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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-22140.
FIRST MIDWEST FINANCIAL, INC.
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(Name of registrant as specified in its charter)
Delaware 42-1406262
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifth at Erie, Storm Lake, Iowa 50588
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (712) 732-4117
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 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark 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. [ ]
Registrant's revenues for the most recent fiscal year ended
were $39.0 million.
As of December 21, 2000, the Registrant had issued and
outstanding 2,429,727 shares of Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the average of the closing bid and asked prices of such stock on the Nasdaq
System as of December 21, 2000, was $19.1 million. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K -- Portions of the Annual Report to Shareholders
for the fiscal year ended September 30, 2000. PART III of Form 10-K -- Portions
of the Proxy Statement for the Annual Meeting of Shareholders to be held during
January 2001.
Forward-Looking Statements
First Midwest Financial, Inc. ("First Midwest," and with its
subsidiaries, the "Company"), and its wholly-owned operating subsidiaries First
Federal Savings Bank of the Midwest and Security State Bank, may from time to
time make written or oral "forward-looking statements", including statements
contained in its filings with the Securities and Exchange Commission (including
this Annual Report on Form 10-K and the Exhibits hereto and thereto), in its
reports to shareholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with
respect to the Company's beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions, that are subject to significant risks
and uncertainties, and are subject to change based on various factors some of
which are beyond the Company's control. The words "may", "could", "should",
"would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and
similar expressions are intended to identify forward-looking statements. The
important factors we discuss below and elsewhere in this document, as well as
other factors discussed under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in our Annual Report to
Shareholders and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this prospectus:
o the strength of the United States economy in general
and the strength of the local economies in which the
Company conducts operations;
o the effects of, and changes in, trade, monetary and
fiscal policies and laws, including interest rate
policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary
fluctuations;
o the timely development of and acceptance of new
products and services of the Company and the perceived
overall value of these products and services by users,
including the features, pricing and quality compared to
competitors' products and services;
o the willingness of users to substitute competitors'
products and services for the Company's products and
services;
o the success of the Company in gaining regulatory
approval of its products and services, when required;
o the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking,
securities, agriculture and insurance);
o technological changes;
1
o acquisitions;
o changes in consumer spending and saving habits; and
o the success of the Company at managing the risks
involved in the foregoing.
The Company wishes to caution readers that such
forward-looking statements speak only as of the date made. The Company does not
undertake, and expressly disclaims any intent or obligation, to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of the Company.
PART I
Item 1. Description of Business
General
First Midwest Financial, Inc. is a Delaware corporation, the
principal assets of which are First Federal Savings Bank of the Midwest ("First
Federal") and Security State Bank ("Security"). First Midwest, on September 20,
1993, acquired all of the capital stock of First Federal in connection with
First Federal's conversion from the mutual to stock form ownership (the
"Conversion"). On September 30, 1996, First Midwest became a bank holding
company upon its acquisition of Security, as discussed below.
Since the Conversion, the Company has been an active acquiror
of financial institutions. On March 28, 1994, First Midwest acquired Brookings
Federal Bank in Brookings, South Dakota ("Brookings"). On December 29, 1995,
First Midwest acquired Iowa Savings Bank, FSB in Des Moines, Iowa ("Iowa
Savings"). Brookings and Iowa Savings were both merged with, and now operate as
divisions of, First Federal. On September 30, 1996, First Midwest completed the
acquisition of Central West Bancorporation ("CWB"). CWB was the holding company
for Security in Stuart, Iowa, which upon the merger of CWB into First Midwest
resulted in Security becoming a stand-alone banking subsidiary of First Midwest.
Unless the context otherwise requires, references herein to the Company include
First Midwest, Security and First Federal and its subsidiaries on a consolidated
basis. See "Management's Discussion and Analysis -- Acquisitions Completed" in
the Annual Report to Shareholders attached hereto as Exhibit 13 (the "Annual
Report").
First Federal and Security (collectively, the "Banks") are the
only direct, active subsidiaries of First Midwest. The Banks are
community-oriented financial institutions offering a variety of financial
services to meet the needs of the communities they serve. The Company, through
its subsidiary Banks, provides a full range of financial services. The principal
business of First Federal historically has consisted of attracting retail
deposits from the general public and investing those funds primarily in one- to
four-family residential mortgage loans and, to a lesser extent, commercial and
multi-family real estate, agricultural operating and real estate, construction,
consumer and commercial business loans primarily in First Federal's market area.
Recently, First Federal's lending activities have expanded to include an
increased emphasis on originations and purchases of commercial and
2
multi-family real estate loans, generally from outside First Federal's market
area. The principal business of Security has been and continues to be attracting
retail deposits from the general public and investing those funds in
agricultural real estate and operating loans and, to a lesser extent, one- to
four-family residential, commercial business and consumer loans. The Banks also
purchase mortgage-backed securities and invest in U.S. Government and agency
obligations and other permissible investments. At September 30, 2000, the
Company had total assets of $505.6 million, deposits of $318.7 million, and
shareholders' equity of $40.0 million.
The Company's revenues are derived primarily from interest on
mortgage loans, mortgage-backed securities, investments, consumer loans,
agricultural operating loans, commercial business loans, income from service
charges and loan originations, loan servicing fee income, and income from the
sale of mutual funds, insurance products, annuities and brokerage services
through its service corporation subsidiaries.
First Federal, directly through its wholly-owned subsidiary,
First Services Financial Limited ("First Services"), and indirectly through
independent contractors, offers mutual funds and, in some locations, insurance
products and annuities. In addition, Brookings Service Corporation, a subsidiary
of First Services, offers full service brokerage services through PrimeVest
Financial Services, Inc., a third party vendor.
First Midwest and the Banks are subject to comprehensive
regulation. See "Regulation" herein.
The executive offices of the Company are located at Fifth at
Erie, Storm Lake, Iowa 50588. Its telephone number at that address is (712)
732-4117.
Market Area
First Federal Savings Bank of the Midwest has four divisions:
First Federal Savings Bank Storm Lake, Brookings Federal Bank, Iowa Savings Bank
and First Federal Savings Bank Sioux Falls. First Federal's headquarters is
located on the corner of Fifth and Erie streets in Storm Lake, Iowa. First
Federal Storm Lake operates a total of six branch offices in Storm Lake, Lake
View, Laurens, Manson, Odebolt and Sac City, Iowa. Brookings Federal Bank
operates two facilities in Brookings, South Dakota. Iowa Savings Bank has bank
facilities in Des Moines and West Des Moines, Iowa. A third Iowa Savings Bank
office, its new main office, is planned for construction in Urbandale, Iowa.
First Federal Sioux Falls has opened a temporary facility while construction is
underway for its permanent building.
Security State Bank operates its business through three
full-service offices in Casey, Menlo and Stuart, Iowa.
The Company's primary market area includes the Iowa counties
of Adair, Buena Vista, Calhoun, Guthrie, Ida, Pocahontas, Polk and Sac, and the
South Dakota counties of Brookings, Lincoln and Minnehaha.
3
Storm Lake is located in northwest Iowa approximately 150
miles northwest of Des Moines and 200 miles south of Minneapolis in Buena Vista
County. Like much of the State of Iowa, Storm Lake and the surrounding market
area are highly dependent upon farming and agricultural markets. Major employers
in the area include Buena Vista County Hospital, IBP, Inc., Bil Mar Foods of
Iowa, and Buena Vista University. The world's largest electricity-generating
wind farm is located in Buena Vista County. This $235 million project, completed
in June 1999, provides enough electricity to serve 71,000 average-sized
Midwestern households. Storm Lake is also home to Buena Vista University, which
currently enrolls 1,256 full-time students at its Storm Lake campus and employs
79 full-time faculty.
Brookings is located in east central South Dakota,
approximately 50 miles north of Sioux Falls and 200 miles west of Minneapolis in
Brookings County. The bank's market area encompasses approximately a 30 mile
radius of Brookings. The area is generally rural, and agriculture is a
significant industry in the community. South Dakota State University is the
largest employer in Brookings. The University had 8,540 students enrolled for
the 1999 fall term and employs 504 full- time faculty. The community also has
several manufacturing companies, including 3M, Larson Manufacturing, Daktronics,
Falcon Plastics and Twin City Fan. The Brookings division operates from a main
office located in downtown Brookings and one drive-up branch office also located
in Brookings.
Des Moines, the State of Iowa's capitol, is located in central
Iowa. The Des Moines market area encompasses Polk County and surrounding
counties. Iowa Savings Bank Division's main office operates near a high-traffic
intersection, across from a major shopping mall in West Des Moines. The Highland
Park facility is located in a historical district approximately five minutes
north of downtown Des Moines. Des Moines is one of the top three insurance
centers in the world, with sixty-seven insurance company headquarters and over
one hundred regional insurance offices. Other major businesses include Hy-Vee
Food Stores, Inc., Bridgestone-Firestone, Inc., Communication Data Services,
Inc., Pioneer Hi-Bred, John Deere, and Meredith Corporation. Universities in the
area include Drake University, Upper Iowa University, Simpson College, Grand
View College, Hamilton College and the University of Osteopathic Medicine and
Health Sciences.
Sioux Falls is located at the crossroads of Interstates 29 and
90 in southeast South Dakota, 270 miles southwest of Minneapolis. The Sioux
Falls market area encompasses Minnehaha and Lincoln counties. The city has
ranked number two on the list of national entrepreneurial hot spots in 1999 and
was among the top ten cities for new jobs and for new or expanded facilities in
1998 (Cogenetics, Inc. April 1999; Site Selection, 1998). The bank is located at
a high-traffic intersection of Minnesota and 33rd in the heart of Sioux Falls.
Major employers in the area include Sioux Valley Hospital, Avera McKennan
Hospital, John Morrell & Company, Gateway 2000, Midwest Coast Transport, and
Hy-Vee Food Stores. Sioux Falls is also home to Augustana College, enrollment
1,774, and The University of Sioux Falls, enrollment 1,107.
Security's main office operates in Stuart, which is located in
west-central Iowa, approximately 40 miles west of Des Moines on the border of
Adair and Guthrie counties. Security's market area is highly dependent on
farming and agriculture-related businesses, such as Agri-Drain Corporation,
Cardinal Glass, and Rose Acre Farms. In recent years, efforts of the West
Central I-80 Development Corporation have resulted in significant development of
new service-related businesses in the area,
4
associated with the westward expansion of Des Moines and direct interstate
highway access. Seven industrial parks exist in these two counties. This
development provides economic diversity to Security's market area.
Many of the Company's market areas are highly dependant on
agriculture-related businesses. Agriculture-related businesses in recent years
have performed well due to a relatively stable agricultural environment in the
Company's market area. The recent decline in grain prices has challenged area
grain farmers, however, livestock prices have improved over the past year to
help stabilize the agricultural economy. Although there has been minimal effect
observed to date, an extended period of low commodity prices could result in a
reduced demand for goods and services provided by agriculture-related
businesses, which could also affect other businesses in the Company's market
area.
Lending Activities
General. Historically, the Company has originated fixed-rate,
one- to four-family mortgage loans. In the early 1980's, the Company began to
focus on the origination of adjustable-rate mortgage ("ARM") loans and
short-term loans for retention in its portfolio in order to increase the
percentage of loans in its portfolio with more frequent repricing or shorter
maturities, and in some cases higher yields, than fixed-rate residential
mortgage loans. The Company, however, has continued to originate fixed-rate
residential mortgage loans in response to consumer demand. See "Management's
Discussion and Analysis -- Asset/Liability Management" in the Annual Report.
While the Company historically has focused its lending
activities on the origination of loans secured by first mortgages on
owner-occupied one- to four-family residences, it also originates and purchases
commercial and multi-family real estate loans and originates consumer,
commercial business, residential and commercial construction and agriculturally
related loans. The Company originates most of its loans in its primary market
area. More recently, the Company has increased its emphasis, both in absolute
dollars and as a percentage of its gross loan portfolio, on these less
traditional lending activities. At September 30, 2000, the Company's net loan
portfolio totaled $324.7 million, or 64.2% of the Company's total assets.
Loan applications are initially considered and approved at
various levels of authority, depending on the type, amount and loan-to-value
ratio of the loan. The Company has loan committees for each of the Banks
comprised of officers of such Banks. Loans in excess of certain amounts require
the approval of at least two committee members who must also be executive
officers, or by such Bank's Board of Directors, which has responsibility for the
overall supervision of the loan portfolio. The Company reserves the right to
discontinue, adjust or create new lending programs to respond to its needs and
to competitive factors.
At September 30, 2000, the Company's largest lending
relationship to a single borrower or group of related borrowers totaled $6.3
million. The Company had eleven other lending relationships in excess of $3.0
million as of September 30, 2000 with the average outstanding balance of such
loans totaling approximately $4.3 million. At September 30, 2000, each of these
loans was performing in accordance with its repayment terms.
5
Loan Portfolio Composition. The following table provides
information about the composition of the Company's loan portfolio in dollar
amounts and in percentages (before deductions for loans in process, deferred
fees and discounts and allowances for losses) as of the dates indicated.
September 30,
---------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------------- --------------- ---------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Real Estate Loans
One- to four-family............... $ 78,476 31.6% $ 73,903 27.8% $ 85,799 30.5% $110,317 34.8% $105,702 31.6%
Commercial and multi-family....... 85,157 34.2 74,870 28.1 66,845 23.8 85,793 27.1 103,595 31.0
Agricultural...................... 11,068 4.5 11,732 4.4 10,537 3.8 9,874 3.1 10,895 3.3
Construction or development....... 7,819 3.1 21,264 8.0 32,990 11.7 28,379 9.0 31,301 9.4
--------- ----- --------- ----- --------- ----- -------- ----- -------- ----
Total real estate loans....... 182,520 73.4 181,769 68.3 196,171 69.8 234,363 74.0 251,493 75.3
--------- ----- --------- ----- --------- ----- -------- ----- -------- ----
Other Loans:
- -----------
Consumer Loans:
Home equity...................... 7,823 3.1 14,007 5.3 15,285 5.4 14,834 4.7 18,144 5.4
Automobile....................... 5,356 2.2 6,106 2.3 4,445 1.6 3,861 1.3 2,596 .8
Other (1)........................ 7,249 2.9 7,285 2.7 6,509 2.3 4,731 1.4 5,743 1.7
--------- ----- --------- ----- --------- ----- -------- ----- -------- -----
Total consumer loans.......... 20,428 8.2 27,398 10.3 26,239 9.3 23,426 7.4 26,483 7.9
Agricultural operating............ 30,364 12.2 38,650 14.5 37,234 13.2 29,284 9.2 26,810 8.0
Commercial business............... 15,468 6.2 18,456 6.9 21,587 7.7 29,942 9.4 29,332 8.8
--------- ----- --------- ----- --------- ----- -------- ----- -------- -----
Total other loans............. 66,260 26.6 84,504 31.7 85,060 30.2 82,652 26.0 82,625 24.7
--------- ----- --------- ----- --------- ----- -------- ----- -------- -----
Total loans................... 248,780 100.0% 266,273 100.0% 281,231 100.0% 317,015 100.0% 334,118 100.0%
===== ===== ===== ===== =====
Less:
- ----
Loans in process.................. 2,240 8,700 7,738 10,494 5,424
Deferred fees and discounts....... 650 553 298 350 401
Allowance for losses.............. 2,356 2,379 2,909 3,093 3,590
-------- -------- -------- -------- --------
Total loans receivable, net....... $243,534 $254,641 $270,286 $303,078 $324,703
======== ======== ======== ======== ========
(1) Consist generally of various types of secured and unsecured consumer loans.
6
The following table shows the composition of the Company's
loan portfolio by fixed and adjustable rate at the dates indicated.
September 30,
-----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---------------- --------------- --------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------ ------ ------- ------ -------
Fixed Rate Loans:
- ----------------
Real estate:
One- to four-family................... $ 41,322 16.6% $ 33,369 12.5% $ 51,235 18.2% $ 52,943 16.7% 50,813 15.2%
Commercial and multi-family........... 14,036 5.6 11,124 4.2 11,582 4.1 34,326 10.8 35,277 10.6
Agricultural.......................... 4,250 1.7 5,978 2.3 4,982 1.8 5,080 1.6 3,147 .9
Construction or development........... 2,938 1.2 2,997 1.1 1,829 .7 2,322 .8 4,001 1.2
--------- ----- --------- ----- -------- ----- -------- ---- -------- ----
Total fixed-rate real estate loans. 62,546 25.1 53,468 20.1 69,628 24.8 94,671 29.9 93,238 27.9
Consumer............................... 19,145 7.7 26,100 9.8 24,909 8.8 21,803 6.9 25,066 7.5
Agricultural operating................ 14,998 6.1 16,280 6.1 18,821 6.7 14,896 4.7 10,396 3.1
Commercial business................... 7,200 2.9 10,462 3.9 15,108 5.4 23,206 7.3 14,215 4.3
--------- ----- --------- ----- -------- ----- -------- ---- -------- ----
Total fixed-rate loans............. 103,889 41.8 106,310 39.9 128,466 45.7 154,576 48.8 142,915 42.8
--------- ----- --------- ----- -------- ----- -------- ---- -------- ----
Adjustable Rate Loans:
- ---------------------
Real estate:
One- to four-family................... 37,154 14.9 40,534 15.2 34,564 12.3 57,374 18.1 54,889 16.4
Commercial and multi-family........... 71,121 28.6 63,746 23.9 55,263 19.6 51,467 16.2 68,318 20.5
Agricultural.......................... 6,818 2.7 5,754 2.2 5,555 2.0 4,794 1.6 7,748 2.3
Construction or development........... 4,881 2.0 18,267 6.9 31,161 11.1 26,057 8.2 27,300 8.2
--------- ----- --------- ----- -------- ----- -------- ---- -------- ----
Total adjustable-rate real
estate loans....................... 119,974 48.2 128,301 48.2 126,543 45.0 139,692 44.1 158,255 47.4
Consumer............................... 1,283 .5 1,298 .5 1,330 .5 1,623 .5 1,417 .4
Agricultural operating................. 15,366 6.2 22,370 8.4 18,413 6.5 14,388 4.5 16,414 4.9
Commercial business.................... 8,268 3.3 7,994 3.0 6,479 2.3 6,736 2.1 15,117 4.5
--------- ----- --------- ----- -------- ----- -------- ---- -------- ----
Total adjustable rate loans........ 144,891 58.2 159,963 60.1 152,765 54.3 162,439 51.2 191,203 57.2
--------- ----- --------- ----- -------- ----- -------- ---- -------- ----
Total loans........................ 248,780 100.0% 266,273 100.0% 281,231 100.0% 317,015 100.0% 334,118 100.0%
===== ===== ===== ===== =====
Less:
- ----
Loans in process....................... 2,240 8,700 7,738 10,494 5,424
Deferred fees and discounts............ 650 553 298 350 401
Allowance for loan losses.............. 2,356 2,379 2,909 3,093 3,590
------- -------- ------- -------- --------
Total loans, net................... $243,534 $254,641 $270,286 $303,078 $324,703
======== ======== ======== ======== ========
7
The following table illustrates the interest rate sensitivity
of the Company's loan portfolio at September 30, 2000. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract reprices. The table does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
Real Estate
-------------------------------------
Mortgage(1) Construction Consumer Operating Business Total
----------------- ----------------- ---------------- ---------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
2001(2) $89,855 8.29% $17,342 10.10% $ 7,949 9.34% $21,563 10.23% $19,657 10.15% $156,366 9.05%
2002-2005 70,209 7.79 10,544 9.42 13,692 9.12 3,624 9.37 9,542 8.37 107,611 8.22
2005 and following 60,129 7.31 3,414 8.58 4,842 9.36 1,623 9.56 133 10.35 70,141 7.57
- --------------------------
(1) Includes one- to four-family, multi-family, commercial and agricultural real
estate loans.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
8
The total amount of loans due after September 30, 2000 which
have predetermined interest rates is $142.9 million, while the total amount of
loans due after such date which have floating or adjustable interest rates is
$191.2 million.
One- to Four-Family Residential Mortgage Lending. One- to
four-family residential mortgage loan originations are generated by the
Company's marketing efforts, its present customers, walk-in customers and
referrals from real estate agents and builders. At September 30, 2000, the
Company's one- to four-family residential mortgage loan portfolio totaled $105.7
million, or 31.6% of the Company's total gross loan portfolio. Approximately
33.3% of the Company's one- to four-family mortgage loans or 10.5% of the
Company's gross loans have been purchased, generally from other financial
institutions. The majority of these are ARM loans. See "--Originations,
Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities." At
September 30, 2000, the average outstanding principal balance of a one- to
four-family residential mortgage loan was $55,000.
The Company offers fixed-rate and ARM loans. During the year
ended September 30, 2000, the Company originated $4.0 million of adjustable-rate
loans and $11.3 million of fixed-rate loans secured by one- to four-family
residential real estate. The Company's one- to four-family residential mortgage
originations are secured primarily by properties located in its primary market
area and surrounding areas.
The Company originates one- to four-family residential
mortgage loans with terms up to a maximum of 30-years and with loan-to-value
ratios up to 97% of the lesser of the appraised value of the security property
or the contract price. The Company generally requires that private mortgage
insurance be obtained in an amount sufficient to reduce the Company's exposure
to at or below the 80% loan-to-value level or the loans are sold. Residential
loans generally do not include prepayment penalties.
The Company currently offers one, three and five year ARM
loans with an initial interest rate margin over the yield on the corresponding
U.S. Treasury Security. These loans have a fixed-rate for the stated period and,
thereafter, such loans adjust annually. These loans generally provide for an
annual cap of up to a 200 basis points and a lifetime cap of 600 basis points
over the initial rate. As a consequence of using an initial fixed-rate and caps,
the interest rates on these loans may not be as rate sensitive as is the
Company's cost of funds. The Company's ARMs do not permit negative amortization
of principal and are not convertible into a fixed rate loan. The Company
qualifies ARM loan borrowers at the fully indexed rate. The Company's
delinquency experience on its ARM loans has generally been similar to its
experience on fixed rate residential loans.
Due to consumer demand, the Company also offers fixed-rate
mortgage loans with terms up to 30 years, most of which conform to secondary
market standards, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards.
Interest rates charged on these fixed-rate loans are competitively priced
according to market conditions. The Company currently sells most, but not all,
of its fixed-rate loans with terms of 15 years or longer.
In underwriting one- to four-family residential real estate
loans, the Company evaluates both the borrower's ability to make monthly
payments and the value of the property securing the loan.
9
Most properties securing real estate loans made by the Company are appraised by
independent fee appraisers approved by the Board of Directors. The Company
generally requires borrowers to obtain an attorney's title opinion, and fire and
property insurance (including flood insurance, if necessary) in an amount not
less than the amount of the loan. Real estate loans originated by the Company
generally contain a "due on sale" clause allowing the Company to declare the
unpaid principal balance due and payable upon the sale of the security property.
Commercial and Multi-Family Real Estate Lending. The Company
is also engaged in commercial and multi-family real estate lending in its
primary market area and surrounding areas and has purchased whole loan and
participation interests in loans from other financial institutions. At September
30, 2000, the Company's commercial and multi-family real estate loan portfolio
totaled $103.6 million, or 31.0% of the Company's total gross loan portfolio.
The purchased loans and loan participation interests are generally secured by
properties located in the Midwest and Northwest. The Company, in order to
supplement its loan portfolio and consistent with management's objectives to
expand the Company's commercial and multi-family loan portfolio, purchased $48.9
million, $42.4 million and $16.3 million of such loans during fiscal 2000, 1999
and 1998, respectively. At September 30, 2000, none of the Company's commercial
and multi-family real estate loans were non- performing. See " -- Non-Performing
Assets, Other Loans of Concern and Classified Assets."
The Company's commercial and multi-family real estate loan
portfolio is secured primarily by apartment buildings, nursing homes, assisted
living/retirement facilities, office buildings and hotels. Commercial and
multi-family real estate loans generally have terms that do not exceed 20 years,
have loan-to-value ratios of up to 80% of the appraised value of the security
property, and are typically secured by personal guarantees of the borrowers. The
Company has a variety of rate adjustment features and other terms in its
commercial and multi-family real estate loan portfolio. Commercial and
multi-family real estate loans provide for a margin over a number of different
indices. In underwriting these loans, the Company currently analyzes the
financial condition of the borrower, the borrower's credit history, and the
reliability and predictability of the cash flow generated by the property
securing the loan. Appraisals on properties securing commercial real estate
loans originated by the Company are performed by independent appraisers.
At September 30, 2000, the Company's largest commercial and
multi-family real estate loan was a $6.3 million loan secured by a retail
shopping center, a single-family residential housing development and other real
estate. The Company had fourteen other commercial and/or multi-family loans in
excess of $2.5 million at such date. All of these loans are currently performing
in accordance with their terms. At September 30, 2000, the average outstanding
principal balance of a commercial or multi-family real estate loan held by the
Company was $428,000.
Multi-family and commercial real estate loans generally
present a higher level of risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect 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 and 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 (for example, if
leases are not obtained or
10
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired.
Construction Lending. The Company makes construction loans to
individuals for the construction of their residences as well as to builders for
the construction of one- to four-family residences and commercial and
multi-family real estate. At September 30, 2000, the Company's construction loan
portfolio totaled $31.3 million, or 9.4% of the Company's total gross loan
portfolio.
Construction loans to individuals for their residences are
structured to be converted to permanent loans at the end of the construction
phase, which typically runs up to twelve months. These construction loans have
rates and terms which generally match the one- to four-family loan rates then
offered by the Company, except that during the construction phase the borrower
pays interest only. Generally, the maximum loan-to-value ratio of owner occupied
single family construction loans is 80% of appraised value. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At September 30, 2000, the
Company had $820,000 of construction loans to borrowers intending to live in the
properties upon completion of construction.
Construction loans to builders of one- to four-family
residences require the payment of interest only for up to 24 months and have
terms of up to 24 months. These loans may provide for the payment of interest
and loan fees from loan proceeds and carry adjustable rates of interest. Loan
fees charged in connection with the origination of such loans are generally 1%.
At September 30, 2000, the Company did not have any construction loans to
builders of one- to four-family residences.
Construction loans on commercial and multi-family real estate
projects may be secured by apartments, agricultural facilities, small office
buildings, medical facilities, assisted living facilities, hotels or other
property, and are structured to be converted to permanent loans at the end of
the construction phase, which generally runs up to 18 months. These construction
loans have rates and terms which match any permanent multi-family or commercial
real estate loan then offered by the Company, except that during the
construction phase the borrower pays interest only. These loans generally
provide for the payment of interest and loan fees from loan proceeds. At
September 30, 2000, the Company had approximately $30.2 million of loans for the
construction of commercial and multi-family real estate. This amount consisted
of three loans totaling $11.1 million for the construction of assisted living
facilities, three loans totaling $5.6 million for the construction of hotels,
three loans totaling $6.2 million for the construction of apartment complexes,
and four loans totaling $7.3 million for the construction of commercial
facilities. All of these loans were performing in accordance with their terms at
September 30, 2000.
Construction loans are obtained principally through continued
business from builders who have previously borrowed from the Company, as well as
referrals from existing customers and walk-in customers. The application process
includes a submission to the Company of accurate plans, specifications, costs of
the project to be constructed and projected revenues from the project. These
items are also used as a basis to determine the appraised value of the subject
property. Loans are based on the lesser of the current appraised value of the
property or the cost of construction (land plus building).
11
Because of the uncertainties inherent in estimating
construction costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. Construction loans to borrowers other than
owner-occupants also involve many of the same risks discussed above regarding
multi-family and commercial real estate loans and tend to be more sensitive to
general economic conditions than many other types of loans. Also, the funding of
loan fees and interest during the construction phase makes the monitoring of the
progress of the project particularly important, as customary early warning
signals of project difficulties may not be present.
Agricultural Lending. The Company originates loans to finance
the purchase of farmland, livestock, farm machinery and equipment, seed,
fertilizer and for other farm related products. At September 30, 2000, the
Company had agricultural real estate loans secured by farmland of $10.9 million
or 3.3% of the Company's gross loan portfolio. At the same date, $26.8 million,
or 8.0% of the Company's gross loan portfolio, consisted of secured loans
related to agricultural operations.
Agricultural operating loans are originated at either an
adjustable or fixed rate of interest for up to a one year term or, in the case
of livestock, upon sale. Most agricultural operating loans have terms of one
year or less. Such loans provide for payments of principal and interest at least
annually, or a lump sum payment upon maturity if the original term is less than
one year. Loans secured by agricultural machinery are generally originated as
fixed-rate loans with terms of up to seven years. At September 30, 2000, the
average outstanding principal balance of an agricultural operating loan held by
the Company was $42,000. At September 30, 2000, $17,000, or .06%, of the
Company's agricultural operating loans were non-performing.
Agricultural real estate loans are frequently originated with
adjustable rates of interest. Generally, such loans provide for a fixed rate of
interest for the first one to five years, adjusting annually thereafter. In
addition, such loans generally amortize over a period of ten to 20 years.
Adjustable-rate agricultural real estate loans provide for a margin over the
yields on the corresponding U.S. Treasury Security or prime rate. Fixed-rate
agricultural real estate loans generally have terms up to five years.
Agricultural real estate loans are generally limited to 75% of the value of the
property securing the loan. At September 30, 2000, $37,000, or .3% of the
Company's agricultural real estate portfolio was non-performing.
Agricultural lending affords the Company the opportunity to
earn yields higher than those obtainable on one- to four-family residential
lending. Nevertheless, agricultural lending involves a greater degree of risk
than one- to four-family residential mortgage loans because of the typically
larger loan amount. In addition, payments on loans are dependent on the
successful operation or management of the farm property securing the loan or for
which an operating loan is utilized. The success of the loan may also be
affected by many factors outside the control of the farm borrower.
Weather presents one of the greatest risks as hail, drought,
floods, or other conditions, can severely limit crop yields and thus impair loan
repayments and the value of the underlying collateral. This risk can be reduced
by the farmer with a variety of insurance coverages which can help to ensure
loan repayment. Government support programs, and recently the Company, generally
require that farmers procure crop insurance coverage.
12
Grain and livestock prices also present a risk as prices may
decline prior to sale resulting in a failure to cover production costs. These
risks may be reduced by the farmer with the use of futures contracts or options
to mitigate price risk. The Company frequently requires borrowers to use future
contracts or options to reduce price risk and help ensure loan repayment.
Another risk is the uncertainty of government programs and
other regulations. During periods of low commodity prices, the income from
government programs can be a significant source of cash to make loan payments
and if these programs are discontinued or significantly changed, cash flow
problems or defaults could result.
Finally, many farms are dependent on a limited number of key
individuals upon whose injury or death may result in an inability to
successfully operate the farm.
Consumer Lending. The Company offers a variety of secured
consumer loans, including automobile, boat, home equity, home improvement,
federally guaranteed student loans, and loans secured by savings deposits. In
addition, the Company offers other secured and unsecured consumer loans. The
Company currently originates substantially all of its consumer loans in its
primary market area and surrounding areas. The Company originates consumer loans
on both a direct and indirect basis. At September 30, 2000, the Company's
consumer loan portfolio totaled $26.5 million, or 7.9% of its total gross loan
portfolio. Of the consumer loan portfolio at September 30, 2000, substantially
all were short- and intermediate-term, fixed-rate loans.
The largest component of the Company's consumer loan portfolio
consists of home equity loans and lines of credit. Substantially all of the
Company's home equity loans and lines of credit are secured by second mortgages
on principal residences. The Company will lend amounts which, together with all
prior liens, may be up to 100% of the appraised value of the property securing
the loan. Home equity loans and lines of credit have maximum terms of up to 15
years and five years, respectively.
The Company primarily originates automobile loans on a direct
basis, but also originates indirect automobile loans on a very limited basis.
Direct loans are loans made when the Company extends credit directly to the
borrower, as opposed to indirect loans, which are made when the Company
purchases loan contracts, often at a discount, from automobile dealers which
have extended credit to their customers. The Company's automobile loans
typically are originated at fixed interest rates with terms up to 60 months for
new and used vehicles. Loans secured by automobiles are generally originated for
up to 80% of the N.A.D.A. book value of the automobile securing the loan.
Consumer loan terms vary according to the type and value of
collateral, length of contract and creditworthiness of the borrower. The
underwriting standards employed by the Company for consumer loans include an
application, a determination of the applicant's payment history on other debts
and an assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do
residential mortgage loans, particularly in the case of consumer loans which are
unsecured or are secured by rapidly depreciable assets, such
13
as automobiles or recreational equipment. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. At
September 30, 2000, none of the Company's consumer loan portfolio was
non-performing.
Commercial Business Lending. The Company also originates
commercial business loans. Most of the Company's commercial business loans have
been extended to finance local and regional businesses and include short-term
loans to finance machinery and equipment purchases, inventory and accounts
receivable. Commercial loans also involve the extension of revolving credit for
a combination of equipment acquisitions and working capital in expanding
companies. At September 30, 2000, $29.3 million, or 8.8% of the Company's total
gross loan portfolio was comprised of commercial business loans.
The maximum term for loans extended on machinery and equipment
is based on the projected useful life of such machinery and equipment.
Generally, the maximum term on non-mortgage lines of credit is one year. The
loan-to-value ratio on such loans and lines of credit generally may not exceed
80% of the value of the collateral securing the loan. The Company's commercial
business lending policy includes credit file documentation and analysis of the
borrower's character, capacity to repay the loan, the adequacy of the borrower's
capital and collateral as well as an evaluation of conditions affecting the
borrower. Analysis of the borrower's past, present and future cash flows is also
an important aspect of the Company's current credit analysis. Nonetheless, such
loans are believed to carry higher credit risk than more traditional
investments.
The largest commercial business loan outstanding at September
30, 2000 was a $5.4 million warehouse line of credit secured by the assignment
of automobile contracts. The next largest commercial business loan outstanding
at September 30, 2000 was a $2.9 million loan secured by bank stock and other
assets. The Company had three other commercial business loans outstanding in
excess of $1.0 million at September 30, 2000. All of these loans are currently
performing in accordance with their terms. At September 30, 2000, the average
outstanding principal balance of a commercial business loan held by the Company
was $29,000.
Unlike residential mortgage loans, which generally are made on
the basis of the borrower's ability to make repayment from his or her employment
and other income and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Company's commercial business loans are usually, but
not always, secured by business assets and personal guarantees. However, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. At
September 30, 2000, $51,000 or .2% of the Company's commercial business loan
portfolio was non-performing.
14
Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities
Loans are generally originated by the Company's staff of
salaried loan officers. Loan applications are taken and processed in the
branches and the main office of the Company. While the Company originates both
adjustable-rate and fixed-rate loans, its ability to originate loans is
dependent upon the relative customer demand for loans in its market. Demand is
affected by the interest rate environment.
The Company, from time to time, sells whole loans and loan
participations generally without recourse. At September 30, 2000, there were no
loans outstanding sold with recourse. When loans are sold the Company typically
retains the responsibility for collecting and remitting loan payments, making
certain that real estate tax payments are made on behalf of borrowers, and
otherwise servicing the loans. The servicing fee is recognized as income over
the life of the loans. The Company services loans that it originated and sold
totaling $21.8 million at September 30, 2000, of which $5.7 million were sold to
Fannie Mae and $16.1 million were sold to others.
In periods of economic uncertainty, the Company's ability to
originate large dollar volumes of loans may be substantially reduced or
restricted, with a resultant decrease in related loan origination fees, other
fee income and operating earnings. In addition, the Company's ability to sell
loans may substantially decrease as potential buyers (principally government
agencies) reduce their purchasing activities.
15
The following table shows the loan origination (including
undisbursed portions of loans in process), purchase and repayment activities of
the Company for the periods indicated.
Year Ended September 30,
---------------------------------
1998 1999 2000
-------- -------- ---------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family $ 4,356 $ 1,532 $ 4,047
- commercial and multi-family 8,543 4,354 7,386
- agricultural real estate 1,808 1,357 2,933
Non-real estate - consumer 745 1,480 2,131
- commercial business 7,459 7,669 8,420
- agricultural operating 20,905 17,110 13,981
-------- -------- ---------
Total adjustable-rate 43,816 33,502 38,898
Fixed rate:
Real estate - one- to four-family 17,775 25,662 11,268
- commercial and multi-family 7,756 18,871 8,659
- agricultural real estate 2,576 2,146 525
Non-real estate - consumer 20,172 15,272 17,233
- commercial business 29,437 30,135 14,747
- agricultural operating 25,716 17,687 12,992
-------- -------- ---------
Total fixed-rate 103,432 109,773 65,424
-------- -------- ---------
Total loans originated 147,248 143,275 104,322
Purchases:
- ----------
Real estate- one-to-four-family 15,933 25,531 --
- commercial and multi-family 16,324 42,398 48,877
Non-real estate - commercial business 4,290 9,401 6,688
- agricultural operating 400 -- --
-------- -------- ---------
Total loans 36,947 77,330 55,565
Total mortgage-backed securities 39,409 93,409 --
-------- -------- ---------
Total purchased 76,356 170,739 55,565
Sales and Repayments:
- ---------------------
Sales:
Real estate - one- to four-family 5,613 270 4,532
Non-real estate - consumer -- -- --
- commercial business -- 7,134 --
-------- -------- ---------
Total loans 5,613 7,404 4,532
Mortgage-backed securities 5,916 -- 20,654
-------- -------- ---------
Total sales 11,529 7,404 25,186
-------- -------- ---------
Repayments:
Loan principal repayments 163,435 182,915 138,038
Mortgage-backed securities repayments 15,713 19,055 9,663
-------- -------- ---------
Total principal repayments 179,148 201,970 147,701
-------- -------- ---------
Total reductions 190,677 209,374 172,887
Increase (decrease) in other items, net 60 2,119 (788)
-------- -------- ---------
Net increase (decrease) $ 32,987 $106,759 $ (13,788)
======== ======== =========
16
At September 30, 2000, approximately $136.8 million, or 40.9%,
of the Company's gross loan portfolio consisted of purchased loans. The Company
believes that purchasing loans secured by real estate located outside of its
market area assists the Company in diversifying its portfolio and may lessen the
adverse affects on the Company's business or operations which could result in
the event of a downturn or weakening of the local economy in which the Company
conducts its operations. However, additional risks are associated with
purchasing loans secured by real estate outside of the Company's market area,
including the lack of knowledge of the local real estate market and difficulty
in monitoring and inspecting the property securing the loans.
The following table provides information regarding the
Company's balance of wholly purchased real estate loans and real estate loan
participations for each state in which the balance of such loans exceeded $1.0
million at September 30, 2000. Not included in the following table are purchased
commercial business loans totaling $4.8 million, approximately 60% of which are
located in the Company's market area.
One- to Four- Commercial and Construction Loans Total Purchased
Family Loans Multi-Family Loans
--------------- ---------------- ------------------ ---------------
Number Number Number Number
of of of of
Location Balance Loans Balance Loans Balance Loans Balance Loans
- ---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Arizona $ 81 3 $ 1,417 2 $ 5,000 1 $ 6,498 6
Colorado 6 4 1,011 5 1,049 2 2,066 11
Florida 11 1 -- -- 3,106 1 3,117 2
Illinois -- -- 3,680 5 -- -- 3,680 5
Iowa 214 25 9,685 18 800 1 10,699 44
Minnesota -- -- 11,279 14 1,658 2 12,937 16
Missouri 725 14 1,293 5 -- -- 2,018 19
Nebraska -- -- 4,609 2 -- -- 4,609 2
New Mexico -- -- -- -- 5,275 1 5,275 1
New York 1,295 64 -- -- -- -- 1,295 64
North Carolina 15,777 74 -- -- -- -- 15,777 74
North Dakota 19 6 1,154 4 -- -- 1,173 10
South Dakota 399 26 2,793 5 3,481 2 6,673 33
Washington 15,264 52 19,707 13 9,786 3 44,757 68
Wisconsin -- -- 8,773 10 -- -- 8,773 10
Other states 1,418 64 1,190 3 -- -- 2,608 67
------- --- ------- -- ------- -- -------- ---
Total $35,209 333 $66,591 86 $30,155 13 $131,955 432
------- === ======= == ======= == ======== ===
Percent of loan portfolio 33.3% 64.3% 96.3% 39.5%
==== ==== ==== ====
Non-Performing Assets, Other Loans of Concern, and Classified Assets
When a borrower fails to make a required payment on real
estate secured loans and consumer loans within 16 days after the payment is due,
the Company generally institutes collection procedures
17
by mailing a delinquency notice. The customer is contacted again, by written
notice or telephone, before the payment is 45 days past due and again before 75
days past due. In most cases, delinquencies are cured promptly; however, if a
loan has been delinquent for more than 90 days, satisfactory payment
arrangements must be adhered to or the Company will initiate foreclosure or
repossession.
Generally, when a loan becomes delinquent 90 days or more or
when the collection of principal or interest becomes doubtful, the Company will
place the loan on a non-accrual status and, as a result, previously accrued
interest income on the loan is taken out of current income. The loan will remain
on a non-accrual status until the loan becomes current.
The following table sets forth the Company's loan
delinquencies by type, before allowance for loan losses, by amount and by
percentage of type at September 30, 2000.
Loans Delinquent For:
------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
----------------------------- ------------------------------ ----------------------------
Percent Percent Percent
of of of
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family............. 7 $ 213 .20% 4 $ 97 .09% 4 $206 .19%
Commercial and multi-family..... 2 674 .65 -- -- -- -- -- --
Agricultural real estate........ -- -- -- 1 87 .80 1 37 .33
Consumer.......................... 20 171 .65 6 66 .25 -- -- --
Agricultural operating............ 7 429 1.60 2 5 .02 1 17 .06
Commercial business............... 6 232 .79 4 39 .13 2 51 .17
--- ------ -- ---- -- ----
Total......................... 42 $1,719 .51% 17 $294 .09% 8 $311 .09%
=== ====== == ==== == ====
Delinquencies 90 days and over constituted .09% of total loans
and .06% of total assets.
The table below sets forth the amounts and categories of
non-performing assets in the Company's loan portfolio. Loans, with some
exceptions, are typically placed on non-accrual status when the loan becomes 90
days or more delinquent or when the collection of principal and/or interest
become doubtful. For all years presented, the Company's troubled debt
restructurings (which involved forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates)
are included in the table and were performing as agreed.
18
September 30,
---------------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family $ 347 $ 444 $ 298 $ 613 $ 206
Commercial and multi-family 1,623 1,692 777 1,055 --
Agricultural real estate 127 -- -- 70 37
Consumer 331 246 142 140 --
Agricultural operating 184 289 1,738 285 17
Commercial business 33 204 209 75 51
------ ------ ------ ------ ------
Total non-accruing loans 2,645 2,875 3,164 2,238 311
------ ------ ------ ------ ------
Accruing loans delinquent
90 days or more 177 282 3,905 -- --
------ ------ ------ ------ ------
Total non-performing loans 2,822 3,157 7,069 2,238 311
------ ------ ------ ------ ------
Restructured Loans:
Agricultural operating -- -- -- 923 918
Commercial business -- -- -- 53 43
------ ------ ------ ------ ------
Total restructured loans -- -- -- 976 961
Foreclosed assets:
One- to four-family 75 85 19 94 --
Commercial real estate -- 67 1,324 -- 430
Consumer 8 -- 19 24 15
Commercial business 9 4 -- 25 --
------ ------ ------ ------ ------
Total 92 156 1,362 143 445
Less: Allowance for losses 5 -- 299 -- --
------ ------ ------ ------ ------
Total foreclosed assets, net 87 156 1,063 143 445
------ ------ ------ ------ ------
Total non-performing assets $2,909 $3,313 $8,132 $3,357 $1,717
====== ====== ====== ====== ======
Total as a percentage of total assets .75% .82% 1.94% .66 % .34%
====== ====== ====== ====== ======
For the year ended September 30, 2000, gross interest income
which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to approximately $33,000, of which
none was included in interest income.
Non-accruing Loans. At September 30, 2000, the Company had
$311,000 in non-accruing loans, which constituted .09% of the Company's gross
loan portfolio. At such date, there were no non-accruing loans or aggregate
non-accruing loans to one borrower in excess of $500,000 in net book value.
Other Loans of Concern. At September 30, 2000, there were
loans totaling $8.2 million not included in the table above where known
information about the possible credit problems of borrowers caused management to
have concern as to the ability of the borrower to comply with the present loan
repayment terms. This amount consisted of six one- to four-family residential
mortgage loans totaling $167,000, nine commercial business loans totaling $1.4
million, 16 agricultural operating loans totaling $2.2 million, fourteen
consumer loans totaling $139,000 and four commercial real estate loan totaling
$4.3 million.
19
Classified Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the Office of Thrift Supervision (the "OTS") to be of lesser
quality as "substandard," "doubtful" or "loss." 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 association 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 minimal value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. The loans held by
Security are subject to similar classification by its regulatory authorities.
When assets are classified as either substandard or doubtful,
the Bank may establish general allowances for loan losses in an amount deemed
prudent by management. General allowances represent loss allowances which 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 assets are classified as "loss," the Bank is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge-off such amount. The Banks'
determinations as to the classification of their assets and the amount of their
valuation allowances are subject to review by their regulatory authorities, who
may order the establishment of additional general or specific loss allowances.
On the basis of management's review of its assets, at
September 30, 2000, the Company had classified a total of $6.1 million of its
assets as substandard, $135,000 as doubtful and none as loss.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in its loan portfolio and changes in the nature and volume
of its loan activity, including those loans which are being specifically
monitored by management. Such evaluation, which includes a review of loans for
which full collectibility may not be reasonably assured, considers among other
matters, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance.
Current economic conditions in the agricultural sector of the
Company's market area indicate potential weakness due to uncertain growing
conditions in 2001 and historically low commodity prices. Near drought
conditions exist in a limited portion of the Company's agricultural market area,
which has the potential to reduce crop yields in 2001 for these areas. Price
levels for grain crops have generally been depressed since mid-1998 and
currently remain at historically low levels. Grain crop prices are not expected
to increase significantly in the near term. Livestock prices have improved in
recent months and are currently at levels that present minimal concern. The
agricultural economy is accustomed to commodity price fluctuations and is
generally able to handle such fluctuations without significant problem. Although
the Company underwrites its agricultural loans based on the current level of
commodity prices, an extended period of low commodity prices or adverse growing
conditions could result in weakness in the agricultural loan portfolio and could
create a need for the
20
Company to increase its allowance for loan losses through increased charges to
provision for loan losses.
Real estate properties acquired through foreclosure are
recorded at the lower of cost or fair value. If fair value at the date of
foreclosure is lower than the balance of the related loan, the difference will
be charged-off to the allowance for loan losses at the time of transfer.
Valuations are periodically updated by management and if the value declines, a
specific provision for losses on such property is established by a charge to
operations.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance.
The following table sets forth an analysis of the Company's
allowance for loan losses.
Year Ended September 30,
-----------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
(Dollars in Thousands)
Balance at beginning of period $ 1,650 $ 2,356 $ 2,379 $ 2,909 $ 3,092
Iowa Savings acquisition 132 -- -- -- --
Security acquisition 563 -- -- -- --
Charge-offs:
One-to four-family -- -- (103) (84) (65)
Agricultural operating -- -- (595) (1,160) --
Commercial and multi-family (35) (2) (299) -- (370)
Consumer (54) (66) (152) (202) (104)
Commercial business -- (55) (17) (420) (730)
------- ------- ------- ------- -------
Total charge-offs (89) (123) (1,166) (1,866) (1,269)
Recoveries:
Consumer -- -- 17 39 55
Commercial business -- -- 5 8 33
Commercial and multi-family -- 2 -- -- --
Agricultural operating -- 24 11 11 39
------- ------- ------- ------- -------
Total recoveries -- 26 33 58 127
------- ------- ------- ------- -------
Net charge-offs (89) (97) (1,133) (1,808) (1,142)
Additions charged to operations 100 120 1,663 1,992 1,640
------- ------- ------- ------- -------
Balance at end of period $ 2,356 $ 2,379 $ 2,909 $ 3,093 $ 3,590
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to average
loans outstanding during the period .04% .04% .44% .63% .37%
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to average
non-performing assets 5.30% 4.46% 21.50% 43.12% 64.53%
======= ======= ======= ======= =======
For more information on the provision for loan losses, see
'Management's Discussion and Analysis - Results of Operations" in the Annual
Report.
21
The distribution of the Company's allowance for losses on
loans at the dates indicated is summarized as follows:
September 30,
--------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------------ -------------------- -------------------- ----------------- -------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
One- to four-family $ 235 31.54% $ 222 27.75% $ 257 30.50% $ 331 34.80% $ 250 31.63%
Commercial and multi-
family real estate 639 34.23 712 28.12 602 23.77 772 27.06 1,183 31.01
Agricultural real estate 138 4.45 117 4.41 132 3.75 114 3.11 124 3.26
Construction 59 3.14 106 7.99 165 11.73 123 8.95 125 9.37
Consumer 270 8.21 289 10.29 277 9.33 308 7.39 335 7.93
Agricultural operating 531 12.21 580 14.51 1,024 13.24 806 9.24 611 8.02
Commercial business 271 6.22 277 6.93 324 7.68 449 9.45 592 8.78
Unallocated 213 -- 76 -- 128 -- 190 -- 370 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $2,356 100.00% $2,379 100.00% $2,909 100.00% $3,093 100.00% $3,590 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
22
Investment Activities
General. The investment policy of the Company generally is to
invest funds among various categories of investments and maturities based upon
the Company's need for liquidity, to achieve the proper balance between its
desire to minimize risk and maximize yield, to provide collateral for
borrowings, and to fulfill the Company's asset/liability management policies.
The Company's investment and mortgage-backed securities portfolios are managed
in accordance with a written investment policy adopted by the Board of Directors
which is implemented by members of the Bank's Investment Committee.
As of September 30, 2000, the Company's entire investment and
mortgage-backed securities portfolios were classified as available for sale. For
additional information regarding the Company's investment and mortgage-backed
securities portfolios, see Notes 1 and 3 of the Notes to Consolidated Financial
Statements in the Annual Report.
Investment Securities. It is the Company's general policy to
purchase investment securities which are U.S. Government securities and federal
agency obligations, state and local government obligations, commercial paper,
corporate debt securities and overnight federal funds.
The following table sets forth the carrying value of the
Company's investment security portfolio, excluding mortgage-backed securities,
at the dates indicated.
September 30,
-----------------------------
1998 1999 2000
------- ------- -------
(In Thousands)
Investment Securities:
Trust preferred securities(1) $27,256 $26,998 $25,921
U.S. government securities 757 -- --
Federal agency obligations 27,015 15,492 16,380
Municipal bonds 1,341 1,387 1,215
Equity investments 1,230 856 1,070
Freddie Mac preferred stock 427 202 213
Fannie Mae common stock 129 125 143
------- ------- -------
Subtotal 58,155 45,060 44,942
FHLB stock 5,506 8,126 8,328
------- ------- -------
Total investment securities and FHLB stock $63,661 $53,186 $53,270
======= ======= =======
Other Interest-Earning Assets:
Interest bearing deposits in other financial
institutions and Federal Funds sold $ 5,818 $ 4,208 $ 5,938
======= ======= =======
- -------------------
(1) Within the trust preferred securities presented above, there are securities
from individual issuers that exceed 10% of the Company's total equity. The
name and the aggregate market value of securities of each individual issuer
are as follows, as of September 30, 2000: PNC Capital Trust, $4.7 million;
Key Corp Capital I, $4.8 million; Huntington Capital II, $4.6 million; Bank
Boston Capital Trust IV, $4.7 million; BankAmerica Capital III, $4.8
million.
23
The composition and maturities of the Company's investment
securities portfolio, excluding equity securities, FHLB stock and
mortgage-backed securities, are indicated in the following table.
September 30, 2000
----------------------------------------------------------------------------
After 1 After 5
Year Years
1 Year or Through Through After Total Investment
Less 5 Years 10 Years 10 Years Securities
--------- -------- -------- --------- ----------------------
Carrying Carrying Carrying Carrying Amortized Market
Value Value Value Value Cost Value
----- ----- ----- ----- ---- -----
(Dollars in Thousands)
Trust preferred securities $ -- $ -- $ -- $25,921 $27,159 $25,921
Municipal bonds 211 685 319 -- 1,200 1,215
Federal agency obligations -- -- 15,401 979 16,959 16,380
---- ---- ------- ------- ------- -------
Total investment securities $211 $685 $15,720 $26,900 $45,318 $43,516
==== ==== ======= ======= ======= =======
Weighted average yield 5.33% 5.87% 6.27% 7.48% 7.00% 7.00%
Mortgage-Backed Securities. The Company's mortgage-backed and
related securities portfolio consists of securities issued under
government-sponsored agency programs, including those of Ginnie Mae, Fannie Mae
and Freddie Mac. The Company also holds Collateralized Mortgage Obligations
("CMOs"), as well as a limited amount of privately issued mortgage pass-through
certificates. The Ginnie Mae, Fannie Mae and Freddie Mac certificates are
modified pass-through mortgage-backed securities that represent undivided
interests in underlying pools of fixed-rate, or certain types of
adjustable-rate, predominantly single-family and, to a lesser extent,
multi-family residential mortgages issued by these government-sponsored
entities. Fannie Mae and Freddie Mac generally provide the certificate holder a
guarantee of timely payments of interest, whether or not collected. Ginnie Mae's
guarantee to the holder is timely payments of principal and interest, backed by
the full faith and credit of the U.S. Government. Privately issued mortgage
pass-through certificates generally provide no guarantee as to timely payment of
interest or principal, and reliance is placed on the creditworthiness of the
issuer, which the Company monitors on a regular basis.
CMOs are special types of pass-through debt in which the
stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules, as well as a residual interest, with
each such class possessing different risk characteristics. At September 30,
2000, the Company held CMOs totaling $71.2 million, all of which were secured by
underlying collateral issued under government-sponsored agency programs or
residential real estate mortgage loans. Premiums associated with the purchase of
these CMOs are not significant, therefore, the risk of significant yield
adjustments because of accelerated prepayments is limited. Yield adjustments are
encountered as interest rates rise or decline, which in turn slows or increases
prepayment rates and affect the average lives of the CMOs.
24
At September 30, 2000, $100.5 million or 98.0% of the
Company's mortgage-backed securities portfolio had fixed rates of interest and
$2.0 million or 2.0% of such portfolio had adjustable rates of interest.
Mortgage-backed securities generally increase the quality of
the Company's assets by virtue of the insurance or guarantees that back them,
are more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. At September 30, 2000, $99.7
million or 97.3% of the Company's mortgage-backed securities were pledged to
secure various obligations of the Company.
While mortgage-backed securities carry a reduced credit risk
as compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. The prepayment risk associated with
mortgage-backed securities is monitored periodically, and prepayment rate
assumptions adjusted as appropriate to update the Company's mortgage-backed
securities accounting and asset/liability reports. Classification of the
Company's mortgage-backed securities portfolio as available for sale is designed
to minimize that risk.
The following table sets forth the carrying value of the
Company's mortgage-backed securities at the dates indicated.
September 30,
-----------------------------------
1998 1999 2000
------- -------- --------
(In Thousands)
Ginnie Mae $42,951 $ 27,886 $ 23,780
CMO 11,283 95,325 71,164
Freddie Mac 2,827 5,791 4,720
Fannie Mae 4,711 3,934 2,469
Privately Issued Mortgage Pass-Through Certificates 682 493 405
------- -------- --------
Total $62,454 $133,429 $102,538
======= ======== ========
25
The following table sets forth the contractual maturities of
the Company's mortgage-backed securities at September 30, 2000. Not considered
in the preparation of the table below is the effect of prepayments, periodic
principal repayments and the adjustable-rate nature of these instruments.
Due in
-----------------------------------------------
After 1 After 5 September 30,
Year Years 2000
1 Year or Through Through After Balance
Less 5 Years 10 Years 10 Years Outstanding
---- ------- -------- -------- -----------
(Dollars in Thousands)
Ginnie Mae $-- $ -- $ -- $23,780 $ 23,780
CMO -- -- 16,579 54,585 71,164
Freddie Mac 52 94 627 3,947 4,720
Fannie Mae 2 64 568 1,835 2,469
Privately Issued Mortgage
Pass-Through Certificates(1) -- -- -- 405 405
--- ---- ------- ------- --------
Total $54 $158 $17,774 $84,552 $102,538
=== ==== ======= ======= ========
Weighted average yield 11.01% 9.83% 6.57% 6.70% 6.68%
- ------------------
(1) This security is rated AA by a nationally recognized rating agency.
At September 30, 2000, the contractual maturity of 82.5% of
all of the Company's mortgage- backed securities was in excess of ten years. The
actual maturity of a mortgage-backed security is typically less than its stated
maturity due to scheduled principal payments and prepayments of the underlying
mortgages. Prepayments that are different than anticipated will affect the yield
to maturity. The yield is based upon the interest income and the amortization of
any premium or discount related to the mortgage-backed security. In accordance
with generally accepted accounting principles, premiums and discounts are
amortized over the estimated lives of the loans, which decrease and increase
interest income, respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage- backed security, and these assumptions are reviewed
periodically to reflect actual prepayments. Although prepayments of underlying
mortgages depend on many factors, including the type of mortgages, the coupon
rate, the age of mortgages, the geographical location of the underlying real
estate collateralizing the mortgages and general levels of market interest
rates, the difference between the interest rates on the underlying mortgages and
the prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Company may be subject
to reinvestment risk because to the extent that the Company's mortgage-backed
securities amortize or prepay faster than anticipated, the Company may not be
able to reinvest the proceeds of such repayments and prepayments at a comparable
rate.
26
Sources of Funds
General. The Company's sources of funds are deposits,
borrowings, amortization and repayment of loan principal, interest earned on or
maturation of investment securities and short-term investments, and funds
provided from operations.
Borrowings, including Federal Home Loan Bank ("FHLB") of Des
Moines and Federal Reserve Bank of Chicago ("FRB") advances, reverse repurchase
agreements and retail repurchase agreements, may be used at times to compensate
for seasonal reductions in deposits or deposit inflows at less than projected
levels, may be used on a longer-term basis to support expanded lending
activities, and may also be used to match the funding of a corresponding asset.
Deposits. The Company offers a variety of deposit accounts
having a wide range of interest rates and terms. The Company's deposits consist
of passbook savings accounts, money market savings accounts, NOW and regular
checking accounts, and certificate accounts currently ranging in terms from
fourteen days to 60 months. The Company only solicits deposits from its primary
market area and does not use brokers to obtain deposits. The Company relies
primarily on competitive pricing policies, advertising and customer service to
attract and retain these deposits.
The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Company has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. The Company has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. Based
on its experience, the Company believes that its passbook savings, money market
savings accounts, NOW and regular checking accounts are relatively stable
sources of deposits. However, the ability of the Company to attract and maintain
certificates of deposit and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.
27
The following table sets forth the savings flows at the
Company during the periods indicated.
Year Ended September 30,
-------------------------------------------
1998 1999 2000
--------- --------- ---------
(Dollars in Thousands)
Opening balance $ 246,116 $ 283,858 $ 304,780
Deposits 615,028 608,478 655,460
Withdrawals (589,176) (599,915) (654,717)
Interest credited 11,890 12,359 13,131
--------- --------- ---------
Ending balance $ 283,858 $ 304,780 $ 318,654
========= ========= =========
Net increase (decrease) $ 37,742 $ 20,922 $ 13,874
========= ========= =========
Percent increase (decrease) 15.34 % 7.37% 4.55%
========= ========= =========
The following table sets forth the dollar amount of savings
deposits in the various types of deposit programs offered by the Company for the
periods indicated.
Year Ended September 30,
---------------------------------------------------------------------------------------------
1998 1999 2000
------------------------- ------------------------ -----------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings
Deposits:
Commercial Demand.............. $ 4,971 1.75% $ 5,681 1.86% $ 6,041 1.90%
Passbook Accounts.............. 18,610 6.56 17,043 5.59 15,025 4.71
NOW Accounts................... 16,637 5.86 16,055 5.27 16,472 5.17
Money Market Accounts.......... 22,509 7.93 41,905 13.75 41,012 12.87
---------- ------ ------- ------ ---------- ------
Total Non-Certificate.......... 62,727 22.10 80,684 26.47 78,550 24.65
---------- ------ ------- ------ ---------- ------
Certificates:
- ------------
Variable....................... 559 .20 1,253 .41 1,077 .34
0.00 - 3.99%.................. 95 .03 267 .09 100 .03
4.00 - 5.99%................. 130,729 46.05 185,476 60.85 97,054 30.46
6.00 - 7.99%................. 87,940 30.98 37,098 12.17 141,873 44.52
8.00 - 9.99%................. 1,808 .64 2 .01 --- ---
---------- ------ ------- ------ ---------- ------
Total Certificates............. 221,131 77.90 224,096 73.53 240,104 75.35
---------- ------ ------- ------ ---------- ------
Total Deposits................. $283,858 100.00% $304,780 100.00% $318,654 100.00%
========== ====== ======== ====== ========== ======
28
The following table shows rate and maturity information for
the Company's certificates of deposit as of September 30, 2000.
0.00- 4.00- 6.00- Percent
Variable 3.99% 5.99% 7.99% Total of Total
-------- ----- ----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
- -----------------------------
December 31, 2000 $ 244 $ 2 $24,052 $ 9,605 $ 33,903 14.1%
March 31, 2001 104 -- 20,579 12,052 32,735 13.6
June 30, 2001 204 52 13,734 13,599 27,589 11.5
September 30, 2001 221 -- 9,785 28,081 38,087 15.9
December 31, 2001 66 -- 6,802 12,873 19,741 8.2
March 31, 2002 120 -- 5,559 7,238 12,917 5.4
June 30, 2002 1 -- 5,210 22,290 27,501 11.5
September 30, 2002 -- -- 2,929 11,095 14,024 5.8
December 31, 2002 -- -- 2,547 6,274 8,821 3.7
March 31, 2003 -- -- 1,771 3,521 5,292 2.2
June 30, 2003 -- 3 1,204 3,405 4,612 1.9
September 30, 2003 -- -- 934 3,531 4,465 1.9
Thereafter 117 43 1,948 8,309 10,417 4.3
------ ---- ------- -------- -------- ------
Total $1,077 $100 $97,054 $141,873 $240,104 100.0%
====== ==== ======= ======== ======== ======
Percent of total .45% .04% 40.42% 59.09% 100.00%
==== ==== ======= ======== ======
The following table indicates the amount of the Company's
certificates of deposit and other deposits by time remaining until maturity as
of September 30, 2000.
Maturity
-------------------------------------------------------------
After After
3 Months 3 to 6 6 to 12 After
or Less Months Months 12 months Total
-----------------------------------------------------------
(In Thousands)
Certificates of deposit less than $100,000 $26,246 $27,031 $56,139 $ 99,474 $208,890
Certificates of deposit of $100,000 or more 7,657 5,704 9,536 8,317 31,214
------- ------- ------- -------- --------
Total certificates of deposit $33,903 $32,735 $65,675 $107,791 $240,104(1)
======= ======= ======= ======== ========
(1) Includes deposits from governmental and other public entities totaling $10.0
million.
Borrowings. Although deposits are the Company's primary source
of funds, the Company's policy has been to utilize borrowings when they are a
less costly source of funds, can be invested at a positive interest rate spread,
or when the Company desires additional capacity to fund loan demand.
29
The Company's borrowings historically have consisted of
advances from the FHLB of Des Moines upon the security of a blanket collateral
agreement of a percentage of unencumbered loans and the pledge of specific
investment securities. Such advances can be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. At September 30, 2000, the Company had $139.7 million of advances
from the FHLB of Des Moines and the ability to borrow up to an additional $28.0
million. All of the Company's advances currently carry fixed rates. At September
30, 2000, advances totaling $28.2 million had terms to maturity of one year or
less. The remaining $111.5 million had maturities ranging up to 19 years.
From time to time, the Company has offered retail repurchase
agreements to its customers. These agreements typically range from 14 days to
five years in term, and typically have been offered in minimum amounts of
$100,000. The proceeds of these transactions are used to meet cash flow needs of
the Company. At September 30, 2000, the Company had approximately $4.3 million
of retail repurchase agreements outstanding.
The Company has also, from time to time, entered into reverse
repurchase agreements through nationally recognized broker-dealer firms. These
agreements are accounted for as borrowings by the Company and are secured by
certain of the Company's investment and mortgage-backed securities. The
broker-dealer takes possession of the securities during the period that the
reverse repurchase agreement is outstanding. The terms of the agreements have
typically ranged from 30 days to a maximum of six months. The Company has not
entered into any reverse repurchase agreements in the past five years.
The following table sets forth the maximum month-end balance
and average balance of FHLB advances, retail repurchase agreements and other
borrowings (consisting of FRB advances) for the periods indicated.
Year Ended September 30,
------------------------------------
1998 1999 2000
-------- -------- --------
(In Thousands)
Maximum Balance:
- ----------------
FHLB advances $109,766 $161,348 $157,658
Retail repurchase agreements 4,075 4,322 4,920
Other borrowings 2,100 200 --
Average Balance:
- ----------------
FHLB advances $ 95,328 $135,846 $149,896
Retail repurchase agreements 2,916 3,300 3,460
Other borrowings 557 48 --
30
The following table sets forth certain information as to the
Company's FHLB advances and other borrowings at the dates indicated.
At September 30,
------------------------------------
1998 1999 2000
------- -------- --------
(Dollars in Thousands)
FHLB advances $85,264 $161,348 $139,738
Retail repurchase agreements 4,075 3,021 4,255
Other borrowings 550 -- --
------- -------- --------
Total borrowings $89,889 $164,369 $143,993
======= ======== ========
Weighted average interest rate of FHLB advances 5.91% 5.38% 5.78%
Weighted average interest rate of retail repurchase
agreements 5.71% 5.28% 6.43%
Weighted average interest rate of other borrowings 5.45% ---% ---%
Subsidiary Activities
The only subsidiaries of the Company are First Federal and
Security. First Federal has one service subsidiary, First Services Financial
Limited ("First Services"). At September 30, 2000, the net book value of First
Federal's investment in First Services was approximately $786,000. Security does
not have any subsidiaries.
First Federal organized First Services, its sole service
corporation, in 1983. First Services is located in Storm Lake, Iowa and offers
mutual funds and, in some locations, insurance products and annuities. In
addition, Brookings Service Corporation ("BSC"), a subsidiary of First Services,
offers full brokerage services through PrimeVest Financial Services, Inc., a
third party vendor. First Services, together with its subsidiary BSC, recognized
net income of $37,000 during fiscal 2000.
Regulation
General. First Midwest currently has two wholly-owned
subsidiaries, First Federal, a federally-chartered thrift institution and
Security, an Iowa-chartered commercial bank. First Federal is subject to
extensive regulation, supervision and examination by the OTS, as its chartering
authority and primary federal regulator, and by the Federal Deposit Insurance
Corporation (the "FDIC"), which insures its deposits up to applicable limits.
First Federal is a member of the FHLB System and is subject to certain limited
regulation by the FRB. Such regulation and supervision governs the activities in
which an institution can engage and the manner in which such activities are
conducted, and is intended primarily for the protection of the insurance fund
and depositors. Security is subject to extensive regulation, supervision and
examination by the Iowa Superintendent of Banking (the "ISB") and the FRB, which
are its state and primary federal regulators, respectively. It is also subject
to regulation by the FDIC, which insures its deposits up to applicable limits.
As with First Federal, such regulation and supervision governs the activities in
which Security can engage and the manner
31
in which such activities are conducted and is intended primarily for the
protection of the insurance fund and depositors.
First Midwest is regulated as a bank holding company by the
FRB. Bank holding companies are subject to comprehensive regulation and
supervision by the FRB under the Bank Holding Company Act of 1956, as amended
(the "BHCA") and the regulations of the FRB. As a bank holding company, First
Midwest must file reports with the FRB and such additional information as the
FRB may require, and is subject to regular inspections by the FRB. First Midwest
is subject to the activity limitations imposed under the BHCA and in general may
engage in only those activities that the FRB has determined to be closely
related to banking.
Regulatory authorities have been granted extensive discretion
in connection with their supervisory and enforcement activities which are
intended to strengthen the financial condition of the banking industry,
including the imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC, the FRB or the Congress could have a material impact on
First Midwest, First Federal or Security and their respective operations.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
Federal Regulation of Financial Institutions. The OTS has
extensive authority over the operations of savings associations. As part of this
authority, First Federal is required to file periodic reports with the OTS and
is subject to periodic examination by the OTS and the FDIC. The last regular OTS
examination of First Federal was as of November 6, 2000. When these examinations
are conducted by the OTS, the examiners may require First Federal to provide for
higher general or specific loan loss reserves. Security is subject to similar
regulation and oversight by the ISB and the FRB and was last examined as of July
17, 2000.
Each federal banking regulator has extensive enforcement
authority over its regulated institutions. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports. Except under certain circumstances, public disclosure of final
enforcement actions by the regulator is required.
In addition, the investment, lending and branching authority
of First Federal is prescribed by federal laws and it is prohibited from
engaging in any activities not permitted by such laws. Security is subject to
such restrictions under state law as administered by the ISB. Federal savings
associations are also generally authorized to branch nationwide whereas Iowa
chartered banks, such as Security, are limited to establishing branches in the
counties contiguous to the county where their home office is located. At
September 30, 2000, First Federal and Security were in compliance with the noted
restrictions.
32
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). Security is subject to similar restrictions. At
September 30, 2000, First Federal's and Security's lending limit under these
restrictions was $5.4 million and $927,000, respectively. First Federal and
Security are in compliance with the loans-to-one-borrower limitation.
Insurance of Accounts and Regulation by the FDIC. First
Federal is a member of the Savings Association Insurance Fund (the "SAIF") and
Security is a member of the Bank Insurance Fund (the "BIF"), each of which is
administered by the FDIC. Deposits are insured up to applicable limits by the
FDIC and such insurance is backed by the full faith and credit of the United
States Government. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the SAIF or the BIF. The FDIC also has the authority to
initiate enforcement actions against any FDIC insured institution after giving
its primary federal regulator the opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. The current assessment rates range
from zero to .27% per $100 of assessable deposits. Risk classification of all
insured institutions will be made by the FDIC for each semi-annual assessment
period. Institutions that are well- capitalized and have a high supervisory
rating are subject to the lowest assessment rate. At September 30, 2000, each of
First Federal and Security met the capital requirements of a "well capitalized"
institution and were not subject to any assessment. See Note 13 of Notes to
Consolidated Financial Statements in the Annual Report.
Prior to the enactment of the legislation recapitalizing the
SAIF in 1996, a portion of the SAIF assessment imposed on savings associations
was used to repay obligations issued by a federally chartered corporation to
provide financing for resolving the thrift crisis in the 1980s. Although the
legislation also now requires assessments to be made on BIF-assessable deposits
for this purpose, effective January 1, 1997, that assessment will be limited to
20% of the rate imposed on SAIF assessable deposits until the earlier of
December 31, 1999 or when no savings association continues to exist, thereby
imposing a greater burden on SAIF member institutions such as First Federal.
Thereafter, however, assessments on BIF-member institutions will be made on the
same basis as SAIF-member institutions. The rates established by the FDIC to
implement this requirement for all FDIC-insured institutions is a 2.02 basis
point assessment on both SAIF deposits and BIF deposits.
Regulatory Capital Requirements. Federally insured financial
institutions, such as First Federal and Security, are required to maintain a
minimum level of regulatory capital. These capital requirements mandate that an
institution maintain at least the following ratios: (1) a core (or Tier 1)
capital to adjusted total assets ratio of 4% (which can be reduced to 3% for
highly rated institutions); (2) a Tier 1 capital to risk-weighted assets ratio
of 4% and (3) a risk-based capital to risk-weighted assets ratio of 8%. Capital
requirements in excess of these standards may be imposed on individual
33
institutions on a case-by-case basis. See Note 13 of Notes to Consolidated
Financial Statements in the Annual Report.
An FDIC-insured institution's primary federal regulator is
also authorized and, under certain circumstances required, to take certain
actions against an "undercapitalized institution" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such institution must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
primary federal regulator is also authorized, and with respect to institution's
whose capital is further depleted, required to impose additional restrictions
that can affect all aspects of the institution's operations, including the
appointment of a receiver for a "critically undercapitalized" institution (i.e.,
one with a tangible capital ratio of 2% or less). As a condition to the approval
of the capital restoration plan, any company controlling an undercapitalized
institution must agree that it will enter into a limited capital maintenance
guarantee with respect to the institution's achievement of its capital
requirements.
The imposition of any of these measures on First Federal or
Security may have a substantial adverse effect on Company's operations and
profitability. First Midwest shareholders do not have preemptive rights, and
therefore, if First Midwest is directed by the OTS, the FRB or the FDIC to issue
additional shares of Common Stock, such issuance may result in the dilution in
shareholders percentage of ownership of First Midwest.
Limitations on Dividends and Other Capital Distributions. The
OTS imposes various restrictions on savings associations with respect to their
ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. The OTS also prohibits a savings association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result of
such action, the regulatory capital of the association would be reduced below
the amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
Savings institutions such as First Federal may make a capital
distribution without the approval of the OTS, provided they notify the OTS
30-days before they declare the capital distribution and they meet the following
requirements: (i) have a regulatory rating in one of the two top examination
categories, (ii) are not of supervisory concern, and will remain adequately- or
well-capitalized, as defined in the OTS prompt corrective action regulations,
following the proposed distribution, and (iii) the distribution does not exceed
their net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If a savings
institution does not meet the above stated requirements, it must obtain the
prior approval of the OTS before declaring any proposed distributions.
Security may pay dividends, in cash or property, only out of
its undivided profits. In addition, FRB regulations prohibit the payment of
dividends by a state member bank if losses have at any time been sustained by
such bank that equal or exceed its undivided profits then on hand, unless (i)
the prior approval of the FRB has been obtained and (ii) at least two-thirds of
the shares of each class of stock outstanding have approved the dividend
payment. FRB regulations also prohibit the payment
34
of any dividend by a state member bank without the prior approval of the FRB if
the total of all dividends declared by the bank in any calendar year exceeds the
total of its net profits for that year combined with its retained net profits of
the previous two calendar years (minus any required transfers to a surplus or to
a fund for the retirement of any preferred stock).
Qualified Thrift Lender Test. All savings associations,
including First Federal, are required to meet a qualified thrift lender ("QTL")
test to avoid certain restrictions on their operations. This test requires a
savings association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis or meet the requirements for a domestic
building and loan association under the Internal Revenue Code. Under either
test, the required assets primarily consist of residential housing related loans
and investments. At September 30, 2000, First Federal met the test and has
always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must
convert to a national bank charter, unless it requalifies as a QTL within one
year and thereafter remains a QTL, or limits its new investments and activities
to those permissible for both a savings association and a national bank. In
addition, the association is immediately ineligible to receive any new FHLB
borrowings and is subject to national bank limits for payment of dividends and
branching authority. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB borrowings, which may
result in prepayment penalties.
Community Reinvestment Act. Under the Community Reinvestment
Act ("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS and the FRB, in connection with the examination of First
Federal and Security, respectively, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by the institution. An unsatisfactory rating may be used as the
basis for the denial of such an application. First Federal was examined for CRA
compliance in January 2000 and Security was examined in June 1999 and both
received a rating of "satisfactory."
Bank Holding Company Regulation
General. Bank holding companies, such as First Midwest, are
subject to comprehensive regulation by the FRB under the BHCA and the
regulations of the FRB. As a bank holding company, First Midwest is required to
file reports with the FRB and such additional information as the FRB may
require, and is subject to regular inspections by the FRB. The FRB also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
35
Under FRB policy, a bank holding company must serve as a
source of strength for its subsidiary banks. Under this policy the FRB may
require a holding company to contribute additional capital to an
undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the FRB includes,
among other things, operating a savings institution (such as First Federal),
mortgage company, finance company, credit card company or factoring company;
performing certain data processing operations; providing certain investment and
financial advice; underwriting and acting as an insurance agent for certain
types of credit-related insurance; leasing property on a full-payout,
non-operating basis; real estate and personal property appraising; and, subject
to certain limitations, providing securities brokerage services for customers.
The scope of permissible activities may be expanded from time to time by the
FRB. Such activities may also be affected by federal legislation.
Interstate Banking and Branching. The FRB may approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of a bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state or if the applicant (and its depository
institution affiliates) controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
Iowa has adopted a five year minimum existence requirement. States are
authorized to limit the percentage of total insured deposits in the state which
may be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit.
The federal banking agencies are also generally authorized to
approve interstate merger transactions without regard to whether such
transaction is prohibited by the law of any state. Interstate acquisitions of
branches or the establishment of a new branch is permitted only if the law of
the state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions are also subject to the nationwide and statewide
insured deposit concentration amounts described above. Iowa permits interstate
branching only by merger.
36
Dividends. The FRB has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the FRB's
view that a bank holding company should pay cash dividends only to the extent
that its net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The FRB may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice or would
violate any law, regulation, FRB order, or any condition imposed by, or written
agreement with, the FRB. This notification requirement does not apply to any
company that meets the well-capitalized standard for commercial banks, has a
safety and soundness examination rating of at least a "2" and is not subject to
any unresolved supervisory issues.
Capital Requirements. The FRB has established capital
requirements for bank holding companies that generally parallel the capital
requirements for commercial banks and federal thrift institutions such as First
Federal and Security. First Midwest is in compliance with these requirements.
Federal Home Loan Bank System
First Federal and Security are both members of the FHLB of Des
Moines, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances must be used for
residential home financing.
As members of the FHLB System, First Federal and Security are
required to purchase and maintain stock in the FHLB of Des Moines. At September
30, 2000, the Banks had in the aggregate $8.3 million in FHLB stock, which was
in compliance with this requirement. For the fiscal year ended September 30,
2000, dividends paid by the FHLB of Des Moines to First Federal and Security
totaled $552,000. Over the past five calendar years such dividends have averaged
6.83% and were 6.86% for the first three quarters of the calendar year 2000.
Under federal law the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-
37
income housing projects. These contributions have affected adversely the level
of FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of First Federal's FHLB stock may result in a
corresponding reduction in First Federal's capital.
Federal and State Taxation
Federal Taxation. First Midwest and its subsidiaries file
consolidated federal income tax returns on a fiscal year basis using the accrual
method of accounting. In addition to the regular income tax, corporations,
including savings banks such as First Federal, generally are subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20%
on alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items, less
any available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings bank's bad
debt reserves and deducted for federal income tax purposes exceed the allowable
amount of such reserves computed under the experience method and to the extent
of the bank's supplemental reserves for losses on loans ("Excess"), such Excess
may not, without adverse tax consequences, be utilized for the payment of cash
dividends or other distributions to a shareholder (including distributions on
redemption, dissolution or liquidation) or for any other purpose (except to
absorb bad debt losses). As of September 30, 2000, First Federal's Excess for
tax purposes totaled approximately $6.7 million.
First Midwest and its consolidated subsidiaries have not been
audited by the IRS within the past ten years. In the opinion of management, any
examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, First Midwest) would not result in a
deficiency which could have a material adverse effect on the financial condition
of First Midwest and its subsidiaries.
Iowa Taxation. First Federal and Security file Iowa franchise
tax returns. First Midwest and First Federal's subsidiary file Iowa corporation
tax returns on a fiscal year-end basis.
Iowa imposes a franchise tax on the taxable income of mutual
and stock savings banks and commercial banks. The tax rate is 5%, which may
effectively be increased, in individual cases, by application of a minimum tax
provision. Taxable income under the franchise tax is generally similar to
taxable income under the federal corporate income tax, except that, under the
Iowa franchise tax, no deduction is allowed for Iowa franchise tax payments and
taxable income includes interest on state and municipal obligations. Interest on
U.S. obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax. The taxable income for Iowa franchise tax purposes is
apportioned to Iowa through the use of a one-factor formula consisting of gross
receipts only.
Taxable income under the Iowa corporate income tax is
generally similar to taxable income under the federal corporate income tax,
except that, under the Iowa tax, no deduction is allowed for Iowa income tax
payments; interest from state and municipal obligations is included in income;
interest from U.S. obligations is excluded from income; and 50% of federal
corporate income tax
38
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.
South Dakota Taxation. First Federal files a South Dakota
franchise tax return due to the operations of its Brookings division. The South
Dakota franchise tax is imposed only on depository institutions. First Midwest,
Security and First Federal's subsidiaries are therefore not subject to the South
Dakota franchise tax.
South Dakota imposes a franchise tax on the taxable income of
a depository institution at the rate of 6%. Taxable income under the franchise
tax is generally similar to taxable income under the federal corporate income
tax, except that, under the South Dakota franchise tax, no deduction is allowed
for state income and franchise taxes, bad debt deductions are determined on the
basis of actual charge-offs, income from municipal obligations exempt from
federal taxes are included in the franchise taxable income, and there is a
deduction allowed for federal income taxes accrued for the fiscal year. The
taxable income for South Dakota franchise tax purposes is apportioned to South
Dakota through the use of a three-factor formula consisting of tangible real and
personal property, payroll and gross receipts.
Delaware Taxation. As a Delaware holding company, First
Midwest is exempted from Delaware corporate income tax but is required to file
an annual report with and pay an annual fee to the State of Delaware. First
Midwest is also subject to an annual franchise tax imposed by the State of
Delaware.
Competition
The Company faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from commercial banks, savings banks, credit
unions, insurance companies, and mortgage bankers making loans secured by real
estate located in the Company's market area. Commercial banks and credit unions
provide vigorous competition in consumer lending. The Company competes for real
estate and other loans principally on the basis of the quality of services it
provides to borrowers, interest rates and loan fees it charges, and the types of
loans it originates.
The Company attracts all of its deposits through its retail
banking offices, primarily from the communities in which those retail banking
offices are located; therefore, competition for those deposits is principally
from other commercial banks, savings banks, credit unions and brokerage offices
located in the same communities. The Company competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with interbranch deposit and withdrawal
privileges at each.
The Company serves Adair, Buena Vista, Calhoun, Guthrie, Ida,
Pocahontas, Polk and Sac counties in Iowa and Brookings County in South Dakota.
There are 31 commercial banks, four savings banks, other than First Federal, and
one credit union which compete for deposits and loans in the First Federal's
primary market area in northwest Iowa and eight commercial banks, one savings
bank, other than First Federal, and one credit union which compete for deposits
and loans in First Federal's market area in Brookings, South Dakota. In
addition, there are twelve commercial banks
in Security's primary market area in west central Iowa. First Federal competes
for deposits and loans with numerous financial institutions located throughout
the metropolitan market areas of Des Moines, Iowa and Sioux Falls, South Dakota.
Employees
At September 30, 2000, the Company and its subsidiaries had a
total of 136 employees, including 12 part-time employees. The Company's
employees are not represented by any collective bargaining group. Management
considers its employee relations to be good.
Executive Officers of the Company Who Are Not Directors
The following information as to the business experience during
the past five years is supplied with respect to the executive officers of the
Company who do not serve on the Company's Board of Directors. There are no
arrangements or understandings between such persons named and any persons
pursuant to which such officers were selected.
Donald J. Winchell - Mr. Winchell, age 48, serves as Senior
Vice President, Treasurer and Chief Financial Officer of First Midwest and First
Federal, and is responsible for the formulation and implementation of policies
and objectives for First Federal's finance and accounting functions. His duties
include financial planning, interest rate risk management, accounting,
investments, financial policy development and compliance, budgeting and
asset/liability management. Mr. Winchell also serves as Treasurer of First
Services Financial Limited and Brookings Service Corporation. Mr. Winchell
joined First Federal in 1989 as Vice President and Chief Financial Officer, was
appointed Treasurer in 1990, and Senior Vice President in 1992. Prior to joining
First Federal, Mr. Winchell served as Senior Vice President and Chief Financial
Officer of Midwest Federal Savings and Loan Association of Nebraska City,
Nebraska since 1981. Mr. Winchell received a Bachelor of Science degree and a
Bachelor of Business Administration degree from Washburn University, Topeka,
Kansas. Mr. Winchell is a certified public accountant.
Item 2. Description of Property
-----------------------
The Company conducts its business at its main office and
branch office in Storm Lake, Iowa, and five other locations in its primary
market area in Northwest Iowa. The Company also operates two offices in
Brookings, South Dakota, through the Company's Brookings Federal Bank division
of the Bank; two offices in Des Moines, Iowa, through the Company's Iowa Savings
Bank division of the Bank; one office in Sioux Falls, South Dakota, through the
Company's Sioux Falls division of the Bank; and three offices in West Central
Iowa through the Company's Security State Bank subsidiary.
The Company owns all of its offices, except for the branch
offices located at Storm Lake Plaza, Storm Lake, Iowa and West Des Moines, Iowa
as to which the land is leased. The total net book value of the Company's
premises and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at September 30, 2000 was $6.1 million. See
Note 7 of Notes to Consolidated Financial Statements in the Annual Report.
40
The Company believes that its current facilities are adequate
to meet the present and foreseeable needs of the Company and the Banks. The
Company has begun construction of a new office located in Sioux Falls, South
Dakota and has initiated plans to construct a new office to be located in
Urbandale, Iowa. The construction of the Sioux Falls office is anticipated to be
completed during the second quarter of the 2001 fiscal year and the construction
of the Urbandale office is anticipated to be completed by the end of the 2001
fiscal year. In November 1996, the Company purchased an existing building
located in West Des Moines, Iowa. In March 1998, the facility opened as an
additional office of the Iowa Savings Bank Division of First Federal.
The Bank maintains an on-line data base with a service bureau,
whose primary business is providing such services to financial institutions. The
net book value of the data processing and computer equipment utilized by the
Company at September 30, 2000 was approximately $380,000.
Item 3. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various
legal actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with counsel representing Company in
the proceedings, that the resolution of these proceedings should not have a
material effect on Company's consolidated financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the quarter ended September 30,
2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
---------------------------------------------------------------------
Page 56 of the attached 2000 Annual Report to Shareholders is
herein incorporated by reference.
Item 6. Selected Financial Data
-----------------------
Page 10 of the attached 2000 Annual Report to Shareholders is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis or Financial Condition and Results
of Operation
------------------------------------------------------------------------
Pages 11 through 21 of the attached 2000 Annual Report to
Shareholders are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
41
Pages 17 through 19 of the attached 2000 Annual Report to
Shareholders are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Pages 22 through 52 of the attached 2000 Annual Report to
Shareholders are herein incorporated by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
------------------------------------------------------------------------
The information required by Item 304 of Regulation S-K
regarding the change in the Company's accountants was previously filed as part
of the Company's Current Report on Form 8-K filed on May 30, 2000, as amended on
Form 8-K/A filed on June 13, 2000 and the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held in January 2001, filed on
December 18, 2000.
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Directors
Information concerning directors of the Company is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held in January 2001, filed on
December 18, 2000.
Executive Officers
Information concerning the executive officers of the Company
is incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held in January 2001,
filed on December 18, 2000 and from the information set forth under the caption
"Executive Officers of the Company Who Are Not Directors" contained in Part I of
this Form 10-K.
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
42
To the Company's knowledge, except as noted below, based
solely on a review of the copies of such reports furnished to the Company and
written representations that no other reports were required during the fiscal
year ended September 30, 2000, all Section 16(a) filing requirements applicable
to its officers, directors and greater than 10 percent beneficial owners were
complied with.
Item 11. Executive Compensation
----------------------
Information concerning executive compensation is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held in January 2001, filed on December 18, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information concerning security ownership of certain
beneficial owners and management is incorporated herein by reference from the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held in January 2001, filed on December 18, 2000.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Information concerning certain relationships and transactions
is incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held in January 2001,
filed on December 18, 2000.
43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) The following is a list of documents filed as part of this
report:
(1) Financial Statements:
The following financial statements are incorporated by
reference under Part II, Item 8 of this Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Balance Sheets as of September 30, 2000 and 1999.
3. Consolidated Statements of Income for the Years Ended
September 30, 2000, 1999 and 1998.
4. Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended September 30, 2000, 1999 and 1998.
5. Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999 and 1998.
6. Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the
information is not required under the related instructions or
is inapplicable.
(3) Exhibits:
See Index of Exhibits.
(b) Reports on Form 8-K:
There were no Form 8-Ks filed by the Registrant during the
three month period ended September 30, 2000.
44
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 MIDWEST FINANCIAL, INC.
Date: December 28, 2000 By: /s/ James S. Haahr
--------------------------------
James S. Haahr
(Duly Authorized Representative)
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/ James S. Haahr Date: December 28, 2000
------------------
James S. Haahr, Chairman of the Board
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ E. Wayne Cooley Date: December 28, 2000
-------------------
E. Wayne Cooley, Director
By: /s/ E. Thurman Gaskill Date: December 28, 2000
----------------------
E. Thurman Gaskill, Director
By: /s/ Rodney G. Muilenburg Date: December 28, 2000
------------------------
Rodney G. Muilenburg, Director
By:/s/ Jeanne Partlow Date: December 28, 2000
------------------
Jeanne Partlow, Director
By: /s/ G. Mark Mickelson Date: December 28, 2000
----------------------
G. Mark Mickelson, Director
By: /s/ J. Tyler Haahr Date: December 28, 2000
------------------
J. Tyler Haahr, Director, Senior Vice
President, Secretary and Chief Operating
Officer
By: /s/ Donald J. Winchell Date: December 28, 2000
----------------------
Donald J. Winchell, Senior Vice
President, Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
3(i) Registrant's Articles of Incorporation as currently in
effect, filed on June 17, 1993 as an exhibit to the
Registrant's registration statement on Form S-1
(Commission File No. 33-64654), are incorporated herein
by reference.
3(ii) Registrant's Bylaws, as amended and restated, filed as
Exhibit 3(ii) to Registrant's Report on Form 10-K for the
fiscal year ended September 30, 1998 (Commission File No.
0-22140), is incorporated herein by reference.
4 Registrant's Specimen Stock Certificate, filed on June
17, 1993 as an exhibit to the Registrant's registration
statement on Form S-1 (Commission File No. 33-64654), is
incorporated herein by reference.
10.1 Registrant's 1995 Stock Option and Incentive Plan, filed
as Exhibit 10.1 to Registrant's Report on Form 10-KSB for
the fiscal year ended September 30, 1996 (Commission File
No. 0-22140), is incorporated herein by reference.
10.2 Registrant's 1993 Stock Option and Incentive Plan, filed
on June 17, 1993 as an exhibit to the Registrant's
registration statement on Form S-1 (Commission File No.
33-64654), is incorporated herein by reference.
10.3 Registrant's Recognition and Retention Plan, filed on
June 17, 1993 as an exhibit to the Registrant's
registration statement on Form S-1 (Commission File No.
33-64654), is incorporated herein by reference.
10.4 Employment agreement between First Federal Savings Bank
of the Midwest and J. Tyler Haahr, filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year
ended September 30, 1997 (Commission File No. 0-22140),
is incorporated herein by reference.
10.5 Registrant's Supplemental Employees' Investment Plan,
filed as an exhibit to Registrant's Report on Form 10-KSB
for the fiscal year ended September 30, 1994 (Commission
File No. 0- 22140), is incorporated herein by reference.
10.6 Employment agreements between First Federal Savings Bank
of the Midwest and James S. Haahr and Donald J. Winchell,
filed on June 17, 1993 as an exhibit to the Registrant's
registration statement on Form S-1 (Commission File No.
33-64654), is incorporated herein by reference.
10.7 Registrant's Executive Officer Compensation Program,
filed as Exhibit 10.6 to Registrant's Report on Form 10-K
for the fiscal year ended September 30, 1998 (Commission
File No. 0- 22140), is incorporated herein by reference.
10.8 Registrant's Executive Officer Incentive Stock Option
Plan for Mergers and Acquisitions, filed as Exhibit 10.7
to Registrant's Report on Form 10-K for the fiscal year
ended September 30, 1998 (Commission File No. 0-22140),
is incorporated herein by reference.
11 Statement re: computation of per share earnings (included
under Note 1 and 2 of Notes to Consolidated Financial
Statements in the Annual Report to Shareholders' attached
hereto as Exhibit 13).
13 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23.1 Consent of McGladery & Pullen, LLP.
23.2 Consent of Crowe, Chizek and Company LLP.
27 Financial Data Schedule (electronic filing only).
99 Report of Predecessor Accountants.