SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [FEE REQUIRED] For the Fiscal Year Ended June 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number 0-25509
FIRST FEDERAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 42-1485449
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
329 Pierce Street, Sioux City, Iowa 51101
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(Address of Principal Executive Offices) Zip Code
(712) 277_0200
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES |X|. NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
As of September 3, 2002, there were issued and outstanding 4,172,169 shares
of the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the last sale price, as reported by the
NASDAQ National Market, on September 3, 2002 was $49,691,300. This amount does
not include shares held by the Bank's Employee Stock Ownership Plan and by
officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II of Form 10-K--Annual Report to Stockholders for the fiscal year
ended June 30, 2002.
2. Part III of Form 10-K--Proxy Statement for the 2002 Annual Meeting of
Stockholders.
PART I
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ITEM 1 BUSINESS
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General
First Federal Bankshares, Inc.
First Federal Bankshares, Inc. (the "Company" or the "Registrant") is a
Delaware corporation that serves as the holding company for First Federal Bank,
a federally-chartered stock savings bank headquartered in Sioux City, Iowa (the
"Bank"). As of June 30, 2002, the Company owned 100% of the Bank's common stock,
and currently the Company engages in no other significant activities beyond its
ownership of such common stock. Consequently, its net income is derived
primarily from the Bank's operation.
Prior to April 13, 1999, the Bank's common stock was owned approximately
53.49% by First Federal Bankshares, M.H.C. (the "Mutual Holding Company") and
46.51% by public stockholders. On April 13, 1999, pursuant to a Plan of
Conversion and Reorganization, and after a series of transactions, the Company
was formed to own all of the capital stock of the Bank, and the Company sold the
ownership interest in the Bank previously held by the Mutual Holding Company to
the public in a subscription offering that resulted in net cash proceeds of
approximately $23 million. Public stockholders of the Bank had their shares
exchanged into 2,182,807 shares of common stock of the Company (representing an
exchange ratio of 1.64696 shares of Company common stock for each share of Bank
common stock). The Mutual Holding Company ceased to exist following the
reorganization. The reorganization was accounted for in a manner similar to a
pooling of interests and did not result in any significant accounting
adjustments. As a result of the reorganization, the consolidated financial
statements for prior periods have been restated to reflect the changes in the
par value of common stock from $1.00 per share (for the Bank's common stock) to
$0.01 per share (for the Company's common stock). At June 30, 2002, the Company
had total assets of $650.8 million, total deposits of $472.6 million and
stockholders' equity of $71.3 million.
The Company's principal executive office is located at 329 Pierce Street,
Sioux City, Iowa 51101 and its telephone number at that address is (712)
277-0200.
First Federal Bank
First Federal Bank ("First Federal" or the "Bank") is a federally chartered
stock savings bank headquartered in Sioux City, Iowa. Founded in 1923, First
Federal's deposits have been federally insured since 1935 by the Savings
Association Insurance Fund and its predecessor, the Federal Savings and Loan
Insurance Corporation. The Bank has been a member of the Federal Home Loan Bank
System since 1935.
The Bank is a community-oriented financial institution offering traditional
financial services to its local community. The Bank's primary lending area
includes mid- and northwest-Iowa and contiguous portions of Nebraska and South
Dakota. The Bank's primary lending activity involves the origination of fixed
rate and adjustable rate mortgage ("ARM") loans secured by single-family
residential, multi-family residential and non-residential real estate.
Longer-term fixed rate residential mortgage loans are originated primarily for
sale in the secondary market on a servicing-released basis, while Fixed rate
loans with terms generally less than 15 years and ARM loans are retained in the
Bank's portfolio. To a lesser extent, the Bank makes second mortgage loans
secured by the borrower's principal residence and other types of consumer loans
such as auto loans and home improvement loans. In addition, the Bank invests in
mortgage-backed securities issued or guaranteed by Fannie Mae ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC"), or the Government National
Mortgage Association ("GNMA"), and in securities issued by the United States
Government and agencies thereof.
The Bank conducts operations through its main office in Sioux City, Iowa,
and its 15 branch offices in northwest and central Iowa and northeast Nebraska.
The Bank's principal executive office is located at 329 Pierce Street,
Sioux City, Iowa 51101, and its telephone number at that address is (712)
277-0200.
2
Forward Looking Statements
This Annual Report on Form 10-K may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "expect",
"intend", "may", and similar expressions identify such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. These forward-looking statements are based largely on the
expectations of the Registrant or the Registrant's management and are subject to
a number of risks and uncertainties, including but not limited to economic,
competitive, regulatory, and other factors affecting the Registrant's
operations, markets, products and services, as well as expansion strategies and
other factors discussed elsewhere in this report filed by the Registrant with
the Securities and Exchange Commission. Many of these factors are beyond the
Registrant's control.
Market Area
The Registrant conducts operations through its main office in Sioux City,
Iowa, which is located on the western border of Iowa, and its 15 branch offices
in northwest and central Iowa and northeast Nebraska. The Registrant gained
access to the central Iowa market as a result of the acquisition of financial
institutions headquartered in Grinnell and Newton, Iowa in 1998 and 1999. These
cities are located within an hour's drive of Des Moines, Iowa, the state capital
and largest metropolitan area in Iowa. The Newton acquisition included a branch
office located in West Des Moines, Iowa, which is a high-growth residential and
commercial development area. The population of Sioux City, West Des Moines,
Newton and Grinnell is approximately 85,000, 42,000, 15,000 and 9,000,
respectively. The total population of the Registrant's primary market area is
approximately 450,000. Most employment in the Registrant's primary market area
is in agriculture and agriculture-related industries, but also includes
significant manufacturing and service businesses. Major employers in the
northwest Iowa primary market area, which includes contiguous portions of
Nebraska and South Dakota, include Iowa Beef Processors, MCI Telemarketing,
Sioux Honey Association, Wells Dairy, Interbake Foods, Gateway 2000, Great West
Casualty, the 185th Fighter Group of the Iowa Air National Guard, Mercy Medical
Center, St. Luke's Regional Medical Center, American Identity and Diamond Vogel
Paint. Major employers in the central Iowa primary market area include Grinnell
College, Grinnell Mutual Insurance Company, GTE, Grinnell Regional Medical
Center, Donaldson Company, Maytag Corporation, Skiff Medical Center, Newton
Manufacturing, the Vernon Company, Cline Tool and Service Company, Thombert,
Inc. and Walmart.
The Registrant's business and operating results are significantly affected
by the general economic conditions prevalent in its primary market area. The
Registrant's primary market area is projected to experience only moderate
population growth for the foreseeable future.
Lending Activities
General. Historically, the principal lending activity of the Registrant has
been the origination or purchase of mortgage loans secured by one- to
four-family residential properties. The Registrant also originates loans secured
by commercial real estate and multi-family units and purchases participation
interests in multi-family loans and commercial real estate loans originated by
other lenders in the midwest. Multi-family and commercial real estate loans
totaled $137.8 million, $141.1 million and $109.0 million, respectively, at June
30, 2002, 2001 and 2000. In recent years, the Registrant has increased its
consumer lending activities to broaden services offered to customers and to
improve the Registrant's interest rate risk exposure.
The Registrant has sought to make its interest earning assets more interest
rate sensitive by actively originating and purchasing variable rate loans, such
as ARM loans, adjustable rate second mortgage loans and medium-term consumer
loans. The Registrant also purchases mortgage-backed securities with adjustable
rates. At June 30, 2002 approximately $238.5 million or 47.8% of the
Registrant's total loan and mortgage-backed securities portfolio had variable
interest rates.
3
The Registrant actively originates fixed rate mortgage loans, generally
with 10 to 30 year terms to maturity secured by one- to four-family residential
properties. One- to four-family fixed rate loans generally are originated and
underwritten for resale in the secondary mortgage market. The Registrant sold
$69.9 million, $51.0 million and $24.6 million, respectively, of one- to
four-family fixed rate residential loan during the fiscal years ended June 30,
2002, 2001 and 2000. In addition, during the fiscal year ended June 30, 2001,
the Registrant securitized and subsequently sold $112.7 million of fixed-rate
one-to four-family mortgage loans in securitized transactions. The Registrant
also actively originates loans insured or guaranteed by the United States
Government or agencies thereof, such as VA, Rural Development and FHA loans. The
Registrant also originates interim construction loans on one- to four-family
residential properties and construction loans on commercial real estate and
multi-family units.
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Registrant's loan portfolio, by type of loan on the dates
indicated.
At June 30,
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2002 2001 2000
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate:
One- to four-family units (1) $ 164,816 39.40% $ 181,034 43.32% $ 325,057 64.36%
Multi-family dwelling units 56,537 13.51 62,040 14.85 54,455 10.78
(2)
Commercial real estate (3) .. 81,232 19.42 79,025 18.91 54,594 10.81
Commercial business loans ... 15,502 3.71 14,976 3.58 8,533 1.69
Home equity and second ...... 40,347 9.64 38,224 9.15 35,695 7.07
mortgage
Auto loans .................. 32,168 7.69 24,212 5.79 13,801 2.73
Loans on deposits ........... 672 0.16 802 0.19 659 0.13
Other non-mortgage loans (4) 32,569 7.78 22,538 5.39 16,887 3.34
Total ..................... $ 423,843 101.31 $ 422,851 101.18% $ 509,681 100.91%
Less
Allowance for loan losses ... (4,584) (1.10) (4,737) (1.13) (3,394) (0.67)
Loans in process ............ (1,500) (0.36) (458) (0.11) (550) (0.11)
Net unearned premiums on .... 2,076 0.50 1,537 0.37 1,684 0.33
loans
Deferred loan fees .......... (1,453) (0.35) (1,295) (0.31) (2,331) (0.46)
Total loans, net .......... $ 418,382 100.00% $ 417,898 100.00% $ 505,090 100.00%
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(1) Includes construction loans on one- to four-family units.
(2) Includes construction loans on multi-family dwelling units.
(3) Includes construction loans on commercial real estate.
(4) Includes other secured non-mortgage loans, credit card loans, education
loans and unsecured personal loans.
4
Loan and Mortgage-Backed Securities Maturity Schedule. The following table
sets forth certain information as of June 30, 2002, regarding the dollar amount
of loans and mortgage-backed securities maturing in the Registrant's portfolio
based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable and floating rate loans and
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust rather than in which they mature, and fixed rate
loans and mortgage-backed securities are included in the period in which the
final contractual repayment is due. Fixed rate mortgage-backed securities are
assumed to mature in the period in which the final contractual payment is due on
the underlying mortgage.
One Ten
Through Three Five Through Beyond
Within One Three Through Through Twenty Twenty
Year Years Five Years Ten Years Years Years Total
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(In Thousands)
First mortgage loans:
One- to four-family residences:
Adjustable ................................ $ 33,394 $ 31,489 $ 19,538 $ 1,572 $ -- $ -- 85,993
Fixed ..................................... 3,354 1,118 1,645 29,790 37,772 5,144 78,823
-------- -------- --------- -------- -------- ------- --------
Total one- to four-family ................. 36,748 32,607 21,183 31,362 37,772 5,144 164,816
Multi-family and commercial real estate:
Adjustable ................................. 47,978 38,773 11,821 -- -- -- 98,572
Fixed ...................................... 25,689 4,030 7,069 1,185 1,224 -- 39,197
-------- -------- --------- -------- -------- ------- --------
Total multi-family and commercial .......... 73,667 42,803 18,890 1,185 1,224 -- 137,769
Commercial loans:
Adjustable ................................. 12,407 481 -- -- -- -- 12,888
Fixed ...................................... 1,054 790 459 311 -- -- 2,614
-------- -------- --------- -------- -------- ------- --------
Total commercial loans ..................... 13,461 1,271 459 311 -- -- 15,502
Consumer loans and other non-mortgage loans:
Adjustable ................................. 4,641 -- 133 -- -- -- 4,774
Fixed ...................................... 3,530 12,740 33,749 37,095 13,419 449 100,982
-------- -------- --------- -------- -------- ------- --------
Total consumer loans and other non-mortgage
loans ...................................... 8,171 12,740 33,882 37,095 13,419 449 105,756
Total loans receivable ....................... $132,047 $ 89,421 $ 74,414 $ 69,953 $ 52,415 $ 5,593 $423,843
======== ======== ========= ======== ======== ======= ========
Mortgage-backed securities (MBS):
Fixed-rate MBS - held to maturity .......... 598 529 631 28,781 7,790 157 38,486
Adjustable-rate MBS - available for sale.... 20,556 441 9,573 5,654 -- -- 36,224
Total mortgage-backed securities ............. $ 21,154 $ 970 $ 10,204 $ 34,435 $ 7,790 $ 157 $ 74,710
======== ======== ========= ======== ======== ======= ========
The following table sets forth the dollar amount of all loans maturing or
repricing after June 30, 2003 which have predetermined interest rates and have
floating or adjustable interest rates.
Floating or
Predetermined Adjustable
Rates Rates Total
----- ----- -----
(In thousands)
Real estate mortgage:
One- to four-family................. $ 75,469 $ 52,599 $ 128,068
Other mortgage loans................ 13,508 50,594 64,102
Commercial loans...................... 1,560 481 2,041
Consumer.............................. 97,452 133 97,585
Total............................. $ 187,989 $ 103,807 $ 291,796
Residential Real Estate Loans. The Registrant's primary lending activity
consists of the origination of one- to four-family, owner-occupied, residential
mortgage loans secured by property located in the Registrant's primary market
area. The majority of the Registrant's residential mortgage loans consists of
loans secured by owner-occupied, single-family residences. The Registrant
generally has limited its real estate loan originations to properties within its
primary market area. However, the Registrant also purchases whole loans
originated by others, on a limited basis, with an emphasis on single-family ARM
loans having interest rate caps generally of 2% annually
5
and 5% over the life of the loan and with margins over various indexes ranging
from 180 to 275 basis points depending on the index. During the three-year
period ended June 30, 2002, the Registrant purchased $7.1 million of one- to
four-family residential loans. One- to four-family loans purchased outside of
the Registrant's primary lending area totaled approximately $25.1 million at
June 30, 2002 and included approximately $20.6 million of loans that are
geographically distributed in the midwestern United States. The remaining loans
are scattered throughout the United States with the largest geographic
concentration in Connecticut with $1.4 million.
The 60- and 90-day delinquency rates on loans purchased and originated by
the Registrant were 0.48% and 0.79%, respectively, at June 30, 2002. Management
attributes the low delinquency rates to the current relative strength of the
residential housing sector in the Midwest. The Registrant purchases loans from
other institutions as market conditions permit in order to reduce the
Registrant's overall credit risk by increasing geographical diversity and to
supplement its loan portfolio in periods of weaker local demand.
At June 30, 2002, the Registrant had $164.8 million, or 39.4%, of its total
loan portfolio invested in first mortgage loans secured by one-to four-family
residences. During fiscal year 2001, the Registrant securitized $112.7 million
in fixed-rate one- to four-family mortgage loans and subsequently sold such
securities in the secondary market.
The Registrant currently offers residential mortgage loans for terms
ranging from 10 to 30 years, and with adjustable or fixed interest rates.
Origination of fixed rate mortgage loans versus ARM loans is monitored on an
ongoing basis and is affected significantly by the level of market interest
rates, customer preference, the Registrant's interest rate GAP position and loan
products offered by the Registrant's competitors. During fiscal 2002, one- to
four-family residential ARM loans decreased by $35.7 million, or 29.4%, to $86.0
million from $121.7 million in fiscal 2001 as borrowers chose fixed-rate loans
in the generally lower interest rate environment.
The Registrant's long-term fixed rate loans generally are originated and
underwritten for resale in the secondary mortgage market. Whether the Registrant
can or will sell fixed rate loans to the secondary market, however, depends on a
number of factors including the yield on the loan and the term of the loan,
market conditions and the Registrant's current GAP position. For example, fixed
rate loans with terms less than 15 years are likely to be retained by the
Registrant. Moreover, the Registrant is more likely to retain fixed rate loan
originations if its one year GAP is positive. The Registrant generally sells
long-term, fixed-rate loans at origination, servicing-released. Servicing
release premium is determined at loan closing, thus assuring the profit at
current market rates. The Registrant's fixed rate mortgage loans are amortized
on a monthly basis with principal and interest due each month. Residential real
estate loans often remain outstanding for significantly shorter periods than
their contractual terms because borrowers may refinance or prepay loans at their
option.
The Registrant's ARM loans generally adjust annually with interest rate
adjustment limitations ranging from one to two percentage points per year and
with a cap on total rate increases over the life of the loan. The Registrant has
used different interest indexes for ARM loans, such as the one-year Treasury
Constant Maturity, the Monthly National Median Cost of Funds, the National
Average Contract Rate for Previously Occupied Homes and the Eleventh District
Cost of Funds. The Registrant also has purchased ARM loans with various interest
rate indexes. Consequently, the interest rate adjustments on the Registrant's
portfolio of ARM loans do not reflect changes in a particular interest rate
index.
The Registrant's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Registrant the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means of
adjusting the rates on the Registrant's fixed rate mortgage loan portfolio, and
the Registrant has generally exercised its rights under these clauses.
Regulations limit the amount that a savings bank may lend relative to the
appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans. The Registrant's lending policies, however, generally limit the
maximum loan-to-value ratio on both fixed rate and ARM loans to 97% of the
lesser of the appraised value or the purchase price of the property to serve as
security for the loan. If the loan-to-value ratio is in excess of 80%, private
mortgage insurance is generally required to limit the Registrant's exposure.
6
The Registrant makes real estate loans with loan-to-value ratios in excess
of 80%. For real estate loans with loan-to-value ratios of between 80% and 95%,
the Registrant requires the first 12% to 25% of the loan to be covered by
private mortgage insurance. For real estate loans with loan-to-value ratios of
between 95% and 97%, the Registrant requires private mortgage insurance to cover
the first 25% to 35% of the loan amount. For real estate loans with terms to
maturity of 20 years or less and loan-to-value ratios of between 80% and 85% the
Registrant may require the first 6% of the loan to be covered by private
mortgage insurance. The Registrant requires fire and casualty insurance, as well
as title insurance or an opinion of counsel regarding good title, on all
properties securing real estate loans made by the Registrant.
Construction Loans. The Registrant originates loans to finance the
construction of single family residential property. However, construction
lending is not a significant part of the Registrant's overall lending activities
because of the low level of new home construction in the Registrant's primary
market area. At June 30, 2002, the Registrant had $1.5 million, or 0.4%, of its
total loan portfolio invested in interim construction loans. Loans for
construction of single family residential property are made with either
adjustable or fixed rate terms. A construction loan fee of $400 is charged for
each loan. Loan proceeds are disbursed in increments as construction progresses
and as inspections warrant. Construction loans are structured to be converted to
permanent loans originated by the Registrant at the end of the construction
period, which is generally six months, not to exceed 12 months.
The Registrant's commercial loan department also originates loans for
construction to contractors and entrepreneurs. These loans include loans for the
construction of single-family dwellings for speculation or customized building,
apartment buildings, condominiums, nonresidential structures, and loans for the
renovation of existing structures. Commercial department construction loans
generally have adjustable rates and proceeds are disbursed in increments as
construction progresses subject to inspections. Loans for the construction of
single-family spec homes are generally paid off at the maturity of the
construction loan. Construction loans on commercial real estate are often
structured to convert to permanent loans originated by the Registrant at the end
of the construction period, which is generally 12 to 24 months. Less frequently,
loans on commercial real estate projects are structured to cover the
construction period only. At June 30, 2002, the Registrant had $1.8 million, or
0.4%; $15.0 million, or 3.5%; and $6.0 million, or 1.4%, respectively, of its
total loan portfolio invested in loans for the construction of single-family
speculation units, multi-family residential properties and nonresidential
properties. These totals include participations in construction lending
purchased outside the Company's primary lending area.
Multi-Family Residential Real Estate Loans. Loans secured by multi-family
real estate constituted $56.5 million or 13.5% of the Registrant's total loan
portfolio at June 30, 2002, compared to $62.0 million or 14.9% of the
Registrant's total loan portfolio at June 30, 2001 and $54.5 million, or 10.8%
of the total loan portfolio at June 30, 2000. The Registrant's multi-family real
estate loans are secured by multi-family residences, such as apartment
buildings. At June 30, 2002, 25.4% of the Registrant's multi-family loans were
secured by properties located within the Registrant's primary market area. At
June 30, 2002, the Registrant's multi-family real estate loans had an average
balance of $673,000. The terms of each multi-family loan are negotiated on a
case by case basis, although such loans typically have adjustable interest rates
tied to a market index or fixed rates to amortize over 10 to 20 years with a
three to ten year balloon or call option.
The Registrant's policy is to limit multi-family real estate loans to
principal balances not exceeding its loan-to-one borrower limit. At June 30,
2002, the Registrant's largest multi-family real estate borrower had an
aggregate principal outstanding balance of $7.0 million, which balance was
within the Registrant's loan-to-one borrower limit.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
7
Commercial Real Estate Loans. Loans secured by commercial real estate
constituted $81.2 million, or 19.4%, of the Registrant's total loan portfolio at
June 30, 2002. By comparison, commercial real estate loans totaled $79.0
million, or 18.9%, and $54.6 million, or 10.8% of the total loan portfolio, at
June 30, 2001 and 2000, respectively. The Registrant's commercial real estate
loans are secured by improved property such as offices, small business
facilities, and other non-residential buildings. Of the improved properties
securing such commercial real estate loans at June 30, 2002, 69.9% were located
within the Registrant's primary market area. Commercial real estate loans are
offered with fixed and adjustable interest rates.
The Registrant's policy is to limit commercial real estate loans to
principal balances not exceeding its loan-to-one borrower limit. At June 30,
2002, the Registrant's largest commercial real estate borrower had an aggregate
principal outstanding balance of $6.5 million, which balance was within the
Registrant's loan-to-one borrower limit. The outstanding balance for this
borrower included loans secured by a combination of commercial real estate and
multi-family residential real estate.
Loans secured by commercial real estate generally involve a greater degree
of credit risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired.
Commercial Loans. The Registrant makes commercial loans primarily in its
market area to a variety of professionals, sole proprietorships and small- to
medium-sized businesses. At June 30, 2002, commercial loans constituted $15.5
million, or 3.7%, of the Registrant's total loan portfolio, compared to $15.0
million, or 3.6% of the Registrant's total loan portfolio at June 30, 2001 and
$8.5 million, or 1.7% of the total loan portfolio at June 30, 2000. The
Registrant offers term loans for fixed assets and working capital, revolving
lines of credit, letters of credit and Small Business Administration guaranteed
loans. Commercial term loans are generally offered with initial fixed rates of
interest for the first 1 to 3 years and with terms of up to 10 years. Business
lines of credit have floating rates of interest and are payable on demand,
subject to annual review and renewal. Commercial loans with variable rates of
interest are generally indexed to the highest prime rate as published daily in
the Wall Street Journal.
When making commercial loans, the Registrant considers the financial
statements of the borrower, the Registrant's lending history with the borrower,
the debt service capabilities of the borrower, the projected cash flows of the
business and the value of the collateral, if any. Commercial loans are generally
secured by a variety of collateral, primarily accounts receivable, inventory and
equipment, and are generally supported by personal guarantees.
Commercial loans also generally are considered to involve more risk than
one- to four-family residential real estate loans. Because commercial loans
often depend on the successful operation or management of the business,
repayment of such loans may be affected by adverse conditions in the economy.
Moreover, commercial loans typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business, and,
therefore, depend substantially on the success of the business itself. Any
collateral securing commercial loans may depreciate over time, may be difficult
to appraise and to liquidate, and may fluctuate in value.
Consumer Loans. Federal savings associations are authorized to make secured
and unsecured consumer loans in an aggregate amount up to 35% of their assets.
In addition, the Registrant has lending authority above the 35% category for
certain consumer loans, such as second mortgage, home property improvement
loans, mobile home loans and loans secured by savings accounts.
As of June 30, 2002, consumer loans totaled $105.8 million, or 25.3% of the
Registrant's total loan portfolio, compared to $85.8 million, or 20.5%, and
$67.0 million, or 13.3%, respectively, at June 30, 2001 and 2000. The principal
types of consumer loans offered by the Registrant are second mortgage loans,
auto loans, home improvement loans, credit card loans, unsecured loans and loans
secured by deposit accounts. Consumer loans are offered primarily on a fixed
rate basis, and at June 30, 2002 had an average maturity of 78 months. The
Registrant's
8
home equity loans, second mortgage loans, and home improvement loans, are
generally secured by the borrower's principal residence. At June 30, 2002, home
equity loans, second mortgage loans, and home improvement loans, totaled $40.3
million, or 38.2% of consumer loans.
The underwriting standards employed by the Registrant for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount.
It is expected that the Registrant's consumer loan portfolio will continue
to grow during the foreseeable future, and is expected to range between 15% and
20% of assets. Consumer loans tend to have higher interest rates than
residential mortgage loans, but also tend to have a higher risk of default than
one-to four-family residential mortgage loans. See "Non-Performing Assets and
Asset Classification" for information regarding the Registrant's loan loss
experience and reserve policy.
Mortgage-Backed Securities. The Registrant also invests in mortgage-backed
securities issued or guaranteed by the United States Government or agencies
thereof in order to reduce interest rate risk exposure and improve liquidity.
These securities, which consist primarily of mortgage-backed securities issued
or guaranteed by FNMA, FHLMC and GNMA, totaled $74.7 million at June 30, 2002.
The Registrant's objective in investing in mortgage-backed securities varies
from time to time depending upon market interest rates, local mortgage loan
demand, and the Registrant's level of liquidity. The Registrant's fixed-rate
mortgage-backed securities are held for investment, and management has the
intent and ability to hold such securities on a long-term basis or to maturity.
Adjustable rate MBS are available for sale and are carried at estimated fair
value. Mortgage-backed securities have lower credit risk than direct loans
because principal and interest on the securities are either insured or
guaranteed by the United States Government or agencies thereof.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources such as real estate broker referrals, existing customers,
borrowers, builders, attorneys and walk-in customers. Upon receipt of a loan
application, a credit report is obtained to verify specific information relating
to the applicant's credit standing. In the case of a real estate loan, an
appraisal of the real estate intended to secure the proposed loan is made by an
independent appraiser approved by the Registrant. For those loans that are sold
to investors, an automated underwriting system provided by either FNMA or FHLMC
is used in many cases. On occasion, a private mortgage insurance contract
underwriter approved by the investor may be used. Loans that are not sold or
loans that are not underwritten by a contract underwriter are reviewed by an
underwriter in the Registrant's loan department and/or at least one member of
the Registrant's internal loan committee. One- to four-family residential
mortgage loans with principal balances in excess of $500,000 and multi-family
and commercial real estate loans with principal balances in excess of $2.0
million must be submitted by the loan department directly to the loan committee
of the Board of Directors for approval. Approvals subsequently are ratified by
the full Board of Directors. Fire and casualty insurance (and flood insurance,
if applicable) are required at the time the loan is made and throughout the term
of the loan. Once the loan is approved a loan commitment is promptly issued to
the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of the necessary insurance
on the property serving as collateral which insurance must be maintained during
the full term of the loan. Title insurance or an attorney's opinion based on a
title search of the property is required on all first lien loans secured by real
property.
Loan Originations, Purchases and Sales. Of total loans in the Registrant's
portfolio at June 30, 2002, 86.5% were originated by the Registrant or purchased
through a Madison, Wisconsin mortgage banking relationship described below. The
Registrant is actively involved in the origination and underwriting of the loans
purchased in Madison, Wisconsin. At June 30, 2002, the Registrant had $93.5
million of loans purchased outside the Registrant's primary market area.
Included in the total of loans purchased outside of the Bank's primary lending
area are loans purchased from a mortgage banking firm headquartered in Madison,
Wisconsin. The Bank has an exclusive agreement with this firm, which gives the
Bank first right of refusal an any real estate loans generated including one-
9
to four-family, multi-family, commercial real estate and land development loans
secured by properties located primarily in the Madison, Wisconsin metropolitan
area. The Bank has sold, and anticipates that it will continue to sell,
participation interests in these loans to other financial institutions located
in Iowa and contiguous states. At June 30, 2002, the outstanding principal
balance of loans purchased under the above agreement was $65.5 million and
partial interests in these balance sold to other financial institutions totaled
$14.9 million.
The following table sets forth the Registrant's gross loan originations,
loans purchased and loans sold for the periods indicated.
For the years ended June 30,
------------------------------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Loans originated:
Conventional one- to four-family real estate loans:
Construction loans ...................................... $ 11,734 $ 12,233 $ 20,021
Loans on existing property .............................. 11,611 20,910 31,362
Loans refinanced ........................................ 55,716 22,959 9,976
Insured and guaranteed loans .............................. 29,320 21,147 17,325
Multifamily and commercial real estate (1):
Construction loans ...................................... 18,183 20,344 18,023
Loans on existing property .............................. 51,817 53,904 56,612
Commercial loans .......................................... 16,749 23,180 12,925
Consumer loans ............................................ 77,417 57,360 45,447
-------- -------- --------
Total loans originated ................................ $272,547 $232,037 $211,691
======== ======== ========
Loans purchased:
One- to four-family ....................................... $ -- $ 650 $ 6,491
Multi-family and commercial real estate ................... 19,001 21,110 14,370
-------- -------- --------
Total loans purchased ................................. $ 19,001 $ 21,760 $ 20,861
======== ======== ========
Loans sold ................................................... $ 69,916 $ 51,028 $ 24,583
======== ======== ========
- -------------------------------------------
(1) Includes loans purchased in Madison, Wisconsin through mortgage banking
relationship described above.
Loan Commitments. The Registrant issues standby loan origination
commitments to qualified borrowers primarily for the construction and purchase
of residential and commercial real estate. Such commitments are made on
specified terms and conditions and are made for periods of up to 60 days, during
which time the interest rate is locked-in. The Registrant generally charges a
loan fee based on a percentage of the loan amount. The Registrant also charges a
commitment fee of $300 for single-family residential properties if the borrower
receives the loan from the Registrant. Commitment fees are generally not charged
for multi-family and commercial real estate properties. At June 30, 2002, the
Registrant had commitments to originate and purchase $31.5 million of loans. The
Registrant's experience has been that few commitments expire without being
funded by the Registrant.
Loan Origination and Other Fees. In addition to interest earned on loans,
the Registrant generally receives loan origination fees. To the extent that
loans are originated or acquired for the Registrant's portfolio, the Registrant
defers loan origination fees and costs and amortizes such amounts as yield
adjustments over the life of the loans using the interest method of
amortization. Fees and costs deferred are recognized into income immediately
upon the sale of the related loan. At June 30, 2002, the Registrant had $1.5
million of deferred loan fees.
In addition to loan origination fees, the Registrant also receives other
fees and service charges that consist primarily of late charges and loan
servicing fees on loans sold. The Registrant recognized other fees and service
charges on loans that totaled $1.8 million, $969,000 and $568,000 for the years
ended June 30, 2002, 2001 and 2000, respectively.
Loan origination and commitment fees are volatile sources of income. Such
fees vary with the volume and type of loans and commitments made and purchased
and with competitive conditions in the mortgage markets, which in turn respond
to the demand for and availability of money.
Loans to One Borrower. Under federal law, savings associations are subject
to the same limits as those applicable to national banks, which limit loans to
one borrower to the greater of $500,000 or 15% of unimpaired
10
capital and unimpaired surplus and an additional amount equal to 10% of
unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). At June 30, 2002, the Registrant's largest borrower had aggregate
loans outstanding from the Registrant of $7.0 million, or 13.4% of the
Registrant's unimpaired capital and surplus. Including this borrower, there were
32 borrowers each with aggregate loans outstanding at June 30, 2002 in excess of
$3.0 million.
Delinquencies and Classified Assets
Delinquencies. The Registrant's collection procedures provide that when a
loan is 15 days past due, a late charge is added and the borrower is contacted
by mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower. Additional late charges may
be added and, if the loan continues in a delinquent status for 90 days or more,
the Registrant generally initiates foreclosure proceedings.
The Registrant reviews delinquency reports for multi-family and commercial
real estate and other commercial loans weekly. Delinquencies in these loan types
often involve more active and timely management than delinquencies in loans
secured by single-family residential properties. If these delinquencies
continue, steps are taken on a case-by-case basis to bring the loan current, if
possible, before foreclosure proceedings are initiated, generally after 90 days
in delinquency status.
The multi-family real estate loan delinquency rate (loans 60 days or more
past due as a percentage of total multi-family real estate loans) was 5.5% at
June 30, 2002, primarily due to a loan secured by an assisted living facility in
Madison, Wisconsin that is currently not producing sufficient cash flow for debt
service. Commercial real estate and commercial business loan delinquency rates
(loans 60 days or more past due as a percentage of total commercial real estate
and commercial business loans) increased in the last fiscal year to 1.9% from
1.5% due to a negative change in economic conditions in parts of the
Registrant's market area. Management continues to use aggressive collection and
foreclosure efforts to protect the Registrant's assets. In addition, the
Registrant continues to tighten asset quality requirements in response to
negative economic indicators.
Non-Performing Assets and Asset Classification. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential and
commercial mortgage loans are placed on non-accrual status generally when either
principal or interest is 90 days or more past due and management considers the
interest uncollectible or when the Registrant commences foreclosure proceedings.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income.
Real estate acquired by the Registrant as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned ("REO") until
such time as it is sold. When REO is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value. Any
write-down of REO is charged to the allowance for real estate loan losses.
At June 30, 2002, the Registrant's total of real property acquired as the
result of foreclosure or by deed in lieu of foreclosure was $85,000 compared to
a total of $130,000 at June 30, 2001. The Registrant had no allowance for losses
on real estate owned as of June 30, 2002 and 2001.
In addition, the Company had repossessed automobiles, boats and trailers
with an estimated fair value less cost to sell that totaled $325,000 at June 30,
2002.
11
Non-Performing Loans. The following table sets forth information regarding
non-accrual loans, accrual loans and other non-performing assets at the dates
indicated:
At June 30,
-------------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
One-to four family residential ..............................$ 527 $ -- $ --
Commercial real estate ...................................... 3,681 -- 15
Commercial business ......................................... 584 1,094 --
Consumer .................................................... 314 -- --
Total ..................................................... 5,106 1,094 15
Loans accounted for on an accrual basis (1)(2):
One-to four family residential .............................. 780 970 1,187
Multi-family residential .................................... -- -- 547
Commercial real estate ...................................... -- 233 247
Consumer .................................................... 305 363 112
Total ..................................................... 1,085 1,566 2,093
Total non-performing loans .................................. 6,191 2,660 2,108
Other non-performing assets (3) (4) ......................... 410 130 65
Total non-performing assets ...............................$6,601 $2,790 $2,173
Non-performing loans as a percentage of total loans ............ 1.48% 0.64% 0.42%
Non-performing loans as a percentage of total assets ........... 0.95% 0.40% 0.29%
Non-performing loans and real estate owned to total loans
and real estate owned ....................................... 1.58% 0.67% 0.43%
Non-performing assets as a percentage of total assets .......... 1.01% 0.42% 0.30%
- ----------------------------------------------
(1) Includes all loans 90 days or more contractually delinquent.
(2) Delinquent FHA/VA guaranteed loans and delinquent loans with past due
interest that, in the opinion of management, is collectible, are not placed
on non-accrual status.
(3) Represents the net book value of real property acquired by the Registrant
through foreclosure or deed in lieu of foreclosure. Upon acquisition, this
property is carried at the lower of cost or fair market value less
estimated costs of disposition.
(4) For fiscal 2002, includes repossessed automobiles, boats and trailers
carried at the lower of cost or fair market value less estimated costs of
disposition. Total carrying amount was $325,000 at June 30, 2002.
12
The following table sets forth information with respect to the Registrant's
delinquent loans and other problem assets at June 30, 2002.
At June 30, 2002
----------------
Balance Number
------- ------
(In Thousands)
Residential real estate:
Loans past due 60-89 days .............................................. $ 798 19
Loans past due 90 days or more ......................................... 1,307 27
Multi-family real estate:
Loans past due 60-89 days .............................................. 243 1
Loans past due 90 days or more ......................................... 2,857 1
Commercial real estate:
Loans past due 60-89 days .............................................. 495 4
Loans past due 90 days or more ......................................... 744 3
Commercial business:
Loans past due 60-89 days .............................................. 83 5
Loans past due 90 days or more ......................................... 484 2
Consumer loans:
Loans past due 60-89 days .............................................. 311 45
Loans past due 90 days or more ......................................... 619 71
Foreclosed real estate and repossessions .................................. 410 25
Other non-performing assets ............................................... 180 3
Restructured loans not included in other nonperforming categories above ... -- --
Loans to facilitate sale of real estate owned ............................. -- --
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but such assets possess some weaknesses,
are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS which can order the establishment of additional
general or specific loss allowances. The Registrant regularly reviews the
problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations.
13
At June 30, 2002, the aggregate amount of the Registrant's classified
assets, and of the Registrant's general and specific loss allowances were as
follows:
June 30, 2002
(In Thousands)
Substandard assets................................. $ 8,911
Doubtful assets.................................... 708
Loss assets........................................ 17
Total classified assets....................... $ 9,636
General loss allowances............................ 4,567
Specific loss allowances........................... 17
Total allowances.............................. $ 4,584
A summary of the Registrant's principal classified assets is as follows.
Over a five-year period the Registrant originated loans totaling
approximately $2.8 million to an industrial metals recycler, that experienced
declining prices for its product in a generally weaker market in the most recent
two years, as well as unfavorable weather conditions that impeded recycling
operations to a greater extent than is normally expected. During fiscal 2002,
the Registrant charged off balances totaling $2.2 million due to
uncollectibility. The Registrant is in the process of liquidating collateral
assigned to this loan. At June 30, 2002 the remaining book balance of the loans
totaled $475,000. The Registrant expects no further losses related to this
credit.
Another borrower, involved in the construction of agriculture-related
structures, had experienced an instance of alleged employee fraud and
unfavorable weather conditions that delayed completion of construction projects.
At June 30, 2002, the total loan balance was $1.3 million. Due to continuing
cash flow problems associated with the agricultural industry, $454,000, or
34.2%, of the loan balance was classified `doubtful' at June 30, 2002 and the
remaining balance was classified `substandard'.
In August 2000, the Registrant originated a $3.3 million loan secured by a
newly constructed assisted living facility located in Madison, Wisconsin. The
facility continues to experience cash flow problems due to lower-than-normal
occupancy rates as compared to similar facilities in the Madison market area.
The loan was classified "substandard" at June 30, 2002. The total loan balance
at June 30, 2002 was $2.9 million. A new management company was engaged in
Spring 2001 however, the occupancy rate has not improved and cash flow currently
does not support debt service. The Registrant has commenced foreclosure on this
property.
The Registrant originated a loan to a commercial contractor in the
Registrant's primary market area that specializes in excavating. The borrower
experienced cash flow problems due to losses incurred on a large out-of-state
contract in 2001. At June 30, 2002, the total loan balance was $949,000 and the
loan was current. Due to continuing cash flow concerns, the loan was classified
`substandard' at June 30, 2002.
The Registrant originated loans to a commercial borrower in Madison,
Wisconsin that totaled $1.4 million at June 30, 2002. Balances totaling $400,000
were sold to other investors. A review of the credit indicates a probable
shortfall in liquidation value of the collateral. The loans were classified
'special mention' at June 30, 2002. The loans were current at June 30, 2002.
Allowance for Loan Losses. The Company has established a systematic method
of periodically reviewing the credit quality of the loan portfolio in order to
establish an allowance for losses on loans. As part of this process, an
independent loan review department was established during fiscal 2002. The
allowance for losses on loans is based on management's current judgments about
the credit quality of individual loans and segments of the loan portfolio. The
allowance for losses on loans is established through a provision for loan losses
based on management's evaluation of the risk inherent in the loan portfolio, and
considers all known internal and external factors that affect loan
collectibility as of the reporting date. Such evaluation, which includes a
review of all loans on which full collectibility of interest and principal may
not be reasonably assured, considers, among other matters, the estimated net
realizable value of the underlying collateral, economic conditions, historical
loan loss experience, management's knowledge of inherent risks in the portfolio
that are probable and reasonably estimable and other factors that warrant
recognition in providing an allowance for loan losses. Management calculates the
allowance for loan losses based on asset type, as follows: 100% of portions of
loan balances classified as loss, 30% to 75% of portions of loan balances
classified as doubtful, 5% to 40% of portions of loan balances classified as
substandard, and 0% to 15% of portions of loan balances classified as special
mention. Management calculates additional allowances for
14
loan losses, based on historical loss experience, on loans not classified in the
categories delineated above, as follows: .25% for mortgage loans, 1.0% for
multi-family and commercial real estate loans and consumer loans, and 1.5% for
commercial business loans.
The breakdown of general loss allowances and specific loss allowances is
made for regulatory accounting purposes only. While both general and specific
loss allowances are charged against earnings, general loan loss allowances are
added back to GAAP capital in computing risk-based capital under OTS
regulations. The financial statements of the Registrant are prepared in
accordance with GAAP and, accordingly, provisions for loan losses are based on
management's estimate of net realizable value or fair value of the collateral,
as applicable. The Registrant regularly reviews its loan portfolio, including
problem loans, to determine whether any loans require classification or the
establishment of reserves.
During fiscal 2002, 2001 and 2000, the Registrant credited $3.8 million,
$5.2 million and $554,000, respectively, to the allowance for loan losses.
Management periodically reviews the entire loan portfolio to determine the
extent, if any, to which further additional loan loss provisions may be deemed
necessary. There can be no assurance that the allowance for loan losses will be
adequate to cover losses that may in fact be realized in the future and that
additional provisions for loan losses will not be required.
Analysis of the Allowance for Loan Losses. The following table sets forth
information regarding the Registrant's allowance for loan losses at the dates
indicated.
At or for years ended June 30,
--------------------------------------------------
2002 2001 2000
(Dollars in Thousands)
Total loans outstanding...................................... $ 423,843 $ 422,851 $ 509,681
Average loans outstanding.................................... 422,805 484,911 480,377
Allowance balance (at beginning of period)................... 4,737 3,394 3,135
Provision:
Residential............................................... 60 240 80
Commercial real estate.................................... 1,019 1,120 224
Commercial business....................................... 2,000 3,560 --
Consumer.................................................. 755 235 250
Charge-offs:
Residential............................................... (5) -- (5)
Commercial real estate.................................... (697) (70) (30)
Commercial business....................................... (2,640) (3,551) --
Consumer.................................................. (858) (269) (346)
Recoveries................................................... 213 78 86
Allowance balance (at end of period)......................... $ 4,584 $ 4,737 $ 3,394
Allowance for loan losses as a percent of total loans
outstanding.................................................. 1.08% 1.12% 0.67%
Net loans charged off as a percent of average loans outstanding 0.94% 0.79% 0.06%
Investment Activities
The Registrant's portfolio of investment securities, excluding investments
in mortgage-backed securities, totaled $80.9 million, $93.3 million and $111.8
million, respectively, at June 30, 2002, 2001 and 2000. The purpose of the
Registrant's investment portfolio is to (i) improve the Registrant's interest
rate sensitivity gap by reducing the average term to maturity of the
Registrant's assets, (ii) improve liquidity, and (iii) effectively reinvest
funds generated from amortization and prepayment on the Registrant's traditional
loan portfolio.
The Registrant is required under federal regulations to maintain a
sufficient amount of liquid assets that may be invested in specified short-term
securities and certain other investments to assure its safe and sound operation.
See "Regulation--Federal Regulations--Liquidity Requirements" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The Registrant generally has
maintained a liquidity portfolio in excess of regulatory requirements. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to
15
the attractiveness of the yields then available in relation to other
opportunities and its expectation of the level of yield that will be available
in the future, as well as management's projections as to the short term demand
for funds to be used in the Registrant's loan origination and other activities.
Investment Portfolio. The following table sets forth the carrying value of
the Registrant's investment securities portfolio, short-term investments and
FHLB stock, at the dates indicated. At June 30, 2002, the Registrant's FHLB
stock yielded 3.00%. At June 30, 2002, the fair value of the Registrant's
investment securities - held to maturity portfolio was $25.0 million.
At June 30,
----------------------------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Investment securities - held to maturity:
U.S. Government and agency securities $ 9,993 $ 2,878 $ 3,118
Other securities 14,816 9,160 7,516
Total investment securities held to maturity $ 24,809 $ 12,038 $ 10,634
Investment securities - available for sale:
U.S. Government and agency securities $ -- $ 61,748 $ 89,165
Other securities 56,089 19,558 11,976
Total investment securities available for sale $ 56,089 $ 81,306 $ 101,141
Totals $ 80,898 $ 93,344 $ 111,775
Interest-bearing deposits $ 103 $ 57,708 $ 3,555
FHLB stock 5,038 9,469 8,929
Total investments $ 86,039 $ 160,521 $ 124,259
Investment Portfolio Maturities
The table below sets forth the scheduled maturities, carrying values, and
average yields for the Registrant's investment securities at June 30, 2002.
Total investment
One year or less One to five years Five to ten years More than ten years securities
---------------- ----------------- ----------------- ------------------- ----------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Investment
securities-held to
maturity (1)....... $ 3,922 6.39% $ 14,205 3.80% $ 2,576 6.83% $ 4,106 7.25% $ 24,809 5.09%
Investment
securities-available
for sale........... 45,312 3.39% -- -- 5,326 7.09% 5,451 3.12% 56,089 3.72%
------ ---- ----- ---- ----- ---- ----- ---- ------ ----
Total Investment
securities......... $ 49,234 3.63% $ 14,205 3.80% $ 7,902 7.00% $ 9,557 4.89% $ 80,898 4.14%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
- -------------------------------------------
(1) Municipal securities are tax-effected.
Sources of Funds
General. Deposits are the major source of the Registrant's funds for
lending and other investment purposes. In addition to deposits, the Registrant
derives funds from the amortization and prepayment of loans and mortgage-backed
securities, the sale or maturity of investment securities, operations and, if
needed, advances from the Federal Home Loan Bank of Des Moines (the "FHLB").
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
Deposits. Consumer and commercial deposits are attracted principally from
within the Registrant's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits, term certificate accounts and individual retirement accounts.
On a limited basis,
16
the Registrant will negotiate interest rates to attract jumbo certificates.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Registrant regularly evaluates the internal cost of funds, surveys
rates offered by competing institutions, reviews the Registrant's cash flow
requirements for lending and liquidity and executes rate changes when deemed
appropriate. The Registrant does not obtain funds through brokers, nor does it
actively solicit funds outside its primary market area. Historically, the
Registrant has rarely used premiums to attract savings deposits.
In the unlikely event of a liquidation of the Registrant, depositors will
be entitled to full payment of their deposit accounts prior to any payment being
made to the stockholders of the Registrant. The majority of the Registrant's
depositors are residents of Iowa, Nebraska and South Dakota.
Deposit Portfolio. Savings and other deposits in the Registrant as of June
30, 2002, are composed of the following:
Percentage
Weighted Average Minimum of Total
Interest Rate(1) Minimum Term Category Amount Balances Deposits
---------------- ------------ -------- ------ -------- --------
Noninterest bearing checking
0.00% None accounts $ None $ 21,130 4.47%
Interest bearing checking
0.43% None accounts 200 55,255 11.69%
0.94% None Money Market Plus accounts 200 8,966 1.90%
1.76% None Money Market Select accounts 10,000 99,225 20.97%
0.42% None Savings accounts/Club accounts 10/5 31,323 6.63%
0.40% None Unredeemed certificates 1,000 6,062 1.28%
4.55% 6 to18 months Fixed term, fixed rate (2) 1,000 57,599 12.19%
5.57% 14 to 36 months Fixed term, fixed rate (2) 1,000 53,199 11.26%
5.67% 42 to 48 months Fixed term, fixed rate (2) 1,000 14,758 3.12%
5.55% 6 to 48 months Fixed term, fixed rate IRA (2) 100 25,355 5.36%
2.24% 3 to 6 months Fixed term, fixed rate (3) 100/1,000 13,929 2.95%
2.96% 7 to 12 months Fixed term, fixed rate (3) 100/1,000 18,553 3.93%
3.65% 2 years Fixed term, fixed rate (3) 100/1,000 7,891 1.67%
1.80% 2 years Fixed term, variable rate IRA 100 1,048 0.22%
4.41% 2.5 years Fixed term, fixed rate 1,000 1,921 0.41%
3.91% 2.5 years Fixed term, option rate (4) 1,000 1,714 0.36%
34 and 35
5.56% months Change up term and rate (5) (6) 1,000 10,731 2.27%
4.43% 3 years Fixed term, fixed rate (3) 100/1,000 23,758 5.03%
4.72% 4 years Fixed term, fixed rate 1,000 3,821 0.81%
5.73% 58 months Fixed term, fixed rate 1,000 5,393 1.14%
4.90% 5 years Fixed term, fixed rate 1,000 8,910 1.89%
5.10% 6 years Fixed term, fixed rate 1,000 1,088 0.23%
5.45% 8 years Fixed term, fixed rate 1,000 1,019 0.22%
2.97% 472,648 100.00%
- ---------------------------------------------------
(1) Yield rates for fixed term, fixed rate certificates.
(2) During fiscal 2001 and a portion of fiscal 2002, the Company offered
special certificates that allowed the customer to select any term within
the listed range for that product.
(3) Individual retirement accounts (IRAs) are offered for this term. The
minimum for IRAs is $100 and the minimum for other certificates is $1,000.
The minimum for additions to IRAs is $25, while the minimum for additions
to other certificates is $1,000.
(4) The rate on the option rate certificate may be changed once during the term
to the currently offered rate at the certificate holder's option.
(5) The certificate holder may change to another certificate product on the
first and/or second anniversary. This product was discontinued during
fiscal 2002.
(6) Individual retirement accounts are offered for 35-month terms.
17
The following table sets forth the change in dollar amount of deposits in
the various types of deposit accounts offered by the Registrant between the
dates indicated.
Balance at Increase Balance at Increase Balance at Increase
June 30,2002 %Deposits (Decrease) June 30, 2001 %Deposits (Decrease) June 30, 2000 %Deposits(Decrease)
------------ --------- ------------------------ --------- --------------------------------------------
(Dollars in Thousands)
Checking accounts ..............$ 76,385 16.16% 6,051 $ 70,334 14.39% (2,130) $ 72,464 15.37% 12,372
Savings accounts ............... 31,323 6.63% 3,424 27,899 5.71% (940) 28,839 6.11% (6,270)
Money market accounts .......... 108,191 22.90% 24,187 84,004 17.19% 6,639 77,365 16.40% (4,588)
Option rate certificates (1) ... 1,714 0.36% 63 1,651 0.34% (370) 2,021 0.43% (302)
Change up certificates (2) ..... 7,713 1.63% 442 7,271 1.49% (3,338) 10,609 2.25% 617
6 to 36 month special (3) ...... 110,796 23.45% ( 74,785) 185,581 37.96% 68,912 116,669 24.74% 116,669
42 to 48 month special (3) ..... 14,758 3.12% 6,688 8,070 1.65% 3,448 4,622 0.98% 4,622
3 through 11 month certificates 13,395 2.83% 10,770 2,625 0.54% (9,340) 11,965 2.54% (27,180)
12 through 18 month certificates 12,921 2.73% 8,613 4,308 0.88% (13,464) 17,772 3.77% (40,655)
19 through 30 month certificates 8,038 1.70% 554 7,484 1.53% (19,367) 26,851 5.69% (26,399)
32 and 36 month certificates ... 5,467 1.16% (149) 5,616 1.15% (2,480) 8,096 1.72% (12,641)
45 and 48 month certificates ... 3,729 0.79% (2,473) 6,202 1.27% (4,814) 11,016 2.34% (1,658)
58 through 96 month certificates 16,410 3.47% 1,416 14,994 3.07% (3,455) 18,449 3.91% (7,232)
IRA certificates ............... 55,746 11.79% (2,105) 57,851 11.84% (417) 58,268 12.35% (5,510)
Other certificates ............. 6,062 1.28% 1,244 4,818 0.99% (1,802) 6,620 1.40% 5,612
--------- ------ -------- --------- ------ ------ --------- ------ -----
$ 472,648 100.00% ( 16,060) $ 488,708 100.00% 17,082 $ 471,626 100.00% 7,457
========= ====== ======== ========= ====== ====== ========= ====== =====
- -----------------------------------------------------
(1) This certificate is a 30-month certificate, during which term the rate may
be changed to a currently offered rate, once, at the customer's option.
(2) This certificate is a 34-month certificate, during which term the
certificate may be changed to a product with a different term and/or rate
on the first and/or second anniversary of the opening of the certificate.
This product was discontinued in fiscal 2002.
(3) During fiscal 2002, 2001 and 2000, the Company offered special certificates
that allowed the customer to select any term within the listed range for
that product. These special certificates are not automatically renewable.
18
Time Deposits by Rates
The following table sets forth the time deposits in the Registrant
classified by rates as of the dates indicated.
At June 30,
------------------------------------------------------
2002 2001 2000
---- ---- ----
4% or less......................... $ 93,812 $ 11,798 $ 20,344
4.01% - 6.00%...................... 92,414 140,152 157,222
6.01% - 8.00%...................... 70,523 154,522 115,391
---- ---- --------------- --------------- ---------------
$ 256,749 $ 306,472 $ 292,957
=============== =============== ===============
Time Deposit Maturity Schedule. The following table sets forth the amount
and maturities of certificates of deposit at June 30, 2002.
Amount due
--------------------------------------------------------------------------
Less than
one year 1-2 years 2-3 years After 3 years Total
-------- --------- --------- ------------- -----
4% or less......................... $ 70,886 $ 14,721 $ 7,321 $ 884 $ 93,812
4.01% - 6.00%...................... 48,804 15,896 12,817 16,897 92,414
6.01% - 8.00%...................... 57,906 12,550 67 -- 70,523
------------- ------------- ------------- ------------- -------------
$ 175,596 $ 43,167 $ 20,205 $ 17,781 $ 256,749
============= ============= ============= ============= =============
Certificates of Deposit $100,000 and Over. The following table indicates
the amount of the Registrant's certificates of deposit and other time deposits
of $100,000 or more by time remaining until maturity as of June 30, 2002.
Maturity Period Certificates of Deposits
--------------- ------------------------
(In Thousands)
Three months or less................................................ $ 10,810
Three through six months............................................ 4,250
Six through twelve months........................................... 4,580
Over twelve months.................................................. 6,160
----------
Total.......................................................... $ 25,800
==========
Deposit Activity. The following table sets forth the savings activities of
the Registrant for the periods indicated:
At June 30,
2002 2001 2000
(In Thousands)
Deposits transferred on sale of branch. $ (8,900) $ -- $ --
Net withdrawals in excess of deposits.. (26,644) (7,111) (12,624)
Interest credited...................... 19,669 24,193 20,080
----------- ----------- -----------
Net increase (decrease) in deposits. $ (15,895) $ 17,082 $ 7,456
=========== =========== ===========
19
Borrowings. Savings deposits are the primary source of funds for the
Registrant's lending and investment activities and for its general business
purposes. The Registrant, if the need arises, may rely upon advances from the
FHLB and the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. Advances from the
FHLB are secured by the Registrant's stock in the FHLB and a portion of the
Registrant's first mortgage loans. At June 30, 2002, 2001 and 2000, the
Registrant had $99.1 million, $89.1 million and $174.0 million, respectively, of
advances outstanding from the FHLB.
The FHLB functions as a central reserve bank providing credit for the
Registrant and other member savings associations and financial institutions. As
a member, the Registrant is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. The FHLB requires members to pledge and maintain sufficient eligible
collateral to secure total indebtedness and members must be in compliance with
collateral requirements prior to the funding of any advance.
The following table sets forth certain information regarding borrowings by
the Registrant at the end of and during the periods indicated.
At June 30,
-----------------------------------------
2002 2001 2000
---- ---- ----
Weighted average rate paid
on FHLB advances.......................................... 5.22% 5.81% 6.13%
Rate paid on ESOP borrowing................................. 7.00% 7.00% 7.00%
During the Years Ended June 30,
-----------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Maximum amount of FHLB advances outstanding at any month end $ 99,065 $ 185,600 $ 174,500
Approximate average FHLB advances outstanding 88,974 149,756 156,271
Approximate weighted average rate paid on FHLB advances 5.63% 6.14% 5.95%
Approximate average ESOP borrowing outstanding $ 1,507 $ 1,630 $ 1,757
Average rate paid on ESOP borrowing 7.00% 7.00% 7.00%
Subsidiary Activities
The Company has three wholly-owned subsidiaries: First Federal Bank,
Mid-Iowa Security Corp. and Equity Services, Inc. Since the Company engages in
no other significant activities beyond its ownership of the Bank, the
description of the Company's activities in this Form 10-K effectively represents
a description of the activities of the Bank. Equity Services, Inc. is in the
business of developing residential lots in the Registrant's primary market area.
Mid-Iowa Security Corp. generates revenues primarily by providing real estate
brokerage services.
The Bank has one active wholly owned subsidiary. First Financial
Corporation ("First Financial"), an Iowa corporation, operates a title search
and abstract continuation business through its wholly owned Iowa subsidiary,
Sioux Financial Corporation. First Financial is also a majority owner of United
Escrow, Inc., which serves as an escrow agent in Woodbury County, Iowa.
Under federal law, SAIF-insured institutions are required to provide 30
days' advance notice to the OTS and FDIC before establishing or acquiring a
subsidiary or conducting a new activity in a subsidiary. The insured
20
institution must also provide the FDIC and the OTS such information as may be
required by applicable regulations and must conduct the activity in accordance
with the rules and orders of the OTS. In addition to other enforcement and
supervision powers, the OTS may determine after notice and opportunity for a
hearing that the continuation of a savings institution's ownership of or
relation to a subsidiary (i) constitutes a serious risk to the safety, soundness
or stability of the savings institution, or (ii) is inconsistent with the
purposes of FIRREA. Upon the making of such determination, the OTS may order the
savings institution to divest the subsidiary or take other actions.
Competition
The Registrant encounters strong competition both in attracting deposits
and in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations and credit unions in its market area, and the Registrant
expects continued strong competition from such financial institutions in the
foreseeable future. The Registrant's market area includes branches of several
commercial banks that are substantially larger than the Registrant in terms of
state-wide deposits. In addition, a growing number of the Registrant's
competitors are utilizing the Internet to attract deposits both locally and
nationwide. The Registrant competes for savings by offering depositors a high
level of personal service and expertise together with a wide range of financial
services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions choosing to compete in the
Registrant's market area. An increasing number of these institutions are using
the Internet to originate and underwrite loans. The Registrant offers a
competitive internet banking product to its retail and business customers.
Competition is likely to increase as a result of the recent enactment of
the Gramm-Leach-Bliley Act of 1999, which eases restrictions on entry into the
financial services market by insurance companies and securities firms. Moreover,
to the extent that these changes permit banks, securities firms and insurance
companies to affiliate, the financial services industry could experience further
consolidation. This could result in a growing number of larger financial
institutions competing in the Registrant's primary market area that offer a
wider variety of financial services than the Registrant currently offers.
Competition for deposits, for the origination of loans and the provision of
other financial services may limit the Registrant's growth and adversely impact
its profitability in the future.
The Registrant competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels and
volatility of the mortgage markets. Management's strategy has been to offer
several new product offerings in certificate and retirement accounts to help
retain current deposits and reduce shrinkage. Recent product offerings have been
made available in transaction accounts to increase customer base and to position
the Registrant as a family financial center.
Regulation
As a federally chartered SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of and owns stock in the FHLB of Des Moines, which is
one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Company and the Bank and their operations.
21
The description of statutory provisions and regulations applicable to
savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and Federal Deposit Insurance Corporation Improvement Act
("FDICIA") (1) restrict the solicitation of brokered deposits by savings
institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the Bank's unimpaired capital and surplus on an
unsecured basis. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain securities and bullion, but generally does
not include real estate. The Bank's maximum loans to one borrower limit was $7.0
million at June 30, 2002. As of June 30, 2002, the Bank was in compliance with
its loans-to-one-borrower limitations.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly average basis in 9 out of every 12 months. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of June 30, 2002, the Bank maintained
77.4% of its portfolio assets in qualified thrift investments and, therefore,
met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. As of June 30, 2002, the Bank was a
"well-capitalized" institution.
Liquidity. The Bank is required to maintain sufficient liquidity to assure
its safe and sound operation. The Bank's average liquidity ratio for the quarter
ended June 30, 2002, was 31.6%.
22
Community Reinvestment Act and Fair Lending Laws. Savings associations
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to comply with the Fair Lending Laws
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% stockholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder.
Among other things, these regulations generally require such loans to be made on
terms substantially the same as those offered to unaffiliated individuals and do
not involve more than the normal risk of repayment. However, recent regulations
now permit executive officers and directors to receive the same terms through
benefit or compensation plans, that are widely available to other employees, as
long as the director or executive officer is not given preferential treatment
compared to other participating employees. Regulation O also places individual
and aggregate limits on the amount of loans the Bank may make to such persons
based, in part, on the Bank's capital position, and requires certain approval
procedures to be followed. At June 30, 2002, the Bank was in compliance with the
regulations.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard
23
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
mortgage servicing rights ("MSRs"). Tangible capital is defined as core capital
less all intangible assets (including supervisory goodwill) plus a specified
amount of MSRs. The OTS regulations also require that, in meeting the tangible,
leverage and risk-based capital standards, institutions must deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank, and unrealized gains (losses) on certain available for sale
securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
OTS regulatory capital rules also incorporate an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred, for
the present time, the date on which the interest rate component is to be
deducted from total capital. The rule also provides that the Director of the OTS
may waive or defer an institution's interest rate risk component on a
case-by-case basis.
24
At June 30, 2002, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of June 30, 2002.
At June 30, 2002
------------------------------
Percent of
Amount Assets (1)
------ ----------
(Dollars in Thousands)
Tangible capital:
Capital level................................................$ 47,855 7.62%
Requirement.................................................. 9,418 1.50%
Excess....................................................... 38,437 6.12%
To be well capitalized under prompt
corrective action provisions............................... N/A N/A
Core capital:
Capital level................................................ 47,855 7.62%
Requirement ................................................. 18,836 3.00%
Excess....................................................... 29,019 4.62%
To be well capitalized under prompt
corrective action provisions............................... 31,393 5.00%
Fully phased-in risk-based capital:
Capital level................................................ 52,434 12.66%
Requirement ....................................................... 33,138 8.00%
Excess....................................................... 19,296 4.66%
To be well capitalized under prompt
corrective action provisions............................... 41,423 10.00%
- ---------------------------------------
(1) Tangible and core capital levels are calculated on the basis of a
percentage of total adjusted assets; risk-based capital levels are
calculated on the basis of a percentage of risk-weighted assets.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based deposit insurance assessment system. The
FDIC assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to
25
the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank, as a federal association, is required to be a member of the FHLB
System, which consists of 12 regional FHLBs. The FHLB provides a central credit
facility primarily for member institutions. The Bank, as a member of the FHLB of
Des Moines, is required to acquire and hold shares of capital stock in that FHLB
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. As of June 30, 2002, the Bank was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the FHLBs pay to their members and
could also result in the FHLBs imposing a higher rate of interest on advances to
their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At June 30,
2002, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements imposed by the Office of Thrift
Supervision.
Holding Company Regulation
General. The Company is a non-diversified savings and loan holding company
within the meaning of the HOLA, as amended. As such, the Company is registered
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. The Bank must notify
the OTS 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. Upon any
nonsupervisory acquisition by the Company of another savings association or
savings bank that meets the QTL test and is deemed to be a savings institution
by the OTS, the Company would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would be
subject to extensive limitations on the types of business activities in which it
could engage. The HOLA limits the activities of a multiple savings and loan
holding company and its non-insured institution subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and
activities authorized by OTS regulation. The OTS is prohibited from approving
any acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must
26
consider the financial and managerial resources, future prospects of the company
and institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity or debt securities registered under the Securities
Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new
requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and their directors and executive officers; and (v) new and increased civil and
criminal penalties for violation of the securities laws. Many of the provisions
became effective immediately while other provisions become effective over a
period of 30 to 270 days and are subject to rulemaking by the Securities and
Exchange Commission. Although management anticipates that the Registrant will
incur additional expense in complying with the provisions of the Sarbanes-Oxley
Act and the resulting regulations, management does not expect that such
compliance will have a material impact on the Registrant's results of operations
or financial condition.
Federal Securities Law
Shares of the Company's common stock are registered with the SEC under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is also subject to the proxy rules, tender offer rules,
insider trading restrictions, annual and periodic reporting, and other
requirements of the Exchange Act.
FEDERAL AND STATE TAXATION
Federal Taxation. For federal income tax purposes, the Registrant and its
subsidiaries file a consolidated federal income tax return on a fiscal year
basis using the accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations will be able to convert to a
commercial bank charter, diversify their lending, or be merged into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves will be subject to recapture, regardless
of whether or not a particular thrift intends to convert its charter, be
acquired, or diversify its activities. The recapture tax on post-1987 reserves
is assessed in equal installments over the six year period beginning in 1996.
However, if a thrift meets a minimum level of mortgage lending test (i.e., if
the thrift's level of mortgage lending activity (re-financings and home equity
loans do not count) is equal to or exceeds its average mortgage lending activity
for the six years preceding 1996, adjusted for inflation), then the thrift may
suspend its tax bad debt recapture for the 1996 and 1997 tax years. At June 30,
2002, the Bank had a balance of approximately $200,000 of bad debt reserves in
retained income that would be recaptured under this legislation.
27
Deferred income taxes arise from the recognition of certain items of income
and expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements.
The Registrant accounts for deferred income taxes by the liability method,
applying the enacted statutory rates in effect at the balance sheet date to
differences between the book cost and the tax cost of assets and liabilities.
The resulting deferred tax liabilities and assets are adjusted to reflect
changes in the tax laws.
The Registrant is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds the Registrant's regular income tax for the
year. The alternative minimum tax will be imposed at the rate of 20% of a
specially computed tax base. Included in this base will be a number of
preference items, including the following: (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that would have been allowable
on the basis of actual experience; (ii) interest on certain tax-exempt bonds
issued after August 7, 1986; and (iii) an "adjusted current earnings"
computation which is similar to a tax earnings and profits computation. In
addition, for purposes of the new alternative minimum tax, the amount of
alternative minimum taxable income that may be offset by net operating losses is
limited to 90% of alternative minimum taxable income.
The Registrant has not been audited by the Internal Revenue Service for the
past eleven years. For additional information regarding taxation, see Note 11 of
Notes to Consolidated Financial Statements.
Iowa Taxation. The Bank currently files an Iowa franchise tax return. The
Bank's subsidiaries file Iowa corporation tax returns on a fiscal-year basis.
The Registrant and its other subsidiaries also file Iowa corporation tax returns
on a fiscal-year basis. The state of Iowa imposes a tax on the Iowa franchise
taxable income of savings institutions at the rate of 5%. Iowa franchise taxable
income is generally similar to federal taxable income except that interest from
state and municipal obligations is taxable, and no deduction is allowed for
state franchise taxes. The state corporation income tax ranges from 6% to 12%
depending upon Iowa corporation taxable income. Interest from federal securities
is not taxable for purposes of the Iowa corporation income tax.
Delaware Taxation. Delaware franchise taxes are imposed on the Registrant.
Two methods are provided for calculating the tax and the lesser tax is payable.
The first method is based on authorized number of shares. The tax under this
method is $90.00 for the first 10,000 authorized shares plus $50.00 for each
additional 10,000 shares or part thereof. The second method is based on assumed
par value capital. The tax rate under this method is $200 per $1,000,000 or
portion thereof of assumed par value capital. "Assumed par" is computed by
dividing total gross assets by total issued shares (including treasury shares).
"Assumed par value capital" is calculated by multiplying the lesser of "assumed
par" or stated par value by total authorized shares. For fiscal 2002 the
Registrant recorded Delaware franchise tax expense of $42,000 and submitted
payments that totaled $39,900.
ITEM 2 PROPERTIES
The Company conducts its business through its main office located in Sioux
City, Iowa, and 15 branch offices located in the market area. The following
table sets forth certain information concerning the main office and each branch
office of the Registrant at June 30, 2002. The aggregate net book value of the
Registrant's premises and equipment was $13.8 million at June 30, 2002.
Owned Lease
Year or Expiration
Opened or Acquired Leased Date
------------------ ------ ----
329 Pierce Street 1988 Owned --
Sioux City, Iowa 51102
924 Pierce Street 1991 Owned --
Sioux City, Iowa 51101
28
2727 Hamilton Blvd. 1981 Owned --
Sioux City, Iowa 51104
301 Plymouth St., N.W. 1990 Owned --
Le Mars, Iowa 51031
3839 Indian Hills Dr. 1978 Owned --
Sioux City, Iowa 51104
921 Iowa Avenue 1972 Owned --
Onawa, Iowa 51040
1201 2nd Avenue 1976 Owned --
Sheldon, Iowa 51201
4211 Morningside Avenue 1965 Owned --
Sioux City, Iowa 51106
104 1st Street, S.E. 1974 Owned --
Orange City, Iowa 51041
4701 Singing Hills Blvd.
Sioux City, Iowa 51106 1995 Owned --
2738 Cornhusker Drive
South Sioux City, Nebraska 68776 1998 Owned --
CENTRAL IOWA DIVISION
1025 Main Street 1998 Owned --
Grinnell, Iowa 50112
123 W. 2nd Street, North 1999 Owned --
Newton, Iowa 50208
1907 1st Avenue E. 1999 Owned --
Newton, Iowa 50208
108 E. Washington 1999 Owned --
Monroe, Iowa 50170
3900 Westown Parkway 1999 Owned --
West Des Moines, Iowa 50266
The Registrant's accounting and record keeping activities are maintained on
an in-house data processing system. The Registrant owns data processing
equipment it uses for its internal processing needs. The net book value of such
data processing equipment and related software at June 30, 2002, was $538,000.
ITEM 3 LEGAL PROCEEDINGS
- ------------------------
There are various claims and lawsuits in which the Registrant is
periodically involved incident to the Registrant's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------
29
No matters were submitted during the fourth quarter of fiscal 2002 to a vote of
security holders.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ---------------------------------------------------------------------------
The back inside cover page of the Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- -----------------------------------------------------
Pages 1 through 3 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------------------- ------------------------------------ ---------------------
OF OPERATIONS
-------------
Pages 4 through 16 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 8 FINANCIAL STATEMENTS
- ---------------------------
Pages 17 through 50 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
- --------------------------------------------------------------------------------
DISCLOSURE
----------
There were no changes in or disagreements with accountants in the
Registrant's accounting and financial disclosure during fiscal 2002.
PART III
ITEM 10 DIRECTORS AND OFFICERS OF THE REGISTRANT
- ------------------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the Registrant's definitive Proxy Statement dated
September 20, 2002.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
Information concerning executive compensation is incorporated herein by
reference from the Registrant's definitive Proxy Statement dated September 20,
2002. In addition, the Registrant has adopted four equity-based compensation
plans: the First Federal Savings Bank of Siouxland 1992 Incentive Stock Option
Plan (the "1992 Stock Option Plan"), the 1992 Stock Option Plan for Outside
Directors (the "Directors' Plan"), the 1999 Stock Option Plan (the "1999 Stock
Option Plan") and the 1999 Recognition and Retention Plan (the "1999 Recognition
Plan").
Set forth below is certain information as of June 30, 2002 regarding
equity-based compensation plans:
================================ ========================= ========================= ========================
Number of securities to
be issued upon exercise Number of securities
of outstanding options Weighted average remaining available
and rights exercise price for issuance under plan
================================ ========================= ========================= ========================
================================ ========================= ========================= ========================
1992 Stock Option Plan (1) 12,755 $14.22 --
Directors' Plan (1) 823 20.34 --
1999 Stock Option Plan 206,700 9.21 43,100
1999 Recognition Plan 36,400 N/A 6,250
- -------------------------------- ------------------------- ------------------------- ------------------------
Total 256,678 49,350
================================ ========================= ========================= ========================
- --------------------------------
(1) The 1992 Stock Option Plan and the Directors' Plan ended July 13, 2002. Any
securities remaining available for issuance under the plans expired as of
July 13, 2002.
N/A: Not applicable.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ----------------------------------------------------------------------
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Registrant's
definitive Proxy Statement dated September 20, 2002.
ITEM 13 CERTAIN TRANSACTIONS
- ----------------------------
Information concerning relationships and transactions is incorporated
herein by reference from the Registrant's definitive Proxy Statement dated
September 20, 2002.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a)(1) Financial Statements
The following information appearing in the Registrant's Annual Report to
Stockholders for the year ended June 30, 2002, is incorporated by reference in
this Annual Report on Form 10-K as Exhibit 13.
Annual Report Section Pages in Annual Report
- --------------------- ----------------------
Selected Financial Data 1-3
Management's Discussion and Analysis 4-16
of Financial Condition and Results
of Operations
Report of Independent Auditors 17
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Stockholders' Equity 20
and Comprehensive Income
Consolidated Statements of Cash Flows 21-22
Notes to Consolidated Financial 23-50
Statements
With the exception of the aforementioned information, the Registrant's
Annual Report to Stockholders for the year ended June 30, 2002 is not deemed
filed as part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
------------------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits
---------------
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10_K Report
- -------------- -------- ------ ----------------
3 Articles of Incorporation Not Applicable
3 Bylaws Not Applicable
4 Instruments defining the Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
31
10 Material contracts None Not Applicable
11 Statement re: computation Not Not Applicable
of per share earnings required
12 Statement re: computation Not Not Applicable
of ratios required
13 Annual Report to 13 Exhibit 13
Security Holders
16 Letter re: change in
certifying Not Applicable
accountants none
18 Letter re: change in
accounting principles None Not Applicable
19 Previously unfilled
documents None Not Applicable
22 Subsidiaries of Registrant 22 Exhibit 22
23 Published report regarding None Not Applicable
matters submitted to vote of
security holders
24 Consent of Independent Auditors 24 Exhibit 24
and Counsel
25 Power of Attorney Not Not Applicable
Required
28 Additional Exhibits None Not Applicable
29 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99.1 Additional Exhibit 99.1 Exhibit 99.1
(b) Reports on Form 8-K:
On August 23, 2002, the Registrant filed a report on Form 8-K relating to a
share repurchase program.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST FEDERAL BANKSHARES, INC.
Date: September 30, 2002 By: /s/ Barry E. Backhaus
-------------------------
Barry E. Backhaus
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Barry E. Backhaus By: /s/ Katherine A. Bousquet
---------------------------------------------- -----------------------------------
Barry E. Backhaus Katherine A. Bousquet
President and Chief Executive Officer Vice President and Treasurer
and Chairman of the Board (Principal (Principal Financial and Accounting
Executive Officer) Officer)
Date: September 25, 2002 Date: September 25, 2002
By: /s/ Jon G. Cleghorn By: /s/ David S. Clay
------------------------------------------------- -----------------------------------
Jon G. Cleghorn David S. Clay
Executive Vice President, Chief Operating Officer Director
and Director
Date: September 25, 2002 Date: September 25, 2002
By: /s/ Gary L. Evans By: /s/ Allen J. Johnson
----------------- -----------------------------------
Gary L. Evans Allen J. Johnson
Director Director
Date: September 25, 2002 Date: September 25, 2002
By: /s/ Steven L. Opsal By: /s/ David Van Engelenhoven
------------------------------------------------- -----------------------------------
Steven L. Opsal David Van Engelenhoven
Executive Vice President and Director Director
Date: September 25, 2002 Date: September 25, 2002
By: /s/ Harland D. Johnson
-------------------------------------------------
Harland D. Johnson
Director
Date: September 25, 2002
Certification pursuant to Rule 13a-14
of the Securities Exchange Act of 1934, as Amended,
as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Barry E. Backhaus, Chief Executive Officer of First Federal Bankshares, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of First Federal
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this annual report.
September 30, 2002 /s/ Barry E. Backhaus
- ------------------------ -----------------------
Date Barry E. Backhaus
Chief Executive Officer
Certification pursuant to Rule 13a-14
of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Katherine A. Bousquet, Chief Financial Officer of First Federal Bankshares,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of First Federal
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this annual report.
September 30, 2002 /s/ Katherine A. Bousquet
- ------------------------ -------------------------
Date Katherine A. Bousquet
Chief Financial Officer
First Federal Bank
Equity Services, Inc.
Mid-Iowa Security Corp.