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EX-23.1 - NORTH CENTRAL BANCSHARES INCv176963_ex23-1.htm
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EX-21.1 - NORTH CENTRAL BANCSHARES INCv176963_ex21-1.htm
EX-32.1 - NORTH CENTRAL BANCSHARES INCv176963_ex32-1.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 2009

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934:    For the transition period from _______ to _______  

Commission File No.  0-27672

NORTH CENTRAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

Iowa
42-1449849
(State of incorporation)
(I.R.S. Employer Identification No.)

825 Central Avenue
 
Fort Dodge, Iowa
50501
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code  (515) 576-7531
 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
  
The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: N/A

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
Yes o No x
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer o
Accelerated Filer o
   
Non-Accelerated Filer o (Do not check if smaller reporting company)
Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 2b-2 of the Exchange Act).
 
Yes o No x
 
The aggregate market 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, 2009 was $16,957,000.

As of March 12, 2010, there were issued and outstanding 1,348,448 shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.  Portions of the Proxy Statement for the registrant’s 2010 Annual Meeting of Shareholders are incorporated by reference to Items 10, 11, 12, 13 and Item 14 of Part III hereof.
2.  Portions of the 2009 Annual Report to Shareholders are incorporated by reference to Items 5, 6, 7, 7A and 8 of Part II hereof.

 
 

 

 
Table of Contents
 
 
PART I
 
Item 1
Business
2  
Item 1A
Risk Factors
32
Item 1B
Unresolved Staff Comments
37
Item 2
Properties
38
Item 3
Legal Proceedings
39
Item 4
Reserved
39
 
PART II
 
Item 5
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
39
Item 6
Selected Financial Data
39
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operation
39
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
39
Item 8
Financial Statements and Supplementary Data
39
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
39
Item 9A(T)
Controls and Procedures
40
Item 9B
Other Information
40
 
PART III
 
Item 10
Directors, Executive Officers and Corporate Governance
41
Item 11
Executive Compensation
41
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
41
Item 13
Certain Relationships and Related Transactions, and Director Independence
41
Item 14
Principal Accountant Fees and Services
42
 
PART IV
 
Item 15
Exhibits, Financial Statement Schedules
43

 
 

 

PART I

North Central Bancshares, Inc. and First Federal Savings Bank of Iowa (the “Bank”) may from time to time make written or oral “forward-looking statements.” These forward-looking statements may be contained in this annual filing on Form 10-K with the Securities and Exchange Commission (the “SEC”), the Annual Report to Shareholders, 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.  As used in this Form 10-K, the terms “we,” “us,” “our,” “North Central” and “Company” mean North Central Bancshares, Inc. and its subsidiaries, including the Bank, on a consolidated basis (unless the context indicates another meaning).
 
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:
 
 
·
developments impacting the financial services industry and global credit markets, and the response of legislators and regulators thereto;
 
 
·
new laws and regulations aimed at stimulating the economy and mitigating the effects of the current global economic crisis;
 
 
·
the impact of special assessments by the Federal Deposit Insurance Corporation (the “FDIC”);
 
 
·
developments at other companies in our industry, including the potential failure of other financial institutions;
 
 
·
the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
 
 
·
changes in consumer spending and saving habits;
 
 
·
the strength of our loan portfolio, including potential defaults by borrowers and our realization of amounts below the amounts we are due on certain loans;
 
 
·
impairments to the value of investment securities held by us;
 
 
·
the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve (the “Federal Reserve”);
 
 
·
inflation, interest rate, market and monetary fluctuations;
 
 
·
our ability to attract and retain key personnel to implement our strategy and oversee our operations;
 
 
·
the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance);
 
 
·
our success in gaining regulatory approval of products and services, when required;
 
 
·
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;
 
 
·
the willingness of users to substitute competitors’ products and services for our products and services;
 
 
·
our ability to attract funds and raise capital when needed to support growth or ongoing operations;
 
 
·
our previous expansion into new market areas and the associated costs may reduce our profitability;
 
 
·
the availability of desirable avenues to deploy our existing capital;
 
 
·
our success at managing the risks involved in our business, including our ability to maintain an effective system of internal control over financial reporting;
 
 
·
limitations imposed on us by our articles of incorporation and bylaws which could restrict our ability to pursue growth opportunities; and
 
 
·
limitations imposed on us by virtue of the agreements we entered into with the United States Treasury in connection with our participation in the Troubled Asset Relief Program Capital Purchase Program (including any potential changes to these agreements required to comply with changes in applicable Federal laws).
 
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.

 
- 1 -

 

ITEM 1.
BUSINESS

General

North Central Bancshares, Inc., an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa, a federally chartered savings bank.  The Company owns 100% of the outstanding stock of the Bank.  The Company’s stock is traded on the Nasdaq Global Market under the symbol “FFFD.”

The Company conducts business as a unitary savings and loan holding company and the principal business of the Company consists of the operation of the Bank.  The Company’s executive offices are located at the home office of the Company at 825 Central Avenue, Fort Dodge, Iowa.  The 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 ten other branch offices located in Iowa.  Eight of the Bank’s offices are located in north central and central Iowa, in the cities of Fort Dodge (2), Nevada, Ames, Perry, Ankeny, Clive and West Des Moines.  Three of the Bank’s offices are located in southeast Iowa, in the cities of Burlington (2) and Mount Pleasant. The Bank is the successor to First Federal Savings and Loan Association of Fort Dodge, which was originally chartered 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 consumer loans, with emphasis on second mortgage loans.  The Bank’s deposits are insured by the FDIC.  The Bank has been a member of the Federal Home Loan Bank (“FHLB”) system since 1954.  At December 31, 2009, the Bank had total assets of $455.0 million, total deposits of $334.8 million, and total shareholders’ equity of $48.3 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.  Information on the website shall not be considered a part of this Form 10-K.

Market Area and Competition

The Company is a savings and loan holding company serving its primary market area of Webster, Story, Des Moines, Dallas, Polk, and Henry Counties, which are located in the central, north central and southeastern parts of the State of Iowa.  The Company’s market area is influenced by agriculture, manufacturing, retail sales, insurance, financial and other professional services and public education.  The Company is headquartered in Fort Dodge, the Webster County seat, where it also operates two branch offices.

The year 2009 was an extremely challenging one for the financial industry and the entire world economy.  The financial crisis and recession also impacted the local economies in the Company’s market area.  The unemployment rate for the month of December 2009 for Webster County was 7.9%, for Story County 4.6%, for Dallas County 5.6%, for Polk County 6.5%, for Henry County 8.8% and for Des Moines County 9.0%.  These compare to the national rate of 10.0% and the State of Iowa rate of 6.6%.

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 outside the State of Iowa. The Company intends to continue such originations and purchases pursuant to its underwriting standards for Company-originated loans.

 
- 2 -

 

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 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 secured and unsecured consumer loans, with emphasis on second mortgage real estate loans.  At December 31, 2009, the Company’s total loans receivable was $383.2 million, of which $151.6 million, or 39.6%, were one-to-four family residential real estate first mortgage loans, $63.5 million, or 16.6%, were multifamily real estate first mortgage loans, primarily purchased by the Company, $84.6 million, or 22.1%, were commercial real estate first mortgage loans, primarily purchased by the Company, and $7.8 million, or 2.0%, were construction real estate loans.  Consumer loans, consisting primarily of second mortgage loans and automobile loans, totaled $75.7 million, or 19.7%, of the Company’s loan portfolio.

Loans to One Borrower.   Savings associations, 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, but generally does not include real estate.  At December 31, 2009, it was the Company’s policy to limit loans to one borrower to $5.0 million, with higher limits subject to board approval.  At December 31, 2009, it was the Company’s policy to limit loans to related entities, corporate groups, or common guarantors to $10.0 million.  These limitations are less than regulatory requirements.  At December 31, 2009, the Company’s largest aggregate outstanding loans to a single borrower or group of related borrowers totaled $5.5 million.  At December 31, 2009, the Company had one other lending relationship of over $4.0 million.

 
- 3 -

 

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,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
         
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-to-four family residential
  $ 151,550       39.55 %   $ 170,184       41.83 %   $ 195,586       43.23 %   $ 214,499       47.31 %   $ 201,242       45.88 %
Multifamily
    63,470       16.57       57,968       14.25       56,587       12.51       65,807       14.52       73,946       16.86  
Commercial
    84,595       22.08       91,978       22.61       109,186       24.13       95,508       21.07       81,255       18.52  
Construction
    7,853       2.05       8,447       2.08       17,385       3.84       12,091       2.67       21,192       4.83  
Total first mortgage loans
    307,468       80.25       328,577       80.77       378,744       83.71       387,905       85.57       377,635       86.09  
                                                                                 
Consumer loans:
                                                                               
Automobiles
  $ 14,777       3.86     $ 14,106       3.47     $ 12,667       2.80     $ 10,459       2.31     $ 9,252       2.11  
Second mortgage
    55,824       14.57       58,001       14.26       54,586       12.06       49,070       10.82       44,218       10.08  
Other
    5,088       1.33       6,099       1.50       6,460       1.43       5,901       1.30       7,545       1.72  
Total consumer loans
    75,689       19.75       78,206       19.23       73,713       16.29       65,430       14.43       61,015       13.91  
                                                                                 
Total loans receivable
  $ 383,157       100.00 %   $ 406,783       100.00 %   $ 452,457       100.00 %   $ 453,335       100.00 %   $ 438,650       100.00 %
                                                                                 
Less:
                                                                               
Undisbursed portion of construction loans
  $ 1,005       0.26 %   $ 840       0.21 %   $ 2,364       0.52 %   $ 1,217       0.27 %   $ 5,666       1.29 %
Unearned loan (premium) discount
    (155 )     (0.04 )     (347 )     (0.09 )     (370 )     (0.08 )     (583 )     (0.13 )     (769 )     (0.18 )
Net deferred loan origination fees (costs)
    281       0.07       124       0.03       119       0.03       165       0.04       149       0.03  
                                                                                 
Allowance for loan losses
    7,171       1.87       5,379       1.32       3,487       0.77       3,493       0.77       3,326       0.76  
                                                                                 
Total loans receivable, net
  $ 374,855       97.83 %   $ 400,787       98.53 %   $ 446,857       98.76 %   $ 449,043       99.05 %   $ 430,278       98.10 %

 
- 4 -

 

Loan Maturity Schedule.  The following table sets forth the contractual maturity of the Company’s loan portfolio at December 31, 2009.  Overdraft lines of credit are reported as due within one year.

   
At December 31, 2009
 
   
Within
   
1-5
   
Beyond 5
       
   
1 Year
   
Years
   
Years
   
Total
 
   
(In thousands)
 
First mortgage loans:
                         
One-to-four family residential
  $ 2,049     $ 6,159     $ 143,342     $ 151,550  
Multifamily
    1,584       8,788       53,098       63,470  
Commercial
    11,504       28,016       45,075       84,595  
Construction
    7,853       -       -       7,853  
Consumer loans
    5,951       41,643       28,095       75,689  
Total
  $ 28,941     $ 84,606     $ 269,610     $ 383,157  

The following table sets forth the dollar amounts of all fixed rate and adjustable rate loans in each loan category at December 31, 2009 due after December 31, 2010.

   
Due After December 31, 2010
 
   
Fixed
   
Adjustable
   
Total
 
   
(In thousands)
 
First mortgage loans:
                 
One-to-four family residential
  $ 33,621     $ 115,880     $ 149,501  
Multifamily
    7,958       53,928       61,886  
Commercial
    27,640       45,451       73,091  
Consumer loans
    58,035       11,703       69,738  
Total
  $ 127,254     $ 226,962     $ 354,216  

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 typically runs up to twelve months.  At December 31, 2009, 23.2% of the Company’s residential real estate loans had fixed rates, and 76.8% 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 Freddie Mac 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 of 15 years or greater in the secondary mortgage market.  For the year ended December 31, 2009, the Company sold $69.6 million of one-to-four family residential mortgage loans, generally to lower the Company’s interest rate risk.  One-to-four family portfolio loans are originated and underwritten according to policies approved by our board of directors.

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 rate 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.

 
- 5 -

 

The Company establishes various annual and life-of-the-loan caps on ARM loan interest rate adjustments.  At December 31, 2009, the Company generally offered ARM loans with annual rate caps of 2.00% and maximum life-of-loan caps of 6.00% above the initial interest rate.   At present, the interest rate on the Company’s ARM loans are calculated by using the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year.  In addition, the Company establishes floors for each loan originated below which the loan may not adjust. One-to-four family residential ARM loans totaled $108.5 million, or 28.3%, of the Company’s total loan portfolio at December 31, 2009.

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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Discussion of Market Risk – Interest Rate Sensitivity Analysis” in the 2009 Annual Report to Shareholders, which is included as Exhibit 13.1 to this Form 10-K and incorporated herein by reference.

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 association 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.  The Company originates one-to-four family residential mortgage loans with terms up to a maximum of 30 years and with loan-to-value ratios up to 96.5% of the lesser of the appraised value of the security property or the contract price.  The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to be at or below the 80% loan-to-value level.  The Company requires fire and casualty insurance, flood insurance, where applicable, an abstract of title, and a title opinion or title insurance 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 $148.1 million, or 38.6%, of the Company’s total loan portfolio at December 31, 2009.  Of such loans, $100.0 million, or 67.5%, were purchased or originated by the Company and were secured by properties outside the State of Iowa.  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 and commercial 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 project.  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 Company’s Senior Management Loan Committee and the board of directors and are generally subject to the same underwriting standards as for loans originated by the Company.  All out of state originated loans less than $1.0 million are approved by the Company’s Senior Management Loan Committee 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 copies of the original loan application, title insurance policy, appraisal and personal financial statements of any guarantors of the loan, and certified rent rolls. An executive officer of the Company also makes a personal inspection of the property securing the loan. Such purchases are made without recourse to the seller. At December 31, 2009, $19.7 million, or 19.7%, of out of state multifamily and commercial real estate loans were serviced by the Bank.  At December 31, 2009, $80.3 million, or 80.3%, of the out of state multifamily and commercial real estate loans were serviced by the originating financial institution, mortgage company or alternate servicing financial institution.  The Company imposes a $3.0 million limit on the aggregate size of multifamily and commercial loans to any one borrower for loans secured by real estate located outside the State of Iowa and a $5.0 million limit on the aggregate size of multifamily and commercial loans to one borrower applied to loans secured by real estate located in Iowa.  The Company also imposes a $3.0 million and $4.0 million loan limit per secured property located outside and inside the State of Iowa, respectively.  Any exceptions to these limits 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.”

 
- 6 -

 

Loans secured by multifamily and commercial real estate generally involve a greater degree of credit risk than single-family residential mortgage loans and such loans also typically 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.

Construction Lending.  The Company makes construction loans to individuals for the construction of their residences as well as to builders for the construction of one-to-four family residences and commercial and multifamily real estate.  At December 31, 2009, the Company’s construction loan portfolio totaled $7.8 million, or 2.0%, of the Company’s total loan portfolio.  Construction loans to individuals for their residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs up to twelve months.  These construction loans have rates and terms which generally match the one-to-four family ARM loan rates then offered by the Company, except that during the construction phase the borrower pays interest only.  Generally, the maximum loan-to-value ratio of owner occupied single family construction loans is 80% of appraised value.  Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans.

Generally, construction loans to builders of one-to-four family residences require the payment of interest only with terms of up to 12 months.  These loans may also provide for the payment of interest and loan fees from loan proceeds and carry adjustable rates of interest.  At December 31, 2009, the Company had $3.7 million of one-to-four family construction loans of which $1.3 million was nonperforming.

Construction loans on commercial and multifamily real estate projects may be secured by apartments, small office buildings, strip retail centers, or other property, and are generally structured to be converted to permanent loans at the end of the construction phase, which generally runs up to 12 months.  During the construction phase the borrower pays interest only.  These loans generally provide for the payment of interest and loan fees from loan proceeds.  At December 31, 2009, the Company had approximately $4.1 million of loans for the construction of commercial real estate of which $3.0 million was nonperforming.

Construction loans are obtained principally through continued business from builders who have previously borrowed from the Company and from new or existing customers who are building new facilities.  The application process includes a submission to the Company of accurate plans, specifications, and costs of the project to be constructed and projected revenues from the project.  These items are also used as a basis to determine the appraised value of the subject property.  Loans are based on the lesser of the current appraised value of the property or the cost of construction (land plus building).

Because of the uncertainties inherent in estimating construction costs and the market for the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project.  Construction loans to borrowers other than owner-occupants also involve many of the same risks discussed above regarding multifamily and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans.  Also, the funding of loan fees and interest during the construction phase makes the monitoring of the progress of the project particularly important, as customary early warning signals of project difficulties may not be present.

Consumer Loans, Including Second Mortgage Loans. The Company also originates consumer loans, which consists primarily of one-to-four family second mortgage loans, including home equity lines of credit. As of December 31, 2009, consumer loans totaled $75.7 million, of which second mortgage loans totaled $55.8 million, or 14.6%, of the Company’s total loan portfolio. The Company’s second mortgage loans generally have fixed interest rates for terms of three to five years. The Company’s home equity lines of credit are adjustable rate loans with terms up to ten 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 85%.  In recent years the Company originated one-to-four family second mortgage loans with a loan-to-value ratio of up to 100%; however during 2008 that limit was reduced to 95% and in 2009 the limit was further reduced to 85%.  Generally, second mortgage loans in excess of 85% loan-to-value are insured through a pool insurance product, unless the loan has secondary collateral.  These types of loans are subject to stricter underwriting guidelines.  As of December 31, 2009, the average principal amount of the Company’s second mortgage loans was approximately $24,000.

 
- 7 -

 

To a lesser extent, the Company also originates loans secured by automobiles, with fixed rates generally up to 100% 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 six years.  At December 31, 2009, automobile loans totaled $14.8 million, or 3.9%, 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, 2009, other consumer loans totaled $5.1 million, or 1.3%, of the Company’s total loan portfolio. Included in other consumer loans are unsecured consumer loans which totaled $1.1 million, or 0.3%, 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 $5,000, and the average balance of such loans is approximately $2,400.

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 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, 2009, $993,000 or 0.3%, 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 income information 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, at least one member of 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.

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, and 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. At December 31, 2009, the Company had outstanding commitments to originate $1.4 million of loans. This amount does not include commitments to purchase loans, undisbursed overdraft loan privileges, undisbursed home equity lines of credit or the unfunded portion of loans in process.

Purchased or Out of State Originated Loans. At December 31, 2009, the Company’s loan portfolio contained $111.8 million of loans secured by out of state properties.  These loans represented 29.2% of the Company’s total loan portfolio at December 31, 2009.  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, 2009, the Company’s out of state multifamily residential and commercial real estate loans had an average balance of $769,000 and the largest loan had a principal balance of $3.2 million.  As of December 31, 2009, there were two out of state commercial real estate loans totaling $3.2 million 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 out of state one-to-four family residences.  Due to economic conditions during 2009, including the uncertainty surrounding real estate values in other geographical areas, the Bank did not purchase any out of market one-to-four residential real estate loans.  At December 31, 2009, $8.0 million, or 2.1%, of the Company’s total loan portfolio consisted of out of state one-to-four family loans.  As of December 31, 2009, there was one out of state one-to-four family first mortgage loan totaling $1.5 million that was more than 90 days past due.

 
- 8 -

 

There are certain risks with loans purchased by the Company that are not associated with loans the Company originates.  At December 31, 2009, $19.8 million, or 17.7%, of purchased loans were serviced by the Bank.  At December 31, 2009, $92.0 million, or 82.3%, of purchased loans were serviced by the originating financial institution, mortgage company or alternate servicing financial institution.  Although the Company reviews each purchased loan using the Company’s underwriting criteria for originations and a Company officer performs an on-site inspection of each purchased multifamily and commercial real estate 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 requires appropriate documentation, and personal inspections of the underlying real estate collateral by an executive officer prior to purchase.  The Company limits its out of state loan portfolio concentration within a single state to 100% of the Bank’s risk based capital.  The Company also limits its loan portfolio concentration to a single servicer to 100% of the Bank’s risk based capital.

 
- 9 -

 

Set forth below is a table of the Company’s out of state purchased or originated loans by state of origin as of December 31, 2009.

   
One-to-four
   
Multi-
   
Commercial
   
Land
   
Total Balance as of
   
Percentage as of
 
State
 
Family
   
Family
   
Real Estate
   
Development
   
December 31, 2009
   
December 31, 2009
 
Arizona
  $ -     $ -     $ 2,751     $ -     $ 2,751       2.5 %
Arkansas
    160       -       -       -       160       0.1  
California
    5,198       11,085       11,071       -       27,354       24.5  
Colorado
    -       6,201       1,026       -       7,227       6.5  
District of Columbia
    1,500       -       -       -       1,500       1.3  
Florida
    -       -       276       3,000       3,276       2.9  
Illinois
    -       1,579       862       -       2,441       2.2  
Indiana
    -       1,076       397       -       1,473       1.3  
Kansas
    -       -       348       -       348       0.3  
Michigan
    -       2,093       -       -       2,093       1.9  
Minnesota
    -       2,320       806       -       3,126       2.8  
Missouri
    963       -       3,574       -       4,537       4.1  
Nebraska
    -       -       5,338       -       5,338       4.8  
Nevada
    -       -       1,377       -       1,377       1.2  
North Carolina
    52       -       -       -       52       0.0  
Ohio
    -       1,372       -       -       1,372       1.2  
Oregon
    -       2,510       2,298       -       4,808       4.3  
South Carolina
    -       -       4,521       -       4,521       4.0  
South Dakota
    -       -       2,455       -       2,455       2.2  
Texas
    155       -       1,903       -       2,058       1.8  
Utah
    -       -       8,432       -       8,432       7.5  
Virginia
    -       -       1,188       744       1,932       1.7  
Washington
    -       11,924       1,689       -       13,613       12.2  
Wisconsin
    -       9,574       -       -       9,574       8.6  
                                                 
Total
  $ 8,028     $ 49,734     $ 50,312     $ 3,744     $ 111,818       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,
 
   
2009
   
2008
   
2007
 
   
(In thousands)
 
                   
Total loans receivable at beginning of period
  $ 406,783     $ 452,457     $ 453,335  
Originations:
                       
First mortgage loans:
                       
One-to-four family residential
    91,783       52,200       55,106  
Multifamily
    2,333       860       2,104  
Commercial
    8,182       4,946       21,291  
Consumer loans:
                       
Automobiles
    8,801       9,849       10,518  
Second mortgage
    23,605       29,540       31,559  
Other
    4,338       5,312       5,001  
Total
    139,042       102,707       125,579  
                         
Loan Purchases:
                       
First mortgage one-to-four family
    -       -       6,293  
First mortgage multifamily
    9,449       13,154       1,707  
First mortgage commercial
    5,313       5,430       32,591  
Loan Sales:
                       
First mortgage one-to-four family
    (69,601 )     (41,823 )     (36,072 )
First mortgage commercial
    -       -       (2,000 )
                         
Transfer of mortgage loans to foreclosed real estate
    (2,647 )     (2,678 )     (2,360 )
Repayments
    (105,182 )     (122,464 )     (126,616 )
Net loan activity
    (23,626 )     (45,674 )     (878 )
Total loans receivable at end of period
  $ 383,157     $ 406,783     $ 452,457  

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, 2009, the Company had $281,000 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.

Investment Activities

At December 31, 2009, the Company’s investment portfolio was comprised of state and local obligations, mortgage-backed securities, U.S. Government agency securities, interest-bearing deposits and equity securities consisting of mutual funds, and Federal Home Loan Bank (FHLB) stock.  During 2009, the Company sold the remainder of the Freddie Mac preferred stock that it owned.  At December 31, 2009, $354,000 of the Company’s investment portfolio, excluding mutual funds and FHLB stock, was scheduled to mature in one year or less, $1.6 million was scheduled to mature within one to five years, and $21.0 million was scheduled to mature in more than 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,
 
   
2009
   
2008
   
2007
 
   
(In thousands)
 
                   
Investment securities
                 
Mortgage-backed securities
  $ 11,165     $ 19,754     $ 2,191  
State and local obligations
    4,326       1,772       2,770  
U.S. government agency securities
    7,476       -       -  
FHLB stock
    3,925       4,692       5,064  
Mutual funds
    207       1,230       1,938  
Equity securities
    -       82       4,636  
Total investment securities
    27,099       27,530       16,599  
Interest-earning deposits
    12,805       6,564       3,132  
Total investments
  $ 39,904     $ 34,094     $ 19,731  

Investment Portfolio Maturities.  The following table sets forth the scheduled maturities, market values and weighted average yields for the Company’s investment portfolio at December 31, 2009.

   
At December 31,2009
 
   
One Year or Less
   
One to Five Years
   
Five to Ten Years
   
Over Ten Years
   
Total
 
         
Weighted
         
Weighted
         
Weighted
         
Weighted
         
Weighted
   
Average
 
   
Fair
   
Average
   
Fair
   
Average
   
Fair
   
Average
   
Fair
   
Average
   
Fair
   
Average
   
Life in
 
   
Value
   
Yield
   
Value
   
Yield
   
Value
   
Yield
   
Value
   
Yield
   
Value
   
Yield
   
Years
 
   
(Dollars in thousands)
 
                                                                   
Investment securities:
                                                                 
Mortgage-backed securities
  $ 1       6.21 %   $ 33       5.90 %   $ 1,960       3.93 %   $ 9,171       3.67 %   $ 11,165       3.72 %     3.32  
State and local obligations (1)
    353       4.26       1,087       2.89       2,372       4.26       514       4.15       4,326       3.90       5.74  
U.S. government agency securities (1)
    -       -       505       1.15       5,919       2.58       1,052       3.00       7,476       2.54       2.33  
FHLB stock
    -       -       -       -       -       -       -       -       3,925       2.00          
Mutual funds
    -       -       -       -       -       -       -       -       207       5.27          
Total securities available-for-sale
  $ 354       4.27 %   $ 1,625       2.41 %   $ 10,251       3.23 %   $ 10,737       3.63 %   $ 27,099       3.19 %        
                                                                                         
Interest-earning deposits
    -       -       -       -       -       -       -       -       12,805       0.08          
Total investments
  $ 354       4.27 %   $ 1,625       2.41 %   $ 10,251       3.23 %   $ 10,737       3.63 %   $ 39,904       2.19 %         

(1)
Certain securities have call features which allow the issuer to call the security prior to maturity date.

Sources of Funds

General. Deposits are the primary 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 2009, 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 noninterest-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 totaled $13.2 million at December 31, 2009, an increase of $7.4 million from December 31, 2008.  Beginning fiscal year 2005, the Company began utilizing brokered certificates of deposit as an alternative wholesale funding source.  As of December 31, 2009, the Company had $601,000 in brokered certificates of deposit, a decrease of $15.0 million from December 31, 2008.

 
- 12 -

 

Deposit Portfolio.  Deposits with the Company as of December 31, 2009, were represented by the various types of deposit programs described below.

Weighted
                     
Percentage
 
Average
         
Minimum
         
of Total
 
Interest Rate
 
Original Term
 
Checking and Savings Deposits
 
Balance
   
Balances
   
Deposits
 
                 
(Dollars in
       
                 
thousands)
       
                           
0.00%
 
None
 
Noninterest-bearing demand
  $ 50     $ 16,185       4.8 %
0.30%
 
None
 
NOW accounts
    50       77,694       23.2  
0.19%
 
None
 
Savings accounts
    25       28,866       8.6  
0.62%
 
None
 
Money market savings
    2,500       36,095       10.8  
       
Total non-maturing deposits
            158,840       47.4  
                                 
       
Certificates of Deposit
                       
                                 
0.67%
 
1-3 months
 
Fixed term, fixed rate
  $ 1,000     $ 84       0.0 %
0.89%
 
4-6 months
 
Fixed term, fixed rate
    1,000       1,569       0.5  
1.01%
 
7-9 months
 
Fixed term, fixed rate
    1,000       5,214       1.6  
1.67%
 
10-12 months
 
Fixed term, fixed rate
    1,000       58,051       17.3  
2.42%
 
13-24 months
 
Fixed term, fixed rate
    1,000       45,539       13.6  
3.63%
 
25-36 months
 
Fixed term, fixed rate
    1,000       6,638       2.0  
3.21%
 
37-48 months
 
Fixed term, fixed rate
    1,000       11,400       3.4  
4.34%
 
49-60 months
 
Fixed term, fixed rate
    1,000       47,342       14.1  
3.66%
 
61 months or greater
 
Fixed term, fixed rate
    1,000       136       0.0  
       
Total certificates of deposit
            175,973       52.6  
                                 
       
Total deposits
          $ 334,813       100.0 %
 
 
- 13 -

 

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.

   
(Dollars in thousands)
 
                         
         
Increase
   
Increase
       
   
Balance
   
(Decrease)
   
(Decrease)
   
Balance
 
   
12/31/09
   
%
   
$
   
12/31/08
 
Noninterest bearing demand
  $ 16,185       6.47 %   $ 984     $ 15,201  
NOW
    77,694       34.24       19,817       57,877  
Savings accounts
    28,866       10.48       2,738       26,128  
Money market savings
    36,095       5.45       1,867       34,228  
Certificates of deposit that mature:
                               
within 12 months
    110,154       (26.77 )     (40,272 )     150,426  
within 12-36 months
    42,028       (9.90 )     (4,619 )     46,647  
beyond 36 months
    23,791       20.99       4,128       19,663  
Total
  $ 334,813       (4.39 ) %   $ (15,357 )   $ 350,170  
                                 
           
Increase
   
Increase
         
   
Balance
   
(Decrease)
   
(Decrease)
   
Balance
 
   
12/31/08
   
%
     
$
   
12/31/07
 
Noninterest bearing demand
  $ 15,201       11.18 %   $ 1,528     $ 13,673  
NOW
    57,877       6.82       3,697       54,180  
Savings accounts
    26,128       6.50       1,595       24,533  
Money market savings
    34,228       3.56       1,177       33,051  
Certificates of deposit that mature:
                               
within 12 months
    150,426       4.48       6,456       143,970  
within 12-36 months
    46,647       (34.07 )     (24,102 )     70,749  
beyond 36 months
    19,663       (23.76 )     (6,129 )     25,792  
Total
  $ 350,170       (4.31 ) %   $ (15,778 )   $ 365,948  
                                 
           
Increase
   
Increase
         
   
Balance
   
(Decrease)
   
(Decrease)
   
Balance
 
   
12/31/07
   
%
     
$
   
12/31/06
 
Noninterest bearing demand
  $ 13,673       6.92 %   $ 885     $ 12,788  
NOW
    54,180       9.15       4,544       49,636  
Savings accounts
    24,533       (2.49 )     (627 )     25,160  
Money market savings
    33,051       (4.72 )     (1,637 )     34,688  
Certificates of deposit that mature:
                               
within 12 months
    143,970       7.15       9,601       134,369  
within 12-36 months
    70,749       (14.54 )     (12,035 )     82,784  
beyond 36 months
    25,792       23.38       4,887       20,905  
Total
  $ 365,948       1.56 %   $ 5,618     $ 360,330  
                                 
           
Increase
   
Increase
         
   
Balance
   
(Decrease)
   
(Decrease)
   
Balance
 
   
12/31/06
   
%
     
$
   
12/31/05
 
Noninterest bearing demand
  $ 12,788       4.94 %   $ 602     $ 12,186  
NOW
    49,636       0.80       394       49,242  
Savings accounts
    25,160       (6.98 )     (1,888 )     27,048  
Money market savings
    34,688       (22.64 )     (10,153 )     44,841  
Certificates of deposit that mature:
                               
within 12 months
    134,369       25.91       27,652       106,717  
within 12-36 months
    82,784       15.02       10,811       71,973  
beyond 36 months
    20,905       (6.39 )     (1,426 )     22,331  
Total
  $ 360,330       7.77 %   $ 25,992     $ 334,338  
 
 
- 14 -

 

The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated:

   
At December 31,
 
   
2009
   
2008
   
2007
 
   
(In thousands)
 
Rate:
                 
                   
1.99% or less
  $ 74,847     $ 1,266     $ 33  
2.00-2.99%
&