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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2005
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission file number 2-89283
IOWA FIRST BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF IOWA 42-1211285
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer of
incorporation or organization) Identification No.)
300 East Second Street
Muscatine, Iowa 52761
----------------------------------------
(Address of principal executive offices)
563-263-4221
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
At May 6, 2005 there were 1,382,669 shares of the registrant's common stock
outstanding.
1
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE NO.
PART 1 Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets,
March 31, 2005 and December 31, 2004 3
Consolidated Condensed Statements of
Income, Three Months Ended
March 31, 2005 and 2004 4
Consolidated Condensed Statements of
Cash Flows, Three Months Ended
March 31, 2005 and 2004 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of
Operations 7-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Controls and Procedures 14
PART II Other Information
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
Signatures 15
2
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
2005 2004
------------------------
ASSETS
Cash and due from banks ................................ $ 16,528 $ 14,730
Interest-bearing deposits at financial institutions .... 7,533 8,395
Federal funds sold ..................................... 21,601 12,300
Investment securities available for sale ............... 35,439 30,325
Loans, net of allowance for loan losses March 31, 2005,
$3,399; December 31, 2004, $3,385 .................... 283,039 280,899
Bank premises and equipment, net ....................... 7,278 7,411
Accrued interest receivable ............................ 2,096 2,046
Life insurance contracts ............................... 4,485 4,438
Restricted investment securities ....................... 2,685 2,659
Other assets ........................................... 871 980
----------------------
TOTAL ASSETS ................................... $ 381,555 $ 364,183
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 50,974 $ 50,070
Interest bearing deposits .............................. 238,858 227,665
----------------------
TOTAL DEPOSITS ................................. 289,832 277,735
Note payable ........................................... 2,100 2,100
Securities sold under agreements to repurchase ......... 11,907 5,885
Federal Home Loan Bank advances ........................ 41,773 42,916
Treasury tax and loan open note ........................ 60 74
Junior subordinated debentures ......................... 4,125 4,125
Dividends payable ...................................... 346 345
Other liabilities ...................................... 1,957 1,769
----------------------
TOTAL LIABILITIES .............................. 352,100 334,949
----------------------
Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ......... 3,678 3,517
----------------------
STOCKHOLDERS' EQUITY
Common stock ........................................... 200 200
Additional paid-in capital ............................. 4,255 4,255
Retained earnings ...................................... 38,836 38,416
Accumulated other comprehensive income ................. 131 330
Less net cost of common shares acquired for the treasury (13,967) (13,967)
Less maximum cash obligation related to KSOP shares .... (3,678) (3,517)
----------------------
TOTAL STOCKHOLDERS' EQUITY ..................... 25,777 25,717
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 381,555 $ 364,183
======================
See notes to Consolidated Condensed Financial Statements.
3
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Condensed Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
2005 2004
------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees:
Taxable ............................................ $4,170 $4,073
Nontaxable ......................................... 65 43
Investment securities available for sale:
Taxable ............................................ 154 201
Nontaxable ......................................... 148 171
Federal funds sold ................................... 148 82
Restricted investment securities ..................... 24 11
Interest bearing deposits and other .................. 60 42
------------------
Total interest and dividend income ............. 4,769 4,623
------------------
INTEREST EXPENSE:
Deposits ............................................. 1,128 978
Note payable ......................................... 23 23
Other borrowed funds ................................. 546 669
Junior subordinated debentures ....................... 106 106
------------------
Total interest expense ......................... 1,803 1,776
------------------
Net interest income .................................. 2,966 2,847
Provision for loan losses .............................. 240 170
------------------
Net interest income after provision for
loan losses .................................... 2,726 2,677
------------------
Other income:
Trust department ..................................... 99 92
Service fees ......................................... 474 429
Investment securities gains, net ..................... 0 33
Gains on loans sold .................................. 52 20
Corporate owned life insurance ....................... 49 46
Other ................................................ 84 72
------------------
Total other income ............................. 758 692
------------------
Operating expenses:
Salaries and employee benefits ....................... 1,360 1,275
Occupancy expenses, net .............................. 203 196
Equipment expenses ................................... 167 155
Office supplies, printing, and postage ............... 93 85
Computer costs ....................................... 136 129
Advertising and business promotion ................... 37 35
Other operating expenses ............................. 374 296
------------------
Total operating expenses ....................... 2,370 2,171
------------------
Income before income taxes ........................... $1,114 $1,198
Income taxes ........................................... 348 375
------------------
Net income ............................................. $ 766 $ 823
==================
Net income per common share, basic and diluted ......... $ 0.55 $ 0.58
==================
Dividends declared per common share .................... $ 0.25 $ 0.24
====== ======
Comprehensive income ................................... $ 567 $ 827
====== ======
See notes to Consolidated Condensed Financial Statements.
4
Iowa First Bancshares Corp. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For The Three months Ended March 31, 2005 and 2004
(In Thousands)
(Unaudited)
2005 2004
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 766 $ 823
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from loans sold .......................................... 3,148 2,872
Loans underwritten ................................................ (2,729) (2,972)
Gains on loans sold ............................................... (52) (20)
Provision for loan losses ......................................... 240 170
Investment securities gains, net .................................. -- (33)
Depreciation ...................................................... 158 140
Amortization of premiums and accretion of discounts
on investment securities available for sale, net ................ 70 69
Net (increase) decrease in accrued interest receivable ............ (50) 178
Net (increase) decrease in other assets ........................... 109 (59)
Net increase in other liabilities ................................. 307 169
--------------------
Net cash provided by operating activities ................... $ 1,967 $ 1,337
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits
at financial institutions ......................................... $ 862 $ (1,603)
Net increase in federal funds sold .................................. (9,301) (13,361)
Proceeds from sales of available for sale securities ................ -- 1,151
Proceeds from maturities, calls and paydowns of available
for sale securities ............................................... 1,315 6,135
Purchases of available for sale securities .......................... (6,817) (3,034)
Net increase in loans ............................................... (2,747) (2,944)
Purchases of bank premises and equipment ............................ (25) (139)
Increase in cash value of life insurance contracts .................. (47) (44)
Net (purchases) sales of restricted investment securities ........... (26) 66
--------------------
Net cash (used in) investing activities ..................... $(16,786) $(13,773)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits ............. $ 904 $ (1,181)
Net increase in interest-bearing deposits ........................... 11,193 17,016
Net increase in securities sold under agreements to repurchase ...... 6,022 1,177
Net decrease in treasury tax and loan open note ..................... (14) (445)
Payments of advances from Federal Home Loan Bank .................... (1,143) (1,479)
Cash dividends paid ................................................. (345) (343)
Purchases of common stock for the treasury .......................... -- (340)
--------------------
Net cash provided by financing activities ................... $ 16,617 $ 14,405
---------------------
Net increase in cash and due from banks .................... $ 1,798 $ 1,969
Beginning cash and due from banks ................................... 14,730 12,988
-------------------
Ending cash and due from banks ...................................... $ 16,528 $ 14,957
====================
Supplemental Disclosures of Cash Flow Information, cash payments for:
Interest .......................................................... $ 1,653 $ 1,711
Income taxes ...................................................... 31 150
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on investment securities available for sale, net . (199) 4
(Increase) in maximum cash obligations related to KSOP shares ..... (161) (290)
Transfers of loans to other real estate owned ..................... -- 25
See notes to Consolidated Condensed Financial Statements.
5
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine (Muscatine) and First National
Bank in Fairfield (Fairfield). First National Bank of Muscatine has a total of
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. Some of these other services include
sweep accounts, lock-box deposits, debit cards, credit-related insurance,
internet banking, automated teller machines, telephone banking and investment
services through a third-party arrangement. The Company also owns the
outstanding stock of Iowa First Capital Trust I, which was capitalized in March
2001 for the purpose of issuing Company Obligated Mandatorily Redeemable
Preferred Securities.
Basis of Presentation:
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries, except Iowa First Capital Trust I, which does not
meet the criteria for consolidation. The consolidated financial statements are
unaudited and should be read in conjunction with the consolidated financial
statements contained in the 2004 Annual Report on Form 10-K. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and conform to predominant
practices within the banking industry. Management of the Company has made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
the consolidated financial statements. In the opinion of management, all
adjustments and normal recurring accruals considered necessary for a fair
presentation of the results of operations for the interim periods presented
herein have been included. Operating results for the three months ended March
31, 2005 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2005.
Reclassifications:
Certain amounts in the prior year financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform to current year
presentations.
Note 2. Capital Stock and Earnings Per Share
Common shares and preferred stock authorized total 6,000,000 shares and 500,000
shares, respectively. Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Diluted earnings per share is arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period. The average number of shares
of common stock outstanding for the three months ended March 31, 2005 was
1,382,669. The average number of shares of common stock outstanding for the
three months ended March 31, 2004 was 1,413,594. There were no common stock
equivalents in 2005 or 2004.
Note 3. Commitments and Contingencies
The Banks are parties to financial instruments with off-balance-sheet risk made
in the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
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.
6
Financial instruments whose contract amounts represent credit risk:
March 31, 2005 December 31, 2004
-----------------------------------
Commitments to extend credit ........... $40,417,000 $40,467,000
Standby letters of credit .............. 1,152,000 1,121,000
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 $10,189,000 and $18,143,000 at March 31, 2005 and December
31, 2004, 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 March 31, 2005
and December 31, 2004 no amounts have been recorded as liabilities for the
Banks' potential obligations under these guarantees.
The Company also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $67,000 and $434,000 as of March 31, 2005 and
December 31, 2004, respectively. These amounts are classified as loans held for
sale and are included in loans at the respective balance sheet dates.
Results of Operations:
Quarter ended March 31, 2005 compared with quarter ended March 31, 2004:
The Company recorded net income of $766,000 for the quarter ended March 31,
2005, compared with net income of $823,000 for the quarter ended March 31, 2004,
a decrease of $57,000 or 6.9%. This decrease in net income primarily resulted
from increased operating expenses and charge-off of a portion of a credit
relationship at our Fairfield bank and the associated replenishment of the
allowance for loan losses.
Basic and diluted earnings per share were $.55 for the three months ended March
31, 2005, $.03 or 5.2% less than the same period in 2004. The Company's
annualized return on average assets for the first quarter of 2005 was .82%
compared to .89% during the first quarter of the prior year. The Company's
annualized return on average equity for the three months ended March 31, 2005
and March 31, 2004 was 12.0% and 13.0%, respectively.
7
The distribution of average assets, liabilities and stockholders' equity and
interest rates, as well as interest differential was as follows (dollar amounts
in thousands and income and rates on fully taxable equivalent basis using
statutory tax rates in effect for the year presented):
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------------------------- ------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------
Assets
Taxable loans, net .................................. $273,487 $ 4,170 6.10% $261,603 $ 4,073 6.23%
Taxable investment securities available for sale .... 20,442 154 3.01 20,040 201 4.01
Nontaxable investment securities and loans .......... 18,790 323 6.88 18,848 324 6.88
Federal funds sold .................................. 25,075 148 2.36 37,318 82 0.88
Restricted investment securities .................... 2,676 24 3.59 3,002 11 1.47
Interest-bearing deposits at financial
institutions ...................................... 7,795 60 3.08 7,538 42 2.23
-------------------- -------------------
Total interest-earning assets .................. 348,265 4,879 5.60% 348,349 4,733 5.43%
-------- --------
Cash and due from banks ............................. 15,664 14,255
Bank premises and equipment, net .................... 7,337 6,745
Life insurance contracts ............................ 4,465 4,281
Other assets ........................................ 3,036 2,934
-------- --------
Total .......................................... $378,767 $376,564
======== ========
Liabilities
Deposits:
Interest-bearing demand ........................... $129,110 $ 352 1.10% $126,074 $ 178 0.57%
Time .............................................. 109,135 776 2.88 110,039 800 2.95
Note payable ........................................ 2,100 23 4.41 2,760 23 3.33
Other borrowings .................................... 51,753 546 4.28 57,087 669 4.75
Junior subordinated debentures ...................... 4,125 106 10.32 4,125 106 10.32
-------------------- -------------------
Total interest-bearing liabilities ............. 296,223 1,803 2.47% 300,085 1,776 2.40%
-------- --------
Noninterest-bearing deposits ........................ 51,057 45,884
Other liabilities ................................... 2,044 1,902
-------- --------
Total liabilities .............................. 349,324 347,871
Redeemable common stock held by KSOP ................ 3,574 3,065
Stockholders' Equity ................................ 25,869 25,628
-------- --------
Total .......................................... $378,767 $376,564
======== ========
Net interest earnings ............................... $ 3,076 $ 2,957
======== ========
Net Interest Margin (net interest earnings divided
by total interest-earning assets) ................. 3.53% 3.40%
====== ======
Nonaccruing loans are included in the average balance of loans. Loan fees are
not material.
8
The net interest margin increased to 3.53% during the first quarter of 2005
compared to 3.40% during the first quarter of 2004. The return on average
interest-earning assets increased 17 basis points (from 5.43% in 2004 to 5.60%
in 2005) while interest paid on average interest-bearing liabilities increased
only 7 basis points (from 2.40% in 2004 to 2.47% in 2005).
The Federal Reserve Bank Board increased interest rates five times during the
last seven months of 2004 and twice more the first three months of 2005. The
prime lending rate which was 4.00% at the beginning of 2004 had increased to
5.75% by March 31, 2005. Over the past few years, a period of historically low
interest rates, the Company has emphasized the utilization of 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 taxable loans during all of
2004 falling slightly less than the rates paid on interest-bearing liabilities
(38 basis points and 42 basis points, respectively). As market interest rates
have risen, rates received on taxable loans have decreased thirteen basis points
while rates paid on interest-bearing liabilities have increased seven basis
points when comparing the first quarter of 2005 with 2004. This result occurs
due, in large measure, 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 and the loan repricing date met. Additionally, the mix of loans
comprising the taxable loan portfolio, and pricing of new loan volume compared
to existing loan rates, impact the overall yield earned. The extent of these
impacts in the future will depend upon, among other things, the amount and
timing of future market interest rate hikes and competitive pressures.
Rates received on taxable investment securities available for sale have
decreased during the first quarter of 2005, compared to the first quarter of
2004, by 100 basis points. Over the same time period, rates paid on
interest-bearing liabilities increased seven basis points. This was largely due
to maturities and early calls of taxable investment securities coupled with
reinvestment at appreciably lower interest rates. This portfolio, however, with
an average maturity of only approximately two years may be able to reprice
higher if market interest rates remain at their current level or experience
further increases.
Rates received during the quarter ended March 31, 2005, versus the same quarter
of 2004, on nontaxable investment securities available for sale and loans
remained unchanged while rates paid on interest-bearing liabilities increased
seven basis points. Most of the nontaxable investment securities available for
sale were purchased when market interest rates were higher than rates currently
available, despite recent interest rate hikes. In the current interest rate
environment, when nontaxable investment securities mature or are sold, called,
or otherwise paid down, the reinvestment rate available is frequently lower than
the yield of the liquidating security.
The rate received on overnight federal funds sold to other banks increased 148
basis points during the first quarter of 2005, compared to the same quarter of
2004. This increase is primarily attributable to the monetary policy shift of
the Federal Reserve Bank which has caused overnight federal funds rates to
significantly rise. For the quarter ended March 31, 2005, average federal funds
sold to total average assets had been reduced to 6.6% from 9.9% during the same
quarter in 2004. These federal funds sold can be used to fund future loan
demand, deposit or other liability outflows, investment securities purchases, or
various other purposes as identified by management.
The rate earned on interest-bearing deposits at financial institutions
(primarily FDIC insured certificates of deposit) increased 85 basis points
during the first quarter of 2005 versus the same quarter of 2004, while the
average balance decreased $257,000. This asset category yielded 72 basis points
over federal funds sold with little, if any, credit risk. The average duration
of interest-bearing deposits at financial institutions was less than two years
during the quarter ended March 31, 2005.
During this period of rising market interest rates, the rates paid on
interest-bearing demand deposits rose 53 basis points. In contrast, the rates
paid on time deposits were actually reduced seven basis points when comparing
the first quarters of 2005 and 2004 as time deposits tend to reprice higher at a
slower pace than interest-bearing demand deposits due to their longer
maturities.
9
The rate paid on the note payable outstanding increased 108 basis points during
the first quarter of 2005 compared to the same quarter last year. This was the
result of seven increases during the last seven months of 2004 and first three
months of 2005 in the prime lending rate to which the note payable rate is tied.
The usage of wholesale funding sources (primarily Federal Home Loan Bank
advances), while mitigating intermediate and long-term interest rate risk,
tended to represent a relatively higher cost of funds than deposits for the
Company. The Company's average rate paid for such Federal Home Loan Bank
advances and other funds, however, was reduced by 47 basis points when comparing
the first quarters of 2005 and 2004. Management has reduced reliance on
wholesale funding sources as evidenced by the average balance in this category
declining over $5 million during the first quarter of 2005 compared to the first
quarter of 2004.
Intense competition for all types of loans and deposits tends to limit the
Company's ability to control pricing and other terms when dealing with
customers. Despite these limitations, the Company was able to increase the
overall net interest margin to 3.53% during the three months ended March 31,
2005, compared to 3.40% for the same period last year.
Provisions for loan losses were $240,000 and $170,000 for the three months ended
March 31, 2005 and March 31, 3004, respectively. Net loan charge-offs for the
quarter ended March 31, 2005 totaled $226,000 compared to net charge-offs of
$140,000 for the same quarter in 2004. The vast majority of net loan charge-offs
in 2005 was attributable to one borrower.
The allowance for possible loan losses is maintained at the level considered
adequate by management of the Banks to provide for probable losses in the
existing loan portfolio. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs. In determining the adequacy of
the allowance balance the Banks make continuous evaluations of the loan
portfolio and related off-balance sheet commitments, consider current economic
conditions, the composition of the loan portfolio, historical loan loss
experience, review of specific problem loans, the estimated net realizable value
or the fair value of the underlying collateral, and other factors. There can be
no assurance that loan losses will not exceed the estimated amounts or that the
company will not be required to make additional provisions for loan losses in
the future. Asset quality is a constant priority for the Company and its
subsidiary banks. Should the economic climate deteriorate, borrowers may
experience difficulty, and the level of non-performing, charge-offs, and
delinquencies could rise thus requiring further increases in the provision.
Nonaccrual loans totaled $1,662,000 at March 31, 2005, a very modest decrease of
$6,000 from December 31, 2004. There was a total of $38,000 other real estate
owned at March 31, 2005 compared to $77,000 at December 31, 2004. Loans past due
90 days or more and still accruing totaled $255,000, which was $48,000 or 23.2%
more than at year-end 2004. The allowance for possible loan losses of $3,399,000
at March 31, 2005, represented 1.2% of gross loans and 174% of total nonaccrual
loans, other real estate owned, and loans past due 90 days or more and still
accruing.
Other income results from the charges and fees collected by the Company from its
customers for various services performed, gross trust department revenue,
miscellaneous other income, 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 the first quarter of 2005
was $758,000; $66,000 or 9.5% more than the first quarter of 2004. Service fees,
particularly on deposit accounts, were the largest single area of growth in the
other income category, exhibiting an increase of $45,000 or 10.5%. Trust
department income rose $7,000 or 7.6% while gains on loans sold grew $32,000 or
160.0%. Income on corporate owned life insurance increased $3,000 or 6.5%.
Finally, miscellaneous other income increased $12,000 or 16.7%. No securities
gains were recognized during the first quarter of 2005 compared to $33,000 of
gains in 2004.
Operating expenses include all the costs incurred to operate the Company except
for interest expense, the loan loss provision and income taxes. For the quarter
ended March 31, 2005, salaries and employee benefits, the largest component of
operating expenses, increased $85,000 or 6.7% due to normal raises, incentives
and the rising cost of health care. Additionally, a new branch was opened in
December 2004 with the first quarter of 2005 reflecting the related operating
expenses, including salaries and benefits. Occupancy and equipment expenses
increased $19,000 or 5.4% as depreciation and property taxes rose. All other
operating expenses increased $95,000 or 17.4% due in large measure to the new
branch discussed above and final settlement in the first quarter of 2004 of a
non-recurring liability at an amount approximately $20,000 more advantageous to
the Company than previously anticipated and accrued for. Total operating
expenses increased $199,000 or 9.2% during the first quarter of 2005 versus the
same quarter last year. Increased costs of regulatory compliance and technology
spending continue to challenge the Company in its effort to control expenses
while maintaining strong productivity, efficiency, capacity and high quality
customer service.
10
Income tax expense for the quarter ended March 31, 2005 of $348,000 represented
31.2% of income before taxes. For the comparable quarter last year income tax
expense was 31.3% of income before tax.
The efficiency ratio, defined as noninterest expense, excluding the provision
for loan losses, as a percent of net interest income plus noninterest income,
was 63.6% and 61.3% for the three months ended March 31, 2005 and 2004,
respectively. The primary reasons for this change in the efficiency ratio are
discussed previously in this report.
Discussion and Analysis of Financial Condition
The Company's assets at March 31, 2005 totaled $381,555,000, an increase of
$17,372,000 or 4.8% from December 31, 2004. As of March 31, 2005, the Company
had $21,601,000 of federal funds sold compared to $12,300,000 at December 31,
2004. This increase resulted from growth in deposits and securities sold under
agreements to repurchase (see below for further discussion). These liquid
assets, federal funds sold, may be used to fund future loan growth, deposit or
other liability outflows, purchases of investment securities available for sale,
or various other purposes as identified by management.
At March 31, 2005, interest-bearing deposits at financial institutions
(primarily fully FDIC insured certificates of deposit) as well as some
interest-bearing demand accounts at various banking institutions totaled
$7,533,000 versus $8,395,000 at December 31, 2004. This decline was chiefly due
to the yield spreads available on new interest-bearing deposits being less than
Company established target spreads to alternative investments.
Total available for sale securities increased $5,114,000 or 16.9% during the
first three months of 2005 to total $35,439,000 at March 31, 2005. The Banks
emphasize purchase of securities with maturities of five years and less as such
purchases typically offer reasonable yields with limited credit risk as well as
limited interest rate risk. Additionally, selected securities with longer
maturities are owned in order to enhance overall portfolio yield without
significantly increasing risk. In the relatively low, but rising interest rate
environment which continued during the first quarter of 2005, the banks
purchased more securities than the total of securities that were sold, matured,
called, or paid down. However, most of the securities that were purchased had
rather short maturities or likely early call dates. Average taxable investment
securities available for sale had an average duration of only approximately two
years. Securities sold during the first quarter of 2005 and 2004 totaled none
and $1,151,000, respectively, and resulted in net gains recognized of none and
$33,000, respectively.
Net loans totaled $283,039,000 at March 31, 2005, an increase of $2,140,000 or
0.8% from December 31, 2004. Competition for high-quality loans remains intense
in all loan categories. The Company's first quarter 2005 proceeds from sales of
real estate loans in the secondary market totaled $3,148,000 versus $2,872,000
for the same period in 2004.
Total deposits at March 31, 2005, were $289,832,000, an increase of $12,097,000
or 4.4% from the balance at December 31, 2004. Certificates of deposit
represented on average for the three months ended March 31, 2005, approximately
38% of total deposits. Interest-bearing demand deposits, comprised of savings,
money market and NOW accounts, represented another 44% of average deposits. The
final 18% of average deposits were in noninterest-bearing accounts. Securities
sold under agreements to repurchase increased $6,022,000 (102.3%) to total
$11,907,000 as more corporate dollars were directed to this category. Advances
borrowed from the Federal Home Loan Bank declined by $1,143,000 from year-end
2004, totaling $41,773,000 at quarter end.
The note payable balance of $2,100,000 at March 31, 2005, was unchanged from the
balance at December 31, 2004. The next scheduled annual principal payment of
$600,000 is due at the end of the third quarter of 2005. This is a variable rate
revolving five-year term note priced at Prime Rate less one percent, with a
floor of 3.25% and a ceiling of 5.25%.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" refers to those assets and
liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
11
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative gap exists when
total interest-bearing liabilities are in excess of interest-earning assets.
Generally a positive repricing gap will result in increased net interest income
in a rising rate environment and decreased net interest income in a falling rate
environment. A negative repricing gap tends to produce increased net interest
income in a falling rate environment and decreased net interest income in a
rising rate environment. At March 31, 2005, rate sensitive liabilities exceeded
rate sensitive assets within a one year maturity range and, thus, the Company is
theoretically positioned to benefit from a decline in interest rates within the
next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change. Because the repricing gap position does not capture
these risks, Management utilizes simulation modeling to measure and manage the
rate sensitivity exposure of earnings. The Company's simulation model provides a
projection of the effect on net interest income of various interest rate
scenarios and balance sheet strategies.
Liquidity
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are varied,
but include general economic conditions, asset/liability mix, bank reputation,
future FDIC funding needs, changes in regulatory environment, and credit
standing. Assets which provide liquidity consist principally of loans, cash and
due from banks, interest-bearing deposits at financial institutions, investment
securities, and short-term investments such as federal funds. Maturities of
securities held for investment purposes and loan payments provide a constant
flow of funds available for cash needs. Additionally, liquidity can be gained by
the sale of loans or securities prior to maturity if such assets had previously
been designated as available for sale. Interest rates, relative to the rate paid
by the security or loan sold, along with the maturity of the security or loan,
are the major determinates of the price which can be realized upon sale.
The stability of the Company's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer deposits
tend to be small in size, diversified across a large base of individuals, and
are government insured to the extent permitted by law. Total deposits at March
31, 2005, were $289,832,000 or 76.0% of total liabilities and equity.
Federal funds sold overnight totaled $21,601,000 or 5.7% of March 31, 2005 total
assets. These federal funds sold may be used to fund loans as well as deposit
withdrawals, or for other purposes as defined by management.
Securities available for sale with a fair value totaling $35,439,000 at
quarter-end included net unrealized gains of approximately $209,000. These
securities may be sold in whole or in part to increase liquid assets, reposition
the investment portfolio, or for other purposes as defined by management.
Capital
Stockholders' equity increased $60,000 (0.2%) during the three months ended
March 31, 2005. The year-to-date increase included net income of $766,000,
decrease of $199,000 in accumulated other comprehensive income, $346,000 of
dividends declared to shareholders, and $161,000 increase in the maximum
obligation related to KSOP shares.
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a consistent system for
comparing capital positions of financial institutions and to take into account
the different inherent risks among financial institutions' assets and
off-balance-sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.
12
A comparison of the Company's capital as of March 31, 2005 with the requirements
to be considered adequately capitalized is presented below.
For Capital
Actual Adequacy Purposes
-----------------------------
Total capital to risk-weighted assets ......... 12.9% 8.00%
Tier 1 capital to risk-weighted assets ........ 11.7% 4.00%
Tier 1 capital to average assets .............. 8.7% 4.00%
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Trends, Events or Uncertainties
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. In the opinion of management, all such transactions,
with one exception, are on substantially the same terms, including interest
rates on loans and collateral, as those prevailing at the time for comparable
transactions with others, involve no more than normal risk of collectibility,
and present no other unfavorable features. One loan relationship, which resulted
in a first quarter 2005 net charge-off of $211,000, was with a related party of
a subsidiary bank director.
In the normal course of business, the Banks are involved in various legal
proceedings. In the current opinion of management, any liability resulting from
such proceedings would not have a material effect on the Company's financial
statements.
The Company has in the past from time to time purchased, as they became
available in the market, shares of its outstanding common stock for the
treasury. During the first quarter of 2005 and 2004 total shares purchased by
the Company for the treasury were none and 11,643, respectively.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT With
the exception of the historical information contained in this report, the
matters described herein may contain certain forward-looking statements with
respect to the Company's financial condition, results of operations, plans,
objectives, future performance and business. These forward-looking statements
are subject to certain risks and uncertainties, not all of which can be
predicted or anticipated. 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 that may cause actual results to differ materially from those
contemplated by the forward-looking statements herein include market conditions
as well as conditions affecting the banking industry generally and factors
having a specific impact on the Company, including but not limited to
fluctuations in interest rates and in the economy; the impact of laws and
regulations applicable to the Company and changes therein; the impact of
accounting pronouncements applicable to the Company and changes therein;
competitive conditions in the markets in which the Company operates, including
competition from banking and non-banking companies with substantially greater
resources; the Company's ability to control the composition of its loan
portfolio without adversely affecting interest income; the Company's dependence
on third party suppliers; and the Company's ability to respond to changes in
technology. Readers of this Form 10-Q should therefore not place undue reliance
on forward-looking statements.
Additional 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, those listed in the Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2004.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in the quantitative and qualitative market risks
since the prior year-end. Such risks were described in the Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2004.
Item 4. Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer (Chairman of the Board, President and CEO) and principal
financial officer (Executive Vice President, Chief Operating Officer &
Treasurer), of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There was no change in
the Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has no legal proceedings which are deemed material.
Item 2. Unregistered Sales of Equity Securties and Use of Proceeds
During the quarter ended March 31, 2005, the Company did not purchase any of its
own common stock.
Item 3. Defaults Upon Senior Securities
There have been no defaults upon senior securities by the Company.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held at its offices on April 21, 2005, the
shareholders elected the following individuals to the Board of Directors for the
indicated terms:
Votes in Favor Votes Withheld Term
-----------------------------------------------------
Craig R. Foss .......... 1,082,192 50 3 years
Donald R. Heckman ...... 969,672 112,570 3 years
D. Scott Ingstad ....... 1,082,192 50 3 years
Beverly J. White ....... 970,032 112,210 3 years
At this Annual Meeting the shareholders also ratified the election of McGladrey
& Pullen, LLP as independent registered public accounting firm for the fiscal
year ending December 31, 2005 with 968,812 votes in favor and 113,430 votes
against or withheld.
Item 5. Other Information
There has been no new information not previously disclosed requiring disclosure
under this item.
Item 6. Exhibits
(a) Exhibits
Exhibit 31.1 - Certification pursuant to Rule 13a-15(e) and 15d-15(e)
Exhibit 31.2 - Certification pursuant to Rule 13a-15(e) and 15d-15(e)
Exhibit 32.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
(Registrant)
May 16, 2005 /s/ D. Scott Ingstad
- ------------ -------------------------------
Date D. Scott Ingstad, Chairman of
the Board, President and CEO
May 16, 2005 /s/ Kim K. Bartling
- ------------ -------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
15