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 June 30, 1999
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission file number 2-89283
IOWA FIRST BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF IOWA 42-1211285
- --------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
300 East Second Street
Muscatine, Iowa 52761
- ----------------------------------------
(Address of principal executive offices)
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 June 30, 1999 there were 1,532,424 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,
June 30, 1999 and December 31, 1998
Consolidated Condensed Statements of Operations,
Three and Six Months Ended June 30, 1999 and 1998
Consolidated Condensed Statements of Cash Flows,
Six Months Ended June 30, 1999 and 1998
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)
June 30, December 31,
1999 1998
------------------------
ASSETS
Cash and due from banks ................................ $ 10,470 $ 14,408
Investment securities available for sale (cost June 30,
1999, $66,886; December 31, 1998, $57,581) .......... 66,789 58,711
Federal funds sold and securities
purchased under resale agreements ................... 900 12,555
Loans, net of allowance for possible loan
losses June 30, 1999, $2,913; December 31, 1998,
$2,787 .............................................. 264,146 250,318
Bank premises and equipment, net ....................... 5,675 5,858
Other assets ........................................... 4,188 3,561
--------- ---------
TOTAL ASSETS ........................................ $ 352,168 $ 345,411
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits ........................... $ 40,508 $ 44,430
Interest bearing deposits .............................. 220,606 217,416
--------- ---------
TOTAL DEPOSITS ...................................... $ 261,114 $ 261,846
Notes payable .......................................... 6,950 7,250
Securities sold under agreements to
repurchase .......................................... 4,180 5,645
Federal Home Loan Bank advances ........................ 53,052 47,973
Treasury tax and loan open note ........................ 2,483 163
Other liabilities ...................................... 1,934 2,225
Federal Funds Purchased ................................ 1,875 0
--------- ---------
TOTAL LIABILITIES ................................... $ 331,588 $ 325,102
STOCKHOLDERS' EQUITY
Common stock ........................................... $ 200 $ 200
Surplus ................................................ 4,408 4,408
Retained earnings ...................................... 26,500 25,460
--------- ---------
$ 31,108 $ 30,068
Accumulated other comprehensive income (loss) .......... (61) 708
Less net cost of common shares acquired for the treasury (10,467) (10,467)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY .......................... $ 20,580 $ 20,309
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $ 352,168 $ 345,411
========= =========
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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- ------- ------- -------
INTEREST INCOME:
Interest and fees on loans ...................................... $ 5,169 $ 4,731 $10,230 $ 9,156
Interest on investment securities ............................... 921 917 1,755 1,837
Interest on federal funds sold and securities
purchased under resale agreements ............................. 112 285 239 511
------- ------- ------- -------
Total interest income ........................................... $ 6,202 $ 5,933 $12,224 $11,504
------- ------- ------- -------
INTEREST EXPENSE:
Interest on deposits ............................................ $ 2,394 $ 2,507 $ 4,694 $ 4,847
Interest on other borrowed funds ................................ 877 679 1,712 1,238
Interest on notes payable ....................................... 131 96 264 96
------- ------- ------- -------
Total interest expense .......................................... $ 3,402 $ 3,282 $ 6,670 $ 6,181
------- ------- ------- -------
Net interest income ............................................. $ 2,800 $ 2,651 $ 5,554 $ 5,323
Provision for possible loan losses ................................. 112 26 166 44
------- ------- ------- -------
Net interest income after provision for
possible loan losses .......................................... $ 2,688 $ 2,625 $ 5,388 $ 5,279
Investment securities gains (losses) ............................... -- -- -- 4
Other income ....................................................... 490 465 945 877
Other expense ...................................................... 1,913 1,882 3,885 3,715
------- ------- ------- -------
Income before income taxes ...................................... $ 1,265 $ 1,208 $ 2,448 $ 2,445
Applicable income taxes ............................................ 390 368 764 765
------- ------- ------- -------
Net income ......................................................... $ 875 $ 840 $ 1,684 $ 1,680
======= ======= ======= =======
Net income per common share :
Basic ............................................................ $ 0.57 $ 0.51 $ 1.10 $ 0.97
======= ======= ======= =======
Diluted .......................................................... $ 0.57 $ 0.51 $ 1.10 $ 0.97
======= ======= ======= =======
Dividends declared per common share ................................ $ 0.21 $ 0.21 $ 0.42 $ 0.42
======= ======= ======= =======
Comprehensive income ............................................... $ 337 $ 806 $ 915 $ 1,654
======= ======= ======= =======
See notes to Consolidated Condensed Financial Statements.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 1999 and 1998
(In Thousands)
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 1,684 $ 1,680
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from FHLMC ........................................... 1,737 295
Loans underwritten for FHLMC ................................... (1,724) (295)
Gains on loans sold to FHLMC ................................... (13) --
Provision for loan losses ...................................... 166 44
Investment securities (gains) losses, net ...................... -- (4)
Depreciation ................................................... 319 312
Amortization of premiums and accretion of discounts
on loans and investment securities, net ...................... 66 67
(Increase) in other assets ...................................... (627) (559)
(Decrease) increase in other liabilities ........................ (291) (9)
-------- --------
Net cash provided by operating activities ......................... $ 1,317 $ 1,531
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold .................. $ 11,655 $ (2,905)
Proceeds from sales, maturities, calls and paydowns of available
for sale securities .......................................... 10,144 14,707
Purchases of available for sale securities ..................... (19,059) (10,827)
Net (increase) in loans ........................................ (13,994) (24,954)
Purchases of bank premises and equipment ....................... (136) (327)
-------- --------
Net cash (used in) investing activities ........................ $(11,390) $(24,306)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing deposits ........ $ (3,922) $ 1,209
Net increase in interest bearing deposits ...................... 3,190 10,324
Net increase (decrease) in securities sold under
agreements to repurchase ..................................... (1,465) 1,470
Net increase in other borrowings ............................... 9,274 18,988
Net increase (decrease) in notes payable ....................... (300) 7,250
Cash dividends paid ............................................ (642) (758)
Reissuance of treasury stock ................................... -- --
Purchases of common stock for the treasury ..................... -- (10,750)
-------- --------
Net cash provided by financing activities ...................... $ 6,135 $ 27,733
-------- --------
Net increase in cash and due from banks ........................ (3,938) 4,958
Cash and due from banks:
Beginning ...................................................... $ 14,408 $ 12,726
-------- --------
Ending ......................................................... $ 10,470 $ 17,684
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest ..................................................... $ 6,582 $ 6,167
Income taxes ................................................. $ 634 $ 628
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
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine (Muscatine) and First National
Bank in Fairfield (Fairfield). First National Bank of Muscatine has a total of
five locations in Muscatine, Iowa. First National Bank in Fairfield has two
locations in Fairfield, Iowa. Each bank is engaged in the general commercial
banking business and provides full service banking to individuals and
businesses, including checking, savings 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. 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 includes cash
on-hand, amounts due from banks, and 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 Banks recognize interest income on impaired loans on a cash
basis.
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. 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 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.
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 average number of shares
of common stock outstanding for the second quarter of 1999 and 1998 were
1,532,424 and 1,637,200, respectively. The average number of shares of common
stock outstanding for the first six months of 1999 and 1998 were 1,532,424 and
1,732,000, respectively. There were no common stock equivalents in 1999 or 1998.
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 June 30, 1999, were $352,168,000. Muscatine's
total assets were $259,791,000 which reflects a $12,724,000 (5.2%) increase from
December 31, 1998, total assets. Fairfield's total assets were $91,334,000 at
June 30, 1999, which is a decrease of $5,933,000 (6.1%) when compared to
December 31, 1998, total assets. Total consolidated assets increased by 2.0%
during the first six months of 1999.
Net loans totaled 264,146,000 at June 30, 1999. Net loans at Muscatine increased
by $13,566,000 (7.4%) during the first six months. Net loans increased at
Fairfield by $262,000 (0.4%) during the first six months. Consolidated net loans
increased by $13,828,000 (5.5%) year-to-date.
Total available for sale securities increased $8,078,000 during the first six
months of 1999 while federal funds sold decreased $11.7 million. The Banks
emphasize purchase of securities with maturities of five years and less as such
purchases offer reasonable yields with 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 June 30, 1999, less than 40% of investment
securities mature in more than five years and less than 15% mature in more than
ten years. No securities have been sold during the year.
Total deposits at June 30, 1999, were $261,114,000. Deposits at Muscatine
increased $7,215,000 (4.0%) from the prior year end. Fairfield's total deposits
decreased $7,982,000 (9.9%) during the same period. This represents a combined
deposit decrease of slightly more than $700,000 (0.3%) for the Company during
the first six months of 1999. Additionally, securities sold under agreements to
repurchase decreased $1,465,000 and advances borrowed from the Federal Home Loan
Bank increased $5,079,000 to total $53.1 million at quarter end.
Results of Operations
Consolidated net income was $875,000, or $.57 per share, for the second quarter
of 1999. This was $35,000 or 4.2% more than the same period last year. For the
first six months, net income totaled $1,684,000 or $1.10 per share compared to
$1,680,000 or $.97 per share last year. Interest expense on debt used to
purchase treasury shares is the primary reason year-to-date net income is nearly
identical to the previous year while earnings per share over the same time
period increased 13.4%. This interest expense totaled $264,000 before tax for
the first six months of 1999 compared to only $96,000 in 1998. Due in large part
to the purchase of the treasury shares, return on equity for the first half of
1999 was 16.5%, appreciably greater than the 13.0% for the same period last
year.
The Company has been able to expand net interest income, as compared to the
prior year by actively managing asset quality, growth of the loan portfolio, and
rates paid on assets and liabilities. Management has expressed concern for
several quarters, however, as to the ability to continue increasing 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
income. 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 $112,000 and $166,000 for the three and six
months ended June 30, 1999. This was $86,000 and $122,000 more than the same
periods in 1998. Net loan charge-offs totaled only $39,000 during the first six
months of 1999. However, due to low farm commodity prices in 1998 and thus far
in 1999, and the resultant pressure on cash flow and equity of some farm
borrowers, our bank in Fairfield increased its provisions for possible loan
losses. While no significant loan charge-offs have yet been specifically
identified, prudent management dictated strengthening our reserves for possible
loan losses as the financial picture of selected farm borrowers weakened. The
market prices of farm commodities, coupled with the level of success our farm
customers have in the production and marketing of their current year output,
will help determine the actual required loan loss reserves.
Nonaccrual loans totaled $599,000 at June 30, 1999, $263,000 less than the end
of the second quarter in 1998. Other real estate owned totaled $723,000, and
loans past due 90 days or more and still accruing totaled $749,000. The reserve
for loan losses of $2,913,000 represents 1.1% of net loans and 141% 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 59.8% for the first six months of
1999 compared to 59.4% for all of 1998.
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 June 30, 1999, rate sensitive liabilities exceeded
rate sensitive assets within a one year maturity range by approximately 20% 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 June
30, 1999, were $261,114,000 or 74% of total liabilities and equity.
Securities available for sale with a cost totaling $66,886,000 at quarter-end
included net unrealized losses of $97,000. 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
Retained earnings increased $553,000 during the three months, and $1,040,000
during the six months, ended June 30, 1999.
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 June 30, 1999 with the requirements
to be considered adequately capitalized is presented below.
For Capital
Actual Adequacy Purposes
--------------------------
Tier 1 risk-based capital ...................... 8.02% 4.00%
Total risk-based capital ....................... 9.19% 8.00%
Tier 1 leverage ratio .......................... 5.64% 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
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 computer problems
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. All needed upgrades or replacements of mission critical systems
have been completed as of June 30, 1999. The Validation phase encompasses the
testing and verification of changes to systems and coordination with outside
parties. The Company has finished testing mission critical systems and
applications. By the Implementation phase, all systems should be certified as
year 2000 compliant and should be in use. The Company has completed the vast
majority of this phase as of June 30, 1999. The remaining Implementation will be
completed by September 30, 1999. Because there remains so many unknowns about
the potential issues with the year 2000, the Company has updated and tested its
disaster recovery plan which now includes specific provisions for dealing with
potential year 2000 related disaster recovery situations.
The Company believes it will incur a total of approximately $300,000 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.
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. Failure to satisfactorily address the Year 2000 Issue may expose a
financial institution to various 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.
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
OTHER INFORMATION
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 June 30, 1999.
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)
8/11/99 /s/ George A. Shepley
- ---------------- -------------------------------------
Date George A. Shepley, Chairman of
the Board and Chief Executive Officer
8/11/99 /s/ Kim K. Bartling
- ---------------- -------------------------------------
Date Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer