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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-22140.
FIRST MIDWEST FINANCIAL, INC.
(Name of registrant as specified in its charter)
Delaware 42-1406262
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifth at Erie, Storm Lake, Iowa 50588
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (712) 732-4117
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES |_| NO |X|
As of March 31, 2003, the Registrant had issued and outstanding 2,493,949
shares of Common Stock. The aggregate market value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average of the
closing bid and asked prices of such stock on the Nasdaq System as of March 31,
2003, was $29.3 million. (The exclusion from such amount of the market value of
the shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K -- Portions of the Annual Report to Shareholders
for the fiscal year ended September 30, 2003. PART III of Form 10-K -- Portions
of the Proxy Statement for the Annual Meeting of Shareholders to be held during
January 2004.
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Forward-Looking Statements
First Midwest Financial, Inc. ("First Midwest," and with its subsidiaries,
the "Company"), and its wholly-owned operating subsidiaries First Federal
Savings Bank of the Midwest and Security State Bank, may from time to time make
written or oral "forward-looking statements", including statements contained in
its filings with the Securities and Exchange Commission (including this Annual
Report on Form 10-K and the Exhibits hereto and thereto), in its reports to
shareholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties, and are subject to change based on various factors some of which
are beyond the Company's control. The words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The important
factors we discuss below and elsewhere in this document, as well as other
factors discussed under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report to
Shareholders and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this prospectus:
o the strength of the United States economy in general and the
strength of the local economies in which the Company conducts
operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these
products and services by users, including the features, pricing and
quality compared to competitors' products and services;
o the willingness of users to substitute competitors' products and
services for the Company's products and services;
o the success of the Company in gaining regulatory approval of its
products and services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities, agriculture
and insurance);
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o the success of the Company at managing the risks involved in the
foregoing.
The Company wishes to caution readers that such forward-looking statements
speak only as of the date made. The Company does not undertake, and expressly
disclaims any intent or obligation, to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of
the Company.
1
PART I
Item 1. Description of Business
General
First Midwest Financial, Inc. is a Delaware corporation, the principal
assets of which are all the issued and outstanding shares of First Federal
Savings Bank of the Midwest ("First Federal") and Security State Bank
("Security"). First Midwest, on September 20, 1993, acquired all of the capital
stock of First Federal in connection with First Federal's conversion from the
mutual to stock form ownership (the "Conversion"). On September 30, 1996, First
Midwest became a bank holding company upon its acquisition of Security, as
discussed below.
Since the Conversion, the Company has acquired several financial
institutions. On March 28, 1994, First Midwest acquired Brookings Federal Bank
in Brookings, South Dakota ("Brookings"). On December 29, 1995, First Midwest
acquired Iowa Savings Bank, FSB in Des Moines, Iowa ("Iowa Savings"). Brookings
and Iowa Savings were both merged with, and now operate as divisions of, First
Federal. On September 30, 1996, First Midwest completed the acquisition of
Central West Bancorporation ("CWB"). CWB was the holding company for Security in
Stuart, Iowa, which upon the merger of CWB into First Midwest resulted in
Security becoming a stand-alone banking subsidiary of First Midwest. Unless the
context otherwise requires, references herein to the Company include First
Midwest, Security and First Federal and all subsidiaries on a consolidated
basis.
First Federal and Security (collectively, the "Banks") are the only
direct, active banking subsidiaries of First Midwest. The Banks are
community-oriented financial institutions offering a variety of financial
services to meet the needs of the communities they serve. The Company, through
the Banks, provides a full range of financial services. The principal business
of First Federal historically has consisted of attracting retail deposits from
the general public and investing those funds primarily in one- to four-family
residential mortgage loans and, to a lesser extent, commercial and multi-family
real estate, agricultural operating and real estate, construction, consumer and
commercial business loans primarily in First Federal's market area. First
Federal's lending activities have expanded to include an increased emphasis on
originations of commercial and multi-family real estate loans and commercial
business loans. The principal business of Security has been and continues to be
attracting retail deposits from the general public and investing those funds in
agricultural real estate and operating loans, commercial and multi-family real
estate loans, one- to four-family residential loans and, to a lesser extent,
commercial business and consumer loans. The Banks also purchase mortgage-backed
securities and invest in U.S. Government and agency obligations and other
permissible investments. At September 30, 2003, the Company had total assets of
$772.3 million, deposits of $435.6 million, and shareholders' equity of $43.0
million.
The Company's revenues are derived primarily from interest on mortgage
loans, mortgage-backed securities, investments, consumer loans, agricultural
operating loans, commercial business loans, income from service charges and loan
originations, loan servicing fee income, and income from the sale of mutual
funds, insurance products, annuities and brokerage services through its service
corporation subsidiaries.
First Federal, directly through its wholly-owned subsidiary, First
Services Financial Limited ("First Services"), offers mutual funds, equities,
bonds, insurance products and annuities.
First Services Trust Company, established in April 2002 as a wholly-owned
subsidiary of First Midwest, provides a full range of trust services. First
Midwest Financial Capital Trust, also a wholly-
2
owned subsidiary of First Midwest, was established in July 2001 for the purpose
of issuing Company Trust Preferred Securities.
First Midwest and the Banks are subject to comprehensive regulation. See
"Regulation" herein.
The executive offices of the Company are located at Fifth at Erie, Storm
Lake, Iowa 50588. Its telephone number at that address is (712) 732-4117.
Market Area
First Federal Savings Bank of the Midwest has four divisions: First
Federal Savings Bank Storm Lake/Northwest Iowa (FFSL), , Brookings Federal Bank
(BFB), Iowa Savings Bank (ISB), and First Federal Savings Bank Sioux Falls
(FFSF). First Federal's headquarters is located on the corner of Fifth and Erie
streets in Storm Lake, Iowa. FFSL operates a total of six offices in Storm Lake,
Lake View, Laurens, Manson, Odebolt and Sac City, Iowa. BFB operates one office
in Brookings, South Dakota. ISB operates four offices in Des Moines, West Des
Moines and Urbandale, Iowa. FFSF operates one office in Sioux Falls with plans
to open a second office in 2004.
Security State Bank operates its business through three full-service
offices in Casey, Menlo and Stuart, Iowa.
The Company's primary market area includes the Iowa counties of Adair,
Buena Vista, Calhoun, Dallas, Guthrie, Ida, Pocahontas, Polk and Sac, and the
South Dakota counties of Brookings, Lincoln and Minnehaha.
Iowa ranks sixth lowest nationally in business costs (Economy.com Inc.
2003), among the top ten states for "technology sophistication" in K-12 schools
(Market Data Retrieval), third most favorable business liability climate in the
nation (Harris Interactive Survey, U.S. Chamber of Commerce, 2003), second "most
livable" state in the nation (Morgan Qullno State Rankings, 2003), and has low
corporate income taxes.
South Dakota ranks first in "entrepreneurial friendliness" (Small Business
Survival Foundation, 2002), first in students per computer (Technology Courts
2002), is the second "safest" state (FBI, 2001), and has no corporate income
tax, personal income tax, personal property tax, business inventory tax, or
inheritance tax.
Storm Lake is located in Iowa's Buena Vista County approximately 150 miles
northwest of Des Moines and 200 miles south of Minneapolis. Like much of the
State of Iowa, Storm Lake and the surrounding market area are highly dependent
upon farming and agricultural markets. Major employers in the area include Buena
Vista Regional Medical Center, Tyson-Foods, Bil Mar Foods of Iowa, and Buena
Vista University, which currently enrolls 1,257 full-time students at its Storm
Lake campus and employs 81 full-time faculty members.
Brookings is located in east central South Dakota's Brookings County,
approximately 50 miles north of Sioux Falls and 200 miles west of Minneapolis.
BFB's market area encompasses approximately a 30-mile radius of Brookings. The
area is generally rural, and agriculture is a significant industry in the
community. South Dakota State University is the largest employer in Brookings.
The University had 10,561 students enrolled for the 2003 fall term and employs
420 full-time faculty members. The community also has several manufacturing
companies, including 3M, Larson Manufacturing, Daktronics, Falcon Plastics and
Twin City Fan. The Brookings division operates from an office located in
downtown Brookings.
3
Des Moines, Iowa's capitol, is located in central Iowa. The Des Moines
market area encompasses Polk County and surrounding counties. ISB's main office
is located in a high growth area just off I-80 at the intersection of two major
streets in Urbandale. The West Des Moines office operates near a high-traffic
intersection, across from a major shopping mall. The Ingersoll office is located
near the heart of Des Moines, on a major thoroughfare, in a densely populated
area. The Highland Park facility is located in a historical district
approximately five minutes north of downtown Des Moines. The Des Moines metro
area is one of the top three insurance centers in the world, with sixty-seven
insurance company headquarters and over one hundred regional insurance offices.
Major employers include Principle Life Insurance Company, Des Moines Community
Schools, Central Iowa Hospital Corporation, Mercy Hospital Medical Center,
Hy-Vee Food Stores, Inc., Wells Fargo Home Mortgage Inc., Pioneer Hi Bred
International Inc., Bridgestone/Firestone, Communications Data Services Inc.,
and Meredith Corporation. Universities and colleges in the area include Des
Moines Area Community College, Drake University, Simpson College, Des Moines
University - Osteopathic Medical Center, Grand View College, AIB College of
Business, and Upper Iowa University. Unemployment rate in the Des Moines metro
area was 3.2% as of October 2003.
Sioux Falls is located at the crossroads of Interstates 29 and 90 in
southeast South Dakota, 270 miles southwest of Minneapolis. The Sioux Falls
market area encompasses Minnehaha and Lincoln counties. Sioux Falls ranks third
in a national list of top cities to start a company according to a report by
Cognetics, Inc. (Kiplinger Report, April 2001). Sioux Falls received an "A+" on
Zero Population Growth's 2001 Kid-Friendly Cities Report Card, excelling in
health, public safety, education, economics, environment, and community life;
ranking third out of 140 cities. The city was called a "Diamond in the Rough" as
a great smaller market for businesses to make a move. The magazine cited the
community's growth rates as a hugh opportunity and recognized the state's
friendly tax laws. (Sales & Marketing Management April 2002.) The bank is
located at a high-traffic intersection of Minnesota and 33rd in the heart of
Sioux Falls. The second location, expected to open in 2004, is located at the
high-traffic intersection of 12th and Elmwood. Major employers in the area
include Sioux Valley Hospital, Avera McKennan Hospital, John Morrell & Company,
Gateway, Inc., and Hy-Vee Food Stores. Sioux Falls is home to Augustana College
with 2003 fall enrollment of 1,848 and The University of Sioux Falls with 2003
fall enrollment of 1,485. Unemployment rate in Sioux Falls was 2.6% as of
September 2003.
Security's main office operates in Stuart, which is located in
west-central Iowa on the border of Adair and Guthrie counties, approximately 40
miles west of Des Moines. Security's market area is highly dependent on farming
and agriculture. Local businesses include Agri-Drain Corporation, Cardinal
Glass, Rose Acre Farms, Wausau Supply and Schafer Systems, Inc. In addition, a
large number of area residents commute to the Des Moines metro area for work. In
recent years, efforts of the West Central I-80 Development Corporation have
resulted in significant development of new service-related businesses in the
area, associated with the westward expansion of Des Moines and direct interstate
highway access. Seven industrial parks exist in these two counties with rail
access recently added to the Stuart area. This development provides economic
diversity to Security's market area.
Several of the Company's market areas are dependant on agriculture-related
businesses. Iowa land values are currently near the all-time high of 1981.
Agriculture-related businesses in recent years have performed well due to a
relatively stable agricultural environment in the Company's market area.
Generally low commodity prices have challenged area farmers over the past few
years; however, commodity prices have improved over the past year to help
stabilize the agricultural economy. Although there has been minimal effect
observed to date, an extended period of low commodity prices could result in a
reduced demand for goods and services provided by agriculture-related
businesses, which could also affect other businesses in the Company's market
area.
4
Lending Activities
General. Historically, the Company has originated fixed-rate, one- to
four-family mortgage loans. In the early 1980's, the Company began to focus on
the origination of adjustable-rate mortgage ("ARM") loans and short-term loans
for retention in its portfolio in order to increase the percentage of loans in
its portfolio with more frequent repricing or shorter maturities, and in some
cases higher yields, than fixed-rate residential mortgage loans. The Company,
however, has continued to originate fixed-rate residential mortgage loans in
response to consumer demand, although most such loans are sold in the secondary
market. See "Management's Discussion and Analysis -- Asset/Liability Management"
in the Annual Report.
While the Company historically has focused its lending activities on the
origination of loans secured by first mortgages on owner-occupied one- to
four-family residences, it also originates and purchases commercial and
multi-family real estate loans and originates consumer, commercial business,
residential and commercial construction and agriculturally related loans. The
Company originates most of its loans in its primary market area. More recently,
the Company has increased its emphasis, both in absolute dollars and as a
percentage of its gross loan portfolio, on all types of commercial lending. At
September 30, 2003, the Company's net loan portfolio totaled $349.7 million, or
45.3% of the Company's total assets.
Loan applications are initially considered and approved at various levels
of authority, depending on the type, amount and loan-to-value ratio of the loan.
The Company has loan committees for each of the Banks. Loans in excess of
certain amounts require the approval of at least two committee members who must
also be executive officers, by the Bank's Board loan committee or by the Bank's
Board of Directors, which has responsibility for the overall supervision of the
loan portfolio. The Company reserves the right to discontinue, adjust or create
new lending programs to respond to its needs and to competitive factors.
At September 30, 2003, the Company's largest lending relationship to a
single borrower or group of related borrowers totaled $9.8 million. This lending
relationship has total borrowings outstanding with the Company of $23.8 million,
with $14.0 million sold to other participants. The Company had twenty-two other
lending relationships in excess of $3.0 million as of September 30, 2003 with
the average outstanding balance of such loans totaling approximately $4.4
million. At September 30, 2003, each of these loans was performing in accordance
with its repayment terms.
5
Loan Portfolio Composition. The following table provides information about
the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
September 30,
------------------------------------------------------------------------------------
2003 2002 2001
------------------------ ------------------------ ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
Real Estate Loans
One- to four-family ................... $ 52,193 14.4% $ 72,678 20.5% $ 95,612 27.9%
Commercial and multi-family ........... 171,791 47.2 151,806 42.9 123,636 36.0
Agricultural .......................... 11,639 3.2 12,067 3.4 11,729 3.4
Construction or development ........... 19,435 5.3 25,745 7.3 21,884 6.4
-------- -------- -------- -------- -------- --------
Total real estate loans ............... 255,058 70.1 262,296 74.1 252,861 73.7
-------- -------- -------- -------- -------- --------
Other Loans:
Consumer Loans:
Home equity ........................ 18,126 5.0 14,669 4.2 17,458 5.1
Automobile ......................... 3,271 0.9 3,287 0.9 4,160 1.2
Other(1) ........................... 5,237 1.4 5,637 1.6 6,551 1.9
-------- -------- -------- -------- -------- --------
Total consumer loans ............. 26,634 7.3 23,593 6.7 28,169 8.2
Agricultural operating ................ 22,599 6.2 25,308 7.1 25,253 7.4
Commercial business ................... 59,468 16.4 42,844 12.1 36,773 10.7
-------- -------- -------- -------- -------- --------
Total other loans ................ 108,701 29.9 91,745 25.9 90,195 26.3
-------- -------- -------- -------- -------- --------
Total loans ...................... 363,759 100.0% 354,041 100.0% 343,056 100.0%
======== ======== ========
Less:
Loans in process ...................... 8,895 7,155 5,859
Deferred fees and discounts ........... 210 256 266
Allowance for losses .................. 4,962 4,693 3,869
-------- -------- --------
Total loans receivable, net ........... $349,692 $341,937 $333,062
======== ======== ========
September 30,
--------------------------------------------------------
2000 1999
------------------------ ------------------------
Amount Percent Amount Percent
-------- -------- -------- --------
Real Estate Loans
One- to four-family ................... $105,702 31.6% $110,317 34.8%
Commercial and multi-family ........... 103,595 31.0 85,793 27.1
Agricultural .......................... 10,895 3.3 9,874 3.1
Construction or development ........... 31,301 9.4 28,379 9.0
-------- -------- -------- --------
Total real estate loans ............... 251,493 75.3 234,363 74.0
-------- -------- -------- --------
Other Loans:
Consumer Loans:
Home equity ........................ 18,144 5.4 14,834 4.7
Automobile ......................... 2,596 .8 3,861 1.3
Other(1) ........................... 5,743 1.7 4,731 1.4
-------- -------- -------- --------
Total consumer loans ............. 26,483 7.9 23,426 7.4
Agricultural operating ................ 26,810 8.0 29,284 9.2
Commercial business ................... 29,332 8.8 29,942 9.4
-------- -------- -------- --------
Total other loans ................ 82,625 24.7 82,652 26.0
-------- -------- -------- --------
Total loans ...................... 334,118 100.0% 317,015 100.0%
======== ========
Less:
Loans in process ...................... 5,424 10,494
Deferred fees and discounts ........... 401 350
Allowance for losses .................. 3,590 3,093
-------- --------
Total loans receivable, net ........... $324,703 $303,078
======== ========
- ----------
(1) Consist generally of various types of secured and unsecured consumer
loans.
6
The following table shows the composition of the Company's loan portfolio by
fixed and adjustable rate at the dates indicated.
September 30,
-------------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Fixed Rate Loans
Real estate:
One- to four-family ............................... $ 36,655 10.1% $ 45,387 12.8% $ 55,521 16.2%
Commercial and multi-family ....................... 95,976 26.4 72,658 20.5 40,778 11.9
Agricultural ...................................... 5,311 1.5 5,498 1.6 5,605 1.6
Construction or development ....................... 11,528 3.1 2,788 0.8 5,545 1.6
-------- -------- -------- -------- -------- --------
Total fixed-rate real estate loans ............. 149,470 41.1 126,331 35.7 107,449 31.3
Consumer .......................................... 17,889 4.9 20,282 5.7 25,834 7.5
Agricultural operating ............................ 5,238 1.4 9,339 2.6 7,402 2.2
Commercial business ............................... 27,967 7.7 14,455 4.1 14,986 4.4
-------- -------- -------- -------- -------- --------
Total fixed-rate loans ......................... 200,564 55.1 170,407 48.1 155,671 45.4
-------- -------- -------- -------- -------- --------
Adjustable Rate Loans:
Real estate:
One- to four-family ............................... 15,538 4.3 27,291 7.7 40,091 11.7
Commercial and multi-family ....................... 75,815 20.8 79,148 22.4 82,858 20.5
Agricultural ...................................... 6,328 1.7 6,569 1.9 6,124 1.8
Construction or development ....................... 7,907 2.2 22,957 6.5 16,339 4.8
-------- -------- -------- -------- -------- --------
Total adjustable-rate real estate loans ........ 105,588 29.0 135,965 38.5 145,412 42.4
Consumer .......................................... 8,745 2.4 3,311 0.9 2,335 .7
Agricultural operating ............................ 17,361 4.8 15,969 4.5 17,851 5.2
Commercial business ............................... 31,501 8.7 28,389 8.0 21,787 6.4
-------- -------- -------- -------- -------- --------
Total adjustable rate loans .................... 163,195 44.9 183,634 51.9 187,385 54.6
-------- -------- -------- -------- -------- --------
Total loans ..................................... 363,759 100.0% 354,041 100.0% 343,056 100.0%
======== ======== ========
Less:
Loans in process .................................. 8,895 7,155 5,859
Deferred fees and discounts ....................... 210 256 266
Allowance for losses .............................. 4,962 4,693 3,869
-------- -------- --------
Total loans receivable, net ..................... $349,692 $341,937 $333,062
======== ======== ========
September 30,
-----------------------------------------------
2000 1999
-------------------- --------------------
Amount Percent Amount Percent
-------- -------- -------- --------
(Dollars in Thousands)
Fixed Rate Loans
Real estate:
One- to four-family ............................... $ 50,813 15.2% $ 52,943 16.7%
Commercial and multi-family ....................... 35,277 10.6 34,326 10.8
Agricultural ...................................... 3,147 .9 5,080 1.6
Construction or development ....................... 4,001 1.2 2,322 .8
-------- -------- -------- --------
Total fixed-rate real estate loans ............. 93,238 27.9 94,671 29.9
Consumer .......................................... 25,066 7.5 21,803 6.9
Agricultural operating ............................ 10,396 3.1 14,896 4.7
Commercial business ............................... 14,215 4.3 23,206 7.3
-------- -------- -------- --------
Total fixed-rate loans ......................... 142,915 42.8 154,576 48.8
-------- -------- -------- --------
Adjustable Rate Loans:
Real estate:
One- to four-family ............................... 54,889 16.4 57,374 18.1
Commercial and multi-family ....................... 68,318 20.5 51,467 16.2
Agricultural ...................................... 7,748 2.3 4,794 1.6
Construction or development ....................... 27,300 8.2 26,057 8.2
-------- -------- -------- --------
Total adjustable-rate real estate loans ........ 158,255 47.4 139,692 44.1
Consumer .......................................... 1,417 .4 1,623 .5
Agricultural operating ............................ 16,414 4.9 14,388 4.5
Commercial business ............................... 15,117 4.5 6,736 2.1
-------- -------- -------- --------
Total adjustable rate loans .................... 191,203 57.2 162,439 51.2
-------- -------- -------- --------
Total loans ..................................... 334,118 100.0% 317,015 100.0%
======== ========
Less:
Loans in process .................................. 5,424 10,494
Deferred fees and discounts ....................... 401 350
Allowance for losses .............................. 3,590 3,093
-------- --------
Total loans receivable, net ..................... $324,703 $303,078
======== ========
7
The following table illustrates the interest rate sensitivity of the
Company's loan portfolio at September 30, 2003. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract reprices. The table does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Real Estate
-----------------------------------------
Agricultural
Mortgage(1) Construction Consumer Operating
------------------ ------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Due During Years
Ending September 30
2004(2) $ 91,891 5.93% $ 12,735 6.46% $ 13,021 5.78% $ 17,989 6.42%
2005-2008 103,798 6.28 6,116 6.38 10,094 7.33 3,502 6.18
2009 and following 39,934 6.43 584 4.50 3,519 7.56 1,108 6.48
Commercial
Business Total
------------------- ------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(Dollars in Thousands)
Due During Years
Ending September 30
2004(2) $ 35,092 5.45% $170,728 5.91%
2005-2008 22,960 5.51 146,470 6.23
2009 and following 1,416 6.04 46,561 6.48
- ----------
(1) Includes one- to four-family, multi-family, commercial and agricultural
real estate loans.
(2) Includes demand loans, loans having no stated maturity and overdraft
loans.
8
The total amount of loans due after September 30, 2004 which have
predetermined interest rates is $153.6 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $100.9
million.
One- to Four-Family Residential Mortgage Lending. One- to four-family
residential mortgage loan originations are generated by the Company's marketing
efforts, its present customers, walk-in customers and referrals from real estate
agents and builders. At September 30, 2003, the Company's one- to four-family
residential mortgage loan portfolio totaled $52.2 million, or 14.4% of the
Company's total gross loan portfolio. Approximately 11.0% of the Company's one-
to four-family mortgage loans or 1.6% of the Company's gross loans have been
purchased, generally from other financial institutions. The majority of these
are ARM loans. See "--Originations, Purchases, Sales and Servicing of Loans and
Mortgage-Backed Securities." At September 30, 2003, the average outstanding
principal balance of a one- to four-family residential mortgage loan was
$54,000.
The Company offers fixed-rate and ARM loans. During the year ended
September 30, 2003, the Company originated $1.7 million of adjustable-rate loans
and $76.2 million of fixed-rate loans secured by one- to four-family residential
real estate, of which approximately $31.6 million was held in portfolio. The
Company's one- to four-family residential mortgage originations are secured
primarily by properties located in its primary market area and surrounding
areas.
The Company originates one- to four-family residential mortgage loans with
terms up to a maximum of 30-years and with loan-to-value ratios up to 97% of the
lesser of the appraised value of the security property or the contract price.
The Company generally requires that private mortgage insurance be obtained in an
amount sufficient to reduce the Company's exposure to at or below the 80%
loan-to-value level or the loans are sold. Residential loans generally do not
include prepayment penalties.
The Company currently offers one, three, five and seven year ARM loans.
These loans have a fixed-rate for the stated period and, thereafter, such loans
adjust annually. These loans generally provide for an annual cap of up to a 200
basis points and a lifetime cap of 600 basis points over the initial rate. As a
consequence of using an initial fixed-rate and caps, the interest rates on these
loans may not be as rate sensitive as is the Company's cost of funds. The
Company's ARMs do not permit negative amortization of principal and are not
convertible into a fixed rate loan. The Company's delinquency experience on its
ARM loans has generally been similar to its experience on fixed rate residential
loans.
Due to consumer demand, the Company also offers fixed-rate mortgage loans
with terms up to 30 years, most of which conform to secondary market standards,
i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards. Interest rates charged
on these fixed-rate loans are competitively priced according to market
conditions. The Company currently sells most, but not all, of its fixed-rate
loans with terms greater than 15 years. Historically, the Company had held in
portfolio a higher percentage of its fixed rate mortgage loans.
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Most properties securing real estate
loans made by the Company are appraised by independent fee appraisers approved
by the Board of Directors. The Company generally requires borrowers to obtain an
attorney's title opinion or title insurance, and fire and property insurance
(including flood insurance, if necessary) in an amount not less than the amount
of the loan. Real estate loans originated by the Company generally contain a
"due on sale" clause allowing the Company to declare the unpaid principal
balance due and payable upon the sale of the security property.
9
Commercial and Multi-Family Real Estate Lending. The Company is also
engaged in commercial and multi-family real estate lending in its primary market
area and surrounding areas and has purchased whole loan and participation
interests in loans from other financial institutions. At September 30, 2003, the
Company's commercial and multi-family real estate loan portfolio totaled $171.8
million, or 47.2% of the Company's total gross loan portfolio. The purchased
loans and loan participation interests are generally secured by properties
located in the Midwest and Northwest. See " - Originations, Purchases, Sales and
Servicing of Loans and Mortgage-Backed Securities." The Company, in order to
supplement its loan portfolio and consistent with management's objectives to
expand the Company's commercial and multi-family loan portfolio, purchased $26.2
million, $24.5 million, and $24.0 million of such loans during fiscal 2003, 2002
and 2001, respectively. At September 30, 2003, $417,000 or 0.2% of the Company's
commercial and multi-family real estate loans were non-performing. See " --
Non-Performing Assets, Other Loans of Concern and Classified Assets."
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, nursing homes, assisted
living/retirement facilities, office buildings and hotels. Commercial and
multi-family real estate loans generally have terms that do not exceed 20 years,
have loan-to-value ratios of up to 80% of the appraised value of the security
property, and are typically secured by personal guarantees of the borrowers. The
Company has a variety of rate adjustment features and other terms in its
commercial and multi-family real estate loan portfolio. Commercial and
multi-family real estate loans provide for a margin over a number of different
indices. In underwriting these loans, the Company currently analyzes the
financial condition of the borrower, the borrower's credit history, and the
reliability and predictability of the cash flow generated by the property
securing the loan. Appraisals on properties securing commercial real estate
loans originated by the Company are performed by independent appraisers.
At September 30, 2003, the Company's largest commercial and multi-family
real estate loan was a $7.4 million loan secured by residential housing
developments. The Company had eighteen other commercial and/or multi-family
loans in excess of $3.0 million at such date. All of these loans are currently
performing in accordance with their terms. At September 30, 2003, the average
outstanding principal balance of a commercial or multi-family real estate loan
held by the Company was $545,000.
Multi-family and commercial real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effect of general economic conditions
on income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
multi-family and commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed, or a
bankruptcy court modifies a lease term, or a major tenant is unable to fulfill
its lease obligations), the borrower's ability to repay the loan may be
impaired.
Construction Lending. The Company makes construction loans to individuals
for the construction of their residences as well as to builders for the
construction of one- to four-family residences and commercial and multi-family
real estate. At September 30, 2003, the Company's construction loan portfolio
totaled $19.4 million, or 5.3% of the Company's total gross loan portfolio.
Construction loans to individuals for their residences are structured to
be converted to permanent loans at the end of the construction phase, which
typically runs up to twelve months. These construction loans have rates and
terms which generally match the one- to four-family loan rates then offered by
the Company, except that during the construction phase the borrower pays
interest only. Generally, the maximum loan-to-value ratio of owner occupied
single family construction loans is 80% of appraised
10
value. Residential construction loans are generally underwritten pursuant to the
same guidelines used for originating permanent residential loans. At September
30, 2003, the Company had $1.4 million of construction loans to borrowers
intending to live in the properties upon completion of construction.
Generally, construction loans to builders of one- to four-family
residences require the payment of interest only for up to 12 months and have
terms of up to 12 months. These loans may provide for the payment of interest
and loan fees from loan proceeds and carry adjustable rates of interest. Loan
fees charged in connection with the origination of such loans are generally 1%.
Construction loans on commercial and multi-family real estate projects may
be secured by apartments, agricultural facilities, small office buildings,
medical facilities, assisted living facilities, hotels or other property, and
are generally structured to be converted to permanent loans at the end of the
construction phase, which generally runs up to 18 months. During the
construction phase the borrower pays interest only. These loans generally
provide for the payment of interest and loan fees from loan proceeds. At
September 30, 2003, the Company had approximately $18.0 million of loans for the
construction of commercial and multi-family real estate. This amount consisted
of three loans totaling $496,000 for the construction of non-owner occupied
single family residences, two loans totaling $2.9 million for the construction
of churches, and nine loans totaling $14.6 million for the construction of
commercial facilities. All of these loans were performing in accordance with
their terms at September 30, 2003.
Construction loans are obtained principally through continued business
from builders who have previously borrowed from the Company and from existing
customers who are building new facilities. The application process includes a
submission to the Company of accurate plans, specifications, costs of the
project to be constructed and projected revenues from the project. These items
are also used as a basis to determine the appraised value of the subject
property. Loans are based on the lesser of the current appraised value of the
property or the cost of construction (land plus building).
Because of the uncertainties inherent in estimating construction costs and
the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding multi-family and commercial
real estate loans and tend to be more sensitive to general economic conditions
than many other types of loans. Also, the funding of loan fees and interest
during the construction phase makes the monitoring of the progress of the
project particularly important, as customary early warning signals of project
difficulties may not be present.
Agricultural Lending. The Company originates loans to finance the purchase
of farmland, livestock, farm machinery and equipment, seed, fertilizer and for
other farm related products. At September 30, 2003, the Company had agricultural
real estate loans secured by farmland of $11.6 million or 3.2% of the Company's
gross loan portfolio. At the same date, $22.6 million, or 6.2% of the Company's
gross loan portfolio, consisted of secured loans related to agricultural
operations.
Agricultural operating loans are originated at either an adjustable or
fixed rate of interest for up to a one year term or, in the case of livestock,
upon sale. Most agricultural operating loans have terms of one year or less.
Such loans provide for payments of principal and interest at least annually, or
a lump sum payment upon maturity if the original term is less than one year.
Loans secured by agricultural machinery are generally originated as fixed-rate
loans with terms of up to seven years. At September 30, 2003, the average
outstanding principal balance of an agricultural operating loan held by the
Company was $47,000. At September 30, 2003, $291,000, or 1.3%, of the Company's
agricultural operating loans were non-performing.
11
Agricultural real estate loans are frequently originated with adjustable
rates of interest. Generally, such loans provide for a fixed rate of interest
for the first one to five years, which then balloon or adjust annually
thereafter. In addition, such loans generally amortize over a period of ten to
20 years. Adjustable-rate agricultural real estate loans provide for a margin
over the yields on the corresponding U.S. Treasury Security or prime rate.
Fixed-rate agricultural real estate loans generally have terms up to five years.
Agricultural real estate loans are generally limited to 75% of the value of the
property securing the loan. At September 30, 2003, none of the Company's
agricultural real estate portfolio was non-performing.
Agricultural lending affords the Company the opportunity to earn yields
higher than those obtainable on one- to four-family residential lending.
Nevertheless, agricultural lending involves a greater degree of risk than one-
to four-family residential mortgage loans because of the typically larger loan
amount. In addition, payments on loans are dependent on the successful operation
or management of the farm property securing the loan or for which an operating
loan is utilized. The success of the loan may also be affected by many factors
outside the control of the farm borrower.
Weather presents one of the greatest risks as hail, drought, floods, or
other conditions, can severely limit crop yields and thus impair loan repayments
and the value of the underlying collateral. This risk can be reduced by the
farmer with a variety of insurance coverages which can help to ensure loan
repayment. Government support programs and the Company generally require that
farmers procure crop insurance coverage.
Grain and livestock prices also present a risk as prices may decline prior
to sale resulting in a failure to cover production costs. These risks may be
reduced by the farmer with the use of futures contracts or options to mitigate
price risk. The Company frequently requires borrowers to use future contracts or
options to reduce price risk and help ensure loan repayment.
Another risk is the uncertainty of government programs and other
regulations. During periods of low commodity prices, the income from government
programs can be a significant source of cash to make loan payments and if these
programs are discontinued or significantly changed, cash flow problems or
defaults could result.
Finally, many farms are dependent on a limited number of key individuals
upon whose injury or death may result in an inability to successfully operate
the farm.
Consumer Lending. The Company offers a variety of secured consumer loans,
including automobile, boat, home equity, home improvement, federally guaranteed
student loans, and loans secured by savings deposits. In addition, the Company
offers other secured and unsecured consumer loans. The Company currently
originates substantially all of its consumer loans in its primary market area
and surrounding areas. The Company originates consumer loans on both a direct
and indirect basis. At September 30, 2003, the Company's consumer loan portfolio
totaled $26.6 million, or 7.3% of its total gross loan portfolio. Of the
consumer loan portfolio at September 30, 2003, most were short- and
intermediate-term, fixed-rate loans.
The largest component of the Company's consumer loan portfolio consists of
home equity loans and lines of credit. Substantially all of the Company's home
equity loans and lines of credit are secured by second mortgages on principal
residences. The Company will lend amounts which, together with all prior liens,
may be up to 100% of the appraised value of the property securing the loan. Home
equity loans and lines of credit have maximum terms of up to 15 years and five
years, respectively.
12
The Company primarily originates automobile loans on a direct basis, but
also originates indirect automobile loans on a very limited basis. Direct loans
are loans made when the Company extends credit directly to the borrower, as
opposed to indirect loans, which are made when the Company purchases loan
contracts, often at a discount, from automobile dealers which have extended
credit to their customers. The Company's automobile loans typically are
originated at fixed interest rates with terms up to 60 months for new and used
vehicles. Loans secured by automobiles are generally originated for up to 80% of
the N.A.D.A. book value of the automobile securing the loan.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles or recreational
equipment. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. At September 30, 2003, 17,000, or 0.1%, of
the Company's consumer loan portfolio was non-performing.
Commercial Business Lending. The Company also originates commercial
business loans. Most of the Company's commercial business loans have been
extended to finance local and regional businesses and include short-term loans
to finance machinery and equipment purchases, inventory and accounts receivable.
Commercial loans also involve the extension of revolving credit for a
combination of equipment acquisitions and working capital in expanding
companies. At September 30, 2003, $59.5 million, or 16.4% of the Company's total
gross loan portfolio was comprised of commercial business loans.
The maximum term for loans extended on machinery and equipment is based on
the projected useful life of such machinery and equipment. Generally, the
maximum term on non-mortgage lines of credit is one year. The loan-to-value
ratio on such loans and lines of credit generally may not exceed 80% of the
value of the collateral securing the loan. The Company's commercial business
lending policy includes credit file documentation and analysis of the borrower's
character, capacity to repay the loan, the adequacy of the borrower's capital
and collateral as well as an evaluation of conditions affecting the borrower.
Analysis of the borrower's past, present and future cash flows is also an
important aspect of the Company's current credit analysis. Nonetheless, such
loans are believed to carry higher credit risk than more traditional
investments.
The largest commercial business loan outstanding at September 30, 2003 was
a $7.9 million warehouse line of credit secured primarily by the assignment of
automobile contracts and new and used automobiles. The next largest commercial
business loan outstanding at September 30, 2003 was a $5.8 million loan secured
by operating assets used in the manufacture and sale of commercial signs. The
Company had ten other commercial business loans outstanding in excess of $1.0
million at September 30, 2003. All of these loans are currently performing in
accordance with their terms. At September 30, 2003, the average outstanding
principal balance of a commercial business loan held by the Company was
$142,000.
13
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company's commercial business loans are usually, but not
always, secured by business assets and personal guarantees. However, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. At
September 30, 2003, $126,000 or 0.2% of the Company's commercial business loan
portfolio was non-performing.
Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities
Loans are generally originated by the Company's staff of salaried loan
officers. Loan applications are taken and processed in the branches and the main
office of the Company. While the Company originates both adjustable-rate and
fixed-rate loans, its ability to originate loans is dependent upon the relative
customer demand for loans in its market. Demand is affected by the interest rate
and economic environment.
The Company, from time to time, sells whole loans and loan participations
generally without recourse. At September 30, 2003, there were no loans
outstanding sold with recourse. When loans are sold the Company typically
retains the responsibility for collecting and remitting loan payments, making
certain that real estate tax payments are made on behalf of borrowers, and
otherwise servicing the loans. The servicing fee is recognized as income over
the life of the loans. The Company services loans that it originated and sold
totaling $48.1 million at September 30, 2003, of which $26.0 million were sold
to Fannie Mae and $22.1 million were sold to others.
In periods of economic uncertainty, the Company's ability to originate
large dollar volumes of loans may be substantially reduced or restricted, with a
resultant decrease in related loan origination fees, other fee income and
operating earnings. In addition, the Company's ability to sell loans may
substantially decrease as potential buyers (principally government agencies)
reduce their purchasing activities.
14
The following table shows the loan origination (including undisbursed
portions of loans in process), purchase and repayment activities of the Company
for the periods indicated.
September 30,
------------------------------------------
2003 2002 2001
--------- --------- --------
(Dollars in Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family ...................... $ 1,748 $ 1,892 $ 1,957
- commercial and multi-family ..................... 24,452 23,781 5,691
- agricultural real estate ........................ 5,861 3,807 3,622
Non-real estate - consumer ............................. 10,424 3,161 7,288
- commercial business ............................. 68,088 83,479 31,016
- agricultural operating .......................... 25,133 20,036 23,748
--------- --------- --------
Total adjustable-rate .................................. 135,706 136,156 73,322
--------- --------- --------
Fixed rate:
Real estate - one- to four-family ...................... 76,215 49,493 37,116
- commercial and multi-family ..................... 52,282 50,848 6,504
Non-real estate - consumer ............................. 12,578 13,823 17,894
- commercial business ............................. 33,405 33,277 15,776
- agricultural operating .......................... 14,502 16,265 8,980
--------- --------- --------
Total fixed-rate ....................................... 188,982 163,706 86,270
--------- --------- --------
Total loans originated ................................. 324,688 299,862 159,592
--------- --------- --------
Purchases:
Real estate- one-to-four-family .............................. -- -- 4,735
- commercial and multi-family ..................... 26,163 24,542 23,960
Non-real estate - commercial business ........................ -- 2,563 4,514
--------- --------- --------
Total loans .......................................... 26,163 27,105 33,209
Total mortgage-backed securities ....................... 428,753 128,494 22,886
--------- --------- --------
Total purchased ...................................... 454,916 155,599 56,095
--------- --------- --------
Sales and Repayments:
Sales:
Real estate - one- to four family ......................... 46,418 21,486 14,085
Non-real estate - commercial business ..................... -- -- --
--------- --------- --------
Total loans .......................................... 46,418 21,486 14,085
Mortgaged-backed securities ............................... 88,210 -- --
--------- --------- --------
Total sales .......................................... 134,628 21,486 14,085
--------- --------- --------
Repayments:
Loan principal repayments ................................. 294,761 293,241 169,809
Mortgage-backed securities repayments ..................... 185,621 48,519 16,447
--------- --------- --------
Total principal repayments ................................ 480,382 341,760 186,256
--------- --------- --------
Total reductions ..................................... 615,010 363,246 200,341
--------- --------- --------
Increase (decrease) in other items, net ................... (7,067) (1,389) 4,816
--------- --------- --------
Net increase (decrease) .............................. $ 157,527 $ 90,826 $ 20,162
--------- --------- --------
At September 30, 2003, approximately $76.3 million, or 21.0%, of the
Company's gross loan portfolio consisted of purchased loans. The Company
believes that purchasing loans secured by real estate located outside of its
market area assists the Company in diversifying its portfolio and may lessen the
adverse affects on the Company's business or operations which could result in
the event of a downturn or weakening of the local economy in which the Company
conducts its operations. However,
15
additional risks are associated with purchasing loans secured by real estate
outside of the Company's market area, including the lack of knowledge of the
local real estate market and difficulty in monitoring and inspecting the
property securing the loans. The Company does not record any adjustments to the
allowance for loan losses as a result of these loan purchases.
The following table provides information regarding the Company's balance
of wholly purchased real estate loans and real estate loan participations for
each state in which the balance of such loans exceeded $1.0 million at September
30, 2003. Not included in the following table are purchased commercial business
loans totaling $631,000, approximately 45% of which are located in the Company's
market area.
One- to four- Commercial and Construction Total Purchased
Family Loans Multi-Family Loans Loans
------------ ------------ ----- -----
Number Number Number Number
of of of of
Location Balance Loans Balance Loans Balance Loans Balance Loans
-------- ------- ----- ------- ----- ------- ----- ------- -----
(Dollars in Thousands)
Arizona .................... $ 34 1 $ 6,516 2 $ -- -- $ 6,550 3
California ................. 1 1 2,667 2 -- -- 2,668 3
Colorado ................... -- -- 5,105 8 -- -- 5,105 8
Iowa ....................... 728 18 5,049 6 -- -- 5,777 24
Minnesota .................. -- -- 4,053 5 -- -- 4,053 5
Missouri ................... 478 9 3,712 3 -- -- 4,190 12
Montana .................... -- -- 1,491 1 -- -- 1,491 1
North Carolina ............. 2,689 13 -- -- -- -- 2,689 13
Oregon ..................... -- -- -- -- 2,496 1 2,496 1
South Dakota ............... 92 7 3,773 3 -- -- 3,865 10
Washington ................. 639 2 24,404 10 3,395 1 28,438 13
Wisconsin .................. -- -- 5,596 4 -- -- 5,596 4
Other states ............... 1,089 65 1,631 4 -- -- 2,720 69
------ --- ------- -- ------ ------ ------- ---
Total ................... $5,750 116 $63,997 48 $5,891 2 $75,638 166
====== === ======= == ====== ====== ======= ===
Percent of loan Portfolio 11.0% 37.3% 30.3% 20.8%
====== ======= ====== ======
Non-Performing Assets, Other Loans of Concern, and Classified Assets
When a borrower fails to make a required payment on real estate secured
loans and consumer loans within 16 days after the payment is due, the Company
generally initiates collection procedures by mailing a delinquency notice. The
customer is contacted again, by written notice or telephone, before the payment
is 30 days past due and again before 60 days past due. In most cases,
delinquencies are cured promptly; however, if a loan has been delinquent for
more than 90 days, satisfactory payment arrangements must be adhered to or the
Company will initiate foreclosure or repossession.
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status until the loan becomes current.
16
The following table sets forth the Company's loan delinquencies by type,
before allowance for loan losses, by amount and by percentage of type at
September 30, 2003.
Loans Delinquent For:
-------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
------------------------------- ------------------------------ ----------------------------
Percent Percent Percent
of of of
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family ....... 1 $ 69 .13% 1 $ 27 .05% 1 $ 156 .30%
Commercial and multi-
family .................... -- -- -- -- -- -- 1 417 .24
Consumer ..................... 10 111 .42 2 14 .05 2 17 .06
Agricultural operating ....... -- -- -- -- -- -- 1 291 1.29
Commercial business .......... 5 757 1.27 -- -- -- 3 126 .21
------ ------ ------ ------ ------ ------
Total .................. 16 $ 937 .26% 3 $ 41 .01% 8 $1,007 .28%
====== ====== ====== ====== ====== ======
Delinquencies 90 days and over constituted .28% of total loans and .13% of total
assets.
17
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans, with some exceptions, are
typically placed on non-accrual status when the loan becomes 90 days or more
delinquent or when the collection of principal and/or interest become doubtful.
For all years presented, the Company's troubled debt restructurings (which
involved forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates) are included in the
table and were performing as agreed.
September 30,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Non-accruing loans:
One- to four-family ............................. $ 156 $ 51 $ 168 $ 206 $ 613
Commercial and multi-family ..................... 417 417 464 -- 1,055
Agricultural real estate ........................ -- 41 -- 37 70
Consumer ........................................ 17 -- 33 -- 140
Agricultural operating .......................... 291 394 569 17 285
Commercial business ............................. 126 408 369 51 75
------ ------ ------ ------ ------
Total non-accruing loans ..................... 1,007 1,311 1,603 311 2,238
Accruing loans delinquent
90 days or more ................................. -- 819 -- -- --
------ ------ ------ ------ ------
Total non-performing loans ................... 1,007 2,130 1,603 311 2,238
------ ------ ------ ------ ------
Restructured Loans:
Consumer ........................................ -- -- 10 -- --
Agricultural operating .......................... 28 9 14 918 923
Commercial business ............................. 31 71 -- 43 53
------ ------ ------ ------ ------
Total restructured loans ..................... 59 80 24 961 976
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family ............................. -- -- -- -- 94
Commercial real estate .......................... 912 1,310 889 430 --
Consumer ........................................ 4 18 51 15 24
Commercial business ............................. 193 -- -- -- 25
------ ------ ------ ------ ------
Total ........................................ 1,109 1,328 940 445 143
Less: Allowance for losses ...................... -- -- -- -- --
------ ------ ------ ------ ------
Total foreclosed assets, net ................. 1,109 1,328 940 445 143
------ ------ ------ ------ ------
Total non-performing assets ..................... $2,175 $3,538 $2,567 $1,717 $3,357
====== ====== ====== ====== ======
Total as a percentage of total assets ........... .28% .58% .49% .34% .66%
====== ====== ====== ====== ======
For the year ended September 30, 2003, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $128,000, of which none was
included in interest income.
Non-accruing Loans. At September 30, 2003, the Company had $1.0 million in
non-accruing loans, which constituted .28% of the Company's gross loan
portfolio. At such date, there were no non-accruing loans or aggregate
non-accruing loans to one borrower in excess of $500,000 in net book value.
Accruing Loans Delinquent 90 Days or More. At September 30, 2003, the
Company has no accruing loans delinquent 90 days or more.
18
Other Loans of Concern. At September 30, 2003, there were loans totaling
$8.5 million not included in the table above where known information about the
possible credit problems of borrowers caused management to have concern as to
the ability of the borrower to comply with the present loan repayment terms.
This amount consisted of three one- to four-family residential mortgage loans
totaling $95,000, six commercial business loans totaling $724,000, six
agricultural operating loans totaling $1.7 million, eleven consumer loans
totaling $209,000 and three commercial real estate loans totaling $5.8 million.
Commercial real estate loans of concern at September 30, 2003 included a
$4.1 million participation loan secured by a hotel located in Federal Way,
Washington. A slow down in the travel industry after 9/11 contributed to
delinquency issues with this loan during fiscal 2002. The travel industry is in
process of recovering from this slow down and the loan was current at September
30, 2003.
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the
Office of Thrift Supervision (the "OTS") to be of lesser quality as
"substandard," "doubtful" or "loss." An asset is considered "substandard" if it
is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the savings association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such minimal value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. The loans held by Security are subject to similar
classification by its regulatory authorities.
When assets are classified as either substandard or doubtful, the Bank may
establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When assets are classified as "loss," the Bank is required
either to establish a specific allowance for losses equal to 100% of that
portion of the asset so classified or to charge-off such amount. The Banks'
determinations as to the classification of their assets and the amount of their
valuation allowances are subject to review by their regulatory authorities, who
may order the establishment of additional general or specific loss allowances.
On the basis of management's review of its assets, at September 30, 2003,
the Company had classified a total of $9.5 million of its assets as substandard,
$33,000 as doubtful and none as loss.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Current economic conditions in the agricultural sector of the Company's
market area are generally stable due to improved commodity prices. The
agricultural economy is accustomed to commodity price fluctuations and is
generally able to handle such fluctuations without significant problem. Although
the Company underwrites its agricultural loans based on the current level of
19
commodity prices, an extended period of low commodity prices or adverse growing
conditions could result in weakness in the agricultural loan portfolio and could
create a need for the Company to increase its allowance for loan losses through
increased charges to provision for loan losses.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value. If fair value at the date of foreclosure is lower
than the balance of the related loan, the difference will be charged-off to the
allowance for loan losses at the time of transfer. Valuations are periodically
updated by management and if the value declines, a specific provision for losses
on such property is established by a charge to operations.
Although management believes that it uses the best information available
to determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance.
20
The following table sets forth an analysis of the Company's allowance for
loan losses.
September 30
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(Dollars in Thousands)
Balance at beginning of period ..................... $ 4,693 $ 3,869 $ 3,590 $ 3,093 $ 2,909
Charge-offs:
One-to four family .............................. (4) (11) (37) (65) (84)
Agricultural operating .......................... -- (84) (308) -- (1,160)
Commercial and multi-family ..................... (31) -- -- (370) --
Consumer ........................................ (49) (139) (61) (104) (202)
Commercial business ............................. (29) (86) (76) (731) (420)
------- ------- ------- ------- -------
Total charge-offs ............................ (113) (320) (482) (1,270) (1,866)
------- ------- ------- ------- -------
Recoveries:
One-to-four family .............................. 2 2 2 -- --
Consumer ........................................ 13 39 29 55 39
Commercial business ............................. 10 4 3 33 8
Commercial and multi-family ..................... -- -- -- -- --
Agricultural operating .......................... 7 9 17 39 11
------- ------- ------- ------- -------
Total recoveries ............................. 32 54 51 127 58
------- ------- ------- ------- -------
Net charge-offs .............................. (81) (266) (431) (1,143) (1,808)
Additions charged to operations ................. 350 1,090 710 1,640 1,992
------- ------- ------- ------- -------
Balance at end of period ........................ $ 4,962 $ 4,693 $ 3,869 $ 3,590 $ 3,093
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period ..... .02% .08% .13% .37% .63%
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average non-performing assets ................... 2.50% 4.54% 16.04% 64.53% 43.12%
======= ======= ======= ======= =======
For more information on the provision for loan losses, see "Management's
Discussion and Analysis - Results of Operations" in the Annual Report.
21
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
September 30,
---------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
One- to four-family ....... $ 135 14.35% $ 170 20.53% $ 222 27.87% $ 250 31.63% $ 331 34.80%
Commercial and multi-family
real estate ............... 2,390 46.99 2,536 42.88 1,604 36.04 1,183 31.01 772 27.06
Agricultural real estate .. 116 3.20 131 3.41 128 3.42 124 3.26 114 3.11
Construction .............. 122 5.58 129 7.27 88 6.38 125 9.37 123 8.95
Consumer .................. 344 7.32 317 6.66 403 8.21 335 7.93 308 7.39
Agricultural operating .... 628 6.21 639 7.15 617 7.36 611 8.02 806 9.24
Commercial business ....... 1,027 16.35 663 12.10 618 10.72 592 8.78 449 9.45
Unallocated ............... 200 -- 108 -- 189 -- 370 -- 190 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .................. $4,962 100.00% $4,693 100.00% $3,869 100.00% $3,590 100.00% $3,093 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
22
Investment Activities
General. The investment policy of the Company generally is to invest funds
among various categories of investments and maturities based upon the Company's
need for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize yield, to provide collateral for borrowings, and to fulfill
the Company's asset/liability management policies. The Company's investment and
mortgage-backed securities portfolios are managed in accordance with a written
investment policy adopted by the Board of Directors, which is implemented by
members of the Bank's Investment Committee.
As of September 30, 2003, the Company's entire investment and
mortgage-backed securities portfolios were classified as available for sale. For
additional information regarding the Company's investment and mortgage-backed
securities portfolios, see Notes 1 and 3 of the Notes to Consolidated Financial
Statements in the Annual Report.
Investment Securities. It is the Company's general policy to purchase
investment securities which are U.S. Government securities and federal agency
obligations, state and local government obligations, commercial paper, corporate
debt securities and overnight federal funds.
The following table sets forth the carrying value of the Company's
investment security portfolio, excluding mortgage-backed securities, at the
dates indicated.
September 30,
---------------------------------------
2003 2002 2001
------- ------- -------
(Dollars in Thousands)
Investment Securities:
Trust preferred securities(1) ................................................... $23,323 $24,128 $24,680
Federal agency obligations ...................................................... -- -- 5,080
Municipal bonds ................................................................. 606 764 1,023
Equity investments .............................................................. 494 660 420
Freddie Mac preferred stock ..................................................... 226 191 249
Fannie Mae common stock ......................................................... 140 156 160
Other ........................................................................... 1,001 -- --
------- ------- -------
Subtotal ..................................................................... 25,790 25,899 31,612
FHLB stock ......................................................................... 10,930 6,843 6,399
------- ------- -------
Total investment securities and FHLB stock ................................... $36,720 $32,742 $38,011
======= ======= =======
Other Interest-Earning Assets:
Interest bearing deposits in other financial institutions and Federal
Funds sold ...................................................................... $ 7,667 $ 6,051 $ 7,750
======= ======= =======
- ----------
(1) Within the trust preferred securities presented above, there are
securities from individual issuers that exceed 10% of the Company's total
equity. The name and the aggregate market value of securities of each
individual issuer are as follows, as of September 30, 2003: Key Corp
Capital I, $4.4 million; Bank Boston Capital Trust IV, $4.3 million;
BankAmerica Capital III, $4.6 million.
23
The composition and maturities of the Company's investment securities
portfolio, excluding equity securities, FHLB stock and mortgage-backed
securities, are indicated in the following table.
September 30, 2003
----------------------------------------------------------------------------------
After 1 After 5
Year Years
1 Year or Through Through After Total Investment
Less 5 Years 10 Years 10 Years Securities
--------- -------- --------- --------- ------------------------
Carrying Carrying Carrying Carrying Amortized Market
Value Value Value Value Cost Value
--------- -------- --------- --------- --------- -------
(Dollars in Thousands)
Trust preferred securities ............... $ -- $ -- $ -- $23,323 $26,741 $23,323
Municipal bonds .......................... 319 287 -- -- 585 606
Other .................................... -- 1,001 -- -- 998 1,001
------- ------- ------- ------- ------- -------
Total investment securities .............. $ 319 $ 1,288 $ -- $23,323 $28,324 $24,930
======= ======= ======= ======= ======= =======
Weighted average yield(1) ................ 5.90% 5.57% 0.00% 2.66% 2.69% 2.85%
(1) Yields on tax-exempt obligations have not been computed on a
tax-equivalent basis.
Mortgage-Backed Securities. The Company's mortgage-backed and related
securities portfolio consists of securities issued under government-sponsored
agency programs, including those of Ginnie Mae, Fannie Mae and Freddie Mac. The
Company also holds Collateralized Mortgage Obligations ("CMOs"), as well as a
limited amount of privately issued mortgage pass-through certificates. The
Ginnie Mae, Fannie Mae and Freddie Mac certificates are modified pass-through
mortgage-backed securities that represent undivided interests in underlying
pools of fixed-rate, or certain types of adjustable-rate, predominantly
single-family and, to a lesser extent, multi-family residential mortgages issued
by these government-sponsored entities. Fannie Mae and Freddie Mac generally
provide the certificate holder a guarantee of timely payments of interest,
whether or not collected. Ginnie Mae's guarantee to the holder is timely
payments of principal and interest, backed by the full faith and credit of the
U.S. Government. Privately issued mortgage pass-through certificates generally
provide no guarantee as to timely payment of interest or principal, and reliance
is placed on the creditworthiness of the issuer, which the Company monitors on a
regular basis.
CMOs are special types of pass-through debt in which the stream of
principal and interest payments on the underlying mortgages or mortgage-backed
securities is used to create classes with different maturities and, in some
cases, amortization schedules, as well as a residual interest, with each such
class possessing different risk characteristics. At September 30, 2003, the
Company held CMOs totaling $3.8 million, all of which were secured by underlying
collateral issued under government-sponsored agency programs or residential real
estate mortgage loans. Premiums associated with the purchase of these CMOs are
not significant, therefore, the risk of significant yield adjustments because of
accelerated prepayments is limited. Yield adjustments are encountered as
interest rates rise or decline, which in turn slows or increases prepayment
rates and affect the average lives of the CMOs.
At September 30, 2003, $339.7 million or 99.8% of the Company's
mortgage-backed securities portfolio had fixed rates of interest and $614,000 or
0.2% of such portfolio had adjustable rates of interest.
24
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Company. At September 30, 2003, $288.8 million or 84.9%
of the Company's mortgage-backed securities were pledged to secure various
obligations of the Company.
While mortgage-backed securities carry a reduced credit risk as compared
to whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed, and value, of such
securities. The prepayment risk associated with mortgage-backed securities is
monitored periodically, and prepayment rate assumptions adjusted as appropriate
to update the Company's mortgage-backed securities accounting and
asset/liability reports. Classification of the Company's mortgage-backed
securities portfolio as available for sale is designed to minimize that risk.
The following table sets forth the carrying value of the Company's
mortgage-backed securities at the dates indicated.
September 30,
------------------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Thousands)
Ginnie Mae ............................................................. $ 12,548 $ 23,484 $ 39,490
CMO .................................................................... 3,824 43,259 68,845
Freddie Mac ............................................................ 183,899 33,320 3,180
Fannie Mae ............................................................. 139,848 92,075 1,952
Privately Issued Mortgage Pass-Through Certificates .................... 166 210 295
-------- -------- --------
Total ............................................................ $340,285 $192,348 $113,762
======== ======== ========
The following table sets forth the contractual maturities of the Company's
mortgage-backed securities at September 30, 2003. Not considered in the
preparation of the table below is the effect of prepayments, periodic principal
repayments and the adjustable-rate nature of these instruments.
Due in
----------------------------------------------------------- -------------
After 1 After 5 September 30,
Year Years 2003
1 Year or Through Through After Balance
Less 5 Years 10 Years 10 Years Outstanding
--------- ------- -------- -------- -------------
(Dollars in Thousands)
Ginnie Mae ................................... $ -- $ -- $ 10 $12,538 $ 12,548
CMO .......................................... -- -- 3,371 453 3,824
Freddie Mac .................................. 184 117 183,460 138 183,899
Fannie Mae ................................... -- 10 130,586 9,252 139,848
Privately Issued Mortgage .................... -- -- -- 166 166
Pass-Through Certificates(1) ..............
---- ---- -------- ------- --------
Total ................................ $184 $127 $317,427 $22,547 $340,285
==== ==== ======== ======= ========
Weighted average yield ....................... 6.62% 8.83% 2.75% 4.72% 2.87%
- ----------
(1) This security is rated Aaa by a nationally recognized rating agency.
25
At September 30, 2003, the contractual maturity of 6.6% of all of the
Company's mortgage-backed securities was in excess of ten years. The actual
maturity of a mortgage-backed security is typically less than its stated
maturity due to scheduled principal payments and prepayments of the underlying
mortgages. Prepayments that are different than anticipated will affect the yield
to maturity. The yield is based upon the interest income and the amortization of
any premium or discount related to the mortgage-backed security. In accordance
with generally accepted accounting principles, premiums and discounts are
amortized over the estimated lives of the loans, which decrease and increase
interest income, respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect actual prepayments. Although prepayments of underlying
mortgages depend on many factors, including the type of mortgages, the coupon
rate, the age of mortgages, the geographical location of the underlying real
estate collateralizing the mortgages and general levels of market interest
rates, the difference between the interest rates on the underlying mortgages and
the prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Company may be subject
to reinvestment risk because to the extent that the Company's mortgage-backed
securities amortize or prepay faster than anticipated, the Company may not be
able to reinvest the proceeds of such repayments and prepayments at a comparable
rate.
Sources of Funds
General. The Company's sources of funds are deposits, borrowings,
amortization and repayment of loan principal, interest earned on or maturation
of investment securities and short-term investments, and funds provided from
operations.
Borrowings, including Federal Home Loan Bank ("FHLB") of Des Moines and
Federal Reserve Bank of Chicago ("FRB") advances, reverse repurchase agreements
and retail repurchase agreements, may be used at times to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels, may be used on a longer-term basis to support expanded lending
activities, and may also be used to match the funding of a corresponding asset.
Deposits. The Company offers a variety of deposit accounts having a wide
range of interest rates and terms. The Company's deposits consist of passbook
savings accounts, money market savings accounts, NOW and regular checking
accounts, and certificate accounts currently ranging in terms from fourteen days
to 60 months. The Company only solicits deposits from its primary market area
and does not currently use brokers to obtain deposits. The Company relies
primarily on competitive pricing policies, advertising and customer service to
attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Company has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. Based
on its experience, the Company believes that its passbook savings, money market
savings accounts, NOW and regular checking accounts are relatively stable
sources of deposits. However, the ability of the Company to attract and maintain
26
certificates of deposit and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Company during the
periods indicated.
September 30,
------------------------------------------------------
2003 2002 2001
----------- --------- ---------
(Dollars in Thousands)
Opening balance ................................. $ 355,780 $ 338,782 $ 318,654
Deposits ........................................ 1,528,054 978,256 723,458
Withdrawals ..................................... (1,457,277) (972,856) (718,006)
Interest credited ............................... 8,996 11,598 14,676
----------- --------- ---------
Ending balance ............................... $ 435,553 $ 355,780 $ 338,782
=========== ========= =========
Net increase ................................. $ 79,773 $ 16,998 $ 20,128
=========== ========= =========
Percent increase ............................. 22.42% 5.02% 6.32%
=========== ========= =========
27
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company for the periods
indicated.
September 30,
-------------------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Transactions and Savings
Deposits:
Commercial Demand ............... $ 17,458 4.01% $ 11,935 3.35% $ 7,733 2.28%
Passbook Accounts ............... 21,323 4.89 15,064 4.23 12,221 3.61
NOW Accounts .................... 24,603 5.65 20,088 5.65 19,511 5.76
Money Market Accounts ........... 73,572 16.89 55,261 15.53 51,185 15.11
-------- -------- -------- -------- -------- --------
Total Non-Certificate ........... 136,956 31.44 102,348 28.76 90,650 26.76
-------- -------- -------- -------- -------- --------
Certificates:
Variable ........................ 2,210 0.51 2,169 0.61 1,011 0.30
0.00 - 1.99% .................... 110,833 25.45 10,252 2.88 -- --
2.00 - 3.99% .................... 130,236 29.90 134,446 37.79 19,598 5.78
4.00 - 5.99% .................... 38,633 8.87 61,541 17.30 106,841 31.54
6.00 - 7.99% .................... 16,685 3.83 45,024 12.66 120,682 35.62
-------- -------- -------- -------- -------- --------
Total Certificates .............. 298,597 68.56 253,432 71.24 248,132 73.24
-------- -------- -------- -------- -------- --------
Total Deposits .................. $435,553 100.00% $355,780 100.00% $338,782 100.00%
======== ======== ======== ======== ======== ========
28
The following table shows rate and maturity information for the Company's
certificates of deposit as of September 30, 2003.
0.00 - 2.00- 4.00- 6.00- Percent
Variable 1.99% 3.99% 5.99% 7.99% Total of Total
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
December 31, 2003 ............... $ 639 $ 45,175 $ 24,354 $ 2,282 $ 2,531 $ 74,981 25.1%
March 31, 2004 .................. 318 25,304 6,692 3,385 1,176 36,875 12.3
June 30, 2004 ................... 455 12,984 27,403 1,647 1,204 43,693 14.6
September 30, 2004 .............. 209 14,392 11,104 2,500 639 28,844 9.7
December 31, 2004 ............... 217 3,189 8,813 679 1,893 14,791 5.0
March 31, 2005 .................. 271 4,762 10,671 737 1,307 17,748 5.9
June 30, 2005 ................... 101 1,971 11,352 1,394 2,691 17,509 5.9
September 30, 2005 .............. -- 2,023 3,763 731 1,091 7,608 2.5
December 31, 2005 ............... -- 846 6,741 352 3,646 11,585 3.9
March 31, 2006 .................. -- 114 5,376 524 210 6,224 2.1
June 30, 2006 ................... -- 10 1,929 976 297 3,212 1.1
September 30, 2006 .............. -- 60 2,430 700 -- 3,190 1.1
Thereafter ................... -- 3 9,608 22,726 -- 32,337 10.8
-------- -------- -------- -------- -------- -------- --------
Total ........................ $ 2,210 $110,833 $130,236 $ 38,633 $ 16,685 $298,597 100.0%
======== ======== ======== ======== ======== ======== ========
Percent of total ............. 0.74% 37.11% 43.62% 12.94% 5.59% 100.00%
======== ======== ======== ======== ======== ========
The following table indicates the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of September 30,
2003.
Maturity
----------------------------------------------------------------------
After After
3 Months 3 to 6 6 to 12 After
or Less Months Months 12 Months Total
-------- ------- ------- --------- --------
(In Thousands)
Certificates of deposit less than $100,000 ......... $28,453 $16,201 $48,935 $ 95,579 $189,168
Certificates of deposit of $100,000 or more ........ 46,528 20,674 23,602 18,625 109,429
------- ------- ------- -------- --------
Total certificates of deposit ...................... $74,981 $36,875 $72,537 $114,204 $298,597(1)
======= ======= ======= ======== ========
- ----------
(1) Includes deposits from governmental and other public entities totaling
$71.5 million.
Borrowings. Although deposits are the Company's primary source of funds,
the Company's policy has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread, or when the
Company desires additional capacity to fund loan demand.
The Company's borrowings historically have consisted of advances from the
FHLB of Des Moines upon the security of a blanket collateral agreement of a
percentage of unencumbered loans and the pledge of specific investment
securities. Such advances can be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At
September 30, 2003, the Company had $223.8 million of advances from the FHLB of
Des Moines and the ability to borrow up
29
to an approximate additional $95.5 million. At September 30, 2003, advances
totaling $110.8 million had terms to maturity of one year or less. The remaining
$112.9 million had maturities ranging up to 16 years.
On July 16, 2001, the Company issued all of the 10,000 authorized shares
of Company Obligated Mandatorily Redeemable Preferred Securities of First
Midwest Financial Capital Trust I (preferred securities of subsidiary trust)
holding solely subordinated debt securities. Distributions are paid
semi-annually. Cumulative cash distributions are calculated at a variable rate
of LIBOR (as defined) plus 3.75%, not to exceed 12.5%. The Company may, at one
or more times, defer interest payments on the capital securities for up to 10
consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any
deferral period, all accumulated and unpaid distributions will be paid. The
capital securities will be redeemed on July 25, 2031; however, the Company has
the option to shorten the maturity date to a date not earlier than July 25,
2006. The redemption price is $1,000 per capital security plus any accrued and
unpaid distributions to the date of redemption plus, if redeemed prior to July
25, 2011, a redemption premium as defined in the Indenture Agreement. Holders of
the capital securities have no voting rights, are unsecured and rank junior in
priority of payment to all of the Company's indebtedness and senior to the
Company's common stock.
From time to time, the Company has offered retail repurchase agreements to
its customers. These agreements typically range from 14 days to five years in
term, and typically have been offered in minimum amounts of $100,000. The
proceeds of these transactions are used to meet cash flow needs of the Company.
At September 30, 2003, the Company had $202,000 of retail repurchase agreements
outstanding.
Historically, the Company has entered into reverse repurchase agreements
through nationally recognized broker-dealer firms. These agreements are
accounted for as borrowings by the Company and are secured by certain of the
Company's investment and mortgage-backed securities. The broker-dealer takes
possession of the securities during the period that the reverse repurchase
agreement is outstanding. The terms of the agreements have typically ranged from
7 days to a maximum of six months. At September 30, 2003, the Company had $57.5
million of reverse repurchase agreements outstanding.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, retail and reverse repurchase agreements and Preferred
Securities of Subsidiary Trust for the periods indicated.
September 30,
---------------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Thousands)
Maximum Balance:
FHLB advances........................................................ $226,165 $125,090 $129,010
Retail and reverse repurchase agreements............................. 110,488 70,176 20,239
Preferred securities of subsidiary trust............................. 10,000 10,000 10,000
Average Balance:
FHLB advances........................................................ $176,961 $118,415 $126,208
Retail and reverse repurchase agreements............................. 78,209 39,288 6,490
Preferred securities of subsidiary trust............................. 10,000 10,000 1,981
30
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated.
September 30,
--------------------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Thousands)
FHLB advances ....................................................... $223,784 $125,090 $126,352
Retail and reverse repurchase agreements ............................ 57,702 70,176 1,993
Preferred securities of subsidiary trust ............................ 10,000 10,000 10,000
-------- -------- --------
Total borrowings .............................................. $291,486 $205,266 $138,345
======== ======== ========
Weighted average interest rate of FHLB advances ..................... 3.40% 5.46% 5.76%
Weighted average interest rate of retail and reverse
repurchase agreements ............................................... 1.16% 1.90% 4.57%
Weighted average interest rate of preferred securities
of subsidiary trust ................................................. 4.90% 5.61% 7.57%
Subsidiary Activities
The only subsidiaries of the Company are First Federal, Security, First
Services Trust Company and First Midwest Financial Capital Trust I. First
Federal has one service subsidiary, First Services Financial Limited ("First
Services"). At September 30, 2003, the net book value of First Federal's
investment in First Services was approximately $84,000. Security does not have
any subsidiaries. First Federal organized First Services, its sole service
corporation, in 1983. First Services is located in Storm Lake, Iowa and offers
mutual funds, equities, bonds, insurance products and annuities. First Services
recognized a net loss of $35,000 during fiscal 2003.
Regulation
Recent Legislation - USA Patriot Act of 2001. In October 2001, the USA
Patriot Act of 2001 was enacted in response to the terrorist attacks in New
York, Pennsylvania and Washington, D.C. which occurred on September 11, 2001.
The Patriot Act is intended to strengthen U.S. law enforcement's and the
intelligence communities' abilities to work cohesively to combat terrorism on a
variety of fronts. The potential impact of the Patriot Act on financial
institutions of all kinds is significant and wide ranging. The Patriot Act
contains sweeping anti-money laundering and financial transparency laws and
imposes various regulations, including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into
law the Sarbanes-Oxley Act of 2002, or the SOA. The SOA is the most far-reaching
U.S. securities legislation enacted in many years, and includes many substantive
and disclosure-based requirements. The stated goals of the SOA are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. The SOA generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the Securities
and
31
Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange
Act"). Given the extensive and continuing SEC role in implementing rules
relating to many of the SOA's new requirements, the effects of these
requirements remain to be determined, although it is likely that the Company's
costs will increase somewhat, at least in the short term, as a result of SOA
implementation.
General. Bank holding companies, such as First Midwest, are subject to
comprehensive regulation by the FRB under the BHCA and the regulations of the
FRB. As a bank holding company, First Midwest is required to file reports with
the FRB and such additional information as the FRB may require, and is subject
to regular inspections by the FRB. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require a
holding company to contribute additional capital to an undercapitalized
subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution (such as First Federal), mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; real estate and personal property appraising; and, subject to certain
limitations, providing securities brokerage services for customers. The scope of
permissible activities may be expanded from time to time by the FRB. Such
activities may also be affected by federal legislation.
First Midwest currently has four wholly-owned subsidiaries, First Federal,
a federally-chartered thrift institution, Security, an Iowa-chartered commercial
bank, First Midwest Financial Capital Trust I, a statutory business trust
organized under the Delaware Business Trust Act and First Services Trust
Company, a South Dakota corporation that provides trust services. First Federal
is subject to extensive regulation, supervision and examination by the OTS, as
its chartering authority and primary federal regulator, and by the Federal
Deposit Insurance Corporation (the "FDIC"), which insures its deposits up to
applicable limits. First Federal is a member of the FHLB System and is subject
to certain limited regulation by the FRB. Such regulation and supervision
governs the activities in which an institution can engage and the manner in
which such activities are conducted, and is intended primarily for the
protection of the insurance fund and depositors. Security is subject to
extensive regulation, supervision and examination by the Iowa Superintendent of
Banking (the "ISB") and the FRB, which are its state and primary federal
regulators, respectively. It is also subject to regulation by the FDIC, which
insures its
32
deposits up to applicable limits. As with First Federal, such regulation and
supervision governs the activities in which Security can engage and the manner
in which such activities are conducted and is intended primarily for the
protection of the insurance fund and depositors.
First Midwest is regulated as a bank holding company by the FRB. Bank
holding companies are subject to comprehensive regulation and supervision by the
FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA") and the
regulations of the FRB. As a bank holding company, First Midwest must file
reports with the FRB and such additional information as the FRB may require, and
is subject to regular inspections by the FRB. First Midwest is subject to the
activity limitations imposed under the BHCA and in general may engage in only
those activities that the FRB has determined to be closely related to banking.
Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities which are intended
to strengthen the financial condition of the banking industry, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in the nature of such regulation and
oversight, whether by the OTS, the FDIC, the FRB or legislatively by Congress,
could have a material impact on First Midwest, First Federal or Security and
their respective operations.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Financial Institutions. The OTS has extensive
supervisory and regulatory authority over the operations of savings
associations. As part of this authority, First Federal is required to file
periodic reports with the OTS and is subject to periodic examination by the OTS
and the FDIC. The last regular OTS examination of First Federal was as of March
24, 2003. Security is subject to similar regulation and oversight by the ISB and
the FRB and was last examined as of April 1, 2003.
Each federal and state banking regulator has extensive enforcement
authority over its regulated institutions. This enforcement authority includes,
among other things, the power to compel higher reserves, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports. Except under certain
circumstances, public disclosure of final enforcement actions by the regulator
is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. Security is subject to such restrictions
under state law as administered by the ISB. Federal savings associations are
generally authorized to branch nationwide, whereas Iowa chartered banks, such as
Security, are limited to establishing branches in the counties contiguous to or
cornering upon the county where their home office is located.
Both First Federal's and Security's general permissible lending limit to
one borrower is equal to the greater of $500,000 or 15% of unimpaired capital
and surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). Security is subject to similar restrictions. At September 30,
2003, First Federal's and Security's lending limit under these restrictions was
$7.6 million and $972,000, respectively. First Federal and Security are in
compliance with their lending limits.
33
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the Savings Association Insurance Fund (the "SAIF") and Security is a
member of the Bank Insurance Fund (the "BIF"), each of which is administered by
the FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against any FDIC insured institution after giving its primary federal
regulator the opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. The current assessment rates range from zero
to .27% per $100 of assessable deposits. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
Institutions that are well-capitalized and have a high supervisory rating are
subject to the lowest assessment rate. At September 30, 2003, each of First
Federal and Security met the capital requirements of a "well capitalized"
institution and were not subject to any assessment. See Note 13 of Notes to
Consolidated Financial Statements in the Annual Report.
Regulatory Capital Requirements. Federally insured financial institutions,
such as First Federal and Security, are required to maintain a minimum level of
regulatory capital. These capital requirements mandate that an institution
maintain at least the following ratios: (1) a core (or Tier 1) capital to
adjusted total assets ratio of 4% (which can be reduced to 3% for highly rated
institutions); (2) a Tier 1 capital to risk-weighted assets ratio of 4% and (3)
a risk-based capital to risk-weighted assets ratio of 8%. Capital requirements
in excess of these standards may be imposed on individual institutions on a
case-by-case basis. See Note 13 of Notes to Consolidated Financial Statements in
the Annual Report.
An FDIC-insured institution's primary federal regulator is also authorized
and, under certain circumstances required, to take certain actions against an
"undercapitalized institution" (generally defined to be one with less than
either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8%
risk-based capital ratio). Any such institution must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The primary
federal regulator is also authorized, and with respect to institution's whose
capital is further depleted, required to impose additional restrictions that can
affect all aspects of the institution's operations, including the appointment of
a receiver for a "critically undercapitalized" institution (i.e., one with a
tangible capital ratio of 2% or less). As a condition to the approval of the
capital restoration plan, any company controlling an undercapitalized
institution must agree that it will enter into a limited capital maintenance
guarantee with respect to the institution's achievement of its capital
requirements.
Though not anticipated, the imposition of any of these measures on First
Federal or Security may have a substantial adverse effect on Company's
operations and profitability. First Midwest shareholders do not have preemptive
rights, and therefore, if First Midwest is directed by the OTS, the FRB or the
FDIC to issue additional shares of Common Stock, such issuance may result in the
dilution in shareholders percentage of ownership of First Midwest.
Limitations on Dividends and Other Capital Distributions. The OTS imposes
various restrictions on savings associations with respect to their ability to
make distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the
34
capital account. The OTS also prohibits a savings association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result of
such action, the regulatory capital of the association would be reduced below
the amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
Savings institutions such as First Federal may make a capital distribution
without the approval of the OTS, provided they notify the OTS 30-days before
they declare the capital distribution and they meet the following requirements:
(i) have a regulatory rating in one of the two top examination categories, (ii)
are not of supervisory concern, and will remain adequately- or well-capitalized,
as defined in the OTS prompt corrective action regulations, following the
proposed distribution, and (iii) the distribution does not exceed their net
income for the calendar year-to-date plus retained net income for the previous
two calendar years (less any dividends previously paid). If a savings
institution does not meet the above stated requirements, it must obtain the
prior approval of the OTS before declaring any proposed distributions.
Security may pay dividends, in cash or property, only out of its undivided
profits. In addition, FRB regulations prohibit the payment of dividends by a
state member bank if losses have at any time been sustained by such bank that
equal or exceed its undivided profits then on hand, unless (i) the prior
approval of the FRB has been obtained and (ii) at least two-thirds of the shares
of each class of stock outstanding have approved the dividend payment. FRB
regulations also prohibit the payment of any dividend by a state member bank
without the prior approval of the FRB if the total of all dividends declared by
the bank in any calendar year exceeds the total of its net profits for that year
combined with its retained net profits of the previous two calendar years (minus
any required transfers to a surplus or to a fund for the retirement of any
preferred stock).
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis or meet the requirements for a domestic
building and loan association under the Internal Revenue Code. Under either
test, the required assets primarily consist of residential housing related loans
and investments. At September 30, 2003, First Federal met the test and has
always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL within one year and
thereafter remains a QTL, or limits its new investments and activities to those
permissible for both a savings association and a national bank. In addition, the
association is subject to national bank limits for payment of dividends and
branching authority. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS and the FRB, in
connection with the examination of First Federal and Security, respectively, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by the institution. An
unsatisfactory rating may be used as the basis for the denial of such an
application. First Federal was
35
examined for CRA compliance in January 2002 and Security was examined in June
2003 and both received a rating of "satisfactory."
Interstate Banking and Branching. The FRB may approve an application of an
adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than such holding company's home state, without regard to
whether the transaction is prohibited by the laws of any state. The FRB may not
approve the acquisition of a bank that has not been in existence for the minimum
time period (not exceeding five years) specified by the statutory law of the
host state or if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. Iowa has adopted a five year
minimum existence requirement. States are authorized to limit the percentage of
total insured deposits in the state which may be held or controlled by a bank or
bank holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. Individual states may also waive
the 30% state-wide concentration limit.
The federal banking agencies are also generally authorized to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state. Interstate acquisitions of branches or the
establishment of a new branch is permitted only if the law of the state in which
the branch is located permits such acquisitions. Interstate mergers and branch
acquisitions are also subject to the nationwide and statewide insured deposit
concentration amounts described above. Iowa permits interstate branching only by
merger.
Holding Company Dividends. The FRB has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the FRB's
view that a bank holding company should pay cash dividends only to the extent
that its net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
Holding Company Capital Requirements. The FRB has established capital
requirements for bank holding companies that generally parallel the capital
requirements for commercial banks and federal thrift institutions such as First
Federal and Security. First Midwest is in compliance with these requirements.
Federal Home Loan Bank System. First Federal and Security are both members
of the FHLB of Des Moines, which is one of 12 regional FHLBs, that administers
the home financing credit function of savings associations. Each FHLB serves as
a reserve or central bank for its members within its assigned region. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established
36
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances must be used for
residential home financing.
As members of the FHLB System, First Federal and Security are required to
purchase and maintain stock in the FHLB of Des Moines. At September 30, 2003,
the Banks had in the aggregate $10.9 million in FHLB stock, which was in
compliance with this requirement. For the fiscal year ended September 30, 2003,
dividends paid by the FHLB of Des Moines to First Federal and Security totaled
$286,000. Over the past five calendar years such dividends have averaged 3.0%
and were 3.0% for the first three quarters of the calendar year 2003.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital. Recent legislative changes will require
the FHLB to change the characteristics and amount of FHLB stock held by its
members. It is also anticipated that these changes will restrict the ability of
FHLB members to redeem their shares of FHLB stock.
Federal and State Taxation
Federal Taxation. First Midwest and its subsidiaries file consolidated
federal income tax returns on a fiscal year basis using the accrual method of
accounting. In addition to the regular income tax, corporations, including
savings banks such as First Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings bank's bad debt reserves
and deducted for federal income tax purposes exceed the allowable amount of such
reserves computed under the experience method and to the extent of the bank's
supplemental reserves for losses on loans ("Excess"), such Excess may not,
without adverse tax consequences, be utilized for the payment of cash dividends
or other distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 2003, First Federal's Excess for tax purposes
totaled approximately $6.7 million.
First Midwest and its consolidated subsidiaries have not been audited by
the IRS within the past ten years. In the opinion of management, any examination
of still open returns (including returns of subsidiaries and predecessors of, or
entities merged into, First Midwest) would not result in a deficiency which
could have a material adverse effect on the financial condition of First Midwest
and its subsidiaries.
Iowa Taxation. First Federal and Security file Iowa franchise tax returns.
First Midwest and First Federal's subsidiary file a consolidated Iowa
corporation tax return on a fiscal year-end basis.
37
Iowa imposes a franchise tax on the taxable income of mutual and stock
savings banks and commercial banks. The tax rate is 5%, which may effectively be
increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax. The taxable income for Iowa franchise tax purposes is
apportioned to Iowa through the use of a one-factor formula consisting of gross
receipts only.
Taxable income under the Iowa corporate income tax is generally similar to
taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are deductible from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.
South Dakota Taxation. First Federal and First Services Trust Company file
a consolidated South Dakota franchise tax return due to their operations in
Sioux Falls and Brookings. The South Dakota franchise tax is imposed on
depository institutions and trust companies. First Midwest, Security and First
Federal's subsidiaries are therefore not subject to the South Dakota franchise
tax.
South Dakota imposes a franchise tax on the taxable income of depository
institutions and trust companies at the rate of 6%. Taxable income under the
franchise tax is generally similar to taxable income under the federal corporate
income tax, except that, under the South Dakota franchise tax, no deduction is
allowed for state income and franchise taxes, bad debt deductions are determined
on the basis of actual charge-offs, income from municipal obligations exempt
from federal taxes are included in the franchise taxable income, and there is a
deduction allowed for federal income taxes accrued for the fiscal year. The
taxable income for South Dakota franchise tax purposes is apportioned to South
Dakota through the use of a three-factor formula consisting of tangible real and
personal property, payroll and gross receipts.
Delaware Taxation. As a Delaware holding company, First Midwest is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. First Midwest is
also subject to an annual franchise tax imposed by the State of Delaware.
Competition
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from commercial banks, savings banks, credit unions,
insurance companies, and mortgage bankers making loans secured by real estate
located in the Company's market area. Commercial banks and credit unions provide
vigorous competition in consumer lending. The Company competes for real estate
and other loans principally on the basis of the quality of services it provides
to borrowers, interest rates and loan fees it charges, and the types of loans it
originates.
The Company attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings banks, credit unions and brokerage offices located in
the same communities. The Company competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
38
The Company serves Adair, Buena Vista, Calhoun, Dallas, Guthrie, Ida,
Pocahontas, Polk and Sac counties in Iowa and Brookings, Lincoln and Minnehaha
counties in South Dakota. There are thirty-six commercial banks, one savings
bank, other than First Federal, and one credit union which compete for deposits
and loans in First Federal's primary market area in northwest Iowa and eight
commercial banks, one savings bank, other than First Federal, and one credit
union which compete for deposits and loans in First Federal's market area in
Brookings, South Dakota. In addition, there are twelve commercial banks in
Security's primary market area in west central Iowa. First Federal competes for
deposits and loans with numerous financial institutions located throughout the
metropolitan market areas of Des Moines, Iowa and Sioux Falls, South Dakota.
Employees
At September 30, 2003, the Company and its subsidiaries had a total of 178
employees, including 20 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
Executive Officers of the Company Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company who
do not serve on the Company's Board of Directors. There are no arrangements or
understandings between such persons named and any persons pursuant to which such
officers were selected.
Donald J. Winchell - Mr. Winchell, age 51, serves as Senior Vice
President, Secretary, Treasurer and Chief Financial Officer of First Midwest and
First Federal, and is responsible for the formulation and implementation of
policies and objectives for First Federal's finance and accounting functions.
His duties include financial planning, interest rate risk management,
accounting, investments, financial policy development and compliance, budgeting
and asset/liability management. Mr. Winchell also serves as Secretary of
Security State Bank, Director and Secretary/Treasurer of First Services Trust
Company, and Treasurer of First Services Financial Limited and Brookings Service
Corporation. Mr. Winchell joined First Federal in 1989 as Vice President and
Chief Financial Officer, was appointed Treasurer in 1990, and Senior Vice
President in 1992. Prior to joining First Federal, Mr. Winchell served as Senior
Vice President and Chief Financial Officer of Midwest Federal Savings and Loan
Association of Nebraska City, Nebraska since 1981. Mr. Winchell received a
Bachelor of Science degree and a Bachelor of Business Administration degree from
Washburn University, Topeka, Kansas. Mr. Winchell is a certified public
accountant.
On December 5, 2003, Mr. Ronald J. Walters was hired to assume the
position of Chief Financial Officer in the place of Mr. Winchell, who is leaving
the company effective January 9, 2004 to pursue other interests. Mr. Walters,
age 54, joined First Midwest as Senior Vice President. Prior to joining the
Company, Mr. Walters served as Vice President, Treasurer and Chief Financial
Officer of Kankakee Bancorp, Inc. of Kankakee, Illinois, (now known as Centrue
Financial Corporation) having worked for the company since 1984. Mr. Walters
received a Bachelor of Science degree from the University of Illinois, Chicago,
Illinois. Mr. Walters is a certified public accountant.
Item 2. Properties
The Company conducts its business at its main office and branch office in
Storm Lake, Iowa, and five other locations in its primary market area in
Northwest Iowa. The Company also operates one office in Brookings, South Dakota,
through the Company's Brookings Federal Bank division of the Bank; four offices
in Des Moines, Iowa, through the Company's Iowa Savings Bank division of the
Bank; one office
39
in Sioux Falls, South Dakota, through the Company's Sioux Falls division of the
Bank; and three offices in West Central Iowa through the Company's Security
State Bank subsidiary.
The Company owns all of its offices, except for the branch offices located
at Storm Lake Plaza, Storm Lake, Iowa and West Des Moines, Iowa as to which the
land is leased. The total net book value of the Company's premises and equipment
(including land, building and leasehold improvements and furniture, fixtures and
equipment) at September 30, 2003 was $11.4 million. See Note 6 of Notes to
Consolidated Financial Statements in the Annual Report.
The Company believes that its current facilities are adequate to meet the
present and foreseeable needs of the Company and the Banks.
The Bank maintains an on-line data base with a service bureau, whose
primary business is providing such services to financial institutions. The net
book value of the data processing and computer equipment utilized by the Company
at September 30, 2003 was approximately $791,000.
Item 3. Legal Proceedings
The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing Company in the
proceedings, that the resolution of these proceedings should not have a material
effect on Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Page 48 of the attached 2003 Annual Report to Shareholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 14 of the attached 2003 Annual Report to Shareholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 15 through 23 of the attached 2003 Annual Report to Shareholders are
herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Pages 19 through 20 of the attached 2003 Annual Report to Shareholders are
herein incorporated by reference.
40
Item 8. Financial Statements and Supplementary Data
Pages 24 through 45 of the attached 2003 Annual Report to Shareholders are
herein incorporated by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9a. Controls and Procedures
Any control system, no matter how well designed and operated, can provide
only reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
Disclosure Controls and Procedures
The Corporation's management, with the participation of the Corporation's
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of its disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act)) as of the end of the period covered by this report. Based on
such evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Corporation's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Corporation in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Corporation's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fourth quarter of the fiscal year to which
this report relates that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held in January 2004 filed on December 17, 2003.
The Company has adopted a Code of Ethics that applies to its principal executive
officer and principal financial officers of the Company. A copy of the Code
Ethics, included as an exhibit to this Form 10-K and filed with the Securities
and Exchange Commission, may also be found on the Company's website at
www.fmficash.com.
Executive Officers
Information concerning the executive officers of the Company is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held in January 2004, filed on
December 17, 2003 and from the information set forth under the caption
"Executive Officers of the Company Who Are Not Directors" contained in Part I of
this Form 10-K.
41
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% shareholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended September 30, 2003, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with except that during
the fiscal year ended September 30, 2003, Mr. Gaskill and Mr. Thure each
inadvertently failed to file a timely Form 4 and Form 3, respectively. Both
forms were subsequently filed.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held in January 2004, filed on December 17, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning securities authorized for issuance under equity
compensation plans and information concerning security ownership of certain
beneficial owners and management is incorporated herein by reference from the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held in January 2004, filed on December 17, 2003, and Note 11 of Notes to
Consolidated Financial Statements.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held in January 2004, filed on
December 17, 2003.
Item 14. Principal Accountant Fees and Services
Audit Fees
1. Fees paid to McGladrey & Pullen, LLP and its associated entity, RSM
McGladrey, Inc., for each of the last two fiscal years are set forth below.
Fiscal Audit Audit-Related Tax All Other
Year Fees Fees Fees Fees
---- ---- ---- ---- ----
2003 $83,000 $7,000 $9,000 $ --
2002 $62,000 $6,000 $11,000 $6,000
Audit fees include fees for services performed to comply with generally accepted
auditing standards, including the recurring audit of the Company's consolidated
financial statements. This category also includes fees for audits provided in
connection with statutory filings or services that generally only the principal
auditor reasonably can provide to a client, such as procedures related to audit
of income tax
42
provisions and related reserves, consents and assistance with and review of
documents filed with the Securities and Exchange Commission.
Audit-related fees include fees associated with assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's financial statements. This category includes fees related to
assistance in financial due diligence related to mergers and acquisitions,
consultations regarding generally accepted accounting principles, reviews and
evaluations of the impact of new regulatory pronouncements, general assistance
with implementation of the new SEC and Sarbanes-Oxley Act of 2002 requirements
and audit services not required by statute or regulation. Audit-related fees
also include audits of employee benefit plans, as well as the review of
information systems and general internal controls unrelated to the audit of the
financial statements.
Tax fees primarily include fees associated with tax audits, tax compliance, tax
consulting, as well as tax planning. This category also includes services
related to tax disclosure and filing requirements.
The Audit Committee has not authorized any non-audit services by the independent
auditor. The Audit Committee must approve any such services prior to the
services being performed. The Audit Committee's considerations would include
whether such services are consistent with the SEC's rules on auditor
independence.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of documents filed as part of this report:
(1) Financial Statements:
The following financial statements are incorporated by
reference under Part II, Item 8 of this Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Balance Sheets as of September 30,
2003 and 2002.
3. Consolidated Statements of Income for the Years
Ended September 30, 2003, 2002 and 2001.
4. Consolidated Statements of Changes in
Shareholders' Equity for the Years Ended September
30, 2003, 2002 and 2001.
5. Consolidated Statements of Cash Flows for the
Years Ended September 30, 2003, 2002 and 2001.
6. Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
All financial statement schedules have been omitted as
the information is not required under the related instructions
or is inapplicable.
(3) Exhibits:
See Index of Exhibits.
43
(b) Reports on Form 8-K:
During the three month period ended September 30, 2003, the Registrant
filed and furnished, respectively, two current reports on Form 8-K, one dated
July 7, 2003, to report the issuance of a press release announcing the
authorization of a stock repurchase program, and another dated July 18, 2003, to
report the issuance of a press release announcing the Company's earnings for the
three months and nine months ended June 30, 2003.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MIDWEST FINANCIAL, INC.
Date: December 26, 2003 By: /s/ James S. Haahr
--------------------------------
James S. Haahr
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ James S. Haahr Date: December 26, 2003
-----------------------------------------
James S. Haahr, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ J. Tyler Haahr Date: December 26, 2003
-----------------------------------------
J. Tyler Haahr, Director, President and
Chief Operating Officer
By: /s/ E. Wayne Cooley Date: December 26, 2003
-----------------------------------------
E. Wayne Cooley, Director
By: /s/ E. Thurman Gaskill Date: December 26, 2003
-----------------------------------------
E. Thurman Gaskill, Director
By: /s/ Rodney G. Muilenburg Date: December 26, 2003
-----------------------------------------
Rodney G. Muilenburg, Director
By: /s/ Jeanne Partlow Date: December 26, 2003
-----------------------------------------
Jeanne Partlow, Director
By: /s/ G. Mark Mickelson Date: December 26, 2003
-----------------------------------------
G. Mark Mickelson, Director
By: /s/ John Thune Date: December 26, 2003
-----------------------------------------
John Thune, Director
By: /s/ Donald J. Winchell Date: December 26, 2003
-----------------------------------------
Donald J. Winchell, Senior Vice
President, Secretary, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
3(i) Registrant's Articles of Incorporation as currently in effect, filed on
June 17, 1993 as an exhibit to the Registrant's registration statement on
Form S-1 (Commission File No. 33-64654), are incorporated herein by
reference.
3(ii) Registrant's Bylaws, as amended and restated, filed as Exhibit 3(ii) to
Registrant's Report on Form 10-K for the fiscal year ended September 30,
1998 (Commission File No. 0-22140), is incorporated herein by reference.
4 Registrant's Specimen Stock Certificate, filed on June 17, 1993 as an
exhibit to the Registrant's registration statement on Form S-1 (Commission
File No. 33-64654), is incorporated herein by reference.
10.1 Registrant's 1995 Stock Option and Incentive Plan, filed as Exhibit 10.1
to Registrant's Report on Form 10-KSB for the fiscal year ended September
30, 1996 (Commission File No. 0-22140), is incorporated herein by
reference.
10.2 Registrant's 1993 Stock Option and Incentive Plan, filed on June 17, 1993
as an exhibit to the Registrant's registration statement on Form S-1
(Commission File No. 33-64654), is incorporated herein by reference.
10.3 Registrant's Recognition and Retention Plan, filed on June 17, 1993 as an
exhibit to the Registrant's registration statement on Form S-1 (Commission
File No. 33-64654), is incorporated herein by reference.
10.4 Employment agreement between First Federal Savings Bank of the Midwest and
J. Tyler Haahr, filed as an exhibit to Registrant's Report on Form 10-K
for the fiscal year ended September 30, 1997 (Commission File No.
0-22140), is incorporated herein by reference.
10.5 Registrant's Supplemental Employees' Investment Plan, filed as an exhibit
to Registrant's Report on Form 10-KSB for the fiscal year ended September
30, 1994 (Commission File No. 0-22140), is incorporated herein by
reference.
10.6 Employment agreements between First Federal Savings Bank of the Midwest
and James S. Haahr and Donald J. Winchell, filed on June 17, 1993 as an
exhibit to the Registrant's registration statement on Form S-1 (Commission
File No. 33-64654), is incorporated herein by reference.
10.7 Registrant's Executive Officer Compensation Program, filed as Exhibit 10.6
to Registrant's Report on Form 10-K for the fiscal year ended September
30, 1998 (Commission File No. 0-22140), is incorporated herein by
reference.
10.8 Registrant's Executive Officer Incentive Stock Option Plan for Mergers and
Acquisitions, filed as Exhibit 10.7 to Registrant's Report on Form 10-K
for the fiscal year ended September 30, 1998 (Commission File No.
0-22140), is incorporated herein by reference.
10.9 Registrant's 2002 Omnibus Incentive Plan.*
11 Statement re: computation of per share earnings (included under Note 2 of
Notes to Consolidated Financial Statements in the Annual Report to
Shareholders' attached hereto as Exhibit 13).
13 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of McGladrey & Pullen, LLP.
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99 Code of Ethics*
- ----------
* Filed Herewith