maintained to not exceed the
insurance limits provided by the Federal Deposit Insurance Corporation (FDIC).
Some of these funds may also be held in interest-bearing demand accounts at
various banking institutions. The large increase in this asset category during
2004 was the result of a management strategy to achieve a higher yield on a
portion of the Company's liquid assets than could be earned investing in
overnight federal funds sold, while maintaining a high level of safety for
principal and average maturities of less than two years.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
decreased $19,114,000 or 60.8% to $12,300,000 at December 31, 2004, from
$31,414,000 at December 31, 2003. As of December 31, 2004, federal funds sold
represented 3.4% of total assets. These federal funds can be used to fund future
loan demand, deposit or other liability outflows, investment securities
purchases, or various other purposes as identified by management. One of
management's key focuses for 2004 was to prudently reduce the Company's
overnight liquidity (i.e. federal funds sold) while increasing net interest
income and margin. Each of these objectives have been met as demonstrated by the
following: average federal funds sold declined to $28.7 million in 2004 compared
to $44.8 million in 2003; net interest income increased $515,000 or 4.6%; and
net interest margin improved to 3.50% from 3.22%.
Investment Securities
All the Banks' securities are maintained in the available for sale category as
the securities may be liquidated to provide cash for operating, investing, or
financing purposes. These securities are reported at fair value. Investment
securities decreased $6,832,000 or 18.4% to $30,325,000 at December 31, 2004,
from $37,157,000 at December 31, 2003. The amortized cost of such securities at
December 31, 2004 and 2003 was $29,798,000 and $35,900,000, respectively. The
net decrease was the result of a number of transactions in the securities
portfolio. The Banks purchased additional available for sale securities totaling
$12,488,000 and recognized a net decrease in unrealized gains on securities
available for sale before applicable income tax of $730,000. Securities sales
totaled $2,548,000 and paydowns, maturities, and calls were another $15,818,000.
Additionally, the investment securities portfolio realized net gains of $45,000
during 2004 and net premium amortization of $269,000.
Rates received on taxable investment securities available for sale decreased 59
basis points more than the rates paid on interest-bearing liabilities (101 basis
points versus 42 basis points, respectively). Rates received on nontaxable
investment securities and loans decreased only 10 basis points compared to the
42 basis point decline in rates paid on interest-bearing liabilities. 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. In the 2004 interest rate environment, when investment securities
matured or were sold, called, or otherwise paid down, the reinvestment rate
available was nearly always lower than the yield of the liquidating security.
Investment securities as of December 31, 2004 were approximately 56% U.S.
government agency securities, 1% mortgage-backed securities, and 43% state and
political subdivisions. During 2004, management continued to focus the
investment securities portfolio in the U.S. government agency as well as state
and political subdivisions categories. These investment types earn a "spread"
over U.S. Treasury securities thus offering an opportunity to increase after-tax
income. The year 2004 experienced a continuation of low market interest rates,
relative to the past several decades. In an effort to prudently maintain a
competitive yield in the investment portfolio, 99% of the total portfolio was
invested in relatively highly rated U.S. government agency securities and state
and political subdivisions. No corporate securities were included in the
investment portfolio as of December 31, 2004 as available spreads to treasuries
were not deemed sufficient to offset the higher event risk of such securities
compared to the other investments in the portfolio.
Investment securities as of December 31, 2003 were approximately 55% U.S.
government agency securities, 2% mortgage-backed securities, 40% state and
political subdivisions, and 3% corporate obligations. During 2003, management
continued to focus the investment securities portfolio in the U.S. government
agency as well as state and political subdivisions categories. These investment
types earn a "spread" over U.S. Treasury securities thus offering an opportunity
to increase after-tax income. The year 2003 experienced a continuation of
historically low market interest rates. In an effort to prudently maintain a
competitive yield in the investment portfolio, over 95% of the total portfolio
was invested in relatively highly rated U.S. government agency securities and
state and political subdivisions. Additionally, to increase total return of the
investment portfolio, 3% was invested in corporate obligations, which was less
than the prior year in recognition of the greater credit and event risk of such
securities, especially during challenging economic times.
12
Investment securities as of December 31, 2002 were approximately 48% U.S.
government agency securities, 1% mortgage-backed securities, 44% state and
political subdivisions, and 7% corporate obligations. During 2002, management
emphasized investments in U.S. government agencies as well as state and
political subdivisions. The year 2002 experienced market interest rate
reductions with rates as low as any time in several decades. To prudently
maintain a competitive yield in the investment portfolio, over 92% of the total
portfolio was invested in relatively highly rated U.S. government agency
securities and state and political subdivisions. Additionally, to increase total
return of the investment portfolio, 7% was invested in corporate obligations.
The fair value of investment securities available for sale at the date indicated
are summarized as follows (dollar amounts in thousands):
December 31,
---------------------------------
2004 2003 2002
---------------------------------
U.S. government agencies ................ $17,054 $20,367 $18,242
Mortgage-backed securities .............. 382 575 281
State and political subdivisions ........ 12,889 14,979 16,769
Corporate obligations ................... -- 1,236 2,803
---------------------------------
$30,325 $37,157 $38,095
=================================
The following table shows the maturities of investment securities available for
sale at December 31, 2004 and the weighted average yields of such securities
(dollar amounts in thousands):
After One, But After Five, But After Ten Years
Within One Year Within Five Years Within Ten Years or Nonmaturing
Amount Yield Amount Yield Amount Yield Amount Yield
--------------------------------------------------------------------------
U.S. government agencies ....... $ 3,045 4.15% $13,506 2.71% $ 503 5.00% $ -- --%
Mortgage-backed securities ..... -- -- 382 3.80 -- -- -- --
State and political subdivisions 2,173 7.12 6,421 7.48 2,427 7.37 1,868 7.50
------- ------- ------- -------
$ 5,218 $20,309 $ 2,930 $ 1,868
======= ======= ======= =======
The weighted average yields in the previous table are calculated on the basis of
the carrying value and effective yields weighted for the scheduled maturity of
each security. Weighted average yields on tax-exempt securities have been
computed on a fully taxable equivalent basis using the federal statutory tax
rate of 34%, the rate in effect for the year ended December 31, 2004, and
excluding the interest expense allocated to carry certain tax-exempt securities.
As of December 31, 2004, no investment in a single security, other than U.S.
government agency securities, exceeded 10% of stockholders' equity.
Loans
Gross loans outstanding at December 31, 2004 increased $14,179,000 or 5.2% from
December 31, 2003. This increase was the result of loan originations and
purchases which exceeded loan repayments, sales, and net loan charge-offs. Loans
underwritten and sold to the secondary real estate market totaled $12,016,000
during 2004.
The amounts of loans outstanding at the indicated dates is shown in the
following table according to the type of loans (dollar amounts in thousands):
December 31,
-----------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------
Commercial ........................ $123,079 $113,811 $109,045 $106,286 $103,340
Agricultural ...................... 23,320 25,154 28,185 27,926 28,000
Real estate, construction ......... 10,508 10,165 6,051 7,752 4,055
Real estate, mortgage ............. 106,377 102,893 113,295 110,931 109,557
Tax exempt, real estate mortgage .. 5,594 3,897 3,297 1,290 2,050
Installment ....................... 14,940 13,891 17,118 21,401 26,611
Other ............................. 466 294 235 291 194
-----------------------------------------------------
$284,284 $270,105 $277,226 $275,877 $273,807
=====================================================
13
The following loan categories outstanding at December 31, 2004 mature as follows
(dollar amounts in thousands):
After One
Year, But
Amount One Year Within After
of Loans or Less Five Years Five Years
---------------------------------------------
Commercial ..................... $123,079 $ 41,563 $ 55,091 $ 26,425
Agricultural ................... 23,320 8,517 11,110 3,693
Real estate, construction ...... 10,508 6,371 3,219 918
--------------------------------------------
$156,907 $ 56,451 $ 69,420 $ 31,036
============================================
The interest rates on the amount due after one year that are fixed or adjustable
are as follows as of December 31, 2004 (dollar amounts in thousands):
Fixed Adjustable
------------------------
Commercial ................................... $44,474 $37,042
Agricultural ................................. 11,250 3,553
Real estate, construction .................... 2,449 1,688
------------------------
$58,173 $42,283
========================
During 2004 commercial loans increased by $9,268,000 or 8.1%, agricultural loans
decreased $1,834,00 or 7.3%, construction real estate loans increased by
$343,000 or 3.4%, mortgage real estate loans increased by $3,484,000 or 3.4%,
tax exempt real estate mortgage loans increased by $1,697,000 or 43.5%, and
installment and other loans increased by $1,221,000 or 8.6%. Overall, loans
increased $14,179,000 or 5.2%. The increase in commercial loans and mortgage
real estate loans reflects management's focus on those particular lending areas
during the year, coupled with relatively firm demand in our markets. The
reduction in agricultural loans resulted from a select few loans paying down or
moving to another lender. The increase in installment loans is largely
attributable to an increased emphasis on this area in our sales approach.
Management continues to search for quality growth in all loan categories while
remaining vigilant in maintaining high credit standards. As previously noted,
the Company sells some real estate loans to the secondary market resulting in
increased fee income and reduced interest rate risk. These sales of real estate
loans, net of any gains recognized upon sale, totaled $11,582,000, $25,985,000,
and $20,203,000 for the years ended December 31, 2004, 2003, and 2002,
respectively. As of December 31, 2004, the Company's general legal lending limit
was approximately $5,658,000. For loans collateralized by marketable securities,
the total legal limit was approximately $9,430,000 as of December 31, 2004.
Loan Risk Elements Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning the aggregate amount of
nonperforming loans. Nonperforming loans comprise (a) loans accounted for on a
nonaccrual basis; (b) accruing loans contractually past due 90 days or more as
to interest or principal payments (but not included in the nonaccrual loans in
(a) above); and (c) other loans whose terms have been renegotiated to provide a
reduction or deferral of interest or principal because of a deterioration in the
financial position of the borrower (exclusive of loans in (a) or (b) above)
(dollar amounts in thousands):
December 31,
---------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------
Loans accounted for on a nonaccrual basis ...... $ 1,668 $2,123 $1,730 $ 640 $ 785
Accrual loans contractually past due
90 days or more .............................. 207 215 1,053 128 96
Loans whose terms have been renegotiated to
provide a reduction or deferral of interest or
principal because of a deterioration in the
financial position of the borrower ........... -- -- -- -- --
Total nonaccrual loans were $1,668,000 at December 31, 2004, a decrease of
$455,000 or 21.4% from December 31, 2003. Total nonaccrual and accrual loans
contractually past due 90 days or more were $1,875,000 at December 31, 2004, a
decrease of $463,000 or 19.8% from a year earlier. Compared to the average over
the past five years, nonaccrual loans at December 31, 2004 were $279,000 or
20.1% more than average. Total nonaccrual and accrual loans contractually past
due 90 days or more were $146,000 or 8.4% higher at December 31, 2004 than the
average for these categories over the past five years.
14
When the full collectibility of principal or interest on any loan is considered
doubtful, previously accrued but uncollected interest remains as accrued if the
principal and interest is protected by sound collateral value based upon a
current independent, qualified appraisal. In practice, in the vast majority of
cases, the interest accrued but uncollected on loans transferred to nonaccrual
status is charged-off at the time of transfer. Interest in the amounts of
$76,000, $139,000, and $100,000, would have been earned on the nonaccrual loans
had they been performing loans in accordance with their original terms during
2004, 2003, and 2002, respectively. The interest collected on loans designated
as nonaccrual loans and included in income for the years ended December 31,
2004, 2003, and 2002 was $52,000, $78,000, and $30,000, respectively.
As of December 31, 2004, the Company had loans totaling $4,890,000 in addition
to those listed as nonaccrual, past due or renegotiated that were identified by
the Banks' internal asset rating systems as classified assets. This represents a
$1,420,000 or 22.5% decrease from 2003. The Company is not aware of any single
loan or group of loans, other than these and those reflected above, of which
full collectibility cannot reasonably be expected. Management has committed
ongoing resources and attention on efforts designed to control the amount of
classified assets. The Company has $23,320,000 in total agricultural loans. The
Company does not have any other direct loan concentrations in one industry which
comprise more than ten percent of total loans outstanding as of December 31,
2004. However, each community in which we operate has a few major employers. In
the event one or more of these large employers would experience financial
difficulties, the total level of direct and indirect loans affected may well
exceed 10% of total loans outstanding. The Company does not have any foreign
loans. The Company's loans are heavily concentrated geographically in the state
of Iowa with most of that concentration centered in the counties of Muscatine
and Jefferson.
In general, the agricultural loan portfolio risk is dependent on factors such as
governmental policies, weather conditions, agricultural commodities prices,
marketing strategies and timing, consumer willingness to purchase, as well as
the mix of grain and livestock raised. Commercial loan risk can also vary widely
from period to period and is particularly sensitive to changing business,
technology and economic conditions as well as governmental policies. Consumer
(installment and real estate mortgage) loan risk is substantially influenced by
employment opportunities in the markets served by the Company. The national,
regional, State of Iowa, and Counties of Muscatine and Jefferson economic
activity and success levels dramatically influence the risk in each of the loan
portfolios.
Other real estate owned was $77,000, none, and $503,000 as of December 31, 2004,
2003, and 2002, respectively.
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the
form of provisions for loan losses. Loan losses or recoveries are charged or
credited directly to the allowance for loan losses. The provision for loan
losses is determined based upon an evaluation of a number of factors by
management of the Banks including (i) loss experience in relation to outstanding
loans, loan delinquencies, and the existing level of the allowance for loan
losses, (ii) a continuing review of problem loans and overall portfolio
composition and quality, (iii) regular examinations and appraisals of loan
portfolios conducted by federal supervisory authorities, (iv) current and
expected economic conditions, and (v) other factors that, in management's
judgment, deserved evaluation in estimating loan losses. Management of the Banks
continues to review the loan portfolios and believes the allowance for loan
losses provides for losses that are probable as of December 31, 2004. However,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional provisions for loan
losses in the future. Asset quality is a constant priority for the Company and
its subsidiary banks. Should the economic climate deteriorate, borrowers may
experience difficulty, and the level of non-performing loans, charge-offs, and
delinquencies could rise thus requiring further increases in the provision.
15
The Banks allocate the allowance for loan losses according to the amount deemed
to be necessary to provide for probable losses being incurred within the
categories of loans set forth in the table below. The amount of such components
of the allowance for loan losses and the ratio of loans in such categories to
total loans outstanding are as follows (dollar amounts in thousands):
2004 2003 2002 2001 2000
-------------------------------------------------------------------------------------------------
Allow- Percent Allow- Percent Allow- Percent Allow- Percent Allow- Percent
ance of Loans ance of Loans ance of Loans ance of Loans ance of Loans
For to For to For to For to For to
Loan Total Loan Total Loan Total Loan Total Loan Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
-------------------------------------------------------------------------------------------------
Real estate loans:
Mortgage ....... $ 293 39.39% $ 172 39.54% $ 147 42.06% $ 111 40.68% $ 108 40.01%
Construction ... -- 3.70 -- 3.76 -- 2.18 -- 2.81 -- 1.48
Commercial ....... 1,833 43.29 2,313 42.14 2,875 39.33 2,768 38.53 2,614 37.74
Agricultural ..... 1,110 8.20 556 9.31 111 10.17 89 10.12 280 10.23
Installment ...... 149 5.26 139 5.14 171 6.18 214 7.76 266 9.72
Other ............ -- 0.16 -- 0.11 -- 0.08 -- 0.10 -- 0.82
-----------------------------------------------------------------------------------------------
$3,385 100.00% $3,180 100.00% $3,304 100.00% $3,182 100.00% $3,268 100.00%
===============================================================================================
Deposits
Total average deposits decreased 0.1% in 2004, increased 4.5% in 2003, and
increased 1.0% in 2002. The average deposits are summarized below (dollar
amounts in thousands):
2004 2003 2002
----------------------------------------------------------
Average Average Average
Interest Interest Interest
Expense Expense Expense
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------
Noninterest-bearing demand $ 48,153 --% $ 44,637 --% $ 41,128 --%
Savings .................. 25,593 0.4 24,248 0.5 22,032 1.0
Interest-bearing demand .. 101,393 0.7 101,015 0.8 93,721 1.4
Time ..................... 108,988 2.8 114,526 3.3 115,267 3.8
-------- -------- --------
Total deposits ........... $284,127 $284,426 $272,148
======== ======== ========
Included in interest-bearing time deposits are certificates of deposit with a
minimum denomination of $100,000, with scheduled maturities as follows (dollar
amounts in thousands):
Year Ended
December 31,
2004
------------
One to three months ...................................... $ 3,900
Three to six months ...................................... 2,910
Six to twelve months ..................................... 5,799
Over twelve months ....................................... 11,527
-------
$24,136
=======
16
RESULTS OF OPERATIONS:
Changes in Basic and Diluted Earnings Per Share
The increase in basic and diluted earnings per share between 2004 and 2003
amounted to $.39 or 17.2%. The decrease from 2002 to 2003 amounted to $.21 or
8.5%. The major sources of change are presented in the following table:
2004 2003
--------------------
Net income per share, prior year ....................... $ 2.27 $ 2.48
--------------------
Increase (decrease) attributable to:
Net interest income .................................. 0.37 (0.32)
Provision for loan losses ............................ 0.17 (0.14)
Investment securities gains, net ..................... 0.02 (0.04)
Other income ......................................... 0.17 0.20
Salaries and employee benefits ....................... (0.19) (0.06)
Income taxes ......................................... (0.20) 0.12
Change in average common shares outstanding .......... 0.05 0.03
--------------------
Net change ..................................... 0.39 (0.21)
--------------------
Net income per share, current year ............. $ 2.66 $ 2.27
====================
Net Interest Income
The following table sets forth a summary of the changes in interest earned and
paid resulting from changes in volume and rates. Changes attributable to both
rate and volume which cannot be segregated have been allocated to the change due
to volume (dollar amounts in thousands and income on a fully taxable equivalent
basis using statutory rates in effect for year presented):
Year Ended December 31, 2004 Year Ended December 31, 2003
--------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------ -------------------
Average Average Total Average Average Total
Balance Rate Change Balance Rate Change
--------------------------------------------------------------
Interest income:
Taxable loans ................... $ 194 $(1,007) $ (813) $ (591) $ (1,726) $ (2,317)
Taxable investment securities
available for sale ............ (104) (220) (324) (22) (176) (198)
Nontaxable investment
securities and loans .......... 25 (19) 6 (75) (52) (127)
Federal funds sold .............. (190) 85 (105) 95 (182) (87)
Restricted investment securities (17) (31) (48) (10) 6 (4)
Interest-bearing deposits at
financial institutions ........ 73 3 76 95 (23) 72
--------------------------------------------------------------
Total interest income ..... (19) (1,189) (1,208) (508) (2,153) (2,661)
--------------------------------------------------------------
Interest expense:
Interest-bearing demand deposits 4 (88) (84) 78 (648) (570)
Interest-bearing time deposits .. (164) (504) (668) (19) (634) (653)
Notes payable ................... (20) (40) (60) (48) (109) (157)
Other borrowings ................ (614) (299) (913) (371) (421) (792)
Company obligated mandatorily
redeemable preferred securities -- -- -- 13 -- 13
--------------------------------------------------------------
Total interest expense .... (794) (931) (1,725) (347) (1,812) (2,159)
--------------------------------------------------------------
Change in net
interest earnings ......... $ 775 $ (258) $ 517 $ (161) $ (341) $ (502)
==============================================================
Nonaccruing loans are included in the average balance. Loan fees are not
material.
17
Provision for Loan Losses
The following table summarizes average loan balances at the end of each year;
changes in the allowance for loan losses arising from loans charged off and
recoveries on loans previously charged off by loan category; and the provisions
for loan losses which have been charged to operating expense (dollar amounts in
thousands):
Year Ended December 31,
--------------------------------------------------------
2004 2003 2002 2001 2000
--------------------------------------------------------
Balance of allowance for loan
losses at beginning of year ............. $ 3,180 $ 3,304 $ 3,182 $ 3,268 $ 3,091
--------------------------------------------------------
Loans charged off:
Commercial and agricultural ............... 159 620 133 237 98
Mortgage .................................. 58 97 39 20 16
Installment ............................... 56 103 199 247 216
--------------------------------------------------------
Total loans charged off ........... 273 820 371 504 330
--------------------------------------------------------
Recoveries of loans previously charged off:
Commercial and agricultural ............. 9 4 6 6 19
Mortgage ................................ 20 1 -- -- 3
Installment ............................. 39 46 47 46 56
--------------------------------------------------------
Total recoveries .................. 68 51 53 52 78
--------------------------------------------------------
Net loans charged off (recovered) ......... 205 769 318 452 252
--------------------------------------------------------
Provisions for loan losses charged
to operating expense .................... 410 645 440 366 429
--------------------------------------------------------
Balance at end of year .................... $ 3,385 $ 3,180 $ 3,304 $ 3,182 $ 3,268
========================================================
Average net loans outstanding ............. $272,890 $267,914 $276,454 $276,271 $272,425
Ratio of net loan charge-offs
(recoveries) to average net
loans outstanding ....................... 0.08% 0.29% 0.12% 0.16% 0.09%
Allowance for loan losses as a
percentage of average net
loans outstanding ....................... 1.24 1.19 1.20 1.15 1.21
Coverage of net charge-offs by
year-end allowance for loan
losses .................................. 16.51 4.14 10.39 7.04 12.97
Other Income
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, gains (or losses) from the sale of investment
securities in the available for sale category and loans, as well as income from
corporate owned life insurance. Total other income for 2004 was $3,164,000 which
was $267,000 or 9.2% more than 2003. Primary contributors to this increase
included: growth in trust fees of $71,000 (22.8%); service fees charged for
various products and services, particularly associated with deposit accounts,
rose $276,000 (16.2%); gains on loans sold declined $145,000 (41.7%) as fewer
home loans were refinanced and sold to the secondary market; and various other
income categories improved $65,000 (12.1%).
Total other income for 2003 of $2,897,000 exceeded the level achieved in 2002 by
$233,000 or 8.7%. Trust fees actually declined in 2003 by $56,000 or 15.3%.
Service fees charged for various products and services, largely related to
deposit accounts, rose $189,000 or 12.5%. Gains on loans sold increased $136,000
or 64.2% as more home loans were refinanced and sold to the secondary market.
Net gains on investment securities sales decreased by $62,000 or 73.8% and
various other income categories improved $26,000 or 5.3%.
18
Operating Expenses
Operating expenses include all the costs incurred to operate the Company, except
for interest expense, the loan loss provision, and income taxes. A continuing
objective of the Company is to successfully control these overhead costs while
maintaining optimal productivity, efficiency, capacity, and quality service.
Salaries and benefits, the largest component of operating expenses, increased
$259,000 or 5.2% in 2004 compared to 2003. The increase in salaries and benefits
resulted from normal raises, higher bonus and incentive expense reflecting the
Company's record year, hiring and training new employees to staff branch
expansions, as well as the rising cost of health insurance. Occupancy expenses
increased to $756,000 during 2004, which represented a $49,000 or 6.9% increase
from 2003. This rise in occupancy costs was largely the result of opening new
branch facilities in Muscatine during 2003 and late 2004. Accordingly, higher
depreciation expense and property taxes represented the majority of the increase
in occupancy expense. Equipment expenses totaled $638,000; a more modest $20,000
or 3.2% increase from 2003. Office supplies, printing, and postage of $330,000
in 2004 were $32,000 or 8.8% less than 2003 as management focused attention on
controlling these costs. Computer costs declined modestly in 2004 to total
$516,000, a $10,000 or 1.9% decrease from 2003. This cost reduction was
accomplished despite additional products and services purchased from our primary
data processor. Advertising and business promotion increased $9,000 or 5.4% to
total $177,000 in 2004 compared to 2003. Finally, other operating expenses
decreased $39,000 or 2.8% to $1,378,000 for 2004 compared to 2003. This decrease
was due to a combination of management's focus on various components of this
expense category as well as non-recurring items which resulted in approximately
$45,000 less net expense in 2004 than 2003. Overall, operating expenses
increased $256,000, or 2.9%, to total $9,054,000 versus $8,798,000 in 2003. The
efficiency ratio, defined as noninterest expense, excluding the provision for
loan losses, as a percent of net interest income plus noninterest operating
income, was 61.1% in 2004. This was an improvement compared to the efficiency
ratio of 62.7% for the year ended December 31, 2003. The 2004 versus 2003
efficiency ratio was impacted by higher net interest income and higher
noninterest income which more than offset the rise in noninterest operating
expenses. As previously noted, the 2004 net interest income was $515,000 more
than 2003, noninterest operating income was $267,000 more in 2004 than 2003, and
other noninterest operating expenses were $256,000 greater in 2004 than 2003.
Salaries and benefits, the largest component of operating expenses, were
actively monitored and controlled during 2003. Total salaries and benefits of
$5,000,000 in 2003 increased only $87,000 or 1.8% from 2002. Occupancy expenses
increased to $707,000 during 2003, which represented a $33,000 or 4.9% increase
from 2002. This rise in occupancy costs was largely the result of opening a new
branch facility in Muscatine during the year. Equipment expenses were reduced to
$618,000; a $62,000 or 9.1% decline from 2002 as management focused on control
of this expense category. Office supplies, printing, and postage of $362,000 in
2003 were $20,000 or 5.8% more than 2002. Computer costs rose in 2003 to total
$526,000, a $20,000 or 4.0% increase from 2002. This cost increase was primarily
attributed to additional computer communications, recovery, and backup
expenditures, as well as new marketing applications. Advertising and business
promotion decreased $2,000 or 1.2% to total $168,000 in 2003 compared to 2002.
Finally, other operating expenses decreased $9,000 or 0.6% to $1,417,000 for
2003 compared to 2002. This decrease was due in large measure to management's
continual focus on expense control. Overall, operating expenses increased only
$87,000, or 1.0%, to total $8,798,000 versus $8,711,000 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 62.7% in 2003.
This was higher than the efficiency ratio of 61.1% for the year ended December
31, 2002. The efficiency ratio was most impacted by lower net interest income in
2003 than 2002. As previously noted, the 2003 net interest income was $459,000
less than 2002, other income was $233,000 more in 2003 than 2002, and other
operating expenses were only $87,000 greater in 2003 than 2002.
19
Significant time and money was spent in 2002 and 2001 to maintain and enhance
our state-of-the-art Internet banking solution for our customers. While
enthusiastically embraced by our target segment of customers, these necessary
expenditures will likely not be recovered for some time in the future as most
competitors charge little, if anything, for Internet banking services. It is
important for the Company to offer this service, however, to maintain a
satisfied customer base and market share with cross-selling opportunities for
other more profitable products and services. Total salaries and benefits of
$4,913,000 in 2002 increased only $13,000 or .3% from 2001. Occupancy expenses
decreased to $674,000 during 2002, a $54,000 or 7.4% decline from 2001. Office
supplies, printing, and postage of $342,000 in 2002 was $34,000 or 9.0% less
than 2001. Computer costs rose in 2002 to total $506,000, a $60,000 or 13.5%
increase from 2001. This computer cost increase was primarily attributed to
additional costs associated with the Company's relatively new digital document
imaging as well as business continuity contracts. Advertising and business
promotion decreased $24,000 or 12.4% to total $170,000 in 2002 compared to 2001.
This decline was the result of a more focused and shared approach to advertising
by our subsidiary banks during 2002. Finally, other operating expenses increased
$300,000 or 26.6% to $1,426,000 for 2002 compared to 2001. This increase was
largely due to the impact of costs incurred for consulting, employee recruiting,
Federal Reserve Bank processing, losses incurred on other real estate, and
insurance and bonds. Overall, operating expenses increased $234,000 or 2.8% to
total $8,711,000 versus $8,477,000 in 2001. The efficiency ratio, defined as
noninterest expense, excluding the provision for loan losses, as a percent of
net interest income plus noninterest income, was 61.1% in 2002. This was an
improvement from the efficiency ratio of 62.0% for the year ended December 31,
2001.
Net Income
The Company's consolidated net income for the three years is as follows (dollar
amounts in thousands):
Year Ended December 31,
--------------------------------------
2004 2003 2002
--------------------------------------
Net income ..................... $3,703 $3,220 $3,570
======================================
Net income increased $483,000 or 15.0% in 2004. The net interest income
increased $515,000 or 4.6%. The provision for loan losses decreased $235,000 or
36.4% to total $410,000 in 2004. Other noninterest income, without securities
gains, grew $244,000 or 8.5%. Securities gains increased to $45,000 in 2004 from
$22,000 a year earlier. Noninterest operating expenses rose $256,000 or 2.9% and
income taxes increased $278,000 or 20.2%. The income tax expense increase was
attributed to higher net income in 2004 than 2003 and an increase in the
effective tax rate for the year ended December 31, 2004 of 30.9% compared to
29.9% the prior year.
Net income decreased $350,000 or 9.8% in 2003. The net interest income decreased
$459,000 or 4.0%. The provisions for loan losses increased $205,000 or 46.6% to
total $645,000 in 2003. Other noninterest income, without securities gains, grew
$295,000 or 11.4%. Securities gains decreased to $22,000 in 2003 from $84,000 a
year earlier. Noninterest operating expenses rose $87,000 or 1.0% and income
taxes decreased $168,000 or 10.9%. The income tax expense decrease was
attributed to lower net income in 2003 than 2002 and a slight decrease in the
effective tax rate for the year ended December 31, 2003 of 29.9% compared to
30.2% the prior year.
Selected Consolidated Ratios:
Year Ended December 31,
--------------------------
2004 2003 2002
--------------------------
Percentage of net income to:
Average stockholders' equity ................... 14.49% 12.86% 14.87%
Average total assets ........................... 0.99 0.83 0.93
Percentage of average stockholders' equity to
average total assets ........................... 6.82 6.46 6.28
Dividend payout ratio, based on dividends
declared during the year ....................... 36.84 41.85 37.10
Interest Rate Sensitivity and Risk Management:
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitivity" 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.
20
The following table shows the interest rate sensitivity position at several
repricing intervals (dollar amounts in thousands):
Repricing Maturities at December 31, 2004
-----------------------------------------------------------------
Less Than 3-12 1-5 More Than Noninterest
3 Months Months Years 5 Years Bearing Total
-----------------------------------------------------------------
Assets:
Loans ......................................................... $ 75,715 $ 28,605 $126,184 $ 52,112 $ 1,668 $284,284
Investment securities ......................................... 1,255 3,963 20,309 4,798 -- 30,325
Other earning assets .......................................... 14,156 2,281 4,258 -- -- 20,695
Life insurance contracts ...................................... -- 4,438 -- -- -- 4,438
Restricted investment securities .............................. -- 2,659 -- -- -- 2,659
Nonearning assets ............................................. -- -- -- -- 21,782 21,782
----------------------------------------------------------------
Total assets ............................................ $ 91,126 $ 41,946 $150,751 $ 56,910 $ 23,450 $364,183
================================================================
Liabilities and Equity:
Deposits ...................................................... $ 44,175 $ 99,764 $ 82,519 $ 1,207 $ 50,070 $277,735
Notes payable ................................................. 2,100 -- -- -- -- 2,100
Securities sold under agreements
to repurchase and open note ................................. 4,647 728 584 -- -- 5,959
FHLB advances ................................................. 1,100 6,000 34,683 1,133 -- 42,916
Junior subordinated debentures ................................ -- -- -- 4,125 -- 4,125
Other liabilities ............................................. -- -- -- -- 2,114 2,114
Redeemable common stock held
by KSOP ..................................................... -- -- -- -- 3,517 3,517
Equity ........................................................ -- -- -- -- 25,717 25,717
----------------------------------------------------------------
Total liabilities and equity ............................ $ 52,022 $106,492 $117,786 $ 6,465 $ 81,418 $364,183
================================================================
Repricing gap ................................................... $ 39,104 $ 64,546) $ 32,965 $ 50,445 $(57,968) $ --
Cumulative repricing gap ........................................ 39,104 (25,442) 7,523 57,968 -- --
The data in this table incorporates the contractual repricing characteristics as
well as an estimate of the actual repricing characteristics of the Company's
assets and liabilities. Based on the estimate, 20% of the savings and NOW
accounts are reflected in the less than 3 months category, 30% in the 3-12
months category, with the remainder in the 1-5 years category. Also, 25% of the
money market accounts are reflected in the less than 3 months repricing category
with the remainder in the 3-12 months category.
FHLB advances in the 1-5 year repricing category include $2,283,000 of advances
with actual maturities in the greater than 5 year category. These advances have
options associated with them which allow the Company to "put" the advances back
to the FHLB at a date substantially earlier than the stated maturity. The
Company may utilize this put option if deemed appropriate, or hold such advances
until maturity. As part of the Company's overall interest rate risk management,
these puts are analyzed and used when advantageous. During 2004, advances
totaling $2,160,000 were put back to the FHLB. The Federal Home Loan Bank has
the option to call before maturity advances totaling $1,500,000. Given current
interest rates, management believes it is unlikely the Federal Home Loan Bank
will call these advances prior to maturity.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative repricing 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 December 31, 2004, using the estimates
discussed above, rate sensitive liabilities exceeded rate sensitive assets
within a one-year period by $25,442,000 and, thus, the Company is theoretically
positioned to benefit from a decline in interest rates within the next year.
This compares to year-end 2003 rate sensitive liabilities exceeding rate
sensitive assets within a one-year period of $30,759,000.
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.
21
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 and loan payments provide a constant flow of funds available for cash
needs. Liquidity also can be gained by the sale of loans or securities, which
were previously designated as available for sale, FHLB advances, and lines of
credit. 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 determinants of
the price which can be realized upon sale. Net cash provided by operating
activities totaled $4,808,000 in 2004 which compares to cash provided by
operating activities for the year ended December 31, 2003 of $6,329,000. The
Company generated operating cash from sales of its new production and refinanced
mortgage loans, non-cash provision for loan losses, depreciation, amortization,
declining accrued interest receivable, and increase in other liabilities. Net
cash provided by investing activities totaled $8,456,000 for the year ended
December 31, 2004 as cash was generated by reducing federal funds sold, sales,
maturities, calls and paydowns of securities. Cash was used to purchase
interest-bearing deposits at financial institutions, securities, loans, and bank
premises and equipment. Net cash used in investing activities totaled $1,211,000
for the year ended December 31, 2003. During the years ended December 31, 2004
and 2003 cash used in financing activities totaled $11,522,000 and $9,413,000,
respectively. The cash used during the year resulted primarily from payments
which exceeded new advances from the Federal Home Loan Bank, payments on notes
payable, a net decrease in interest-bearing deposits as well as treasury tax and
loan open note, cash dividends paid to shareholders, and purchases of common
stock for the treasury.
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 under
$100,000 at December 31, 2004 were $253,599,000 or 91.3% of total deposits and
69.6% of total liabilities, mezzanine capital, and equity.
At December 31, 2004, securities sold under agreements to repurchase and
treasury tax and loan open note funding sources totaled $5,959,000. Federal Home
Loan Bank advances totaled $42,916,000. At year-end total federal funds sold and
securities maturing within one year were $17,518,000 or 4.8% of total assets.
Both short-term and long-term liquidity are actively monitored and managed. The
Company had an unused secured line of credit totaling $1,700,000 at December 31,
2004.
Equity increased $280,000 during 2004 to total $25,717,000 at December 31, 2004.
At December 31, 2004, securities available for sale totaling $30,325,000
included $662,000 of gross unrealized gains and $135,000 gross unrealized
losses. These securities may be sold in whole or part to increase liquid assets,
reposition the investment portfolio, or for other purposes as defined by
management.
Off-Balance-Sheet Arrangements:
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.
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.
December 31,
--------------------------
2004 2003
--------------------------
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit ................... $40,467,000 $35,066,000
Standby letters of credit ...................... 1,121,000 2,336,000
22
The commitments to extend credit above are net of participations sold to other
banks. Total participations sold to other banks related to the commitments to
extend credit were $18,143,000 and $8,668,000 at December 31, 2004 and 2003,
respectively.
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 December 31, 2004
and 2003 no amounts have been recorded as liabilities for the Banks' potential
obligations under these guarantees.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $434,000 and none as of December 31, 2004 and
2003, respectively. These amounts are classified as loans held for sale and are
included in loans at the respective balance sheet dates.
Contingencies:
In the normal course of business, the Banks are involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Company's financial
statements.
Contractual Obligations:
The following table presents, as of December 31, 2004, significant fixed and
determinable contractual obligations to third parties by payments date (dollar
amounts in thousands):
Payments Due In
--------------------------------------------------------
One Year One to Three to Over
Or Less Three Year Five Years Five Years Total
--------------------------------------------------------
Deposits without a stated maturity ........... $168,975 $ -- $ -- $ -- $168,975
Certificates of deposit ...................... 56,376 36,648 14,529 1,207 108,760
Notes payable ................................ 600 1,200 300 -- 2,100
Securities sold under agreements to repu4,573e 728 584 -- 5,885
Federal Home Loan Bank advances (a) .......... 7,100 20,800 11,100 3,916 42,916
Treasury tax and loan open note .............. 74 -- -- -- 74
Junior subordinated debentures ............... -- -- -- 4,125 4,125
Purchase obligations (b) ..................... 715 860 860 645 3,080
--------------------------------------------------------
Total ................................ $238,413 $ 60,236 $ 27,373 $ 9,893 $335,915
========================================================
Each of the above obligations exclude accrued interest payable, as applicable.
(a) Of the advances maturing after five years, $2,283,000 have options which
allow the Company the right, but not the obligation to "put" the advances
back to the Federal Home Loan Bank.
(b) The Company's purchase obligations represent obligations under agreements
to purchase goods or services that are enforceable and legally binding on
the Company and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. The purchase
obligation amounts presented above primarily relate to certain contractual
payments for services provided for information technology. The actual
obligations paid may differ from these amounts due to the portion of such
payments which are variable in nature.
23
Capital:
As previously noted, stockholders' equity increased $280,000 or 1.1% in 2004.
The Company had net income of $3,703,000, a decrease in accumulated other
comprehensive income of $458,000, cash dividends declared totaling $1,358,000,
increase in obligation related to KSOP shares totaling $546,000, and net
treasury shares purchased of $1,061,000. Dividends to stockholders were declared
at a rate of $.98, $.95, and $.92 per share during the years ended December 31,
2004, 2003, and 2002, respectively.
Impact of Inflation and Changing Prices:
The financial statements and related data presented herein have been prepared 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.
Current Accounting Developments:
The Company is not aware of any new accounting developments which are
anticipated to have a significant impact on the consolidated financial
statements.
Forward-Looking Statements:
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "bode," "predict,"
"suggest," "appear," "plan," "intend," "estimate," "may," "will," "would,"
"could," "should" or other similar expressions. Additionally, all statements in
this document, including forward-looking statements, speak only as of the date
they are made, and the Company undertakes no obligation to update any statement
in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of any future terrorist threats and attacks, and the
response of the United States to any such threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
24
o Technological changes implemented by the Company and by other parties,
including third-party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects, and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Quarterly Results of Operations (Unaudited):
In the fourth quarter of 2004, net income was $922,000, compared with $719,000
in the same period of 2003, an increase of 28.2%. The net interest income during
the fourth quarter of 2003 was $2,965,000 compared with $2,712,000 for the
fourth quarter of 2003. The provision for loan losses in the fourth quarter of
2004 was $30,000 compared with $120,000 in 2003. Other income totaled $833,000
and $647,000 during the fourth quarter of 2004 and 2003, respectively. Other
operating expenses of $2,439,000 in the last quarter of 2004 compared with
$2,216,000 for the last quarter of 2003. Income tax expense was $407,000 and
$304,000 for the final quarter of 2004 and 2003, respectively.
Quarterly results of operations are as follows (dollar amounts in thousands):
Quarter Ended
-------------------------------------------------
March 31, June 30, September 30, December 31,
2004 2004 2004 2004
-------------------------------------------------
Total interest and dividend income .................... $4,623 $4,600 $4,631 $4,695
Total interest expense ................................ 1,776 1,713 1,673 1,730
------------------------------------------------
Net interest income .................................... 2,847 2,887 2,958 2,965
Provision for loan losses .............................. 170 90 120 30
Other income ........................................... 692 844 795 833
Other expense .......................................... 2,171 2,205 2,239 2,439
------------------------------------------------
Income before income taxes ............................. 1,198 1,436 1,394 1,329
Applicable income taxes ................................ 375 448 424 407
------------------------------------------------
Net income ............................................. $ 823 $ 988 $ 970 $ 922
================================================
Net income per share, basic and diluted ................ $ 0.58 $ 0.71 $ 0.70 $ 0.67
================================================
25
Quarter Ended
------------------------------------------------
March 31, June 30, September December 31,
2003 2003 2003 2003
------------------------------------------------
Total interest and dividend income .................... $5,135 $5,090 $4,869 $4,665
Total interest expense ................................ 2,354 2,251 2,059 1,953
-------------------------------------------
Net interest income .................................... 2,781 2,839 2,810 2,712
Provision for loan losses .............................. 370 90 65 120
Other income ........................................... 647 765 838 647
Other expense .......................................... 2,200 2,180 2,202 2,216
-------------------------------------------
Income before income taxes ............................. 858 1,334 1,381 1,023
Applicable income taxes ................................ 241 390 441 304
-------------------------------------------
Net income ............................................. $ 617 $ 944 $ 940 $ 719
===========================================
Net income per share, basic and diluted ................ $ 0.43 $ 0.67 $ 0.66 $ 0.51
===========================================
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Management's asset/liability
committee meets periodically to review the Company's interest rate risk position
and profitability, and to make or recommend adjustments for consideration by the
Board of Directors. Management also reviews the Banks' securities portfolio,
formulates investment strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in the most
effective manner. Notwithstanding the Company's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while maintaining or
enhancing net interest margins. At times, depending on the level of general
interest rates, the relationship between long- and short-term interest rates,
market conditions and competitive factors, the Board and management may
determine to increase the Company's interest rate risk position somewhat in
order to increase its net interest margin. The Company's results of operations
and net portfolio values remain vulnerable to changes in interest rates and to
fluctuations in the difference between long- and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance-sheet contracts. The following table sets forth, at
December 31, 2004, an analysis of the Banks' interest rate risk as measured by
the estimated changes in NPV resulting from instantaneous and sustained parallel
shifts in the yield curve (+ or - 200 basis points, measured in 100 basis point
increments).
Estimated Increase
Change in (Decrease) in NPV
Interest Estimated ----------------------------
Rates NPV Amount Amount Percent
- ---------------------------------------------------------------------------
(Basis Points) (Dollars in Thousands)
+200 $ 20,692 $ (4,505) (20%)
+100 22,902 (2,295) (9)
- 25,197 - -
- -100 27,986 2,789 11
- -200 30,878 5,681 23
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities, except commodity price risk to the extent such risk may
affect the agricultural loan portfolio.
26
Item 8. Financial Statements and Supplementary Data
IOWA FIRST BANCSHARES CORP.
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 28
- --------------------------------------------------------------------------------
Financial Statements
Consolidated balance sheets 29
Consolidated statements of income 30
Consolidated statements of changes in stockholders' equity 31
Consolidated statements of cash flows 32 - 33
Notes to consolidated financial statements 34 - 49
- --------------------------------------------------------------------------------
27
McGladrey & Pullen
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Iowa First Bancshares Corp.
Muscatine, Iowa
We have audited the accompanying consolidated balance sheets of Iowa First
Bancshares Corp. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years ended December 31, 2004, 2003, and 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Iowa First
Bancshares Corp. and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for the years ended December
31, 2004, 2003, and 2002, in conformity with U.S. generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 14, 2005
McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation
of separate and independent legal entities.
28
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 2004 and 2003
Assets 2004 2003
- ------------------------------------------------------------------------------------------------
Cash and due from banks (Note 1) .............................. $ 14,730,000 $ 12,988,000
Interest-bearing deposits at financial institutions ........... 8,395,000 6,948,000
Federal funds sold ............................................ 12,300,000 31,414,000
Investment securities available for sale (Note 3) ............. 30,325,000 37,157,000
Loans, net of allowance for loan losses 2004 $3,385,000;
2003 $3,180,000 (Notes 4, 8, and 14) ........................ 280,899,000 266,925,000
Bank premises and equipment, net (Note 5) ..................... 7,411,000 6,764,000
Accrued interest receivable ................................... 2,046,000 2,231,000
Life insurance contracts ...................................... 4,438,000 4,254,000
Restricted investment securities .............................. 2,659,000 3,028,000
Other assets .................................................. 980,000 705,000
------------------------------
Total assets .......................................... $ 364,183,000 $ 372,414,000
==============================
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ....................................... $ 50,070,000 $ 47,549,000
Interest-bearing .......................................... 227,665,000 230,027,000
------------------------------
Total deposits (Note 6) ............................... 277,735,000 277,576,000
Note payable (Note 7) ....................................... 2,100,000 2,700,000
Securities sold under agreements to repurchase (Note 8) ..... 5,885,000 4,912,000
Federal Home Loan Bank advances (Note 8) .................... 42,916,000 52,071,000
Treasury tax and loan open note (Note 8) .................... 74,000 556,000
Junior subordinated debentures (Note 9) ..................... 4,125,000 4,125,000
Dividends payable ........................................... 345,000 343,000
Other liabilities ........................................... 1,769,000 1,723,000
------------------------------
Total liabilities ..................................... 334,949,000 344,006,000
------------------------------
Commitments and Contingencies (Note 13)
Redeemable Common Stock Held by Employee Stock Ownership
Plan with 401(k) provisions (KSOP) (Note 11) ................ 3,517,000 2,971,000
------------------------------
Stockholders' Equity (Note 10):
Preferred stock, stated value of $1.00 per share; shares
authorized 500,000; shares issued none .................... -- --
Common stock, no par value; shares authorized 6,000,000;
shares issued 1,832,429; shares outstanding 2004,
1,382,669; 2003, 1,417,560 ................................ 200,000 200,000
Additional paid-in capital .................................. 4,255,000 4,251,000
Retained earnings ........................................... 38,416,000 36,071,000
Accumulated other comprehensive income ...................... 330,000 788,000
Less cost of common shares acquired for the treasury
2004, 449,760; 2003, 414,869 .............................. (13,967,000) (12,902,000)
Less maximum cash obligation related to KSOP shares (Note 11) (3,517,000) (2,971,000)
------------------------------
Total stockholders' equity ............................ 25,717,000 25,437,000
------------------------------
Total liabilities and stockholders' equity ............ $ 364,183,000 $ 372,414,000
==============================
See Notes to Consolidated Financial Statements.
29
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans, including fees:
Taxable ............................................... $16,403,000 $17,216,000 $19,533,000
Nontaxable ............................................ 218,000 137,000 131,000
Investment securities available for sale:
Taxable ............................................... 649,000 973,000 1,171,000
Nontaxable ............................................ 654,000 731,000 821,000
Federal funds sold ...................................... 341,000 446,000 533,000
Restricted investment securities ........................ 65,000 113,000 117,000
Interest-bearing deposits and other ..................... 219,000 143,000 71,000
---------------------------------------
Total interest and dividend income ................ 18,549,000 19,759,000 22,377,000
---------------------------------------
Interest expense:
Deposits ................................................ 3,952,000 4,704,000 5,927,000
Notes payable ........................................... 90,000 150,000 307,000
Other borrowed funds .................................... 2,424,000 3,337,000 4,129,000
Junior subordinated debentures .......................... 426,000 426,000 --
Company obligated mandatorily redeemable
preferred securities .................................. -- -- 413,000
---------------------------------------
Total interest expense ............................ 6,892,000 8,617,000 10,776,000
---------------------------------------
Net interest income ............................... 11,657,000 11,142,000 11,601,000
Provision for loan losses (Note 4) ........................ 410,000 645,000 440,000
---------------------------------------
Net interest income after provision for loan losses 11,247,000 10,497,000 11,161,000
---------------------------------------
Other income:
Trust department ........................................ 382,000 311,000 367,000
Service fees ............................................ 1,979,000 1,703,000 1,514,000
Investment securities gains, net ........................ 45,000 22,000 84,000
Gains on loans sold ..................................... 203,000 348,000 212,000
Corporate owned life insurance .......................... 195,000 214,000 204,000
Other ................................................... 360,000 299,000 283,000
---------------------------------------
Total other income ................................ 3,164,000 2,897,000 2,664,000
---------------------------------------
Operating expenses:
Salaries and employee benefits .......................... 5,259,000 5,000,000 4,913,000
Occupancy expenses, net ................................. 756,000 707,000 674,000
Equipment expenses ...................................... 638,000 618,000 680,000
Office supplies, printing, and postage .................. 330,000 362,000 342,000
Computer costs .......................................... 516,000 526,000 506,000
Advertising and business promotion ...................... 177,000 168,000 170,000
Other operating expenses ................................ 1,378,000 1,417,000 1,426,000
---------------------------------------
Total operating expenses .......................... 9,054,000 8,798,000 8,711,000
---------------------------------------
Income before income taxes ........................ 5,357,000 4,596,000 5,114,000
Income taxes (Note 12) .................................... 1,654,000 1,376,000 1,544,000
---------------------------------------
Net income ........................................ $ 3,703,000 $ 3,220,000 $ 3,570,000
=======================================
Net income per common share, basic and diluted ............ $ 2.66 $ 2.27 $ 2.48
Weighted average common shares, basic and diluted ......... 1,394,577 1,419,905 1,440,466
Dividends declared per share .............................. $ 0.98 $ 0.95 $ 0.92
See Notes to Consolidated Financial Statements.
30
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2004, 2003, and 2002
Accumulated Maximum
Other Cash
Additional Compre- Obligation Compre-
Common Paid-In Retained hensive Treasury Related to hensive
Stock Capital Earnings Income Stock KSOP Shares Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 .... $200,000 $4,265,000 $31,944,000 $858,000 $(11,985,000) $(2,242,000) $23,040,000
Comprehensive income:
Net income ................ -- -- 3,570,000 -- -- -- $3,570,000 3,570,000
Other comprehensive income,
net of tax (Note 2) ..... -- -- -- 243,000 -- -- 243,000 243,000
----------
Comprehensive income .. $3,813,000
==========
Cash dividends declared, $.92
per share ................. -- -- (1,319,000) -- -- -- (1,319,000)
Purchase of 34,045 shares of
common stock for the
treasury .................. -- -- -- -- (800,000) -- (800,000)
Sale of 2,086 shares of
common stock to the KSOP
and others ................ -- (11,000) -- -- 65,000 -- 54,000
Change related to KSOP shares
(Note 11) ................. -- -- -- -- -- (475,000) (475,000)
------------------------------------------------------------------------ ------------
Balance, December 31, 2002 .... 200,000 4,254,000 34,195,000 1,101,000 (12,720,000) (2,717,000) 24,313,000
Comprehensive income:
Net income ................ -- -- 3,220,000 -- -- -- $3,220,000 3,220,000
Other comprehensive (loss),
net of tax (Note 2) ..... -- -- -- (313,000) -- -- (313,000) (313,000)
----------
Comprehensive income .. $2,907,000
==========
Cash dividends declared, $.95
per share ................. -- -- (1,344,000) -- -- -- (1,344,000)
Purchase of 8,600 shares of
common stock for the
treasury .................. -- -- -- -- (235,000) -- (235,000)
Sale of 1,715 shares of
common stock to the KSOP .. -- (3,000) -- -- 53,000 -- 50,000
Change related to KSOP shares
(Note 11) ................. -- -- -- -- -- (254,000) (254,000)
------------------------------------------------------------------------ ------------
Balance, December 31, 2003 .... 200,000 4,251,000 36,071,000 788,000 (12,902,000) (2,971,000) 25,437,000
Comprehensive income:
Net income ................ -- -- 3,703,000 -- -- -- $3,703,000 3,703,000
Other comprehensive (loss),
net of tax (Note 2) ..... -- -- -- (458,000) -- -- (458,000) (458,000)
----------
Comprehensive income .. $3,245,000
==========
Cash dividends declared, $.98
per share ................. -- -- (1,358,000) -- -- -- (1,358,000)
Purchase of 36,372 shares of
common stock for the
treasury .................. -- -- -- -- (1,111,000) -- (1,111,000)
Sale of 1,481 shares of
common stock to the KSOP .. -- 4,000 -- -- 46,000 -- 50,000
Change related to KSOP shares
(Note 11) ................. -- -- -- -- -- (546,000) (546,000)
------------------------------------------------------------------------ -----------
Balance, December 31, 2004 .... $200,000 $4,255,000 $38,416,000 $330,000 $(13,967,000) $(3,517,000) $25,717,000
======================================================================== ===========
31
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
- ------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .......................................... $ 3,703,000 $ 3,220,000 $ 3,570,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from loans sold .......................... 11,785,000 26,333,000 20,415,000
Loans underwritten ................................ (12,016,000) (25,595,000) (20,593,000)
Gains on loans sold ............................... (203,000) (348,000) (212,000)
Provision for loan losses ......................... 410,000 645,000 440,000
Investment securities gains, net .................. (45,000) (22,000) (84,000)
Depreciation ...................................... 575,000 523,000 537,000
Deferred income taxes ............................. (32,000) 290,000 (37,000)
Amortization of premiums and accretion
of discounts on investment securities,
net ............................................. 269,000 184,000 44,000
Changes in assets and liabilities:
Decrease in accrued interest receivable ......... 185,000 441,000 121,000
Net (increase) decrease in other assets ......... (148,000) 672,000 397,000
Net increase (decrease) in other liabilities .... 325,000 (14,000) (121,000)
-------------------------------------------
Net cash provided by operating
activities .................................... 4,808,000 6,329,000 4,477,000
-------------------------------------------
Cash Flows from Investing Activities:
Net (increase) in interest-bearing deposits
at financial institutions ......................... (1,447,000) (5,157,000) (171,000)
Net (increase) decrease in federal funds sold ....... 19,114,000 (814,000) 400,000
Proceeds from sales of available for sale securities 2,548,000 516,000 4,013,000
Proceeds from maturities, calls, and
paydowns of securities available for sale ......... 15,818,000 10,002,000 12,307,000
Purchase of securities available for sale ........... (12,488,000) (10,241,000) (9,520,000)
Net (increase) decrease in loans .................... (14,052,000) 5,839,000 (1,824,000)
Purchases of bank premises and equipment ............ (1,222,000) (1,984,000) (785,000)
Purchases of life insurance contracts ............... -- (100,000) (405,000)
Increase in cash value of life insurance
contracts ......................................... (184,000) (201,000) (187,000)
(Purchases) sales of restricted investment securities 369,000 929,000 (89,000)
--------------------------------------------
Net cash provided by (used in) investing
activities .................................... $ 8,456,000 $ (1,211,000) $ 3,739,000
--------------------------------------------
(Continued)
32
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in noninterest-bearing deposits ....... $ 2,521,000 $ 2,256,000 $ 3,128,000
Net increase (decrease) in interest-bearing deposits (2,362,000) 4,898,000 (230,000)
Repayment of notes payable ......................... (600,000) (3,922,000) (2,119,000)
Proceeds from note payable ......................... -- 3,322,000 --
Net increase (decrease) in securities sold
under agreements to repurchase ................... 973,000 (1,679,000) 1,523,000
Advances from Federal Home Loan Bank ............... 1,000,000 10,550,000 7,100,000
Payments of advances from Federal Home
Loan Bank .......................................... (10,155,000) (23,088,000) (13,197,000)
Net increase (decrease) in treasury tax and
loan open note ................................... (482,000) (229,000) 163,000
Cash dividends paid ................................ (1,356,000) (1,336,000) (1,315,000)
Purchases of common stock for the treasury ......... (1,111,000) (235,000) (800,000)
Proceeds from issuance of common stock ............. 50,000 50,000 153,000
--------------------------------------------
Net cash (used in) financing
activities ................................... (11,522,000) (9,413,000) (5,594,000)
--------------------------------------------
Net increase (decrease) in cash and
due from banks ............................... 1,742,000 (4,295,000) 2,622,000
Cash and due from banks:
Beginning .......................................... 12,988,000 17,283,000 14,661,000
--------------------------------------------
Ending ............................................. $ 14,730,000 $ 12,988,000 $ 17,283,000
============================================
Supplemental Disclosures of Cash Flow
Information, cash payments for:
Interest ........................................... $ 6,954,000 $ 8,723,000 $ 10,963,000
Income taxes ....................................... 1,558,000 1,191,000 1,619,000
Supplemental Schedule of Noncash Investing
and Financing Activities:
Change in accumulated other comprehensive
income, unrealized gains (losses) on securities
available for sale, net .......................... (458,000) (313,000) 243,000
(Increase) in maximum cash obligation related
to KSOP shares ................................... (546,000) (254,000) (475,000)
Transfers of loans to other real estate owned ...... 102,000 123,000 547,000
See Notes to Consolidated Financial Statements.
33
Iowa First Bancshares Corp. and Subsidiaries
Notes to Consolidated 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 and First National Bank in
Fairfield (the "Banks"). First National Bank of Muscatine has a total of six
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. 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.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity
with accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The allowance for loan losses is inherently subjective, as
it requires material estimates that are susceptible to significant change. The
fair value disclosure of financial instruments is an estimate that can be
computed within a range.
Principles of consolidation: As of and for the years ended December 31, 2004 and
2003, the accompanying consolidated financial statements include the accounts of
the Company and all wholly-owned subsidiaries, except Iowa First Capital Trust
I, which under current accounting rules, no longer meets the criteria for
consolidation. For prior periods presented, the accompanying consolidated
financial statements include the accounts of the Company and all of its
wholly-owned subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and due
from banks includes cash on-hand, amounts due from banks, and the cash items in
process of clearing. Cash flows from interest-bearing deposits at financial
institutions, federal funds sold, loans, deposits, securities sold under
agreements to repurchase, revolving line of credit, and the treasury tax and
loan open note are reported net.
Cash and due from banks: The Banks are required by federal banking regulations
to maintain certain cash and due from bank reserves. The reserve requirement was
approximately $3,474,000 and $3,251,000 as of December 31, 2004 and 2003,
respectively.
Investment securities available for sale: Securities available for sale are
accounted for at fair value and the unrealized holding gains or losses are
presented as a separate component of accumulated other comprehensive income, net
of their deferred income tax effect. Realized gains and losses, determined using
the specific-identification method, are included in earnings.
Declines in the fair value of individual available for sale securities below
their cost that are other than temporary would result in write-downs of the
individual securities to their fair value. The related write-downs would be
included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the expected life of the security. There were no investments held to
maturity or for trading purposes as of December 31, 2004 or 2003.
Loans: Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. The Banks record impaired loans at
the present value of expected future cash flows discounted at the loan's
effective interest rate, or as an expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent. A
loan is impaired when it is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. The Banks recognize interest income on impaired loans on a
cash basis.
34
The allowance for loan losses is maintained at the level considered adequate by
management of the Banks to provide for losses that are probable. 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, historical loan loss
experience, review of specific problem loans, and other factors.
Direct loan origination fees and costs are generally being deferred and the net
amounts amortized as an adjustment of the related loan or lease's yield. The
Banks generally amortize these amounts over the contractual life. Direct loan
origination fees and costs related to loans sold to unrelated third parties are
recognized as income or expense in the current consolidated statements of
income. Commitment fees based upon a percentage of customers' unused lines of
credit and fees related to standby letters of credit are not significant.
Sales of loans: As part of its management of assets and liabilities, the Company
periodically sells residential real estate loans. Loans which are expected to be
sold in the foreseeable future are classified as held for sale and are recorded
at the lower of cost or estimated market value in the aggregate.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit, including standby letters
of credit. Such financial instruments are recorded when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for
as sales, only when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right to pledge or
exchange the assets it received, and no condition both constrains the transferee
from taking advantage of its right to pledge or exchange and provides more than
a modest benefit to the transferor, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity or the ability to unilaterally cause the holder to
return specific assets.
Bank premises and equipment: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method based on the estimated useful lives.
Life insurance contracts: Life insurance contracts are stated at their cash
surrender value.
Restricted investment securities: Restricted investment securities represent
Federal Home Loan Bank and Federal Reserve Bank common stock. The stock is
carried at cost.
Other assets: Other real estate (ORE), which is included in other assets,
represents properties acquired through foreclosure, in-substance foreclosure, or
other proceedings. ORE is recorded at the lower of the amount of the loan or
fair value of the properties. Any write-down to fair value at the time of
transfer to ORE is charged to the allowance for loan losses. Property is
evaluated regularly to ensure that the recorded amount is supported by the
current fair value. Subsequent write-downs to fair value are charged to
earnings.
Other revenue recognition: Revenue from trust services and other service charges
and fees is recognized as the services are provided.
Income taxes: The Company files its tax return on a consolidated basis with its
subsidiary banks. The entities follow the direct reimbursement method of
accounting for income taxes under which income taxes or credits which result
from the subsidiary banks' inclusion in the consolidated tax return are paid to
or received from the parent company.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Common stock held by KSOP: The Company's maximum cash obligation related to
these shares is classified outside stockholders' equity because the shares are
not readily traded and could be put back to the Company for cash.
Trust assets: Trust assets (other than cash deposits) held by the Banks in
fiduciary or agency capacities for its customers are not included in the
accompanying consolidated balance sheets since such items are not assets of the
Banks.
35
Earnings per share: Basic earnings per share are arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. There were no common stock equivalents outstanding during
the years ended December 31, 2004, 2003, and 2002.
Current accounting developments: The Company is not aware of any new accounting
developments which are anticipated to have a significant impact on the
consolidated financial statements.
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. Comprehensive Income
Comprehensive income is defined as the change in equity during a period from
transactions and other events from non-owner sources. Comprehensive income is
the total of net income and other comprehensive income, which for the Company is
comprised entirely of unrealized gains and losses on securities available for
sale.
Other comprehensive income (loss) is comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------
Year Ended December 31, 2004
-----------------------------------
Unrealized gains (losses) on securities
available for sale:
Unrealized holding (losses) arising during
the year ........................................ $(685,000) $(255,000) $(430,000)
Less reclassification adjustment for gains
included in net income .......................... 45,000 17,000 28,000
-----------------------------------
Other comprehensive (loss) .................. $(730,000) $(272,000) $(458,000)
===================================
Year Ended December 31, 2003
-----------------------------------
Unrealized gains (losses) on securities
available for sale:
Unrealized holding (losses) arising during
the year ........................................ $(477,000) $(178,000) $(299,000)
Less reclassification adjustment for gains
included in net income .......................... 22,000 8,000 14,000
-----------------------------------
Other comprehensive (loss) .................. $(499,000) $(186,000) $(313,000)
===================================
Year Ended December 31, 2002
-----------------------------------
Unrealized gains on securities available
for sale:
Unrealized holding gains arising during
the year ........................................ $ 473,000 $ 178,000 $ 295,000
Less reclassification adjustment for gains
included in net income .......................... 84,000 32,000 52,000
-----------------------------------
Other comprehensive income .................. $ 389,000 $ 146,000 $ 243,000
===================================
Note 3. Investment Securities Available for Sale
The amortized cost and fair value of investment securities available for sale as
of December 31, 2004 and 2003 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
December 31, 2004
-----------------------------------------------------------
U.S. government agencies ....... $ 17,156,000 $ 18,000 $ (120,000) $ 17,054,000
Mortgage-backed securities ..... 393,000 3,000 (14,000) 382,000
State and political subdivisions 12,249,000 641,000 (1,000) 12,889,000
-----------------------------------------------------------
$ 29,798,000 $ 662,000 $ (135,000) $ 30,325,000
===========================================================
36
All securities which have unrealized losses as of December 31, 2004 have been in
that unrealized loss position for less than 12 months. Those securities include
U.S. government agencies with a fair value of $13,477,000 and unrealized losses
of $120,000, mortgage-backed securities with a fair value of $382,000 and
unrealized losses of $14,000, and state and political subdivision securities
with a fair value of $218,000 and unrealized losses of $1,000. For all of those
investment securities, the unrealized losses are generally due to changes in
interest rates and, as such, are considered to be temporary, by the Company.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
December 31, 2003
-----------------------------------------------------------
U.S. government agencies ....... $ 20,095,000 $ 273,000 $ (1,000) $ 20,367,000
Mortgage-backed securities ..... 571,000 6,000 (2,000) 575,000
State and political subdivisions 14,038,000 941,000 -- 14,979,000
Corporate obligations .......... 1,196,000 40,000 -- 1,236,000
-----------------------------------------------------------
$ 35,900,000 $ 1,260,000 $ (3,000) $ 37,157,000
===========================================================
All securities which have unrealized losses as of December 31, 2003 have been in
that unrealized loss position for less than 12 months. Those securities included
U.S. government agencies with a fair value of $558,000 and unrealized losses of
$1,000 and mortgage-backed securities with a fair value of $444,000 and
unrealized losses of $2,000. For all of those investment securities, the
unrealized losses were generally due to changes in interest rates and, as such,
were considered to be temporary, by the Company.
The amortized cost and fair value of investment securities available for sale as
of December 31, 2004, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities for mortgage-backed securities
because the mortgages underlying the securities may be prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary.
Amortized Fair
Cost Value
--------------------------
Securities available for sale:
Due in one year or less ........................ $ 5,189,000 $ 5,218,000
Due after one year through five years .......... 19,683,000 19,927,000
Due after five years through ten years ......... 2,789,000 2,930,000
Due after ten years ............................ 1,744,000 1,868,000
--------------------------
29,405,000 29,943,000
Mortgage-backed securities ..................... 393,000 382,000
--------------------------
$29,798,000 $30,325,000
==========================
Investment securities with a carrying value of $14,374,000 and $11,511,000 as of
December 31, 2004 and 2003, respectively, are pledged on securities sold under
agreements to repurchase, trust deposits, and for other purposes as required or
permitted by law.
All sales of securities during the years ended December 31, 2004, 2003, and 2002
were from securities identified as available for sale. Information on proceeds
received, as well as the gross gains and losses from the sale of those
securities is as follows for the years ended December 31, 2004, 2003, and 2002:
2004 2003 2002
------------------------------------
Proceeds from sales of securities ....... $2,548,000 $ 516,000 $4,013,000
Gross gains from sales of securities .... 61,000 22,000 86,000
Gross losses from sales of securities ... 16,000 -- 2,000
37
Note 4. Loans
The composition of loans is summarized as follows:
December 31,
----------------------------
2004 2003
----------------------------
Commercial ..................................... $123,079,000 $113,811,000
Agricultural ................................... 23,320,000 25,154,000
Real estate:
Construction ................................. 10,508,000 10,165,000
Mortgage ..................................... 106,377,000 102,893,000
Tax exempt, mortgage ......................... 5,594,000 3,897,000
Installment .................................... 14,940,000 13,891,000
Other .......................................... 466,000 294,000
----------------------------
Total loans ............................ 284,284,000 270,105,000
Less allowance for loan losses ................. 3,385,000 3,180,000
----------------------------
$280,899,000 $ 266,925,000
============================
Included in real estate mortgage loans above are loans held for sale of $434,000
and none as of December 31, 2004 and 2003, respectively.
Loans considered to be impaired are as follows:
December 31,
-----------------------
2004 2003
-----------------------
Impaired loans for which an allowance has been
provided ........................................... $2,464,000 $2,453,000
=======================
Allowance provided for impaired loans, included in the
allowance for loan losses .......................... $ 525,000 $ 639,000
=======================
There are no impaired loans for which an allowance has not been provided.
The average recorded investment in impaired loans during 2004 and 2003 was
$2,632,000 and $2,230,000, respectively. Interest income on impaired loans of
$53,000, $66,000, and $269,000 was recognized for cash payments received in
2004, 2003, and 2002, respectively.
Nonaccruing loans totaled $1,668,000 and $2,123,000 at December 31, 2004 and
2003, respectively. Interest income in the amount of $76,000, $139,000, and
$100,000 would have been earned on the nonaccrual loans had they been performing
loans in accordance with their original terms during the years ended December
31, 2004, 2003, and 2002, respectively. The interest collected on loans
designated as nonaccrual loans and included in income for the years ended
December 31, 2004, 2003, and 2002 totaled $52,000, $78,000, and $30,000,
respectively. Nonaccrual loans include impaired loans (presented in the table
above) of $1,125,000 and $1,646,000 as of December 31, 2004 and 2003,
respectively.
Loans past due 90 days or more and still accruing interest totaled $207,000 and
$215,000 as of December 31, 2004 and 2003, respectively.
Changes in the allowance for loan losses are summarized as follows:
Year Ended December 31,
--------------------------------------
2004 2003 2002
--------------------------------------
Beginning balance .................... $3,180,000 $3,304,000 $3,182,000
Provisions charged to expense ...... 410,000 645,000 440,000
Recoveries ......................... 68,000 51,000 53,000
--------------------------------------
3,658,000 4,000,000 3,675,000
Loans charged off .................. 273,000 820,000 371,000
--------------------------------------
Ending balance ....................... $3,385,000 $3,180,000 $3,304,000
======================================
38
The Company retains mortgage loan servicing on loans sold into the secondary
market which are not included in the accompanying consolidated balance sheets.
The unpaid principal balance on these loans was $42,563,000 and $39,149,000 as
of December 31, 2004 and 2003, respectively. Custodial escrow balances
maintained in connection with these loans were approximately $218,000 and
$177,000 as of December 31, 2004 and 2003, respectively.
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows:
Years of
Useful
Lives December 31,
-------------------------------------------
2004 2003
---------------------------
Land ........................... $ 1,136,000 $ 1,136,000
Bank premises .................. 10-40 8,532,000 $ 7,917,000
Leasehold improvements ......... 5-15 122,000 122,000
Furniture and equipment ........ 5-15 3,912,000 3,303,000
---------------------------
13,702,000 12,478,000
Accumulated depreciation ....... 6,291,000 5,714,000
---------------------------
$ 7,411,000 $ 6,764,000
===========================
Note 6. Deposits
The composition of deposits is summarized as follows:
December 31,
---------------------------
2004 2003
---------------------------
Demand ........................................ $ 99,958,000 $100,662,000
NOW accounts .................................. 44,058,000 40,699,000
Savings ....................................... 24,959,000 24,802,000
Time certificates ............................. 108,760,000 111,413,000
---------------------------
$277,735,000 $277,576,000
===========================
Included in interest-bearing deposits are certificates of deposit with a minimum
denomination of $100,000 totaling $24,136,000 and $23,986,000 as of December 31,
2004 and 2003, respectively.
At December 31, 2004, the scheduled maturities of all certificates of deposit
are as follows:
Year ending December 31:
2005 $ 56,376,000
2006 24,935,000
2007 11,713,000
2008 6,217,000
2009 8,312,000
Thereafter 1,207,000
-------------
$ 108,760,000
=============
Note 7. Note Payable
Note payable is summarized as follows:
December 31,
------------------------
2004 2003
------------------------
Revolving note payable to a bank, interest variable
at prime rate minus one percent with a floor rate
of 3.25% and a ceiling rate of 5.25%, due May 1,
2008, with annual principal installments of
$600,000, secured by stock of subsidiary banks
of the Company................................... $2,100,000 $2,700,000
========================
The Company's above-referenced revolving note payable includes an unused
$1,700,000 line of credit, in addition to the $2,100,000 balance outstanding, as
of December 31, 2004.
39
The note payable includes certain restrictive covenants regarding the Company's
net worth and regulatory capital.
Note 8. Other Borrowed Funds
Other borrowed funds consist of the following:
December 31,
----------------------------
2004 2003
----------------------------
Securities sold under agreements to
repurchase ................................. $ 5,885,000 $ 4,912,000
Federal Home Loan Bank advances .............. 42,916,000 52,071,000
Treasury tax and loan open note .............. 74,000 556,000
The securities sold under agreements to repurchase represent agreements with
customers of the Banks which are collateralized with securities of the Banks
held by the Federal Home Loan Bank of Des Moines. The Federal Home Loan Bank may
sell, loan, or otherwise dispose of such securities to other parties in the
normal course of their operations with prior written approval of the Banks, and
have agreed to resell to the Banks substantially identical securities at the
maturities of the agreements. At December 31, 2004, all but $584,000 of the
securities sold under agreements to repurchase mature within twelve months. All
of this $584,000 matures within two years. At December 31, 2003, all but
$1,273,000 of the securities sold under agreements to repurchase had maturities
within twelve months. Of this $1,273,000, $716,000 was scheduled to mature
within two years and the remaining $557,000 within three years.
Additional information concerning securities sold under agreements to repurchase
follows:
December 31,
--------------------------
2004 2003
--------------------------
Daily average amount outstanding during the year ... $ 5,974,000 $ 5,615,000
Maximum outstanding as of any month-end ............ 7,135,000 6,685,000
Weighted average interest rate during the year ..... 1.55% 2.06%
Weighted average interest rate at the end
of the year ...................................... 1.65% 1.74%
Securities underlying the agreements at the end
of the year, carrying and fair value ............. $10,065,000 $10,342,000
Advances from the Federal Home Loan Bank as of December 31, 2004 bear interest
and are due as follows:
Weighted
Average
Interest
Rate at
Year-End Balance Due
-----------------------
Year ending December 31:
2005 4.92% $ 7,100,000
2006 4.93 12,750,000
2007 4.07 8,050,000
2008 4.50 7,700,000
2009 5.64 3,400,000
Thereafter 4.73 3,916,000
------------
$ 42,916,000
============
As of December 31, 2003, the Company had advances from the Federal Home Loan
Bank totaling $52,071,000 with maturities ranging from 2004 to 2018 and weighted
average interest rates ranging from 4.12% to 6.27%.
Federal Home Loan Bank advances are collateralized by Federal Home Loan Bank
stock, included in restricted investment securities on the balance sheet,
totaling $2,503,000 and $2,872,000 as of December 31, 2004 and 2003,
respectively. Additionally, first mortgage loans of approximately $82,696,000
and $78,540,000 as of December 31, 2004 and 2003, respectively, are pledged as
collateral on Federal Home Loan Bank advances.
The treasury tax and loan open note represents overnight borrowings from the
Federal Reserve Bank system.
40
Note 9. Junior Subordinated Debentures and Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Subordinated Debentures
Junior subordinated debentures:
Junior subordinated debentures are due to Iowa First Capital Trust I, a 100%
owned non-consolidated subsidiary of the Company. The debentures were issued in
2001 in conjunction with the Trust's issuance of 4,000 shares of company
obligated mandatorily redeemable preferred securities. The debentures bear the
same interest rate and terms as the preferred securities, detailed later in this
note.
The debentures are included on the balance sheet as liabilities; however for
regulatory purposes, at the present time, $4,000,000, representing the entire
amount of the trust's capital securities, is allowed in the calculation of Tier
I capital.
Company obligated mandatorily redeemable preferred securities:
On March 28, 2001, the Company issued 4,000 shares totaling $4,000,000 of
company obligated mandatorily redeemable preferred securities of Iowa First
Capital Trust I. The securities provide for cumulative cash distributions
calculated at a 10.18% annual rate. The Company may, at one or more times, defer
interest payments on the capital securities for up to 10 consecutive semi-annual
periods, but not beyond June 8, 2031. At the end of the deferral period, all
accumulated and unpaid distributions will be paid. The capital securities will
be redeemed on June 8, 2031; however, the Company has the option to shorten the
maturity date to a date not earlier than June 8, 2011. The redemption price
begins at 105.09% to par and is reduced 51 basis points each year until June 8,
2021 when the capital securities can be redeemed at par. Holders of the capital
securities have no voting rights, are unsecured, and rank junior in priority of
payment to all of the Company's indebtedness and senior to the Company's capital
stock. For periods prior to December 31, 2003, the capital securities were
included in the consolidated balance sheets as a liability with the cash
distributions included in interest expense.
Note 10. Regulatory Matters
The Company and Banks ("Entities") are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Entities' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Entities must meet specific capital guidelines that involve quantitative
measures of the Entities' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Entities' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Entities to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2004, that the
Entities meet all capital adequacy requirements to which they are subject.
As of December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately or well capitalized, an institution must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since the notification that management
believes have changed the Banks' categories.
41
The Company and Banks' actual capital amounts and ratios are presented in the
following table.
To be Well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------
As of December 31, 2004
Total Capital (to Risk-Weighted Assets):
Consolidated .......................... $35,831,000 13.4% $21,425,000 >= 8.0% N/A N/A
First National Bank of Muscatine ...... 28,637,000 14.5 15,769,000 >= 8.0 $19,711,000 >= 10.0%
First National Bank in Fairfield ...... 9,373,000 12.2 6,213,000 >= 8.0 7,767,000 >= 10.0
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated .......................... 32,479,000 12.1 10,730,000 >= 4.0 N/A N/A
First National Bank of Muscatine ...... 26,173,000 13.3 7,885,000 >= 4.0 11,827,000 >= 6.0
First National Bank in Fairfield ...... 8,495,000 10.9 3,107,000 >= 4.0 4,660,000 >= 6.0
Tier 1 Capital (to Average Assets):
Consolidated .......................... 32,479,000 8.7 14,911,000 >= 4.0 N/A N/A
First National Bank of Muscatine ...... 26,173,000 9.6 10,850,000 >= 4.0 13,562,000 >= 5.0
First National Bank in Fairfield ...... 8,495,000 8.4 4,042,000 >= 4.0 5,052,000 >= 5.0
As of December 31, 2003
Total Capital (to Risk-Weighted Assets):
Consolidated .......................... $34,375,000 13.0% $21,124,000 >= 8.0% N/A N/A
First National Bank of Muscatine ...... 27,837,000 14.6 15,286,000 >= 8.0 $19,107,000 >= 10.0%
First National Bank in Fairfield ...... 9,134,000 12.7 5,766,000 >= 8.0 7,208,000 >= 10.0
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated .......................... 31,195,000 11.8 10,562,000 >= 4.0 N/A N/A
First National Bank of Muscatine ...... 25,447,000 13.3 7,643,000 >= 4.0 11,464,000 >= 6.0
First National Bank in Fairfield ...... 8,473,000 11.8 2,883,000 >= 4.0 4,325,000 >= 6.0
Tier 1 Capital (to Average Assets):
Consolidated .......................... 31,195,000 8.2 15,274,000 >= 4.0 N/A N/A
First National Bank of Muscatine ...... 25,447,000 9.1 11,161,000 >= 4.0 13,952,000 >= 5.0
First National Bank in Fairfield ...... 8,473,000 8.3 4,093,000 >= 4.0 5,116,000 >= 5.0
Current banking law limits the amount of dividends banks can pay. As of December
31, 2004, amounts available for payment of dividends were $2,349,000 and
$465,000 for First National Bank of Muscatine and First National Bank in
Fairfield, respectively. Regardless of formal regulatory restrictions the Banks
may not pay dividends which would result in their capital levels being reduced
below the minimum requirements shown above. Note 11.
Employee Benefits
The Company and bank subsidiaries sponsor an Employee Stock Ownership Plan with
401(k) provisions (KSOP). This plan owns 97,562 shares of the Company as of
December 31, 2004 and covers substantially all employees who have reached the
age of 21 and worked at least 1,000 hours any year. The Company and subsidiary
banks match 50% of the amount an employee contributes to the plan up to a
maximum of 6% of the employee's pay. Additionally, the Company and subsidiary
banks may make profit sharing contributions to the plan which are allocated to
the accounts of participants in the plan on the basis of total relative
compensation. The amounts expensed for the years ended December 31, 2004, 2003,
and 2002 were $327,000, $325,000, and $319,000, respectively.
An employee, upon termination of employment, has the option of retaining
ownership of shares vested pursuant to the plan or selling such shares to the
Company. Since the shares of common stock held by the KSOP are not readily
traded, the Company has reflected the maximum cash obligation related to those
securities outside of stockholders' equity. As of December 31, 2004, 97,562
shares held by the KSOP, at a fair value of $36.05 per share, have been
reclassified from stockholders' equity to mezzanine capital.
42
The Company has entered into deferred compensation agreements with certain
directors and executive officers of the Company and the Banks. Under the
provisions of the agreements, the directors and officers may defer a portion of
their compensation each year. Based upon individual performance, if Board
established performance targets are met, a match of up to 50% of the officers'
deferrals may be paid by the Company. Related to the agreements, the Company has
purchased various life insurance contracts. Interest on deferrals is computed at
an annual rate equal to the taxable equivalent (determined using the Company's
highest marginal tax bracket) of the highest yielding insurance contract
purchased by the Company related to the agreements. At December 31, 2004, the
rate was 9%. Upon retirement, the director or officer will receive the deferral
balance in 180 equal monthly installments. During the years ended December 31,
2004, 2003, and 2002, the Company expensed $175,000, $152,000, and $134,000,
respectively, related to the agreements. As of December 31, 2004 and 2003, the
liability related to the agreements was $669,000 and $494,000, respectively.
During the years ended December 31, 2004, 2003, and 2002, total cash payouts
pursuant to the agreements totaled none, none, and $35,000, respectively.
Note 12. Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
------------------------------------------
2004 2003 2002
------------------------------------------
Currently paid or payable ....... $ 1,686,000 $ 1,086,000 $ 1,581,000
Deferred income taxes ........... (32,000) 290,000 (37,000)
------------------------------------------
$ 1,654,000 $ 1,376,000 $ 1,544,000
==========================================
Income tax expense differs from the amount computed by applying the federal
income tax rate to income before income taxes. The reasons for this difference
are as follows:
Year Ended December 31,
-------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
% Of % Of % Of
Dollar Pretax Dollar Pretax Dollar Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------------
Computed "expected" income tax
expense ......................... $ 1,875,000 35.0% $ 1,609,000 35.0% $ 1,790,000 35.0%
Effect of graduated tax rate ...... (54,000) (1.0) (46,000) (1.0) (51,000) (1.0)
Tax exempt interest and dividend
income, net ..................... (301,000) (5.6) (293,000) (6.4) (308,000) (6.0)
State income taxes, net ........... 177,000 3.3 152,000 3.3 169,000 3.3
Increase in cash surrender value of
life insurance contracts ........ (66,000) (1.2) (69,000) (1.5) (64,000) (1.2)
Other ............................. 23,000 0.4 23,000 0.5 8,000 0.1
-------------------------------------------------------------------------
$ 1,654,000 30.9% $ 1,376,000 29.9% $ 1,544,000 30.2%
=========================================================================
Net deferred taxes, included in other assets/liabilities on the consolidated
balance sheets, consist of the following components as of December 31:
2004 2003
------------------------
Deferred tax assets:
Allowance for loan losses ...................... $ 576,000 $ 500,000
Deferred compensation .......................... 249,000 184,000
------------------------
825,000 684,000
------------------------
Deferred tax liabilities:
Securities available for sale .................. (197,000) (469,000)
Bank premises and equipment .................... (485,000) (406,000)
Net deferred loan origination fees ............. (77,000) (64,000)
Other .......................................... (41,000) (24,000)
------------------------
(800,000) (963,000)
------------------------
Net deferred tax assets (liabilities) .... $ 25,000 $(279,000)
========================
43
The change in deferred income taxes was reflected in the financial statements as
follows for the years ended December 31, 2004, 2003, and 2002:
2004 2003 2002
-----------------------------------
Provision for income taxes .............. $ (32,000) $ 290,000 $ (37,000)
Statement of stockholders' equity,
accumulated other comprehensive
income ................................ (272,000) (186,000) 146,000
-----------------------------------
$(304,000) $ 104,000 $ 109,000
===================================
Note 13. Commitments and Contingencies
Financial instruments with off-balance-sheet risk: 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 consolidated balance sheets.
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.
December 31,
-------------------------
2004 2003
-------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit ................. $40,467,000 $35,066,000
Standby letters of credit .................... 1,121,000 2,336,000
The commitments to extend credit above are net of participations sold to other
banks. Total participations sold to other banks related to the commitments to
extend credit were $18,143,000 and $8,668,000 at December 31, 2004 and 2003,
respectively.
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 and 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 on the previous page. If the commitment
is funded, the Banks would be entitled to seek recovery from the customer. At
December 31, 2004 and 2003, no amounts have been recorded as liabilities for the
Banks' potential obligations under these guarantees.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $434,000 and none as of December 31, 2004 and
2003, respectively. These amounts are classified as loans held for sale and are
included in loans at the respective balance sheet dates.
Concentration of credit risk: The Banks grant commercial, real estate, and
installment loans to customers in the Banks' primary market area of Iowa, with
most loans concentrated in the Iowa counties of Muscatine and Jefferson. The
Banks have reasonably diversified loan portfolios, as set forth in Note 4. The
distribution of commitments to extend credit and standby letters of credit
approximates the distribution of loans outstanding. The Banks' policies for
requiring collateral are consistent with prudent lending practices and
anticipate the potential for economic fluctuations. Collateral varies but may
include accounts receivable, inventory, property and equipment, residential real
estate properties, and income producing commercial properties. It is the policy
of the Banks to file financing statements and mortgages covering collateral
pledged.
44
Aside from cash on-hand and in-vault, the Company's cash is maintained at
correspondent banks. The total amount of cash on deposit, certificates of
deposit, and federal funds sold with correspondent banks exceeded federal
insured limits by $12,985,000 and $26,714,000 as of December 31, 2004 and 2003,
respectively. In the opinion of management, no material risk of loss exists due
to the correspondent banks' financial condition and the fact they are all well
capitalized.
Contingencies: In the normal course of business, the Banks are involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
consolidated financial statements.
Commitments: The Company has entered into contracts for information technology
services for the Banks. These contracts provide for payments of approximately
$430,000 in each of the next six and one half years. The actual amounts paid may
differ from these amounts due to the portion of such payments which are variable
in nature.
Note 14. Related Party Matters
Senior officers and directors of the Company and the Banks, principal holders of
equity securities of the Company, and their associates were indebted to the
Banks for loans made in the ordinary course of business. Such loans are on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others. As of December 31, 2004, none of
these loans are classified as nonaccrual, past due, or restructured.
The activity in such loans during the years ended December 31, 2004 and 2003 is
as follows:
2004 2003
----------------------------------
Balance, beginning ................. $ 13,805,000 $ 13,475,000
Additions ........................ 6,149,000 7,872,000
Repayments ....................... (5,691,000) (7,542,000)
----------------------------------
Balance, ending .................... $ 14,263,000 $ 13,805,000
==================================
Note 15. Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments in the table below:
Cash and due from banks and interest-bearing deposits at financial institutions:
The carrying value for cash and due from banks and interest-bearing deposits at
financial institutions, with maturities of one month or less, equal their fair
values. Fair values of interest-bearing deposits at financial institutions with
remaining maturities of over one month are estimated using discounted cash flow
analysis, using interest rates currently available for similar instruments.
Federal funds sold: The carrying value for federal funds sold equals their fair
value.
Investment securities available for sale: Fair values for investment securities
available for sale are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market prices
of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. Fair values for
all other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Accrued interest receivable and payable: The carrying value of accrued interest
receivable and payable represents its fair value.
45
Restricted investment securities: The carrying value of restricted investment
securities equals their fair value.
Deposits: Fair values for demand deposits (i.e., interest and noninterest
checking, passbook savings, and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities of time deposits.
Notes payable, securities sold under agreements to repurchase and treasury tax
and loan open note: For variable rate debt and short-term instruments, the
carrying amount is a reasonable estimate of fair value. The fair value of
securities sold under agreements to repurchase with maturities of over one month
is estimated using discounted cash flow analysis, using interest rates available
on similar borrowings.
Federal Home Loan Bank advances and junior subordinated debentures: The fair
value of Federal Home Loan Bank advances and junior subordinated debentures is
estimated using a discounted cash flow analysis, employing interest rates
currently being offered on similar borrowings.
Commitments to extend credit and standby letters of credit: The fair value of
these commitments is not material.
The carrying values and estimated fair values of financial instruments as of
December 31, 2004 and 2003 are summarized as follows:
2004 2003
--------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------------------------------------------------
Financial Assets:
Cash and due from banks ........ $ 14,730,000 $ 14,730,000 $ 12,988,000 $ 12,988,000
Interest-bearing deposits at
financial institutions ....... 8,395,000 8,342,000 6,948,000 6,963,000
Federal funds sold ............. 12,300,000 12,300,000 31,414,000 31,414,000
Investment securities
available for sale ........... 30,325,000 30,325,000 37,157,000 37,157,000
Loans, net of allowance ........ 280,899,000 282,843,000 266,925,000 272,905,000
Accrued interest receivable .... 2,046,000 2,046,000 2,231,000 2,231,000
Restricted investment securities 2,659,000 2,659,000 3,028,000 3,028,000
Financial Liabilities:
Deposits ....................... 277,735,000 278,096,000 277,576,000 279,015,000
Notes payable .................. 2,100,000 2,100,000 2,700,000 2,700,000
Securities sold under
agreements to repurchase ..... 5,885,000 5,890,000 4,912,000 4,943,000
Federal Home Loan Bank
advances ..................... 42,916,000 44,061,000 52,071,000 54,621,000
Treasury tax and loan open note 74,000 74,000 556,000 556,000
Junior subordinated debentures . 4,125,000 5,024,000 4,125,000 4,714,000
Accrued interest payable ....... 412,000 412,000 474,000 474,000
46
Note 16. Parent Company Only Condensed Financial Information
The following is condensed financial information of Iowa First Bancshares Corp.
(parent company only):
Balance Sheets
(Parent Company Only)
December 31,
----------------------------
Assets 2004 2003
----------------------------
Cash ................................................. $ 382,000 $ 348,000
Investment in subsidiaries ........................... 35,548,000 35,258,000
Other assets ......................................... 235,000 228,000
----------------------------
Total assets ................................. $ 36,165,000 $ 35,834,000
============================
Liabilities and Stockholders' Equity
Liabilities:
Notes payable ...................................... $ 2,100,000 $ 2,700,000
Junior subordinated debentures ..................... 4,125,000 4,125,000
Other liabilities .................................. 706,000 601,000
----------------------------
6,931,000 7,426,000
----------------------------
Redeemable Common Stock Held by KSOP ................. 3,517,000 2,971,000
----------------------------
Stockholders' Equity:
Common stock ....................................... 200,000 200,000
Additional paid-in capital ......................... 4,255,000 4,251,000
Retained earnings .................................. 38,416,000 36,071,000
Accumulated other comprehensive income ............. 330,000 788,000
Less cost of common shares acquired for the treasury (13,967,000) (12,902,000)
Less maximum cash obligation related to KSOP shares (3,517,000) (2,971,000)
----------------------------
Total stockholders' equity ................... 25,717,000 25,437,000
----------------------------
Total liabilities and stockholders' equity ... $ 36,165,000 $ 35,834,000
============================
47
Statements of Income
(Parent Company Only)
Year Ended December 31,
-----------------------------------------
2004 2003 2002
-----------------------------------------
Operating revenue:
Dividends received from subsidiaries ......... $ 3,400,000 $ 2,913,000 $ 3,013,000
Management fees and other income ............. 396,000 338,000 327,000
-----------------------------------------
Total operating revenue ................ 3,796,000 3,251,000 3,340,000
Interest expense ............................... 516,000 576,000 733,000
Operating expenses ............................. 631,000 628,000 700,000
-----------------------------------------
Income before income tax (credits),
and equity in subsidiaries'
undistributed net income ............... 2,649,000 2,047,000 1,907,000
Applicable income tax (credits) ................ (306,000) (345,000) (425,000)
-----------------------------------------
2,955,000 2,392,000 2,332,000
Equity in subsidiaries' undistributed net income 748,000 828,000 1,238,000
-----------------------------------------
Net income ............................. $ 3,703,000 $ 3,220,000 $ 3,570,000
=========================================
48
Note 16. Parent Company Only Condensed Financial Information (Continued)
Statements of Cash Flows
(Parent Company Only)
Year Ended December 31,
-----------------------------------------
2004 2003 2002
-----------------------------------------
Cash Flows from Operating Activities:
Net income .................................. $ 3,703,000 $ 3,220,000 $ 3,570,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in subsidiaries' undistributed net
income .................................. (748,000) (828,000) (1,238,000)
Amortization and depreciation ............. 12,000 14,000 17,000
Changes in assets and liabilities:
(Increase) in other assets ............... (19,000) (5,000) (26,000)
Increase (decrease) in other liabilities . 103,000 (79,000) 9,000
-----------------------------------------
Net cash provided by operating
activities ............................ 3,051,000 2,322,000 2,332,000
-----------------------------------------
Cash Flows (Used In) Investing Activities,
purchases of equipment ...................... -- (1,000) --
-----------------------------------------
Cash Flows from Financing Activities:
Repayment of notes payable .................. (600,000) (3,922,000) (2,119,000)
Proceeds from note payable .................. -- 3,322,000 --
Cash dividends paid ......................... (1,356,000) (1,336,000) (1,315,000)
Purchases of common stock for the treasury .. (1,111,000) (235,000) (800,000)
Proceeds from issuance of common stock ...... 50,000 50,000 153,000
-----------------------------------------
Net cash (used in) financing activities (3,017,000) (2,121,000) (4,081,000)
-----------------------------------------
Net increase (decrease) in cash ....... 34,000 200,000 (1,749,000)
Cash:
Beginning ................................... 348,000 148,000 1,897,000
-----------------------------------------
Ending ...................................... $ 382,000 $ 348,000 $ 148,000
=========================================
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9a. 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 and
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
(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.
49
Part III
Item 10. Directors and Executive Officers of the Registrant
Information called for by this Item is set forth under the caption "Information
Concerning Nominees for Election as Directors" in the Company's 2004 Proxy
Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
The information called for by this Item is set forth under the captions
"Executive Compensation", "Performance Incentive Plans", "Executive Employment
Agreements" and "Deferred Compensation Agreements" in the Company's 2004 Proxy
Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information called for by this Item is set forth under the caption "Security
Ownership of Certain Beneficial Owners" and "Information Concerning Nominees for
Election as Directors" in the Company's 2004 Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
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, and involve no more than the
normal risk of collectibility.
Item 14. Principal Accountant Fees and Services
Information called for by this Item is set forth under the caption "Accountant
Fees" in the Company's 2004 Proxy Statement, and is incorporated herein by
reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents Filed with This Report:
(1) Financial Statements. The following consolidated financial statements
of the Company and its subsidiaries are incorporated by reference from
the 2004 Annual Report to Shareholders of the Company:
Report of Independent Registered Public Accounting Firm.
Consolidated balance sheets -- dated December 31, 2004 and 2003.
Consolidated statements of income -- years ended December 31, 2004,
2003, and 2002.
Consolidated statements of changes in stockholders' equity -- years
ended December 31, 2004, 2003, and 2002.
Consolidated statements of cash flows - years ended December 31, 2004,
2003, and 2002.
Notes to consolidated financial statements.
(2) Financial Statement Schedules. All schedules are omitted because they
are not applicable, are not required, or because the required
information is included in the financial statements or the
accompanying notes thereto.
50
(3) Exhibits.
Exhibit Number Exhibit Description
----------------------------------------------------------------------
(3) Articles of Incorporation, as amended.
Incorporated by reference to Exhibit (3) to
the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(10a) Employment Agreement. Incorporated by
reference to Exhibit (10a) to the
registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(10b) Change in Control Employment Agreement.
Incorporated by reference to Exhibit (10b)
to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
1995.
(10c) Executive Deferred Compensation Agreement.
Incorporated by reference to Exhibit (10c)
to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
2000.
(10d) Director Deferred Fee Agreement.
Incorporated by reference to Exhibit (10d)
to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
2000.
(20) Registrant's Proxy Statement Dated March 18, 2005.
Exhibit is being filed herewith.
(21) Subsidiaries of Registrant. Exhibit is being
filed herewith.
(31.1) Certification of Chief Financial Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934 and Section 302 of the
Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Executive Officer pursuant
to Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934 and Section 302 of the
Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2) Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(99.1) Audit Committee Charter. Exhibit is being filed
herewith.
(99.4) Code of Ethical Conduct for Principal Officers and
Financial Managers. Exhibit is being filed
herewith.
(99.5) Code of Business Conduct and Ethics. Exhibit is
being filed herewith.
(99.6) Nominating and Corporate Governance Committee
Charter and Corporate Government Principles.
Exhibit is being filed herewith.
(99.7) Charter of the Human Resource and Compensation
Committee. Exhibit is being filed herewith.
(b) Exhibits
Exhibits to the Form 10-K required by Item 601 of Regulation S-K are
attached or incorporated herein by refinance as stated in the Index to
Exhibits.
(c) Financial Statements Excluded from Annual Report to Shareholders Pursuant
to Rule 14a3(b) Not applicable.
51
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 17, 2005 /s/ D. Scott Ingstad
-------------- --------------------------------------
D. Scott Ingstad
Chairman of the Board
President and Chief Executive Officer
Date: March 17, 2005 /s/ Kim K. Bartling
-------------- --------------------------------------
Kim K. Bartling, Executive Vice
President, Chief Operating Officer,
Treasurer and Director (Principal
Financial and Accounting Officer)
We, the undersigned directors of Iowa First Bancshares Corp. hereby severally
constitute D. Scott Ingstad and Kim K. Bartling, and each of them, our true and
lawful attorneys with full power to them, and each of them, to sign for us and
in our name, the capacities indicated below, the Annual Report on Form 10-K of
Iowa First Bancshares Corp. for the fiscal year ended December 31, 2004, to be
filed herewith and any amendments to said Annual Report, and generally do all
such things in our name and behalf in our capacities as directors to enable Iowa
First Bancshares Corp. to comply with the provisions of the Securities Exchange
Act of 1934 as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or either of them, to said Annual Report on Form 10-K and
any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------------------------------------------------------
/s/ Roy J. Carver, Jr. Director February 17, 2005
- ----------------------- -----------------
Roy J. Carver, Jr.
/s/ Stephen R. Cracker Director February 17, 2005
- ----------------------- -----------------
Stephen R. Cracker
/s/ Larry L. Emmert Director February 17, 2005
- ----------------------- -----------------
Larry L. Emmert
/s/ Craig R. Foss Director February 17, 2005
- ----------------------- -----------------
Craig R. Foss
/s/ Donald R. Heckman Director February 17, 2005
- ----------------------- -----------------
Donald R. Heckman
/s/ David R. Housley Director February 17, 2005
- ----------------------- -----------------
David R. Housley
/s/ Victor G. McAvoy Director February 17, 2005
- ----------------------- -----------------
Victor G. McAvoy
/s/ John "Jay" S. McKee Director February 17, 2005
- ----------------------- -----------------
John "Jay" S. McKee
/s/ Richard L. Shepley Director February 17, 2005
- ----------------------- -----------------
Richard L. Shepley
/s/ Beverly J. White Director February 17, 2005
- ----------------------- -----------------
Beverly J. White
52