SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------ ------------
0-27672
(Commission File Number)
NORTH CENTRAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Iowa 421449849
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
c/o First Federal Savings Bank of Iowa
825 Central Avenue, Fort Dodge, Iowa 50501
(Address of Principal Executive Offices) (Zip Code)
(515) 576-7531
(Registrant's Telephone Number including area code)
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)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2).
YES NO [X]
The aggregate value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the average bid and asked prices of the
Common Stock as of June 30, 2003 was $50,907,908.
As of March 8, 2004, there were issued and outstanding 1,588,280 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the Registrant's 2004 Annual Meeting of
Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part
III hereof.
2. Portions of the 2003 Annual Report to Shareholders are
incorporated by reference into Items 7, 7A, 8 and 9 of Part II hereof.
PART I
North Central Bancshares, Inc., and First Federal Savings Bank of Iowa
may from time to time make written or oral "forward-looking statements." These
forward-looking statements may be contained in this annual filing with the
Securities and Exchange Commission (the "SEC"), the Annual Report to
Shareholders, other filings with the SEC, and in other communications by the
Company and the Bank, which are made in good faith pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties. The following factors, many of which are subject to change based
on various other factors beyond the Company's control, and other factors
discussed in this Form 10-K, as well as other factors identified in the
Company's filings with the SEC and those presented elsewhere by management from
time to time, could cause its financial performance to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements:
o the strength of the United States economy in general and the strength
of the local economies in which the Company and the Bank conduct
operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of new products and services
and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to
competitors' products and services;
o the willingness of users to substitute competitors' products and
services for the Company's and the Bank's products and services;
o the Company's and the Bank's success in gaining regulatory approval of
their products and services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o the Company's and the Bank's success at managing the risks involved in
their business.
This list of important factors is not exclusive. The Company or the
Bank does not undertake to update any forward-looking statement, whether written
or oral, that may be made from time to time by or on behalf of the Company or
the Bank.
ITEM 1. BUSINESS
General
North Central Bancshares, Inc. (the "Holding Company"), an Iowa
corporation, is the holding company for First Federal Savings Bank of Iowa (the
"Bank"), a federally chartered savings bank. Collectively, the Holding Company
and the Bank are referred to herein as the "Company." The Holding Company owns
100% of the outstanding stock of the Bank. The Holding Company's stock is quoted
on the National Market System of the Nasdaq Stock Market under the symbol
"FFFD".
2
At this time, the Holding Company conducts business as a unitary
savings and loan holding company and the principal business of the Holding
Company consists of the operation of the Bank. The Holding Company's executive
offices are located at the home office of the Company at 825 Central Avenue,
Fort Dodge, Iowa. The Holding Company's telephone number is (515) 576-7531.
First Federal Savings Bank of Iowa
The Bank is a federally chartered savings bank that conducts its
operations from its main office located in Fort Dodge, Iowa and nine branch
offices located in Iowa. Seven of the Bank's branches are located in north
central and central Iowa, in the cities of Fort Dodge, Nevada, Ames, Perry,
Ankeny and Clive. Three of the Bank's offices are located in south east Iowa, in
the cities of Burlington and Mount Pleasant. The Bank is the successor to First
Federal Savings and Loan Association of Fort Dodge, which was chartered
originally in 1954, and on May 7, 1987 became a federally chartered savings
bank. The Bank adopted its present name on February 27, 1998. The Bank is a
community-oriented savings institution that is primarily engaged in the business
of attracting deposits from the general public in the Bank's market areas, and
investing such deposits in one-to-four family residential real estate mortgages,
multifamily and commercial mortgages and, to a lesser extent, secured and
unsecured consumer loans, with emphasis on second mortgage loans. The Bank's
deposits are insured by the FDIC under the SAIF. The Bank has been a member of
the Federal Home Loan Bank ("FHLB") System since 1954. At December 31, 2003, the
Bank had total assets of $424.3 million, total deposits of $284.7 million, and
total shareholders' equity of $37.9 million.
The Bank's principal executive office is located at 825 Central Avenue,
Fort Dodge, Iowa and its telephone number at that address is (515) 576-7531. The
Bank's website address is www.firstfederaliowa.com.
Market Area and Competition
The Company is an independent savings and loan holding company serving
its primary market area of Webster, Story, Dallas, Polk, Henry and Des Moines
Counties, which are located in the central and north central and southeastern
parts of the State of Iowa. The Company's market area is influenced by
agriculture as well as retail sales, professional services and public education.
The Company is headquartered in Fort Dodge, the Webster County seat, where it
operates two Company locations.
The unemployment rate for the month of December 2003 for Webster County
was 4.2%, for Story County 2.8%, for Dallas County 2.9%, for Polk County 3.6%,
for Henry County 6.2% and for Des Moines County 5.5%. These compare to the
national rate of 5.7% and the State of Iowa rate of 4.4%.
Due to the type of loan demand in the Company's overall market area,
increased competition, and the Company's decision to diversify its loan
portfolio, the Company has originated and purchased loans (primarily one-to-four
family, multifamily and commercial real estate loans) from out of state. The
Company intends to continue such originations and purchases pursuant to its
underwriting standards for Company-originated loans.
The Company encounters strong competition both in attracting deposits
and in originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks and credit
unions in its market area. Competition for loans comes from such financial
institutions as well as mortgage banking companies. The Company expects
continued strong competition in the foreseeable future. Many such institutions
have greater financial and marketing resources available to them than does the
Company. The Company competes for savings deposits by offering depositors a high
level of personal service and a wide range of competitively priced financial
products. In recent years, additional strong competition has come from stock and
3
bond dealers and brokers and, in particular, mutual funds. The Company competes
for real estate loans primarily through the interest rates and loan fees it
charges and advertising, as well as by offering high levels of personal service.
Lending Activities
Loan Portfolio Composition. The principal components of the Company's
loan portfolio are fixed-rate and adjustable-rate first mortgage loans secured
primarily by one-to four-family owner-occupied residential real estate, fixed-
and adjustable-rate first mortgage loans secured by multifamily residential and
commercial real estate and, to a lesser extent, secured and unsecured consumer
loans, with emphasis on second mortgage real estate loans. At December 31, 2003,
the Company's total loans receivable totalled $367.4 million, of which $173.9
million, or 47.4%, were one-to four-family residential real estate first
mortgage loans, $70.0 million, or 19.0%, were multifamily real estate first
mortgage loans, primarily purchased by the Company and $69.6 million, or 18.9%,
were commercial real estate first mortgage loans, primarily purchased by the
Company. Consumer loans, consisting primarily of automobile loans and second
mortgage loans, totalled $53.9 million, or 14.7%, of the Company's loan
portfolio.
Savings banks, such as the Bank, are generally subject to the same
limits on loans to one borrower as are imposed on national banks. Generally,
under these limits, a savings association may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of the association's
unimpaired capital and surplus. Additional amounts may be lent, in the aggregate
not exceeding 10% of unimpaired capital and surplus, if any such loan or
extension of credit is fully secured by readily-marketable collateral. Such
collateral is defined to include certain debt and equity securities and bullion,
but generally does not include real estate. At December 31, 2003, it was the
Company's policy to limit loans to one borrower to $3.0 million, with higher
limits subject to board approval. These limitations are less than the regulatory
guidelines. At December 31, 2003, the Company's largest aggregate outstanding
loans to one borrower was $3.3 million and the second largest borrower had an
aggregate balance of $3.1 million, both of which were first mortgage multifamily
residential real estate loans and both were performing, pursuant to their
respective terms, as of that date.
4
Analysis of Loan Portfolio. Set forth below are selected data relating
to the composition of the Company's loan portfolio by type of loan as of the
dates indicated:
At December 31,
---------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
First mortgage loans:
One four-family residential(1) . $173,889 47.33% $ 148,751 43.17% $161,549 51.81% $176,615 54.78% $164,057 56.23%
Multifamily .................... 69,963 19.04 70,779 20.54 74,396 23.86 75,858 23.53 73,417 25.16
Commercial .................... 69,609 18.95 71,251 20.68 25,722 8.25 24,127 7.48 17,723 6.07
-------- ------ --------- ------ -------- ----- -------- ------ -------- ------
Total first mortgage loans .. 313,461 85.32 290,781 84.39 261,667 83.91 276,600 85.79 255,197 87.47
-------- ------ --------- ------ -------- ----- -------- ------ -------- ------
Consumer loans:
Automobiles ................. 9,801 2.67% 10,115 2.94% 9,406 3.02% 8,803 2.73% 8,003 2.74%
Second mortgage(2) .......... 37,601 10.23 38,239 11.10 35,619 11.42 31,910 9.90 23,604 8.09
Other(3) .................... 6,533 1.78 5,438 1.58 5,134 1.65 5,095 1.58 4,956 1.70
-------- ------ --------- ------ -------- ----- -------- ------ -------- ------
Total consumer loans ........ 53,935 14.68 53,792 15.61 50,159 16.09 45,808 14.21 36,563 12.53
-------- ------ --------- ------ -------- ----- -------- ------ -------- ------
Total loans receivable ...... $367,396 100.00% $ 344,573 100.00% $311,826 100.00% $322,408 100.00% $291,760 100.00%
Less:
Undisbursed portion of
construction loans .......... $ 1,855 0.50% $ 929 0.27% $ 1,055 0.34% 1,493 0.45% $ 1,982 0.68%
Unearned loan (premium) discount (696) (0.19) (623) (0.18) (37) (0.01) 69 0.02 136 0.05
Net deferred loan origination
fees(costs) ................. 113 0.03 3 0.00 (56) (0.02) (23) (0.01) 106 0.04
Allowance for loan losses ...... 3,165 0.86 3,118 0.90 2,883 0.92 2,843 0.88 2,777 0.95
-------- ------ --------- ------ -------- ----- -------- ------ -------- ------
Total loans receivable, net . $362,959 98.80% $ 341,146 99.01% $307,981 98.77% $318,026 98.64% $286,759 98.29%
======== ===== ========= ====== ======== ===== ======== ===== ======== =====
- -----------------------------------
(1) Includes interest-only construction loans that convert to permanent loans.
(2) Second mortgage loans included $4.9 million, $4.0 million, $2.0 million,
$1.6 million and $1.5 million of nonowner-occupied residential first
mortgage loans at December 31, 2003, 2002, 2001, 2000 and 1999,
respectively.
(3) Other consumer loans included $2.1 million, $1.9 million, $1.9 million, $1.5
million and $1.6 million of commercial mortgage loans at December 31, 2003,
2002, 2001, 2000 and 1999, respectively.
5
Loan Maturity Schedule. The following table sets forth the maturity or
period to repricing of the Company's loan portfolio at December 31, 2003.
Overdraft lines of credit are reported as due in one year or less.
Adjustable-rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in which they contractually mature, and
fixed rate loans are included in the period in which the final contractual
repayment is due.
At December 31, 2003
--------------------
Within 1-3 3-5 5-10 10-20 Beyond 20
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(In thousands)
First mortgage loans:
One-to four-family
residential(1) . $ 29,564 $ 14,622 $ 51,996 $ 40,425 $ 36,716 $ 566 $173,889
Multifamily ....... 12,951 20,449 25,645 10,074 844 -- 69,963
Commercial ........ 6,409 15,143 23,531 13,446 11,080 -- 69,609
Consumer loans (2) .. 5,511 14,292 22,719 8,813 2,600 -- 53,935
-------- -------- -------- -------- -------- ------ --------
Total .......... $ 54,435 $ 64,506 $123,891 $ 72,758 $ 51,240 $ 566 $367,396
======== ======== ======== ======== ======== ====== ========
(1) One-to four-family loans include $34.2 million of loans with repricing
periods greater than 5 years that have been classified as fixed rate
loans. $27.3 million of these loans with repricing periods less than 5
years have been classified as adjustable rate loans.
(2) Includes second mortgage loans of $37.6 million at December 31, 2003.
The following table sets forth the dollar amounts of all fixed rate and
adjustable rate loans in each loan category at December 31, 2003 due after
December 31, 2004.
Due After December 31, 2004
---------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
First mortgage loans:
One-to four-family residential(1) ...... $ 79,972 $ 64,353 $144,325
Multifamily ............................ 2,542 54,470 57,012
Commercial ............................. 40,436 22,764 63,200
Consumer loans (2) ......................... 48,298 126 48,424
-------- -------- --------
Total $171,248 $141,713 $312,961
======== ======== ========
________________________
(1) One-to four-family loans include $34.2 million of loans with repricing
periods greater than 5 years have been classified as fixed rate loans.
(2) Includes second mortgage loans of $34.8 million at December 31, 2003.
One-to four-family Residential Real Estate Loans. Traditionally, the
Company's primary lending activity consists of the origination of fixed- and
adjustable-rate one-to-four family owner-occupied residential first mortgage
loans, substantially all of which are collateralized by properties located in
the Company's market area. The Company also originates one-to four-family,
interest only construction loans that convert to permanent loans after an
initial construction period that generally does not exceed nine months. At
December 2003, 46.1% of the Company's residential real estate loans had fixed
rates, and 53.9% had adjustable rates.
The Company originates loans for portfolio and sells loans in the
secondary mortgage market. However, the Company's one-to four-family,
fixed-rate, residential real estate loans originated for portfolio are generally
originated and underwritten according to standards that qualify such loans to be
included in Federal Home Loan Mortgage Corporation ("FHLMC") and Fannie Mae
purchase and guarantee programs and that otherwise permit resale in the
secondary mortgage market. The Company has sold fixed-rate loans with maturities
in excess of 15 years in the secondary mortgage market. For the year ended
December 31, 2003, the Company sold $50.2 million of one-to four-family
residential mortgage loans, generally to lower the Company's interest rate risk.
One-to four-family loans are underwritten and originated according to policies
approved by the Board of Directors.
6
Originations of one-to-four family fixed-rate first mortgage loans are
monitored on an ongoing basis and are affected significantly by the level of
market interest rates, the Company's interest rate gap position, and loan
products offered by the Company's competitors. The Company's one-to four-family
fixed-rate first mortgage loans amortize on a monthly basis with principal and
interest due each month. The Company also offers one-to-four family
adjustable-rate first mortgage loans that convert to adjustable-rate loans that
adjust on an annual basis after the initial fixed rate term. The initial fixed
term of these loans are primarily 5 and 7 years and the overall maturity of
these loans may be up to 30 years. The Company determines whether a customer
qualifies for these loans based upon the initial fixed interest rate.
The Company's adjustable rate mortgage loans, or "ARM loans", are
generally originated for terms of up to 30 years, with interest rates that
adjust annually. The Company establishes various annual and life-of-the-loan
caps on ARM loan interest rate adjustments. At December 31, 2003, the Company
offered ARM loans with annual rate caps of 1.5% and maximum life-of-loan caps of
11.95%. At present, the interest rate on its ARM loans is calculated by using
the weekly average yield on United States Treasury Securities adjusted to a
constant maturity of one year. The Company determines whether a borrower
qualifies for an ARM loan based on the fully indexed rate of the ARM loan at the
time the loan is originated, rather than the introductory or "teaser" rate or
the maximum life-of-the rate to which the loan could adjust. In addition, the
Company establishes floors for each loan originated below which the loan may not
adjust. One-to-four family residential ARM loans totalled $93.7 million, or
25.4%, of the Company's total loan portfolio at December 31, 2003.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower. Management believes
that the Company's credit risk associated with its ARM loans is reduced because
of the annual and lifetime interest rate adjustment limitations on such loans,
although such limitations do create an element of interest rate risk. See Item
7A. "Discussion of Market Risk Interest Rate Sensitivity Analysis" in the 2003
Annual Report to Shareholders, which is attached to this Form 10-K as Exhibit
13.1.
The Company's one-to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings institution may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. "See
Regulation-Regulation of Federal Savings Associations-Real Estate Lending
Standards." The Company's lending policies limit the maximum loan-to-value ratio
on mortgage loans without private mortgage insurance to 80% of the lesser of the
appraised value or the purchase price of the property to serve as collateral for
the loan. The Company generally makes one-to four-family first real estate loans
with loan-to-value ratios of up to 97%; however, for one-to four-family real
estate loans with loan-to-value ratios greater than 80%, the Company requires
the loan amount to be covered by private mortgage insurance. The Company
requires fire and casualty insurance, flood insurance, where applicable, an
abstract of title, and a title opinion on all properties securing real estate
loans originated by the Company.
Multifamily Residential and Commercial Real Estate Loans. The Company's
loan portfolio contains loans secured by multifamily residential and commercial
real estate. Such loans constituted approximately $139.6 million, or 38.0%, of
the Company's total loan portfolio at December 31, 2003. Of such loans, $121.5
million, or 87.1%, were purchased or originated by the Company and were secured
by properties outside the State of Iowa (the "out of state" properties). The
multifamily and commercial real estate loans are primarily secured by
multifamily residences such as apartment buildings and by commercial facilities
such as office buildings and retail buildings. Multifamily residential real
estate loans are offered with fixed and adjustable rates and are structured in a
number of different ways depending upon the circumstances of the borrower and
the type of multifamily project. Fixed rate loans generally amortize over 15 to
30 years, and generally contain call provisions permitting the Company to
require that the entire principal balance be repaid at the end of five to
fifteen years. Such loans are priced as five to fifteen year loans with maximum
loan-to-value ratios of 80%. See " Purchased or Out of State Originated Loans".
All purchased or out of state originated multifamily or commercial real
estate loans in excess of $1.0 million are approved by the Chief Executive
Officer, Chief Operating Officer and the Board of Directors and are subject to
the same underwriting standards as for loans originated by the Company. All
purchased or out of state originated loans less than $1.0 million are approved
by the Chief Executive Officer and Chief Operating Officer and ratified by the
Board of Directors and are subject to the same underwriting standards as loans
originated by the Company. Before a loan is purchased, the Company obtains a
copy of the original loan application, certified rent rolls, the original title
insurance policy an original appraisal and personal financial statements of any
guarantors of the loan. An executive officer or director of the Company also
makes a personal inspection of the property securing the loan. Such purchases
are made without recourse to the seller. $15.4 million, or 12.7%, of out of
7
state multifamily and commercial real estate loans are serviced by the Bank.
$106.1 million, or 87.3%, of the out of state multifamily and commercial real
estate loans are serviced by the originating financial institution or mortgage
company. The Company imposes a $3.0 million limit on the aggregate size of
multifamily and commercial loans to any one borrower. Any exceptions to the
limit must be specifically approved by the Board of Directors on a loan-by-loan
basis within the Company's legal lending limit. See "Regulation -- Regulation of
Federal Savings Associations -- Loans to One Borrower".
Loans secured by multifamily and commercial real estate generally
involve a greater degree of credit risk than single-family residential mortgage
loans and typically, such loans also have larger loan balances. This increased
credit risk is a result of several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on income producing properties, and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily and commercial real estate is typically dependent
upon the successful operation of the related real estate property. If the cash
flow from such real estate projects is reduced, the borrower's ability to repay
the loan may be impaired. As a result, these types of loans present greater
potential loan delinquencies and loan losses than single family residential
loans.
Consumer Loans, Including Second Mortgage Loans. The Company also
originates consumer loans, which primarily include second mortgage loans. As of
December 31, 2003, consumer loans totalled $53.9 million, of which second
mortgage loans totalled $37.6 million, or 10.2%, of the Company's total loan
portfolio. The Company's second mortgage loans generally have fixed interest
rates and are generally for terms of 3 to 5 years. The Company's second mortgage
loans are generally secured by the borrower's principal residence with a maximum
loan-to-value ratio, including the principal balances of both the first and
second mortgage loans, of generally no more than 90%. The average principal
amount of the Company's second mortgage loans is approximately $18,000.
To a lesser extent, the Company also originates loans secured by
automobiles, with fixed rates generally up to 90% loan-to-value basis for new
cars. All of the Company's automobile loans were originated by the Company and
generally have terms of up to five years. At December 31, 2003, automobile loans
totalled $9.8 million, or 2.7% of the Company's total loan portfolio.
In addition, the Company also makes other types of consumer loans,
including unsecured signature loans for various purposes. At December 31, 2003,
other consumer loans totalled $6.5 million, or 1.8% of the Company's total loan
portfolio. Included in the other consumer loans are unsecured consumer loans
which totaled $523,000, or 0.1% of the Company's total loan portfolio. The
minimum loan amount for unsecured signature loans is $2,000, the maximum loan
amount for such loans is generally $7,500, and the average balance of such loans
is approximately $2,000.
The Company originates a limited number of commercial business loans,
which the Company includes with its consumer loan portfolio for reporting
purposes. Such loans are generally secured and are originated for any business
purpose, such as for the purchase of business equipment. The maximum loan amount
for such loans is approximately $7,500.
The Company's business plan calls for an increase in consumer lending
for the foreseeable future, particularly second mortgage lending. The Company
expects consumer loan demand will come from its existing customer base. Consumer
loans generally provide for shorter terms and higher yields as compared to
residential first mortgage loans, but generally carry higher risks of default.
At December 31, 2003, $201,000, or 0.40%, of the Company's consumer loan
portfolio was on non-accrual status.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, and walk-in customers. Upon
receiving a loan application, the Company obtains a credit report and employment
verification to verify specific information relating to the applicant's
employment, income, and credit standing. In the case of a real estate loan, an
appraiser approved by the Company appraises the real estate intended to
collateralize the proposed loan. An underwriter in the Company's loan department
reviews the loan application file for accuracy and completeness, and verifies
the information provided. Pursuant to the Company's written loan policies, two
members of management, including at least one member of senior management,
approves all first mortgage loans. The Loan Committee of the Board of Directors
meets quarterly to review a sampling of all loans originated in the previous
three months.
8
After a loan is approved, a loan commitment letter is promptly issued to
the borrower. The commitment letter specifies the terms and conditions of the
proposed loan including the amount of the loan, interest rate, amortization
term, a brief description of the required collateral, and required insurance
coverage. Commitments are typically issued for 60-day periods in the case of
loans to refinance, loans to purchase existing real estate, and construction
loans. The borrower must provide proof of fire and casualty insurance on the
property serving as collateral, which insurance must be maintained during the
full term of the loan. An abstract of title along with an attorney's title
opinion is required on all first mortgage loans secured by real property in
Iowa. At December 31, 2003, the Company had outstanding commitments to originate
$1.3 million of loans. This amount does not include commitments to purchase,
undisbursed overdraft loan privileges, undisbursed home equity line of credit or
the unfunded portion of loans in process.
Purchased or Out of State Originated Loans. The Company's loan
portfolio contains $138.4 million of loans secured by out of state properties.
These loans represented 37.7% of the Company's total loan portfolio at December
31, 2003. All of the one-to four-family, multifamily residential and commercial
real estate loans in the Company's loan portfolio, which are purchased out of
state by the Company are without recourse to the seller. At December 31, 2003,
the Company's multifamily residential and commercial real estate loans had an
average balance of $655,000 and the largest loan had a principal balance of $2.4
million. As of December 31, 2003 there were no multifamily or commercial real
estate loans that were more than 90 days past due.
To supplement its origination of one-to four-family first mortgage
loans, the Company also purchases first mortgage loans secured by one-to
four-family residences out of state. At December 31, 2003, $16.9 million, or
4.6%, of the Company's total loan portfolio consisted of purchased one-to
four-family loans. As of December 31, 2003 there were no purchased one-to
four-family first mortgage loans that were more than 90 days past due.
Loans purchased by the Company entail certain risks not necessarily
associated with loans the Company originates. The Company's purchased loans are
generally acquired without recourse against the seller. $16.4 million, or 11.9%,
of out of state loans are serviced by the Bank. $121.9 million, or 88.1%, of the
out of state loans are serviced by the originating financial institution or
mortgage company. Although the Company reviews each purchased loan using the
Company's underwriting criteria for originations and a Company officer or
director performs an on-site inspection of each purchased loan, the Company is
dependent on the servicer of the loan for ongoing collection efforts and
collateral review. In addition, the Company purchases loans with a variety of
terms, including maturities, interest rate caps and indices for adjustment of
interest rates that may differ from those offered at the time by the Company in
connection with loans the Company originates. Finally, the market areas in which
the properties which secure the purchased loans are located are subject to
economic and real estate market conditions that may significantly differ from
those experienced in the Company's market areas. If economic conditions continue
to limit the Company's opportunities to originate loans in its market areas, the
Company may increase its investment in out of state mortgage loans. There can be
no assurance, however, that economic conditions in these out of state areas will
not deteriorate in the future resulting in increased loan delinquencies and loan
losses among the loans secured by property in these areas.
In an effort to reduce the risk of loss on out of state purchased loans,
the Company generally purchases loans that meet the underwriting policies for
loans originated by the Company although specific rates and terms may differ
from the rates and terms offered by the Company. The Company also requires
appropriate documentation, and personal inspections of the underlying real
estate collateral by an executive officer or director prior to purchase.
9
Set forth below is a table of the Company's purchased or out of state
originated loans by state of origin (including multifamily residential,
commercial real estate and one-to four-family first mortgage loans) as of
December 31, 2003.
State Balance as of Percentage as of
----- December 31, 2003 December 31, 2003
----------------- -----------------
(In thousands)
Arizona $ 3,110 2.2%
California 36,703 26.5
Colorado 16,710 12.1
Georgia 7 0.0
Illinois 4,357 3.1
Indiana 3,474 2.5
Kansas 723 0.5
Michigan 3,011 2.2
Minnesota 12,121 8.8
Missouri 8,983 6.5
Montana 7 0.0
Nebraska 5,780 4.2
Nevada 1,667 1.2
North Carolina 546 0.4
Ohio 1,023 0.7
Oregon 8,799 6.4
South Dakota 1,705 1.2
Tennessee 60 0.0
Texas 5,468 4.0
Utah 4,237 3.1
Virginia 3 0.0
Washington 5,273 3.8
Wisconsin 14,629 10.6
--------- -----
Total $ 138,396 100.0%
========= =====
10
Origination, Purchase and Sale of Loans. The table below shows the
Company's originations, purchases and sales of loans for the periods indicated.
For the Years Ended
December 31,
2003 2002 2001
---- ---- ----
(In thousands)
Total loans receivable at beginning of period $ 344,574 $ 311,826 $ 322,408
--------- --------- ---------
Originations:
First mortgage loans:
One-to four-family residential ........... 117,916 84,143 83,270
Multifamily .............................. 3,491 -- --
Commercial ............................... 1,244 264 --
Consumer loans:
Automobile ............................... 7,288 8,573 8,003
Second mortgage .......................... 25,857 28,577 27,033
Other .................................... 4,482 4,303 4,339
-------- -------- --------
Total originations: .................... 160,278 125,860 122,645
Loan Purchases:
First mortgage one-to four-family ........ 13,001 5,104 1,865
First mortgage multifamily ............... 20,545 22,891 20,876
First mortgage commercial ................ 11,540 56,434 5,043
Loan Sales:
First mortgage-- one-to four-family ...... (48,188) (52,899) (49,309)
Transfer of mortgage loans (to) ............. (954) (107) (889)
foreclosed real estate
Repayments .................................. (133,400) (124,535) (110,813)
-------- -------- --------
Net loan activity ........................... 22,822 32,748 (10,582)
-------- -------- --------
Total loans receivable at end of period $ 367,396 $ 344,574 $ 311,826
========= ========= =========
Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Company generally receives fees in connection with loan
originations. Such loan origination fees, net of costs to originate, are
deferred and amortized using an interest method over the contractual life of the
loan. Net deferred fees and costs are recognized into income immediately upon
prepayment of the related loan. At December 31, 2003, the Company had $113,000
of deferred loan origination fees, net. Such fees vary with the type of loans
and commitments made. The Company typically charges a document preparation fee
on fixed- and adjustable-rate first mortgage loans. In addition to loan
origination fees, the Company also receives other fees, service charges (such as
overdraft fees), and other income that consist primarily of deposit transaction
account service charges and late charges and loan prepayment fees. The Company
recognized fees and service charges of $2.9 million, $2.4 million and $2.0
million for the fiscal years ended December 31, 2003, 2002 and 2001,
respectively.
Investment Activities
At December 31, 2003, the Company's investment portfolio is comprised
of State and Local Obligations, mortgage-backed securities, mutual funds,
interest-bearing deposits and equity securities consisting of FHLMC preferred
stocks, FNMA preferred stock, FHLB stock and other common stock. At December 31,
2003, $237,000, or 4.6%, of the Company's investment portfolio, excluding
mortgage-backed securities, mutual funds and equity securities, was scheduled to
mature in one year or less, and $2.4 million, or 47.4% was scheduled to mature
within one to five years.
Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short term demand for funds to be
used in the Company's loan origination and other activities. In addition, the
Company's liquidity levels are affected by the level and source of its borrowed
funds.
11
Investment Portfolio. The following table sets forth the carrying value
of the Company's investment portfolio at the dates indicated.
At December 31,
2003 2002 2001
---- ---- ----
(In thousands)
Investment securities:
U.S. Government agencies (1) .. $ -- $ -- $ 1,003
Mortgage-backed securities .... 9,023 4,026 6,331
State and Local Obligations (1) 5,133 6,073 5,952
FHLB stock .................... 4,778 4,478 4,429
Mutual Fund ................... 1,989 2,000 2,002
Equity securities(2) .......... 6,029 6,257 11,649
------- ------- -------
Total investment securities . 26,952 22,834 31,366
Interest-earning deposits ..... 7,125 13,026 17,650
------- ------- -------
Total investments ........... $34,077 $35,860 $49,016
======= ======= =======
______________________________________
(1) Certain securities have call features which allows the issuer to call
the security prior to maturity date.
(2) Certain securities have call features which allows the issuer to call
the security.
12
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and weighted average yields
for the Company's investment portfolio at December 31, 2003.
At December 31, 2003
--------------------
One Year or Less One to Five Years Five to Ten Years Over Ten Years
---------------- ----------------- ----------------- --------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Investment securities:
Mortgage-backed securities $ - -% $ 94 5.60% $1,570 5.80% $7,358 4.66%
State and Local Obligations(1) 237 4.23 2,431 4.62 1,759 4.97 706 6.27
Mutual Fund............ - - - - - - - -
FHLB Stock............. - - - - - - - -
Common Stock........... - - - - - - - -
Preferred Stock-FNMA(2) - - - - - - - -
Preferred Stock-FHLMC(2) - - - - - - - -
------ ---- ------ ---- ------ ---- ------ ----
Total securities available
for sale............... . $ 237 4.23% $2,525 4.66% $3,329 5.36% $8,064 4.80%
Interest-bearing deposits. 7,125 1.11 - - - - - -
------ ---- ------ ---- ------ ---- ------ ----
Total investments.... $7,362 1.21% $2,525 4.66% $3,329 5.36% $8,064 4.80%
====== ==== ====== ==== ====== ==== ====== ====
Total
-----
Annualized
Average Weighted
Carrying Fair Life in Average
Value Value Years Yield
----- ----- ----- -----
(Dollars in thousands)
Investment securities:
Mortgage-backed securities $ 9,022 $ 9,022 2 4.87%
State and Local Obligations(1) 5,133 5,133 3 4.94
Mutual Fund............ 1,990 1,990 2.18
FHLB Stock............. 4,778 4,778 3.00
Common Stock........... 4 4 -
Preferred Stock-FNMA(2) 1,010 1,010 5.81
Preferred Stock-FHLMC(2) 5,015 5,015 3.75
------- ------- ----
Total securities available
for sale............... . $26,952 $26,952 4.18%
Interest-bearing deposits. 7,125 7,125 1.11
------- ------- ----
Total investments.... $34,077 $34,077 3.53
======= ======= ====
(1) Certain securities have call features which allows the issuer to call
the security prior to maturity date.
(2) Certain securities have call features which allows the issuer to call
the security.
13
Sources of Funds
General. Deposits are the major source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from FHLB advances, the amortization and prepayment of loans, the
maturity and calls of investment securities and operations. Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. The Company uses short-term
borrowings to compensate for reductions in the availability of funds from other
sources or on a longer term basis for general business purposes.
Deposits. During 2003, consumer and commercial deposits were attracted
principally from within the Company's market area through the offering of a
broad selection of deposit instruments including noninterst-bearing demand
accounts, NOW accounts, savings accounts, money market savings, certificates of
deposit and individual retirement accounts. Deposit account terms vary according
to the minimum balance required, the period of time during which the funds must
remain on deposit, and the interest rate, among other factors. The maximum rate
of interest which the Company may pay is not established by regulatory
authority. The Company regularly evaluates its internal cost of funds, surveys
rates offered by competing institutions, reviews the Company's cash flow
requirements for lending and liquidity, and executes rate changes when deemed
appropriate. Public fund deposits totalled $3.3 million at December 31, 2003, a
reduction of $2.0 million from December 31, 2002. Historically, the Company does
not obtain retail funds through brokers through a solicitation of funds, nor by
offering negotiated rates on certificates of deposit in excess of $100,000.
Beginning fiscal year 2004, the Company's Board approved acceptance of deposits
by these methods. Currently, however, the Company does not have any of these
types of deposits.
Deposit Portfolio. Deposits with the Company as of December 31, 2003,
were represented by the various types of deposit programs described below.
Weighted Percentage
Average Checking and Minimum of Total
Interest Rate Original Term Savings Deposits Balance Balances Deposits
- ------------- ------------- ---------------- ------- -------- --------
(Dollars in
thousands)
0.00% None Noninterest-bearing demand $ 50 $ 9,161 3.23%
0.17 None NOW accounts 50 41,602 14.65
0.30 None Savings accounts 25 27,765 9.78
0.88 None Money Market savings 2,500 25,785 9.08
Certificates of Deposit
-----------------------
0.79 1-3 months Fixed term, fixed rate $ 1,000 $ 237 0.08
1.11 4-6 months Fixed term, fixed rate 1,000 1,998 0.70
1.56 7-9 months Fixed term, fixed rate 1,000 805 0.28
1.77 10-12 months Fixed term, fixed rate 1,000 20,389 7.18
2.89 13-24 months Fixed term, fixed rate 1,000 56,159 19.79
3.84 25-36 months Fixed term, fixed rate 1,000 25,541 8.99
4.23 37-48 months Fixed term, fixed rate 1,000 5,054 1.78
5.16 49-60 months Fixed term, fixed rate 1,000 65,945 23.22
5.72 61 months or greater Fixed term, fixed rate 1,000 3,346 1.18
1.00 Various Variable rate 100 177 0.06
-------- ------
Total deposits $283,964 100.00%
======== ======
14
The following table sets forth the change in dollar amount of deposits
in the various types of deposit accounts offered by the Company between the
dates indicated.
Increase Increase Increase Increase
Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance
12/31/03 % $ 12/31/02 % $ 12/31/01
------- ---------- ---------- ------- ---------- ---------- -------
(Dollars in thousands)
Noninterest bearing demand $ 9,161 12.32% $ 1,005 $ 8,156 18.82% $ 1,292 $ 6,864
NOW ...................... 41,602 14.37 5,228 36,374 7.72 2,607 33,767
Savings account .......... 27,765 8.06 2,072 25,693 17.44 3,815 21,878
Money market savings ..... 25,785 8.58 2,037 23,748 (15.48) (4,348) 28,096
Certificates of deposit
that mature:
within 12 months ..... 92,660 36.52 24,788 67,872 (28.33) (26,833) 94,705
within 12-36 months .. 56,268 (24.83) (18,587) 74,855 41.16 21,828 53,027
beyond 36 months ..... 30,723 (23.77) (9,579) 40,302 32.24 9,825 30,477
-------- ------ -------- -------- ------ -------- --------
Total .............. $283,964 2.51% $ 6,964 $277,000 3.05% $ 8,186 $268,814
======== ==== ======== ======== ==== ======== ========
Increase Increase Increase Increase
Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance
12/31/01 % $ 12/31/00 % $ 12/31/99
-------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in thousands)
Noninterest bearing demand $ 6,864 13.06% $ 793 $ 6,071 (5.32)% $ (341) $ 6,412
NOW ...................... 33,767 11.72 3,542 30,225 0.43 129 30,096
Passbook savings ......... 21,878 0.71 154 21,724 (15.90) (4,106) 25,830
Money market savings ..... 28,096 14.59 3,577 24,519 40.40 7,055 17,464
Certificates of deposit
that mature:
within 12 months ..... 94,705 1.65 1,533 93,172 (20.71) (24,343) 117,515
within 12-36 months .. 53,027 (14.43) (8,945) 61,972 17.58 9,265 52,707
beyond 36 months ..... 30,477 29.78 6,993 23,484 11.78 2,477 21,007
-------- ------ -------- -------- ------ -------- --------
Total ............. $268,814 2.93% $ 7,647 $261,167 (3.64)% $ (9,864) $271,031
======== ==== ======== ======== ===== ======== ========
15
The following table sets forth the certificates of deposit in the
Company classified by rates as of the dates indicated:
At December 31,
2003 2002 2001
---- ---- ----
(In thousands)
Rate
3.99% or less.............. $ 95,626 $ 68,526 $ 23,765
4.00-5.99%................. 66,580 88,840 95,618
6.00-7.99%................. 17,445 25,664 58,814
8.00% or greater........... - - 12
--------- --------- ---------
$ 179,651 $ 183,030 $ 178,209
========= ========= =========
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 2003.
Amount Due
Less
Than 1 1-2 2-3 3-4 4-5 After 5
Year Years Years Years Years Years Total
---- ----- ----- ----- ----- ----- -----
(In thousands)
Rate
3.99% or less......... $60,997 $19,637 $ 4,919 $ 1,691 $ 8,382 $ - $ 95,626
4.00-5.99%............ 29,079 4,011 12,926 17,736 2,828 - 66,580
6.00-7.99%............ 2,584 10,621 4,154 86 - - 17,445
------- ------- ------- ------- ------- ----- --------
$92,660 $34,269 $21,999 $19,513 $11,210 $ - $179,651
======= ======= ======= ======= ======= ===== ========
The following table indicates the amount of the Company's certificates
of deposit greater than $100,000 by time remaining until maturity at December
31, 2003. This amount does not include savings accounts of greater than
$100,000, which totalled approximately $1.2 million at December 31, 2003.
Certificates
of Deposit over
Remaining Maturity $100,000
------------------ --------
(In thousands)
Three months or less............................... $ 2,848
Three through six months........................... 4,818
Six through twelve months.......................... 3,689
Over twelve months................................. 7,396
---------
Total............................................ $ 18,751
=========
16
The following table sets forth the changes in deposits of the Company
for the periods indicated:
Year Ended December 31,
2003 2002 2001
---- ---- ----
(In thousands)
Net increase (decrease) before interest
credited .......................... $ 607 $ 335 $(1,626)
Interest credited ..................... 6,357 7,851 9,273
------- ------- -------
Net increase in deposits .......... $ 6,964 $ 8,186 $ 7,647
======= ======= =======
Borrowings
Deposits are the Company's primary source of funds. The Company may
also obtain funds from the FHLB. FHLB advances are collateralized by selected
assets of the Company. Such advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of the OTS and the
FHLB. The maximum amount of FHLB advances to a member institution generally is
reduced by borrowings from any other source.
For the
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Weighted average rate paid on:
FHLB advances ........... 4.63% 5.33% 6.01%
FHLB advances:
Maximum balance ......... $103,021 $ 89,561 $ 88,563
Average balance ......... 96,904 82,996 75,827
Weighted average rate paid on:
Other borrowings ........ 1.00% 4.07% 2.39%
Other borrowings:
Maximum balance ......... $ 21 $ 275 $ 275
Average balance ......... 19 26 27
Title Abstract Business
A component of the Company's operating strategy to increase
non-interest income is through the abstract company business conducted through a
wholly owned subsidiary, First Iowa Title Services Inc. ("First Iowa"). First
Iowa currently provides real estate title abstracting services in Webster, Boone
and Jasper counties. These services include researching recorded documents at
the county courthouse and providing a history of those documents as they pertain
to specific parcels of real estate. This information is used to determine who
owns specific parcels of real estate and what encumbrances are on those specific
parcels. The abstract business performed by First Iowa replaces a significant
portion of the function of a title insurance company. Iowa law prohibits Iowa
insurance companies or companies authorized to do business in Iowa from issuing
title insurance or insurance against loss or damage by reason of defective
title, encumbrance or otherwise. Institutions can purchase title insurance, for
their own protection or to sell loans on the secondary market, but the cost of
this insurance may not be passed on to the borrower. First Iowa had 17 employees
as of December 31, 2003.
Insurance and Annuity Business
Another component of the Company's operating strategy to increase
non-interest income is through First Federal Investment Services, Inc. ("First
Federal Investments"), a wholly owned subsidiary of the Bank. First Federal
Investments' activities include the sale of life insurance on mortgage loans,
and credit life and accident and health insurance on consumer loans made by the
Company. In addition, First Federal Investments sells life insurance annuity
products, mutual funds and other noninsured products. First Federal Investments
had two employees as of December 31, 2003.
17
Mortgage Company Business
First Iowa Mortgage, Inc. is a wholly-owned subsidiary of the Bank.
First Iowa Mortgage, Inc. originated first mortgage loans and subsequently sold
these loans and the mortgage servicing rights to investors. First Iowa Mortgage,
Inc. currently is inactive and these services are provided by the Bank.
Multifamily Apartment Buildings
On July 13, 1995, the Company formed the Northridge Apartments Limited
Partnership with the Fort Dodge Housing Corporation ("FDHC"), a non-profit Iowa
corporation formed to acquire, develop and manage low-and moderate-income
housing for residents of the Fort Dodge area. The FDHC is controlled by the Fort
Dodge Municipal Housing Agency, an agency chartered by the City of Fort Dodge.
The Northridge Partnership is a low-income housing tax credit project for
certain federal tax purposes. A 44-unit apartment complex was completed on
February 1, 1997. The tax credits for the year ended December 31, 2003 are
approximately $151,000. The tax credits will continue for an additional
three-year period.
On October 24, 1996, the Company formed the Northridge Apartments
Limited Partnership II to acquire, develop and manage low-and moderate-income
housing for residents of the Fort Dodge area. Northridge Partnership II was
awarded low income housing tax credits in 2002 by the Iowa Finance Authority.
These credits were awarded to construct a 23 unit apartment building in Fort
Dodge, Iowa. A 23-unit apartment complex was completed on March 31, 2003. The
tax credits for the year ended December 31, 2003 are approximately $86,000. Tax
credits for 2003 were prorated from the date of occupancy by tenants. The tax
credits will continue for an additional nine year period and will be
approximately $127,000 annually. In addition, this building is located in an
area designated as a state enterprise zone. A State of Iowa one time income tax
credit of approximately $166,000 was awarded for the year ended December 31,
2003.
Personnel
At December 31, 2003, the Company had 118 full-time and 24 part-time
employees (including the 17 employees of First Iowa and the 2 employees at First
Federal Investments). None of the Company's employees is represented by a
collective bargaining group. The Company believes its relationship with its
employees to be good.
18
FEDERAL AND STATE TAXATION
Federal Taxation
General. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Holding Company. For federal income tax purposes, the Holding
Company, the Bank and the Bank's subsidiaries will be eligible to file
consolidated income tax returns and report their income on a calendar year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's tax reserve for bad debts, discussed below.
The Holding Company and the Bank are not currently under audit by the IRS and
have not been audited for the past five years.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having
an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to loans and to make, within specified
formula limits, annual additions to the reserve which are deductible for
purposes of computing the Bank's taxable income. Pursuant to the Small Business
Job Protection Act of 1996, the Bank has now recaptured (and taken into income)
over a multi-year period a portion of the balance of its bad debt reserve as of
December 31, 1995.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve", i.e. its reserve as of
December 31, 1987, to the extent thereof and then from its supplemental reserve
for losses on loans, and an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not constitute nondividend distributions and, therefore, will not be
included in the Bank's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, in some situations,
approximately one and one-half times the nondividend distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
federal corporate income tax rate. We do not intend to pay distributions that
would result in the recapture of any portion of our bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the
"Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate
of 20%. Only 90% of AMTI can be offset by AMTI minimum tax net operating loss
carryovers, of which there is none. AMTI is also adjusted by determining the tax
treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. The Holding Company
does not expect to be subject to the AMT.
Dividends-Received Deduction. The Holding Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.
State and Local Taxation
Iowa and Colorado Taxation. The Holding Company and the Bank's
subsidiaries file Iowa corporation tax returns and the Bank files an Iowa
franchise and Colorado income tax return.
The State of Iowa imposes a tax on the Iowa franchise taxable income of
thrift institutions at the rate of 5%. Iowa franchise taxable income is
generally similar to federal taxable income except that interest from state and
municipal obligations is taxable, and no deduction is allowed for state
franchise taxes. The net operating loss carryback and carryforward rules are
similar to the federal rules.
The state corporation income tax rate ranges from 6% to 12% depending
upon Iowa corporation taxable income. Interest from federal securities is not
taxable for purposes of the Iowa corporation income tax.
19
REGULATION
General
The Bank is a federal savings bank subject to regulation, examination
and supervision by the OTS and is subject to the examination and supervision of
the Federal Deposit Insurance Corporation ("FDIC") as its deposit insurer. The
Bank is a member of the SAIF, and its deposit accounts are insured up to
applicable limits by the FDIC. All of the deposit premiums paid by the Bank to
the FDIC for deposit insurance are currently paid to the SAIF. The Bank is also
a member of the FHLB of Des Moines, which is one of the 12 regional FHLBs. The
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition, and it must obtain regulatory approvals prior to entering
into certain transactions, such as mergers with, or acquisitions of, other
depository institutions. The OTS conducts periodic examinations to assess the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings association can engage and is intended primarily for the protection of
the insurance fund and depositors. The Holding Company, as a savings and loan
holding company, files certain reports with, and otherwise complies with, the
rules and regulations of the OTS and of the SEC under the federal securities
laws.
The OTS and the FDIC have significant discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC, SEC or the Congress, could have a
material adverse impact on the Company, the Bank, and their operations and
stockholders.
On November 12, 1999, President Clinton signed into law landmark
financial services legislation, titled the Gramm-Leach-Bliley Act ("GLB Act").
The GLB Act repeals depression-era laws restricting affiliations among banks,
securities firms, insurance companies and other financial services providers.
The impact of the GLB Act on the Company and the Bank, where relevant, is
discussed throughout the regulation section below.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
Regulation of Federal Savings Associations
Business Activities. The Bank derives its lending and investment powers
from the HOLA, as amended, and the regulations of the OTS. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of debt
securities, and certain other assets. The Bank may also establish service
corporations that may engage in activities not otherwise permissible for the
Bank, including certain real estate equity investments and securities and
insurance brokerage. The Bank's authority to invest in certain types of loans or
other investments is limited by federal law.
Loans to One Borrower. The Bank is generally subject to the same limits
on loans to one borrower as a national bank. With specified exceptions, the
Bank's total loans or extensions of credit to a single borrower cannot exceed
15% of the Bank's unimpaired capital and surplus which does not include
accumulated other comprehensive income. The Bank may lend additional amounts up
to 10% of its unimpaired capital and surplus which does not include accumulated
other comprehensive income, if the loans or extensions of credit are
fully-secured by readily-marketable collateral. The Bank currently complies with
applicable loans-to-one borrower limitations.
QTL Test. Under federal law, the Bank must comply with the qualified
thrift lender, "QTL" test. Under the QTL test, the Bank is required to maintain
at least 65% of its"portfolio assets" in certain "qualified thrift investments"
in at least nine months of the most recent 12-month period. "Portfolio assets"
means, in general, the Bank's total assets less the sum of:
o specified liquid assets up to 20% of total assets:
o goodwill and other intangible assets; and
20
o the value of property used to conduct the Bank's business
The Bank may also satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
The Bank met the QTL test at December 31, 2003, and in each of the prior 12
months, and, therefore, qualified as a thrift lender. If the Bank fails the QTL
test it must either operate under certain restrictions on its activities or
convert to a bank charter.
Capital Requirements. The OTS regulations require savings associations
to meet three minimum capital standards: (1) a tangible capital ratio
requirement of 1.5% of total assets as adjusted under the OTS regulations, (2) a
leverage ratio requirement of 3.0% of core capital to such adjusted total
assets, if a savings association has been assigned the highest composite rating
of 1 under the Uniform Financial Institutions Rating System, and (3) a
risk-based capital ratio requirement of 8.0% of core and supplementary capital
to total risk-based assets. The minimum leverage capital ratio for any other
depository institution that does not have a composite rating of 1 will be 4%,
unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. In determining the
amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks found by the OTS to be
inherent in the type of asset.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative and other preferred stock,
mandatory convertible debt securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses. In addition, up to
45% of unrealized gains on available-for-sale equity securities with a readily
determinable fair value may be included in tier 2 capital. The allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets, and the amount of supplementary
capital that may be included as total capital cannot exceed the amount of core
capital.
On May 10, 2002, the OTS adopted an amendment to its capital
regulations which eliminated the interest rate risk component of the risk-based
capital requirement.
At December 31, 2003, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. The table below presents the Bank's
regulatory capital as compared to the OTS regulatory capital requirements at
December 31, 2003:
Capital
Bank Requirements Excess Capital
---- ------------ --------------
(In thousands)
Tangible capital........ $ 31,816 $ 6,270 $ 25,546
Core capital............ 31,816 12,541 19,275
Risk-based capital...... 34,958 22,554 12,404
The OTS imposes various restrictions or requirements on the Company's
ability to make capital distributions, including cash dividends. A savings
institution that is the subsidiary of a savings and loan holding company must
file a notice with the OTS at least 30 days before making a capital
distribution. The Company must file an application for prior approval if the
total amount of its capital distributions, including the proposed distribution,
for the applicable calendar year would exceed an amount equal to the Company's
net income for that year plus the Company's retained net income for the previous
two years.
The OTS may disapprove of a notice of application if:
o The Company would be undercapitalized following the
distribution.
o the proposed capital distribution raises safety and soundness
concerns; or
21
o the capital distribution would violate a prohibition contained
in any statute, regulation or agreement.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (i) in states that expressly authorize branches of savings
associations located in another state and (ii) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "-- QTL Test." The authority for a federal savings association
to establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation 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, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received an "Outstanding" CRA rating
in its most recent examination.
The CRA regulations establish an assessment system that bases an
associations rating on its actual performance in meeting community needs. In
particular, the assessment system focuses on three tests: (a) a lending test, to
evaluate the institution's record of making loans in its assessment areas; (b)
an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting low
or moderate income individuals and businesses; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In general, these
transactions must be on terms which are as favorable to the Bank as comparable
transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the Bank's capital.
Collateral in specified amounts must usually be provided by affiliates in order
to receive loans from the Bank. In addition, the OTS regulations prohibit a
savings association from lending to any of its affiliates that engage in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary.
Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded
its interpretations of Sections 23A and 23B of the FRA and replaced these
interpretations with Regulation W. In addition, Regulation W makes various
changes to existing law regarding Sections 23A and 23B, including expanding the
definition of what constitutes an affiliate subject to Sections 23A and 23B and
exempting certain subsidiaries of state-chartered banks from the restrictions of
Sections 23A and 23B.
Under Regulation W, all transactions entered into on or before December
12, 2002, which either became subject to Sections 23A and 23B solely because of
Regulation W, and all transactions covered by Sections 23A and 23B, the
treatment of which will change solely because of Regulation W, became subject to
Regulation W on July 1, 2003. All other covered affiliate transactions become
subject to Regulation W on April 1, 2003. The Federal Reserve Board expects each
depository institution that is subject to Sections 23A and 23B to implement
policies and procedures to ensure compliance with Regulation W. We do not expect
that the changes made by Regulation W will have a material adverse effect on our
business.
The Bank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the Federal Reserve Board. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more that the
normal risk of repayment or present other unfavorable features and (b) not
22
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the Bank's capital. The regulations allow small discounts on fees on
residential mortgages for directors, officers and employees. In addition,
extensions for credit in excess of certain limits must be approved by the Bank's
Board of Directors.
Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension
of personal loans to directors and executive officers of issuers (as defined in
Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced
by an insured depository institution, such as the Bank, that are subject to the
insider lending restrictions of Section 22(h) of the Federal Reserve Act.
Enforcement. The OTS has primary enforcement responsibility over
savings associations, including the Bank. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
Standards for Safety and Soundness. Under federal law, the OTS has
adopted a set of guidelines prescribing safety and soundness standards. These
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings
standards, and compensation, fees and benefits. In general, the guidelines
require appropriate systems and practices to identify and mange the risks and
exposures specified in the guidelines. In addition, the OTS adopted regulations
that authorize, but do not require, the OTS to order an institution that has
been given notice that it is not satisfying these safety and soundness standards
to submit a compliance plan. If, after being notified, an institution fails to
submit an acceptable plan or fails in any material respect to implement an
accepted plan, the OTS must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to which
an undercapitalized association is subject under the "prompt corrective
action"provisions of federal law. If an institution fails to comply with such an
order, the OTS may seek to enforce such order in judicial proceedings and to
impose civil money penalties.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (i) are secured by real estate, or (ii) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations
require each savings association to establish and maintain written internal real
estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying OTS guidelines, which include loan-to-value ratios
for the different types of real estate loans. Associations are also permitted to
make a limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of the following
four categories based on the association's capital:
o well capitalized;
o adequately capitalized;
o undercapitalized; and
o critically undercapitalized.
At December 31, 2003, the Bank met the criteria for being considered
"well-capitalized." When appropriate, the OTS can require corrective action by a
savings association holding company under the "prompt corrective action"
provision of federal law.
Insurance of Deposit Accounts. The Bank is a member of the SAIF, and
the Bank pays its deposit insurance assessments to the SAIF. The FDIC also
maintains another insurance fund, the Bank Insurance Fund, which primarily
insures the deposits of banks and state chartered savings banks.
23
Under federal law, the FDIC established a risk based assessment system
for determining the deposit insurance assessments to be paid by insured
depositary institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the quarter ending three months before the beginning
of the assessment period. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%.
In addition, all FDIC insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately 0.0168% of insured
deposits to fund interest payment on bonds issued by the Financing Corporation,
an agency of the federal government established to recapitalize the predecessor
to the SAIF. These assessments will continue until the Financing Corporation
bonds mature in 2017.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of the regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of Des Moines, is required to acquire and hold
shares of capital stock in the FHLB of Des Moines in an amount at least equal to
the greater of 0.12% of the total assets of the Bank. The Bank is also required
to own activity based stock, which is based on 4.45% of the Bank's outstanding
advances. These percentages are subject to change by the FHLB. The Bank was in
compliance with this requirement with an investment in FHLB of Des Moines stock
at December 31, 2003 of $4.8 million. Any advances from a FHLB must be secured
by specified types of collateral, and all long-term advances may be obtained
only for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
be affected.
Under the GLB Act, membership in the FHLB is now voluntary for all
federally-chartered savings associations, such as the Bank. The GLB Act also
replaces the existing redeemable stock structure of the FHLB System with a
capital structure that requires each FHLB to meet a leverage limit and a
risk-based permanent capital requirement. Two classes of stock are authorized:
Class A (redeemable on 6-months notice) and Class B (redeemable on 5-years
notice).
Federal Reserve System. The Bank is subject to provisions of the FRA
and the FRB's regulations pursuant to which depositary institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts). The
FRB regulations generally require that reserves be maintained in the amount of
3.0% of the aggregate of transaction accounts up to $42.1 million. The amount of
aggregate transaction accounts in excess of $42.1 million are currently subject
to a reserve ratio of 10.0%. The FRB regulations currently exempt $6.0 million
of otherwise reservable balances from the reserve requirements, which exemption
is adjusted by the FRB at the end of each year. The Bank is in compliance with
the foregoing reserve requirements. Because required reserves must be maintained
in the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank, or a pass-through account as defined by the FRB, the effect of
this reserve requirement is to reduce the Bank's interest-earning assets. The
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS. FHLB System members
are also authorized to borrow from the Federal Reserve discount window, but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
Privacy Regulations. Pursuant to the GLB Act, the OTS has published
final regulations implementing the privacy protection provisions of the GLB Act.
The new regulations generally require that the Bank disclose its privacy policy,
including identifying with whom it shares a customer's "nonpublic personal
information," to customers at the time of establishing the customer relationship
and annually thereafter. In addition, the Bank is required to provide its
customers with the ability to "opt-out" of having it share their personal
information with unaffiliated third parties and not to disclose account numbers
or access codes to nonaffiliated third parties for marketing purposes. The Bank
currently has a privacy protection policy in place and believes that such
policies are in compliance with the regulations.
24
Prohibitions Against Tying Arrangements. Federal savings banks are
subject to the prohibitions of 12 U.S.C. ss. 1972 on certain tying arrangements.
A depository institution is prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or its affiliates
or not obtain services of a competitor of the institution.
Regulation of Savings and Loan Holding Companies
The Holding Company is registered as an unitary savings and loan
holding company and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Holding Company and any of its non-savings association subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the financial safety, soundness or
stability of a subsidiary savings association. Unlike bank holding companies,
federal savings and loan holding companies are not subject to any regulatory
capital requirements or to supervision by the FRB.
The Home Owner and Loan Act ("HOLA"), as amended, prohibits a savings
and loan holding company, directly or indirectly, or through one or more
subsidiaries, from acquiring control (as defined under HOLA) of another savings
institution (or a holding company parent) without prior OTS approval. In
addition, a savings and loan holding company is prohibited from directly or
indirectly acquiring (i) through mergers, consolidation or purchase of assets,
another savings institution or a holding company thereof, or acquiring all or
substantially all of the assets of such institution (or a holding company)
without prior OTS approval; and (ii) control of any depository institution not
insured by the FDIC (except through a merger with and into the holding company's
savings institution subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate
subsidiary an insured institution that has a principal office outside of the
state where the principal office of its subsidiary institution in located,
except, (i) in the case of certain emergency acquisitions approved by the FDIC;
(ii) if such holding company controls a savings institution subsidiary that
operated a home or branch office in such additional state as of March 5, 1987;
or (iii) if the laws of the state in which the savings institution to be
acquired is located specifically authorize a savings institution charted by that
state to be acquired by a savings institution chartered by the state where the
acquiring savings institution or savings and loan holding company is located or
by a holding company that controls such a state chartered association.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to satisfy the QTL test.
See "-- Regulation of Federal Savings Associations -- QTL Test" for a discussion
of the QTL requirements.
In addition, for grandfathered savings and loans companies (such as the
Company), the GLB Act prohibits the sale of such entities to nonfinancial
companies. This prohibition is intended to restrict the transfer of
grandfathered rights to other entities and, thereby, prevent evasion of the
limitation on the creation of new unitary savings and loan holding companies.
Transactions between the Bank and the Holding Company and its other
subsidiaries are subject to various conditions and limitations. See "--
Regulation of Federal Savings Associations -- Transactions with Related
Parties." See "-- Regulation of Federal Savings Associations -- Limitation on
Capital Distributions."
The USA PATRIOT Act
In response to the events of September 11th, 2001, President George W.
Bush signed into law the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or
the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
25
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an
anti-money laundering compliance officer, (iii) ongoing employee training
programs, and (iv) an independent audit function to test the anti-money
laundering program.
o Pursuant to Section 326, on May 9, 2003, the Secretary of the Department of
Treasury, in conjunction with other bank regulators issued Joint Final
Rules that provide for minimum standards with respect to customer
identification and verification. These rules became effective on October 1,
2003.
O Section 312 requires financial institutions that establish, maintain,
administer, or manage private banking accounts or correspondent accounts in
the United States for non-United States persons or their representatives
(including foreign individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering.
o Effective December 25, 2001, financial institutions are prohibited from
establishing, maintaining, administering or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a physical presence
in any country), and will be subject to certain record keeping obligations
with respect to correspondent accounts of foreign banks.
o Bank regulators are directed to consider a holding company's effectiveness
in combating money laundering when ruling on Federal Reserve Act and Bank
Merger Act applications.
The Sarbanes-Oxley Act
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range of
corporate governance and accounting measures for public companies designed to
promote honesty and transparency in corporate America and better protect
investors from the type of corporate wrongdoing that occurred in Enron, WorldCom
and similar companies. The Sarbanes-Oxley Act's principal legislation includes:
o the creation of an independent accounting oversight board;
o auditor independence provisions which restrict non-audit services that
accountants may provide to their audit clients;
o additional corporate governance and responsibility measures, including the
requirement that the chief executive officer and chief financial officer
certify financial statements;
o the forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer's securities by directors and senior officers in
the twelve month period following initial publication of any financial
statements that later require restatement;
o an increase in the oversight of, and enhancement of certain requirements
relating to audit committees of public companies and how they interact with
the company's independent auditors;
o requirement that audit committee members must be independent and are
absolutely barred from accepting consulting, advisory or other compensatory
fees from the issuer;
o requirement that companies disclose whether at least one member of the
committee is a "financial expert" (as such term is defined by the
Securities and Exchange Commission) and if not, why not;
o expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a prohibition
on insider trading during pension blackout periods;
o a prohibition on personal loans to directors and officers, except certain
loans made by insured financial institutions;
o disclosure of a code of ethics and filing a Form 8-K for a change or waiver
of such code;
26
o mandatory disclosure by analysts of potential conflicts of interest; and
o a range of enhanced penalties for fraud and other violations.
Although we anticipate that we will incur additional expense in
complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not expect that such compliance will have a
material impact on our results of operations or financial condition.
Federal Securities Laws
The Company's common stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
27
ITEM 2. PROPERTIES
The Company conducts its business through its main office located in
Fort Dodge, Iowa and nine full-service offices located in Fort Dodge, Nevada,
Ames, Perry, Ankeny, Clive, Burlington and Mount Pleasant, Iowa. The following
table sets forth certain information concerning the main office and each branch
office of the Company and the offices of First Iowa Title Services at December
31, 2003. In addition to the properties listed below, First Federal Investments
owns land and an office building in Fort Dodge, Iowa and equipment with a net
book value of $195,000, Northridge Apartments Limited Partnership owns a
multifamily apartment building with a net book value of $1.6 million and
Northridge Apartment Limited Partnership II owns a multifamily apartment
building with a book value of $1.4 million at December 31, 2003. The aggregate
net book value of the Company's premises and equipment, on a consolidated basis
was $9.8 million at December 31, 2003.
Lease
Location Opening Date Expiration Date Net Book Value
Main Office:
825 Central Avenue 1973 N/A $ 1,320,192
Fort Dodge, Iowa
Branch Offices:
201 South 25th Street 1977 N/A $ 191,244
Fort Dodge, Iowa
404 Lincolnway 1977 N/A $ 435,814
Nevada, Iowa
316 South Duff 1995 N/A $ 1,897,537
Ames, Iowa
1111-141st Street 1999 N/A $ 783,192
Perry, Iowa
321 North Third Street 1953 N/A $ 536,703
Burlington, Iowa
1010 North Roosevelt 1975 N/A $ 956,245
Burlington, Iowa
102 South Main 1991 N/A $ 243,489
Mount Pleasant, Iowa
2204 Woodlands Parkway 2003 2004(3) $ -
Clive, Iowa
13150 Hickman Road 2003 N/A $ 1,393,760
Clive, Iowa
2110 SE Delaware 2003 N/A $ 1,842,159
Ankeny, Iowa
First Iowa Offices:
628 Central Avenue 1982 N/A $ 21,896
Fort Dodge, Iowa
814 8th Street 1996 (1) $ 8,827
Boone, Iowa
200 1st Street South 1996 2003 (2) $ 12,992
Newton, Iowa
_______________________
(1) Month to month lease.
(2) New lease effective January, 2004 for a five year term.
(3) Leased office space for the temporary location of the Clive office.
28
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 2003.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The information required by this Item is incorporated herein by
reference to page 62 of the Company's 2003 Annual Report to Shareholders under
the heading "Shareholder Information," which section is included in Exhibit 13.1
to this Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by
reference to page 4 of the Company's 2003 Annual Report to Shareholders under
the heading "Selected Financial Data," which section is included in Exhibit 13.1
to this Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated herein by
reference to pages 7 through 26 of the Company's 2003 Annual Report to
Shareholders under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which section is included in
Exhibit 13.1 to this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated herein by
reference to pages 11 through 14 of the Company's 2003 Annual Report to
Shareholders under the heading "Discussion of Market Risk--Interest Rate
Sensitivity Analysis," which section is included in Exhibit 13.1 to this Annual
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to pages 27 through 60 of the Company's 2003 Annual Report to
Shareholders under the headings "Independent Auditor's Report," "Consolidated
Financial Statements" and "Notes to Consolidated Financial Statements," which
sections are included in Exhibit 13.1 to this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
ITEM 9A CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive
Officer and Chief Financial Officer and Treasurer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this report. Based upon that evaluation, the Company's President and Chief
Executive Officer and Chief Financial Officer and Treasurer concluded that the
disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation that occurred
during the Company's last fiscal quarter that has materially affected, or that
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors and Executive Officers of the
Registrant is included under the headings "Information with Respect to Nominees
and Continuing Directors," "Nominees for Election as Directors," "Continuing
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 23, 2004, which has been filed with the SEC and
is incorporated herein by reference.
The Company and the Bank have adopted a Code of Conduct and Ethics
which applies to all employees, officers and directors of the Company. The
Company has also adopted a Code of Ethics for Senior Financial Officers of North
Central Bancshares, Inc., which applies to the Company's principal executive
officer, principal financial officer, principal accounting officer or controller
or person performing similar functions for the Company. The Code of Ethics for
Senior Financial Officers of the Company meets the requirements of a "code of
ethics" as defined by Item 406 of Regulation S-K. In accordance with Item 406 of
Regulation S-K, the Code of Ethics for Senior Financial Officers is filed
herewith as Exhibit 14.1 to this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is included under the
headings "Executive Compensation" (excluding the Stock Performance Graph and the
Compensation Committee Report) and "Directors' Compensation" in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on April 23,
2004, which has been filed with the SEC and is incorporated herein by reference.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners
and management is included under the headings "Principal Shareholders of the
Company" and "Security Ownership of Management" in the Company's Proxy Statement
for its Annual Meeting of Shareholders to be held on April 23, 2004, which has
been filed with the SEC and is incorporated herein by reference.
The following table sets forth the aggregate information of our equity
compensation plans in effect as of December 31, 2003.
Number of securities remaining
available for future issuance
Plan category Number of securities to be Weighted-average under equity compensation plans
------------- issued upon exercise of exercise price of (excluding securities reflected
outstanding options outstanding options in column (a))
------------------- ------------------- --------------
(a) (b) (c)
Equity compensation
plans approved by security
holders.................... 167,610 $ 17.02 28,605
Equity compensation
plans not approved by
security holders........... - - - - 40,000 1
Total..................... 167,610 $ 17.02 68,605 2
- -----------------------
(1) The equity compensation plan not approved by shareholders is that portion
of the 1996 Stock Option Plan which grants nonqualified options to
directors out of a pool of 40,000 shares reserved to the plan without
shareholder approval.
(2) Reflects 40,000 shares reserved for future grant under the 1996 Stock
Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
included under the heading "Transaction with Certain Related Persons" in the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held on
April 23, 2004, which has been filed with the SEC and is incorporated herein by
reference.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding the aggregate fees billed for each of the last
two fiscal years by the Company's principal accountant is included under the
heading "Principal Accountant Fees and Services" in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on April 23, 2004,
which has been filed with the SEC and is incorporated herein by reference.
31
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. The consolidated balance sheets of North Central Bancshares, Inc.
and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders'equity
and cash flows for the years ended December 31, 2003, 2002 and
2001, together with the related notes and the independent
auditor's report of McGladrey & Pullen, LLP, independent
certified public accounts.
2. Financial Statement Schedules have been omitted because they are
not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
3. See Exhibit Index on following page.
(b) Reports on Form 8-K filed during the last quarter of 2003.
The Company filed a Form 8-K on October 27, 2003 furnishing to the
Commission a press release announcing the Company's earnings for the
period ended September 30, 2003.
32
(c) Exhibits Required by Item 601 of Securities and Exchange Commission
Regulation S-K:
Exhibit No. Description Page No.
----------- ----------- --------
3.1 Articles of Incorporation of North Central Bancshares, Inc. *
3.2 Bylaws of North Central Bancshares, Inc. *
3.3 Bylaws of North Central Bancshares, Inc., as amended
4.1 Federal Stock Charter of First Federal Savings Bank of Iowa
(formerly known as First Federal Savings Bank of Fort Dodge) *
4.2 Bylaws of First Federal Savings Bank of Iowa (formerly known
as First Federal Savings Bank of Fort Dodge). *
4.3 Specimen Stock Certificate of North Central Bancshares, Inc. *
4.4 Bylaws of First Federal Savings Bank of Iowa, as amended
10.1 Employee Stock Ownership Plan of First Federal Savings
Bank of Iowa (formerly known as First Federal Savings Bank
of Fort Dodge) and ESOP Trust Agreement *****
(incorporating Amendments 1 and 2)
10.1A Amendment #1 to Employee Stock Ownership Plan of First
Federal Savings Bank of Iowa (formerly known as First
Federal Savings Bank of Fort Dodge) and ESOP Trust *******
Agreement
10.1B Amendment #2 to Employee Stock Ownership Plan of First
Federal Savings Bank of Iowa (formerly known as First
Federal Savings Bank of Fort Dodge) and ESOP Trust *******
Agreement
10.2 ESOP Loan Documents, dated September 3, 1996 ****
10.3 Employee Retention Agreements between First Federal
Savings Bank of Fort Dodge and certain executive officers **
10.4 Employment Agreement between First Federal Savings Bank
of Iowa (formerly known as First Federal Savings Bank of
Fort Dodge) and David M. Bradley, effective as of *
August 31, 1994
10.6 Form of Employment Agreement between North Central
Bancshares, Inc. and David M. Bradley *
10.8 North Central Bancshares, Inc. 1996 Stock Option Plan ***
10.9 Amendment No. 1 to the North Central Bancshares, Inc.
1996 Stock Option Plan *****
10.10 Supplemental Retirement and Deferred Compensation Plan
of First Federal Savings Bank of Iowa *******
10.11 Form of Employment Agreement between First Federal Savings
Bank of Iowa and C. Thomas Chalstrom ******
10.12 Form of Employment Agreement between First Federal Savings
Bank of Iowa and Kirk A. Yung ******
10.13 Tax Allocation Agreement between North Central Bancshares,
Inc. and Subsidiaries
13.1 Annual Report to security holders
14.1 Code of Ethics for Senior Financial Officers of North
Central Bancshares, Inc.
21.1 Subsidiaries of the Registrant *
23.1 Consent of McGladrey & Pullen, LLP
31.1 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
33
* Incorporated herein by reference to Registration Statement No. 33-80493
on Form S-1 of North Central Bancshares, Inc. (the "Registrant") filed
with the Securities and Exchange Commission, (the "Commission") on
December 18, 1995, as amended.
** Incorporated herein by reference to the Exhibits to the Annual Report
on Form 10-K filed by Registrant for fiscal year 1995, filed with the
Commission on March 29, 1996.
*** Incorporated herein by reference to the Amended Schedule 14A of
Registrant filed with the Commission on August 19, 1996.
**** Incorporated herein by reference to the Annual Report on Form 10-K of
the Registrant filed with the Commission on March 31, 1997.
***** Incorporated herein by reference to the Annual Report on Form 10-K of
the Registrant filed with the Commission on March 31, 1998.
****** Incorporated by reference to Exhibit 10.3.
******* Incorporated herein by reference to the Annual Report on Form 10-K of
the Registrant filed with the Commission on March 29, 2002.
(d) No financial schedules required by Regulation S-X are filed, and as such
are excluded from the Annual Report as provided by Exchange Act Rule
14a-3(b)(1).
34
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant and has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
North Central Bancshares, Inc.
Date: March 22, 2004 /s/ David M. Bradley
--------------------
By: David M. Bradley
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ David M. Bradley President, Chief Executive Officer, 03/22/04
- -------------------- Director, and Chairman of the Board
David M. Bradley (principal executive officer)
/s/ John L. Pierschbacher Treasurer 03/22/04
- ------------------------- (principal accounting and
John L. Pierschbacher financial officer)
/s/ Robert H. Singer, Jr. Director 03/22/04
- -------------------------
Robert H. Singer, Jr.
/s/ Melvin R. Schroeder Director 03/22/04
- -----------------------
Melvin R. Schroeder
/s/ Mark M. Thompson Director 03/22/04
- --------------------
Mark M. Thompson
/s/ Craig R. Barnes Director 03/22/04
- -------------------
Craig R. Barnes
35