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, 1998 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)
An Iowa Corporation 42-1211285
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
300 East Second Street, Muscatine, Iowa 52761
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (319) 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)
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 1999, was $38,375,323. As of February 28, 1999,
1,532,424 shares of the Registrant's common stock were outstanding.
Documents incorporated by reference:
Portions of the registrant's 1998 Annual Report are incorporated in Parts I and
II of this Form 10-K. Portions of the registrant's Proxy Statement dated March
19, 1999 are incorporated in Part III of this Form 10-K.
<PAGE>
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Page
No.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Table I. Executive Officers of the Registrant
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Signatures
Index of Exhibits
<PAGE>
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS.
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.
On a full-time equivalent basis, year-end employment for the Company and its
subsidiary banks totaled 124 employees.
First National Bank of Muscatine has a total of five 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 and
savings 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 commercial banking business is highly competitive. Subsidiary banks compete
with other commercial banks and with other financial institutions, including
savings and loan associations, savings banks, mortgage banking companies, credit
unions and mutual funds. In recent years, competition also has increased from
institutions not subject to the same regulatory restrictions as banks and bank
holding companies.
The operations of the Company and its subsidiary banks are affected by state and
federal legislative changes and by policies of various regulatory authorities.
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956 (the "Act") and is subject to the supervision of, and regulation by,
the Board of Governors of the Federal Reserve System (the "Board"). Under the
Act, a bank holding company may engage in banking, managing or controlling
banks, furnishing or performing services for banks it controls, and conducting
activities that the Board has determined to be closely related to banking.
National banks are subject to the supervision of, and are examined by, the
Office of the Comptroller of the Currency. Both subsidiary banks of the Company
are members of the Federal Deposit Insurance Corporation, and as such, are
subject to examination thereby. In practice, the primary federal regulator makes
regular examinations of each subsidiary bank subject to its regulatory review or
participates in joint examinations with other federal regulators. Areas subject
to regulation by these authorities include capital levels, the allowance for
possible loan losses, investments, loans, mergers, issuance of securities,
payment of dividends, establishment of branches, and many other aspects of
operations.
Statistical information called for by this Item is contained in the Company's
1998 Annual Report to Shareholders which is incorporated by reference.
<PAGE>
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.
First National Bank of Muscatine conducts its operations from five 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 functions of the bank are conducted
at its main offices. Portions of the building are leased to commercial tenants.
During 1997, a branch was opened inside the 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.
Two locations, in addition to the new Wal-Mart branch, provide banking services
outside the Muscatine downtown area. The office at the Muscatine Mall is
approximately two miles northeast of the main bank. The facility contains 2,304
square feet of floor space in a one-story concrete and steel building. The
facility offers a walk-in lobby and night depository. The three-lane drive-up
facility of this branch is located approximately 500 feet west of the branch at
the parking lot of the mall. The building, drive-up facilities and real estate
are leased. The terms of the lease provide for monthly payments of $2,304 during
the current 5-year term of the lease. This lease expires on May 31, 1999.
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.
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 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.
The Company's facilities are well maintained and are suitable for the Company's
business operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company has no pending legal proceedings which are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
PART I, TABLE I
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
Family Position Business Experience
Name Age Relationship Position Held Since During Past Five Years
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
George A. Shepley 76 None Chairman of the Board 1983 President of the Company,
Chief Executive Officer 1983 January 1989 to 1996;
Director 1983 Chairman of the Board,
Chief Executive Officer
of the Company, 1983 to
present; Chairman of the
Board, 1987 to present,
President, 1963 to
January 1989, First
National Bank of
Muscatine; Chairman of
the Board, 1986 to
present, First National
Bank in Fairfield.
Kim K. Bartling 41 None Executive Vice President 1996 Executive Vice President,
Chief Operating Officer 1996 Chief Operating Officer
Treasurer 1988 and Treasurer of
Director 1994 the Company, December 1996 to
present;
Senior Vice President, Chief
Financial Officer and Treasurer
of the Company, April 1988 to
December 1996; Director
First National Bank of
Muscatine, 1989 to present;
Executive Vice President and
Chief Financial Officer, First
National Bank of Muscatine, 1996 to
present; Senior Vice President/Chief
Financial Officer, First National
Bank of Muscatine, 1987 to
1996; Director First National
Bank in Fairfield, 1990 to present.
D. Scott Ingstad 48 None President 1996 Director, 1990 to present, President,
Director 1990 1996 to present, of the Company;
Director, President and CEO of
First National Bank of Muscatine,
1990 to present.
Patricia R. 51 None Secretary 1986 Corporate Secretary of
Thirtyacre the Company, October 1986
to present.
</TABLE>
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The brokerage firms of Piper Jaffray Inc., Howe Barnes Investments, Inc., and
Meisrow Financial, Inc. make a market for the Company's common stock.
High and low common stock prices and dividends for the last two years were:
1998 by Dividend
Quarters High Low Per Share
- -----------------------------------------------------------------------
First ........................... $31.25 $31.00 $ 0.21
Second .......................... 32.00 30.00 0.21
Third ........................... 34.00 30.38 0.21
Fourth .......................... 32.50 30.50 0.21
Total Dividend Paid ............. $ 0.84
1997 by Dividend
Quarters High Low Per Share
- -----------------------------------------------------------------------
First ........................... $25.50 $20.50 $ 0.19
Second .......................... 27.50 25.50 0.19
Third ........................... 27.50 27.50 0.19
Fourth .......................... 30.00 27.00 0.19
Total Dividend Paid ............. $ 0.76
The above quotations were furnished by the brokerage firms that serve as market
makers for the Company's stock, or as of each year-end, an independent appraisal
of the stock if higher. 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 on pages 40 - 51 of this Form 10-K; and Note 9 to the Company's
Consolidated Financial Statements in the Company's 1998 Annual Report to
Shareholders which is incorporated by reference, pages 30 - 32 of this Form
10-K), capital requirements, and the Company's financial condition.
As of February 28, 1999, the Company had approximately 470 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.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item is contained in the Company's 1998
Annual Report to Shareholders which is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item is contained in the Company's 1998
Annual Report to Shareholders which is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is contained in the Company's 1998
Annual Report to Shareholders which is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item is contained in the Company's 1998 Proxy
Statement which is incorporated by reference.
Director Compensation
The annual retainer that each outside Director of the Company received in 1998
was $5,300. The Company paid $100 for attendance at each committee meeting and
special Board of Directors meeting. During 1998, each Director of the Company
served as Director and member of committees for subsidiary boards and
committees, with the exception of Mr. Carver who served only as a Director of
the Company. The annual retainer fee paid to each outside subsidiary Director
was $4,000, plus $50 to $150 for attendance at each committee meeting. Executive
officers who also serve on the Board of Directors do not receive such retainer
or committee fees.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is contained in the Company's 1998 Proxy
Statement which is incorporated by reference.
ITEM 12. SECURITY OWNERHSIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this Item is contained in the Company's 1998 Proxy
Statement which is incorporated 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.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(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 1998 Annual Report to Shareholders of the
Company:
Page
Consolidated balance sheets -- dated December 31,
1998 and 1997.
Consolidated statements of income -- years ended
December 31, 1998, 1997, and 1996.
Consolidated statements of stockholders' equity -- years
ended December 31, 1998, 1997, and 1996.
Consolidated statements of cash flows - years ended
December 31, 1998, 1997, and 1996.
Notes to consolidated financial statements.
Opinion of independent accountants.
(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 notes
thereto.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last
quarter of the period covered by this report.
(c) Exhibits.
The following exhibits are attached pursuant to Item 601 of
Regulation S-K:
(13) Registrant's 1998 Annual Report to Shareholders
(20) Registrant's Proxy Statement dated March 19, 1999
(24) Power of Attorney
(27) Financial Data Schedule
See Exhibit Index on page 11 hereof for a complete list of management contracts
and arrangements required by this item and all other Exhibits filed or
incorporated by reference as a part of this report.
<PAGE>
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 12, 1999 /s/ George A. Shepley
-------------- ----------------------
George A. Shepley
Chairman of the Board
Date: March 12, 1999 /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 George A. Shepley and Kim 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 names, the capacities indicated below, the Annual Report on Form 10-K of
Iowa First Bancshares Corp. for the fiscal year ended December 31, 1998, 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 18, 1999
- ----------------------
Roy J. Carver, Jr.
/s/ Larry L. Emmert Director February 18, 1999
- ----------------------
Larry L. Emmert
/s/ Craig R. Foss Director February 18, 1999
- ----------------------
Craig R. Foss
/s/ Donald R. Heckman Director February 18, 1999
- ----------------------
Donald R. Heckman
/s/ Dean H. Holst Director February 18, 1999
- ----------------------
Dean H. Holst
/s/ D. Scott Ingstad Director February 18, 1999
- ----------------------
D. Scott Ingstad
/s/ Victor G. McAvoy Director February 18, 1999
- ----------------------
Victor G. McAvoy
/s/ Beverly J. White Director February 18, 1999
- ----------------------
Beverly J. White
<PAGE>
ITEM 14 (a) (3) - INDEX OF EXHIBITS
Exhibit Page
(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.
(13) Registrant's 1998 Annual Report to
Shareholders
(20) Registrant's Proxy Statement Dated
March 19, 1999
(21) Subsidiaries of Registrant Incorporated by reference to
Exhibit 21 to the registrant's
Annual Report on Form 10-K for
the fiscal year ended
December 31, 1995.
(24) Power of Attorney
(27) Financial Data Schedule
IOWA FIRST BANCSHARES CORP.
ANNUAL REPORT
December 31, 1998
<PAGE>
IOWA FIRST BANCSHARES CORP.
STOCKHOLDER INFORMATION AS OF DECEMBER 31, 1998
Market Makers
A market for Iowa First Bancshares Corp. common stock is made by the brokerage
firms of Piper Jaffray, Inc., Howe Barnes Investments, Inc., and Mesirow
Financial, Inc.
Stock Prices Information
The table below shows the reported high and low bid prices of the common stock
during the years ended December 31, 1998 and 1997. The stock prices listed below
were obtained from the market makers or, as of each year-end, an independent
appraisal of the stock, if higher.
1998 High Low
- --------------------------------------------
First Quarter 31.25 31.00
Second Quarter 32.00 30.00
Third Quarter 34.00 30.38
Fourth Quarter 32.50 30.50
1997 High Low
- --------------------------------------------
First Quarter 25.50 20.50
Second Quarter 27.50 25.50
Third Quarter 27.50 27.50
Fourth Quarter 30.00 27.00
Annual Meeting of Stockholders
The Annual Meeting of the Stockholders of Iowa First Bancshares Corp. will be
held at 2:00 p.m., April 15, 1999 at the corporate offices located at 300 East
Second Street, Muscatine, Iowa 52761. Stockholders are encouraged to attend.
Annual Report on Form 10-K
Copies of the Iowa First Bancshares Corp. annual report on Form 10-K and
exhibits, filed with the Securities and Exchange Commission, are available to
stockholders without charge by writing:
Iowa First Bancshares Corp.
300 East Second Street
Muscatine, Iowa 52761
Attention: Patricia R. Thirtyacre, Corporate Secretary
Investor Information
Stockholders, investors and analysts interested in additional information may
contact Mr. Kim K. Bartling, Executive Vice President, Chief Operating Officer
and Treasurer (319) 262-4216 or Mr. George A. Shepley, Chairman and Chief
Executive Officer (319) 262-4200.
<PAGE>
To Our Shareholders:
Net income for the year ended December 31, 1998, was $3,282,000 or $2.02 per
share compared to $3,280,000 or $1.82 the prior year. Contributing to the strong
results were the sizable growth in other noninterest income of $179,000 (10.6%),
as well as management's ability to control noninterest expenses which grew only
1.1% during 1998.
As reported during 1998, the Company purchased approximately 16.5% of the
outstanding shares of Iowa First Bancshares Corp. from our largest shareholder
and his related interests. The total interest expense on the loans used to
partially fund this transaction was $368,000 which reduced net income by
$243,000. However, the purchase of these shares, and the resultant financial
leverage, benefited all of the remaining shareholders and was the principal
reason earnings per share for 1998 were $2.02 compared to only $1.82 the prior
year. This represents an earnings per share increase of 11%. Also, in large
measure due to this stock repurchase, the return on average equity increased
from 12.33% in 1997 to 14.18% in 1998. We are very pleased with these financial
outcomes.
The major physical improvements reported to you in last year's annual report
have been excellent investments. The activity at our Muscatine Wal-Mart branch
has exceeded our expectations, particularly in our ability to generate loans.
The relocation of the downtown branch in Muscatine has also been very well
received by our customers and has proven to be a wise decision. Our branch in
Fairfield, which is located in front of Wal-Mart, is enjoying some activity but
has not experienced the level of loan demand projected in our business plans.
Management is currently considering a plan to expand the lending function and
market penetration of this branch. We are encouraged by the results to date and
future prospects of these facilities. Last year we reported the costs associated
with the construction, staffing, and other expenses encountered opening these
locations. Additionally, significant financial and human resources have been
devoted over the past two years to the Muscatine Bank's efforts in expanding and
enhancing its sales culture and computer systems. The results to date have
justified our decisions to expend the amounts needed to position ourselves for
the future.
Evidence of our success is another year of substantial asset, deposit, and loan
growth. Total assets as of December 31, 1998 were $345,411,000 compared to
$305,783,000 as of December 31, 1997, an increase of approximately $40,000,000
or 13%. Over the same period, deposits grew $19,000,000 (8%) and net loans
increased over $41,000,000 or 20%. Year-end 1998 net loans totaled over
$250,000,000, a new milestone for the Company.
<PAGE>
Advances from the Federal Home Loan Bank have continued to be a significant
source of funding as well as an effective interest rate risk management tool.
Such advances totaled nearly $48,000,000 at year-end 1998. Net recoveries on
loans previously charged-off were $58,000. Loan quality remained good as
evidenced by total nonaccrual and loans past due ninety days or more of only .4%
of net loans. Modest improvement was achieved in the efficiency ratio to 60.75%
for the current year as opposed to 61.10% the prior year. Due to the interest
expense discussed earlier, we were unable to record a greater reduction in this
ratio. Becoming more efficient is one of the Company's goals for 1999.
Please refer to page four for an explanation of what constitutes the efficiency
ratio. Please refer to Management's Discussion and Analysis section of this
report for a more detailed analysis of important issues and trends.
The bid price of Iowa First Bancshares Corp. stock as of December 31, 1998, was
$31.00, a 7.8% increase from the prior year-end. This price represents a price
to book value of 234% and a price to trailing twelve months earnings of 15.3
times. Please refer to the following graph for a summary of the stock price
performance over the last few years.
The omitted graphical presentation reflected the stock price per share for the
period December 31, 1993 through 1998. The data points used in the omitted graph
were as follows:
1993 1994 1995 1996 1997 1998
--------------------------------------------
Dollars per share ...... 11.33 13.00 16.67 20.00 28.75 31.00
All prices are stock split adjusted and are the highest outside broker bid or,
beginning 12/31/93, the appraisal price if higher.
The Board of Directors declared cash dividends during 1998 of $1,344,000,
further evidence of the Directors' commitment to enhance the return to
stockholders consistent with prudent administration of the Company. The graph
below summarizes the cash dividends declared per share for the past several
years.
The omitted graphical presentation reflected the cash dividends per share for
the period December 31, 1993 through 1998. The data points used in the omitted
graph were as follows:
1993 1994 1995 1996 1997 1998
---------------------------------------------
Cash dividends per share ..... .3833 .4500 .5333 .6800 .7800 .8400
All figures are stock split adjusted and reflect the three-for-one stock split
which occurred in July 1996.
The total annual investment return (change in stock price plus dividends) for
the past one, three, and five-year periods has been 11%, 26%, and 25%,
respectively. The graphs below show the growth in total assets and loans over
the past several years.
The omitted graphical presentation was a bar graph showing the total assets
and total loans for the period December 31, 1994 through 1998. The data points
used in the omitted graph were as follows:
1994 1995 1996 1997 1998
-------------------------------------
(In Millions)
Total assets ....... 253.8 272.8 280.5 305.8 345.4
Total loans ........ 162.0 169.3 183.4 208.7 250.3
<PAGE>
Year-end 1998 total assets exceeded year-end 1994 total assets by $91,611,000
for total growth of 36%. Over the same time period loans grew $88,303,000 or
55%.
As we look to 1999, there is, as always, much uncertainty in forecasting the
future direction of interest rates and the economy. The 1999 budgets for the
Company and its subsidiaries project stable to falling market interest rates and
a positive business climate. If rates or the economy vary significantly from
these assumptions, it will become more challenging to maintain or increase net
interest income, and consequently, net income.
On behalf of management and the Board of Directors, we thank you for your
investment in Iowa First Bancshares Corp. and your continued support. We look
forward to hearing from you should you have comments or questions.
/s/ George A. Shepley
--------------------------------
George A. Shepley
Chairman & CEO
/s/ Kim K. Bartling
--------------------------------
Kim K. Bartling
Executive Vice President
COO and Treasurer
<PAGE>
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
<TABLE>
BALANCE SHEET (at year end) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loans ...................................................................... $250,318,000 $208,683,000 $183,438,000
Allowance for loan losses ...................................................... 2,787,000 2,604,000 2,803,000
Deposits and securities sold under
agreements to repurchase .................................................... 267,491,000 247,041,000 243,805,000
Federal Home Loan Bank advances ................................................ 47,973,000 26,468,000 7,473,000
Total assets ................................................................... 345,411,000 305,783,000 280,461,000
Stockholders' equity ........................................................... 20,309,000 28,625,000 25,198,000
STATEMENT OF INCOME (for the year)
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income ............................................................ $ 10,691,000 $ 10,656,000 $ 10,434,000
Provision for loan losses ...................................................... 125,000 4,000 160,000
Other income ................................................................... 1,875,000 1,696,000 1,764,000
Other operating expense ........................................................ 7,633,000 7,547,000 6,857,000
Income before income taxes ..................................................... 4,808,000 4,801,000 5,181,000
Income taxes ................................................................... 1,526,000 1,521,000 1,716,000
Net income ..................................................................... 3,282,000 3,280,000 3,465,000
PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------------
Net income, basic .............................................................. $ 2.02 $ 1.86 $ 2.02
Net income, diluted ............................................................ 2.02 1.82 1.95
Book value at year-end ......................................................... 13.25 15.62 14.48
Stock price at year-end (greater of bid or
appraised price) ............................................................ 31.00 28.75 20.00
Cash dividends declared during the year ........................................ 0.84 0.78 0.68
Cash dividends declared as a percentage
of net income ............................................................... 42% 43% 35%
KEY RATIOS
- -----------------------------------------------------------------------------------------------------------------------------
Return on average assets ....................................................... 1.00% 1.13% 1.26%
Return on average stockholders' equity ......................................... 14.18 12.33 14.46
Net interest margin-tax equivalent ............................................. 3.65 4.11 4.25
Average stockholders' equity to average
assets ...................................................................... 7.02 9.16 8.75
Total capital to risk-weighted assets .......................................... 9.14 14.44 14.20
Efficiency ratio (all operating expenses, excluding the provision for loan
losses, divided by the sum of net interest income
and other income) ........................................................... 60.75 61.10 56.21
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
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, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years ended December 31, 1998, 1997, and 1996. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997, and 1996, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 22, 1999, except for Note 7 as to which
the date is March 1, 1999
<PAGE>
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (Note 1) ............................................... $ 14,273,000 $ 12,639,000
Interest-bearing deposits at financial institutions ............................ 135,000 87,000
Investment securities available for sale (Note 3) .............................. 58,711,000 65,496,000
Federal funds sold and other overnight investments ............................. 12,555,000 9,795,000
Loans, net (Note 4) ............................................................ 250,318,000 208,683,000
Bank premises and equipment, net (Note 5) ...................................... 5,858,000 6,055,000
Accrued interest receivable .................................................... 2,763,000 2,501,000
Other assets ................................................................... 798,000 527,000
----------------------------
Total assets ..................................................... $345,411,000 $305,783,000
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing ...................................................... $ 44,430,000 $ 38,212,000
Interest-bearing ......................................................... 217,416,000 204,570,000
----------------------------
Total deposits (Note 6) .......................................... 261,846,000 242,782,000
Notes payable (Note 7) ...................................................... 7,250,000 - -
Securities sold under agreements to repurchase (Note 8) ..................... 5,645,000 4,259,000
Federal Home Loan Bank advances (Note 8) .................................... 47,973,000 26,468,000
Dividends payable ........................................................... 320,000 374,000
Treasury tax and loan open note (Note 8) .................................... 163,000 1,456,000
Other liabilities ........................................................... 1,905,000 1,819,000
----------------------------
Total liabilities ................................................ 325,102,000 277,158,000
----------------------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 9):
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 .................................................. 200,000 200,000
Additional paid-in capital .................................................. 4,408,000 4,440,000
Retained earnings ........................................................... 25,460,000 23,522,000
Accumulated other comprehensive income ...................................... 708,000 463,000
Less cost of common shares acquired for the treasury,
1998, 300,005; 1997, none ................................................ (10,467,000) - -
----------------------------
Total stockholders' equity ....................................... 20,309,000 28,625,000
----------------------------
Total liabilities and stockholders' equity ....................... $345,411,000 $305,783,000
============================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans:
Taxable ..................................... $19,044,000 $16,464,000 $14,981,000
Nontaxable .................................. 176,000 224,000 264,000
Interest and dividends on investment securities:
Taxable ..................................... 2,633,000 3,246,000 3,237,000
Nontaxable .................................. 848,000 732,000 605,000
Interest on federal funds sold and other
overnight investments ....................... 870,000 480,000 921,000
Other .......................................... 19,000 12,000 24,000
-------------------------------------
Total interest income ............... 23,590,000 21,158,000 20,032,000
-------------------------------------
Interest expense:
Interest on deposits ........................... 9,676,000 9,058,000 8,980,000
Interest on notes payable ...................... 368,000 - - - -
Interest on other borrowed funds ............... 2,855,000 1,444,000 618,000
--------------------------------------
Total interest expense .............. 12,899,000 10,502,000 9,598,000
-------------------------------------
Net interest income ................. 10,691,000 10,656,000 10,434,000
Provision for loan losses (Note 4) ................ 125,000 4,000 160,000
-------------------------------------
Net interest income after
provision for loan losses ........... 10,566,000 10,652,000 10,274,000
-------------------------------------
Other income:
Trust department ............................... 343,000 328,000 340,000
Service fees ................................... 1,131,000 975,000 1,017,000
Investment securities gains, net ............... 18,000 - - 4,000
Other .......................................... 383,000 393,000 403,000
-------------------------------------
Total other income .................. 1,875,000 1,696,000 1,764,000
-------------------------------------
Operating expenses:
Salaries and employee benefits ................. 4,323,000 4,276,000 4,077,000
Occupancy expenses, net ........................ 700,000 699,000 579,000
Equipment expenses ............................. 604,000 472,000 373,000
Office supplies, printing, and postage ......... 419,000 399,000 399,000
Computer costs ................................. 407,000 414,000 374,000
Advertising and business promotion ............. 163,000 157,000 163,000
Other operating expenses ....................... 1,017,000 1,130,000 892,000
-------------------------------------
Total operating expenses ............ $ 7,633,000 $ 7,547,000 $ 6,857,000
-------------------------------------
Income before income taxes .......... $ 4,808,000 $ 4,801,000 $ 5,181,000
Income taxes (Note 11) ............................ 1,526,000 1,521,000 1,716,000
-------------------------------------
Net income .......................... $ 3,282,000 $ 3,280,000 $ 3,465,000
=====================================
Weighted average common shares .................... 1,628,447 1,758,883 1,712,574
Weighted average common and common
equivalent shares, assuming dilution ........... 1,628,447 1,801,022 1,776,680
Net income per common share (Note 12):
Basic .......................................... $ 2.02 $ 1.86 $ 2.02
=====================================
Diluted ........................................ $ 2.02 $ 1.82 $ 1.95
=====================================
Dividends declared per share ...................... $ 0.84 $ 0.78 $ 0.68
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
Common Stock Additional
---------------------- Paid-In Retained
Number Amount Capital Earnings
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 .............................. 1,800,000 $ 200,000 $ 3,800,000 $19,326,000
Comprehensive income:
Net income ........................................ - - - - - - 3,465,000
Other comprehensive income, net of tax,
unrealized (losses) on securities available for
sale, net of reclassification adjustment (Note 2) - - - - - - - -
Comprehensive income
Cash dividends declared, $.68 per share .............. - - - - - - (1,170,000)
Purchase of common stock for the treasury ............ - - - - - - - -
Sale of common stock from the treasury to the ESOP ... - - - - 50,000 - -
Issuance of 45,885 shares of treasury stock upon
exercise of stock options ......................... - - - - 22,000 - -
--------------------------------------------------
Balance, December 31, 1996 .............................. 1,800,000 $ 200,000 $3,872,000 $21,621,000
Comprehensive income:
Net income ........................................ - - - - - - 3,280,000
Other comprehensive income, net of tax,
unrealized gains on securities available for
sale, net of reclassification adjustment
(Note 2) ....................................... - - - - - - - -
Comprehensive income
Cash dividends declared, $.78 per share .............. - - - - - - (1,379,000)
Purchase of common stock for the treasury ............ - - - - - - - -
Sale of common stock to the ESOP ..................... 4,615 - - 120,000 - -
Issuance of 95,590 shares upon exercise of stock
options ............................................ 27,814 - - 448,000 - -
--------------------------------------------------
Balance, December 31, 1997 .............................. 1,832,429 $ 200,000 $4,440,000 $23,522,000
Comprehensive income:
Net income ........................................ - - - - - - 3,282,000
Other comprehensive income, net of tax,
unrealized gains on securities available for
sale, net of reclassification adjustment
(Note 2) ........................................ - - - - - - - -
Comprehensive income
Cash dividends declared, $.84 per share .............. - - - - - - (1,344,000)
Purchase of common stock for the treasury ............ - - - - - - - -
Sale of common stock to the ESOP ..................... - - - - (32,000) - -
Other sales of common stock .......................... - - - - - - - -
--------------------------------------------------
Balance, December 31, 1998 .............................. 1,832,429 $ 200,000 $4,408,000 $25,460,000
==================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
Accumulated
Other
Compre-
hensive
Income
Unrealized
Gain On
Securities
Available Treasury Stock Compre-
For ----------------------- hensive
Sale, Net Number Amount Income Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ....................... $ 229,000 84,237 $ 522,000 $23,033,000
Comprehensive income:
Net income ..................................... - - - - - - $3,465,000 3,465,000
Other comprehensive income, net of tax,
unrealized (losses) on securities available
for sale, net of reclassification adjustment
(Note 2)...................................... (148,000) - - - - (148,000) (148,000)
----------
Comprehensive income .............. $3,317,000
==========
Cash dividends declared, $.68 per share .......... - - - - - - (1,170,000)
Purchase of common stock for the treasury ........ - - 25,500 483,000 (483,000)
Sale of common stock from the treasury to the ESOP - - (4,400) (38,000) 88,000
Issuance of 45,885 shares of treasury stock upon
exercise of stock options ...................... - - (45,885) (391,000) 413,000
----------------------------------- -----------
Balance, December 31, 1996 ....................... $ 81,000 59,452 $ 576,000 $25,198,000
Comprehensive income:
Net income ................................... - - - - - - $3,280,000 3,280,000
Other comprehensive income, net of tax,
unrealized gains on securities available for
sale, net of reclassification adjustment
(Note 2) ................................... 382,000 - - - - 382,000 382,000
----------
Comprehensive income ................... $3,662,000
==========
Cash dividends declared, $.78 per share ........ - - - - - - (1,379,000)
Purchase of common stock for the treasury ...... - - 8,324 174,000 (174,000)
Sale of common stock to the ESOP ............... - - - - - - 120,000
Issuance of 95,590 shares upon exercise of stock
options ...................................... - - (67,776) (750,000) 1,198,000
----------------------------------- -----------
Balance, December 31, 1997 ....................... $ 463,000 - - $ - - $28,625,000
Comprehensive income
Net income ..................................... - - - - - - $3,282,000 3,282,000
Other comprehensive income, net of tax,
unrealized gains on securities available for
sale, net of reclassification adjustment
(Note 2) ..................................... 245,000 - - - - 245,000 245,000
----------
Comprehensive income ................... $3,527,000
==========
Cash dividends declared, $.84 per share - - - - - - (1,344,000)
Purchase of common stock for the treasury ...... - - 308,199 10,753,000 (10,753,000)
Sale of common stock to the ESOP ............... - - (8,064) (282,000) 250,000
Other sales of common stock .................... - - (130) (4,000) 4,000
----------------------------------- -----------
Balance, December 31, 1998 ....................... $ 708,000 300,005 $10,467,000 $20,309,000
=================================== ===========
</TABLE>
<PAGE>
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................. $ 3,282,000 $ 3,280,000 $ 3,465,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from loans sold to FHLMC ........................................ 925,000 572,000 5,526,000
Loans underwritten for FHLMC ............................................. (918,000) (568,000) (5,515,000)
Gains on loans sold to FHLMC ............................................. (7,000) (4,000) (11,000)
Provision for loan losses ................................................ 125,000 4,000 160,000
Investment securities gains, net ......................................... (18,000) - - (4,000)
Depreciation ............................................................. 631,000 520,000 376,000
Deferred income taxes .................................................... 12,000 46,000 (269,000)
Amortization of premiums and accretion
of discounts on investment securities, net ............................. 134,000 188,000 223,000
Change in assets and liabilities:
(Increase) in accrued interest ......................................... (262,000) (168,000) (50,000)
Net (increase) decrease in other assets ................................ (271,000) (267,000) 212,000
Increase (decrease) in other liabilities ............................... (73,000) (58,000) 99,000
-----------------------------------------
Net cash provided by operating activities ........................ 3,560,000 3,545,000 4,212,000
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits at financial institutions ....................................... (48,000) 464,000 (551,000)
Net (increase) decrease in federal funds sold
and other overnight deposits ............................................. (2,760,000) (2,532,000) 17,437,000
Proceeds from sales, maturities, calls, and
paydowns of available for sale securities ................................ 22,161,000 26,578,000 21,167,000
Purchase of available for sale securities ................................... (15,100,000) (24,032,000) (28,514,000)
Net (increase) in loans ..................................................... (41,760,000) (25,249,000) (14,256,000)
Purchases of bank premises and equipment .................................... (434,000) (2,049,000) (560,000)
------------------------------------------
Net cash (used in) investing activities .......................... $(37,941,000) $(26,820,000) $ (5,277,000)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits ..................... $ 6,218,000 $ (5,233,000) $ 8,369,000
Net increase (decrease) in interest-bearing deposits ........................ 12,846,000 9,663,000 (5,970,000)
Proceeds from notes payable ................................................. 9,250,000 - - - -
Repayment of notes payable .................................................. (2,000,000) - - - -
Net increase (decrease) in securities sold under agreements to repurchase ... 1,386,000 (1,194,000) (1,361,000)
Net increase (decrease) in treasury tax and loan open note .................. (1,293,000) (488,000) 419,000
Advances from Federal Home Loan Bank ........................................ 22,650,000 20,900,000 4,100,000
Payments of advances from Federal Home Loan Bank ............................ (1,145,000) (1,905,000) (25,000)
Cash dividends paid ......................................................... (1,398,000) (1,336,000) (1,085,000)
Purchases of common stock for the treasury .................................. (10,753,000) (174,000) (483,000)
Issuance of common stock .................................................... 254,000 1,318,000 501,000
-----------------------------------------
Net cash provided by financing activities ........................ 36,015,000 21,551,000 4,465,000
-----------------------------------------
Net increase (decrease) in cash and due from banks ............... 1,634,000 (1,724,000) 3,400,000
Cash and due from banks:
Beginning ................................................................... 12,639,000 14,363,000 10,963,000
-----------------------------------------
Ending ...................................................................... $14,273,000 $12,639,000 $14,363,000
=========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest ................................................................. $12,965,000 $10,460,000 $ 9,596,000
Income taxes ............................................................. 1,223,000 1,283,000 1,483,000
Supplemental Schedule of Noncash Investing and Financing Activities, change in
accumulated other comprehensive income, unrealized gain (loss) on securities
available for sale, net ..................................................... 245,000 382,000 (148,000)
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
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. First National Bank of Muscatine has a total of five locations
in Muscatine, Iowa. First National Bank in Fairfield has two locations in
Fairfield, Iowa. Each bank is engaged in the general commercial banking
business and provides full service banking to individuals and businesses,
including checking, savings and other 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.
Significant accounting policies:
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles 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. A significant estimate which is particularly
susceptible to change in a short period of time relates to the determination
of the allowance for loan losses. Actual results could differ from those
estimates.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, First National Bank of Muscatine and First National Bank in
Fairfield (Banks). 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 cash items
in process of clearing. Cash flows from interest-bearing deposits at
financial institutions, federal funds sold and other overnight investments,
loans, deposits, securities sold under agreements to repurchase, and 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 $1,719,000 and $1,651,000 at December 31, 1998
and 1997, 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, 1998 or 1997.
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.
<PAGE>
The allowance for loan losses is maintained at the level considered adequate
by management of the Banks to provide for losses that can be reasonably
anticipated. 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.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using the interest method. For all other loans, interest is
accrued daily on the outstanding balances. Accrual of interest is
discontinued on a loan when management believes, after considering collection
efforts and other factors, that the borrower's financial condition is such
that collection of interest is doubtful. Generally this occurs when the
collection of interest or principal has become 90 days past due.
Direct loan origination fees and costs are generally being deferred and the
net amount amortized as an adjustment of the related loan's or lease's yield.
The Banks generally amortize these amounts over the contractual life.
Commitment fees based upon a percentage of customers' unused lines of credit
and fees related to standby letters of credit are not significant.
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.
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.
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.
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.
Earnings per share: 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.
Current accounting developments: The Financial Accounting Standards Board has
issued Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities" which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. Management believes that adoption of this Statement will not
have an effect on the consolidated financial statements.
<PAGE>
The Financial Accounting Standards Board has issued SFAS No. 134 "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" which is effective for
fiscal quarters beginning after December 15, 1998. This Statement requires
that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests as held to maturity, available for
sale, or trading based on its ability and intent to sell or hold those
investments. Management believes that adoption of this Statement will not
have an effect on the consolidated financial statements.
Note 2. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income". This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be disclosed in the financial statements.
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 is comprised as follows:
<TABLE>
Tax
Before Expense Net
Tax (Benefit) of Tax
---------------------------------
Year Ended December 31, 1998
---------------------------------
<S> <C> <C> <C>
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year .................. $ 410,000 $ 154,000 $ 256,000
Less, reclassification adjustment for gains
included in net income ......................................... 18,000 7,000 11,000
---------------------------------
Other comprehensive income ............................. $ 392,000 $ 147,000 $ 245,000
=================================
Year Ended December 31, 1997
---------------------------------
Unrealized gains on securities available for sale:
Unrealized holding gains arising during
the year ....................................................... $ 608,000 $ 226,000 $ 382,000
Less, reclassification adjustment for gains
included in net income ......................................... - - - - - -
---------------------------------
Other comprehensive income ............................. $ 608,000 $ 226,000 $ 382,000
=================================
Year Ended December 31, 1996
---------------------------------
Unrealized gains (losses) on securities available
for sale:
Unrealized holding (losses) arising during
the year ....................................................... $(230,000) $ (85,000) $(145,000)
Less, reclassification adjustment for gains
included in net income ......................................... 4,000 1,000 3,000
---------------------------------
Other comprehensive income ............................. $(234,000) $ (86,000) $(148,000)
=================================
</TABLE>
<PAGE>
Note 3. Investment Securities Available For Sale
The amortized cost and fair value of investment securities available for sale as
of December 31, 1998 and 1997 are summarized as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
December 31, 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ...................... $11,500,000 $ 212,000 $ - - $11,712,000
U.S. government agencies ...................... 17,732,000 286,000 (4,000) 18,014,000
Mortgage-backed securities .................... 4,135,000 47,000 (1,000) 4,181,000
State and political subdivisions .............. 18,083,000 562,000 (4,000) 18,641,000
Corporate obligations, including stock ........ 6,131,000 32,000 - - 6,163,000
------------------------------------------------------
$57,581,000 $ 1,139,000 $ (9,000) $58,711,000
======================================================
December 31, 1997
-------------------------------------------------------
U.S. Treasury securities $12,985,000 $ 124,000 $ (10,000) $13,099,000
U.S. government agencies 18,845,000 189,000 (15,000) 19,019,000
Mortgage-backed securities 9,241,000 48,000 (17,000) 9,272,000
State and political subdivisions 17,437,000 399,000 (7,000) 17,829,000
Corporate obligations, including stock 6,250,000 28,000 (1,000) 6,277,000
------------------------------------------------------
$64,758,000 $ 788,000 $ (50,000) $65,496,000
======================================================
</TABLE>
The amortized cost and fair value of investment securities available for sale as
of December 31, 1998, 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. Stocks are also excluded from the maturity
categories as there is no fixed maturity date.
Amortized Fair
Cost Value
-------------------------
Securities available for sale:
Due in one year or less ..................... $12,796,000 12,867,000
Due after one year through five years ....... 23,325,000 23,819,000
Due after five years through ten years ...... 12,028,000 12,438,000
Due after ten years ......................... 2,729,000 2,838,000
Mortgage-backed securities .................. 4,135,000 4,181,000
Stock ....................................... 2,568,000 2,568,000
-------------------------
$57,581,000 58,711,000
=========================
Investment securities with a carrying value of $18,085,000 and $20,638,000 as of
December 31, 1998 and 1997, respectively, are pledged on public deposits,
securities sold under agreements to repurchase, trust deposits and for other
purposes as required by law.
Proceeds from the sale of securities available for sale were $2,199,000 during
1998, $7,125,000 during 1997, and $1,005,000 during 1996. Gross gains and losses
realized on sales in 1998 were $21,000 and $3,000, respectively. Gross gains and
losses realized on sales in 1997 were $7,000 and $7,000, respectively. Gross
gains and losses realized on sales in 1996 were $4,000 and none, respectively.
<PAGE>
Note 4. Loans
The composition of loans is summarized as follows:
December 31,
----------------------------
1998 1997
----------------------------
Commercial ..................................... $ 94,724,000 $ 79,968,000
Agricultural ................................... 26,685,000 20,494,000
Real estate:
Construction ................................ 2,598,000 2,120,000
Mortgage .................................... 95,535,000 76,904,000
Tax exempt, mortgage ........................ 2,337,000 3,118,000
Installment .................................... 31,268,000 28,686,000
Other .......................................... 100,000 456,000
----------------------------
Total loans ...................... 253,247,000 211,746,000
Less:
Allowance for loan losses ................... 2,787,000 2,604,000
Unearned discount ........................... 142,000 459,000
----------------------------
$250,318,000 $208,683,000
============================
Loans considered to be impaired are as follows:
<TABLE>
December 31,
----------------------
1998 1997
----------------------
<S> <C> <C>
Impaired loans for which an allowance has been provided ........ $ 338,000 $ 702,000
Impaired loans for which no allowance has been provided ........ 319,000 442,000
----------------------
Total loans determined to be impaired ............ $ 657,000 $1,144,000
----------------------
Allowance provided for impaired loans, included in the allowance
for loan losses ............................................. $ 95,000 $ 99,000
======================
</TABLE>
The average recorded investment in impaired loans during 1998 and 1997 was
$854,000 and $1,203,000, respectively. Interest income on impaired loans of
$20,000, $12,000, and $19,000 was recognized for cash payments received in 1998,
1997, and 1996, respectively.
Nonaccruing loans totaled $657,000 and $1,144,000 at December 31, 1998 and 1997,
respectively. Interest income in the amount of $54,000, $90,000, and $66,000
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, 1998,
1997, and 1996, respectively. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 1998,
1997, and 1996 totaled $20,000, $12,000, and $19,000, respectively.
Changes in the allowance for loan losses are summarized as follows:
Year Ended December 31,
----------------------------------
1998 1997 1996
----------------------------------
Beginning balance ...................... $2,604,000 $2,803,000 $2,309,000
Provisions charged to expense........ 125,000 4,000 160,000
Recoveries .......................... 250,000 80,000 496,000
----------------------------------
2,979,000 2,887,000 2,965,000
Loans charged off ................... 192,000 283,000 162,000
----------------------------------
Ending balance ......................... $2,787,000 $2,604,000 $2,803,000
==================================
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 $9,672,000 as of December 31,
1998, $13,319,000 as of December 31, 1997, and $14,735,000 as of December 31,
1996. Custodial escrow balances maintained in connection with these loans were
approximately $67,000, $77,000, and $89,000 at December 31, 1998, 1997, and
1996, respectively. All loans sold are without recourse.
<PAGE>
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows:
Years of
Useful
Lives December 31,
-----------------------
1998 1997
------------------------------
Bank premises (including land of $631,000 and
$596,000, respectively) ..................... 10-40 $6,970,000 $ 7,291,000
Leasehold improvements ......................... 5-15 201,000 201,000
Furniture and equipment ........................ 5-15 2,256,000 2,818,000
-----------------------
9,427,000 10,310,000
Accumulated depreciation ....................... 3,569,000 4,255,000
-----------------------
$5,858,000 $ 6,055,000
=======================
Note 6. Deposits
The composition of deposits is summarized as follows:
December 31,
---------------------------
1998 1997
---------------------------
Demand ..................................... $ 84,351,000 $ 74,434,000
NOW accounts ............................... 36,062,000 31,666,000
Savings .................................... 21,965,000 21,007,000
Time certificates .......................... 119,468,000 115,675,000
---------------------------
$261,846,000 $242,782,000
===========================
Included in interest-bearing deposits are certificates of deposit with a minimum
denomination of $100,000 totaling $28,508,000 and $23,590,000 as of December 31,
1998 and 1997, respectively. Maturities of these certificates are summarized as
follows:
December 31,
-------------------------
1998 1997
-------------------------
One to three months ............................. $ 9,818,000 $ 6,640,000
Three to six months ............................. 5,839,000 4,864,000
Six to twelve months ............................ 7,230,000 8,446,000
Over twelve months .............................. 5,621,000 3,640,000
-------------------------
$28,508,000 $23,590,000
=========================
At December 31, 1998, the scheduled maturities of all certificates of deposit
are as follows:
Year ending December 31:
1999 $ 79,366,000
2000 28,293,000
2001 8,030,000
2002 2,904,000
2003 and thereafter 875,000
------------
$119,468,000
============
<PAGE>
Note 7. Notes Payable
Notes payable are summarized as follows:
<TABLE>
December 31,
----------------------
1998 1997
----------------------
<S> <C> <C>
Term note payable to a bank, interest at 1.5% plus adjusted interbank rate
(7.28% as of December 31, 1998), due May 4,
1999, secured by stock of subsidiary banks of the Company ...................... $1,750,000 $ - -
Term note payable to a bank, interest fixed for five years
at 1.75% plus rate of five-year U.S. Treasury note
(7.36% as of December 31, 1998), due May 4, 2003,
with annual installments of $550,000 starting May 4,
1999, secured by stock of subsidiary banks of the Company ...................... 5,500,000 - -
----------------------
$7,250,000 $ - -
======================
</TABLE>
The notes payable include certain restrictive covenants. The Company is in
compliance with these covenants or they have been waived as of March 1, 1999.
Notes payable are due as follows:
Year ending December 31:
1999 $2,300,000
2000 550,000
2001 550,000
2002 550,000
2003 3,300,000
----------
$7,250,000
==========
Note 8. Other Borrowed Funds
Borrowings consist of the following:
December 31,
------------------------
1998 1997
------------------------
Securities sold under agreements to repurchase $ 5,645,000 $ 4,259,000
Federal Home Loan Bank advances .............. 47,973,000 26,468,000
Treasury tax and loan open note .............. 163,000 1,456,000
<PAGE>
The treasury tax and loan open note represents overnight borrowings from the
Federal Reserve Bank system. 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, 1998,
all but $1,021,000 of the securities sold under agreements to repurchase mature
within twelve months, with $309,000 maturing December 31, 2000 and $712,000
maturing June 30, 2001.
The average and maximum amount outstanding along with the rates of interest
related to securities sold under agreements to repurchase are as follows:
<TABLE>
1998 1997
------------------------
<S> <C> <C>
Daily average amount outstanding during the year ........... $ 5,412,000 $ 4,061,000
Maximum outstanding as of any month end .................... 6,388,000 4,754,000
Weighted average interest rate during the year ............. 5.02% 4.98%
Weighted average interest rate at the end of the year ...... 4.87% 5.26%
Securities underlying the agreements at the end of the year:
Carrying value .......................................... $10,698,000 $ 9,167,000
Fair value .............................................. 10,698,000 9,167,000
</TABLE>
Advances from the Federal Home Loan Bank as of December 31, 1998 bear interest
and are due as follows:
Interest Rate Balance Due
--------------------------------
Year ending December 31:
1999 6.99% $ 250,000
2000 5.70% - 6.73% 3,150,000
2001 5.32% - 7.09% 3,600,000
2002 6.02% - 7.13% 5,150,000
2003 5.52% - 6.67% 3,450,000
2004 and thereafter 5.00% - 7.39% 32,373,000
-----------
$47,973,000
===========
Nearly all of the advances maturing in 2004 and thereafter have options which
allow the Company the right, but not the obligation, to "put" the advances back
to the Federal Home Loan Bank.
As of December 31, 1997 advances from the Federal Home Loan Bank in the amount
of $26,468,000 had interest rates between 5.32% and 7.39% and various maturity
dates between 1998 and 2012.
First mortgage loans of approximately $61,995,000 and $39,702,000 as of December
31, 1998 and 1997, respectively, are pledged as collateral on Federal Home Loan
Bank advances.
Note 9. 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.
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Entities to maintain minimum amounts and ratios (set forth in the
table below) 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, 1998, that the
Entities meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency (OCC) categorized the Banks as well capitalized
under the regulatory framework for prompt corrective action. As of December 31,
1998 the Company is categorized as adequately capitalized. To be categorized as
adequately or well capitalized the Company and Banks 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 OCC notification that
management believes have changed the Banks' category.
The Company and Banks' actual capital amounts and ratios are presented in the
following table.
<TABLE>
To be Well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk Weighted
Assets):
Consolidated ................... $21,793,000 9.1% $19,069,000 >8.0% $23,836,000 >10.0%
First National Bank of Muscatine 21,224,000 12.5 13,612,000 >8.0 17,015,000 >10.0
First National Bank in Fairfield 7,810,000 11.7 5,360,000 >8.0 6,699,000 >10.0
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated ................... 19,006,000 8.0 9,534,000 >4.0 14,302,000 >6.0
First National Bank of Muscatine 19,095,000 11.2 6,806,000 >4.0 10,209,000 >6.0
First National Bank in Fairfield 7,301,000 10.9 2,680,000 >4.0 4,019,000 >6.0
Tier 1 Capital (to Average Assets):
Consolidated ................... 19,006,000 5.6 13,697,000 >4.0 17,121,000 >5.0
First National Bank of Muscatine 19,095,000 7.7 9,906,000 >4.0 12,383,000 >5.0
First National Bank in Fairfield 7,301,000 7.7 3,771,000 >4.0 4,714,000 >5.0
As of December 31, 1997
Total Capital (to Risk Weighted
Assets):
Consolidated ................... $30,106,000 14.4% $16,683,000 >8.0% $20,853,000 >10.0%
First National Bank of Muscatine 19,625,000 13.4 11,696,000 >8.0 14,620,000 >10.0
First National Bank in Fairfield 8,472,000 14.4 4,716,000 >8.0 5,894,000 >10.0
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated ................... 27,502,000 13.2 8,342,000 >4.0 12,512,000 >6.0
First National Bank of Muscatine 17,794,000 12.2 5,848,000 >4.0 8,772,000 >6.0
First National Bank in Fairfield 7,953,000 13.5 2,358,000 >4.0 3,537,000 >6.0
Tier 1 Capital (to Average Assets):
Consolidated ................... 27,502,000 9.1 12,138,000 >4.0 15,172,000 >5.0
First National Bank of Muscatine 17,794,000 8.2 8,637,000 >4.0 10,797,000 >5.0
First National Bank in Fairfield 7,953,000 9.3 3,435,000 >4.0 4,294,000 >5.0
</TABLE>
Current banking law limits the amount of dividends banks can pay. As of December
31, 1998, amounts available for payment of dividends were $4,431,000 and
$556,000 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.
<PAGE>
Note 10. Employee Benefits
The Company and bank subsidiaries sponsor an Employee Stock Ownership Plan with
401(k) provisions. This plan owns 85,973 shares of the Company as of December
31, 1998 and covers substantially all employees who work at least 1,000 hours
per year. 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. 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, 1998, 1997, and 1996 were $294,000, $279,000, and
$266,000, respectively.
The Company had an Incentive Stock Option and Nonstatutory Stock Option Plan
(hereinafter "plan") for directors and senior officers which was terminated on
December 31, 1997. The purpose of the plan was to promote the interests of the
Company and its stockholders by strengthening its ability to attract and retain
key officers and directors by furnishing additional incentives whereby such
officers and directors may be encouraged to acquire, or to increase their
acquisition of, the Company's common stock, thus maintaining their personal and
proprietary interest in the Company's continued success and progress. The plan
was administered by the Human Resource Committee of the Company.
The option price was 100% of the fair market value of the common stock ($9 per
share) of the Company at the grant date. All options granted under the plan
vested ratably over five years and were required to be exercised within five
years of the grant date. The Company retained Right of First Refusal on all
shares issued pursuant to the plan. The activity of the plan for the years ended
December 31, 1997 and 1996 was as follows:
Number of Shares
1997 1996
------------------------
Options, beginning of year ................. 97,365 143,250
Terminated and canceled ................. 1,875 - -
Exercised ............................... 95,490 45,885
-----------------------
Options, end of year ....................... - - 97,365
=======================
Options exercisable, end of year ........... - - 68,115
=======================
Amounts in the above schedule have been adjusted to reflect the three-for-one
stock split which occurred in July 1996.
Note 11. Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
------------------------------------
1998 1997 1996
------------------------------------
Currently paid or payable ............... $1,514,000 $1,475,000 $1,985,000
Deferred income taxes ................... 12,000 46,000 (269,000)
------------------------------------
$1,526,000 $1,521,000 $1,716,000
====================================
<PAGE>
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:
<TABLE>
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
% Of % Of % Of
Dollar Pretax Dollar Pretax Dollar Pretax
Amount Income Amount Income Amount Income
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
income tax expense ...... $ 1,683,000 35.0% $ 1,680,000 35.0% $ 1,813,000 35.0%
Effect of graduated tax rate (48,000) (1.0) (48,000) (1.0) (52,000) (1.0)
Tax exempt interest
income, net ............. (315,000) (6.6) (295,000) (6.1) (269,000) (5.2)
State income taxes, net .... 159,000 3.3 158,000 3.3 171,000 3.3
Other ...................... 47,000 1.0 26,000 0.5 53,000 1.0
--------------------------------------------------------------
$ 1,526,000 31.7% $ 1,521,000 31.7% $ 1,716,000 33.1%
==============================================================
</TABLE>
Net deferred taxes, included in other assets or other liabilities on the
consolidated balance sheets, consist of the following components as of December
31:
1998 1997
---------------------
Deferred tax assets:
Allowance for loan losses ............... $ 237,000 $ 202,000
Other real estate owned ................. 19,000 - -
---------------------
256,000 202,000
---------------------
Deferred tax liabilities:
Securities available for sale ........... (422,000) (275,000)
Bank premises and equipment ............. (97,000) (32,000)
Unrealized bond accretion ............... (9,000) (29,000)
Net deferred loan origination fees ...... (54,000) (33,000)
---------------------
(582,000) (369,000)
---------------------
Net deferred tax (liabilities) $(326,000) $(167,000)
=====================
The net change in 1998 and 1997 deferred income taxes includes $147,000 and
$226,000, respectively, which is reflected in stockholders' equity.
Note 12. Earnings Per Share
The following information was used in the computation of basic and diluted
earnings per share:
<TABLE>
Year Ended December 31,
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Basic and diluted earnings, net income ......... $3,282,000 $3,280,000 $3,465,000
==================================
Weighted average common shares outstanding ..... 1,628,447 1,758,883 1,712,574
Weighted average common shares issuable upon
conversion of stock options ................. - - 42,139 64,106
----------------------------------
Weighted average common and common
equivalent shares ................ 1,628,447 1,801,022 1,776,680
==================================
</TABLE>
<PAGE>
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 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.
Contract
Amount
-----------
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit ................................. $32,556,000
Standby letters of credit .................................... 1,470,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon and some of the commitments will be sold to other
financial intermediaries if drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's credit worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third-party. Those guarantees are
primarily issued to support public and private borrowing arrangements and extend
for no more than one year. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers.
Concentration of credit risk: The Banks grant commercial, real estate, and
installment loans to customers in the Banks' primary market area which includes
Muscatine and Jefferson Counties in Iowa. The Banks have 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 Banks' policies to file financing statements
and mortgages covering collateral pledged.
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.
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. As of December 31, 1998, none
of these loans are classified as nonaccrual, past due, or restructured.
The activity in such loans during the years ended December 31, 1998 and 1997 is
as follows:
1998 1997
-----------------------------
Balance, beginning ........... $ 7,473,000 $ 7,084,000
Additions ................. 11,773,000 11,385,000
Deductions (payments) ..... (10,554,000) (10,996,000)
-----------------------------
Balance, ending .............. $ 8,692,000 $ 7,473,000
=============================
<PAGE>
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 amounts reported in the balance sheets for cash
and due from banks and interest-bearing deposits at financial institutions
equal their fair values.
Investment securities: Fair values for investment securities 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.
Federal funds sold and other overnight investments: The carrying amounts
reported in the balance sheets for federal funds sold and other overnight
investments equal their fair value.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for certain mortgage loans (i.e., one-to-four family
residential) are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. The fair values for other loans (i.e., commercial real
estate and rental property mortgage loans, commercial and industrial loans,
and agricultural 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.
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: For variable rate notes payable, the carrying amount is a
reasonable estimate of fair value. For fixed rate notes payable, fair values
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on similar borrowings.
Securities sold under agreements to repurchase and treasury tax and loan open
note: For such short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Federal Home Loan Bank advances: The fair value is estimated using discounted
cash flow analysis, employing interest rates currently being quoted by the
Federal Home Loan Bank.
<PAGE>
Commitments to extend credit and standby letters of credit: The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. As of December 31, 1998 and 1997, these
items are immaterial in nature.
The carrying amounts and fair values of financial instruments at December 31,
1998 and 1997 are summarized as follows:
<TABLE>
Carrying Amounts Fair Values
-------------------------- --------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks .... $ 14,273,000 $ 12,639,000 $ 14,273,000 $ 12,639,000
Interest-bearing deposits at
financial institutions .. 135,000 87,000 135,000 87,000
Investment securities ...... 58,711,000 65,496,000 58,711,000 65,496,000
Federal funds sold ......... 12,555,000 9,795,000 12,555,000 9,795,000
Loans, net of allowance .... 250,318,000 208,683,000 247,140,000 205,748,000
Accrued interest receivable 2,763,000 2,501,000 2,763,000 2,501,000
Financial Liabilities:
Deposits ................... $261,846,000 $242,782,000 $259,073,000 $237,410,000
Notes payable .............. 7,250,000 - - 7,250,000 - -
Securities sold under
agreements to repurchase 5,645,000 4,259,000 5,645,000 4,259,000
Federal Home Loan Bank
advances ................ 47,973,000 26,468,000 49,320,000 25,951,000
Treasury tax and loan open
note .................... 163,000 1,456,000 163,000 1,456,000
Accrued interest payable ... 895,000 961,000 895,000 961,000
</TABLE>
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 1998 1997
------------------------
Cash ................................................. $ 491,000 $ 2,457,000
Investment in subsidiaries ........................... 27,699,000 26,859,000
Other assets ......................................... 37,000 67,000
------------------------
Total assets ........................... $28,227,000 $29,383,000
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable ..................................... $ 7,250,000 $ - -
Other liabilities ................................. 668,000 758,000
------------------------
7,918,000 758,000
------------------------
STOCKHOLDERS' EQUITY:
Common stock ...................................... 200,000 200,000
Additional paid-in capital ........................ 4,408,000 4,440,000
Retained earnings ................................. 25,460,000 23,522,000
------------------------
30,068,000 28,162,000
Accumulated other comprehensive income ............ 708,000 463,000
Less cost of common shares acquired for the
treasury ........................................ 10,467,000 - -
------------------------
Total stockholders' equity ............. 20,309,000 28,625,000
------------------------
Total liabilities and stockholders'
equity ............................... $28,227,000 $29,383,000
========================
<PAGE>
STATEMENTS OF INCOME
(Parent Company Only)
<TABLE>
Year Ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Operating revenue:
Dividends received from subsidiaries ......... $3,100,000 $ 800,000 $2,000,000
Management fees and other income ............. 323,000 356,000 305,000
--------------------------------------
Total operating revenue ........... 3,423,000 1,156,000 2,305,000
Interest expense ................................ 368,000
Operating expenses .............................. 687,000 659,000 613,000
--------------------------------------
Income before income tax (credits),
and equity in subsidiaries'
undistributed net income .......... 2,368,000 497,000 1,692,000
Applicable income tax (credits) ................. (319,000) (180,000) (155,000)
--------------------------------------
2,687,000 677,000 1,847,000
Equity in subsidiaries' undistributed net income 595,000 2,603,000 1,618,000
--------------------------------------
Net income ........................ $3,282,000 $3,280,000 $3,465,000
======================================
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS
(Parent Company Only)
<TABLE>
Year Ended December 31,
---------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net income .................................. $3,282,000 $3,280,000 $3,465,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in subsidiaries' undistributed net
income ................................. (595,000) (2,603,000) (1,618,000)
Amortization and depreciation ............ 13,000 10,000 10,000
Change in assets and liabilities:
(Increase) decrease in other assets .... 17,000 (7,000) - -
Increase (decrease) in other liabilities (36,000) (101,000) 50,000
----------------------------------------
Net cash provided by operating
activities ....................... 2,681,000 579,000 1,907,000
----------------------------------------
CASH FLOWS (USED IN) INVESTING Activities,
purchases of other assets ................... - - (26,000) (31,000)
----------------------------------------
CASH FLOWS from FINANCING Activities
Proceeds from notes payable ................. 9,250,000 - - - -
Repayment of notes payable .................. (2,000,000) - - - -
Cash dividends paid ......................... (1,398,000) (1,336,000) (1,085,000)
Purchases of common stock for the treasury .. (10,753,000) (174,000) (483,000)
Issuance of common stock .................... 254,000 1,318,000 501,000
-----------------------------------------
Net cash (used in) financing
activities ....................... (4,647,000) (192,000) (1,067,000)
-----------------------------------------
Net increase (decrease) in cash .. (1,966,000) 361,000 809,000
Cash:
Beginning ................................... 2,457,000 2,096,000 1,287,000
----------------------------------------
Ending ...................................... $ 491,000 $2,457,000 $2,096,000
========================================
</TABLE>
<PAGE>
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities held to maturity ......... $ - - $ - - $ - - $ - - $ 53,659,000
Investment securities available for sale ....... 58,711,000 65,496,000 67,622,000 60,728,000 15,791,000
Loans, net ..................................... 250,318,000 208,683,000 183,438,000 169,342,000 162,015,000
Total assets ................................... 345,411,000 305,783,000 280,461,000 272,830,000 253,800,000
Deposits ....................................... 261,846,000 242,782,000 238,352,000 235,953,000 229,023,000
Notes payable .................................. 7,250,000 - - - - - - - -
Other borrowings ............................... 53,781,000 32,183,000 14,870,000 11,737,000 2,248,000
Stockholders' equity ........................... 20,309,000 28,625,000 25,198,000 23,033,000 20,672,000
Interest income ................................ 23,590,000 21,158,000 20,032,000 18,942,000 17,155,000
Interest expense ............................... 12,899,000 10,502,000 9,598,000 9,051,000 7,452,000
Net interest income ............................ 10,691,000 10,656,000 10,434,000 9,891,000 9,703,000
Provision for loan losses ...................... 125,000 4,000 160,000 45,000 65,000
Investment securities gains, net ............... 18,000 4,000 3,000 9,000
Other income ................................... 1,857,000 1,696,000 1,760,000 1,573,000 1,673,000
Operating expenses ............................. 7,633,000 7,547,000 6,857,000 6,877,000 7,141,000
Income before income taxes ..................... 4,808,000 4,801,000 5,181,000 4,545,000 4,179,000
Income taxes ................................... 1,526,000 1,521,000 1,716,000 1,495,000 1,304,000
Net income ..................................... 3,282,000 3,280,000 3,465,000 3,050,000 2,875,000
Per common share (*):
Net income:
Basic .................................... $ 2.02 $ 1.86 $ 2.02 $ 1.77 $ 1.63
Diluted .................................. 2.02 1.82 1.95 1.71 1.60
Cash dividends declared ..................... 0.84 0.78 0.68 0.53 0.45
Cash dividends declared as a percentage of
net
income ................................... 42% 43% 35% 31% 28%
Weighted average common shares ................. 1,628,447 1,758,883 1,712,574 1,724,028 1,760,205
Weighted average common and common equivalent
shares, assuming dilution ................... 1,628,447 1,801,022 1,776,680 1,779,021 1,797,872
</TABLE>
* All per share and weighted average common share information has been
adjusted to reflect the three-for-one stock split which occurred in July
1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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) and First National Bank in Fairfield (Fairfield).
Total average assets of the Company increased 13.5% in 1998, 6.0% in 1997, and
5.9% in 1996. 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):
<TABLE>
1998 1997 1996
------------------------- -------------------------- --------------------------
Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable loans, net ................. $228,491 $19,044 8.33 $190,778 $16,464 8.63 $168,970 $14,981 8.87%
Taxable investment securities
available for sale ............... 42,694 2,633 6.17 53,114 3,246 6.11 53,531 3,237 6.05
Nontaxable investment securities and
loans ........................... 20,374 1,552 7.62 18,431 1,448 7.86 16,442 1,317 8.01
Federal funds sold and other
overnight investments ............ 16,083 889 5.53 8,628 492 5.70 16,902 945 5.59
----------------- ----------------- ------------------
Total interest-earning assets 307,642 24,118 7.84 270,951 21,650 7.99 255,845 20,480 8.00
------- ------- -------
Cash and due from banks ............ 12,462 11,254 11,110
Bank premises and equipment, net ... 5,976 5,316 4,298
Other assets ....................... 3,511 2,863 2,674
-------- -------- --------
Total ........................ $329,591 $290,384 $273,927
======== ======== ========
LIABILITIES
Deposits:
Interest-bearing demand ......... $ 95,243 $ 2,996 3.15 $ 87,926 $ 2,686 3.05 $ 91,735 $ 2,803 3.06
Time ............................ 120,762 6,680 5.53 114,805 6,372 5.55 110,732 6,177 5.58
Notes payable ...................... 5,040 368 7.30 - - - - - - - - - - - -
Other borrowings ................... 45,762 2,855 6.24 22,909 1,444 6.30 11,435 618 5.40
----------------- ----------------- ------------------
Total interest-bearing
liabilities ................ 266,807 12,899 4.83 225,640 10,502 4.65 213,902 9,598 4.49
------- ------- ------
Noninterest-bearing deposits ....... 37,756 35,930 34,106
Other liabilities .................. 1,879 2,212 1,960
-------- -------- --------
Total liabilities ............ 306,442 263,782 249,968
STOCKHOLDERS' EQUITY ............... 23,149 26,602 23,959
-------- -------- --------
Total ........................ $329,591 $290,384 $273,927
======== ======== ========
Net interest earnings .............. $11,219 $11,148 $10,882
======= ======= =======
Net yield (net interest
earnings divided by total
interest-earning assets) ... 3.65% 4.11% 4.25%
===== ===== =====
</TABLE>
The net interest margin decreased in 1998 (from 4.11% in 1997 to 3.65% in 1998).
The return on average interest-earning assets decreased fifteen basis points
(from 7.99% in 1997 to 7.84% in 1998) and interest paid on average
interest-bearing liabilities increased eighteen basis points (from 4.65% in 1997
to 4.83% in 1998). Average interest-earnings assets to total assets remained the
same in 1998 as 1997 at 93.3%.
<PAGE>
The net interest margin decreased in 1997 (from 4.25% in 1996 to 4.11% in 1997).
The return on average interest-earning assets decreased one basis point (from 8%
in 1996 to 7.99% in 1997) and interest paid on average interest-bearing
liabilities increased sixteen basis points (from 4.49% in 1996 to 4.65% in
1997). Average interest-earning assets to total average assets decreased to
93.3% during 1997 compared to 93.4% the previous year.
The net interest margin decreased in 1996 (from 4.28% in 1995 to 4.25% in 1996).
The return on average interest-earning assets decreased three basis points (from
8.03% in 1995 to 8.00% in 1996) and interest paid on average interest-bearing
liabilities increased five basis points (from 4.44% in 1995 to 4.49% in 1996).
Average interest-earning assets to total average assets increased to 93.4%
during 1996 compared to 93.2% the previous year.
<PAGE>
FINANCIAL CONDITION:
Investment Securities
Investment securities at December 31, 1998 were approximately 20% U.S.
Treasury securities, 31% U.S. government agency securities, 7%
mortgage-backed securities, 32% states and political subdivisions, and 10%
corporate obligations. The reduction from 14% last year to 7% in 1998 for
mortgage-backed securities coupled with the increase from 27% to 32% for
states and political subdivisions reflects management's analysis of relative
value in the current interest rate and overall market conditions.
Investment securities at December 31, 1997 were approximately 20% U.S.
Treasury securities, 29% U.S. government agency securities, 14%
mortgage-backed securities, 27% states and political subdivisions, and 10%
corporate obligations. The 1997 increase in the portfolio percentage devoted
to states and political subdivisions securities reflected the higher yields
which were available on these types of investments compared to treasuries and
agencies.
Investment securities at December 31, 1996 were approximately 31% U.S.
Treasury securities, 23% U.S. government agency securities, 15%
mortgage-backed securities, 20% states and political subdivisions, and 11%
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,
-------------------------
1998 1997 1996
-------------------------
U.S. Treasury .................................... $11,712 $13,099 $21,038
U.S. government agencies ......................... 18,014 19,019 15,872
Mortgage-backed securities ....................... 4,181 9,272 9,838
State and political subdivisions ................. 18,641 17,829 13,527
Corporate obligations, including stock ........... 6,163 6,277 7,347
-------------------------
$58,711 $65,496 $67,622
=========================
The following table shows the maturities of investment securities available
for sale at December 31, 1998 and the weighted average yields of such
securities (dollar amounts in thousands):
<TABLE>
After One, After Five,
But Within But Within
Within one Year Five Years Ten Years After Ten Years
-------------- -------------- -------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury ................... $ 5,036 6.07 $ 6,676 5.95 $ - - - -% $ - - - -%
U.S. government agencies ........ 3,984 5.79 8,675 6.28 5,355 6.64 - - - -
Mortgage-backed securities ...... 1,991 6.46 2,190 6.54 - - - - - - - -
States and political subdivisions 1,934 7.52 6,262 6.82 7,617 7.46 2,828 7.65
Corporate obligations, including 1,914 5.83 1,681 6.39 - - - - 2,568 6.73
------- ------- ------- -------
$14,859 $25,484 $12,972 $ 5,396
======= ======= ======= =======
</TABLE>
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,
1998, and excluding the interest expense allocated to carry certain
tax-exempt securities. All stock is included in the after ten years or
nonmaturing category.
<PAGE>
In 1998, the yield on taxable investment securities increased six basis
points due to reinvesting matured, called, and sold securities in investments
yielding more than the taxable investments removed from the balance sheet.
The 1998 yield on nontaxable investment securities and loans decreased 24
basis points largely as a result of normal maturation of relatively high
yield nontaxable investment securities and loans with reinvestment in
obligations of states and political subdivisions at rates higher than other
comparable investment securities but lower than the matured nontaxable
securities and loans had yielded.
At December 31, 1998, no state or political subdivision securities amortized
cost or market value exceeded 10% of stockholders' equity.
Loans
Loans outstanding (net of unearned discount) at December 31, 1998 increased
19.8% from December 31, 1997.
The amounts of loans outstanding, net of unearned discount, at the indicated
dates is shown in the following table according to the type of loans (dollar
amounts in thousands):
December 31,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
Commercial .................... $ 94,724 $ 79,968 $ 73,681 $ 62,399 $ 55,948
Agricultural .................. 26,685 20,494 17,555 16,792 15,264
Real estate, construction ..... 2,598 2,120 2,970 1,187 1,192
Real estate, mortgage ......... 95,535 76,904 60,241 56,475 53,447
Tax exempt, real estate
mortgage .................... 2,337 3,118 3,485 3,735 4,201
Installment, net of unearned
discount .................... 31,126 28,227 28,100 30,359 33,496
Lease financing, net .......... - - - - - - 369 919
Other ......................... 100 456 209 335 74
------------------------------------------------
$253,105 $211,287 $186,241 $171,651 $164,541
================================================
The following loan categories outstanding at December 31, 1998 mature as follows
(dollar amounts in thousands):
<TABLE>
After
One Year, After
Amount One Year But Within Five
Of Loans Or Less Five Years Years
--------------------------------------
<S> <C> <C> <C> <C>
Commercial ........................................ $ 94,724 $ 52,855 $ 24,830 $ 17,039
Agricultural ...................................... 26,685 16,083 4,997 5,605
Real estate, construction ......................... 2,598 2,438 17 143
--------------------------------------
$124,007 $ 71,376 $ 29,844 $ 22,787
======================================
</TABLE>
The interest rates on the amount due after one year are fixed or adjustable
as follows (dollar amounts in thousands):
Fixed Adjustable
------------------
Commercial .......................................... $31,084 $10,785
Agricultural ........................................ 8,782 1,820
Real estate, construction ........................... 160 - -
-----------------
$40,026 $12,605
=================
During 1998 commercial loans increased by $14,756,000 or 18.5%, construction
real estate loans increased by $478,000 or 22.5%, mortgage real estate loans
increased by $18,631,000 or 24.2%, agricultural loans increased $6,191,000 or
30.2%, and net installment loans increased by $2,899,000 or 10.3%. Overall
loan growth of $41,818,000 or 19.8% was very strong, however, competition
from other lenders resulted in lower margins on this growth. Management
continues to search for quality growth in all loan categories. The Company
sells some real estate loans to the secondary market resulting in increased
fee income and reduced interest rate risk.
<PAGE>
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,
-------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------
Loans accounted for on
a nonaccrual basis .......... $ 657 $ 1,144 $ 855 $ 883 $1,201
Accrual loans
contractually past due
90 days or more ............. 346 459 329 111 191
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 ................ - - - - 381 - - - -
Total nonaccrual loans were $657,000 at December 31, 1998, a decrease of
$487,000 or 42.6% from December 31, 1997. Total nonaccrual and accrual loans
contractually past due 90 days or more were $1,003,000 at December 31, 1998,
a decrease of $600,000 or 37.4% from a year earlier.
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 $54,000, $90,000, and $66,000 would have been
earned on the nonaccrual loans had they been performing loans in accordance
with their original terms during 1998, 1997, and 1996, respectively. The
interest collected on loans designated as nonaccrual loans and included in
income for the years ended December 31, 1998, 1997, and 1996 was $20,000,
$12,000, and $19,000, respectively.
As of December 31, 1998, the Company had loans totaling $5,882,000 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 $1,179,000 or 17% decrease from 1997. 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 resources and is focusing its attention on efforts
designed to control the amount of classified assets. The Company has
$26,685,000 in total agricultural loans outstanding. The Company does not
have any other substantial portion of its loans concentrated in one or a few
industries nor does it have any foreign loans outstanding as of December 31,
1998. The Company's loans are heavily concentrated geographically in the Iowa
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
and 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 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.
Other real estate owned was $408,000, $9,000, and none as if December 31,
1998, 1997, and 1996, respectively.
<PAGE>
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 and the existing level of the allowance for loan losses,
(ii) a continuing review of problem loans and overall portfolio quality,
(iii) regular examinations and appraisals of loan portfolios conducted by
federal supervisory authorities, and (iv) current and expected economic
conditions. The allowance for loan losses decreased $128,000 and $217,000 in
1994 and 1995, respectively, as net charge-offs exceeded provisions for loan
losses. In 1996, the allowance for loan losses increased $494,000 as a result
of provisions of $160,000 and net recoveries totaling $334,000. In 1997, the
allowance for loan losses decreased $199,000 as net charge-offs exceeded
provisions for loan losses. In 1998, the allowance for loan losses increased
$183,000 as a result of provisions of $125,000 and net recoveries of $58,000.
Management of the Banks continues to review the loan portfolios and believes
the allowance for loan losses is adequate to absorb losses of existing loans
which may become uncollectible.
The Banks allocate the allowance for loan losses according to the amount
deemed to be necessary to provide for possible 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):
<TABLE>
1998 1997 1996 1995 1994
----------------- ---------------- --------------- ---------------- ----------------
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
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans:
Mortgage ...... $ 95 37.75% $ 84 36.39% $ 134 32.35% $ 124 32.90% $ 141 32.48%
Mortgage
Construction .. - - 1.03 - - 1.00 - - 1.59 - - 0.69 - - 0.72
Construction
Commercial ....... 1,787 37.42 1,726 37.85 1,837 39.56 1,342 36.35 1,714 34.05
Agricultural ..... 248 10.54 249 9.70 264 9.43 133 9.78 282 9.28
Installment ...... 657 12.30 545 13.36 568 15.09 710 17.69 389 20.36
Lease financing
and other ..... - - 0.04 - - 0.22 - - 0.11 - - 0.41 - - 0.56
Tax exempt, real
estate mortgage - - 0.92 - - 1.48 - - 1.87 - - 2.18 - - 2.55
------------------------------------------------------------------------------------------
$ 2,787 100.00% $ 2,604 100.00% $ 2,803 100.00% $ 2,309 100.00% $ 2,526 100.00%
==========================================================================================
</TABLE>
Deposits
Total average deposits increased 6.3% in 1998, .9% in 1997, and 3.1% in 1996.
The average deposits are summarized below (dollar amounts in thousands):
1998 1997 1996
------------------ ------------------ -------------------
Average Average Average
Interest Interest Interest
Expense Expense Expense
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------
Noninterest-bearing
demand .......... $ 37,756 --% $ 35,930 --% $ 34,106 --%
Savings ............ 22,054 2.5 21,733 2.5 23,244 2.5
Interest-bearing
demand .......... 73,189 3.3 66,193 3.2 68,491 3.2
Time ............... 120,762 5.5 114,805 5.6 110,732 5.6
-------- -------- --------
Total deposits $253,761 $238,661 $236,573
======== ======== ========
<PAGE>
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,
-------------------------
1998 1997
-------------------------
One to three months ........................ $ 9,818 $ 6,640
Three to six months ........................ 5,839 4,864
Six to twelve months ....................... 7,230 8,446
Over twelve months ......................... 5,621 3,640
-------------------------
$28,508 $23,590
=========================
RESULTS OF OPERATIONS:
Changes in Diluted Earnings Per Share
The increase in diluted earnings per share between 1998 and 1997 amounted to
$.20. During 1998 the Company purchased approximately 16.5% of the
outstanding common shares of Iowa First Bancshares Corp. from the largest
shareholder and his related interests. This reduction in average common
shares outstanding had a $.20 per share positive impact on earnings per
share. The major sources of change are presented in the following table:
1998 1997
----------------
Net income per share, prior year ..................... $ 1.82 $ 1.95
----------------
Increase (decrease) attributable to:
Net interest income ............................... 0.02 0.12
Provision for loan losses ......................... (0.07) 0.09
Other income ...................................... 0.11 (0.04)
Salaries and employee benefits .................... (0.03) (0.11)
Other operating expenses .......................... (0.03) (0.27)
Income taxes ...................................... 0.11
Change in average common shares outstanding ....... 0.20 (0.03)
----------------
Net change ............................. 0.20 (0.13)
----------------
Net income per share, current year ..... $ 2.02 $ 1.82
================
<PAGE>
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):
<TABLE>
Year Ended December 31, 1998 Year Ended December 31, 1997
---------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Change In Due to Change In
------------------- -------------------
Average Average Total Average Average Total
Balance Rate Change Balance Rate Change
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Taxable loans ................ $ 3,265 $ (685) $ 2,580 $ 1,941 $ (458) $ 1,483
Taxable investment securities
available for sale ........ (634) 21 (613) (23) 32 9
Nontaxable investment
securities and loans ...... 155 (51) 104 159 (28) 131
Federal funds sold and other . 426 (29) 397 (462) 9 (453)
-----------------------------------------------------------
Total interest
income ............ 3,212 (744) 2,468 1,615 (445) 1,170
-----------------------------------------------------------
Interest expense:
Interest-bearing demand ...... 224 86 310 (108) (9) (117)
deposits
Interest-bearing time deposits 332 (24) 308 229 (34) 195
Notes payable ................ 368 368
Other borrowings ............. 1,438 (27) 1,411 620 206 826
-----------------------------------------------------------
Total interest
expense ........... 2,362 35 2,397 741 163 904
-----------------------------------------------------------
Change in net
interest earnings . $ 850 $ (779) $ 71 $ 874 $ (608) $ 266
===========================================================
</TABLE>
<PAGE>
Nonaccruing loans are included in the average balance. Loan fees are not
material.
Provision for Loan Losses
The following table summarizes 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):
<TABLE>
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses at beginning of year ............ $ 2,604 $ 2,803 $ 2,309 $ 2,526 $ 2,654
------------------------------------------------
Loans charged off:
Commercial and agricultural ............ 5 163 24 240 189
Mortgage ............................... 18 4 2 27 2
Installment ............................ 169 116 136 171 227
------------------------------------------------
Total loans charged off ..... 192 283 162 438 418
------------------------------------------------
Recoveries of loans previously charged off:
Commercial and agricultural ............ 176 36 400 120 188
Mortgage ............................... 11 7 49 23 15
Installment ............................ 63 37 47 33 22
------------------------------------------------
Total recoveries ............ 250 80 496 176 225
------------------------------------------------
Net loans charged off (recovered) ......... (58) 203 (334) 262 193
------------------------------------------------
Provisions for loan losses charged
to operating expense ................... 125 4 160 45 65
------------------------------------------------
Balance at end of year .................... $ 2,787 $ 2,604 $ 2,803 $ 2,309 $ 2,526
================================================
Average taxable loans outstanding ......... $228,491 $190,778 $168,970 $162,432 $153,547
Ratio of net loan charge-offs
(recoveries) to average taxable
loans outstanding ..................... (0.03)% 0.11% (0.20)% 0.16% 0.13%
Allowance for loan losses as a
percentage of average taxable
loans outstanding ...................... 1.22 1.36 1.66 1.42 1.65
Coverage of net charge-offs by
year-end allowance for loan
losses ................................. N/A 12.83 N/A 8.81 13.09
</TABLE>
Operating Expenses
A continuing objective of the Company is to manage overhead costs while
maintaining optimal productivity, efficiency, capacity, and quality service.
New branch facilities opened during 1997 in Fairfield and Muscatine and
increased sales focus are necessary to position our banks for the future in
meeting the intense competition that banks face for loans, deposits, and
other banking services. These enhancements, while necessary, do come at a
price. Our efficiency ratio of 60.8% in 1998 compares to 61.1% in 1997 and
remains higher than management's goal. More specifically, equipment expenses
increased $132,000 or 28.0%. Overall, operating expenses increased $86,000
which is only 1.1% greater than the prior year.
Net Income
The Company's consolidated net income for the three years is as follows
(dollar amounts in thousands):
Year Ended December 31,
---------------------------
1998 1997 1996
---------------------------
Net income $ 3,282 $ 3,280 $ 3,465
===========================
<PAGE>
Net income increased $2,000 or .1% in 1998. The net interest income increased
$35,000 or .3%. The net interest income without the interest expense on the
new notes payable would have increased $403,000 or 3.8%. The provision for
loan losses increased from $4,000 in 1997 to $125,000 in 1998. Other income
increased $179,000 or 10.6% and operating expenses increased $86,000 or 1.1%.
Income taxes increased only $5,000.
Net income decreased $185,000 or 5.3% in 1997. This decrease resulted from
improvement in net interest income of $222,000 or 2.1%, reduction of $156,000
or 97.5% in provisions for loan losses, a reduction in other income totaling
$68,000 or 3.9%, an increase of $690,000 or 10.1% in operating expenses, and
a decrease of $195,000 or 11.4% in income taxes.
Net income increased $415,000 or 13.6% in 1996. The net interest income
increased $543,000 or 5.5%, provision for loan losses increased $115,000,
other income rose $188,000 or 11.9%, operating expenses decreased $20,000 or
.3%, and income taxes increased $221,000 or 14.8%.
Selected Consolidated Ratios
Year Ended December 31,
-----------------------
1998 1997 1996
-----------------------
Percentage of net income to:
Average stockholders' equity .............. 14.18% 12.33% 14.46%
Average total assets ...................... 1.00 1.13 1.26
Percentage of average stockholders' equity
to average total assets ................... 7.02 9.16 8.75
Dividend payout ratio ........................ 41.58 42.86 34.87
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.
The following table shows the interest rate sensitivity position at several
repricing intervals (dollar amounts in thousands):
<TABLE>
Repricing Maturities at December 31, 1998
-------------------------------------------------------------
Less Than 3-12 1-5 More Than Interest
3 Months Months Years 5 Years Bearing Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans ........................... $ 64,630 $ 21,972 $ 84,369 $ 81,477 $ 657 $253,105
Investment securities ........... 3,069 11,790 25,484 18,358 10 58,711
Other earning assets ............ 12,690 - - - - - - - - 12,690
Nonearning assets ............... - - - - - - - - 20,905 20,905
------------------------------------------------------------
Total ........................ $ 80,389 $ 33,762 $109,853 $ 99,835 $ 21,572 $345,411
============================================================
Liabilities and Equity:
Deposits ........................ $ 48,263 $102,715 $ 66,438 $ - - $ 44,430 $261,846
Notes payable ................... - - 2,300 4,950 - - - - 7,250
Securities sold under agreements
to repurchase and TT & L ..... 3,946 678 1,021 - - - - 5,645
FHLB advances ................... - - 616 38,196 9,161 - - 47,973
Other liabilities ............... 163 - - - - - - 2,225 2,388
Equity .......................... - - - - - - - - 20,309 20,309
------------------------------------------------------------
Total liabilities and equity $ 52,372 $106,309 $110,605 $ 9,161 $ 66,964 $345,411
============================================================
Repricing gap ...................... $ 28,017 $ (72,547) $ (752) $ 90,674 $ 45,392 $ - -
Cumulative repricing gap ........... 28,017 (44,530) (45,282) 45,392 - - - -
</TABLE>
<PAGE>
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, twenty percent of
the savings and NOW accounts are reflected in the less than 3 months
category, thirty percent in the 3-12 months category, with the remainder in
the 1-5 years category. Also, twenty-five percent of the money market
accounts are reflected in the less than 3 months category with the remainder
in the 3-12 months category.
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, 1998, using the estimates discussed above, rate
sensitive liabilities exceeded rate sensitive assets within a one year period
by $44,530,000 and, thus, the Company is positioned to benefit from a fall 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.
Interest Rate Risk Management
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. Since 1990, management's
asset/liability committee has met monthly 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 increases in
interest rates and to fluctuations in the difference between long- and
short-term interest rates.
<PAGE>
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, 1998, an analysis of the Bank's 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 $ 19,929 $ (5,502) (22)%
+100 22,612 (2,819) (12)
- - 25,431 - - - -
-100 28,359 2,928 12
-200 31,464 6,033 24
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
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.
Liquidity
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are
varied, but include general economic conditions, asset/liability mix, bank
reputation, future FDIC funding needs, changes in regulatory environment, and
credit standing. Assets which provide liquidity consist principally of loans,
cash and due from banks, investment securities, and short-term investments
such as federal funds. Maturities of securities held for investment purposes
and loan payments provide a constant flow of funds available for cash needs.
Liquidity also can be gained by the sale of loans or securities, which were
previously designated as available for sale, prior to maturity. 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. Net cash provided by operating activities
totaled $3,560,000 for the year ended December 31, 1998 which compares to
cash provided by operating activities for the year ended December 31, 1997 of
$3,545,000. The Company continues to generate operating cash from sales of
its mortgage loans. Net cash used in investing activities totaled $37,941,000
for the year ended December 31, 1998 and $26,820,000 for the year ended
December 31, 1997. The increased use of cash resulted primarily from
significant increases in loan originations during the year. During the years
ended December 31, 1998 and 1997 cash provided by financing activities
totaled $36,015,000 and $21,551,000, respectively. The increase in cash
provided during the year resulted from increases in deposits and advances
from the Federal Home Loan Bank as well as proceeds from notes payable issued
by the Company offset by significant uses of cash to purchase 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, 1998 were $233,338,000 or 89.1% of
total deposits and 67.6% of total liabilities and equity.
Equity has decreased in significance as a funding source, decreasing
$8,316,000 during 1998 to total $20,309,000. Most of this decrease is the
result of treasury stock purchases totaling $10,753,000. Securities sold
under agreements to repurchase and treasury tax and loan open note funding
sources totaled $5,808,000. Longer term Federal Home Loan Bank advances
totaled $47,973,000. At year-end total federal funds sold and securities
maturing within one year were $27,414,000 or 7.9% of total assets. Both
short-term and long-term liquidity are actively reviewed and managed.
<PAGE>
At December 31, 1998, securities available for sale totaling $58,711,000
included $1,139,000 of gross unrealized gains and $9,000 of 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.
Capital
Stockholders' equity decreased $8,316,000 (29.1%) in 1998. As noted above,
treasury stock purchases totaled $10,753,000. Dividends to stockholders were
declared at a rate of $.84, $.78, and $.68 per share during the years ended
December 31, 1998, 1997, and 1996, respectively.
Year 2000
The Year 2000 Issue is the result of computer programs using two-digits
instead of four-digits to represent the year. These computer systems, if not
renovated, will be unable to interpret dates past 1999, which could cause a
system failure or other computer errors, leading to a disruption in
operations. The Company developed a five-phase program for year 2000
compliance, as outlined by the Federal Financial Institutions Examination
Council (FFIEC) in a supervisory letter. These phases are Awareness,
Assessment, Renovation, Validation, and Implementation.
The Awareness phase is intended to define the problem and obtain executive
level support for the resources necessary to perform compliance work. This
phase was completed with the formation of a Year 2000 Committee and the
appointment of a Year 2000 Project Manager. The goal of the Assessment phase
is to assess the size and complexity of the problem, including identifying
all systems that may be affected by the year 2000. The Year 2000 Committee
identified any system that might be affected with emphasis on high risk and
mission critical systems. This assessment included hardware, software, vendor
services and computer-controlled devices such as alarms, elevators, and
heating and cooling systems. Through correspondence with vendors, the Company
has determined the year 2000 status of these systems and has made
determinations regarding replacement, upgrades, etc. In the Renovation phase,
the goal is to undertake code enhancements, hardware and software upgrades,
system replacements and vendor correspondence. The Company does not perform
any of its own programming and is reliant on vendors to provide updates. Many
of these systems have been upgraded or replaced as of December 31, 1998. The
Company is working on developing contingency plans for any system that has
not met this deadline. The Validation phase encompasses the testing and
verification of changes to systems and coordination with outside parties. The
Company began testing the mission critical systems in October 1998. The
Company expects to be systematically finished testing all of its mission
critical applications by June 30, 1999. By the Implementation phase, all
systems should be certified as year 2000 compliant and should be in use. The
Company expects this phase also to be completed by June 30, 1999. Because
there remains so many unknowns about the potential issues with the year 2000,
the Company is updating its disaster recovery plan and adding provisions for
potential year 2000 related disaster recovery situations.
The Company believes it will incur approximately $250,000 in year 2000
related costs, although this number could change significantly. This estimate
includes hardware and software upgrades in addition to human resources costs
and consulting fees. At this time, the Company has not identified any
specific situations that it anticipates will require material cost
expenditures. Through December 31, 1998 the Company has incurred costs of
approximately $150,000 in year 2000 related costs.
The Company is also aware of the potential impact of the year 2000 on the
Bank's borrowing customers and their ability to repay. Loan officers have
been in communication with key bank borrowing customers to raise awareness
and evaluate their progress and will continue to do so to help ensure they
will not suffer serious adverse consequences. The Company keeps its customers
informed as to its progress in dealing with the Year 2000 Issue through
quarterly statement enclosures and other forms of communication.
<PAGE>
The federal banking regulators have issued several statements providing
guidance to financial institutions on the steps the regulators expect
financial institutions to take to become year 2000 compliant. The federal
banking regulators are also examining the financial institutions under their
jurisdiction to assess each institution's compliance with the outstanding
guidance. If an institution's progress in addressing the Year 2000 Issue is
deemed by its primary federal regulator to be less than satisfactory, the
institution will be required to enter into a memorandum of understanding with
the regulator which will, among other things, require the institution to
promptly develop and submit an acceptable plan for becoming year 2000
compliant and to provide periodic reports describing the institution's
progress in implementing the plan. Failure to satisfactorily address the Year
2000 Issue may also expose a financial institution to other forms of
enforcement action that its primary federal regulator deems appropriate to
address the deficiencies in the institution's year 2000 remediation program.
Management currently has no reason to believe the Company will be subjected
to any such regulatory actions.
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.
Effect of FASB Statements
The Financial Accounting Standards Board has issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Management
believes that adoption of this Statement will not have an effect on the
consolidated financial statements.
The Financial Accounting Standards Board has issued SFAS No. 134 "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" which is effective for
fiscal quarters beginning after December 15, 1998. This Statement requires
that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests as held to maturity, available for
sale, or trading based on its ability and intent to sell or hold those
investments. Management believes that adoption of this Statement will not
have an effect on the consolidated financial statements.
Quarterly Results of Operations (Unaudited)
In the fourth quarter of 1998, net income was $797,000, compared with
$834,000 in the same period of 1997, a decrease of 4.4%. The net interest
income during the fourth quarter of 1998 was $2,707,000 compared with
$2,737,000 for the fourth quarter of 1997. There was no provision for loan
losses in the fourth quarter of 1997 versus $45,000 in 1998. Other income
totaled $507,000 and $438,000 during the fourth quarter of 1998 and 1997,
respectively. Other operating expenses of $1,988,000 in the last quarter of
1998 compare with $1,966,000 for the last quarter of 1997. Income tax expense
was $384,000 and $375,000 for the final quarter of 1998 and 1997,
respectively.
<PAGE>
Quarterly results of operations are as follows (dollar amounts in thousands):
<TABLE>
Quarter Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
---------------------------------------------
<S> <C> <C> <C> <C>
Total interest income .................... $5,571 $5,933 $5,995 $6,091
Total interest expense ................... 2,899 3,282 3,334 3,384
----------------------------------------
Net interest income ....................... 2,672 2,651 2,661 2,707
Provision for loan losses ................. 18 26 36 45
Other income .............................. 416 465 487 507
Other expense ............................. 1,833 1,882 1,930 1,988
----------------------------------------
Income before income taxes ................ 1,237 1,208 1,182 1,181
Applicable income taxes ................... 397 368 377 384
----------------------------------------
Net income ................................ $ 840 $ 840 $ 805 $ 797
========================================
Net income per share:
Basic .................................. $ 0.46 $ 0.51 $ 0.53 $ 0.52
========================================
Diluted ................................ $ 0.46 $ 0.51 $ 0.53 $ 0.52
========================================
</TABLE>
<TABLE>
Quarter Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
---------------------------------------------
<S> <C> <C> <C> <C>
Total interest income .................... $4,982 $5,247 $5,348 $5,581
Total interest expense ................... 2,383 2,592 2,683 2,844
----------------------------------------
Net interest income ....................... 2,599 2,655 2,665 2,737
Provision for loan losses ................. 3 1 - - - -
Other income .............................. 405 422 431 438
Other expense ............................. 1,721 1,840 2,020 1,966
----------------------------------------
Income before income taxes ................ 1,280 1,236 1,076 1,209
Applicable income taxes ................... 406 399 341 375
----------------------------------------
Net income ................................ $ 874 $ 837 $ 735 $ 834
========================================
Net income per share:
Basic .................................. $ 0.50 $ 0.47 $ 0.42 $ 0.47
========================================
Diluted ................................ $ 0.49 $ 0.46 $ 0.41 $ 0.46
========================================
</TABLE>
<PAGE>
IOWA FIRST BANCSHARES CORP.
DIRECTORS AS OF DECEMBER 31, 1998
George A. Shepley Larry L. Emmert
Chairman of the Board and CEO President
Iowa First Bancshares Corp. Hoffmann, Inc.
Chairman of the Board
First National Bank of Muscatine Craig R. Foss
Chairman of the Board President
First National Bank in Fairfield Foss, Kuiken, and Gookin, P.C.
D. Scott Ingstad Donald R. Heckman
Director and President Investor
Iowa First Bancshares Corp. Factory Manager - Retired
Director, President and CEO H.J. Heinz Co.
First National Bank of Muscatine
Dean H. Holst
Kim K. Bartling Director
Director, Executive Vice President, Chief Iowa First Bancshares Corp.
Operating Officer and Treasurer Director, President and CEO
Iowa First Bancshares Corp. First National Bank in
Director, Executive Vice President and CFO Fairfield
First National Bank of Muscatine Victor G. McAvoy
Director President
First National Bank in Fairfield Muscatine Community College
Roy J. Carver, Jr. Beverly J. White
Chairman of the Board Director and Vice President
Carver Pump Company Quality Foundry Co.
OFFICERS AS OF DECEMBER 31, 1998
George A. Shepley Patricia R. Thirtyacre
Chairman of the Board Corporate Secretary
Chief Executive Officer
Teresa A. Carter
D. Scott Ingstad Internal Audit Manager
President
Kim K. Strause
Kim K. Bartling Assistant Auditor
Executive Vice President
Chief Operating Officer
Treasurer
<PAGE>
IOWA FIRST BANCSHARES CORP.
Subsidiary Bank Directors as of December 31, 1998
<TABLE>
FIRST NATIONAL BANK OF MUSCATINE FIRST NATIONAL BANK IN FAIRFIELD
- -------------------------------------------------- --------------------------------------
<S> <C>
George A. Shepley George A. Shepley
Chairman of the Board and CEO Chairman of the Board and CEO
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Chairman of the Board Chairman of the Board
First National Bank of Muscatine First National Bank of Muscatine
Chairman of the Board Chairman of the Board
First National Bank in Fairfield First National Bank in Fairfield
D. Scott Ingstad Dean H. Holst
Director and President Director
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Director, President and CEO Director, President and CEO
First National Bank of Muscatine First National Bank in Fairfield
Kim K. Bartling Kim K. Bartling
Director, Executive Vice President, Chief Director, Executive Vice President, Chief
Operating Officer and Treasurer Operating Officer and Treasurer
Iowa First Bancshares Corp. Iowa First Bancshares Corp.
Director, Executive Vice President and CFO Director, Executive Vice President and CFO
First National Bank of Muscatine First National Bank of Muscatine
Director Director
First National Bank in Fairfield First National Bank in Fairfield
Larry L. Emmert Stephen R. Cracker
President Director and Executive Vice President
Hoffmann, Inc. First National Bank in Fairfield
Donald R. Heckman Rex Crockett
Investor Chairman of the Board, President and CEO
Factory Manager - Retired The Dexter Co.
H.J. Heinz Co.
Craig R. Foss
Victor G. McAvoy President
President Foss, Kuiken & Gookin PC
Muscatine Community College
Thomas S. Gamrath
Beverly J. White Vice President & Treasurer
Director and Vice President Gamrath-Doyle & Associates, Inc.
Quality Foundry Co.
John R. Hammes
President and General Manager
Jefferson County Equipment Co.
Marvin L. Nelson
President
The Nelson Company, Inc.
C. Gene Parker
Agriculturalist
</TABLE>
IOWA FIRST BANCSHARES CORP.
300 EAST SECOND STREET
MUSCATINE, IOWA 52761
PHONE (319) 263-4221
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders of Iowa First Bancshares Corp., an Iowa
corporation, will be held at the corporate offices of the Company and its
subsidiary, First National Bank of Muscatine, Muscatine, Iowa, on Thursday,
April 15, 1999, beginning at 2:00 p.m. in order to:
1. Elect four Directors for terms of three years each.
2. Elect one Director for a term of two years.
3. Elect one Director for a term of one year.
4. Transact any other business which may be properly brought before the
meeting or any adjournment of the meeting.
Common stockholders of record as of the close of business on March 12, 1999
are entitled to vote at the meeting.
Even if you plan to attend the meeting, we encourage you to sign and return the
enclosed proxy. If you are unable to attend the meeting because of illness or
any other reason, your vote will still be cast. If you do attend the meeting,
your proxy will automatically be suspended if you elect to vote in person.
We encourage your attendance at this meeting. The Officers and Directors want to
keep you, one of the owners of the Company, informed of its activities and
progress.
March 19, 1999
/s/ George A. Shepley
-----------------------------------
George A. Shepley
Chairman of the Board
Chief Executive Officer
EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE, AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE. IT IS IMPORTANT THAT
PROXIES BE RETURNED PROMPTLY.
PROXY STATEMENT
General Information Concerning the Solicitation of Proxies
This proxy statement is furnished on March 19, 1999, in connection with the
solicitation by the Board of Directors of the proxies in the accompanying form.
A shareholder who gives a proxy may revoke it at any time prior to its exercise
by filing with the Corporate Secretary a written revocation or a duly executed
proxy bearing a later date. The proxy will be suspended if the shareholder is
present at the meeting and elects to vote in person.
As of March 12, 1999, 1,532,424 shares of common stock were outstanding, each of
which is entitled to one vote at the meeting. Only shareholders of record as of
the close of business on March 12, 1999 will be entitled to notice of and to
vote at the meeting.
The affirmative vote of the holders of a majority of the outstanding shares
entitled to vote is required for adoption of motions and resolutions, except
that changes in voting rights, removal of Directors, amendments to the Articles
of Incorporation, and approval of mergers, consolidations, or partial
liquidations require the affirmative vote of the holders of two-thirds of the
outstanding shares entitled to vote.
<PAGE>
Beneficial Owners of Common Stock
The following table sets forth information as of February 28, 1999, with respect
to any person who is known to the Company to be the beneficial owner of more
than 5 percent of the Company's common stock.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
- --------------------------------------------------------------------------------
George A. Shepley 114,635 (1) 7.48%
34 Colony Drive
Muscatine, Iowa
(1) Includes 95,735 shares as beneficially owned by Mr. Shepley because the
Company's management believes he has the power to exercise investment
decisions with respect to such shares.
The beneficial ownership of current, continuing and nominated Directors is
set out in the table on the following page. All current Directors and Executive
Officers as a group own beneficially 294,510 shares, which constitutes 19.2
percent of the class.
Election of Directors
At the annual meeting, shareholders will be asked to elect four Directors to
hold office for terms of three years each, one Director to hold office for two
years and one Director to hold office for one year.
The Board of Directors and management recommend the election of the six nominees
listed herein. The named proxies intend to vote for the election of the
nominees. If, at the time of the meeting, any of such nominees is unable or
declines to serve, the discretionary authority provided in the proxy will be
exercised to vote for a substitute or substitutes, unless otherwise directed.
The Board of Directors has no reason to believe that any substitute nominee or
nominees will be required.
Information Concerning Nominees for Election as Directors
The Board of Directors presently consists of ten Directors divided into three
classes, with four Directors in one class and three Directors in two classes.
Directors of one class are elected each year to hold office for a three-year
term, until their successors are duly elected and qualified, or until their
earlier resignation or removal. The terms of office of the current Class II
Directors will expire on the election of the Directors at the 1999 annual
meeting of shareholders.
The shareholders will be asked to elect each of the four Class II nominees
listed herein for terms of three years or until a successor is elected and
qualified or until his or her earlier resignation or removal. The shareholders
will also be asked to elect one nominee to each of Classes I and III for terms
of one and two years, respectively. If all nominees are elected they will fill
all of the current twelve Directorships.
<PAGE>
Certain information is set out below and on the following page with respect to
the six persons nominated by the Board of Directors to serve as Directors and
with respect to the Directors continuing in office for terms expiring in 2000
and 2001. All four Class II nominees are currently Directors of the Company. The
Class I nominee, David R. Housley, and the one Class III nominee, John "Jay" S.
McKee, are not currently Directors of the Company.
IOWA FIRST BANCSHARES CORP.
DIRECTORS
<TABLE>
As of February 28, 1999
Nominated Common Stock
For Term -----------------------
Expiring, Amount and
Nominee Position(s) Or Current Nature of Percent
Or Current Held with Director Term Beneficial of
Director the Company Age Since Expires Ownership Class
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kim K. Bartling Director. Executive Vice President, Chief
Operating Officer, and Treasurer 41 1994 2000 33,677 2.20%
Roy J. Carver, Jr. Director 55 1989 2001 25,404 1.66%
Larry L. Emmert Director 57 1993 2000 17,046 1.11%
Craig R. Foss Director 49 1994 2002 * 3,360 **
Donald R. Heckman Director 60 1984 2002 * 24,060 1.57%
Dean H. Holst Director. President and CEO, First National
Bank in Fairfield 59 1985 2001 22,405 1.46%
David R. Housley None 47 N/A 2000 * 300 **
**
D. Scott Ingstad Director and President. President and CEO,
First National Bank of Muscatine 48 1990 2002 * 21,669 1.41%
Dr. Victor G. McAvoy Director 55 1994 2001 4,650 **
**
John "Jay" S. McKee None 45 N/A 2001 * 100 **
**
George A. Shepley Chairman of the Board and CEO 76 1983 2000 114,635 7.48%
Beverly J. White Director 59 1988 2002 * 21,024 1.37%
<FN>
* Nominated for election to the Board of Directors at the April 15, 1999,
annual meeting of shareholders of Iowa First Bancshares Corp.
** Less than 1 percent of the outstanding stock of the Company.
</FN>
</TABLE>
Shares listed as beneficially owned include, for Directors who are also officers
of the Company shares held in the Company's retirement plan for the benefit of
such individuals.
<PAGE>
The business experience of each nominated and continuing Director is set forth
in the following section. All Directors have held their present position for at
least five years unless otherwise indicated.
Kim K. Bartling. Mr. Bartling has been Executive Vice President, Chief Operating
Officer and Treasurer since December 1996. He has served as Executive Vice
President and Chief Financial Officer of First National Bank of Muscatine since
February 1997. Mr. Bartling served as Senior Vice President, Chief Financial
Officer and Treasurer of the Company and First National Bank of Muscatine
beginning in 1988. Prior to serving in these positions he served as Vice
President/Finance of the Company and First National Bank of Muscatine since
1987. Mr. Bartling is also a Director of the Company, First National Bank of
Muscatine and First National Bank in Fairfield.
Roy J. Carver, Jr. Mr. Carver has been Chairman of Carver Pump Company, a
manufacturer of industrial pumps used in military and civilian applications,
since 1981. Mr. Carver is also a Director of Bandag, Incorporated, and Catalyst,
Inc., which have classes of securities registered with the Securities and
Exchange Commission.
Larry L. Emmert. Mr. Emmert has been President of Hoffmann, Inc., a general
building contractor located in Muscatine, Iowa, since 1981. Mr. Emmert is also a
Director of First National Bank of Muscatine.
Craig R. Foss. Mr. Foss has been President and a shareholder of the law firm of
Foss, Kuiken, and Gookin, P.C., Fairfield, Iowa, since 1979. Mr. Foss is also a
Director of First National Bank in Fairfield.
Donald R. Heckman. Mr. Heckman is an investor. Prior to retirement, Mr. Heckman
had been Factory Manager of the H.J. Heinz Co. plant located in Muscatine, Iowa,
1973 to February 1995. This plant produced and warehoused various consumer
products including ketchup, gravy and various sauces. Mr. Heckman is also a
Director of First National Bank of Muscatine.
Dean H. Holst. Mr. Holst has served as President and CEO of First National Bank
in Fairfield since 1985, prior to which he served as Vice President from 1973 to
1985. Mr. Holst is also a Director of the Company and First National Bank in
Fairfield.
David R. Housley. Mr. Housley has served as President of Doran and Ward Printing
Co., a commercial printing company specializing in the printing of packaging
products, for more than ten years. He also has served as President of Master
Muffler and Brake, Inc. for more than fifteen years and Automart Undercar
Distributors for two years. These companies are retail and wholesale suppliers
of mufflers and various other replacement parts for the underside of
automobiles. Mr. Housley became a Director of First National Bank of Muscatine
in February 1999.
D. Scott Ingstad. Mr. Ingstad has served as Director, President and CEO of First
National Bank of Muscatine since 1990. Prior to joining the Company, Mr. Ingstad
was Senior Vice President/ Senior Loan Officer, First National Bank and Trust
Company, Columbia, Missouri, 1989 to 1990 and President and CEO, Commerce Bank
of Harrisonville, NA, Harrisonville, Missouri, 1986 to 1989. Mr. Ingstad is also
a Director and, as of December 1996, President of the Company.
Victor G. McAvoy. Dr. McAvoy has served as President of Muscatine Community
College and Vice-Chancellor of the Eastern Iowa Community College District since
1986. Mr. McAvoy is also a Director of First National Bank of Muscatine.
John "Jay" S. McKee. Mr. McKee has served as Vice President of Finance of McKee
Button Company, a manufacturer of buttons emphasizing the men's dress shirt
market, since 1982. Mr. McKee became a Director of First National Bank of
Muscatine in February 1999.
George A. Shepley. Mr. Shepley has been Chairman of the Board and CEO of the
Company since 1983. Mr. Shepley served as President of the Company from 1989
until December 1996. He has served as Chairman of the Board, 1987 to present,
President, 1963 to 1989, First National Bank of Muscatine and Chairman of the
Board, 1986 to present, First National Bank in Fairfield.
Beverly J. White. Mrs. White has served as a Director of Quality Foundry Co.
since 1993 as well as Vice President beginning in 1996. Quality Foundry Co. is a
grey iron foundry specializing in semi-steel castings. Mrs. White also served as
Executive Vice President of Muscatine Development Corporation and Muscatine
Chamber of Commerce from 1990 to 1991 and as a Director of Muscatine Development
Corporation from 1989 to 1990. Mrs. White is also a Director of First National
Bank of Muscatine.
<PAGE>
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.
During 1998 the Company purchased approximately 16.5% of the outstanding common
shares of Iowa First Bancshares Corp. from the largest shareholder and longtime
Director of the Company, Carl J. Spaeth, and his related interests. As of
December 31, 1998, Mr. Spaeth is no longer a Director of the Company.
Meetings and Committees of the Board of Directors
The Board of Directors held twelve regular meetings and two special meetings
during the last fiscal year. All incumbent Directors attended at least 75% of
the regular Board of Directors meetings held after each Director was duly
elected and qualified. The annual retainer that each outside Director received
in 1998 was $5,300 plus $100 for each committee meeting attended. Executive
officers who also serve on the Board of Directors do not receive such retainer
or committee fees.
The Company has committees of the Board of Directors, which meet on an "as
needed" basis. During 1998, the Strategic Planning Committee did not meet. Its
members are Mr. Emmert (Chairman), Mr. Bartling, Mr. Heckman, Mr. Ingstad, Mr.
McAvoy, Mr. Shepley and Mrs. White. The Human Resource Committee met once; its
members are Mrs. White (Chairperson), Mr. Emmert, Mr. McAvoy, and Mr. Shepley.
The Retirement Plan Committee met one time during 1998; its members are Mr.
McAvoy (Chairman), Mr. Emmert, Mrs. White and Mr. Bartling.
Compensation Committee Report
The Human Resource Committee serves as the Company's compensation committee. The
Committee policy is to seek to provide fair and competitive compensation,
encourage the retention of highly qualified individuals and enhance shareholder
value by encouraging increased profitability of the Company. This policy is
intended to align the financial interest of the Company's and subsidiary banks'
officers (including executive officers) with those of the shareholders, as well
as to create an atmosphere that recognizes the contribution and performance of
each officer. In addition to merit-based promotions, the essential components of
the compensation policy for the Company's executive officers are base
compensation and cash bonuses.
The Committee considers many factors when determining compensation levels for
executive officers. These factors include the extent to which each executive
officer contributes to enhancement of shareholder value and comparisons of the
Company's compensation of executive officers to the compensation paid to
executive officers by other companies in the banking industry, including peer
groups. The Committee also considers the extent to which each executive officer
contributes to attainment of earnings targets for the Company and each
subsidiary. Other factors include the executive officer's contribution to return
on average assets and return on average equity, contribution to the profitable
growth of the Company, and contribution to improvements in quality of assets
and, thus, quality of earnings. In determining the base compensation of the
executive officers for 1998, the Committee considered all of the aforementioned
factors, as well as an average salary increase at the subsidiary banks of
approximately 3%-4%.
In determining the compensation level for the Chief Executive Officer, the
Committee specifically reviews trends in the Company's return on average assets
and equity. It looks at the overall return to shareholders, including dividends
paid and changes in the fair market value of the Company's stock. The Committee
also assesses the CEO's effectiveness in leadership and communication skills, as
demonstrated by the level at which the subsidiary banks attain their targets for
earnings and asset quality, and the effectiveness of the strategic and operating
planning process, which the CEO leads. During 1997, the Company's diluted
earnings per share decreased 6.7%, cash dividends declared per share increased
14.7%, and total shareholder return was 48%. Return on average assets and equity
was 1.13% and 12.3%, respectively. Nonaccrual loans, renegotiated loans and
loans past due 90 days or more increased only $38,000 (2.4%) while gross loans
increased more than $25 million or 13.4%.
This report submitted by the Human Resource Committee:
Beverly J. White, Chairperson
Larry L. Emmert
Victor G. McAvoy
<PAGE>
Management Compensation
The following table sets forth the remuneration paid or accrued for the past
three years by the Company and its subsidiaries to the highest paid executive
officers whose 1998 cash compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
Long-Term Compensation
----------------------------------
Annual Compensation Awards Payouts
------------------------------------- ---------------------- ------------
Restricted All Other
Other Annual Stock Options LTIP Compen-
Name and Principal Position(s) Year Salary ($) Bonus ($) Compensation ($) Awards ($) or SARs (#) Payouts ($) sation($)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George A. Shepley .................. 1998 200,014 22,502 -- -- -- -- 19,478
Chairman and CEO of the ............ 1997 200,014 27,752 -- -- -- -- 17,854
Company; Chairman, First ........... 1996 195,709 27,889 -- -- -- -- 13,197
National Bank of Muscatine and
First National Bank in Fairfield
D. Scott Ingstad ................... 1998 155,695 20,046 -- -- -- -- 16,212
Director and President ............. 1997 146,895 19,464 -- -- -- -- 14,221
of the Company; Director, ......... 1996 139,900 17,837 -- -- -- -- 13,197
President and CEO, First
National Bank of Muscatine
Dean H. Holst ...................... 1998 116,529 7,735 -- -- -- -- 11,732
Director of the Company; .......... 1997 114,529 8,890 -- -- -- -- 11,340
Director, President and CEO, ....... 1996 110,119 15,141 -- -- -- -- 10,761
First National Bank in Fairfield
Kim K. Bartling .................... 1998 110,000 12,788 -- -- -- -- 11,613
Director, Executive Vice ........... 1997 100,000 14,250 -- -- -- -- 9,875
President, Chief Operating ......... 1996 94,100 12,939 -- -- -- -- 9,260
Officer and Treasurer of the Company;
Director, EVP and CFO, First National
Bank of Muscatine; Director,
First National Bank in
Fairfield
Tim M. Nelson ...................... 1998 93,013 10,696 -- -- -- -- 9,730
Executive Vice President ........... 1997 89,173 11,035 -- -- -- -- 8,642
and Senior Loan Officer, ........... 1996 85,733 9,645 -- -- -- -- 8,012
First National Bank of Muscatine
<FN>
(1) Includes contributions to the employee stock ownership plan with 401(k) provisions.
</FN>
</TABLE>
<PAGE>
Employee Stock Ownership Plan with 401(k) Provisions
The Company sponsors an employee stock ownership plan with 401(k) provisions. An
employee becomes a participant upon completing a minimum period of employment.
Employee contributions up to 6% of total compensation per employee are matched
by the employer at a rate of 50% of the employee contributed amount.
Additionally, the employer may make discretionary profit-sharing contributions
to the plan; total annual contributions cannot exceed the amount that can be
deducted for federal income tax purposes. Participants may direct investment of
the funds they have contributed to their individual accounts under the plan
utilizing several fixed income and equity investment options. A portion of the
discretionary profit-sharing contributions made by the Company or its
subsidiaries for the participants may be directed for investment in common
shares of the Company. Participant (but not Company) contributions are included
in salary in the Summary Compensation Table. The Company and its subsidiaries
contributed a cash total of $293,728 to this plan for 1998.
Performance Incentive Plans
In addition to base compensation, each executive officer of the Company and the
subsidiaries has specific annual weighted goals which, if attained, will result
in year-end cash performance incentive pay equal to 9%-10% of base pay. The
maximum annual payment under this incentive plan is 15% of base pay for
substantially exceeding the goals established. For the year ended December 31,
1998, amounts paid or accrued under this incentive plan totaled $94,928 which
included $73,767 for executive officers of the Company as a group. Also, the
Company and subsidiaries have discretionary performance incentive plans covering
a majority of the officer level employees as well as other specific employees.
These plans encourage improved efficiency and effectiveness of employees by
increasing remuneration as a direct result of individual and organizational goal
attainment. Payments made or accrued under all performance incentive plans,
including the executive officer plan discussed above, totaled $189,041 for 1998.
Executive Employment Agreements
In order to advance the interests of the Company by enabling the Company to
attract and retain the services of key executives upon which the successful
operations of the Company are largely dependent, the Board of Directors tendered
Employment and Change in Control Agreements to D. Scott Ingstad, Dean H. Holst
and Kim K. Bartling. An Employment Agreement was also tendered by the Board of
Directors to Tim M. Nelson. See the Summary Compensation Table for information
regarding the company positions held by these individuals.
The Employment Agreements are for a base term of two years and automatically
renew unless 90 days notice of non-renewal is provided to the other party. If an
executive's employment is terminated prior to the expiration of the Agreement or
by the providing of notice of non-renewal, or if the executive is constructively
discharged (for example, as a result of a reduction in responsibilities or
compensation, or other breach of the Agreement by the Company), the executive is
entitled to a severance benefit of : (1) twelve months base pay; (2) any
vacation pay accrued but not yet taken; (3) an amount equal to the annual
average past three years payment under the Performance Incentive Plan; (4)
reimbursement of a portion of medical premiums paid by the executive such that
the same "cost-sharing" basis provided at the date of termination is maintained.
Upon a change in control, as defined, the Change in Control Agreements become
effective. The executive will, under the Agreement, remain employed by the
Company for three years after the effective date or until executive's normal
retirement date (the Employment Term), whichever is earlier. An executive who is
terminated or constructively discharged after a change in control is entitled to
the following for the remainder of the Employment Term: (1) base pay; (2)
payments under the Performance Incentive Plan; (3) perquisites to which the
executive was entitled on the date of the change in control; and (4)
contributions for benefits expected to be made to the Company's retirement
plans.
Supplemental Compensation will also be provided to mitigate the effects of any
excise taxes applicable to executive employment payments. Each executive is
subject to a confidentiality agreement, and if the executive voluntarily
terminates employment prior to a change in control or if executive's employment
is terminated for cause, the executive will be subject to noncompetition and
nonsolicitation agreements.
<PAGE>
The Company currently has no Incentive Stock Option or Nonstatutory Stock Option
plans.
Comparative Performance By The Company
The graphical presentation omitted herein compares the performance of the
Company's common stock with (i) the Media General Financial Services, Inc.
(MGFS) Index for NASDAQ Stock Market (U.S. Companies), and (ii) the MGFS Index
for the stocks of banks and bank holding companies located in the West North
Central United States which are listed on the New York Stock Exchange or NASDAQ
(representing approximately twenty companies). Most of these companies are
considerably larger than Iowa First Bancshares Corp. The chart assumes an
investment of $100 on January 1, 1994, in each of the Company's common stock,
the NASDAQ National Market Index and the stocks in the bank peer group. Each
year's performance is for the twelve months ended December 31. The index level
for all series was set to 100.00 on January 1, 1994. The overall performance
assumes dividend reinvestment throughout the period. The Company's common stock
is not listed on any stock market exchange thus the price used for the Company's
common stock in the chart was the greater of the year-end bid price supplied by
one of the brokerage firms which acts as a market maker for the Company or the
appraisal price supplied by an independent appraiser. The data points used in
the omitted graph are as follows:
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG IOWA FIRST BANCSHARES CORP.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
1993 1994 1995 1996 1997 1998
-------------------------------------------------
Iowa First Bancshares..... 100 118.38 157.45 194.92 287.61 318.62
Peer Group Index ......... 100 102.08 151.23 209.60 366.73 357.60
NASDAQ Market Index ...... 100 104.99 136.18 169.23 207.00 291.96
Assumes $100 invested on January 1, 1994. Assumes dividends reinvested.
<PAGE>
Independent Auditors
Representatives of McGladrey & Pullen, LLP, independent auditors for the
Company, will be present at the annual meeting, will have an opportunity to make
any statement they desire, and will be available to respond to appropriate
questions.
Deadline for Shareholder Proposals for 2000 Annual Meeting
Proposals by shareholders intended to be presented at the 2000 annual meeting
must be received at the Company's executive offices no later than November 19,
1999, to be included in the proxy statement and proxy form.
Deadline for Shareholder Nominations of Directors for 2000 Annual Meeting
Proposals by shareholders for vacant directorships intended to be presented at
the 2000 annual meeting must be received at the Company's executive offices no
later than November 19, 1999, to be included in the proxy statement and proxy
form.
General
The entire cost of soliciting proxies for the annual meeting is paid by the
Company. No solicitation other than by mail is contemplated.
The Board of Directors knows of no other matters which will be brought before
the meeting, but, if other matters properly come before the meeting, the persons
named in the proxy intend to vote the proxy according to their best judgment.
On written request to the undersigned at 300 East Second Street, Muscatine, Iowa
52761, the Company will provide, without charge to the shareholder, a copy of
its Annual Report on Form 10-K, including financial statements and schedules,
filed with the Securities and Exchange Commission for its most recent fiscal
year.
Information set forth in this proxy statement is as of March 12, 1999, unless
otherwise dated.
/s/ George A. Shepley
--------------------------
March 19, 1999 George A. Shepley
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors of Iowa First Bancshares Corp. hereby severally
constitute George A. Shepley and Kim 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 names, the capacities indicated below, the Annual Report on Form 10-K of
Iowa First Bancshares Corp. for the fiscal year ended December 31, 1998, 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.
Signature Title Date
- --------------------------------------------------------------------------------
/s/ Roy J. Carver, Jr. Director February 18, 1999
- ----------------------
Roy J. Carver, Jr.
/s/ Larry L. Emmert Director February 18, 1999
- ----------------------
Larry L. Emmert
/s/ Craig R. Foss Director February 18, 1999
- ----------------------
Craig R. Foss
/s/ Donald R. Heckman Director February 18, 1999
- ----------------------
Donald R. Heckman
/s/ Dean H. Holst Director February 18, 1999
- ----------------------
Dean H. Holst
/s/ D. Scott Ingstad Director February 18, 1999
- ----------------------
D. Scott Ingstad
/s/ Victor G. McAvoy Director February 18, 1999
- ----------------------
Victor G. McAvoy
/s/ Beverly J. White Director February 18, 1999
- ----------------------
Beverly J. White
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FORM 10-K OF IOWA FIRST BANCSHARES CORP. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,237
<INT-BEARING-DEPOSITS> 135
<FED-FUNDS-SOLD> 12,555
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,711
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 253,105
<ALLOWANCE> 2,787
<TOTAL-ASSETS> 345,411
<DEPOSITS> 261,846
<SHORT-TERM> 8,358
<LIABILITIES-OTHER> 1,905
<LONG-TERM> 52,673
0
0
<COMMON> 200
<OTHER-SE> 20,109
<TOTAL-LIABILITIES-AND-EQUITY> 345,411
<INTEREST-LOAN> 19,220
<INTEREST-INVEST> 3,481
<INTEREST-OTHER> 889
<INTEREST-TOTAL> 23,590
<INTEREST-DEPOSIT> 9,676
<INTEREST-EXPENSE> 12,899
<INTEREST-INCOME-NET> 10,691
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 7,633
<INCOME-PRETAX> 4,808
<INCOME-PRE-EXTRAORDINARY> 3,282
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,282
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.02
<YIELD-ACTUAL> 3.65
<LOANS-NON> 657
<LOANS-PAST> 346
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,604
<CHARGE-OFFS> 192
<RECOVERIES> 250
<ALLOWANCE-CLOSE> 2,787
<ALLOWANCE-DOMESTIC> 2,787
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
