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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No Fee Required]
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No Fee Required]
For the transition period from _______ to _______
Commission file number 0-22140.
FIRST MIDWEST FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Name of small business Issuer 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)
Issuer'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 $.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for the most recent fiscal year ended were $30.7 million
As of December 19, 1997, the Registrant had issued and outstanding
2,691,889 shares of Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the average
of the closing bid and asked prices of such stock on the Nasdaq System as of
December 19, 1997, was $45.6 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
Stockholders for the fiscal year ended September 30, 1997. PART III of Form 10-K
- -- Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held during January 1998.
Forward-Looking Statements
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made by or with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers that such
forward-looking statements speak only as of the date made, and that various
factors, including regional and national economic conditions, changes in levels
of market interest rates, credit risks of lending activities, and competitive
and regulatory factors, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.
PART I
Item 1. Description of Business
General
First Midwest Financial, Inc. ("First Midwest," and with its
subsidiaries, the "Company") is a Delaware corporation, the principal assets of
which are First Federal Savings Bank of the Midwest ("First Federal" or the
"Bank") 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, the Company became a bank holding Company
upon its acquisition of Security, as discussed below. All references to the
Company prior to September 20, 1993, are to First Federal and its subsidiary on
a consolidated basis.
Since the Conversion, the Company has been an active acquiror of
financial institutions. On March 28, 1994, First Midwest acquired Brookings
Federal Bank in Brookings, South Dakota ("Brookings"). On December 29, 1995,
First Midwest acquired Iowa Savings Bank, FSB in Des Moines, Iowa ("Iowa
Savings"). Brookings and Iowa Savings were both merged with and now operate as
divisions of First Federal. Lastly, on September 30, 1996, First Midwest
completed the acquisition of Central West Bancorporation ("CWB") for an
aggregate merger consideration of approximately $5.25 million. CWB was the
holding company for Security in Stuart, Iowa, which upon the merger of CWB into
First Midwest resulted in Security becoming a stand-alone banking subsidiary of
First Midwest. Unless the context otherwise requires, references herein to the
Company include First Midwest, Security and First Federal and its subsidiaries
on a consolidated basis. See "Management's Discussion and Analysis --
Acquisitions Completed" in the Annual Report to Shareholders attached hereto as
Exhibit 13 (the "Annual Report").
First Federal and Security (collectively, the "Banks") are the only
operating subsidiaries of First Midwest. The Banks are community-oriented
financial institutions offering a variety of financial services to meet the
needs of the communities they serve. The Company, through its subsidiary Banks,
provides a full range of financial services. The principal business of First
Federal historically has consisted of attracting retail deposits from the
general public and investing those funds primarily in one- to four-family
residential mortgage loans and, to a lesser extent, commercial and multi-family
real estate, agricultural operating and real estate, construction, consumer and
commercial business loans primarily in First Federal's market area. Recently,
First Federal's lending activities have expanded to include an increased
emphasis on originations and purchases of commercial and multi-family real
estate 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 and, to a lesser extent, one- to
four-family residential, commercial business and consumer loans. The Banks also
purchase mortgage-backed securities and invest in U.S. Government and agency
obligations and other permissible investments. At September 30, 1997, the
Company had total assets of $404.6 million, deposits of $246.1 million, and
shareholders' equity of $43.5 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, through its wholly-owned subsidiary, First Services
Financial Limited ("First Services"), offers mutual funds and, in some
locations, insurance products and annuities. In addition, Brookings Service
Corporation (a subsidiary of First Services) offers full service brokerage
services through PrimeVest Financial Services, Inc., a third party vendor.
First Midwest and the Banks are subject to comprehensive regulation.
See "Regulation" herein.
The executive offices of the Company are located at Fifth at Erie,
Storm Lake, Iowa 50588. Its telephone number at that address is (712) 732-4117.
Market Area
First Federal's main office is located at Fifth at Erie, Storm Lake,
Iowa. First Federal also operates one branch office also located in Storm Lake,
as well as seven additional branch offices located in the communities of Des
Moines (two offices), Lake View, Laurens, Manson, Odebolt, Sac City, Iowa and
two offices in Brookings, South Dakota. Security currently operates its business
through three full service offices in Casey, Menlo and Stuart, Iowa. The
Company's primary market area includes Adair, Buena Vista, Calhoun, Guthrie,
Ida, Pocahontas, Polk and Sac Counties in Iowa and Brookings County in South
Dakota.
Storm Lake is located in northwest Iowa approximately 150 miles
northwest of Des Moines and 200 miles south of Minneapolis in Buena Vista
County. Like much of the State of Iowa, Storm Lake and the Company's primary
market area are highly dependent upon farming and agricultural markets. Major
employers in the area include Buena Vista County Hospital, IBP, Inc. and Bil Mar
Foods of Iowa. Storm Lake is also home to Buena Vista University.
Brookings is located in east central South Dakota, approximately 50
miles north of Sioux Falls and 200 miles west of Minneapolis in Brookings
County. First Federal's market area in South Dakota encompasses approximately a
30 mile radius of Brookings. The area is generally rural, and agriculture is a
significant industry in the community. South Dakota State University is the
largest employer in Brookings. The University had 8,200 students enrolled for
the 1997 fall term and employs 524 full-time professors. The community also has
several manufacturing companies, including 3M, Larson Manufacturing, Daktronics,
Falcon Plastics and Twin City Fan. The Brookings division operates from a main
office located in downtown Brookings and one drive-up branch office also located
in Brookings.
Des Moines, the capitol of Iowa, is centrally located in the state.
First Federal's Des Moines market area encompasses Polk County and the
surrounding counties in central Iowa. The West Des Moines office operates in a
high-traffic area across from a major mall. The Highland Park office is located
approximately five minutes north of downtown Des Moines. As of 1996, the Des
Moines population was approximately 644,000, with an annual household growth
rate of 1.02%. Des Moines is one of the top three insurance centers in the
world, with sixty-seven insurance company headquarters and over one hundred
regional insurance offices. Other major businesses include Hy-Vee Food Stores,
Inc., Bridgestone-Firestone, Inc., Communication Data Services, Inc., Pioneer
Hi-Bred, John Deere, and Meredith Corporation. Universities in the area include
Drake University, Upper Iowa University, Simpson College, Grand View College,
Hamilton College and the University of Osteopathic Medicine and Health Sciences.
Security's main office is in Stuart, which is located in west central
Iowa approximately 40 miles west of Des Moines on the border of Adair and
Guthrie counties. Security's market area is highly dependent on farming and
agriculture-related businesses. In recent years, the westward expansion of Des
Moines, combined with direct interstate highway access to Stuart, has resulted
in significant development of new service-related businesses in the community.
This development provides economic diversity to Security's market area.
Lending Activities
General. Historically, the Company has originated fixed-rate, one- to
four-family mortgage loans. In the early 1980's, the Company began to focus on
the origination of adjustable-rate mortgage ("ARM") loans and short-term loans
for retention in its portfolio in order to increase the percentage of loans in
its portfolio with more frequent repricing or shorter maturities, and in some
cases higher yields, than fixed-rate residential mortgage loans. The Company,
however, has continued to originate fixed-rate residential mortgage loans in
response to consumer demand. See "Management's Discussion and Analysis --
Asset/Liability Management" in the Annual Report.
While the Company historically has focused its lending activities on
the origination of loans secured by first mortgages on owner-occupied one- to
four-family residences, it also originates and purchases commercial and
multi-family real estate loans and originates consumer, commercial business,
residential construction and agriculturally related loans. The Company
originates most of its loans in its primary market area. More recently, the
Company has increased its emphasis, both in absolute dollars and as a percentage
of its gross loan portfolio, on these less traditional lending activities. At
September 30, 1997, the Company's net loan portfolio totaled $254.6 million, or
62.9% of the Company's total assets.
Loan applications are initially considered and approved at various
levels of authority, depending on the type, amount and loan-to-value ratio of
the loan. The Company has loan committees for each of the Banks comprised of
officers of such Banks. Loans in excess of certain amounts require the approval
of at least two committee members who must also be executive officers, or by
such Bank's Board of Directors, which has responsibility for the overall
supervision of the loan portfolio. The Company reserves the right to
discontinue, adjust or create new lending programs to respond to its needs and
to competitive factors.
At September 30, 1997, the Company's largest lending relationship to a
single borrower or group of related borrowers totaled $4.8 million. The Company
had eight other lending relationships in excess of $2.5 million as of September
30, 1997 with the average outstanding balance of such loans totaling
approximately $3.1 million. At September 30, 1997, each of these loans was
performing in accordance with its repayment terms, except for a $4.0 million
commercial real estate loan secured by four nursing homes which was 60 days
delinquent at fiscal year end. See "Business -- Non-Performing Assets, Other
Loans of Concern and Classified Assets."
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,
----------------------------------------------------------------------------------------
1993 1994 1995 1996
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------- ----- -------- ----- ------- ----- -------- -----
(Dollars in Thousands)
Real Estate Loans
One- to four-family.................... $34,485 41.8% $ 55,162 34.3% $ 57,274 30.4% $ 78,476 31.6%
Commercial and multi-family............ 23,775 28.8 59,920 37.3 73,419 38.9 85,157 34.2
Agricultural........................... 6,065 7.4 8,064 5.0 7,021 3.7 11,068 4.5
Construction or development............ 4,037 4.9 10,248 6.4 17,877 9.5 7,819 3.1
------- ----- -------- ----- ------- ----- -------- -----
Total real estate loans............ 68,362 82.9 133,394 83.0 155,591 82.5 182,520 73.4
------- ----- -------- ----- -------- ----- ------- -----
Other Loans:
Consumer Loans:
Home equity........................... 2,158 2.6 3,784 2.4 4,906 2.6 7,823 3.1
Automobile............................ 700 .9 2,944 1.8 3,663 1.9 5,356 2.2
Deposit account....................... 1,421 1.7 385 .2 330 .2 666 .3
Student............................... 268 .3 422 .3 382 .2 324 .1
Other (1)............................. 668 .8 3,063 1.9 3,727 2.0 6,259 2.5
------- ----- -------- ----- ------- ----- ------- -----
Total consumer loans............... 5,215 6.3 10,598 6.6 13,008 6.9 20,428 8.2
Agricultural operating................. 7,817 9.5 7,784 4.8 11,905 6.3 30,364 12.2
Commercial business.................... 1,089 1.3 8,931 5.6 8,173 4.3 15,468 6.2
------- ----- -------- ----- ------- ----- -------- -----
Total other loans.................. 14,121 17.1 27,313 17.0 33,086 17.5 66,260 26.6
------- ----- -------- ----- ------- ----- -------- -----
Total loans........................ 82,483 100.0% 160,707 100.0% 188,677 100.0% 248,780 100.0%
===== ===== ===== =====
Less:
Loans in process....................... 1,345 3,425 8,071 2,240
Deferred fees and discounts............ 88 343 404 650
Allowance for losses................... 825 1,442 1,650 2,356
------- -------- ------- --------
Total loans receivable, net............ $80,225 $155,497 $178,552 $243,534
======= ======== ======== ========
September 30,
------------------------
1997
------------------------
Amount Percent
--------- ------
Real Estate Loans
One- to four-family.................... $ 73,903 27.8%
Commercial and multi-family............ 74,870 28.1
Agricultural........................... 11,732 4.4
Construction or development........... 21,264 8.0
--------- ------
Total real estate loans............ 181,769 68.3
-------- -----
Other Loans:
Consumer Loans:
Home equity........................... 14,007 5.3
Automobile............................ 6,106 2.3
Deposit account....................... 533 .2
Student............................... 383 .1
Other (1)............................. 6,369 2.4
--------- ------
Total consumer loans............... 27,398 10.3
Agricultural operating................. 38,650 14.5
Commercial business.................... 18,456 6.9
-------- ------
Total other loans.................. 84,504 31.7
-------- -----
Total loans........................ 266,273 100.0%
=====
Less:
Loans in process....................... 8,700
Deferred fees and discounts............ 553
Allowance for losses................... 2,379
---------
Total loans receivable, net............ $254,641
========
(1) Consist generally of various types of secured and unsecured consumer loans.
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.
September 30,
----------------------------------------------------------------------------------------
1993 1994 1995 1996
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------- ----- -------- ----- ------- ----- -------- -----
(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One- to four-family..................... $14,991 18.2% $ 19,913 12.4% $22,875 12.1% $ 41,322 16.6%
Commercial and multi-family............. 7,955 9.6 13,340 8.3 14,262 7.6 14,036 5.6
Agricultural............................ 1,144 1.4 1,806 1.1 5,536 2.9 4,250 1.7
Construction or development............. 155 .2 4,231 2.6 2,342 1.3 2,938 1.2
------- ----- ------- ----- ------- ----- -------- -----
Total fixed-rate real estate loans... 24,245 29.4 39,290 24.4 45,015 23.9 62,546 25.1
Consumer................................. 4,676 5.7 10,022 6.2 12,303 6.5 19,145 7.7
Agricultural operating.................. 2,159 2.6 5,945 3.7 7,335 3.9 14,998 6.1
Commercial business..................... 730 .9 7,887 4.9 5,521 2.9 7,200 2.9
------- ----- ------- ----- ------- ----- -------- -----
Total fixed-rate loans............... 31,810 38.6 63,144 39.2 70,174 37.2 103,889 41.8
------- ----- ------- ----- ------- ----- ------- -----
Adjustable Rate Loans:
Real estate:
One- to four-family..................... 19,494 23.6 35,249 21.9 34,399 18.2 37,154 14.9
Commercial and multi-family............. 15,820 19.2 46,580 29.0 59,157 31.4 71,121 28.6
Agricultural............................ 4,921 6.0 6,258 3.9 1,485 .8 6,818 2.7
Construction or development............. 3,882 4.7 6,017 3.8 15,535 8.2 4,881 2.0
------- ----- ------- ----- ------- ----- -------- -----
Total adjustable-rate real
estate loans......................... 44,117 53.5 94,104 58.6 110,576 58.6 119,974 48.2
Consumer................................. 539 .7 576 .4 705 .4 1,283 .5
Agricultural operating................... 5,658 6.8 1,839 1.1 4,570 2.4 15,366 6.2
Commercial business...................... 359 .4 1,044 .7 2,652 1.4 8,268 3.3
------- ----- ------- ----- -------- ----- -------- -----
Total adjustable rate loans.......... 50,673 61.4 97,563 60.8 118,503 62.8 144,891 58.2
------- ----- ------- ----- -------- ----- ------- -----
Total loans.......................... 82,483 100.0% 160,707 100.0% 188,677 100.0% 248,780 100.0%
===== ===== ==== =====
Less:
Loans in process......................... 1,345 3,425 8,071 2,240
Deferred fees and discounts.............. 88 343 404 650
Allowance for loan losses................ 825 1,442 1,650 2,356
------- -------- -------- --------
Total loans, net..................... $80,225 $155,497 $178,552 $243,534
======= ======== ======== ========
September 30,
------------------------
1997
------------------------
Amount Percent
--------- ------
Fixed Rate Loans:
Real estate:
One- to four-family..................... $ 33,369 12.5%
Commercial and multi-family............. 11,124 4.2
Agricultural............................ 5,978 2.3
Construction or development............. 2,997 1.1
--------- ----
Total fixed-rate real estate loans... 53,468 20.1
Consumer................................. 26,100 9.8
Agricultural operating.................. 16,280 6.1
Commercial business..................... 10,462 3.9
-------- -----
Total fixed-rate loans............... 106,310 39.9
------- -----
Adjustable Rate Loans:
Real estate:
One- to four-family..................... 40,534 15.2
Commercial and multi-family............. 63,746 23.9
Agricultural............................ 5,754 2.2
Construction or development............. 18,267 6.9
-------- -----
Total adjustable-rate real
estate loans......................... 128,301 48.2
Consumer................................. 1,298 .5
Agricultural operating................... 22,370 8.4
Commercial business...................... 7,994 3.0
-------- ------
Total adjustable rate loans.......... 159,963 60.1
------- -----
Total loans.......................... 266,273 100.0 %
======
Less:
Loans in process......................... 8,700
Deferred fees and discounts.............. 553
Allowance for loan losses................ 2,379
--------
Total loans, net..................... $254,641
========
The following table illustrates the interest rate sensitivity of the
Company's loan portfolio at September 30, 1997. 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,
1998(2) .......... $108,707 8.03% $ 8,781 9.39% $ 10,100 9.75% $ 34,663 9.67%
1999-2002 ........ 28,253 8.19 8,036 9.20 14,703 9.76 3,898 9.34
2002 and following 23,545 8.08 4,447 8.56 2,595 10.22 89 9.20
Commercial
Business Total
--------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Due During
Years Ending
September 30,
1998(2) .......... $ 15,614 9.65% $177,865 8.66%
1999-2002 ........ 2,831 9.66 57,721 8.88
2002 and following 11 10.73 30,687 8.34
(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.
The total amount of loans due after September 30, 1998 which have
predetermined interest rates is $53.8 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $131.5
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, 1997, the Company's one- to four-family
residential mortgage loan portfolio totaled $73.9 million, or 27.8% of the
Company's total gross loan portfolio. Approximately 12.6% of the Company's one-
to four-family mortgage loans or 3.5% of the Company's gross loans have been
purchased, generally from other financial institutions. See "--Originations,
Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities." At
September 30, 1997, the average outstanding principal balance of a one- to
four-family residential mortgage loan was $41,000.
The Company offers fixed-rate and ARM loans. During the year ended
September 30, 1997, the Company originated $7.9 million of adjustable-rate loans
and $7.3 million of fixed-rate loans secured by one- to four-family residential
real estate. The Company's one- to four-family residential mortgage originations
are secured primarily by properties located in its primary market area and
surrounding areas.
The Company originates one- to four-family residential mortgage loans
with terms up to a maximum of 30-years and with loan-to-value ratios up to 95%
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. Residential loans generally do not include
prepayment penalties.
The Company currently offers one, three and five year ARM loans with an
initial interest rate margin over the yield on the corresponding U.S. Treasury
Security. These loans have a fixed-rate for the stated period and, thereafter,
such loans adjust annually. These loans 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. From time to time the Company may permit ARM
loans to be assumed by qualified borrowers upon payment of an assumption fee.
The Company qualifies ARM loan borrowers at the fully indexed rate. The
Company's delinquency experience on its ARM loans has generally been similar to
its experience on fixed rate residential loans.
Due to consumer demand, the Company also offers fixed-rate mortgage
loans with terms up to 30 years, most of which conform to secondary market
standards, i.e., Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC") standards. Interest rates charged on these fixed-rate
loans are competitively priced according to market conditions. The Company
historically retained its fixed-rate loans for its loan portfolio, however, in
June 1996, the Company began selling, with servicing retained, most of its
fixed-rate loans with terms of 15 years or greater to FNMA.
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, and fire and property insurance (including flood
insurance, if necessary) in an amount not less than the amount of the loan. Real
estate loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property.
Commercial and Multi-Family Real Estate Lending. The Company is also
engaged in commercial and multi-family real estate lending in its primary market
area and surrounding areas and has purchased whole loan and participation
interests in loans from other financial institutions. The purchased loans and
loan participation interests are generally secured by properties located in the
Midwest and Northwest. During fiscal 1997, 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 $26.8 million of
such loans compared to $18.2 million during fiscal 1996. However, due to a large
number of prepayments and maturities of commercial and multi-family real estate
loans during fiscal 1997 as a result of a favorable interest rate environment,
at September 30, 1997, the Company had $74.9 million of commercial and
multi-family real estate loans compared to $85.2 million at September 30, 1996.
At September 30, 1997, $1.7 million, or 2.3% 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, to a lesser extent, hotels
and warehouses. Commercial and multi-family real estate loans generally have
terms that do not exceed 25 years, loan-to-value ratios of up to 75% 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, 1997, the Company's largest commercial and
multi-family real estate loan was a $4.0 million loan secured by four nursing
homes located in Minnesota. At fiscal year end this loan was 60 days delinquent.
See "Business -- Non-Performing Assets, Other Loans of Concern and Classified
Assets." The Company had six other commercial and/or multi-family loans in
excess of $2.5 million at such date. All of these loans are currently performing
in accordance with their terms. At September 30, 1997, the average outstanding
principal balance of a commercial or multi-family real estate loan held by the
Company was $433,000.
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, 1997, the Company's construction loan
portfolio totaled $21.3 million, or 8.0% of the Company's total gross loan
portfolio.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs up to twelve months. These construction loans have rates and
terms which generally match the one- to four-family loan rates then offered by
the Company, except that during the construction phase the borrower pays
interest only. Generally, the maximum loan-to-value ratio of owner occupied
single family construction loans is 80% of appraised value. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At September 30, 1997, the
Company had $1.5 million of construction loans to borrowers intending to live in
the properties upon completion of construction.
Construction loans to builders of one- to four-family residences
require the payment of interest only for up to 24 months and have terms of up to
24 months. These loans may provide for the payment of interest and loan fees
from loan proceeds and carry adjustable rates of interest. Loan fees charged in
connection with the origination of such loans range from 1% to 2%. At September
30, 1997, the Company did not have any construction loans to builders of one- to
four-family residences.
Construction loans on commercial and multi-family real estate projects
may be secured by apartments, agricultural facilities, small office buildings,
medical facilities, assisted living facilities, hotels or other property, and
are structured to be converted to permanent loans at the end of the construction
phase, which generally runs up to 18 months. These construction loans have rates
and terms which match any permanent multi-family or commercial real estate loan
then offered by the Company, except that during the construction phase the
borrower pays interest only. These loans generally provide for the payment of
interest and loan fees from loan proceeds. At September 30, 1997, the Company
had approximately $19.7 million of loans for the construction of commercial and
multi-family real estate. This amount consisted of four loans totaling $4.7
million for the construction of apartment complexes, two loans totaling $4.7
million for the construction of assisted living facilities, nine loans totaling
$8.5 million for the construction of commercial office buildings and one loan
totaling $1.8 million for the construction of a hotel. All of these loans were
performing in accordance with their terms at September 30, 1997.
Construction loans are obtained principally through continued business
from builders who have previously borrowed from the Company, as well as
referrals from existing customers and walk-in customers. The application process
includes a submission to the Company of accurate plans, specifications and costs
of the project to be constructed. 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, 1997, the Company had
agricultural real estate loans secured by farmland of $11.7 million or 4.4% of
the Company's gross loan portfolio. At the same date, $38.7 million, or 14.5% 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 five years. At September 30, 1997, the average
outstanding principal balance of an agricultural operating loan held by the
Company was $34,000. At September 30, 1997, $289,000, or .7%, of the Company's
agricultural operating loans were non-performing.
Agricultural real estate loans are frequently originated with
adjustable rates of interest. Generally, such loans provide for a fixed rate of
interest for the first three years, adjusting annually thereafter. In addition,
such loans generally provide for a ten year term based on a 20 year amortization
schedule. Adjustable-rate agricultural real estate loans provide for a margin
over the yields on the corresponding U.S. Treasury Security. Fixed-rate
agricultural real estate loans generally have terms up to three years.
Agricultural real estate loans are generally limited to 80% of the value of the
property securing the loan. At September 30, 1997, 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 multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Bank generally does not require its borrowers to procure
multi-peril crop or hail insurance. However, recent changes in government
support programs generally require that farmers procure multi-peril crop
insurance to be eligible to participate in such programs.
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 provide
a "floor" below which prices will not fall. The Company does not monitor or
require the use by borrowers of future contracts or options.
Another risk is the uncertainty of government programs and other
regulations. Some farmers rely on the income from government programs 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, 1997, the Company's consumer loan
portfolio totaled $27.4 million, or 10.3% of its total gross loan portfolio. Of
the consumer loan portfolio at September 30, 1997, substantially all were short-
and intermediate-term, fixed-rate loans.
The largest component of the Company's consumer loan portfolio consists
of home equity loans and lines of credit. Substantially all of the Company's
home equity loans and lines of credit are secured by second mortgages on
principal residences. The Company will lend amounts which, together with all
prior liens, may be up to 100% of the appraised value of the property securing
the loan. Home equity loans and lines of credit have maximum terms of up to 15
years and 10 years respectively.
The Company currently originates automobile loans on a direct basis
only. 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, 1997,
$246,000 or .9% of the Company's consumer loan portfolio was non-performing.
Commercial Business Lending. The Company also originates commercial
business loans. The Company offers commercial business loans to service existing
customers, to consolidate its banking relationships with these customers, and to
further its asset/liability management goals. Most of the Company's commercial
business loans have been extended to finance local 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, 1997, $18.5 million, or 6.9% 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, 1997
was a $3.0 million warehouse line of credit secured by the assignment of
automobile contracts. The next largest commercial business loan outstanding at
September 30, 1997 was a $2.8 million participation loan secured by marketable
securities and escrowed operating revenues with a remaining term to maturity of
four years. These loans are currently performing in accordance with their terms.
The Company had no other commercial business loans outstanding in excess of $1.0
million at September 30, 1997. At September 30, 1997, the average outstanding
principal balance of a commercial business loan held by the Company was $44,000.
The Company also offers floorplan loans to three automobile dealers. A
floor plan loan is a loan or line of credit provided to an auto dealership to
finance the acquisition of the dealership's inventory for sale to the general
public. The dealership repays the floorplan loan as vehicles financed under the
loan are sold to consumers. At September 30, 1997, the maximum amount of funds
committed by the Company pursuant to its floorplan arrangements was $900,000, of
which $869,000 was outstanding at such date.
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, 1997, $204,000 or 1.1% 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
environment.
The Company, from time to time, sells whole loans and loan
participations generally without recourse. At September 30, 1997, there were no
loans outstanding sold with recourse. When loans are sold, with the exception of
student loans, 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
mortgage loans that it originated and sold totaling $5.9 million at September
30, 1997, of which $4.9 million were sold to FNMA and $1.0 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.
The following table shows the loan origination (including undisbursed
portions of loans in process), purchase and repayment activities of the Company
for the periods indicated.
Year Ended September 30,
1995 1996 1997
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family ....... $ 8,359 $ 10,554 $ 7,875
- commercial and multi-family 5,044 2,869 4,873
- agricultural real estate .. 1,399 2,244 --
Non-real estate - consumer .............. 480 948 931
- commercial business ... 2,814 2,629 9,998
- agricultural operating 9,553 12,052 27,469
--------- --------- ---------
Total adjustable-rate ............ 27,649 31,296 51,146
Fixed rate:
Real estate - one- to four-family ....... 6,372 6,213 7,260
- commercial and multi-family 601 3,065 4,214
- agricultural real estate .. 78 1,561 2,581
Non-real estate - consumer .............. 11,931 16,899 23,688
- commercial business ... 12,167 8,812 19,127
- agricultural operating 5,229 22,781 27,635
--------- --------- ---------
Total fixed-rate ................. 36,378 59,331 84,505
--------- --------- ---------
Total loans originated ........... 64,027 90,627 135,651
Purchases:
Real estate - commercial and multi-family 19,212 18,252 26,766
- agricultural real estate .. 500 -- --
Non-real estate - commercial business ... 7,959 6,723 3,053
- agricultural operating .... 373 -- --
--------- --------- ---------
28,044 24,975 29,819
Loans from Iowa Savings acquisition ..... -- 16,734 --
Loans from Security acquisition ......... -- 21,005 --
--------- --------- ---------
Total loans ...................... 28,044 62,714 29,819
Total mortgage-backed securities ........ -- 23,406 16,417
--------- --------- ---------
Total purchased .................. 28,044 86,120 46,236
Sales and Repayments:
Real estate - one- to four-family ....... -- 560 3,324
Non-real estate - consumer .............. 129 504 268
--------- --------- ---------
Total loans ...................... 129 1,064 3,592
Mortgage-backed securities .............. 47,934 -- --
--------- --------- ---------
Total sales ...................... 48,063 1,064 3,592
--------- --------- ---------
Loan principal repayments ............... 63,985 91,900 144,364
Mortgage-backed securities repayments ... 3,524 8,834 7,969
--------- --------- ---------
Total principal repayments .............. 67,509 100,734 152,333
--------- --------- ---------
Total reductions ................. 115,572 101,798 155,925
Increase (decrease) in other items, net ... 999 (673) 370
--------- --------- ---------
Net increase (decrease) .......... $ (22,502) $ 74,276 $ 26,332
========= ========= =========
The following table shows the Company's purchased whole real estate
loans and real estate loan participations by state and amount held in the loan
portfolio at September 30, 1997. The Company also purchases commercial business
loans. At September 30, 1997, the Company's portfolio of purchased commercial
business loans totaled $5.2 million.
One- to Four-Family Loans Commercial and Multi-Family Total Purchased Loans
-------------------------------------- -------------------------------------- ----------------------------------
Percent of Percent of total
Number total One- Number Commercial Number Percent
of to Four of and Multi- of of Total
Location Balance Loans Family Balance Loans Family Loans Balance Loans Loans
-------- ------- ----- ------ ------- ----- ------------ ------- ----- -----
(Dollars in Thousands)
Arizona .... $ 166 6 0.22% $ 1,200 1 1.60% $ 1,366 7 0.51%
California . 252 17 0.34 -- -- -- 252 17 0.09
Colorado ... 46 5 0.06 1,492 2 1.99 1,538 7 0.58
Connecticut 1,205 51 1.63 -- -- -- 1,205 51 0.45
Florida .... 20 2 0.03 -- -- -- 20 2 0.01
Illinois ... -- -- -- 1,548 5 2.07 1,548 5 0.58
Indiana .... -- -- -- 2,579 2 3.45 2,579 2 0.97
Iowa ....... 676 50 0.91 4,795 6 6.41 5,471 56 2.05
Kansas ..... -- -- -- 250 1 0.33 250 1 0.09
Minnesota .. -- -- -- 8,636 14 11.54 8,636 14 3.24
Missouri ... 1,514 25 2.05 1,315 8 1.76 2,829 33 1.06
Nebraska ... 181 9 0.24 3,647 3 4.87 3,828 12 1.44
Nevada ..... -- -- -- 1,264 1 1.69 1,264 1 0.47
New York ... 2,297 110 3.11 317 1 0.42 2,614 111 0.98
North Dakota 185 21 0.25 5,027 12 6.71 5,212 33 1.96
Ohio ....... 130 4 0.18 -- -- -- 130 4 0.05
Oregon ..... -- -- -- 2,827 1 3.78 2,827 1 1.06
South Dakota 941 46 1.27 2,335 6 3.12 3,276 52 1.23
Texas ...... 1,575 36 2.13 303 1 0.40 1,878 37 0.71
Washington . -- -- -- 13,800 6 18.43 13,800 6 5.18
Wisconsin .. -- -- -- 15,178 21 20.27 15,178 21 5.70
Wyoming .... 150 9 0.20 -- -- -- 150 9 0.06
------- ---- ----- ------- ---- ----- ------- ---- -----
Total .... $ 9,338 391 12.62% $66,513 91 88.84% $75,851 482 28.47%
======= ==== ===== ======= ==== ===== ======= ==== =====
Non-Performing Assets, Other Loans of Concern, and Classified Assets
When a borrower fails to make a required payment on real estate secured
loans and consumer loans within 16 days after the payment is due, the Company
generally institutes collection procedures by mailing a delinquency notice. The
customer is contacted again, by notice or telephone, when the payment is 45 days
past due and again before 75 days past due. In most cases, delinquencies are
cured promptly; however, if a loan secured by real estate or other collateral
has been delinquent for more than 90 days, satisfactory payment arrangements
must be adhered to or the Company will initiate foreclosure or repossession.
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status until the loan becomes current.
The following table sets forth the Company's loan delinquencies by
type, before allowance for loan losses, by amount and by percentage of type at
September 30, 1997.
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................ 73 $3,018 4.08% 33 $1,055 1.43% 9 $ 526 .71%
Commercial and multi-family........ 2 276 .37 4 5,070 6.77 1 1,623 2.17
Agricultural real estate........... 1 9 .08 1 60 .51 --- --- ----
Consumer............................. 60 402 1.47 34 234 .85 55 295 1.08
Agricultural operating............... 22 508 1.31 15 1,575 4.08 6 313 .81
Commercial business.................. 12 961 5.21 10 275 1.49 3 145 .79
---- ------ --- ----- ---- ------
Total............................ 170 $5,174 1.94% 97 $8,269 3.11% 74 $2,902 1.09%
===== ====== === ====== ==== ======
Delinquencies 90 days and over constituted 1.09% of total loans and
.72% of total assets.
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans, with some exceptions, are
typically placed on non-accrual status when the loan becomes 90 days or more
delinquent or when the collection of principal and/or interest become doubtful.
For all years presented, the Company has had no troubled debt restructuring
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.
September 30,
--------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ......... $ 30 $ 311 $ 127 $ 347 $ 444
Commercial and multi-family . -- 302 199 1,623 1,692
Agricultural real estate .... 1,190 137 46 127 --
Consumer .................... 4 105 206 331 246
Agricultural operating ...... 21 78 100 184 289
Commercial business ......... 16 38 48 33 204
------ ------ ------ ------ ------
Total .................... 1,261 971 726 2,645 2,875
Less: Allowance for losses .. -- 30 15 -- --
------ ------ ------ ------ ------
Total non-accruing loans . 1,261 941 711 2,645 2,875
------ ------ ------ ------ ------
Accruing loans delinquent
90 days or more(1) .......... -- -- -- 177 282
------ ------ ------ ------ ------
Total non-performing loans 1,261 941 711 2,822 3,157
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family ......... 11 -- 48 75 85
Commercial real estate ...... -- -- -- -- 67
Consumer .................... -- -- -- 8 --
Commercial business ......... -- -- -- 9 4
------ ------ ------ ------ ------
Total .................... 11 -- 48 92 156
Less: Allowance for losses .. 11 -- -- 5 --
------ ------ ------ ------ ------
Total .................... -- -- 48 87 156
------ ------ ------ ------ ------
Total non-performing assets ... $1,261 $ 941 $ 759 $2,909 $3,313
====== ====== ====== ====== ======
Total as a percentage of total
assets ....................... .78% .34% .29% .75% .82%
====== ====== ====== ====== ======
(1) These loans were acquired by the company in connection with the
Security acquisition.
For the year ended September 30, 1997, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $229,000 of which none was
included in interest income.
Other Loans of Concern. At September 30, 1997, there were loans
totaling $7.2 million not included in the table above where known information
about the possible credit problems of borrowers caused management to have
concern as to the ability of the borrower to comply with the present loan
repayment terms. This amount consisted of ten commercial real estate loans
totaling $6.2 million, ten one- to four-family residential mortgage loans
totaling $438,000, five commercial business loans totaling $136,000, four
agricultural operating loans totaling $192,000 and 31 consumer loans totaling
$243,000.
Included in the $6.2 million of commercial real estate loans of concern
at September 30, 1997 was a $4.0 million loan secured by four nursing homes
located in Minnesota and a $819,000 loan secured by an apartment complex in
Madison, Wisconsin. At September 30, 1997, the nursing home loan was 60 days
delinquent. The delinquency was attributable to internal control weaknesses that
caused a disruption in cash flows. The borrower has corrected these weaknesses
and is in the process of bringing the loan current.
The $819,000 apartment complex loan was delinquent 60 days at September
30, 1997 due to decreased occupancy rates resulting from lack of management
oversight. The borrower has focused on correcting these problems and occupancy
rates have subsequently increased to a level that will support the properties
current debt service.
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,
1997, the Company had classified a total of $5.6 million of its assets as
substandard, $79,000 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.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value. If fair value at the date of foreclosure is lower
than the balance of the related loan, the difference will be charged-off to the
allowance for loan losses at the time of transfer. Valuations are periodically
updated by management and if the value declines, a specific provision for losses
on such property is established by a charge to operations.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance.
The following table sets forth an analysis of the Company's allowance
for loan losses.
Year Ended September 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ -----
(Dollars in Thousands)
Balance at beginning of period.............. $ 600 $ 825 $ 1,442 $1,650 $2,356
Brookings acquisition....................... --- 518 --- --- ---
Iowa Savings acquisition.................... --- --- --- 132 ---
Security acquisition........................ --- --- --- 563 ---
Charge-offs:
Commercial and multi family............... --- --- (30) (35) (2)
Consumer.................................. --- (6) (12) (54) (66)
Commercial business....................... --- --- --- --- (55)
------- ------- -------- --------- -------
Total charge-offs....................... --- (6) (42) (89) (123)
Recoveries:
Commercial and multi family............... --- --- --- --- 2
Agricultural operating.................... --- --- --- --- 24
------- ------ -------- -------- -------
Total recoveries........................ --- --- --- --- 26
------- ------- -------- --------- -------
Net charge-offs......................... --- (6) (42) (89) (97)
Additions charged to operations............. 225 105 250 100 120
------- ------ -------- ------- ------
Balance at end of period.................... $ 825 $1,442 $ 1,650 $2,356 $2,379
======= ====== ======== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period.............. ---% .01% .03% .04% (.04%)
====== ===== ====== ===== =====
Ratio of net charge-offs during
the period to average non-
performing assets.......................... ---% .54% 5.08% 5.30% 4.46%
====== ===== ======= ==== ====
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
September 30,
------------------------------------------------------------------------------------------------------
1993 1994 1995 1996
--------------------- ----------------------- ------------------------- --------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in Thousands)
One- to four-family........ $ 104 41.80% $ 166 34.32% $ 172 30.36% $ 235 31.54%
Commercial and multi-
family real estate....... 178 28.80 449 37.29 551 38.92 639 34.23
Agricultural real estate... 286 7.40 81 5.02 70 3.72 138 4.45
Construction............... 30 4.90 77 6.38 134 9.47 59 3.14
Consumer................... 39 6.30 106 6.59 145 6.89 270 8.21
Agricultural operating..... 117 9.50 166 4.84 208 6.31 531 12.21
Commercial business........ 16 1.30 134 5.56 123 4.33 271 6.22
Unallocated................ 55 --- 263 --- 247 --- 213 ---
------ ------ ------ ------ ------- ------ ------ ------
Total................. $ 825 100.00% $1,442 100.00% $ 1,650 100.00% $2,356 100.00%
====== ====== ====== ====== ======= ====== ====== ======
1997
-------------------------
Percent
of Loans
in Each
Category
to Total
Amount Loans
------ -----
One- to four-family........ $ 222 27.75%
Commercial and multi-
family real estate....... 712 28.12
Agricultural real estate... 117 4.41
Construction............... 106 7.99
Consumer................... 289 10.29
Agricultural operating..... 580 14.51
Commercial business........ 277 6.93
Unallocated................ 76 ---
------ ------
Total................. $2,379 100.00%
====== ======
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, 1997, 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,
short-term 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,
--------------------------------
1995 1996 1997
------- ------- -------
(In Thousands)
Investment Securities:
U.S. government securities ............................... $ 372 $ 6,178 $ 2,956
Federal agency obligations ............................... 44,900 63,032 65,529
Corporate bonds .......................................... 1,058 202 --
Municipal bonds .......................................... 240 1,392 1,390
Equity investments ....................................... 695 1,433 1,255
FHLMC preferred stock .................................... 1,512 1,598 336
FNMA common stock ........................................ 52 70 94
------- ------- -------
Subtotal ............................................. 48,829 73,905 71,560
FHLB stock ................................................ 3,915 5,525 5,629
------- ------- -------
Total investment securities and FHLB stock ........... $52,744 $79,430 $77,189
======= ======= =======
Other Interest-Earning Assets:
Interest bearing deposits in other financial institutions
and Federal Funds sold .................................. $ 4,162 $13,892 $12,177
======= ======= =======
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, 1997
-------------------------------------------------------------------------
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)
Municipal bonds.................. $ 56 $ 874 $ 460 $ --- $ 1,367 $ 1,390
U.S. government securities....... 2,200 756 --- --- 2,943 2,956
Federal agency obligations....... 13,336 21,854 30,339 --- 65,186 65,529
------- ------- ------- ------ ------- -------
Total investment securities...... $15,592 $23,484 $30,799 $ --- $69,496 $69,875
======= ======= ======= ====== ======= =======
Weighted average yield........... 6.16% 6.27% 7.13% ---% 6.63% 6.63%
The Company's investment securities portfolio at September 30, 1997,
contained no securities of any one issuer with an aggregate book value in excess
of 10% of the Company's shareholders' equity, excluding those issued by the
United States Government, or its agencies.
Mortgage-Backed Securities. The Company's mortgage-backed and related
securities portfolio consists primarily of securities issued under
government-sponsored agency programs, including those of the GNMA, FNMA and
FHLMC. The Company also holds Collateralized Mortgage Obligations ("CMOs"), as
well as a limited amount of privately issued mortgage pass-through certificates.
The GNMA, FNMA and FHLMC 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. FNMA and FHLMC generally provide the certificate
holder a guarantee of timely payments of interest, whether or not collected.
GNMA'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, 1997, the
Company held CMOs totaling $3.8 million, all of which were secured by underlying
collateral issued under government-sponsored agency programs. Premiums ass
ociated 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, 1997, $31.4 million or 70.7% of the Company's
mortgage-backed securities portfolio had fixed rates of interest and $13.0
million or 29.3% of such portfolio had adjustable rates of interest.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees that back them, are
more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. At September 30, 1997, $39.0
million or 87.9% 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,
-------------------------------------------
1995 1996 1997
-------- ------- --------
(In Thousands)
GNMA...................................................... $ 7,484 $ 6,392 $20,925
CMO....................................................... 5,210 4,637 3,832
FHLMC..................................................... 3,967 4,740 3,813
FNMA...................................................... 3,426 18,711 14,939
Privately Issued Mortgage Pass-Through Certificates....... 1,316 1,106 916
-------- ------- --------
Total................................................ $21,403 $35,586 $44,425
======= ======= =======
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at September 30, 1997. 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 1997
1 Year or Through Through After Balance
Less 5 Years 10 Years 10 Years Outstanding
----- ------ -------- --------- --------
(Dollars in Thousands)
GNMA..................................... $ --- $ --- $ --- $20,925 $20,925
CMO...................................... --- --- 1,483 2,349 3,832
FHLMC.................................... 113 346 737 2,617 3,813
FNMA..................................... 75 977 96 13,791 14,939
Privately Issued Mortgage
Pass-Through Certificates(1)........... --- --- --- 916 916
----- ------ -------- -------- --------
Total............................... $188 $1,323 $2,316 $40,598 $44,425
==== ====== ====== ======= =======
Weighted average yield................... 5.73% 8.23% 7.92% 7.29% 7.34%
- ------------------
(1) This security is rated AA by a nationally recognized rating agency.
At September 30, 1997, the contractual maturity of 91.4% 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 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 (including interest earned on
mortgage-backed securities), interest earned on or maturation of investment
securities and short-term investments, and funds provided from operations.
Borrowings, including Federal Home Loan Bank ("FHLB") of Des Moines and
Federal Reserve Bank of Chicago ("FRB") advances, reverse repurchase agreements
and retail repurchase agreements, may be used at times to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels, may be used on a longer-term basis to support expanded lending
activities, and may also be used to match the funding of a corresponding asset.
Deposits. The Company offers a variety of deposit accounts having a
wide range of interest rates and terms. The Company's deposits consist of
passbook savings accounts, money market savings accounts, NOW and regular
checking accounts, and certificate accounts currently ranging in terms from
fourteen days to 60 months. The Company only solicits deposits from its primary
market area and does not use brokers to obtain deposits. The Company relies
primarily on competitive pricing policies, advertising and customer service to
attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. Based
on its experience, the Company believes that its passbook savings, money market
savings accounts, NOW and regular checking accounts are relatively stable
sources of deposits. However, the ability of the Company to attract and maintain
certificates of deposit and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Company during
the periods indicated.
Year Ended September 30,
1995 1996 1997
--------- -------- --------
(Dollars in Thousands)
Opening balance..................... $ 176,167 $171,793 $233,406
Deposits acquired from:
Iowa Savings...................... --- 15,642 ---
Security.......................... --- 27,718 ---
Deposits............................ 261,345 360,606 543,824
Withdrawals......................... (273,066) (350,626) (541,351)
Interest credited................... 7,347 8,273 10,237
Deposits sold....................... --- --- ---
--------- -------- --------
Ending balance..................... $ 171,793 $233,406 $246,116
========= ======== ========
Net increase (decrease)............. $ (4,374) $ 61,613 $ 12,710
========= ======== ========
Percent increase (decrease)......... (2.48)% 35.86% 5.45%
========= ======== ========
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company for the periods
indicated.
Year Ended September 30,
----------------------------------------------------------------------------
1995 1996 1997
----------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings
Deposits:
Commercial Demand................... $ 2,077 1.21% $ 5,453 2.34% $ 5,572 2.26%
Passbook Accounts................... 12,112 7.05 18,278 7.83 21,562 8.76
NOW Accounts........................ 13,459 7.83 16,087 6.89 16,408 6.67
Money Market Accounts............... 14,836 8.64 14,994 6.42 11,869 4.82
-------- ------ -------- ------ -------- ------
Total Non-Certificate............... 42,484 24.73 54,812 23.48 55,411 22.51
-------- ------ -------- ------ -------- ------
Certificates:
Variable............................ 1,498 .87 3,154 1.35 1,259 .51
0.00 - 3.99%....................... 1,593 .93 342 .15 202 .08
4.00 - 5.99%...................... 67,944 39.55 123,835 53.06 129,409 52.58
6.00 - 7.99%...................... 54,322 31.62 47,987 20.56 56,515 22.97
8.00 - 9.99%...................... 3,709 2.16 3,276 1.40 3,320 1.35
10.00 - 11.99%...................... 243 .14 --- --- --- ---
-------- ------ -------- ------ -------- ------
Total Certificates.................. 129,309 75.27 178,594 76.52 190,705 77.49
-------- ------ -------- ------ -------- ------
Total Deposits...................... $171,793 100.00% $233,406 100.00% $246,116 100.00%
======== ====== ======== ====== ======== ======
The following table shows rate and maturity information for the
Company's certificates of deposit as of September 30, 1997.
0.00- 4.00- 6.00- 8.00- Percent
Variable 3.99% 5.99% 7.99% 9.99% Total of Total
-------- ----- ----- ----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts
maturing in
quarter ending:
December 31, 1997................ $ 221 $196 $ 25,153 $ 3,361 $ 390 $ 29,321 15.4%
March 31, 1998................... 142 3 27,391 4,087 858 32,481 17.0
June 30, 1998.................... 212 --- 21,703 17,677 184 39,776 20.9
September 30, 1998............... 321 --- 10,859 5,618 200 16,998 8.9
December 31, 1998................ 199 --- 16,773 3,882 382 21,236 11.1
March 31, 1999................... 164 --- 7,907 2,676 967 11,714 6.2
June 30, 1999.................... --- --- 4,207 4,303 300 8,810 4.6
September 30, 1999............... --- --- 5,578 6,369 37 11,984 6.3
December 31, 1999................ --- --- 1,809 4,343 2 6,154 3.2
March 31, 2000................... --- --- 5,039 1,121 --- 6,160 3.2
June 30, 2000.................... --- --- 437 1,893 --- 2,330 1.2
September 30, 2000............... --- --- 701 139 --- 840 0.5
Thereafter...................... --- 3 1,852 1,046 --- 2,901 1.5
------- ----- -------- ------- ------ -------- ------
Total........................... $1,259 $202 $129,409 $56,515 $3,320 $190,705 100.00%
====== ==== ======== ======= ====== ======== ======
Percent of total................ 0.66 % 0.11% 67.86% 29.63% 1.74% 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, 1997.
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.............................. $23,218 $30,265 $50,623 $67,334 $171,440
Certificates of deposit of
$100,000 or more........................... 6,103 2,216 6,151 4,795 19,265
-------- ------- ------- -------- --------
Total certificates of deposit............... $29,321 $32,481 $56,774 $72,129 $190,705 (1)
======= ======= ======= ======= ========
(1) Includes deposits from governmental and other public entities
totaling $7.5 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, 1997, the Company had $107.4 million of advances from the FHLB of
Des Moines and the ability to borrow up to an additional $31.9 million. All of
the Company's advances currently carry fixed rates, except a $10 million line of
credit which adjusts daily. At September 30, 1997, advances totaling $42.5
million (including the line of credit) had terms to maturity of one year or
less. The remaining $64.9 million had maturities ranging up to 9 years.
From time to time, the Company has offered retail repurchase agreements
to its customers. These agreements typically range from 14 days to five years in
term, and typically have been offered in minimum amounts of $100,000. The
proceeds of these transactions are used to meet cash flow needs of the Company.
At September 30, 1997, the Company had approximately $1.8 million of retail
repurchase agreements outstanding.
The Company has also, from time to time, entered into reverse
repurchase agreements through nationally recognized broker-dealer firms. These
agreements are accounted for as borrowings by the Company and are secured by
certain of the Company's investment and mortgage-backed securities. The
broker-dealer takes possession of the securities during the period that the
reverse repurchase agreement is outstanding. The terms of the agreements have
typically ranged from 30 days to a maximum of six months. The Company has not
entered into any reverse repurchase agreements in the past five years.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, retail repurchase agreements and other
borrowings (consisting of FRB advances) for the periods indicated.
Year Ended September 30,
------------------------------------
1995 1996 1997
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances............................. $78,305 $110,491 $107,426
Retail repurchase agreements.............. 1,312 2,790 2,790
Other borrowings.......................... --- 1,400(1) 2,900
Average Balance:
FHLB advances............................. $56,820 69,265 80,685
Retail repurchase agreements.............. 1,159 2,198 2,285
Other borrowings.......................... --- --- 1,258
(1) Acquired on September 30, 1996 in connection with the acquisition
of Security.
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated.
At September 30,
------------------------------------
1995 1996 1997
------- -------- --------
(Dollars in Thousands)
FHLB advances............................... $51,098 $102,288 $107,426
Retail repurchase agreements................ 1,150 2,790 1,800
Other borrowings............................ --- 1,400 2,900
------- -------- --------
Total borrowings....................... $52,248 $106,478 $112,126
======= ======== ========
Weighted average interest
rate of FHLB advances...................... 6.14% 5.81% 5.86%
Weighted average interest
rate of retail repurchase
agreements................................. 5.75% 5.52% 5.79%
Weighted average interest rate of
other borrowings............................ --- 5.40% 5.55%
Subsidiary Activities
The only subsidiaries of the Company are First Federal and Security.
First Federal has one service subsidiary, First Services Financial Limited
("First Services"). At September 30, 1997, the net book value of First Federal's
investment in First Services was approximately $65,000. Security does not have
any subsidiaries.
First Federal organized First Services, its sole service corporation,
in 1983. First Services is located in Storm Lake, Iowa and offers mutual funds
and, in some locations, insurance products and annuities. In addition, Brookings
Service Corporation ("BSC"), a subsidiary of First Services, offers full
brokerage services through PrimeVest Financial Services, Inc., a third party
vendor. First Services, together with its subsidiary BSC, recognized a net loss
of $20,000 during fiscal 1997.
Regulation
General. First Midwest currently has two wholly-owned subsidiaries,
First Federal, a federally-chartered thrift institution and Security, an
Iowa-chartered commercial bank. First Federal is subject to extensive
regulation, supervision and examination by the OTS, as its chartering authority
and primary federal regulator, and by the Federal Deposit Insurance Corporation
(the "FDIC"), which insures its deposits up to applicable limits. First Federal
is a member of the FHLB System and is subject to certain limited regulation by
the FRB. Such regulation and supervision governs the activities in which an
institution can engage and the manner in which such activities are conducted,
and is intended primarily for the protection of the insurance fund and
depositors. Security is subject to extensive regulation, supervision and
examination by the Iowa Superintendent of Banking (the "ISB") and the FRB, which
are its state and primary federal regulators, respectively. It is also subject
to regulation by the FDIC, which insures its deposits up to applicable limits.
As with First Federal, such regulation and supervision governs the activities in
which it 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 (the "BHCA") and the regulations
of the FRB. As a bank holding company, First Midwest must file reports with the
FRB and such additional information as the FRB may require, and is subject to
regular inspections by the FRB. First Midwest is subject to the activity
limitations imposed under the BHCA and in general may engage in only those
activities that the FRB has determined to be closely related to banking.
Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities which are intended
to strengthen the financial condition of the banking industry, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC, the FRB or the Congress could have a material impact on
First Midwest, First Federal or Security and their respective operations.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Financial Institutions. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, First Federal is required to file periodic reports with the OTS and
is subject to periodic examination by the OTS and the FDIC. The last regular OTS
examination of First Federal was as of May 19, 1997. When these examinations are
conducted by the OTS, the examiners may require First Federal to provide for
higher general or specific loan loss reserves. Security is subject to similar
regulation and oversight by the ISB and the FRB and was last examined as of
January 31, 1997.
Each federal banking regulator has extensive enforcement authority over
its regulated institutions. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports. Except under
certain circumstances, public disclosure of final enforcement actions by the
regulator is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. Security is subject to such restrictions
under state law as administered by the ISB. Federal savings associations are
also generally authorized to branch nationwide whereas Iowa chartered banks such
as Security are limited to establishing branches in the counties contiguous to
the county where their home office is located. At September 30, 1997, First
Federal and Security were in compliance with the noted restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). Security is subject to similar restrictions. At
September 30, 1997, First Federal's and Security's lending limit under these
restrictions was $4.7 million and $996,000, respectively. First Federal and
Security are in compliance with the loans-to-one-borrower limitation.
The federal banking agencies have adopted guidelines establishing
safety and soundness standards on such matters such as loan underwriting and
documentation, asset quality, earnings standards, internal controls and audit
systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must submit
a compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action.
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% of 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, 1997, each of First Federal and Security met
the capital requirements of a "well capitalized" institution and were not
subject to any assessments. See Note 14 of Notes to Consolidated Financial
Statements in the Annual Report.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF or the BIF, as the
case may be, will be less than the designated reserve ratio of 1.25% of SAIF or
BIF insured deposits, respectively. In setting these increased assessments, the
FDIC must seek to restore the reserve ratio to that designated reserve level, or
such higher reserve ratio as established by the FDIC. Premiums for both BIF and
SAIF insured institutions are also subject to change in future periods depending
upon an institution's risk classification.
Prior to the enactment of the legislation recapitalizing the SAIF in
1996, , a portion of the SAIF assessment imposed on savings associations was
used to repay obligations issued by a federally chartered corporation to provide
financing for resolving the thrift crisis in the 1980s. Although the legislation
also now requires assessments to be made on BIF-assessable deposits for this
purpose, effective January 1, 1997, that assessment will be limited to 20% of
the rate imposed on SAIF assessable deposits until the earlier of December 31,
1999 or when no savings association continues to exist, thereby imposing a
greater burden on SAIF member institutions such as First Federal. Thereafter,
however, assessments on BIF-member institutions will be made on the same basis
as SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are a 6.7 basis points assessment
on SAIF deposits and 1.5 basis points assessment on BIF deposits until BIF
insured institutions participate fully in the assessment.
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%. First
Federal also has a tangible capital ratio requirement of 1.5%. Capital
requirements in excess of these standards may be imposed on individual
institutions on a case-by-case basis. See Note 14 of Notes to Consolidated
Financial Statements in the Annual Report.
An FDIC-insured institution's primary federal regulator is also
authorized and, under certain circumstances required, to take certain actions
against an "undercapitalized institution" (generally defined to be one with less
than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or
an 8% risk-based capital ratio). Any such institution must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The primary
federal regulator is also authorized, and with respect to institution's whose
capital is further depleted, required to impose additional restrictions that can
affect all aspects of the institution's operations, including the appointment of
a receiver for a "critically undercapitalized" institution (i.e., one with a
tangible capital ratio of 2% or less). As a condition to the approval of the
capital restoration plan, any company controlling an undercapitalized
institution must agree that it will enter into a limited capital maintenance
guarantee with respect to the institution's achievement of its capital
requirements.
The imposition of any of these measures on First Federal or Security
may have a substantial adverse effect on Company's operations and profitability.
First Midwest shareholders do not have preemptive rights, and therefore, if
First Midwest is directed by the OTS, the FRB or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in stockholders
percentage of ownership of First Midwest.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. Generally, savings associations, such as First Federal,
that before and after the proposed distribution meet their capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
capital requirement for such capital component, as measured at the beginning of
the calendar year, or 75% of its net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
First Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS, as well as FDIC, approval prior to making such distribution. The OTS
may object to the distribution during that 30-day period notice based on safety
and soundness concerns. See "- Regulatory Capital Requirements."
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, 1997, 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 and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS and the FRB, in connection with the examination of First
Federal and Security, respectively, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by the institution. An unsatisfactory rating may be used as the
basis for the denial of such an application.
The federal banking agencies have recently revised the CRA regulations
and the methodology for determining an institution's compliance with the CRA.
Due to the heightened attention being given to the CRA in the past few years,
First Federal and Security may be required to devote additional funds for
investment and lending in their local community. First Federal was examined for
CRA compliance in May 1997 and Security was examined in April 1996 and both
received a rating of "satisfactory."
Transactions with Affiliates. Generally, transactions between an
FDIC-insured institution or its subsidiaries and its affiliates are required to
be on terms as favorable to the institution as transactions with non-affiliates.
In addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the institution's capital. Affiliates of First
Federal and Security include First Midwest and any other company which is under
common control with First Federal and Security. Directors, officers or
controlling persons are also subject to regulations that restrict loans to such
persons and their related interests. Among other things, such loans must be made
on terms substantially the same as for loans to unaffiliated individuals, except
if the loans are made pursuant to an employee benefit plan. At September 30,
1997, First Federal and Security were in compliance with the above restrictions.
Bank Holding Company Regulation
General. Bank holding companies such as First Midwest are subject to
comprehensive regulation by the FRB under the BHCA and the regulations of the
FRB. As a bank holding company, First Midwest is required to file reports with
the FRB and such additional information as the FRB may require, and is subject
to regular inspections by the FRB. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
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, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
The BHCA prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution (such as First Federal), mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; real estate and personal property appraising; and, subject to certain
limitations, providing securities brokerage services for customers. The scope of
permissible activities may be expanded from time to time by the FRB. Such
activities may also be affected by federal legislation.
Interstate Banking and Branching. In 1994, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was enacted
to ease restrictions on interstate banking. Effective September 29, 1995, the
Riegle-Neal Act allows the FRB to 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. The Riegle-Neal Act does not affect the authority of
states 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.
Additionally, since June 1, 1997, the federal banking agencies have
been authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks opts out of the Riegle-Neal Act by adopting a law
after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997
which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. States were also permitted to allow
such transactions before such time by enacting authorizing legislation.
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.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that its net income
for the past year is sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the holding company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
Capital Requirements. The FRB has established capital requirements for
bank holding companies that generally parallel the capital requirements for
commercial banks and federal thrift institutions such as First Federal and
Security. First Midwest is in compliance with these requirements.
Federal Home Loan Bank System
First Federal and Security are both members of the FHLB of Des Moines,
which is one of 12 regional FHLBs, that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and procedures
are subject to the regulation and oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds 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, 1997,
the Banks had in the aggregate $5.6 million in FHLB stock, which was in
compliance with this requirement. For the fiscal year ended September 30, 1997,
dividends paid by the FHLB of Des Moines to First Federal and Security totaled
$386,000. Over the past five calendar years such dividends have averaged 7.5%
and were 7.0% for the first three quarters of the calendar year 1997.
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.
Federal and State Taxation
Federal Taxation. Savings banks such as First Federal that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings bank over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings bank's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings banks to be taxed at a lower effective federal income tax rate than that
applicable to corporations generally (approximately 31.3% assuming the maximum
percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the
above-described reserve method of accounting (including the percentage of
taxable income method) used by many thrift institutions to calculate their bad
debt reserve for federal income tax purposes. Thrift institutions with $500
million or less in assets may, however, continue to use the experience method.
As a result, First Federal must recapture that portion of the reserve that
exceeds the amount that could have been taken under the experience method for
post-1987 tax years. At September 30, 1997, First Federal's post-1987 excess
reserves amounted to approximately $1.5 million. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997. The legislation also requires
thrift institutions to account for bad debts for federal income tax purposes on
the same basis as commercial banks for tax years beginning after December 31,
1995.
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. For taxable years beginning
after 1986 and before 1996, corporations, including savings banks such as First
Federal, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2.0 million.
To the extent earnings appropriated to a savings bank's bad debt
reserves for "qualifying real property loans" 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, 1997, First Federal's Excess for tax purposes
totaled approximately $6.7 million.
First Midwest and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
banks, such as First Federal, that file federal income tax returns as part of a
consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings bank members of the
consolidated group that are functionally related to the activities of the
savings bank member.
First Midwest and its consolidated subsidiaries have not been audited
by the IRS within the past ten years. In the opinion of management, any
examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, First Midwest) would not result in a
deficiency which could have a material adverse effect on the financial condition
of First Midwest and its subsidiaries.
Iowa Taxation. First Federal and Security file Iowa franchise tax
returns. First Midwest and First Federal's subsidiary file Iowa corporation tax
returns on a fiscal year-end basis.
Iowa imposes a franchise tax on the taxable income of mutual and stock
savings banks and commercial banks. The tax rate is 5%, which may effectively be
increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax.
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 excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision. 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.
South Dakota Taxation. First Federal files a South Dakota franchise tax
return due to the operations of its Brookings division. The South Dakota
franchise tax is imposed only on depository institutions. First Midwest,
Security and First Federal's subsidiaries are therefore not subject to the South
Dakota franchise tax.
South Dakota imposes a franchise tax on the taxable income of a
depository institution at the rate of 6%. Taxable income under the franchise tax
is generally similar to taxable income under the federal corporate income tax,
except that, under the South Dakota franchise tax, no deduction is allowed for
state income and franchise taxes, bad debt deductions are determined on the
basis of actual charge-offs, income from municipal obligations exempt from
federal taxes are included in the franchise taxable income, and there is a
deduction allowed for federal income taxes accrued for the fiscal year. The
taxable income for South Dakota franchise tax purposes is apportioned to South
Dakota through the use of a three-factor formula consisting of tangible real and
personal property, payroll and gross receipts.
Delaware Taxation. As a Delaware holding company, First Midwest is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. First Midwest is
also subject to an annual franchise tax imposed by the State of Delaware.
Competition
The Company faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from commercial banks, savings banks, credit
unions, insurance companies, and mortgage bankers making loans secured by real
estate located in the Company's market area. Commercial banks and credit unions
provide vigorous competition in consumer lending. The Company competes for real
estate and other loans principally on the basis of the quality of services it
provides to borrowers, interest rates and loan fees it charges, and the types of
loans it originates.
The Company attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings banks, credit unions and brokerage offices located in
the same communities. The Company competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
The Company serves Adair, Buena Vista, Calhoun, Guthrie, Ida,
Pocahontas, Polk and Sac counties in Iowa and Brookings County in South Dakota.
There are 32 commercial banks, three savings banks, other than First Federal,
and one credit union which compete for deposits and loans in the First Federal's
primary market area in northwest Iowa and eight commercial banks, one savings
bank, other than First Federal, and one credit union which compete for deposits
and loans in First Federal's market area in South Dakota. In addition, there are
twelve commercial banks in Security's primary market area in west central Iowa.
First Federal recently entered the Des Moines, Iowa market area as a result of
the acquisition of Iowa Savings and competes for deposits and loans with
numerous financial institutions located throughout the metropolitan area.
Employees
At September 30, 1997, the Company and its subsidiaries had a total of
112 employees, including 15 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.
Fred A. Stevens - Mr. Stevens, age 50, is President of the Storm Lake
Division and Trust Officer for First Federal. In addition, Mr. Stevens serves as
President and a director of First Services Financial Limited and is a Brookings
Service Corporation director. Mr. Stevens is primarily responsible for the daily
operation of First Midwest and First Federal, including lending, deposit and
trust operations, branch administration, and human resources and compliance. Mr.
Stevens joined First Federal in 1974 as a loan officer, was elected Vice
President in 1982, and Senior Vice President in 1986. He was elected Executive
Vice President and Chief Operating Officer in 1989, Corporate Secretary in 1990,
and Trust Officer in 1992. Mr. Stevens was elected to his current position in
September 1997. Mr. Stevens is a former President of the Storm Lake Chamber of
Commerce and the Storm Lake Rotary Club. Mr. Stevens received his Bachelor of
Science degree from Westmar College, Le Mars, Iowa.
Donald J. Winchell - Mr. Winchell, age 45, serves as Vice President,
Treasurer and Chief Financial Officer of First Midwest and Senior Vice
President, Treasurer and Chief Financial Officer of First Federal, and is
responsible for the formulation and implementation of policies and objectives
for First Federal's finance, accounting and audit functions. His duties include
financial planning, interest rate risk management, accounting, investments,
financial policy development and compliance, budgeting, asset/liability
management, internal controls, and data processing systems and procedures. Mr.
Winchell also serves as Treasurer of First Services Financial Limited and
Brookings Service Corporation. Mr. Winchell joined First Federal in 1989 as Vice
President and Chief Financial Officer, was appointed Treasurer in 1990, and
Senior Vice President in 1992. Prior to joining First Federal, Mr. Winchell
served as Senior Vice President and Chief Financial Officer of Midwest Federal
Savings and Loan Association of Nebraska City, Nebraska since 1981. Mr. Winchell
received a Bachelor of Science degree and a Bachelor of Business Administration
degree from Washburn University, Topeka, Kansas. Mr. Winchell is a certified
public accountant.
Item 2. Description of Property
The Company conducts its business at its main office and branch office
in Storm Lake, Iowa, and five other locations in its primary market area in
Northwest Iowa. The Company also operates two offices in Brookings, South
Dakota, through the Company's Brookings Federal Bank division of the Bank; two
offices in Des Moines, Iowa, through the Company's Iowa Savings Bank division of
the Bank; 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 office
located at Storm Lake Plaza, Storm Lake, 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, 1997 was $4.2 million. See Note 7 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. In November
1996, the Company purchased an existing building located in West Des Moines,
Iowa. In March 1997, the facility opened as an additional office of the Iowa
Savings Bank Division of First Federal.
The Bank maintains an on-line data base with a service bureau, whose
primary business is providing such services to financial institutions. The net
book value of the data processing and computer equipment utilized by the Company
at September 30, 1997 was approximately $288,000.
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,
1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 48 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 10 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis or Financial Condition and Results
of Operation
Pages 11 through 20 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Pages 17 and 18 of the attached 1997 Annual Report to Stockholders are
herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 21 through 45 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On May 17, 1996, the Company dismissed Deloitte & Touche LLP ("D&T") as
their independent accountants. The reports of D&T on the financial statements
for the two years ended September 30, 1995 and 1994 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. The change of independent
accountants was recommended by the Audit Committee and subsequently approved by
the Board of Directors.
In connection with its audits for years ended September 30, 1994 and
1995, and through May 17, 1996, there were no disagreements with D&T on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope of procedure, which disagreements, if not resolved to the
satisfaction of D&T, would have caused them to make reference thereto in their
report on the financial statements for such years. During such same periods,
there have been no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)) with D&T.
On May 17, 1996, the Company engaged the firm of Crowe, Chizek and
Company LLP as independent certified accountants for the fiscal year ending
September 30, 1996.
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 Stockholders held in January 1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Executive Officers
Information concerning executive officers of the Company is set forth
under the caption "Executive Officers" contained in Part I of this Form 10-K.
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders 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, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in January 1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in January
1998, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
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 Stockholders to be held in January 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of documents filed as part of this report:
(1) Financial Statements:
The following financial statements are incorporated
by reference under Part II, Item 8 of this Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Balance Sheets as of September 30, 1997 and 1996.
3. Consolidated Statements of Income for the Years Ended
September 30, 1997, 1996 and 1995.
4. Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended September 30, 1997, 1996 and 1995.
5. Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995.
6. Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All financial statement schedules have been omitted
as the information is not required under the related
instructions or is inapplicable.
(3) Exhibits:
See Index of Exhibits.
(b) Reports on Form 8-K:
There have been no Current Reports on Form 8-K filed within the three
month period ended September 30, 1997.
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, 1997 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 By: /s/Jeanne Partlow
------------------ -----------------
James S. Haahr, Chairman of Jeanne Partlow, Director
the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date:December 26, 1997 Date:December 26, 1997
By: /s/E. Thurman Gaskill By: /s/Rodney G. Muilenburg
--------------------- -----------------------
E. Thurman Gaskill, Director Rodney G. Muilenburg, Director
Date:December 26, 1997 Date:December 26, 1997
By: /s/J. Tyler Haahr By: /s/E. Wayne Cooley
----------------- ------------------
J. Tyler Haahr, Director, Senior E. Wayne Cooley, Director
Vice President, Secretary and
Chief Operating Officer
Date:December 26, 1997 Date:December 26, 1997
By: /s/Donald J. Winchell By: /s/G. Mark Mickelson
--------------------- --------------------
Donald J. Winchell, Vice President G. Mark Mickelson, Director
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Date:December 26, 1997
Officer)
Date:December 26, 1997
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 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.
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 Employment agreement between First Federal Savings Bank of the Midwest and
J. Tyler Haahr
10.4 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.
10.5 Employment agreements between First Federal Savings Bankn of the Midwest
and James S. Haahr, Fred A. Stevens 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.
10.6 Registrant's Executive Officer Compensation Program
10.7 Registrant's Executive Officer Incentive Stock Option Plan for Mergers and
Acquisitions.
11 Statement re: computation of per share earnings (included under Note 1 of Notes
to Consolidated Financial Statements in the Annual Report to Shareholders'
attached hereto as Exhibit 13)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consents of Experts
27 Financial Data Schedule (electronic filing only)
99 Independent Audit Report of former Accountants