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SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [FEE REQUIRED]
For the Fiscal Year Ended June 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from _________ to _________
Commission File Number 0-25509
FIRST FEDERAL BANKSHARES, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-1485449
- ----------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
329 Pierce Street, Sioux City, Iowa 51101
----------------------------------- ----------
(Address of Principal Executive Offices) Zip Code
(712) 277-0200
--------------------------------
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] 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. [ ].
As of September 13, 2000, there were issued and outstanding 4,690,161
shares of the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the last sale price, as reported by
the NASDAQ National Market, on September 13, 2000 was $36,235,156. This amount
does not include shares held by the Bank's Employee Stock Ownership Plan and by
officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II of Form 10-K--Annual Report to Stockholders for the fiscal year
ended June 30, 2000.
2. Part III of Form 10-K--Proxy Statement for the 2000 Annual Meeting of
Stockholders.
PART I
ITEM 1 BUSINESS
General
First Federal Bankshares, Inc.
First Federal Bankshares, Inc. (the "Company" or the "Registrant") is a
Delaware corporation that serves as the holding company for First Federal Bank,
a federally-chartered stock savings bank headquartered in Sioux City, Iowa (the
"Bank"). As of June 30, 2000, the Company owned 100% of the Bank's common stock,
and currently the Company engages in no other significant activities beyond its
ownership of such common stock. Consequently, its net income is derived
primarily from the Bank's operation.
Prior to April 13, 1999, the Bank's common stock was owned
approximately 53.49% by First Federal Bankshares, M.H.C. (the "Mutual Holding
Company") and 46.51% by public stockholders. On April 13, 1999, pursuant to a
Plan of Conversion and Reorganization, and after a series of transactions, the
Company was formed to own all of the capital stock of the Bank, and the Company
sold the ownership interest in the Bank previously held by the Mutual Holding
Company to the public in a subscription offering that resulted in net cash
proceeds of approximately $23 million. Public stockholders of the Bank had their
shares exchanged into 2,182,807 shares of common stock of the Company
(representing an exchange ratio of 1.64696 shares of Company common stock for
each share of Bank common stock). The Mutual Holding Company ceased to exist
following the reorganization. The reorganization was accounted for in a manner
similar to a pooling of interests and did not result in any significant
accounting adjustments. As a result of the reorganization, the consolidated
financial statements for prior periods have been restated to reflect the changes
in the par value of common stock from $1.00 per share (for the Bank's common
stock) to $0.01 per share (for the Company's common stock). At June 30, 2000,
the Company had total assets of $723.4 million, total deposits of $471.6 million
and stockholders' equity of $68.1 million.
The Company's principal executive office is located at 329 Pierce
Street, Sioux City, Iowa 51101 and its telephone number at that address is (712)
277-0200.
First Federal Bank
First Federal Bank ("First Federal" or the "Bank") is a federally
chartered stock savings bank headquartered in Sioux City, Iowa. Founded in 1923,
First Federal's deposits have been federally insured since 1935 by the Savings
Association Insurance Fund and its predecessor, the Federal Savings and Loan
Insurance Corporation. The Bank has been a member of the Federal Home Loan Bank
System since 1935.
The Bank is a community-oriented financial institution offering
traditional financial services to its local community. The Bank's primary
lending area includes mid- and northwest-Iowa and contiguous portions of
Nebraska and South Dakota. The Bank's primary lending activity involves the
origination of fixed rate and adjustable rate mortgage ("ARM") loans secured by
single family residential, multi-family residential and non-residential real
estate. Fixed rate mortgage loans are originated primarily for sale in the
secondary market on a servicing-released basis, while ARM loans are retained in
the Bank's portfolio. To a lesser extent, the Bank makes second mortgage loans
secured by the borrower's principal residence and other types of consumer loans
such as auto loans and home improvement loans. In addition, the Bank invests in
mortgage-backed securities issued or guaranteed by Fannie Mae ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC"), or the Government National
Mortgage Association ("GNMA"), and in securities issued by the United States
Government and agencies thereof.
The Bank conducts operations through its main office in Sioux City,
Iowa, and its 18 branch offices in northwest and central Iowa and northeast
Nebraska.
1
The Bank's principal executive office is located at 329 Pierce Street,
Sioux City, Iowa 51101, and its telephone number at that address is (712)
277-0200.
Forward Looking Statements
This Annual Report on Form 10-K may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "expect",
"intend", "may", and similar expressions identify such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward- looking statements
contained herein. These forward-looking statements are based largely on the
expectations of the Registrant or the Registrant's management and are subject to
a number of risks and uncertainties, including but not limited to economic,
competitive, regulatory, and other factors affecting the Registrant's
operations, markets, products and services, as well as expansion strategies and
other factors discussed elsewhere in this report filed by the Registrant with
the Securities and Exchange Commission. Many of these factors are beyond the
Registrant's control.
Market Area
The Registrant conducts operations through its main office in Sioux
City, Iowa, which is located on the western border of Iowa, and its 18 branch
offices in northwest and central Iowa and northeast Nebraska. The Company gained
access to the central Iowa market area after its acquisition in March 1998 of
GFS Bancorp, Inc. Grinnell is located in Poweshiek County, fifty-five miles east
of Des Moines, Iowa, the state capital and largest metropolitan area. The
Company expanded its presence in the central Iowa market area after its
acquisition in April 1999 of Mid-Iowa Financial Corp. headquartered in Newton,
Iowa, which is located 35 miles east of Des Moines, Iowa. Mid-Iowa Financial
Corp. was the parent company of Mid-Iowa Savings Bank with six offices in Jasper
County, Iowa and an office in West Des Moines, Iowa. The population of Sioux
City, Grinnell and Newton is approximately 85,000, 9,000 and 15,000,
respectively. The total population of the Registrant's primary market area is
approximately 450,000. Most employment in the Registrant's primary market area
is in agriculture and agriculture- related industries, but also includes
significant manufacturing and service businesses. Major employers in the
northwest Iowa primary market area, which includes contiguous portions of
Nebraska and South Dakota, include Iowa Beef Processors, MCI Telemarketing,
Sioux Honey Association, Wells Dairy, Interbake Foods, Gateway 2000, Great West
Casualty, the 185th Fighter Group of the Iowa Air National Guard, Mercy Medical
Center, St. Luke's Regional Medical Center, American Identity and Diamond Vogel
Paint. Major employers in the central Iowa primary market area include Grinnell
College, Grinnell Mutual Insurance Company, GTE, Grinnell Regional Medical
Center, Donaldson Company, Maytag Corporation, Skiff Medical Center, Newton
Manufacturing, the Vernon Company, Cline Tool and Service Company, Thombert,
Inc. and Walmart.
The Registrant's business and operating results are significantly
affected by the general economic conditions prevalent in its primary market
area. The Registrant's primary market area is projected to experience only
moderate population growth for the foreseeable future.
Lending Activities
General. Historically, the principal lending activity of the Registrant
has been the origination or purchase of mortgage loans secured by one- to
four-family residential properties. The Registrant also originates loans secured
by commercial real estate and multi-family units and purchases participation
interests in multi-family loans and commercial real estate loans originated by
other lenders in the midwest. Multi-family and commercial real estate loans
totaled $109.0 million, $72.1 million and $58.4 million, respectively, at June
30, 2000, 1999 and 1998. In recent years, the Registrant has increased its
consumer lending activities to broaden services offered to customers and to
improve the Registrant's interest rate risk exposure.
2
The Registrant has sought to make its interest earning assets more
interest rate sensitive by actively originating and purchasing variable rate
loans, such as ARM loans, adjustable rate second mortgage loans and medium-term
consumer loans. The Registrant also purchases mortgage-backed securities with
adjustable rates. At June 30, 2000 approximately $236.8 million or 43.9% of the
Registrant's total loan and mortgage-backed securities portfolio had variable
interest rates.
The Registrant actively originates fixed rate mortgage loans, generally
with 10 to 30 year terms to maturity secured by one- to four-family residential
properties. One- to four-family fixed rate loans generally are originated and
underwritten for resale in the secondary mortgage market. The Registrant also
actively originates loans insured or guaranteed by the United States Government
or agencies thereof, such as VA, Rural Development and FHA loans. The Registrant
also originates interim construction loans on one- to four-family residential
properties and construction loans on commercial real estate and multi-family
units.
Analysis of Loan Portfolio. Set forth below are selected data relating
to the composition of the Registrant's loan portfolio, by type of loan on the
dates indicated.
At June 30,
--------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- --------
(Dollars in Thousands)
Residential real estate:
One- to four-family units (1)..... $ 325,057 64.36% $ 326,126 71.36% $ 301,415 74.46%
Multi-family dwelling units (2)... 54,455 10.78 40,974 8.96 43,146 10.66
Commercial real estate (3).......... 54,594 10.81 31,158 6.82 15,294 3.78
Commercial loans ................... 8,533 1.69 6,193 1.35 1,798 0.44
Home equity and second mortgage..... 35,695 7.07 32,315 7.07 21,682 5.36
Auto loans.......................... 13,801 2.73 13,603 2.98 16,417 4.06
Loans on deposits................... 659 0.13 616 0.13 584 0.14
Other non-mortgage loans (4)........ 16,887 3.34 10,400 2.28 8,619 2.12
--------- ------- --------- ------- --------- ------
Total........................... $ 509,681 100.91% $ 461,385 100.95% $ 408,955 101.02%
--------- ------- --------- ------- --------- ------
Less
Allowance for loan losses......... (3,394) (0.67) (3,135) (0.69) (2,607) (0.64)
Loans in process.................. (550) (0.11) (942) (0.21) (875) (0.22)
Net unearned premiums on loans.... 1,684 0.33 1,995 0.44 1,483 0.37
Deferred loan fees................ (2,331) (0.46) (2,245) (0.49) (2,156) (0.53)
--------- ------- --------- ------- --------- ------
Total loans, net............... $ 505,090 100.00% $ 457,058 100.00% $ 404,800 100.00%
========= ======= ========= ======= ========= ======
- ----------------
(1) Includes construction loans on one-to four-family units.
(2) Includes construction loans on multi-family dwelling units.
(3) Includes construction loans on commercial real estate.
(4) Includes other secured non-mortgage loans, home improvement loans, credit
card loans, education loans and unsecured personal loans.
3
Loan and Mortgage-Backed Securities Maturity Schedule. The following table
sets forth certain information as of June 30, 2000, regarding the dollar amount
of loans and mortgage-backed securities maturing in the Registrant's portfolio
based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they mature, and fixed rate loans and mortgage-backed
securities are included in the period in which the final contractual repayment
is due. Fixed rate mortgage-backed securities are assumed to mature in the
period in which the final contractual payment is due on the underlying mortgage.
One Three Five Ten Beyond
Within Through Through Through Through Twenty
One Year Three Years Five Years Ten Years Twenty Years Years Total
----------- ------------ ------------ ---------- ------------ --------- --------
(In Thousands)
First mortgage loans:
One- to four-family residences:
Adjustable.............................. $ 49,987 43,824 23,095 21,310 -- -- 138,216
Fixed................................... 7,606 2,792 4,225 52,914 98,741 20,563 186,841
--------- ---------- --------- -------- -------- -------- ---------
Total one- to four-family............... 57,593 46,616 27,320 74,224 98,741 20,563 325,057
Multi-family and commercial real estate:
Adjustable.............................. 32,978 30,771 8,741 -- -- -- 72,490
Fixed................................... 20,574 8,199 1,281 4,798 1,497 210 36,559
--------- ---------- --------- -------- -------- -------- ---------
Total multi-family and commercial....... 53,552 38,970 10,022 4,798 1,497 210 109,049
Commercial loans:
Adjustable.............................. 4,843 105 226 -- -- -- 5,174
Fixed................................... 1,938 575 442 384 20 -- 3,359
--------- ---------- --------- -------- -------- -------- ---------
Total commercial loans.................. 6,781 680 668 384 20 -- 8,533
Consumer loans and other non-mortgage loans:
Adjustable.............................. 4,784 -- -- -- -- -- 4,784
Fixed................................... 4,008 13,273 20,724 18,876 4,826 551 62,258
--------- ---------- --------- -------- -------- -------- ---------
Total consumer loans and other
non-mortgage loans.................... 8,792 13,273 20,724 18,876 4,826 551 67,042
--------- ---------- --------- -------- -------- -------- ---------
Total loans receivable.................. $ 126,718 $ 99,539 $ 58,734 $ 98,282 $ 05,084 $ 21,324 $ 509,681
========= ========== ========= ======== ======== ======== =========
Mortgage-backed securities (MBS):
Fixed-rate MBS - held to maturity......... $ -- $ 996 $ 1,338 $ 3,998 $ 5,878 $ 893 $ 13,103
Adjustable-rate MBS - available
for sale................................ 15,563 622 -- -- -- -- 16,185
--------- ---------- --------- -------- -------- -------- ---------
Total mortgage-backed securities............ $ 15,563 $ 1,618 $ 1,338 $ 3,998 $ 5,878 $ 893 $ 29,288
========= ========== ========= ======== ======== ======== =========
4
The following table sets forth the dollar amount of all loans maturing
or repricing after June 30, 2001 which have predetermined interest rates and
have floating or adjustable interest rates.
Floating or
Predetermined Adjustable
Rates Rates Total
---------- ------------- -----------
(In thousands)
Real estate mortgage:
One- to four-family........... $ 179,235 $ 88,229 $ 267,464
Other mortgage loans.......... 15,985 39,512 55,497
Commercial loans................. 1,421 331 1,752
Consumer......................... 58,250 -- 58,250
--------- ---------- -----------
Total....................... $ 254,891 $ 128,072 $ 382,963
========= =--------- ===========
Residential Real Estate Loans. The Registrant's primary lending
activity consists of the origination of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Registrant's
primary market area. The majority of the Registrant's residential mortgage loans
consists of loans secured by owner-occupied, single-family residences. The
Registrant generally has limited its real estate loan originations to properties
within its primary market area. However, the Registrant also purchases whole
loans originated by others, with an emphasis on single-family ARM loans having
interest rate caps generally of 2% annually and 5% over the life of the loan and
with margins over various indexes ranging from 180 to 275 basis points depending
on the index. During the three-year period through June 30, 2000, the Registrant
purchased approximately $14.9 million of one- to four-family residential loans.
One-to-four family loans purchased outside of the Registrant's primary lending
area totaled approximately $39.9 million at June 30, 2000 and include
approximately $32.6 million of loans that are geographically distributed in the
midwestern United States. The remaining loans are scattered throughout the
United States with the largest geographic concentrations including Connecticut
with $2.3 million, Georgia with $1.0 million and Arizona with approximately $1.1
million.
The delinquency rate on purchased loans and on loans originated by the
Registrant was 1.0% and 0.3%, respectively, at June 30, 2000. Loans purchased
primarily consist of single-family residential loans secured by properties
located in the Midwest. Management attributes the low delinquency rates to the
current relative strength of the economy in the Midwest. The Registrant
purchases loans from other institutions as market conditions permit in order to
reduce the Registrant's overall credit risk by increasing geographical diversity
and to supplement its loan portfolio in periods of weaker local demand.
At June 30, 2000, the Registrant had $325.1 million, or 63.8%, of its
total loan portfolio invested in first mortgage loans secured by one-to
four-family residences.
The Registrant currently offers residential mortgage loans for terms
ranging from 10 to 30 years, and with adjustable or fixed interest rates.
Origination of fixed rate mortgage loans versus ARM loans is monitored on an
ongoing basis and is affected significantly by the level of market interest
rates, customer preference, the Registrant's interest rate GAP position and loan
products offered by the Registrant's competitors. During fiscal 2000, one-to
four- family residential ARM loans increased by $15.9 million, or 13.0%, to
$138.2 million from $122.3 million in fiscal 1999 as borrowers chose ARM loans
with generally lower starting rates than fixed-rate products in the generally
higher interest rate environment.
The Registrant's long-term fixed rate loans generally are originated
and underwritten for resale in the secondary mortgage market. Whether the
Registrant can or will sell fixed rate loans to the secondary market, however,
depends on a number of factors including the yield on the loan and the term of
the loan, market conditions and the Registrant's current GAP position. For
example, fixed rate loans with terms less than 15
5
years are likely to be retained by the Registrant. Moreover, the Registrant is
more likely to retain fixed rate loan originations if its one year GAP is
positive. The Registrant generally sells long-term, fixed-rate loans at
origination, servicing-released. Servicing release premium is determined at loan
closing, thus assuring the profit at current market rates. The Registrant's
fixed rate mortgage loans are amortized on a monthly basis with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers
may refinance or prepay loans at their option.
The Registrant's ARM loans generally adjust annually with interest rate
adjustment limitations ranging from one to two percentage points per year and
with a cap on total rate increases over the life of the loan. The Registrant has
used different interest indexes for ARM loans, such as the one-year Treasury
Constant Maturity, the Monthly National Median Cost of Funds, the National
Average Contract Rate for Previously Occupied Homes and the Eleventh District
Cost of Funds. The Registrant also has purchased ARM loans with various interest
rate indexes. Consequently, the interest rate adjustments on the Registrant's
portfolio of ARM loans do not reflect changes in a particular interest rate
index.
The Registrant's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Registrant the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means of
adjusting the rates on the Registrant's fixed rate mortgage loan portfolio, and
the Registrant has generally exercised its rights under these clauses.
Regulations limit the amount that a savings bank may lend relative to
the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans. The Registrant's lending policies, however, generally limit the
maximum loan-to-value ratio on both fixed rate and ARM loans to 85% of the
lesser of the appraised value or the purchase price of the property to serve as
security for the loan.
The Registrant occasionally makes real estate loans with loan-to-value
ratios in excess of 80%. For real estate loans with loan-to-value ratios of
between 80% and 97%, the Registrant requires the first 12% to 20% of the loan to
be covered by private mortgage insurance. For real estate loans with
loan-to-value ratios of between 90% and 97%, the Registrant requires private
mortgage insurance to cover the first 25% to 30% of the loan amount. The
Registrant requires fire and casualty insurance, as well as title insurance or
an opinion of counsel regarding good title, on all properties securing real
estate loans made by the Registrant.
Construction Loans. The Registrant originates loans to finance the
construction of single family residential property. However, construction
lending is not a significant part of the Registrant's overall lending activities
because of the low level of new home construction in the Registrant's primary
market area. At June 30, 2000, the Registrant had $2.1 million, or 0.4%, of its
total loan portfolio invested in interim construction loans. Loans for
construction of single family residential property are made with either
adjustable or fixed rate terms. A construction loan fee of $400 is charged for
each loan. Loan proceeds are disbursed in increments as construction progresses
and as inspections warrant. Construction loans are structured to be converted to
permanent loans originated by the Registrant at the end of the construction
period, which is generally six months, not to exceed 12 months.
The Registrant's commercial loan department also originates loans for
construction to contractors and entrepreneurs. These loans include loans for the
construction of single-family dwellings for speculation or customized building,
apartment buildings, condominiums, nonresidential structures, and loans for the
renovation of existing structures. Commercial department construction loans
generally have fixed rates and proceeds are disbursed in increments as
construction progresses subject to inspections. Loans for the construction of
single-family spec homes are generally paid off at the maturity of the
construction loan. Construction loans on commercial real estate are often
structured to convert to permanent loans originated by
6
the Registrant at the end of the construction period, which is generally 12 to
24 months. Less frequently, loans on commercial real estate projects are
structured to cover the construction period only. At June 30, 2000, the
Registrant had $4.3 million, or 0.9%; $8.7 million, or 1.7%; and $1.2 million,
or .2%, respectively, of its total loan portfolio invested in loans for the
construction of single-family speculation units, multi-family residential
properties and nonresidential properties.
Multi-Family Residential Real Estate Loans. Loans secured by
multi-family real estate constituted $54.5 million or 10.8% of the Registrant's
total loan portfolio at June 30, 2000, compared to $41.0 million or 9.0% of the
Registrant's total loan portfolio at June 30, 1999 and $43.1 million, or 10.7%
of the total loan portfolio at June 30, 1998. The Registrant's multi-family real
estate loans are secured by multi-family residences, such as apartment
buildings. At June 30, 2000, 28.5% of the Registrant's multi-family loans were
secured by properties located within the Registrant's market area. At June 30,
2000, the Registrant's multi- family real estate loans had an average balance of
$284,000. The terms of each multi-family loan are negotiated on a case by case
basis, although such loans typically have adjustable interest rates tied to a
market index or fixed rates to amortize over 10 to 20 years with a three to ten
year balloon.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Commercial Real Estate Loans. Loans secured by commercial real estate
constituted $54.6 million, or 10.8%, of the Registrant's total loan portfolio at
June 30, 2000. By comparison, commercial real estate loans totaled $31.2
million, or 6.8%, and $15.3 million, or 3.8%, at June 30, 1999 and 1998,
respectively. The Registrant's commercial real estate loans are secured by
improved property such as offices, small business facilities, and other
non-residential buildings. Of the improved properties securing such commercial
real estate loans at June 30, 2000, 37.3% were located within the Registrant's
primary market area. Commercial real estate loans are offered with fixed and
adjustable interest rates.
The Registrant's policy is to limit commercial real estate loans to
principal balances not exceeding its loan-to-one borrower limit. At June 30,
2000, the Registrant's largest commercial real estate borrower had an aggregate
principal outstanding balance of $7.3 million, which balance was within the
Registrant's loan-to- one borrower limit. The outstanding balance for this
borrower included loans secured by commercial real estate used for combination
multi-family residential and non-residential purposes.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired.
Commercial Loans. The Registrant makes commercial loans primarily in
its market area to a variety of professionals, sole proprietorships and small-
to medium-sized businesses. At June 30, 2000, commercial loans constituted $8.5
million, or 1.7%, of the Registrant's total loan portfolio, compared to $6.2
million, or 1.4% of the Registrant's total loan portfolio at June 30, 1999 and
$1.8 million, or 0.4% of the total loan portfolio at June 30, 1998. The
Registrant offers term loans for fixed assets and working capital, revolving
lines of credit, letters of credit and Small Business Administration guaranteed
loans. Commercial term loans are generally offered with initial fixed rates of
interest for the first 3 to 5 years and with terms of up to 10
7
years. Business lines of credit have floating rates of interest and are payable
on demand, subject to annual review and renewal. Commercial loans with variable
rates of interest are generally indexed to the highest prime rate as published
daily in the Wall Street Journal.
When making commercial loans, the Registrant considers the financial
statements of the borrower, the Registrant's lending history with the borrower,
the debt service capabilities of the borrower, the projected cash flows of the
business and the value of the collateral, if any. Commercial loans are generally
secured by a variety of collateral, primarily accounts receivable, inventory and
equipment, and are generally supported by personal guarantees.
Commercial loans also generally are considered to involve more risk
than one- to four-family residential real estate loans. Because commercial loans
often depend on the successful operation or management of the business,
repayment of such loans may be affected by adverse conditions in the economy.
Moreover, commercial loans typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business, and,
therefore, depend substantially on the success of the business itself. Any
collateral securing commercial loans may depreciate over time, may be difficult
to appraise and to liquidate, and may fluctuate in value.
Consumer Loans. Federal savings associations are authorized to make
secured and unsecured consumer loans in an aggregate amount up to 35% of their
assets. In addition, the Registrant has lending authority above the 35% category
for certain consumer loans, such as second mortgage, home property improvement
loans, mobile home loans and loans secured by savings accounts.
As of June 30, 2000, consumer loans totaled $67.0 million, or 13.3% of
the Registrant's total loan portfolio compared to $56.9 million, or 12.5%, and
$47.3 million, or 11.7%, respectively at June 30, 1999 and 1998. The principal
types of consumer loans offered by the Registrant are second mortgage loans,
auto loans, home improvement loans, credit card loans, unsecured loans and loans
secured by deposit accounts. Consumer loans are offered primarily on a fixed
rate basis, and at June 30, 2000 had an average maturity of 67 months. The
Registrant's home equity loans, second mortgage loans, and home improvement
loans, are generally secured by the borrower's principal residence. At June 30,
2000, home equity loans, second mortgage loans, and home improvement loans,
totaled $36.0 million, or 53.7% of consumer loans.
The underwriting standards employed by the Registrant for consumer
loans include a determination of the applicant's credit history and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount.
The Registrant's consumer loan portfolio increased from $42.4 million
at June 30, 1997 to $67.0 million at June 30, 2000. It is expected that the
Registrant's consumer loan portfolio will continue to grow during the
foreseeable future, and is expected to range between 10% and 15% of assets.
Consumer loans tend to have higher interest rates than residential mortgage
loans, but also tend to have a higher risk of default than one-to four-family
residential mortgage loans. See "Non-Performing Assets and Asset Classification"
for information regarding the Registrant's loan loss experience and reserve
policy.
Mortgage-Backed Securities. The Registrant also invests in
mortgage-backed securities issued or guaranteed by the United States Government
or agencies thereof in order to reduce interest rate risk exposure and improve
liquidity. These securities, which consist primarily of mortgage-backed
securities issued or guaranteed by FNMA, FHLMC and GNMA, totaled $29.3 million
at June 30, 2000. The Registrant's objective in investing in mortgage-backed
securities varies from time to time depending upon market interest rates, local
mortgage loan demand, and the Registrant's level of liquidity. The Registrant's
fixed-rate mortgage-backed securities are held for investment, and management
has the intent and ability to hold such
8
securities on a long-term basis or to maturity. Adjustable rate MBS are
available for sale and are carried at estimated fair value. Mortgage-backed
securities have lower credit risk than direct loans because principal and
interest on the securities are either insured or guaranteed by the United States
Government or agencies thereof.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources such as real estate broker referrals, existing customers,
borrowers, builders, attorneys and walk-in customers. Upon receipt of a loan
application, a credit report is obtained to verify specific information relating
to the applicant's credit standing. In the case of a real estate loan, an
appraisal of the real estate intended to secure the proposed loan is made by an
independent appraiser approved by the Registrant. A loan application file is
first reviewed by an underwriter in the Registrant's loan department who checks
applications for accuracy and completeness, and verifies the information
provided. The loan is then reviewed by at least one person of a seven-person
loan committee. One- to four-family residential mortgage loans with principal
balances in excess of $500,000 and multi-family and commercial real estate loans
with principal balances in excess of $1.5 million must be submitted by the loan
department directly to the loan committee of the Board of Directors for
approval. Approvals subsequently are ratified by the full Board of Directors.
Fire and casualty insurance are required at the time the loan is made and
throughout the term of the loan. Once the loan is approved a loan commitment is
promptly issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral which insurance must be
maintained during the full term of the loan. Title insurance or an attorney's
opinion based on a title search of the property is required on all first lien
loans secured by real property.
Loan Originations, Purchases and Sales. Approximately 87.7% of total
loans in the Registrant's portfolio at June 30, 2000 were originated by the
Registrant or purchased through a Madison, Wisconsin mortgage banking
relationship described below. The Registrant is actively involved in the
origination and underwriting of the loans purchased in Madison. At June 30,
2000, the Registrant had $108.0 million of loans purchased outside the
Registrant's primary market area. Included in the total of loans purchased
outside of the Bank's primary lending area are loans purchased from a mortgage
banking firm headquartered in Madison, Wisconsin. The Bank has an exclusive
agreement with this firm, which gives the Bank first right of refusal an any
real estate loans generated including one-to-four family, multi-family,
commercial real estate and land development loans secured by properties located
primarily in the Madison, Wisconsin metropolitan area. The Bank has sold, and
anticipates that it will continue to sell participation interests in these loans
to other financial institutions located in Iowa and contiguous states. At June
30, 2000, the outstanding principal balance of loans purchased under the above
agreement was $89.0 million and partial interests in these balance sold to other
financial institutions totaled approximately $26.7 million.
9
The following table sets forth the Registrant's gross loan
originations, loans purchased and loans sold for the periods indicated.
At June 30,
----------------------------------------------
2000 1999 1998
----------- ---------- -----------
(In Thousands)
Loans originated:
One- to four-family real estate loans:
Construction loans...................................... $ 20,021 $ 13,639 $ 10,910
Loans on existing property.............................. 31,362 20,014 33,885
Loans refinanced........................................ 9,976 31,654 32,980
Insured and guaranteed loans............................ 17,325 19,667 6,178
Multifamily and commercial real estate(1):
Construction loans...................................... 18,023 22,355 4,406
Loans on existing property.............................. 56,612 34,022 8,309
Commercial loans.......................................... 12,925 5,808 2,023
Consumer loans............................................ 45,447 32,298 27,041
----------- ---------- ----------
Total loans originated................................ $ 211,691 $ 179,457 $125,732
=========== ========== ==========
Loans purchased:
One- to four-family....................................... $ 6,491 $ 1,924 $ 6,466
Multi-family and commercial............................... 14,370 2,946 7,303
----------- ---------- ----------
Total loans purchased................................. 20,861 $ 4,870 $ 13,769
=========== ========== ==========
Loans sold.................................................. $ 24,583 $ 39,229 $ 24,816
=========== ========== ==========
- ----------------------------
(1) Include loans purchased in Madison, Wisconsin through mortgage banking
relationship described above.
Loan Commitments. The Registrant issues standby loan origination
commitments to qualified borrowers primarily for the construction and purchase
of residential and commercial real estate. Such commitments are made on
specified terms and conditions and are made for periods of up to 60 days, during
which time the interest rate is locked-in. The Registrant generally charges a
loan fee based on a percentage of the loan amount. The Registrant also charges a
commitment fee of $275 for single-family residential properties if the borrower
receives the loan from the Registrant. Commitment fees are generally not charged
for multi-family and commercial real estate properties. At June 30, 2000, the
Registrant had commitments to originate and purchase $22.7 million of loans. The
Registrant's experience has been that few commitments expire without being
funded by the Registrant.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Registrant generally receives loan origination fees. To the extent
that loans are originated or acquired for the Registrant's portfolio, the
Registrant defers loan origination fees and costs and amortizes such amounts as
yield adjustments over the life of the loans using the interest method of
amortization. Fees and costs deferred are recognized into income immediately
upon the sale of the related loan. At June 30, 2000, the Registrant had $2.3
million of deferred loan fees.
In addition to loan origination fees, the Registrant also receives
other fees and service charges that consist primarily of late charges and loan
servicing fees on loans sold. The Registrant recognized other fees and service
charges on loans that totaled $568,000, $746,000 and $466,000 for the years
ended June 30, 2000, 1999 and 1998, respectively.
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in the mortgage markets, which in turn
respond to the demand for and availability of money.
10
Loans to One Borrower. Under federal law, savings associations are
subject to the same limits as those applicable to national banks, which limit
loans to one borrower to the greater of $500,000 or 15% of unimpaired capital
and unimpaired surplus and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
The Registrant's four largest borrowers had total outstanding balances and
nonfunded commitments ranging from $6.8 million to $7.3 million at June 30,
2000. These total balances, for each of the four borrowers, included loans
secured by commercial real estate used for combination multi- family residential
and nonresidential purposes.
Delinquencies and Classified Assets
Delinquencies. The Registrant's collection procedures provide that when
a loan is 15 days past due, a late charge is added and the borrower is contacted
by mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower. Additional late charges may
be added and, if the loan continues in a delinquent status for 90 days or more,
the Registrant generally initiates foreclosure proceedings.
The Registrant reviews delinquency reports for multi-family and
commercial real estate and other commercial loans weekly. Delinquencies in these
loan types often involve more active and timely management than delinquencies in
loans secured by single-family residential properties. If these delinquencies
continue, steps are taken on a case-by-case basis to bring the loan current, if
possible, before foreclosure proceedings are initiated generally after 90 days
in delinquency status.
Non-Performing Assets and Asset Classification. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential and
commercial mortgage loans are placed on non-accrual status generally when either
principal or interest is 90 days or more past due and management considers the
interest uncollectible or when the Registrant commences foreclosure proceedings.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income.
Real estate acquired by the Registrant as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until such time
as it is sold. When REO is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value. Any write-down
of REO is charged to the allowance for real estate losses.
At June 30, 2000 the Registrant's total of property acquired as the
result of foreclosure or by deed in lieu of foreclosure was $65,000 compared to
a total of $32,000 at June 30, 1999. The Registrant had no allowance for losses
on real estate owned as of June 30, 2000 and 1999.
11
Non-Performing Loans. The following table sets forth information
regarding non-accrual loans, accrual loans and other non-performing assets at
the dates indicated:
At June 30,
----------------------------------------------
2000 1999 1998
----------- ---------- -----------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Residential............................................. $ -- $ 1,003 $ 920
Commercial real estate.................................. 15 1,061 200
--------- -------- ---------
Total................................................. 15 2,064 1,120
--------- -------- ---------
Loans accounted for on an accrual basis (1)(2):
Residential............................................. 1,187 295 144
Multi-family residential.............................. 547 -- --
Commercial real estate................................ 247 -- --
Consumer(3)............................................. 112 101 71
--------- -------- ---------
Total................................................. 2,093 396 215
--------- -------- ---------
Total non-performing loans................................. 2,108 2,460 1,335
Other non-performing assets (4)............................ 65 32 489
--------- -------- ---------
Total non-performing assets................................ $ 2,173 $ 2,492 $ 1,824
========= ======== =========
Non-performing loans as a percentage
of total loans.......................................... 0.42% 0.54% 0.33%
Non-performing loans as a percentage
of total assets......................................... 0.29% 0.36% 0.24%
Non-performing loans and real estate owned
to total loans and real estate owned.................... 0.43% 0.55% 0.47%
Non-performing assets as a percentage
of total assets......................................... 0.30% 0.37% 0.34%
- -----------------------
(1) Includes all loans 90 days or more contractually delinquent.
(2) Delinquent FHA/VA guaranteed loans and delinquent loans with past due
interest that, in the opinion of management, is collectible, are not
placed on non-accrual status.
(3) Delinquent consumer loans are not placed on non-accrual status.
(4) Represents the net book value of property acquired by the Registrant
through foreclosure or deed in lieu of foreclosure. Upon acquisition,
this property is carried at the lower of cost or fair market value less
estimated costs of disposition.
12
The following table sets forth information with respect to the
Registrant's delinquent loans and other problem assets at June 30, 2000.
At June 30, 2000
-----------------------
Balance Number
---------- --------
(In Thousands)
Residential real estate:
Loans past due 60-89 days......................... $ 633 21
Loans past due 90 days or more.................... 1,187 27
Commercial real estate:
Loans past due 60-89 days......................... -- --
Loans past due 90 days or more.................... 794 2
Consumer loans (past due 60 days or more)............ 193 56
Foreclosed real estate and repossessions............. 65 2
Other non-performing assets.......................... -- --
Restructured loans not included
in other nonperforming categories above........... 434 1
Loans to facilitate sale of real estate owned........ 635 3
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss" assets. An
asset is considered "substandard" if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the savings institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which assets possess
some weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When a savings institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances. The Registrant regularly reviews
the problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations.
13
At June 30, 2000, the aggregate amount of the Registrant's classified
assets, and of the Registrant's general and specific loss allowances and
charge-offs were as follows:
June 30, 2000
(In Thousands)
Substandard assets..................................... $ 1,144
Doubtful assets........................................ --
Loss assets............................................ --
-----------
Total classified assets....................... $ 1,144
===========
General loss allowances................................ 3,394
Specific loss allowances............................... --
-----------
Total allowances.............................. $ 3,394
===========
A summary of the Registrant's principal classified assets is as
follows.
The Registrant acquired a $600,000 loan in 1985 on a 48-unit apartment
complex in Southern Iowa in connection with a merger with another financial
institution. The loan was restructured into a $500,000 loan in 1991. The loan
bears an interest rate of 10% through maturity in August 2001. At the time the
loan was restructured, the Registrant wrote off $50,000 of the loan balance
which is due in a balloon payment at maturity. No interest is being accrued on
this $50,000 amount. The outstanding balance of the loan at June 30, 2000 was
$434,000. The loan is now current; however there is an escrow shortage totaling
$15,000. The apartment complex was 93.5% leased at June 30, 2000.
The Registrant took possession of one multi-family and four residential
properties in Madison, Wisconsin on August 5, 1999 by a voluntary deed in lieu
of foreclosure. There were two separate borrowing entities all guaranteed by the
same individuals. The related loan balances totaled approximately $1.6 million
on the date of foreclosure. The properties included one 12-unit apartment
building and four 4-unit condominium properties. The properties were sold in
fiscal 2000 and a net gain on sale of real estate owned totaling $147,000 was
recorded.
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Registrant's loan portfolio based on management's
evaluation of the potential losses that may be incurred. Such evaluation, which
includes a review of all loans of which full collectibility of interest and
principal may not be reasonably assured, considers, among other matters, the
estimated net realizable value of the underlying collateral. Other factors
considered by management include the size and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. Management calculates the allowance for loan losses based on asset
type, as follows: 100% of portions of loan balances classified as loss, 50% of
portions of loan balances classified as doubtful, 15% of portions of loan
balances classified as substandard, and 5% of portions of loan balances
classified as special mention. Management calculates additional allowances for
loan losses on loans not classified in the categories delineated above, as
follows: .25% for mortgage loans, 1.0% for consumer loans, and 1.5% for
multifamily, nonresidential and commercial loans.
The breakdown of general loss allowances and specific loss allowances
is made for regulatory accounting purposes only. While both general and specific
loss allowances are charged against earnings, general loan loss allowances are
added back to GAAP capital in computing risk-based capital under OTS
regulations. The financial statements of the Registrant are prepared in
accordance with GAAP and, accordingly, provisions for loan losses are based on
management's estimate of net realizable value or fair value of the collateral,
as applicable. The Registrant regularly reviews its loan portfolio, including
problem loans, to determine whether any loans require classification or the
establishment of appropriate reserves.
14
During fiscal 2000, 1999 and 1998, the Registrant credited $554,000,
$365,000 and $345,000, respectively, to the allowance for loan losses.
Management periodically reviews the entire loan portfolio to determine the
extent, if any, to which further additional loan loss provisions may be deemed
necessary. There can be no assurance that the allowance for loan losses will be
adequate to cover losses that may in fact be realized in the future and that
additional provisions for loan losses will not be required.
Analysis of the Allowance for Loan Losses. The following table sets
forth information regarding the Registrant's allowance for loan losses at the
dates indicated.
At June 30,
----------------------------------------------
2000 1999 1998
----------- ---------- -----------
(In Thousands)
Total loans outstanding............................... $ 509,681 $ 461,385 $ 408,955
Average loans outstanding............................. 480,377 416,631 358,209
Allowance balance (at beginning of period)............ 3,135 2,607 1,796
Additions related to acquisition...................... -- 325 801
Provision
Residential........................................ 80 110 100
Commercial real estate............................. 224 75 65
Consumer........................................... 250 180 180
Charge-offs:
Residential........................................ (5) (63) (155)
Commercial real estate............................. (30) -- --
Consumer........................................... (346) (184) (267)
Recoveries............................................ 86 85 87
----------- ---------- -----------
Allowance balance (at end of period).................. $ 3,394 $ 3,135 $ 2,607
=========== ========== ===========
Allowance for loan losses as a percent of total
loans outstanding.................................. 0.67% 0.68% 0.64%
Net loans charged off as a percent of average
loans outstanding................................. 0.06% 0.06% 0.09%
Investment Activities
The Registrant's portfolio of investment securities, excluding
investments in mortgage-backed securities, totaled $111.8 million, $112.8
million and $59.2 million, respectively, at June 30, 2000, 1999 and 1998. The
purpose of the Registrant's investment portfolio is to (i) improve the
Registrant's interest rate sensitivity gap by reducing the average term to
maturity of the Registrant's assets, (ii) improve liquidity, and (iii)
effectively reinvest funds generated from amortization and prepayment on the
Registrant's traditional loan portfolio.
The Registrant is required under federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified short-term
securities and certain other investments. See "Regulation--Federal
Regulations--Liquidity Requirements" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Registrant generally has maintained a liquidity portfolio in
excess of regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of yield that
will be available in the future, as well as management's projections as to the
short term demand for funds to be used in the Registrant's loan origination and
other activities.
15
Investment Portfolio. The following table sets forth the carrying value
of the Registrant's investment securities portfolio, short-term investments and
FHLB stock, at the dates indicated. At June 30, 2000, the Registrant's FHLB
stock yielded 6.86%. At June 30, 2000, the market value of the Registrant's
investment securities - held to maturity portfolio was $10.3 million.
At June 30,
----------------------------------------------
2000 1999 1998
----------- ---------- -----------
(In Thousands)
Investment securities - held to maturity:
U.S. Government and agency securities..................... $ 3,118 $ 5,190 $ 9,819
Other securities.......................................... 7,516 9,579 4,911
------------ ---------- -----------
Total investment securities held to maturity............ $ 10,634 $ 14,769 $ 14,730
------------ ---------- -----------
Investment securities - available for sale:
U.S. Government and agency securities..................... $ 89,165 $ 91,692 $ 44,517
Other securities.......................................... 11,976 6,327 --
------------ ---------- -----------
Total investment securities available for sale.......... 101,141 $ 98,019 $ 44,517
------------ ---------- -----------
Totals................................................ $ 111,775 $ 112,788 $ 59,247
------------ ---------- -----------
Interest-bearing deposits................................... 3,555 1,848 7,500
FHLB stock.................................................. 8,929 8,094 5,671
------------ ---------- -----------
Total investments....................................... $ 124,259 $ 122,730 $ 72,418
============ ========== ===========
Investment Portfolio Maturities
The table below sets forth the scheduled maturities, carrying values,
and average yields for the Registrant's investment securities at June 30, 2000.
At June 30, 2000
-------------------------------------------------------------------------------------------------
Total Investment
One Year or Less One to Five Years Five to Ten Years More than 10 Years Securities
------------------ ----------------- ----------------- ------------------ ----------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
(Dollars in Thousands)
Investment securities - held
to maturity(1)...... $ 673 7.28% $ 4,701 6.26% $ 1,585 7.35% $ 3,675 7.24% $ 10,634 6.83%
Investment securities -
available for sale.. -- -- 7,716 6.08% 48,942 6.48% 44,483 7.14% 101,141 6.74%
------- -------- -------- ------- --------
Total investment
securities.......... $ 673 7.28% $ 12,417 6.15% $ 50,527 6.50% $48,158 7.15% $111,775 6.75%
======= ======== ======== ======= ========
- ----------------------------------
(1) Municipal securities are tax-effected.
Sources of Funds
General. Deposits are the major source of the Registrant's funds for
lending and other investment purposes. In addition to deposits, the Registrant
derives funds from the amortization and prepayment of loans and mortgage-backed
securities, the sale or maturity of investment securities, operations and, if
needed, advances from the Federal Home Loan Bank of Des Moines (the "FHLB").
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
16
Deposits. Consumer and commercial deposits are attracted principally
from within the Registrant's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits, term certificate accounts and individual retirement accounts.
On a limited basis, the Registrant will negotiate interest rates to attract
jumbo certificates. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. The Registrant regularly evaluates the internal cost
of funds, surveys rates offered by competing institutions, reviews the
Registrant's cash flow requirements for lending and liquidity and executes rate
changes when deemed appropriate. The Registrant does not obtain funds through
brokers, nor does it actively solicit funds outside its primary market area.
Historically, the Registrant has rarely used premiums to attract savings
deposits.
Deposit Portfolio. Savings and other deposits in the Registrant as of
June 30, 2000, are composed of the following:
Weighted Percentage
Average Minimum of Total
Interest Rate(1) Minimum Term Category Amount Balances Deposits
- ---------------- ------------ -------- ------ -------- --------
0.00% None Noninterest bearing checking accounts $ None $ 12,779 2.71%
1.79% None Interest bearing checking accounts 200 59,685 12.66
1.72% None Money Market Plus accounts 200 5,760 1.22
4.80% None Money Market Select accounts 10,000 71,605 15.18
1.50% None Savings accounts/Club accounts 10/5 28,839 6.11
1.49% None Unredeemed certificates 1,000 6,620 1.40
6.28% 10 to 24 months Fixed term, fixed rate (2) 1,000 66,104 14.02
6.42% 10 to 36 months Fixed term, fixed rate IRA (2) 1,000 12,817 2.72
6.04% 25 to 36 months Fixed term, fixed rate (2) 1,000 50,565 10.72
6.78% 42 to 48 months Fixed term, fixed rate (2) 1,000 5,174 1.10
5.75% 3-5 months Fixed term, fixed rate 1,000 1,598 0.34
4.68% 6 months Fixed term, fixed rate (3) 100/1,000 8,463 1.79
4.85% 7-12 months Fixed term, fixed rate (3) 100/1,000 17,787 3.77
5.52% 14-19 months Fixed term, fixed rate 5,000 19,177 4.07
4.79% 2 years Fixed term, fixed rate (3) 100/1,000 14,768 3.13
5.59% 2 years Fixed term, variable rate IRA 100 1,114 0.24
4.91% 2.5 years Fixed term, fixed rate 1,000 3,530 0.75
4.78% 2.5 years Fixed term, option rate (4) 1,000 2,021 0.43
5.95% 32 months Fixed term, fixed rate 5,000 1,984 0.42
5.94% 34-35 months Change up term and rate (5) 1,000 21,145 4.48
5.14% 3 years Fixed term, fixed rate (3) 100/1,000 30,271 6.41
6.46% 45 months Fixed term, fixed rate 5,000 4,486 0.95
5.21% 4 years Fixed term, fixed rate 1,000 6,885 1.46
6.74% 58 months Fixed term, fixed rate 5,000 6,704 1.42
5.31% 5 years Fixed term, fixed rate 1,000 3,848 0.82
6.00% 6 years Fixed term, fixed rate 1,000 4,708 1.00
6.07% 8 years Fixed term, fixed rate 1,000 3,189 0.68
----- ---------- ------
4.60% $ 471,626 100.00%
========== ======
- -----------------------------------
(1) Yield rates for fixed term, fixed rate certificates.
(2) During fiscal 2000, the Company offered special certificates that allowed
the customer to select any term within the listed range for that product.
(3) Individual retirement accounts (IRAs) are offered for this term. The
minimum for IRAs is $100 and the minimum for other certificates is $1,000.
The minimum for additions to IRAs is $25, while the minimum for additions
to other certificates is $1,000.
(4) The rate on the option rate certificate may be changed once during the term
to the currently offered rate at the certificate holder's option.
(5) The certificate holder may change to another certificate product on the
first or second anniversary.
17
The following table sets forth the change in dollar amount of deposits
in the various types of deposit accounts offered by the Registrant between the
dates indicated.
Balance at Balance at
June 30, % Increase June 30, % Increase
--------- ----- ------ --------- ----- ------
Checking accounts........................... $ 72,464 15.37% 12,372 $ 60,092 12.95% 11,724
Savings accounts............................ 28,839 6.11 (6,270) 35,109 7.56 8,878
Money market accounts....................... 77,365 16.40 (4,588) 81,953 17.66 20,159
Option rate certificates (1)................ 2,021 0.43 (302) 2,323 0.50 (581)
Change up certificates (2).................. 10,609 2.25 617 9,992 2.15 954
10 to 24 month special (3).................. 66,104 14.02 66,104 -- -- --
25 to 36 month special (3).................. 50,565 10.72 50,565 -- -- --
42 to 48 month special (3).................. 4,622 0.98 4,622 -- -- --
3 through 11 month certificates............. 11,965 2.54 (27,180) 39,145 8.43 28,081
12 through 18 month certificates............ 17,772 3.77 (40,655) 58,427 12.59 916
19 through 30 month certificates............ 26,851 5.69 (26,399) 53,250 11.47 10,753
32 and 36 month certificates................ 8,096 1.72 (12,641) 20,737 4.47 (4,356)
45 and 48 month certificates................ 11,016 2.34 (1,658) 12,674 2.73 563
58 through 96 month certificates............ 18,449 3.91 (7,232) 25,681 5.53 (8,095)
IRA certificates............................ 58,268 12.35 (5,510) 63,778 13.74 3,121
Other certificates.......................... 6,620 1.40 5,612 1,008 0.22 (373)
--------- -------- --------- --------- --------- --------
$ 471,626 100.00% 7,457 $ 464,169 100.00% 71,744
========= ======== ========= ========= ========= ========
Balance at
June 30, % Increase
--------- ----- ------
Checking accounts........................... $ 48,368 12.33% 10,297
Savings accounts............................ 26,231 6.68 3,148
Money market accounts....................... 61,794 15.75 15,373
Option rate certificates (1)................ 2,904 0.74 (2,593)
Change up certificates (2).................. 9,038 2.30 3,314
10 to 24 month special (3).................. -- -- --
25 to 36 month special (3).................. -- -- --
42 to 48 month special (3).................. -- -- --
3 through 11 month certificates............. 11,064 2.82 (3,684)
12 through 18 month certificates............ 57,511 14.66 18,445
19 through 30 month certificates............ 42,497 10.83 14,617
32 and 36 month certificates................ 25,093 6.39 1,899
45 and 48 month certificates................ 12,111 3.09 175
58 through 96 month certificates............ 33,776 8.61 2,102
IRA certificates............................ 60,657 15.45 3,599
Other certificates.......................... 1,381 0.35 (1,001)
--------- ------- ---------
$ 392,425 100.00% 65,691
========= ======= ========
- -------------------------------------------
(1) This certificate is a 30-month certificate, during which term the rate may
be changed once to a currently offered rate at the customer's option.
(2) This certificate is a 35-month certificate, during which term the
certificate may be changed once to a product with a different term and/or rate
on the first or second anniversary of the opening of the certificate.
(3) During fiscal 2000, the Company offered special certificates that allowed
the customer to select any term within the listed range for that product.
18
Time Deposits by Rates
The following table sets forth the time deposits in the Registrant
classified by rates as of the dates indicated.
At June 30,
------------------------------------------
2000 1999 1998
----------- ---------- -----------
(In Thousands)
4% or less..................... $ 20,344 $ 20,838 $ 14,684
4.01-6.00%..................... 157,222 227,003 178,324
6.01-8.00%..................... 115,391 39,174 61,348
8.01-9.00%..................... -- -- 1,676
--------- -------- ---------
Total..................... $ 292,957 $287,015 $ 256,032
========= ======== =========
Time Deposit Maturity Schedule. The following table sets forth the
amount and maturities of certificates of deposit at June 30, 2000.
Amount Due
--------------------------------------------------------------
Less Than 1-2 2-3 After
Weighted Average One Year Years Years 3 Years Total
---------------------- ------- -------- ---------
Rate (In Thousands)
- --------
4% or less.............................. $ 19,856 $ 225 $ 136 $ 127 $ 20,344
4.01-6.00%.............................. 101,645 30,279 20,298 5,000 157,222
6.01-8.00%.............................. 57,584 29,602 22,388 5,817 115,391
---------- ------- --------- --------- ----------
Total.............................. $ 179,085 $60,106 $ 42,822 $ 10,944 $ 292,957
Certificates of Deposit $100,000 and Over. The following table
indicates the amount of the Registrant's certificates of deposit and other time
deposits of $100,000 or more by time remaining until maturity as of June 30,
2000.
Maturity Period Certificates of Deposits
--------------- ------------------------
(In Thousands)
Three months or less......................... $ 7,521
Three through six months..................... 5,432
Six through twelve months.................... 8,260
Over twelve months........................... 6,987
----------
Total................................... $ 28,200
==========
Deposit Activity. The following table sets forth the savings activities
of the Registrant for the periods indicated:
At June 30,
----------------------------------------------
2000 1999 1998
----------- ---------- -----------
(In Thousands)
Additions related to acquisition.......................... $ -- $ 105,583 $ 64,792
Net withdrawals in excess of deposits..................... (8,195) (47,551) (15,748)
Interest credited......................................... 15,651 13,712 16,647
---------- ---------- ----------
Net increase (decrease) in deposits..................... $ 7,456 $ 71,744 $ 65,691
========== ========== ==========
19
In the unlikely event of a liquidation of the Registrant, depositors
will be entitled to full payment of their deposit accounts prior to any payment
being made to the stockholders of the Registrant. The majority of the
Registrant's depositors are residents of Iowa, Nebraska and South Dakota.
Borrowings. Savings deposits are the primary source of funds for the
Registrant's lending and investment activities and for its general business
purposes. The Registrant, if the need arises, may rely upon advances from the
FHLB and the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. Advances from the
FHLB are secured by the Registrant's stock in the FHLB and a portion of the
Registrant's first mortgage loans. At June 30, 2000, the Registrant had $174.0
million of advances outstanding from the FHLB.
The FHLB functions as a central reserve bank providing credit for the
Registrant and other member savings associations and financial institutions. As
a member, the Registrant is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. The FHLB requires members to pledge and maintain sufficient eligible
collateral to secure total indebtedness and members must be in compliance with
collateral requirements prior to the funding of any advance.
The following table sets forth certain information regarding borrowings
by the Registrant at the end of and during the periods indicated.
At June 30,
----------------------------------------------
2000 1999 1998
----------- ---------- -----------
Weighted average rate paid
on FHLB advances.......................................... 6.13% 5.74% 5.94%
Rate paid on ESOP borrowing................................. 7.00% 7.00% N/A
During the Year Ended June 30,
----------------------------------------------
2000 1999 1998
----------- ---------- -----------
(Dollars in Thousands)
Maximum amount of FHLB advances outstanding at
any month................................................ $ 174,500 $ 143,600 $ 113,400
Approximate average FHLB advances outstanding............. 156,271 118,900 91,863
Approximate weighted average rate paid on
FHLB advances............................................ 5.95% 5.90% 6.04%
Approximate average ESOP borrowing outstanding............ $ 1,757 $ 401 N/A
Average rate paid on ESOP borrowing....................... 7.00% 7.00% N/A
Subsidiary Activities
The Company has three wholly-owned subsidiaries: First Federal Bank,
Mid-Iowa Security Corp. and Equity Services, Inc. Since the Company engages in
no other significant activities beyond its ownership of the Bank, the
description of the Company's activities in this Form 10-K effectively represents
a description of the activities of
20
the Bank. Equity Services, Inc. is in the business of developing residential
lots in the Registrant's primary market area. Mid-Iowa Security Corp. generates
revenues primarily by providing real estate brokerage services.
The Bank has one active wholly owned subsidiary. First Financial
Corporation ("First Financial"), an Iowa corporation, operates a title search
and abstract continuation business through its wholly owned Iowa subsidiary,
Sioux Financial Corporation. Effective September 30, 1999, the Bank transferred
ownership of Center of Iowa Investments, Limited ("CICB") to First Financial.
CICB generates revenues primarily by providing credit reporting and collection
services. First Financial is also a majority owner of United Escrow, Inc., which
serves as an escrow agent in Woodbury County, Iowa.
Under federal law, SAIF-insured institutions are required to provide 30
days' advance notice to the OTS and FDIC before establishing or acquiring a
subsidiary or conducting a new activity in a subsidiary. The insured institution
must also provide the FDIC and the OTS such information as may be required by
applicable regulations and must conduct the activity in accordance with the
rules and orders of the OTS. In addition to other enforcement and supervision
powers, the OTS may determine after notice and opportunity for a hearing that
the continuation of a savings institution's ownership of or relation to a
subsidiary (i) constitutes a serious risk to the safety, soundness or stability
of the savings institution, or (ii) is inconsistent with the purposes of FIRREA.
Upon the making of such determination, the OTS may order the savings institution
to divest the subsidiary or take other actions.
Competition
The Registrant encounters strong competition both in attracting
deposits and in originating real estate and other loans. Its most direct
competition for deposits has come historically from commercial banks, brokerage
houses, other savings associations and credit unions in its market area, and the
Registrant expects continued strong competition from such financial institutions
in the foreseeable future. The Registrant's market area includes branches of
several commercial banks that are substantially larger than the Registrant in
terms of state-wide deposits. In addition, a growing number of the Registrant's
competitors are utilizing the Internet to attract deposits both locally and
nationwide. The Registrant competes for savings by offering depositors a high
level of personal service and expertise together with a wide range of financial
services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions choosing to compete in the
Registrant's market area. An increasing number of these institutions are using
the Internet to originate and underwrite loans. The Registrant is currently
developing Internet delivery systems, but does not currently utilize the
Internet as a significant means for securing deposits and originating loans. To
the extent the Internet becomes increasingly accepted as a means for securing
deposit and loan products, the Registrant may be competitively disadvantaged.
Competition is likely to increase as a result of the recent enactment
of the Gramm-Leach-Bliley Act of 1999, which eases restrictions on entry into
the financial services market by insurance companies and securities firms.
Moreover, to the extent that these changes permit banks, securities firms and
insurance companies to affiliate, the financial services industry could
experience further consolidation. This could result in a growing number of
larger financial institutions competing in the Registrant's primary market area
that offer a wider variety of financial services than the Registrant currently
offers. Competition for deposits, for the origination of loans and the provision
of other financial services may limit the Registrant's growth and adversely
impact its profitability in the future.
The Registrant competes for loans primarily through the interest rates
and loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels and
volatility of the mortgage markets. Management's strategy has been to offer
several new product offerings in certificate and retirement accounts to help
retain current deposits and reduce shrinkage. Recent product offerings have been
made available in transaction accounts to increase customer base and to position
the Registrant as a family financial center.
21
Regulation
As a federally chartered SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of and owns stock in the FHLB of Des Moines, which is
one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Company and the Bank and their operations.
The description of statutory provisions and regulations applicable to
savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking
statutes, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the Bank's unimpaired capital
and surplus on an unsecured basis. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate. The Bank's maximum loans to
one borrower limit was $7.6 million at June 30, 2000. As of June 30, 2000, the
Bank was in compliance with its loans-to-one-borrower limitations.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly average basis in 9 out of every 12 months. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of June 30, 2000, the Bank maintained
84.0% of its portfolio assets in qualified thrift investments and, therefore,
met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such
22
as the Bank, that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution ("Tier 1 Association") and has not been
advised by the OTS that it is in need of more than normal supervision, could,
after prior notice but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year; or (ii)
75% of its net earnings for the previous four quarters; provided that the
institution would not be undercapitalized, as that term is defined in the OTS
Prompt Corrective Action regulations, following the capital distribution. Any
additional capital distributions would require prior regulatory approval. In the
event the Bank's capital fell below its fully-phased in requirement or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. As of June 30,
2000, the Bank was a "well-capitalized" institution.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a quarterly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus borrowings payable in one year or less. The Bank's average liquidity ratio
for the quarter ended June 30, 2000 was 26.5%, which exceeded the then
applicable requirements.
Community Reinvestment Act and Fair Lending Laws. Savings associations
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to comply with the Fair Lending Laws
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations generally require such loans
to be made on terms substantially the same as those offered to unaffiliated
individuals and do not involve more than the normal risk of repayment. However,
recent regulations now permit executive officers and directors to receive the
same terms through benefit or compensation plans, that are widely available to
other employees, as long as the director or executive officer is not given
preferential treatment compared to other participating employees. Regulation O
also places individual and aggregate limits on the amount of loans the Bank may
make to such persons based, in part, on the Bank's capital position, and
requires certain approval procedures to be followed. At June 30, 2000, the Bank
was in compliance with the regulations.
23
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. If an institution fails to meet these standards, the appropriate federal
banking agency may require the institution to submit a compliance plan.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non- cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain qualifying supervisory goodwill
and certain mortgage servicing rights ("MSRs"). Tangible capital is defined as
core capital less all intangible assets (including supervisory goodwill) plus a
specified amount of MSRs. The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must deduct
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank, and unrealized gains (losses) on certain available for sale
securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
OTS regulatory capital rules also incorporate an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred, for
the present
24
time, the date on which the interest rate component is to be deducted from total
capital. The rule also provides that the Director of the OTS may waive or defer
an institution's interest rate risk component on a case-by-case basis.
At June 30, 2000, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of June 30, 2000.
At June 30, 2000
--------------------------
Percent of
Amount Assets (1)
-------- ----------
(Dollars in Thousands)
Tangible capital:
Capital level................................... $ 47,147 6.71%
Requirement..................................... 10,543 1.50%
--------- ---------
Excess.......................................... 36,604 5.21%
To be well capitalized under prompt
corrective action provisions.................. N/A N/A
Core capital:
Capital level................................... 47,147 6.71%
Requirement .................................... 21,086 3.00%
--------- ---------
Excess.......................................... 26,061 3.71%
To be well capitalized under prompt
corrective action provisions.................. 35,143 5.00%
Fully phased-in risk-based capital:
Capital level................................... 50,541 12.48%
Requirement .................................... 32,396 8.00%
--------- ---------
Excess.......................................... 18,145 4.48%
To be well capitalized under prompt
corrective action provisions.................. 40,495 10.00%
(1) Tangible and core capital levels are calculated on the basis of a
percentage of total adjusted assets; risk-based capital levels are
calculated on the basis of a percentage of risk-weighted assets.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based deposit insurance assessment system.
The FDIC assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting
25
period ending seven months before the assessment period, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized, and one of
three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information which the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. The FDIC is authorized to raise the assessment
rates in certain circumstances. The FDIC has exercised this authority several
times in the past and may raise insurance premiums in the future. If such action
is taken by the FDIC, it could have an adverse effect on the earnings of the
Bank.
Federal Home Loan Bank System
The Bank, as a federal association, is required to be a member of the
FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central
credit facility primarily for member institutions. The Bank, as a member of the
FHLB of Des Moines, is required to acquire and hold shares of capital stock in
that FHLB in an amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. As of June 30, 2000, the Bank was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the FHLBs pay to their members and
could also result in the FHLBs imposing a higher rate of interest on advances to
their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At June 30,
2000, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements imposed by the Office of Thrift
Supervision.
Holding Company Regulation
General. The Company is a non-diversified savings and loan holding
company within the meaning of the HOLA, as amended. As such, the Company is
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings institution.
The Bank must notify the OTS 30 days before declaring any dividend to the
Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
Upon any nonsupervisory acquisition by the Company of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings institution by the OTS, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior
approval of the OTS, and activities authorized by OTS regulation. The OTS is
prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.
26
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
Federal Securities Law
Shares of the Company's common stock are registered with the SEC under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is also subject to the proxy rules, tender offer rules,
insider trading restrictions, annual and periodic reporting, and other
requirements of the Exchange Act.
FEDERAL AND STATE TAXATION
Federal Taxation. For federal income tax purposes, the Registrant and
its subsidiaries file a consolidated federal income tax return on a fiscal year
basis using the accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act
of 1996, all savings banks and savings associations will be able to convert to a
commercial bank charter, diversify their lending, or be merged into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves will be subject to recapture, regardless
of whether or not a particular thrift intends to convert its charter, be
acquired, or diversify its activities. The recapture tax on post-1987 reserves
is assessed in equal installments over the six year period beginning in 1996.
However, if a thrift meets a minimum level of mortgage lending test (i.e., if
the thrift's level of mortgage lending activity (re-financings and home equity
loans do not count) is equal to or exceeds its average mortgage lending activity
for the six years preceding 1996, adjusted for inflation), then the thrift may
suspend its tax bad debt recapture for the 1996 and 1997 tax years. At June 30,
2000, the Bank had a balance of approximately $800,000 of bad debt reserves in
retained income that would be recaptured under this legislation.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which they
are recognized in the consolidated financial statements.
The Registrant accounts for deferred income taxes by the liability
method, applying the enacted statutory rates in effect at the balance sheet date
to differences between the book cost and the tax cost of assets and liabilities.
The resulting deferred tax liabilities and assets are adjusted to reflect
changes in the tax laws.
The Registrant is subject to the corporate alternative minimum tax
which is imposed to the extent it exceeds the Registrant's regular income tax
for the year. The alternative minimum tax will be imposed at the rate of 20% of
a specially computed tax base. Included in this base will be a number of
preference items, including the following: (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that
27
would have been allowable on the basis of actual experience; (ii) interest on
certain tax-exempt bonds issued after August 7, 1986; and (iii) an "adjusted
current earnings" computation which is similar to a tax earnings and profits
computation. In addition, for purposes of the new alternative minimum tax, the
amount of alternative minimum taxable income that may be offset by net operating
losses is limited to 90% of alternative minimum taxable income.
The Registrant has not been audited by the Internal Revenue Service for
the past eight years. For additional information regarding taxation, see Note 9
of Notes to Consolidated Financial Statements.
Iowa Taxation. The Bank currently files an Iowa franchise tax return.
The Bank's subsidiaries file Iowa corporation tax returns on a fiscal-year
basis. The Registrant and its other subsidiaries also file Iowa corporation tax
returns on a fiscal-year basis. The state of Iowa imposes a tax on the Iowa
franchise taxable income of savings institutions at the rate of 5%. Iowa
franchise taxable income is generally similar to federal taxable income except
that interest from state and municipal obligations is taxable, and no deduction
is allowed for state franchise taxes. The state corporation income tax ranges
from 6% to 12% depending upon Iowa corporation taxable income. Interest from
federal securities is not taxable for purposes of the Iowa corporation income
tax.
ITEM 2 PROPERTIES
- ------ ----------
The Company conducts its business through its main office located in
Sioux City, Iowa, and 18 branch offices located in the market area. The
following table sets forth certain information concerning the main office and
each branch office of the Registrant at June 30, 2000. The aggregate net book
value of the Registrant's premises and equipment was $15.3 million at June 30,
2000.
Owned Lease
Year or Expiration
Opened or Acquired Leased Date
------------------ ------ ----------
329 Pierce Street 1988 Owned --
Sioux City, Iowa 51102
924 Pierce Street 1991 Owned --
Sioux City, Iowa 51101
2727 Hamilton Blvd. 1981 Owned --
Sioux City, Iowa 51104
2 W. Bow Drive 1978 Owned --
Cherokee, Iowa 51012
301 Plymouth St., N.W. 1990 Owned --
Le Mars, Iowa 51031
3839 Indian Hills Dr. 1978 Owned --
Sioux City, Iowa 51104
921 Iowa Avenue 1972 Owned --
Onawa, Iowa 51040
1201 2nd Avenue 1976 Owned --
Box 277
Sheldon, Iowa 51201
4211 Morningside Avenue 1965 Owned --
Sioux City, Iowa 51106
28
104 1st Street, S.E. 1974 Owned --
Orange City, Iowa 51041
4701 Singing Hills Blvd.
Sioux City, Iowa 51106 1995 Owned --
2738 Cornhusker Drive
South Sioux City, Nebraska 68776 1998 Owned --
CENTRAL IOWA DIVISION
1025 Main Street 1998 Owned --
Grinnell, Iowa 50112
123 W. 2nd Street, North 1999 Owned --
Newton, Iowa 50208
1907 1st Avenue E. 1999 Owned --
Newton, Iowa 50208
15 E. Howard Street 1999 Owned --
Colfax, Iowa 50054
108 E. Washington 1999 Owned --
Monroe, Iowa 50170
101 W. Jefferson 1999 Leased 07/01/2001
Prairie City, Iowa 50228
West Des Moines Branch 1999 Owned --
3900 Westown Parkway
West Des Moines, Iowa 50266
The Registrant's accounting and record keeping activities are
maintained on an in-house data processing system. The Registrant owns data
processing equipment it uses for its internal processing needs. The net book
value of such data processing equipment and related software at June 30, 2000,
was $948,000.
ITEM 3 LEGAL PROCEEDINGS
- ------ -----------------
There are various claims and lawsuits in which the Registrant is
periodically involved incident to the Registrant's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matters were submitted during the fourth quarter of fiscal 2000 to a
vote of security holders.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
- ------ ------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The back inside cover page of the Annual Report to Stockholders is
herein incorporated by reference.
29
ITEM 6 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- ------ ----------------------------------------------
Pages 1 through 3 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Pages 4 through 14 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 8 FINANCIAL STATEMENTS
- ------ --------------------
Pages 16 through 48 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------ -----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
There were no changes in or disagreements with accountants in the
Registrant's accounting and financial disclosure during fiscal 2000.
PART III
ITEM 10 DIRECTORS AND OFFICERS OF THE REGISTRANT
- ------- ----------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the Registrant's definitive Proxy Statement dated
September 25, 2000.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
Information concerning executive compensation is incorporated herein by
reference from the Registrant's definitive Proxy Statement dated September 25,
2000.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Registrant's definitive
Proxy Statement dated September 25, 2000.
ITEM 13 CERTAIN TRANSACTIONS
- ------- --------------------
Information concerning relationships and transactions is incorporated
herein by reference from the Registrant's definitive Proxy Statement dated
September 25, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
- -------- ---------------------------------------------------
ON FORM 8-K
-----------
(a)(1) Financial Statements
30
The following information appearing in the Registrant's Annual Report
to Stockholders for the year ended June 30, 2000, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Annual Report Section Pages in Annual Report
- --------------------- ----------------------
Selected Financial Data 1-3
Management's Discussion and Analysis 4-14
of Financial Condition and Results
of Operations
Report of Independent Auditors 16
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Stockholders' Equity 19
and Comprehensive Income
Consolidated Statements of Cash Flows 20-21
Notes to Consolidated Financial 22-48
Statements
With the exception of the aforementioned information, the Registrant's
Annual Report to Stockholders for the year ended June 30, 2000 is not deemed
filed as part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits
--------
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-K Report
- -------------- -------- ------ ----------------
3 Articles of Incorporation Not Applicable
3 Bylaws Not Applicable
4 Instruments defining the Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
10 Material contracts None Not Applicable
31
11 Statement re: computation Not Not Applicable
of per share earnings Required
12 Statement re: computation Not Not Applicable
of ratios Required
13 Annual Report to 13 Exhibit 13
Security Holders
16 Letter re: change in
certifying Not Applicable
accountants None
18 Letter re: change in
accounting principles None Not Applicable
19 Previously unfiled
documents None Not Applicable
22 Subsidiaries of Registrant 22 Exhibit 22
23 Published report regarding None Not Applicable
matters submitted to vote of
security holders
24 Consent of Experts and 24 Exhibit 24
Counsel Required
25 Power of Attorney Not Not Applicable
Required
28 Additional Exhibits None Not Applicable
29 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
(b) Reports on Form 8-K:
On January 4, 2000, the Registrant filed a report on Form 8-K relating
to a share repurchase program.
32
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.
FIRST FEDERAL BANKSHARES, INC.
Date: September 27, 2000 By: /s/Barry E. Backhaus
--------------------
Barry E. Backhaus, President and
Chief Executive Officer
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.
By: /s/Katherine A. Bousquet By: /s/Jon G. Cleghorn
------------------------ ------------------
Katherine A. Bousquet Jon G. Cleghorn
Vice President and Treasurer Executive Vice President,
Chief Operating Officer
and Director
Date: September 27, 2000 Date: September 27, 2000
By: /s/Dr. Nancy A. Boysen By: /s/David S. Clay
---------------------- ----------------
Dr. Nancy A. Boysen David S. Clay
Director Director
Date: September 27, 2000 Date: September 27, 2000
By: /s/Gary L. Evans By: /s/Allen J. Johnson
---------------- -------------------
Gary L. Evans Allen J. Johnson
Director Director
Date: September 27, 2000 Date: September 27, 2000
By: /s/Harland D. Johnson By: /s/Steven L. Opsal
--------------------- ------------------
Harland D. Johnson Steven L. Opsal
Director Director
Date: September 27, 2000 Date: September 27, 2000
By: /s/Dennis B. Swanstrom By: /s/ David Van Engelenhoven
---------------------- --------------------------
Dennis B. Swanstrom David Van Engelenhoven
Director Director
Date: September 27, 2000 Date: September 27, 2000
33