UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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)
STATE OF IOWA 42-1211285
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 East Second Street
Muscatine, Iowa 52761
----------------------------------------
(Address of principal executive offices)
319-263-4221
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO_____
At September 30, 1998 there were 1,524,360 shares of the registrant's common
stock outstanding.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE NO.
PART 1 Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets,
September 30, 1998 and December 31, 1997
Consolidated Condensed Statements of
Operations, Three and Nine Months Ended
September 30, 1998 and 1997
Consolidated Condensed Statements of
Cash Flows, Nine Months Ended
September 30, 1998 and 1997
Notes to Consolidated Condensed
Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
1998 1997
--------------------------
ASSETS
Cash and due from banks .................................... $ 12,722 $ 12,726
Investment securities available for sale (cost September 30, 57,471 65,496
1998, $56,261; December 31, 1997, $64,758)
Federal funds sold and securities
purchased under resale agreements ....................... 6,000 9,795
Loans, net of allowance for possible loan
losses September 30, 1998, $2,772;
December 31, 1997, $2,604 ............................... 247,564 208,683
Bank premises and equipment, net ........................... 5,949 6,055
Other assets ............................................... 3,994 3,028
-------- --------
TOTAL ASSETS ............................................ $333,700 $305,783
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ............................... $ 38,294 $ 38,212
Interest bearing deposits .................................. 213,645 204,570
-------- --------
TOTAL DEPOSITS .......................................... $251,939 $242,782
Notes payable .............................................. 7,250 --
Federal funds purchased and securities
sold under agreements to repurchase ..................... 6,302 4,259
Federal Home Loan Bank advances ............................ 45,268 26,468
Treasury tax and loan open note ............................ 914 1,456
Other liabilities .......................................... 2,395 2,193
-------- --------
TOTAL LIABILITIES ....................................... $314,068 $277,158
-------- --------
STOCKHOLDERS' EQUITY
Common Stock ............................................... $ 200 $ 200
Surplus .................................................... 4,439 4,440
Retained earnings .......................................... 24,982 23,522
-------- --------
$ 29,621 $ 28,162
Accumulated other comprehensive income, unrealized
gains (losses) on securities available for sale, net ..... 759 463
Less net cost of common shares acquired for the treasury ... 10,748 --
-------- --------
TOTAL STOCKHOLDERS' EQUITY .............................. $ 19,632 $ 28,625
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $333,700 $305,783
======== ========
See notes to Consolidated Condensed Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------------------- -------------------
INTEREST INCOME:
Interest and fees on loans .................. $ 4,975 $ 4,261 $ 14,131 $ 12,250
Interest on investment securities ........... 848 1,023 2,685 3,013
Interest on federal funds sold and securities
purchased under resale agreements ......... 172 64 683 314
-------- -------- -------- --------
Total interest income ....................... $ 5,995 $ 5,348 $ 17,499 $ 15,577
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits ........................ $ 2,422 $ 2,291 $ 7,269 $ 6,701
Interest on repurchase agreements and
other short-term borrowings ............... 776 392 2,014 957
Interest on notes payable ................... 136 -- 232 --
-------- -------- -------- --------
Total interest expense ...................... $ 3,334 $ 2,683 $ 9,515 $ 7,658
-------- -------- -------- --------
Net interest income ......................... $ 2,661 $ 2,665 $ 7,984 $ 7,919
Provision for possible loan losses ............. 36 -- 80 4
-------- -------- -------- --------
Net interest income after provision for
possible loan losses ...................... $ 2,625 $ 2,665 $ 7,904 $ 7,915
Investment securities gains (losses) ........... 15 3 19 (1)
Other income ................................... 472 428 1,349 1,259
Other expense .................................. 1,930 2,020 5,645 5,581
-------- -------- -------- --------
Income before income taxes .................. $ 1,182 $ 1,076 $ 3,627 $ 3,592
Applicable income taxes ........................ 377 341 1,142 1,146
-------- -------- -------- --------
Net income ..................................... $ 805 $ 735 $ 2,485 $ 2,446
======== ======== ======== ========
Net income per common share :
Basic ........................................ $ 0.53 $ 0.42 $ 1.50 $ 1.40
======== ======== ======== ========
Diluted ...................................... $ 0.53 $ 0.41 $ 1.50 $ 1.36
======== ======== ======== ========
Dividends declared per common share ............ $ 0.21 $ 0.19 $ 0.63 $ 0.57
======== ======== ======== ========
Comprehensive income ........................... $ 1,127 $ 902 $ 2,781 $ 2,660
======== ======== ======== ========
See notes to Consolidated Condensed Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 1998 and 1997
(In Thousands)
1998 1997
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 2,485 $ 2,446
Adjustments to reconcile net income to net cash provided by
operating activities:
Proceeds from FHLMC ..................................... 205 498
Loans underwritten for FHLMC ............................. (201) (494)
Gains on loans sold to FHLMC ............................. (4) (4)
Provision for loan losses ................................ 80 4
Investment securities (gains) losses, net ................ (19) 1
Depreciation ............................................. 472 347
Amortization of premiums and accretion of discounts
on loans and investment securities, net ................ 99 120
(Increase) in other assets ................................ (966) (843)
Increase in other liabilities ............................ 588 324
--------------------
Net cash provided by operating activities ................... $ 2,739 $ 2,399
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold ....................... $ 3,795 $ 3,723
Proceeds from maturities of investment securities ........ 17,932 10,495
Proceeds from sales of investment securities ............. 2,199 6,426
Purchases of investment securities ....................... (12,224) (18,640)
Net (increase) in loans .................................. (38,961) (19,168)
Purchases of bank premises and equipment ................. (366) (1,492)
--------------------
Net cash (used in) investing activities .................. $(27,625) $(18,656)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing deposits .. $ 82 $ (5,717)
Net increase in interest bearing deposits ................ 9,075 7,160
Net increase in securities sold under agreements
to repurchase ......................................... 2,043 114
Net increase in other borrowings ......................... 18,258 12,723
Proceeds from notes payable .............................. 9,250 --
Payments on notes payable ................................ (2,000) --
Cash dividends paid ...................................... (1,078) (998)
Reissuance of treasury stock ............................. 5 525
Purchases of common stock for the treasury ............... (10,753) (161)
--------------------
Net cash provided by financing activities ................ $ 24,882 $ 13,646
--------------------
Net increase in cash and due from banks .................. (4) (2,611)
Cash and due from banks:
Beginning ................................................ 12,726 14,914
--------------------
Ending ................................................... $ 12,722 $ 12,303
====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest ............................................... $ 9,438 $ 7,595
Income taxes ........................................... $ 903 $ 811
See notes to Consolidated Condensed Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company providing
bank and bank related services through its subsidiaries.
Significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, First National Bank of Muscatine
(Muscatine) and First National Bank in Fairfield (Fairfield), collectively
referred to herein as (Banks). All material intercompany accounts and
transactions have been eliminated in consolidation. The unaudited interim
financial statements presented reflect all adjustments which are, in the opinion
of management, necessary to a fair statement of the results for the interim
periods. All such adjustments are of a normal recurring nature.
Presentation of cash flows:
For purposes of reporting cash flows, cash and due from banks include cash
on-hand and amounts due from banks, including cash items in process of clearing.
Cash flows from demand deposits, NOW accounts, savings accounts, federal funds
sold, securities sold under agreements to repurchase, Federal Home Loan Bank
advances, TT&L open note, certificates of deposits, and loans are reported net.
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 stockholders'
equity, net of their deferred income tax effect.
Realized gains or 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 period to maturity. There were no investments held to maturity
or for trading purposes at quarter-end.
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 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 credit reviews 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 and lease origination fees and costs are generally being deferred
and the net amount amortized as an adjustment of the related loan'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
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
market value of the properties. Any write-down to fair market 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 market value.
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 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 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.
Deferred income taxes have not been provided on the equity in undistributed net
income of the subsidiaries as the entities file a consolidated income tax
return.
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.
Fair value of financial instruments:
FAS No. 107, Disclosures about Fair Market 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. Interim condensed financial statements are not required to
include the disclosures outlined by FAS 107 and, accordingly, are not included
herein.
Note 2. Capital Stock and Earnings Per Share
Common shares and preferred stock authorized total 6,000,000 shares and 500,000
shares, respectively. Basic earnings per share is arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Diluted earnings per share is arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period. The following table sets
forth the computation of basic and diluted earnings per share (in thousands
except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Numerator income applicable to
common shares ....................... $ 805 $ 735 $2,485 $2,446
================ ================
Denominator:
Basic-weighted average common
shares outstanding ................ 1,524 1,761 1,661 1,752
Dilutive effect of employee
stock options ..................... -- 35 -- 47
---------------- ----------------
Diluted outstanding shares .......... 1,524 1,796 1,661 1,799
================ ================
Basic earnings per share ............... .53 .42 1.50 1.40
================ ================
Diluted earnings per share ............. .53 .41 1.50 1.36
================ ================
Note 3. Purchase of Treasury Shares
On May 4, 1998, the Company entered into a signed agreement to purchase shares
representing approximately 16.5% of the previously outstanding common stock of
the Company. These shares were purchased from a director of Iowa First
Bancshares Corp. as well as various companies controlled or influenced by him,
his family, his business associates and charities. The purchase of these shares
was approved by the required regulators. The purchase price of approximately
$10.6 million was funded from internal cash and $9.25 million of debt financing.
The Company has repaid $2 million of this debt as of September 30, 1998. Of the
remaining $7.25 million of debt, $1.75 million matures within one year and $5.5
million is amortized over ten years with annual principal payments and a balloon
payment of the remaining balance at the end of five years.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Discussion and Analysis of Financial Condition
The Company's total assets at September 30, 1998, were $333,700,000. Muscatine's
total assets were $239,908,000 which reflects a $24,803,000 (11.5%) increase
from December 31, 1997, total assets. Fairfield's total assets were $92,460,000
at September 30, 1998, which is an increase of $4,928,000 (5.6%) when compared
to December 31, 1997, total assets. Total consolidated assets increased by 9.1%
during the first nine months of 1998.
Net loans totaled $247,564,000 at September 30, 1998. Net loans at Muscatine
increased by $32,069,000 (21.3%) during the first nine months. Net loans
increased at Fairfield by $6,812,000 (11.8%) during the first nine months.
Consolidated net loans increased by $38,881,000 (18.6%) year-to-date with
slightly more than one-third of the increase during the third quarter.
Total available for sale securities decreased $8,025,000 during the first nine
months of 1998 while federal funds sold decreased $3.8 million. The Banks
emphasize purchase of securities with maturities of five years and less as such
purchases offer reasonable yields with very little credit risk as well as
limited interest rate risk. Additionally, selected securities with longer
maturities have been purchased in order to enhance overall portfolio yield
without significantly increasing risk. At September 30, 1998, approximately 30%
of investment securities mature in more than five years and less than 10% mature
in more than ten years. Securities totaling approximately $1.2 million have been
sold during the year, generating net gains of $19,000.
Total deposits at September 30, 1998, were $251,939,000. Deposits at Muscatine
increased $7,051,000 (4.2%) from the prior year end. Fairfield's total deposits
increased $2,116,000 (2.8%) during the same period. This represents a combined
deposit increase of $9.2 million (3.8%) for the Company during the first nine
months of 1998. Additionally, securities sold under agreements to repurchase
increased $2.0 million and advances borrowed from the Federal Home Loan Bank
increased $18.8 million to total $45 million at quarter end.
Results of Operations
Consolidated net income was $805,000, or $.53 per diluted share, for the third
quarter of 1998, compared to $735,000 and $.41 per diluted share for the same
period last year. For the first nine months, net income totaled $2,485,000 or
$1.50 per diluted share compared to $2,446,000 and $1.36 per diluted share last
year. Last year's net income included expenses, after income tax effects, of
approximately $100,000 related to a problem loan. Net income in 1998 included
significant costs associated with opening two new branches and replacing another
branch, the costs of which were only partly reflected in 1997. Also, interest
expense totaling $136,000 and $232,000 for the three and nine months ended
September 30, 1998, respectively, was incurred on debt related to the repurchase
of approximately 16.5% of the outstanding common shares of the Company (see Note
3 for more information).
Management has expressed concern for several quarters as to the ability to
maintain or increase net interest income each successive quarter. The increased
usage of wholesale funding sources, while mitigating intermediate and long-term
interest rate risk, increases interest expense. The interest expense associated
with the debt incurred to purchase treasury shares also adds pressure to the net
interest margin. Finally, the intense competition for all types of loans does
not afford the Company much pricing power when dealing with borrowers.
Provisions for loan losses were $80,000 for the nine months ended September 30,
1998, this was $76,000 more than the same period in 1997. Net loan recoveries
totaled $89,000 compared to net charge-offs of $161,000 for the first nine
months of 1997.
Nonaccrual loans totaled $599,000 at September 30, 1998; $545,000 less than the
end of 1997. Other real estate owned totaled $500,000, and loans past due 90
days or more and still accruing totaled $280,000. The reserve for loan losses of
$2,772,000 represents 1.1% of net loans and more than 200% of total nonaccrual
loans, other real estate owned, and loans past due 90 days or more and still
accruing.
The efficiency ratio, defined as noninterest expense as a percent of net
interest income plus noninterest income, was 60.5% for the first nine months of
1998 compared to 61.1% for all of 1997.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" refers to those assets and
liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative gap exists when
total interest-bearing liabilities are in excess of interest-earning assets.
Generally a positive repricing gap will result in increased net interest income
in a rising rate environment and decreased net interest income in a falling rate
environment. A negative repricing gap tends to produce increased net interest
income in a falling rate environment and decreased net interest income in a
rising rate environment. At September 30, 1998, rate sensitive liabilities
exceeded rate sensitive assets within a one year maturity range by approximately
15% of total assets and, thus, the Company is theoretically positioned to
benefit from a decline in interest rates within the next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change.
Because the repricing gap position does not capture these risks, Management
utilizes simulation modeling to measure and manage the rate sensitivity exposure
of earnings. The Company's simulation model provides a projection of the effect
on net interest income of various interest rate scenarios and balance sheet
strategies.
Liquidity
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are varied,
but include general economic conditions, asset/liability mix, bank reputation,
future FDIC funding needs, changes in regulatory environment, and credit
standing. Assets which provide liquidity consist principally of loans, cash and
due from banks, investment securities, and short-term investments such as
federal funds. Maturities of securities held for investment purposes and loan
payments provide a constant flow of funds available for cash needs.
Additionally, liquidity can be gained by the sale of loans or securities prior
to maturity if such assets had previously been designated as available for sale.
Interest rates, relative to the rate paid by the security or loan sold, along
with the maturity of the security or loan, are the major determinates of the
price which can be realized upon sale.
The subsidiary banks do not have brokered deposits.
The stability of the Company's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer deposits
tend to be small in size, diversified across a large base of individuals, and
are government insured to the extent permitted by law. Total deposits at
September 30, 1998, were $251,939,000 or 75% of total liabilities and equity.
Securities available for sale with a cost totaling $56,261,000 at quarter-end
included net unrealized gains of $1,210,000. These securities may be sold in
whole or in part to increase liquid assets, reposition the investment portfolio,
or for other purposes as defined by Management.
Capital
Stockholders' equity decreased $9 million during the nine months ended September
30, 1998. The main reason for this decline was the purchase of treasury stock
totaling $10.8 million.
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different inherent risks among financial institutions' assets and
off-balance-sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a Financial Institution to maintain capital at higher levels.
A comparison of the Company's capital as of September 30, 1998 with the minimum
requirements is presented below.
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital ...................... 7.47% 4.00%
Total risk-based capital ....................... 8.64% 8.00%
Tier 1 leverage ratio .......................... 5.40% 4.00%
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Year 2000 Compliance
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. The responses received have indicated that systems needing
upgrades or replacements will, in most instances, be available for installation
by December 31, 1998. The Company is working on developing contingency plans for
any system that does meet this deadline. The Validation phase will encompass the
testing and verification of changes to systems and coordination with outside
parties. The Company will be working to test the mission critical systems
starting in October 1998. The Company expects to be 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
remain so many unknowns about the potential issues with the Year 2000, the
Company is evaluating its disaster recovery plan and will be adding provisions
for potential Year 2000 related disaster recovery situations.
The Company believes it will incur approximately $150,000 in Year 2000 related
costs, although this number could vary significantly based upon the results of
testing and other factors. 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 situations that it anticipates will require
material cost expenditures.
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 problem through quarterly statement
enclosures and other forms of communication.
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 problem 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 problem
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.
Trends, Events or Uncertainties
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. All such transactions are on substantially the same
terms, including interest rates on loans and collateral, as those prevailing at
the time for comparable transactions with others, involve no more than normal
risk of collectibility, and present no other unfavorable features.
In the normal course of business, the Banks are involved in various legal
proceedings. In the current opinion of management, any liability resulting from
such proceedings would not have a material effect on the Company's financial
statements.
ITEM 6. Exhibits and reports on Form 8-K.
Reports on Form 8-K. No Form 8-K has been filed for
the quarter ended September 30, 1998.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
(Registrant)
November 13, 1998 /s/ George A. Shepley
- ---------------- -------------------------------
Date George A. Shepley, Chairman of
the Board and Chief Executive Officer
November 13, 1998 /s/ Kim K. Bartling
- ---------------- -------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer