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, 2003
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______________________
Commission File Number 0-25509
FIRST FEDERAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 42-1485449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
329 Pierce Street, Sioux City, Iowa 51101
(Address of Principal Executive Offices) Zip Code
(712) 277-0200
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES |X|. NO |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |_|. NO |X|.
As of September 5, 2003, there were issued and outstanding 3,767,691
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 5, 2003 was $70,642,360. 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, 2003.
2. Part III of Form 10-K--Proxy Statement for the 2003 Annual Meeting of
Stockholders.
PART I
ITEM 1 BUSINESS
General
First Federal Bankshares, Inc.
First Federal Bankshares, Inc. (the "Company" or the "Registrant") is a
Delaware corporation that serves as the holding company for First Federal Bank,
a federally-chartered stock savings bank headquartered in Sioux City, Iowa (the
"Bank"). As of June 30, 2003, 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, 2003, the Company
had total assets of $627.9 million, total deposits of $448.9 million and
stockholders' equity of $69.7 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 Tyson Foods, MCI Telemarketing, Sioux Honey
Association, Wells Dairy, Interbake Foods, Gateway, 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,
Principal Financial, Wells Fargo, Grinnell Mutual Insurance Company, Iowa
Telecom, Grinnell Regional Medical Center, Donaldson Company, Maytag
Corporation, Skiff Medical Center, Newton Manufacturing, and Vernon Company.
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 moderate population
growth in northwest Iowa, central Iowa and Nebraska, but strong growth in the
West Des Moines market.
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 $113.1 million, $137.8 million and $141.1 million, respectively, at June
30, 2003, 2002 and 2001. 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 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, 2003 approximately $198.9 million or 41.4% 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
$62.7 million, $69.9 million and $51.0 million, respectively, of one- to
four-family fixed rate residential loans during the fiscal years ended June 30,
2003, 2002 and 2001. 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
has not securitized any loans since this transaction in 2001. 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.
4
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,
------------------------------------------------------------------
2003 2002 2001
------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
One- to four-family units (1) $ 191,890 46.22% $ 164,816 39.40% $ 181,034 43.32%
Multi-family dwelling units
(2) .......................... 35,051 8.44 56,537 13.51 62,040 14.85
Commercial real estate (3) ... 78,064 18.80 81,232 19.42 79,025 18.91
Commercial business loans .... 16,256 3.91 15,502 3.71 14,976 3.58
Home equity and second
mortgage ..................... 36,962 8.90 40,347 9.64 38,224 9.15
Auto loans ................... 26,292 6.33 32,168 7.69 24,212 5.79
Loans on deposits ............ 511 0.12 672 0.16 802 0.19
Other non-mortgage loans (4) . 35,077 8.45 32,569 7.78 22,538 5.39
--------- ------ --------- ------ --------- ------
Total ...................... 420,103 101.17 423,843 101.31 422,851 101.18
Less
Allowance for loan losses .... (4,615) (1.11) (4,584) (1.10) (4,737) (1.13)
Loans in process ............. (410) (0.10) (1,500) (0.36) (458) (0.11)
Net unearned premiums on loans 1,965 0.47 2,076 0.50 1,537 0.37
Deferred loan fees ........... (1,776) (0.43) (1,453) (0.35) (1,295) (0.31)
--------- ------ --------- ------ --------- ------
Total loans, net ........... $ 415,267 100.00% $ 418,382 100.00% $ 417,898 100.00%
========= ====== ========= ====== ========= ======
At June 30,
----------------------------------------------
2000 1999
--------------------- ----------------------
Amount Percent Amount Percent
--------- ------- --------- -------
(Dollars in Thousands)
One- to four-family units (1) $ 325,057 64.36% $ 326,126 71.36%
Multi-family dwelling units
(2) .......................... 54,455 10.78 40,974 8.96
Commercial real estate (3) ... 54,594 10.81 31,158 6.82
Commercial business loans .... 8,533 1.69 6,193 1.35
Home equity and second
mortgage ..................... 35,695 7.07 32,315 7.07
Auto loans ................... 13,801 2.73 13,603 2.98
Loans on deposits ............ 659 0.13 616 0.13
Other non-mortgage loans (4) . 16,887 3.34 10,400 2.28
--------- ------ --------- ------
Total ...................... 509,681 100.91 461,385 100.95
Less
Allowance for loan losses .... (3,394) (0.67) (3,135) (0.69)
Loans in process ............. (550) (0.11) (942) (0.21)
Net unearned premiums on loans 1,684 0.33 1,995 0.44
Deferred loan fees ........... (2,331) (0.46) (2,245) (0.49)
--------- ------ --------- ------
Total loans, net ........... $ 505,090 100.00% $ 457,058 100.00%
========= ====== ========= ======
- ----------
(1) Includes construction loans on one- to four-family units.
(2) Includes construction loans on multi-family dwelling units.
(3) Includes construction loans on commercial real estate.
(4) Includes other secured and unsecured non-mortgage loans.
5
Loan and Mortgage-Backed Securities Maturity Schedule. The following table
sets forth certain information as of June 30, 2003, 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.
Ten
One Three Five Through Beyond
Within Through Through Through Twenty Twenty
One Year Three Years Five Years Ten Years Years Years Total
-------- ----------- ---------- --------- ------- ------ ---------
(In Thousands)
First mortgage loans:
One- to four-family residences:
Adjustable ................................. $22,131 $21,962 $ 9,692 $ 588 $ -- $ -- $ 54,373
Fixed ...................................... 4,472 467 2,455 59,928 66,987 3,208 137,517
------- ------- ------- ------- ------- ------ --------
Total one- to four-family .................. 26,603 22,429 12,147 60,516 66,987 3,208 191,890
Multi-family and commercial real estate:
Adjustable .................................. 42,151 28,752 16,785 477 -- -- 88,165
Fixed ....................................... 9,788 3,793 9,647 1,181 541 -- 24,950
------- ------- ------- ------- ------- ------ --------
Total multi-family and commercial ........... 51,939 32,545 26,432 1,658 541 -- 113,115
Commercial loans:
Adjustable .................................. 13,227 83 300 -- -- -- 13,610
Fixed ....................................... 596 350 1,164 308 228 -- 2,646
------- ------- ------- ------- ------- ------ --------
Total commercial loans ...................... 13,823 433 1,464 308 228 -- 16,256
Consumer loans and other non-mortgage loans:
Adjustable .................................. 4,371 -- -- -- -- -- 4,371
Fixed ....................................... 2,584 12,888 26,941 36,539 15,084 435 94,471
------- ------- ------- ------- ------- ------ --------
Total consumer loans and other non-mortgage
loans ....................................... 6,955 12,888 26,941 36,539 15,084 435 98,842
Total loans receivable ........................ $99,320 $68,295 $66,984 $99,021 $82,840 $3,643 $420,103
======= ======= ======= ======= ======= ====== ========
Mortgage-backed securities (MBS):
Fixed-rate MBS - held to maturity ........... -- 299 870 16,874 4,290 -- 22,333
Adjustable-rate MBS - available for
sale ........................................ 20,079 5,431 9,416 3,405 -- -- 38,331
------- ------- ------- ------- ------- ------ --------
Total mortgage-backed securities .............. $20,079 $ 5,730 $10,286 $20,279 $ 4,290 $ -- $ 60,664
======= ======= ======= ======= ======= ====== ========
The following table sets forth the dollar amount of all loans maturing or
repricing after June 30, 2004 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 $ 133,045 $ 32,242 $ 165,287
Other mortgage loans 15,162 46,014 61,176
Commercial loans ..... 2,050 383 2,433
Consumer ............. 91,887 -- 91,887
---------- --------- ----------
Total ............ $ 242,144 $ 78,639 $ 320,783
========== ========= ==========
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 has purchased 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
6
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.
The 60- and 90-day delinquency rates on loans purchased and originated by
the Registrant were 0.65% and 0.69%, respectively, at June 30, 2003. Management
attributes the low delinquency rates to the current relative strength of the
residential housing sector in the Midwest.
At June 30, 2003, the Registrant had $191.9 million, or 46.2%, 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 risk position and
loan products offered by the Registrant's competitors. During fiscal 2003, one-
to four-family residential ARM loans decreased by $31.6 million, or 36.7%, to
$54.4 million from $86.0 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 interest rate risk position. 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. At June 30, 2003, approximately $32.0 million, or 58.8%, of the
Registrant's portfolio of residential ARM loans was indexed to the one-year
Treasury Constant maturity.
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.
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
7
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, 2003, 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, 2003, the Registrant had $2.5 million, or
0.6%; $4.5 million, or 1.1%; and $9.8 million, or 2.3%, 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 $35.1 million or 8.4% of the Registrant's total loan
portfolio at June 30, 2003, compared to $56.5 million or 13.5% of the
Registrant's total loan portfolio at June 30, 2002 and $62.0 million, or 14.9%
of the total loan portfolio at June 30, 2001. The Registrant's multi-family real
estate loans are secured by multi-family residences, such as apartment
buildings. At June 30, 2003, 40.1% of the Registrant's multi-family loans were
secured by properties located within the Registrant's primary market area. At
June 30, 2003, the Registrant's multi-family real estate loans had an average
balance of $556,000. 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,
2003, the Registrant's largest multi-family real estate borrower had an
aggregate principal outstanding balance of $3.6 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.
Commercial Real Estate Loans. Loans secured by commercial real estate
constituted $78.1 million, or 18.8%, of the Registrant's total loan portfolio at
June 30, 2003. By comparison, commercial real estate loans totaled $81.2
million, or 19.4%, and $79.0 million, or 18.9% of the total loan portfolio, at
June 30, 2002 and 2001, 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, 2003, 75.7% were located
within the Registrant's primary market area. Commercial real estate loans are
offered with fixed and adjustable interest rates.
8
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,
2003, the Registrant's largest commercial real estate borrower had an aggregate
principal outstanding balance of $6.4 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. At June 30, 2003, the Registrant had a
second commercial real estate borrower with an aggregate principal outstanding
balance of $5.0 million. Additional unfunded loan commitments to this second
borrower totaled $3.3 million.
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, 2003, commercial loans constituted $16.3
million, or 3.9%, of the Registrant's total loan portfolio, compared to $15.5
million, or 3.7% of the Registrant's total loan portfolio at June 30, 2002 and
$15.0 million, or 3.6% of the total loan portfolio at June 30, 2001. 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, 2003, consumer loans totaled $98.8 million, or 23.8% of the
Registrant's total loan portfolio, compared to $105.8 million, or 25.3%, and
$85.8 million, or 20.5%, respectively, at June 30, 2002 and 2001. The principal
types of consumer loans offered by the Registrant are second mortgage loans,
auto loans, home improvement loans, unsecured loans and loans secured by deposit
accounts. Consumer loans are offered primarily on a fixed rate basis, and at
June 30, 2003 had an average maturity of 81 months. The Registrant's home equity
loans, second mortgage loans, and home improvement loans, are generally secured
by the borrower's principal residence. At June 30, 2003, home equity loans,
second mortgage loans, and home improvement loans, totaled $37.0 million, or
37.4% of consumer loans and 8.9% of the Registrant's total loan portfolio.
9
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.
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 $60.7 million at June 30, 2003.
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 that residential and commercial real
estate loans are made. Insurance coverage for commercial and multi-family
properties is required and monitored throughout the term of the loan. The
Registrant purchases blanket insurance coverage to protect its interests in one-
to four-family residential properties and consumer collateral to the extent that
the borrower lets such insurance lapse. 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. 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, 2003, 90.2% were originated by the Registrant or purchased
through a Madison, Wisconsin mortgage banking relationship described below. At
June 30, 2003, the Registrant had $52.9 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 formerly had an
exclusive agreement with this firm, which gave the Bank first right of refusal
on any real estate loans generated including one- to four-family, multi-family,
commercial real estate and land development loans secured by properties located
primarily in the Madison, Wisconsin metropolitan area. The exclusive
relationship with the mortgage-banking firm has been terminated as the Bank
seeks to emphasize loan originations from its primary market area. The
Registrant was actively involved in the origination and underwriting of the
loans purchased in
10
Madison, Wisconsin. At June 30, 2003, the outstanding principal balance of loans
purchased under the above agreement, net of partial interests in these balance
sold to other financial institutions, totaled $20.9 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,
----------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
Loans originated:
Conventional one- to four-family real estate loans:
Construction loans .............................. $ 11,117 $ 11,734 $ 12,233
Loans on existing property ...................... 10,535 11,611 20,910
Loans refinanced ................................ 91,536 55,716 22,959
Insured and guaranteed loans ...................... 29,932 29,320 21,147
Multifamily and commercial real estate:
Construction loans .............................. 8,692 18,183 20,344
Loans on existing property ...................... 30,065 51,817 53,904
Commercial loans .................................. 13,512 16,749 23,180
Consumer loans .................................... 52,934 77,417 57,360
-------- -------- --------
Total loans originated ........................ $248,323 $272,547 $232,037
======== ======== ========
Loans purchased:
One- to four-family ............................... $ -- $ -- $ 650
Multi-family and commercial real estate ........... 15,827 19,001 21,110
-------- -------- --------
Total loans purchased ......................... $ 15,827 $ 19,001 $ 21,760
======== ======== ========
Loans sold ........................................... $ 62,703 $ 69,916 $ 51,028
======== ======== ========
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, 2003, the
Registrant had commitments to originate and purchase $10.2 million of one- to
four-family residential loans and $34.2 million of commercial real estate and
commercial business loans. The Registrant's experience has been that few
commitments for loans on one- to four-family residential properties expire
without being funded by the Registrant. However, commitments to originate
commercial real estate loans and commercial business loans are less likely to be
funded.
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, 2003, the Registrant had $1.8
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 $1.6 million, $1.8 million and $969,000 for the
years ended June 30, 2003, 2002 and 2001, 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 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
11
estate). At June 30, 2003, the Registrant's maximum loans-to-one borrower limit
was $7.7 million. At June 30, 2003, the Registrant's largest borrower had
aggregate loans outstanding from the Registrant of $6.4 million, or 12.4% of the
Registrant's unimpaired capital and surplus.
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 7.6% at
June 30, 2003, 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. The commercial real estate loan delinquency rate (loans 60 days or more
past due as a percentage of total commercial real estate and commercial business
loans) decreased in the last fiscal year to 0.9% from 1.5%. 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 against income.
At June 30, 2003, the Registrant's total of real property acquired as the
result of foreclosure or by deed in lieu of foreclosure was $172,000 compared to
a total of $85,000 at June 30, 2002.
In addition, the Company had repossessed automobiles, boats and trailers
with an estimated fair value less cost to sell that totaled $240,000 at June 30,
2003.
12
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,
------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
One-to four family residential ........... $ 335 $ 527 $ -- $ -- $1,003
Multi-family residential ................. 2,426 2,857 -- -- --
Commercial real estate ................... 628 824 -- 15 1,061
Commercial business ...................... -- 584 1,094 -- --
Consumer ................................. 302 314 -- -- --
------ ------ ------ ------ ------
Total .................................. 3,691 5,106 1,094 15 2,064
------ ------ ------ ------ ------
Loans accounted for on an accrual basis
(1)(2):
One-to four family residential ........... 997 780 970 1,187 295
Multi-family residential ................. -- -- -- 547 --
Commercial real estate ................... -- -- 233 247 --
Consumer ................................. -- 305 363 112 101
------ ------ ------ ------ ------
Total .................................. 997 1,085 1,566 2,093 396
------ ------ ------ ------ ------
Total non-performing loans ............... 4,688 6,191 2,660 2,108 2,460
------ ------ ------ ------ ------
Other non-performing assets (3) (4) ...... 412 410 130 65 32
------ ------ ------ ------ ------
Total non-performing assets ............ $5,100 $6,601 $2,790 $2,173 $2,492
====== ====== ====== ====== ======
Restructured loans not included in other
non-performing categories above (5) ....... $3,005 $ -- $ 449 $ 434 $ 441
====== ====== ====== ====== ======
Non-performing loans as a percentage of total
loans ..................................... 1.13% 1.48% 0.64% 0.42% 0.54%
Non-performing loans as a percentage of total
assets .................................... 0.75% 0.95% 0.40% 0.29% 0.36%
Non-performing loans and real estate owned to
total loans and real estate owned ......... 1.23% 1.58% 0.67% 0.43% 0.55%
Non-performing assets as a percentage of
total assets .............................. 0.81% 1.01% 0.42% 0.30% 0.37%
- ----------
(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, 2003.
(5) Restructured loans have had amounts added to the principal balance and/or
terms of the debt modified. Modification terms include payment extensions,
interest only payments and longer amortization periods, among other
possible concessions that would not normally be considered.
13
The following table sets forth information with respect to the
Registrant's delinquent loans and other problem assets at June 30, 2003.
At June 30, 2003
------------------
Balance Number
------- ------
(In Thousands)
Residential real estate:
Loans past due 60-89 days ............................................. $1,242 25
Loans past due 90 days or more ........................................ 1,332 34
Multi-family real estate:
Loans past due 60-89 days ............................................. 233 1
Loans past due 90 days or more ........................................ 2,426 2
Commercial real estate:
Loans past due 60-89 days ............................................. 104 2
Loans past due 90 days or more ........................................ 628 3
Commercial business:
Loans past due 60-89 days ............................................. -- --
Loans past due 90 days or more ........................................ -- --
Consumer loans:
Loans past due 60-89 days ............................................. 458 45
Loans past due 90 days or more ........................................ 302 28
Foreclosed real estate and repossessions ................................. 412 33
Other non-performing assets (1) .......................................... -- --
Restructured loans not included in other nonperforming categories above(2) 3,005 13
Loans to facilitate sale of real estate owned ............................ -- --
- ----------
(1) Loans not accruing interest but not past due more than 60 days.
(2) Restructured loans have had amounts added to the principal balance and/or
the terms of the debt have been modified.
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.
14
At June 30, 2003, the aggregate amount of the Registrant's classified
assets, and of the Registrant's general and specific loss allowances were as
follows:
June 30, 2003
-------------
(In Thousands)
Substandard assets .................................. $8,588
Doubtful assets ..................................... 448
Loss assets ......................................... --
------
Total classified assets ........................ $9,036
======
General loss allowances ............................. 4,615
Specific loss allowances ............................ --
------
Total allowances ............................... $4,615
======
A summary of the Registrant's principal classified assets is as follows.
A 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, 2003,
the total loan balance was $1.3 million. Due to continuing cash flow problems
associated with the agricultural industry, the loan was classified `substandard'
at June 30, 2003.
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, 2003. The total loan balance
at June 30, 2003 was $2.1 million. A management company with expertise in
managing senior assisted living facilities was engaged in Spring 2001; however,
the occupancy rate has not improved and cash flow currently does not support
debt service. The Registrant commenced foreclosure on this property in October
2002.
The Registrant originated a loan to a commercial contractor in the
Registrant's primary 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, 2003, the total loan balance was $943,000 and the
loan was current. Due to continuing cash flow concerns, the loan was classified
'substandard' at June 30, 2003.
The Registrant originated loans to a commercial borrower in Madison,
Wisconsin that totaled $6.4 million, net of participated balances, at June 30,
2003. The loans were classified "special mention" at June 30, 2003 due to
weakness in the primary source of repayment, the sale of residential units.
Construction of the units was substantially complete and the loans were current
at June 30, 2003.
The Registrant originated loans to a commercial borrower with an aggregate
balance of $1.5 million at June 30, 2003. The borrower operates a retail nursery
and has experienced cash flow problems due to an inability to reach breakeven
sales. The loans were classified "substandard" at June 30, 2003. The loans were
current at June 30, 2003.
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 2003. 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
15
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
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, 1.5% for commercial business
loans, and .75% to 2.00% for consumer 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 2003, 2002 and 2001, the Registrant credited $1.7 million,
$3.8 million and $5.2 million, 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 Company's allowance for loan losses at the dates
indicated.
At or for years ended June 30,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ----------
(Dollars in Thousands)
Total loans outstanding ..................... $ 420,103 $ 423,843 $ 422,851 $ 509,681 $ 461,385
Average loans outstanding ................... 414,171 422,805 484,911 480,377 416,631
Allowance balance (at beginning of period) .. 4,584 4,737 3,394 3,135 2,607
Additions related to acquisition ............ -- -- -- -- 325
Provision charged to operations ............. 1,730 3,835 5,155 554 365
Charge-offs:
Residential .............................. (115) (5) -- (5) (63)
Commercial real estate ................... (721) (697) (70) (30) --
Commercial business ...................... (131) (2,641) (3,551) -- --
Consumer ................................. (1,097) (858) (269) (346) (184)
Recoveries .................................. 365 213 78 86 85
--------- --------- --------- --------- ---------
Allowance balance (at end of period) ........ $ 4,615 $ 4,584 $ 4,737 $ 3,394 $ 3,135
========= ========= ========= ========= =========
Allowance for loan losses as a percent of
total loans outstanding .................. 1.10% 1.08% 1.12% 0.67% 0.68%
Net loans charged off as a percent of average
loans outstanding ........................ 0.41% 0.94% 0.79% 0.06% 0.04%
Investment Activities
The Registrant's portfolio of investment securities, excluding investments
in mortgage-backed securities, totaled $62.4 million, $80.9 million and $93.3
million, respectively, at June 30, 2003, 2002 and 2001. 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
16
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Registrant generally has maintained a liquidity portfolio in
excess of regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of yield that
will be available in the future, as well as management's projections as to the
short term demand for funds to be used in the Registrant's loan origination and
other activities.
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, 2003, the Registrant's FHLB
stock yielded 3.00%. At June 30, 2003, the fair value of the Registrant's
investment securities - held to maturity portfolio was $22.6 million.
At June 30,
--------------------------------
2003 2002 2001
------- ------- --------
(In Thousands)
Investment securities - held to maturity:
U.S. Government and agency securities $ 9,998 $ 9,993 $ 2,878
Other securities 12,175 14,816 9,160
------- ------- --------
Total investment securities held to maturity $22,173 $24,809 $ 12,038
------- ------- --------
Investment securities - available for sale:
U.S. Government and agency securities $ 9,192 $ -- $ 61,748
Other securities 31,003 56,089 19,558
------- ------- --------
Total investment securities available for sale $40,195 $56,089 $ 81,306
------- ------- --------
Totals $62,368 $80,898 $ 93,344
Interest-bearing deposits $ 281 $ 103 $ 57,708
FHLB stock 5,707 5,038 9,469
------- ------- --------
Total investments $68,356 $86,039 $160,521
======= ======= ========
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, 2003.
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
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(Dollars in Thousands)
Investment
securities-held to
maturity (1)....... $ 10,543 2.92% $ 4,349 6.06% $ 2,627 6.59% $ 4,654 7.12% $ 22,173 4.85%
Investment
securities-available
for sale........... 13,622 2.13% 9,192 2.58% 1,791 7.31% 15,591 5.21% 40,195 3.66%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total Investment
securities......... $ 24,165 2.47% $ 13,541 3.70% $ 4,418 6.88% $ 20,245 5.65% $ 62,368 4.08%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
- ----------
(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.
17
Deposits. Consumer and commercial deposits are attracted principally from
within the Registrant's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits, term certificate accounts and individual retirement accounts.
On a limited basis, the Registrant will negotiate interest rates to attract
jumbo certificates. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. The Registrant regularly evaluates the internal cost
of funds, surveys rates offered by competing institutions, reviews the
Registrant's cash flow requirements for lending and liquidity and executes rate
changes when deemed appropriate.
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, 2003, are composed of the following:
Weighted Percentage
Average Minimum of Total
Interest Rate(1) Minimum Term Category Amount Balances Deposits
---------------- -------------- ------------------------------ ---------- ----------- ----------
(In Thousands)
0.00% None Noninterest bearing checking
accounts $ None $ 20,303 4.52%
0.13% None Interest bearing checking
accounts None 71,454 15.92%
0.60% None Money Market accounts 0/1000 86,911 19.35%
0.22% None Savings accounts/Club accounts 0/5 33,959 7.56%
0.20% None Unredeemed certificates n/a 3,327 0.74%
3.29% 6 to 18 months Fixed term, fixed rate (2) 250/1,000 176 0.04%
4.66% 14 to 36 months Fixed term, fixed rate (2) 1,000 17,322 3.86%
5.69% 42 to 48 months Fixed term, fixed rate (2) 1,000 15,024 3.35%
5.34% 6 to 48 months Fixed term, fixed rate IRA (2) 100 7,748 1.73%
1.56% 3 to 6 months Fixed term, fixed rate (3) 500/1,000 25,866 5.76%
2.39% 7 to 12 months Fixed term, fixed rate (3) 500/1,000 56,530 12.59%
3.00% 2 yeas Fixed term, fixed rate (3) 500/1,000 21,872 4.87%
1.21% 2 year Fixed term, variable rate IRA 100 981 0.22%
3.24% 2.5 year Fixed term, fixed rate 1,000 1,526 0.34%
2.90% 2.5 year Fixed term, option rate (4) 1,000 9,653 2.15%
34 and 35
4.53% months Change up term and rate (5) (6) 1,000 3,609 0.80%
3.83% 3 year Fixed term, fixed rate (3) 100/1,000 36,662 8.17%
4.23% 4 years Fixed term, fixed rate 1,000 6,502 1.45%
4.83% 58 months Fixed term, fixed rate 1,000 2,859 0.64%
4.54% 5 year Fixed term, fixed rate 1,000 24,685 5.50%
4.14% 6 year Fixed term, fixed rate 1,000 1,073 0.24%
5.31% 8 year Fixed term, fixed rate 1,000 902 0.20%
1.94% 448,944 100.00%
- ----------
(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 $500 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.
18
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
June 30,2003 % Deposits (Decrease) June 30, 2002 % Deposits (Decrease)
------------ ----------- ---------- ------------- ---------- ---------
(Dollars in Thousands)
Checking accounts .............. $ 91,757 20.44% 15,372 $ 76,385 16.16% 6,051
Savings accounts ............... 33,959 7.56% 2,636 31,323 6.63% 3,424
Money market accounts .......... 86,911 19.36% (21,280) 108,191 22.90% 24,187
Option rate certificates (1) ... 9,653 2.15% 7,939 1,714 0.36% 63
Change up certificates (2) ..... 1,994 0.44% (5,719) 7,713 1.63% 442
6 to 36 month special (3) ...... 17,498 3.90% (93,298) 110,796 23.45% (74,785)
42 to 48 month special (3) ..... 15,024 3.35% 266 14,758 3.12% 6,688
3 through 11 month certificates 23,633 5.26% 10,238 13,395 2.83% 10,770
12 through 18 month certificates 43,054 9.59% 30,133 12,921 2.73% 8,613
19 through 30 month certificates 19,394 4.32% 11,356 8,038 1.70% 554
32 and 36 month certificates ... 14,929 3.33% 9,462 5,467 1.16% (149)
45 and 48 month certificates ... 6,327 1.41% 2,598 3,729 0.79% (2,473)
58 through 96 month certificates 26,694 5.95% 10,284 16,410 3.47% 1,416
IRA certificates ............... 54,790 12.20% (956) 55,746 11.79% (2,105)
Other certificates ............. 3,327 0.74% (2,735) 6,062 1.28% 1,244
-------- ------ ------- -------- ------ -------
$448,944 100.00% (23,704) $472,648 100.00% (16,060)
======== ====== ======= ======== ====== =======
Increase Balance at Increase
(Decrease) June 30, 2001 % Deposits (Decrease)
---------- ------------- ---------- ----------
(Dollars in Thousands)
Checking accounts .............. 6,051 $ 70,334 14.39% (2,130)
Savings accounts ............... 3,424 27,899 5.71% (940)
Money market accounts .......... 24,187 84,004 17.19% 6,639
Option rate certificates (1) ... 63 1,651 0.34% (370)
Change up certificates (2) ..... 442 7,271 1.49% (3,338)
6 to 36 month special (3) ...... (74,785) 185,581 37.96% 68,912
42 to 48 month special (3) ..... 6,688 8,070 1.65% 3,448
3 through 11 month certificates 10,770 2,625 0.54% (9,340)
12 through 18 month certificates 8,613 4,308 0.88% (13,464)
19 through 30 month certificates 554 7,484 1.53% (19,367)
32 and 36 month certificates ... (149) 5,616 1.15% (2,480)
45 and 48 month certificates ... (2,473) 6,202 1.27% (4,814)
58 through 96 month certificates 1,416 14,994 3.07% (3,455)
IRA certificates ............... (2,105) 57,851 11.84% (417)
Other certificates ............. 1,244 4,818 0.99% (1,802)
------- -------- ------ ------
(16,060) $488,708 100.00% 17,082
======= ======== ====== ======
- ----------
(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.
19
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,
--------------------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
2% or less $ 48,986 $ 13,801 $ 4,856
2.01% - 3.00% 56,396 48,969 63
3.01% - 4.00% 48,813 31,042 6,879
4.01% - 5.00% 50,906 58,319 75,512
5.01% - 6.00% 18,287 34,095 64,640
6.01% - 7.00% 835 49,237 132,133
over 7.00% 12,095 21,286 22,389
-------- -------- --------
$236,318 $256,749 $306,472
======== ======== ========
Time deposit maturity schedule. The following table sets forth the amount
and maturities of certificates of deposit at June 30, 2003.
Amount due
----------------------------------------------------------
One year over 1 to over 2 to After
and less two years three years 3 years Total
(In Thousands)
2% or less $ 46,502 $ 2,174 $ 310 $ -- $ 48,986
2.01% - 3.00% 35,918 11,353 8,417 708 56,396
3.01% - 4.00% 18,434 15,692 8,223 6,464 48,813
4.01% - 5.00% 13,408 7,036 15,379 15,083 50,906
5.01% - 6.00% 1,940 6,196 1,644 8,507 18,287
6.01% - 7.00% 815 20 -- -- 835
over 7.00% 12,095 -- -- -- 12,095
-------- ------- ------- -------- --------
$129,112 $42,471 $33,973 $ 30,762 $236,318
======== ======= ======= ======== ========
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, 2003.
Maturity Period Certificates of Deposits
--------------- ------------------------
(In Thousands)
Three months or less ............................ $ 6,128
Three through six months ........................ 5,013
Six through twelve months ....................... 3,654
Over twelve months .............................. 10,005
-------
Total ...................................... $24,800
=======
Deposit Activity. The following table sets forth the savings activities of
the Registrant for the periods indicated:
At June 30,
-------------------------------------
2003 2002 2001
-------- -------- ---------
(In Thousands)
Deposits transferred on sale of branch $ -- $ (8,900) $ --
Net withdrawals in excess of deposits . (36,556) (26,829) (7,111)
Interest credited ..................... 12,852 19,669 24,193
-------- -------- --------
Net (decrease) increase in deposits $(23,704) $(16,060) $ 17,082
======== ======== ========
20
Borrowings. Deposits are the primary source of funds for the Registrant's
lending and investment activities and for its general business purposes. The
Registrant may rely upon advances from the FHLB 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, 2003, 2002 and 2001, the
Registrant had $102.4 million, $99.1 million and $89.1 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,
-------------------------------
2003 2002 2001
----- ----- -----
Weighted average rate paid
on FHLB advances ...................... 4.85% 5.22% 5.81%
Rate paid on ESOP borrowing ............. 7.00% 7.00% 7.00%
During the Years Ended June 30,
-----------------------------------
2003 2002 2001
-------- ------- --------
(Dollars in Thousands)
Maximum amount of FHLB advances outstanding at any month end $107,429 $99,065 $185,600
Approximate average FHLB advances outstanding 105,912 88,974 149,756
Approximate weighted average rate paid on FHLB advances 4.78% 5.63% 6.14%
Approximate average ESOP borrowing outstanding $ 1,385 $ 1,507 $ 1,630
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 and dwellings 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
21
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.
Personnel
As of June 30, 2003, the Company and its wholly owned subsidiaries had 228
full-time equivalent employees. None of the Company's employees is represented
by a collective bargaining group. The Company believes its relationship with its
employees to be good.
Competition
The Registrant encounters strong competition both in attracting deposits
and in originating 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
22
depositors and borrowers also is regulated to a great extent by both federal and
state laws especially in such matters as the ownership of savings accounts and
the form and content of the Bank's mortgage documents. Any change in such
regulation, whether by the FDIC, OTS, or Congress, could have a material adverse
impact on the Company and the Bank and their operations.
The description of statutory provisions and regulations applicable to
savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes,
as amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and Federal Deposit Insurance Corporation Improvement Act
("FDICIA") (1) restrict the solicitation of brokered deposits by savings
institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions.
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, 2003, the Bank maintained
75.4% 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, 2003, 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, 2003, was 27.9%.
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
23
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, 2003, 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 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.
24
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 increase or decrease in market interest rates, divided by the
estimated economic value of the association's assets.
25
At June 30, 2003, 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, 2003.
At June 30, 2003
------------------------
Percent of
Amount Assets (1)
------- ----------
(Dollars in Thousands)
Tangible capital:
Capital level ..................... $46,352 7.65%
Requirement ....................... 9,092 1.50%
------- ----
Excess ............................ 37,260 6.15%
To be well capitalized under prompt
corrective action provisions .... N/A N/A
Core capital:
Capital level ..................... 46,352 7.65%
Requirement ....................... 18,184 3.00%
------- ----
Excess ............................ 28,168 4.65%
To be well capitalized under prompt
corrective action provisions .... 30,307 5.00%
Fully phased-in risk-based capital:
Capital level ..................... 50,981 12.64%
Requirement ............................. 32,254 8.00%
------- ----
Excess ............................ 18,727 4.64%
To be well capitalized under prompt
corrective action provisions .... 40,318 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 the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment
26
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, 2003, 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,
2003, 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 consider the financial and managerial
resources, future prospects of the company and institution involved, the
27
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.
The USA PATRIOT Act
In response to the events of September 11th, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October
26, 2001. The USA PATRIOT Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i)
internal policies, procedures, and controls; (ii) specific
designation of an anti-money laundering compliance officer; (iii)
ongoing employee training programs; and (iv) an independent audit
function to test the anti-money laundering program.
o Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened. On July
23, 2002, the federal bank regulators jointly issued proposed rules
to implement Section 326. The proposed rules require financial
institutions to establish a program specifying procedures for
obtaining identifying information from customers seeking to open new
accounts. This identifying information would be
28
essentially the same information currently obtained by most
financial institutions for individual customers.
o Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking accounts
or correspondence accounts in the United States for non-United
States persons or their representatives (including foreign
individuals visiting the United States) to establish appropriate,
specific, and, where necessary, enhanced due diligence policies,
procedures, and controls designed to detect and report money
laundering.
o Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that
do not have a physical presence in any country), and will be subject
to certain record keeping obligations with respect to correspondent
accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
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,
2003, the Bank had a balance of approximately $200,000 of bad debt reserves in
retained income that would be recaptured under this legislation.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which they
are recognized in the consolidated financial statements.
The Registrant accounts for deferred income taxes by the liability method,
applying the enacted statutory rates in effect at the balance sheet date to
differences between the book cost and the tax cost of assets and liabilities.
The resulting deferred tax liabilities and assets are adjusted to reflect
changes in the tax laws.
The Registrant is subject to the corporate alternative minimum tax which
is imposed to the extent it exceeds the Registrant's regular income tax for the
year. The alternative minimum tax will be imposed at the rate of 20% of a
specially computed tax base. Included in this base will be a number of
preference items, including the following: (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that 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
29
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
10 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 2003 the
Registrant recorded Delaware franchise tax expense of $42,000 and submitted
payments that totaled $37,880.
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, 2003. The aggregate net book value of the
Registrant's premises and equipment was $13.2 million at June 30, 2003.
Owned Lease
Year or Expiration
Opened or Acquired Leased Date
------------------ ------ ----
329 Pierce Street 1988 Owned --
Sioux City, Iowa 51102
924 Pierce Street 1991 Owned --
Sioux City, Iowa 51101
2727 Hamilton Blvd. 1981 Owned --
Sioux City, Iowa 51104
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
30
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, 2003, was $425,000.
ITEM 3 LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Registrant is
periodically involved incident to the Registrant's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 2003 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.
31
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 4 through 19 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Pages 15 through 16 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 22 through 54 of the Annual Report to Stockholders are herein
incorporated by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On April 17, 2003, the Audit Committee of the Registrant elected to change
the Registrant's outside accounting firm KPMG LLP ("KPMG") effective for fiscal
year 2004.
The audit reports of KPMG on the financial statements of the Registrant
for the years ended June 30, 2003 and 2002 did not contain an adverse opinion or
disclaimer of opinion, nor were the reports qualified or modified as to
uncertainty, audit scope or accounting principles.
During the two most recent fiscal years and the interim period through the
date of this report, there were no disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to KPMG's satisfaction,
would have caused KPMG to make reference to the subject matter of the
disagreements in connection with its reports.
During the two most recent fiscal years, there were no reportable events
(as defined in Regulation S-K Item 304 (a)(1)(v)).
On April 17, 2003, the Registrant engaged McGladrey & Pullen, LLP to audit
the consolidated financial statements of the Registrant as of and for the year
ended June 30, 2004. During the two fiscal years ended June 30, 2003 and the
subsequent interim period through the date of this report, the Registrant did
not consult with McGladrey & Pullen, LLP regarding any matters set forth in Item
304(a)(2)(i) or (ii) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including
the Registrant's Chief Executive Officer and Chief Financial Officer, the
Registrant evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) at the end of the period covered by
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Registrant's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the
Registrant files or submits under the Securities Exchange Act of 1934, is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. There has been no change in the Registrant's
internal control over financial reporting during the Registrant's fourth quarter
of fiscal year 2003 that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting.
32
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers of the Registrant
is incorporated herein by reference from the Registrant's definitive Proxy
Statement dated September 24, 2003.
ITEM 11 EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Registrant's definitive Proxy Statement dated September 24,
2003.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Registrant's definitive Proxy
Statement dated September 24, 2003.
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"). All
such plans have been approved by stockholders of the Registrant. The Equity
Compensation Plan Table is incorporated herein by reference from the
Registrant's definitive proxy statement dated September 24, 2003.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from the Registrant's definitive Proxy Statement dated
September 24, 2003.
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, 2003, 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
of Financial Condition and Results
of Operations 4-19
Report of Independent Auditors 21
Consolidated Balance Sheets 22
Consolidated Statements of Operations 23
Consolidated Statements of Stockholders' Equity
and Comprehensive Income 24
33
Consolidated Statements of Cash Flows 25-26
Notes to Consolidated Financial 27-54
Statements
With the exception of the aforementioned information, the Registrant's
Annual Report to Stockholders for the year ended June 30, 2003 is not deemed
filed as part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10_K Report
- -------------- -------- --------------- ----------------
3 Articles of Incorporation Not Applicable
3 Bylaws Not Applicable
4 Instruments defining the Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
10 Material contracts None Not Applicable
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
34
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
31.1 Certification of Chief Executive Officer 31.1 Exhibit 31.1
Pursuant to Section 302
31.2 Certification of Chief Financial Officer 31.2 Exhibit 31.2
Pursuant to Section 302
32 Certification Pursuant to Section 906 32 Exhibit 32
(b) Reports on Form 8-K:
On April 23, 2003, the Registrant filed a report on Form 8-K regarding a
change in certifying accountant effective for fiscal year 2004.
On April 23, 2003, the Registrant filed a report on Form 8-K that included
its press release dated April 22, 2003, which described earnings for the three
months and nine months ended March 31, 2003 and announced a quarterly dividend.
On July 28, 2003, the Registrant filed a report on Form 8-K that included
its press release dated July 25, 2003, in which the Registrant described
earnings for the three months and twelve months ended June 30, 2003 and
announced a quarterly dividend and its Annual Meeting of Stockholders.
On August 22, 2003, the Registrant filed a report on Form 8-K relating to
a share repurchase program.
35
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 18, 2003 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/ Colin D. Anderson
----------------------------------------- --------------------------------------------
Barry E. Backhaus Colin D. Anderson
President and Chief Executive Officer Senior Vice President and Chief Financial
and Chairman of the Board (Principal Officer (Principal Financial and Accounting
Executive Officer) Officer)
Date: September 18, 2003 Date: September 18, 2003
By: /s/ Jon G. Cleghorn By: /s/ David S. Clay
----------------------------------------- ---------------------------------------------
Jon G. Cleghorn David S. Clay
Executive Vice President, Chief Operating Director
Officer and Director
Date: September 18, 2003 Date: September 18, 2003
By: /s/ Gary L. Evans By: /s/ Allen J. Johnson
----------------------------------------- ---------------------------------------------
Gary L. Evans Allen J. Johnson
Director Director
Date: September 18, 2003 Date: September 18, 2003
By: /s/ Steven L. Opsal By: /s/ David Van Engelenhoven
----------------------------------------- ---------------------------------------------
Steven L. Opsal David Van Engelenhoven
Executive Vice President and Director Director
Date: September 18, 2003 Date: September 18, 2003
By: /s/ Arlene T. Curry
-----------------------------------------
Arlene T. Curry
Director
Date: September 18, 2003