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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-22140.
FIRST MIDWEST FINANCIAL, INC.
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(Name of Registrant as specified in its charter)
Delaware 42-1406262
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifth at Erie, Storm Lake, Iowa 50588
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (712) 732-4117
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Registrant's revenues for the most recent fiscal year ended were $37.3
million.
As of December 16, 1999, the Registrant had issued and outstanding
2,522,073 shares of Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the average
of the closing bid and asked prices of such stock on the Nasdaq System as of
December 16, 1999, was $22.5 million. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the Registrant that such person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K -- Portions of the Annual Report to
Shareholders for the fiscal year ended September 30, 1999.
PART III of Form 10-K -- Portions of the Proxy Statement for the Annual
Meeting of Shareholders to be held during January 2000.
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Forward-Looking Statements
First Midwest Financial, Inc. ("First Midwest," and with its
subsidiaries, the "Company"), and its wholly-owned operating subsidiaries First
Federal Savings Bank of the Midwest and Security State Bank, may from time to
time make written or oral "forward-looking statements", including statements
contained in its filings with the Securities and Exchange Commission (including
this Annual Report on Form 10-K and the Exhibits hereto and thereto), in its
reports to shareholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties, and are subject to change based on various factors some of which
are beyond the Company's control. The words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The important
factors we discuss below and elsewhere in this document, as well as other
factors discussed under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report to
Shareholders and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this prospectus:
o the strength of the United States economy in general and the
strength of the local economies in which the Company conducts
operations;
o the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the
Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of new products and
services of the Company and the perceived overall value of
these products and services by users, including the features,
pricing and quality compared to competitors' products and
services;
o the willingness of users to substitute competitors' products
and services for the Company's products and services;
o the success of the Company in gaining regulatory approval of
its products and services, when required;
o the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking,
securities, agriculture and insurance);
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o the success of the Company at managing the risks involved in
the foregoing.
The Company wishes to caution readers that such forward-looking
statements speak only as of the date made. The Company does not undertake, and
expressly disclaims any intent or obligation, to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
PART I
Item 1. Description of Business
General
First Midwest Financial, Inc. is a Delaware corporation, the principal
assets of which are First Federal Savings Bank of the Midwest ("First Federal")
and Security State Bank ("Security"). First Midwest, on September 20, 1993,
acquired all of the capital stock of First Federal in connection with First
Federal's conversion from the mutual to stock form ownership (the "Conversion").
On September 30, 1996, First Midwest became a bank holding company upon its
acquisition of Security, as discussed below.
Since the Conversion, the Company has been an active acquiror of
financial institutions. On March 28, 1994, First Midwest acquired Brookings
Federal Bank in Brookings, South Dakota ("Brookings"). On December 29, 1995,
First Midwest acquired Iowa Savings Bank, FSB in Des Moines, Iowa ("Iowa
Savings"). Brookings and Iowa Savings were both merged with, and now operate as
divisions of, First Federal. On September 30, 1996, First Midwest completed the
acquisition of Central West Bancorporation ("CWB"). CWB was the holding company
for Security in Stuart, Iowa, which upon the merger of CWB into First Midwest
resulted in Security becoming a stand-alone banking subsidiary of First Midwest.
Unless the context otherwise requires, references herein to the Company include
First Midwest, Security and First Federal and its subsidiaries on a consolidated
basis. See "Management's Discussion and Analysis -- Acquisitions Completed" in
the Annual Report to Shareholders attached hereto as Exhibit 13 (the "Annual
Report").
First Federal and Security (collectively, the "Banks") are the only
direct, active subsidiaries of First Midwest. The Banks are community-oriented
financial institutions offering a variety of financial services to meet the
needs of the communities they serve. The Company, through its subsidiary Banks,
provides a full range of financial services. The principal business of First
Federal historically has consisted of attracting retail deposits from the
general public and investing those funds primarily in one- to four-family
residential mortgage loans and, to a lesser extent, commercial and multi-family
real estate, agricultural operating and real estate, construction, consumer and
commercial business loans primarily in First Federal's market area. Recently,
First Federal's lending activities have expanded to include an increased
emphasis on originations and purchases of commercial and multi-family real
estate loans. The principal business of Security has been and continues to be
attracting retail deposits from the general public and investing those funds in
agricultural real estate and operating loans and, to a lesser extent, one- to
four-family residential, commercial business and consumer loans. The Banks also
purchase mortgage-backed securities and invest in U.S. Government and agency
obligations and other permissible investments. At September 30, 1999, the
Company had total assets of $511.2 million, deposits of $304.8 million, and
shareholders' equity of $39.8 million.
The Company's revenues are derived primarily from interest on mortgage
loans, mortgage-backed securities, investments, consumer loans, agricultural
operating loans, commercial business loans, income from service charges and loan
originations, loan servicing fee income, and income from the sale of mutual
funds, insurance products, annuities and brokerage services through its service
corporation subsidiaries.
First Federal, directly through its wholly-owned subsidiary, First
Services Financial Limited ("First Services"), and indirectly through
independent contractors, offers mutual funds and, in some locations, insurance
products and annuities. In addition, Brookings Service Corporation, a subsidiary
of First Services, offers full service brokerage services through PrimeVest
Financial Services, Inc., a third party vendor.
First Midwest and the Banks are subject to comprehensive regulation.
See "Regulation" herein.
The executive offices of the Company are located at Fifth at Erie,
Storm Lake, Iowa 50588. Its telephone number at that address is (712) 732-4117.
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The issue is whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company is heavily
dependent on computer processing in its business activities and the Year 2000
issue creates risk for the Company from unforeseen problems in the Company's
computer system and from third parties whom the Company uses to process
information. Such failures of the Company's computer system and/or third parties
computer systems could have a material impact on the Company's ability to
conduct its business. See the discussion on "Year 2000 Issues" contained in the
Annual Report.
Market Area
First Federal Savings Bank of the Midwest has three divisions: First
Federal Savings Bank, Brookings Federal Bank and Iowa Savings Bank. First
Federal Savings Bank's headquarters is located on the corner of Fifth and Erie
streets in Storm Lake, Iowa. The bank operates a total of six branch offices in
Storm Lake, Lake View, Laurens, Manson, Odebolt and Sac City, Iowa. Brookings
Federal Bank operates two facilities in Brookings, South Dakota. Iowa Savings
Bank has bank facilities in Des Moines and West Des Moines, Iowa. A third Iowa
Savings Bank office, and its new main office, is under construction in
Urbandale, Iowa.
Security State Bank operates its business through three full-service
offices in Casey, Menlo and Stuart, Iowa.
The Company's primary market area includes Adair, Buena Vista, Calhoun,
Guthrie, Ida, Pocahontas, Polk and Sac Counties in Iowa and Brookings County in
South Dakota.
Storm Lake is located in northwest Iowa approximately 150 miles
northwest of Des Moines and 200 miles south of Minneapolis in Buena Vista
County. Like much of the State of Iowa, Storm Lake and the Company's primary
market area are highly dependent upon farming and agricultural markets. Major
employers in the area include Buena Vista County Hospital, IBP, Inc. and Bil Mar
Foods of Iowa. The world's largest electricity-generating wind farm is located
in Buena Vista County. This $235 million project, completed in June 1999,
provides enough electricity to serve 71,000 average-sized Midwestern households.
Storm Lake is also home to Buena Vista University, which currently enrolls 1,256
full-time students at its Storm Lake campus and employs 79 full-time faculty.
Brookings is located in east central South Dakota, approximately 50
miles north of Sioux Falls and 200 miles west of Minneapolis in Brookings
County. First Federal's market area in South Dakota encompasses approximately a
30 mile radius of Brookings. The area is generally rural, and agriculture is a
significant industry in the community. South Dakota State University is the
largest employer in Brookings. The University had 8,540 students enrolled for
the 1999 fall term and employs 504 full-time faculty. The community also has
several manufacturing companies, including 3M, Larson Manufacturing, Daktronics,
Falcon Plastics and Twin City Fan. The Brookings division operates from a main
office located in downtown Brookings and one drive-up branch office also located
in Brookings.
Des Moines, the State of Iowa's capitol, is located in central Iowa.
The Des Moines market area encompasses Polk County and surrounding counties.
Iowa Savings Bank Division's main office operates near a high-traffic
intersection, across from a major shopping mall in West Des Moines. The Highland
Park facility is located in a historical district approximately five minutes
north of downtown Des Moines. Des Moines is one of the top three insurance
centers in the world, with sixty-seven insurance company headquarters and over
one hundred regional insurance offices. Other major businesses include Hy-Vee
Food Stores, Inc., Bridgestone-Firestone, Inc., Communication Data Services,
Inc., Pioneer Hi-Bred, John Deere, and Meredith Corporation. Universities in the
area include Drake University, Upper Iowa University, Simpson College, Grand
View College, Hamilton College and the University of Osteopathic Medicine and
Health Sciences.
Security's main office operates in Stuart, which is located in
west-central Iowa, approximately 40 miles west of Des Moines on the border of
Adair and Guthrie counties. Security's market area, as well as our other market
areas, except perhaps Des Moines, are highly dependent on farming and
agriculture-related businesses. Agriculture-related businesses in recent years
have performed well due to a relatively stable agricultural environment in the
Company's market area. Recently, however, agriculture commodity prices have
declined significantly for the major agricultural products produced in the
Company's market area. Commodity price fluctuations are a normal part of
agriculture, but it is unusual for the pricing of all major products to be
depressed at the same time. Although there has been minimal effect observed to
date, an extended period of low commodity prices could result in reduced demand
for goods and services provided by agriculture-related businesses, which could
also affect other businesses in the Company's market area.
In recent years, the westward expansion of Des Moines, combined with
direct interstate highway access to Stuart, has resulted in significant
development of new service-related businesses in the community. This development
provides economic diversity to Security's market area.
Lending Activities
General. Historically, the Company has originated fixed-rate, one- to
four-family mortgage loans. In the early 1980's, the Company began to focus on
the origination of adjustable-rate mortgage ("ARM") loans and short-term loans
for retention in its portfolio in order to increase the percentage of loans in
its portfolio with more frequent repricing or shorter maturities, and in some
cases higher yields, than fixed-rate residential mortgage loans. The Company,
however, has continued to originate fixed-rate residential mortgage loans in
response to consumer demand. See "Management's Discussion and Analysis --
Asset/Liability Management" in the Annual Report.
While the Company historically has focused its lending activities on
the origination of loans secured by first mortgages on owner-occupied one- to
four-family residences, it also originates and purchases commercial and
multi-family real estate loans and originates consumer, commercial business,
residential and commercial construction and agriculturally related loans. The
Company originates most of its loans in its primary market area. More recently,
the Company has increased its emphasis, both in absolute dollars and as a
percentage of its gross loan portfolio, on these less traditional lending
activities. At September 30, 1999, the Company's net loan portfolio totaled
$303.1 million, or 59.3% of the Company's total assets.
Loan applications are initially considered and approved at various
levels of authority, depending on the type, amount and loan-to-value ratio of
the loan. The Company has loan committees for each of the Banks comprised of
officers of such Banks. Loans in excess of certain amounts require the approval
of at least two committee members who must also be executive officers, or by
such Bank's Board of Directors, which has responsibility for the overall
supervision of the loan portfolio. The Company reserves the right to
discontinue, adjust or create new lending programs to respond to its needs and
to competitive factors.
At September 30, 1999, the Company's largest lending relationship to a
single borrower or group of related borrowers totaled $6.0 million. The Company
had twelve other lending relationships in excess of $2.5 million as of September
30, 1999 with the average outstanding balance of such loans totaling
approximately $3.8 million. At September 30, 1999, each of these loans was
performing in accordance with its repayment terms.
Loan Portfolio Composition. The following table provides information
about the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
September 30,
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1995 1996 1997
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Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans
One- to four-family $ 57,274 30.4% $ 78,476 31.6% $ 73,903 27.8%
Commercial and multi-family 73,419 38.9 85,157 34.2 74,870 28.1
Agricultural 7,021 3.7 11,068 4.5 11,732 4.4
Construction or development 17,877 9.5 7,819 3.1 21,264 8.0
-------- ----- -------- ----- -------- -----
Total real estate loans 155,591 82.5 182,520 73.4 181,769 68.3
-------- ----- -------- ----- -------- -----
Other Loans:
Consumer Loans:
Home equity 4,906 2.6 7,823 3.1 14,007 5.3
Automobile 3,663 1.9 5,356 2.2 6,106 2.3
Deposit account 330 .2 666 .3 533 .2
Student 382 .2 324 .1 383 .1
Other (1) 3,727 2.0 6,259 2.5 6,369 2.4
-------- ----- -------- ----- -------- -----
Total consumer loans 13,008 6.9 20,428 8.2 27,398 10.3
Agricultural operating 11,905 6.3 30,364 12.2 38,650 14.5
Commercial business 8,173 4.3 15,468 6.2 18,456 6.9
-------- ----- -------- ----- -------- -----
Total other loans 33,086 17.5 66,260 26.6 84,504 31.7
-------- ----- -------- ----- -------- -----
Total loans 188,677 100.0% 248,780 100.0% 266,273 100.0%
===== ===== =====
Less:
Loans in process 8,071 2,240 8,700
Deferred fees and discounts 404 650 553
Allowance for losses 1,650 2,356 2,379
-------- -------- --------
Total loans receivable, net $178,552 $243,534 $254,641
======== ======== ========
September 30,
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1998 1999
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Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans
One- to four-family $ 85,799 30.5% $110,317 34.8%
Commercial and multi-family 66,845 23.8 85,793 27.1
Agricultural 10,537 3.8 9,874 3.1
Construction or development 32,990 11.7 28,379 9.0
-------- ----- -------- -----
Total real estate loans 196,171 69.8 234,363 74.0
-------- ----- -------- -----
Other Loans:
Consumer Loans:
Home equity 15,285 5.4 14,834 4.7
Automobile 4,445 1.6 3,861 1.3
Deposit account 716 .3 443 .1
Student 421 .1 460 .1
Other (1) 5,372 1.9 3,828 1.2
-------- ----- -------- -----
Total consumer loans 26,239 9.3 23,426 7.4
Agricultural operating 37,234 13.2 29,284 9.2
Commercial business 21,587 7.7 29,942 9.4
-------- ----- -------- -----
Total other loans 85,060 30.2 82,652 26.0
-------- ----- -------- -----
Total loans 281,231 100.0% 317,015 100.0%
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Less:
Loans in process 7,738 10,494
Deferred fees and discounts 298 350
Allowance for losses 2,909 3,093
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Total loans receivable, net $270,286 $303,078
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(1) Consist generally of various types of secured and unsecured consumer loans.
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.
September 30,
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1995 1996 1997
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Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One- to four-family $ 22,875 12.1% $ 41,322 16.6% $ 33,369 12.5%
Commercial and multi-family 14,262 7.6 14,036 5.6 11,124 4.2
Agricultural 5,536 2.9 4,250 1.7 5,978 2.3
Construction or development 2,342 1.3 2,938 1.2 2,997 1.1
-------- ----- -------- ----- -------- -----
Total fixed-rate real estate loans 45,015 23.9 62,546 25.1 53,468 20.1
Consumer 12,303 6.5 19,145 7.7 26,100 9.8
Agricultural operating 7,335 3.9 14,998 6.1 16,280 6.1
Commercial business 5,521 2.9 7,200 2.9 10,462 3.9
-------- ----- -------- ----- -------- -----
Total fixed-rate loans 70,174 37.2 103,889 41.8 106,310 39.9
-------- ----- -------- ----- -------- -----
Adjustable Rate Loans:
Real estate:
One- to four-family 34,399 18.2 37,154 14.9 40,534 15.2
Commercial and multi-family 59,157 31.4 71,121 28.6 63,746 23.9
Agricultural 1,485 .8 6,818 2.7 5,754 2.2
Construction or development 15,535 8.2 4,881 2.0 18,267 6.9
-------- ----- -------- ----- -------- -----
Total adjustable-rate real
estate loans 110,576 58.6 119,974 48.2 128,301 48.2
Consumer 705 .4 1,283 .5 1,298 .5
Agricultural operating 4,570 2.4 15,366 6.2 22,370 8.4
Commercial business 2,652 1.4 8,268 3.3 7,994 3.0
-------- ----- -------- ----- -------- -----
Total adjustable rate loans 118,503 62.8 144,891 58.2 159,963 60.1
-------- ----- -------- ----- -------- -----
Total loans 188,677 100.0% 248,780 100.0% 266,273 100.0%
===== ===== =====
Less:
Loans in process 8,071 2,240 8,700
Deferred fees and discounts 404 650 553
Allowance for loan losses 1,650 2,356 2,379
-------- -------- --------
Total loans, net $178,552 $243,534 $254,641
======== ======== ========
September 30,
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1998 1999
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Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One- to four-family $ 51,235 18.2% $ 52,943 16.7%
Commercial and multi-family 11,582 4.1 34,326 10.8
Agricultural 4,982 1.8 5,080 1.6
Construction or development 1,829 .7 2,322 .8
-------- ----- -------- -----
Total fixed-rate real estate loans 69,628 24.8 94,671 29.9
Consumer 24,909 8.8 21,803 6.9
Agricultural operating 18,821 6.7 14,896 4.7
Commercial business 15,108 5.4 23,206 7.3
-------- ----- -------- -----
Total fixed-rate loans 128,466 45.7 154,576 48.8
-------- ----- -------- -----
Adjustable Rate Loans:
Real estate:
One- to four-family 34,564 12.3 57,374 18.1
Commercial and multi-family 55,263 19.6 51,467 16.2
Agricultural 5,555 2.0 4,794 1.6
Construction or development 31,161 11.1 26,057 8.2
-------- ----- -------- -----
Total adjustable-rate real
estate loans 126,543 45.0 139,692 44.1
Consumer 1,330 .5 1,623 .5
Agricultural operating 18,413 6.5 14,388 4.5
Commercial business 6,479 2.3 6,736 2.1
-------- ----- -------- -----
Total adjustable rate loans 152,765 54.3 162,439 51.2
-------- ----- -------- -----
Total loans 281,231 100.0% 317,015 100.0%
===== =====
Less:
Loans in process 7,738 10,494
Deferred fees and discounts 298 350
Allowance for loan losses 2,909 3,093
-------- --------
Total loans, net $270,286 $303,078
======== ========
The following table illustrates the interest rate sensitivity of the
Company's loan portfolio at September 30, 1999. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract reprices. The table does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Real Estate
-----------------------------------------
Agricultural
Mortgage(1) Construction Consumer Operating
------------------- ------------------ ------------------ -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -------------
2000(2) $69,826 8.05% $22,710 9.07% $9,682 9.37% $26,972 9.44%
2001-2004 71,760 7.43 3,079 8.67 9,415 9.08 1,905 8.91
2004 and following 64,398 7.34 2,590 8.41 4,329 9.25 407 8.96
Commercial
Business Total
----------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -------------
2000(2) $21,525 9.30% $150,715 8.69%
2001-2004 8,181 8.73 94,340 7.77
2004 and following 236 8.63 71,960 7.50
- -------------------
(1) Includes one- to four-family, multi-family, commercial and agricultural real
estate loans.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after September 30, 2000 which have
predetermined interest rates is $99.1 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $134.7
million.
One- to Four-Family Residential Mortgage Lending. One- to four-family
residential mortgage loan originations are generated by the Company's marketing
efforts, its present customers, walk-in customers and referrals from real estate
agents and builders. At September 30, 1999, the Company's one- to four-family
residential mortgage loan portfolio totaled $110.3 million, or 34.8% of the
Company's total gross loan portfolio. Approximately 35.8% of the Company's one-
to four-family mortgage loans or 12.5% of the Company's gross loans have been
purchased, generally from other financial institutions. See "--Originations,
Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities." At
September 30, 1999, the average outstanding principal balance of a one- to
four-family residential mortgage loan was $57,000.
The Company offers fixed-rate and ARM loans. During the year ended
September 30, 1999, the Company originated $1.5 million of adjustable-rate loans
and $25.7 million of fixed-rate loans secured by one- to four-family residential
real estate. The Company's one- to four-family residential mortgage originations
are secured primarily by properties located in its primary market area and
surrounding areas.
The Company originates one- to four-family residential mortgage loans
with terms up to a maximum of 30-years and with loan-to-value ratios up to 95%
of the lesser of the appraised value of the security property or the contract
price. The Company generally requires that private mortgage insurance be
obtained in an amount sufficient to reduce the Company's exposure to at or below
the 80% loan-to-value level. Residential loans generally do not include
prepayment penalties.
The Company currently offers one, three and five year ARM loans with an
initial interest rate margin over the yield on the corresponding U.S. Treasury
Security. These loans have a fixed-rate for the stated period and, thereafter,
such loans adjust annually. These loans generally provide for an annual cap of
up to a 200 basis points and a lifetime cap of 600 basis points over the initial
rate. As a consequence of using an initial fixed-rate and caps, the interest
rates on these loans may not be as rate sensitive as is the Company's cost of
funds. The Company's ARMs do not permit negative amortization of principal and
are not convertible into a fixed rate loan. From time to time the Company may
permit ARM loans to be assumed by qualified borrowers upon payment of an
assumption fee. The Company qualifies ARM loan borrowers at the fully indexed
rate. The Company's delinquency experience on its ARM loans has generally been
similar to its experience on fixed rate residential loans.
Due to consumer demand, the Company also offers fixed-rate mortgage
loans with terms up to 30 years, most of which conform to secondary market
standards, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards. Interest
rates charged on these fixed-rate loans are competitively priced according to
market conditions. The Company has historically retained its fixed-rate loans
for its loan portfolio, however, from June 1996 through March 1998, the Company
sold, with servicing retained, most of its fixed-rate loans with terms of 15
years or greater to Fannie Mae. The Company suspended selling these loans due to
limited opportunity for other types of investments or to purchase loans due to
the present low interest rate environment. The Company may decide to sell loans
in the future.
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Most properties securing real estate
loans made by the Company are appraised by independent fee appraisers approved
by the Board of Directors. The Company generally requires borrowers to obtain an
attorney's title opinion, and fire and property insurance (including flood
insurance, if necessary) in an amount not less than the amount of the loan. Real
estate loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property.
Commercial and Multi-Family Real Estate Lending. The Company is also
engaged in commercial and multi-family real estate lending in its primary market
area and surrounding areas and has purchased whole loan and participation
interests in loans from other financial institutions. The purchased loans and
loan participation interests are generally secured by properties located in the
Midwest and Northwest. The Company, in order to supplement its loan portfolio
and consistent with management's objectives to expand the Company's commercial
and multi-family loan portfolio, purchased $42.4 million, $16.3 million and
$26.8 million of such loans during fiscal 1999, 1998 and 1997, respectively.
However, due to a large number of prepayments and maturities of commercial and
multi-family real estate loans during fiscal 1999, 1998 and 1997 as a result of
a favorable interest rate environment, at September 30, 1999, 1998 and 1997, the
Company had $85.8 million, $66.8 million and $74.9 million, respectively, of
commercial and multi-family real estate loans compared to $85.2 million at
September 30, 1996. At September 30, 1999, $1.1 million, or 1.2% of the
Company's commercial and multi-family real estate loans were non-performing. See
" -- Non-Performing Assets, Other Loans of Concern and Classified Assets."
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, nursing homes, assisted
living/retirement facilities, office buildings and, to a lesser extent, hotels.
Commercial and multi-family real estate loans generally have terms that do not
exceed 20 years, have loan-to-value ratios of up to 75% of the appraised value
of the security property, and are typically secured by personal guarantees of
the borrowers. The Company has a variety of rate adjustment features and other
terms in its commercial and multi-family real estate loan portfolio. Commercial
and multi-family real estate loans provide for a margin over a number of
different indices. In underwriting these loans, the Company currently analyzes
the financial condition of the borrower, the borrower's credit history, and the
reliability and predictability of the cash flow generated by the property
securing the loan. Appraisals on properties securing commercial real estate
loans originated by the Company are performed by independent appraisers.
At September 30, 1999, the Company's largest commercial and
multi-family real estate loan was a $5.8 million loan secured by a retail
shopping center, a single-family residential housing development and other real
estate. The Company had seven other commercial and/or multi-family loans in
excess of $2.5 million at such date. All of these loans are currently performing
in accordance with their terms. At September 30, 1999, the average outstanding
principal balance of a commercial or multi-family real estate loan held by the
Company was $333,000.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired.
Construction Lending. The Company makes construction loans to
individuals for the construction of their residences as well as to builders for
the construction of one- to four-family residences and commercial and
multi-family real estate. At September 30, 1999, the Company's construction loan
portfolio totaled $28.4 million, or 9.0% of the Company's total gross loan
portfolio.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs up to twelve months. These construction loans have rates and
terms which generally match the one- to four-family loan rates then offered by
the Company, except that during the construction phase the borrower pays
interest only. Generally, the maximum loan-to-value ratio of owner occupied
single family construction loans is 80% of appraised value. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At September 30, 1999, the
Company had $1.6 million of construction loans to borrowers intending to live in
the properties upon completion of construction.
Construction loans to builders of one- to four-family residences
require the payment of interest only for up to 24 months and have terms of up to
24 months. These loans may provide for the payment of interest and loan fees
from loan proceeds and carry adjustable rates of interest. Loan fees charged in
connection with the origination of such loans are generally 1%. At September 30,
1999, the Company did not have any construction loans to builders of one- to
four-family residences.
Construction loans on commercial and multi-family real estate projects
may be secured by apartments, agricultural facilities, small office buildings,
medical facilities, assisted living facilities, hotels or other property, and
are structured to be converted to permanent loans at the end of the construction
phase, which generally runs up to 18 months. These construction loans have rates
and terms which match any permanent multi-family or commercial real estate loan
then offered by the Company, except that during the construction phase the
borrower pays interest only. These loans generally provide for the payment of
interest and loan fees from loan proceeds. At September 30, 1999, the Company
had approximately $26.8 million of loans for the construction of commercial and
multi-family real estate. This amount consisted of two loans totaling $5.7
million for the construction of assisted living facilities, four loans totaling
$5.7 million for the construction of hotels, two loans totaling $3.1 million for
the construction of apartment complexes, and seven loans totaling $12.3 million
for the construction of commercial facilities. All of these loans were
performing in accordance with their terms at September 30, 1999.
Construction loans are obtained principally through continued business
from builders who have previously borrowed from the Company, as well as
referrals from existing customers and walk-in customers. The application process
includes a submission to the Company of accurate plans, specifications and costs
of the project to be constructed. These items are also used as a basis to
determine the appraised value of the subject property. Loans are based on the
lesser of the current appraised value of the property or the cost of
construction (land plus building).
Because of the uncertainties inherent in estimating construction costs
and the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding multi-family and commercial
real estate loans and tend to be more sensitive to general economic conditions
than many other types of loans. Also, the funding of loan fees and interest
during the construction phase makes the monitoring of the progress of the
project particularly important, as customary early warning signals of project
difficulties may not be present.
Agricultural Lending. The Company originates loans to finance the
purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer
and for other farm related products. At September 30, 1999, the Company had
agricultural real estate loans secured by farmland of $9.9 million or 3.1% of
the Company's gross loan portfolio. At the same date, $29.3 million, or 9.2% of
the Company's gross loan portfolio, consisted of secured loans related to
agricultural operations.
Agricultural operating loans are originated at either an adjustable or
fixed rate of interest for up to a one year term or, in the case of livestock,
upon sale. Most agricultural operating loans have terms of one year or less.
Such loans provide for payments of principal and interest at least annually, or
a lump sum payment upon maturity if the original term is less than one year.
Loans secured by agricultural machinery are generally originated as fixed-rate
loans with terms of up to seven years. At September 30, 1999, the average
outstanding principal balance of an agricultural operating loan held by the
Company was $43,200. At September 30, 1999, $285,000, or 1.0%, of the Company's
agricultural operating loans were non-performing.
Agricultural real estate loans are frequently originated with
adjustable rates of interest. Generally, such loans provide for a fixed rate of
interest for the first one to five years, adjusting annually thereafter. In
addition, such loans generally amortize over a period of ten to 20 years.
Adjustable-rate agricultural real estate loans provide for a margin over the
yields on the corresponding U.S. Treasury Security or prime rate. Fixed-rate
agricultural real estate loans generally have terms up to five years.
Agricultural real estate loans are generally limited to 75% of the value of the
property securing the loan. At September 30, 1999, $70,000, or .7% of the
Company's agricultural real estate portfolio was non-performing.
Agricultural lending affords the Company the opportunity to earn yields
higher than those obtainable on one- to four-family residential lending.
Nevertheless, agricultural lending involves a greater degree of risk than one-
to four-family residential mortgage loans because of the typically larger loan
amount. In addition, payments on loans are dependent on the successful operation
or management of the farm property securing the loan or for which an operating
loan is utilized. The success of the loan may also be affected by many factors
outside the control of the farm borrower.
Weather presents one of the greatest risks as hail, drought, floods, or
other conditions, can severely limit crop yields and thus impair loan repayments
and the value of the underlying collateral. This risk can be reduced by the
farmer with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Government support programs, and recently the Company,
generally require that farmers procure multi-peril crop insurance.
Grain and livestock prices also present a risk as prices may decline
prior to sale resulting in a failure to cover production costs. These risks may
be reduced by the farmer with the use of futures contracts or options to provide
a "floor" below which prices will not fall. The Company generally does not
require the use by borrowers of future contracts or options.
Another risk is the uncertainty of government programs and other
regulations. Some farmers rely on the income from government programs to make
loan payments and if these programs are discontinued or significantly changed,
cash flow problems or defaults could result.
Finally, many farms are dependent on a limited number of key
individuals upon whose injury or death may result in an inability to
successfully operate the farm.
Consumer Lending. The Company offers a variety of secured consumer
loans, including automobile, boat, home equity, home improvement, federally
guaranteed student loans, and loans secured by savings deposits. In addition,
the Company offers other secured and unsecured consumer loans. The Company
currently originates substantially all of its consumer loans in its primary
market area and surrounding areas. The Company originates consumer loans on both
a direct and indirect basis. At September 30, 1999, the Company's consumer loan
portfolio totaled $23.4 million, or 7.4% of its total gross loan portfolio. Of
the consumer loan portfolio at September 30, 1999, substantially all were short-
and intermediate-term, fixed-rate loans.
The largest component of the Company's consumer loan portfolio consists
of home equity loans and lines of credit. Substantially all of the Company's
home equity loans and lines of credit are secured by second mortgages on
principal residences. The Company will lend amounts which, together with all
prior liens, may be up to 100% of the appraised value of the property securing
the loan. Home equity loans and lines of credit have maximum terms of up to 15
years and 10 years, respectively.
The Company primarily originates automobile loans on a direct basis and
originates indirect automobile loans on a very limited basis. Direct loans are
loans made when the Company extends credit directly to the borrower, as opposed
to indirect loans, which are made when the Company purchases loan contracts,
often at a discount, from automobile dealers which have extended credit to their
customers. The Company's automobile loans typically are originated at fixed
interest rates with terms up to 60 months for new and used vehicles. Loans
secured by automobiles are generally originated for up to 80% of the N.A.D.A.
book value of the automobile securing the loan.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles or
recreational equipment. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. At September 30, 1999,
$140,000 or .6% of the Company's consumer loan portfolio was non-performing.
Commercial Business Lending. The Company also originates commercial
business loans. Most of the Company's commercial business loans have been
extended to finance local and regional businesses and include short-term loans
to finance machinery and equipment purchases, inventory and accounts receivable.
Commercial loans also involve the extension of revolving credit for a
combination of equipment acquisitions and working capital in expanding
companies. At September 30, 1999, $29.9 million, or 9.4% of the Company's total
gross loan portfolio was comprised of commercial business loans.
The maximum term for loans extended on machinery and equipment is based
on the projected useful life of such machinery and equipment. Generally, the
maximum term on non-mortgage lines of credit is one year. The loan-to-value
ratio on such loans and lines of credit generally may not exceed 80% of the
value of the collateral securing the loan. The Company's commercial business
lending policy includes credit file documentation and analysis of the borrower's
character, capacity to repay the loan, the adequacy of the borrower's capital
and collateral as well as an evaluation of conditions affecting the borrower.
Analysis of the borrower's past, present and future cash flows is also an
important aspect of the Company's current credit analysis. Nonetheless, such
loans are believed to carry higher credit risk than more traditional
investments.
The largest commercial business loan outstanding at September 30, 1999
was a $6.0 million loan secured by bank stock and other assets. Subsequent to
fiscal year end, this loan was paid down to $3.0 million. The next largest
commercial business loan outstanding at September 30, 1999 was a $5.3 million
warehouse line of credit secured by the assignment of automobile contracts. The
Company had three other commercial business loans outstanding in excess of $1.0
million at September 30, 1999. All of these loans are currently performing in
accordance with their terms. At September 30, 1999, the average outstanding
principal balance of a commercial business loan held by the Company was $79,400.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company's commercial business loans are usually, but not
always, secured by business assets and personal guarantees. However, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. At
September 30, 1999, $75,000 or .3% of the Company's commercial business loan
portfolio was non-performing.
Originations, Purchases, Sales and Servicing of Loans and
Mortgage-Backed Securities
Loans are generally originated by the Company's staff of salaried loan
officers. Loan applications are taken and processed in the branches and the main
office of the Company. While the Company originates both adjustable-rate and
fixed-rate loans, its ability to originate loans is dependent upon the relative
customer demand for loans in its market. Demand is affected by the interest rate
environment.
The Company, from time to time, sells whole loans and loan
participations generally without recourse. At September 30, 1999, there were no
loans outstanding sold with recourse. When loans are sold the Company typically
retains the responsibility for collecting and remitting loan payments, making
certain that real estate tax payments are made on behalf of borrowers, and
otherwise servicing the loans. The servicing fee is recognized as income over
the life of the loans. The Company services mortgage loans that it originated
and sold totaling $16.0 million at September 30, 1999, of which $5.0 million
were sold to Fannie Mae and $11.0 million were sold to others.
In periods of economic uncertainty, the Company's ability to originate
large dollar volumes of loans may be substantially reduced or restricted, with a
resultant decrease in related loan origination fees, other fee income and
operating earnings. In addition, the Company's ability to sell loans may
substantially decrease as potential buyers (principally government agencies)
reduce their purchasing activities.
The following table shows the loan origination (including undisbursed
portions of loans in process), purchase and repayment activities of the Company
for the periods indicated.
Year Ended September 30,
------------------------------
1997 1998 1999
-------- -------- --------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family ........... $ 7,875 $ 4,356 $ 1,532
- commercial and multi-family .... 4,873 8,543 4,354
- agricultural real estate ....... -- 1,808 1,357
Non-real estate - consumer .................. 931 745 1,480
- commercial business ............ 9,998 7,459 7,669
- agricultural operating ......... 27,469 20,905 17,110
-------- -------- --------
Total adjustable-rate ................ 51,146 43,816 33,502
Fixed rate:
Real estate - one- to four-family ........... 7,260 17,775 25,662
- commercial and multi-family .... 4,214 7,756 18,871
- agricultural real estate ....... 2,581 2,576 2,146
Non-real estate - consumer .................. 23,688 20,172 15,272
- commercial business ............ 19,127 29,437 30,135
- agricultural operating ......... 27,635 25,716 17,687
-------- -------- --------
Total fixed-rate ..................... 84,505 103,432 109,773
-------- -------- --------
Total loans originated ............... 135,651 147,248 143,275
Purchases:
Real estate- one-to-four-family ............... -- 15,933 25,531
- commercial and multi-family .... 26,766 16,324 42,398
Non-real estate - commercial business ......... 3,053 4,290 9,401
- agricultural operating ......... -- 400 --
-------- -------- --------
Total loans .......................... 29,819 36,947 77,330
Total mortgage-backed securities ............ 16,417 39,409 93,409
-------- -------- --------
Total purchased ...................... 46,236 76,356 170,739
Sales and Repayments:
Sales:
Real estate - one- to four-family ........... 3,324 5,613 270
Non-real estate - consumer .................. 268 -- --
- commercial business ....... -- -- 7,134
-------- -------- --------
Total loans .......................... 3,592 5,613 7,404
Mortgage-backed securities .................. -- 5,916 --
-------- -------- --------
Total sales .......................... 3,592 11,529 7,404
-------- -------- --------
Repayments:
Loan principal repayments ................... 144,364 163,435 182,915
Mortgage-backed securities repayments ....... 7,969 15,713 19,055
-------- -------- --------
Total principal repayments .................. 152,333 179,148 201,970
-------- -------- --------
Total reductions ..................... 155,925 190,677 209,374
Increase (decrease) in other items, net ....... 370 60 2,119
-------- -------- --------
Net increase (decrease) .............. $ 26,332 $ 32,987 $106,759
======== ======== ========
At September 30, 1999, approximately $125.8 million, or 39.7%, of the
Company's gross loan portfolio consisted of purchased loans. The Company
believes that purchasing loans secured by real estate located outside of its
market area assists the Company in diversifying its portfolio and may lessen the
adverse affects on the Company's business or operations which could result in
the event of a downturn or weakening of the local economy in which the Company
conducts its operations. However, additional risks are associated with
purchasing loans secured by real estate outside of the Company's market area,
including the lack of knowledge of the local real estate market and difficulty
in monitoring and inspecting the property securing the loans.
The following table provides information regarding the Company's
balance of wholly purchased real estate loans and real estate loan
participations for each state in which the balance of such loans exceeded $1.0
million at September 30, 1999. Not included in the following table are purchased
commercial business loans totaling $8.2 million, over 85% of which are located
in the Company's market area.
One- to Four-Family Commercial and Total Purchased
Loans Multi-Family Construction Loans Loans
-------------------- -------------------- -------------------- ---------------------
Number Number Number Number
of of of of
Location Balance Loans Balance Loans Balance Loans Balance Loans
- -------------- ------- ------- ------- ------- ------- ------- -------- -------
(Dollars in Thousands)
Arizona ...... $ 86 1 $ 1,589 3 $ -- -- $1,675 4
Colorado ..... 12 4 434 2 1,602 4 2,048 10
Florida ...... 11 1 -- -- 3,000 1 3,011 2
Illinois ..... -- -- 3,728 5 -- -- 3,728 5
Iowa ......... 262 27 3,512 6 400 1 4,174 34
Minnesota .... -- -- 7,665 10 7,358 4 15,023 14
Missouri ..... 976 28 1,592 6 -- -- 2,568 34
Nebraska ..... 101 9 4,706 2 1,615 2 6,422 13
New Mexico ... -- -- -- -- 5,275 1 5,275 1
New York ..... 1,493 69 450 1 -- -- 1,943 70
North Carolina 18,443 86 -- -- -- -- 18,443 86
North Dakota . 38 9 2,029 6 -- -- 2,067 15
South Dakota . 378 24 5,341 9 -- -- 5,719 33
Washington ... 16,355 58 13,491 6 6,740 2 36,586 66
Wisconsin .... -- -- 5,917 9 -- -- 5,917 9
Other states . 1,349 65 1,657 16 -- -- 3,006 81
------- ------- ------- ------- ------- ------- -------- -------
Total ...... $39,504 381 $52,111 81 $25,990 15 $117,605 477
======= ======= ======= ======= ======= ======= ======== =======
Percent of
loan portfolio 35.8% 60.7% 91.5% 37.1%
==== ==== ==== ====
Non-Performing Assets, Other Loans of Concern, and Classified Assets
When a borrower fails to make a required payment on real estate secured
loans and consumer loans within 16 days after the payment is due, the Company
generally institutes collection procedures by mailing a delinquency notice. The
customer is contacted again, by written notice or telephone, when the payment is
45 days past due and again before 75 days past due. In most cases, delinquencies
are cured promptly; however, if a loan has been delinquent for more than 90
days, satisfactory payment arrangements must be adhered to or the Company will
initiate foreclosure or repossession.
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status until the loan becomes current.
The following table sets forth the Company's loan delinquencies by
type, before allowance for loan losses, by amount and by percentage of type at
September 30, 1999.
Loans Delinquent For:
----------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
---------------------------- ------------------------- -------------------------
Percent Percent Percent
of of of
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family 19 $ 674 .6% 6 $ 317 .3% 19 $ 613 .6%
Commercial and multi-family --- --- --- 1 490 .6 2 1,055 1.2
Agricultural real estate --- --- --- --- --- --- 1 70 .7
Consumer 33 300 1.3 10 42 .2 24 140 .6
Agricultural operating 4 138 .5 2 78 .3 9 285 1.0
Commercial business 16 469 1.6 7 111 .4 2 75 .3
------ ------ ------ ------ ------ ------
Total 72 $1,581 .5% 26 $1,038 .3% 57 $2,238 .7%
====== ====== ====== ====== ====== ======
Delinquencies 90 days and over constituted .7% of total loans and .4%
of total assets.
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans, with some exceptions, are
typically placed on non-accrual status when the loan becomes 90 days or more
delinquent or when the collection of principal and/or interest become doubtful.
At September 30, 1999, the Company had four troubled debt restructurings (which
involved forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates) totaling $1.6
million, all of which were performing as agreed. The Company has not had any
other troubled debt restructurings for the periods presented in the table below.
Foreclosed assets include assets acquired in settlement of loans.
September 30,
----------------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ............... $ 127 $ 347 $ 444 $ 298 $ 613
Commercial and multi-family ....... 199 1,623 1,692 777 1,055
Agricultural real estate .......... 46 127 -- -- 70
Consumer .......................... 206 331 246 142 140
Agricultural operating ............ 100 184 289 1,738 285
Commercial business ............... 48 33 204 209 75
------ ------ ------ ------ ------
Total non-accruing loans ....... 726 2,645 2,875 3,164 2,238
------ ------ ------ ------ ------
Accruing loans delinquent
90 days or more ................... -- 177 282 3,905 --
------ ------ ------ ------ ------
Total non-performing loans ..... 726 2,822 3,157 7,069 2,238
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family ............... 48 75 85 19 94
Commercial real estate ............ -- -- 67 1,324 --
Consumer .......................... -- 8 -- 19 24
Commercial business ............... -- 9 4 -- 25
------ ------ ------ ------ ------
Total .......................... 48 92 156 1,362 143
Less: Allowance for losses ........ -- 5 -- 299 --
------ ------ ------ ------ ------
Total .......................... 48 87 156 1,063 143
------ ------ ------ ------ ------
Total non-performing assets ......... $ 774 $2,909 $3,313 $8,132 $2,381
====== ====== ====== ====== ======
Total as a percentage of total assets .29% .75% .82% 1.94% .47%
====== ====== ====== ====== ======
For the year ended September 30, 1999, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $148,000, of which none was
included in interest income.
Non-accruing Loans. At September 30, 1999, the Company had $2.2 million
in non-accruing loans, which constituted .72% of the Company's gross loan
portfolio. At such date, there were no non-accruing loans or aggregate
non-accruing loans to one borrower in excess of $500,000 in net book value,
except as described below.
Non-accruing loans at September 30, 1999 included a commercial real
estate participation loan in the amount of $1.0 million secured by a 116 unit
apartment complex located in Fitchburg, Wisconsin. This loan is in process of
being refinanced and is anticipated to be paid off by March 31, 2000.
The balance of non-accruing agricultural operating loans declined at
September 30, 1999 as a result of stringent adherence to underwriting guidelines
on new and renewed loans, diligent collection efforts, and charge-offs during
the period.
Other Loans of Concern. At September 30, 1999, there were loans
totaling $3.9 million not included in the table above where known information
about the possible credit problems of borrowers caused management to have
concern as to the ability of the borrower to comply with the present loan
repayment terms. This amount consisted of seven one- to four-family residential
mortgage loans totaling $312,000, six commercial business loans totaling $1.0
million, 21 agricultural operating loans totaling $2.4 million and 12 consumer
loans totaling $109,000.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
Office of Thrift Supervision (the "OTS") to be of lesser quality as
"substandard," "doubtful" or "loss." An asset is considered "substandard" if it
is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the savings association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such minimal value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. The loans held by Security are subject to similar
classification by its regulatory authorities.
When assets are classified as either substandard or doubtful, the Bank
may establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When assets are classified as "loss," the Bank is required
either to establish a specific allowance for losses equal to 100% of that
portion of the asset so classified or to charge-off such amount. The Banks'
determinations as to the classification of their assets and the amount of their
valuation allowances are subject to review by their regulatory authorities, who
may order the establishment of additional general or specific loss allowances.
On the basis of management's review of its assets, at September 30,
1999, the Company had classified a total of $5.9 million of its assets as
substandard, $142,000 as doubtful and none as loss.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Current economic conditions in the agricultural sector of the Company's
market area indicate potential weakness due to historically low commodity
prices. The agricultural economy is accustomed to commodity price fluctuations
and is generally able to handle such fluctuations without significant problem.
However, an extended period of low commodity prices could result in weakness of
the Company's agricultural loan portfolio and could create a need for the
Company to increase its allowance for loan losses through increased charges to
provision for loan losses.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value. If fair value at the date of foreclosure is lower
than the balance of the related loan, the difference will be charged-off to the
allowance for loan losses at the time of transfer. Valuations are periodically
updated by management and if the value declines, a specific provision for losses
on such property is established by a charge to operations.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance.
The following table sets forth an analysis of the Company's allowance
for loan losses.
Year Ended September 30,
----------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period .............................. $1,442 $1,650 $2,356 $2,379 $2,909
Iowa Savings acquisition .................................... --- 132 --- --- ---
Security acquisition ........................................ --- 563 --- --- ---
Charge-offs:
One-to four-family ........................................ --- --- --- (103) (84)
Agricultural operating .................................... --- --- --- (595) (1,160)
Commercial and multi-family ............................... (30) (35) (2) (299) ---
Consumer .................................................. (12) (54) (66) (152) (202)
Commercial business ....................................... --- --- (55) (17) (420)
------ ------ ------ ------ ------
Total charge-offs ....................................... (42) (89) (123) (1,166) (1,866)
Recoveries:
Consumer .................................................. --- --- --- 17 39
Commercial business ....................................... --- --- --- 5 8
Commercial and multi-family ............................... --- --- 2 --- ---
Agricultural operating .................................... --- --- 24 11 11
------ ------ ------ ------ ------
Total recoveries ........................................ --- --- 26 33 58
------ ------ ------ ------ ------
Net charge-offs ......................................... (42) (89) (97) (1,133) (1,808)
Additions charged to operations ............................. 250 100 120 1,663 1,992
------ ------ ------ ------ ------
Balance at end of period .................................... $1,650 $2,356 $2,379 $2,909 $3,093
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
loans outstanding during the period ...................... .03% .04% .04% .44% .63%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
non-performing assets ..................................... 5.08% 5.30% 4.46% 21.50% 43.12%
====== ====== ====== ====== ======
For each of the periods indicated in the table above, the additions
charged to operations (provision for loan losses) were relatively constant,
except for fiscal 1998 and 1999. For more information on the provision for loan
losses, see "Management's Discussion and Analysis - Results of Operations" in
the Annual Report.
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
September 30,
---------------------------------------------------------------------------------------------------
1995 1996 1997 1998
---------------------- ------------------- -------------------- ----------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------- ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
One- to four-family ........ $ 172 30.36% $235 31.54% $ 222 27.75% $ 257 30.50%
Commercial and multi-
family real estate ....... 551 38.92 639 34.23 712 28.12 602 23.77
Agricultural real estate ... 70 3.72 138 4.45 117 4.41 132 3.75
Construction ............... 134 9.47 59 3.14 106 7.99 165 11.73
Consumer ................... 145 6.89 270 8.21 289 10.29 277 9.33
Agricultural operating ..... 208 6.31 531 12.21 580 14.51 1,024 13.24
Commercial business ........ 123 4.33 271 6.22 277 6.93 324 7.68
Unallocated ................ 247 --- 213 --- 76 --- 128 ---
------- ------ ------ ------ ------ ------ ------ ------
Total ................. $ 1,650 100.00% $2,356 100.00% $2,379 100.00% $2,909 100.00%
======= ====== ====== ====== ====== ====== ====== ======
September 30,
---------------------
1999
---------------------
Percent
of Loans
in Each
Category
to Total
Amount Loans
------ ------
(Dollars in Thousands)
One- to four-family ........ $ 331 35.43%
Commercial and multi-
family real estate ....... 772 27.55
Agricultural real estate ... 114 3.17
Construction ............... 123 7.32
Consumer ................... 308 7.52
Agricultural operating ..... 806 9.40
Commercial business ........ 449 9.61
Unallocated ................ 190 ---
------ ------
Total ................. $3,093 100.00%
====== ======
Investment Activities
General. The investment policy of the Company generally is to invest
funds among various categories of investments and maturities based upon the
Company's need for liquidity, to achieve the proper balance between its desire
to minimize risk and maximize yield, to provide collateral for borrowings, and
to fulfill the Company's asset/liability management policies. The Company's
investment and mortgage-backed securities portfolios are managed in accordance
with a written investment policy adopted by the Board of Directors which is
implemented by members of the Bank's Investment Committee.
As of September 30, 1999, the Company's entire investment and
mortgage-backed securities portfolios were classified as available for sale. For
additional information regarding the Company's investment and mortgage-backed
securities portfolios, see Notes 1 and 3 of the Notes to Consolidated Financial
Statements in the Annual Report.
Investment Securities. It is the Company's general policy to purchase
investment securities which are U.S. Government securities and federal agency
obligations, state and local government obligations, commercial paper, corporate
debt securities and overnight federal funds.
The following table sets forth the carrying value of the Company's
investment security portfolio, excluding mortgage-backed securities, at the
dates indicated.
September 30,
---------------------------------
1997 1998 1999
------- ------- -------
(In Thousands)
Investment Securities:
Trust preferred securities(1) ................ $ -- $27,256 $26,998
U.S. government securities ................... 2,956 757 --
Federal agency obligations ................... 65,529 27,015 15,492
Municipal bonds .............................. 1,390 1,341 1,387
Equity investments ........................... 1,255 1,230 856
Freddie Mac preferred stock .................. 336 427 202
Fannie Mae common stock ...................... 94 129 125
------- ------- -------
Subtotal ................................. 71,560 58,155 45,060
FHLB stock .................................... 5,629 5,506 8,126
------- ------- -------
Total investment securities and FHLB stock $77,189 $63,661 $53,186
======= ======= =======
Other Interest-Earning Assets:
Interest bearing deposits in other financial
institutions and Federal Funds sold ....... $12,177 $ 5,818 $ 4,208
======= ======= =======
- -------------------
(1) Within the trust preferred securities presented above, there are securities
from individual issuers that exceed 10% of the Company's total equity. The
name and the aggregate market value of securities of each individual issuer
are as follows, as of September 30, 1999:
PNC Capital Trust $4.8 million
Key Corp Capital I $5.0 million
Huntington Capital II $4.9 million
Bank Boston Capital Trust IV $4.8 million
BankAmerica Capital III $4.8 million
The composition and maturities of the Company's investment securities
portfolio, excluding equity securities, FHLB stock and mortgage-backed
securities, are indicated in the following table.
September 30, 1999
-----------------------------------------------------------------------------------
After 1 After 5
Year Years
1 Year or Through Through After Total Investment
Less 5 Years 10 Years 10 Years Securities
------- ------- ------- ------- ------------------------
Carrying Carrying Carrying Carrying Amortized Market
Value Value Value Value Cost Value
------- ------- ------- ------- --------- -------
(Dollars in Thousands)
Trust preferred securities ............... $ -- $ -- $ -- $26,998 $27,630 $26,998
Municipal bonds .......................... 105 959 323 -- 1,360 1,387
Federal agency obligations ............... -- 4,939 10,553 -- 15,923 15,492
------- ------- ------- ------- ------- -------
Total investment securities .............. $ 105 $ 5,898 $10,876 $26,998 $44,913 $43,877
======= ======= ======= ======= ======= =======
Weighted average yield 5.83% 5.60% 6.83% 6.11% 6.22% 6.22%
======= ======= ======= ======= ======= =======
Mortgage-Backed Securities. The Company's mortgage-backed and related
securities portfolio consists of securities issued under government-sponsored
agency programs, including those of Ginnie Mae, Fannie Mae and Freddie Mac. The
Company also holds Collateralized Mortgage Obligations ("CMOs"), as well as a
limited amount of privately issued mortgage pass-through certificates. The
Ginnie Mae, Fannie Mae and Freddie Mac certificates are modified pass-through
mortgage-backed securities that represent undivided interests in underlying
pools of fixed-rate, or certain types of adjustable-rate, predominantly
single-family and, to a lesser extent, multi-family residential mortgages issued
by these government-sponsored entities. Fannie Mae and Freddie Mac generally
provide the certificate holder a guarantee of timely payments of interest,
whether or not collected. Ginnie Mae's guarantee to the holder is timely
payments of principal and interest, backed by the full faith and credit of the
U.S. Government. Privately issued mortgage pass-through certificates generally
provide no guarantee as to timely payment of interest or principal, and reliance
is placed on the creditworthiness of the issuer, which the Company monitors on a
regular basis.
CMOs are special types of pass-through debt in which the stream of
principal and interest payments on the underlying mortgages or mortgage-backed
securities is used to create classes with different maturities and, in some
cases, amortization schedules, as well as a residual interest, with each such
class possessing different risk characteristics. At September 30, 1999, the
Company held CMOs totaling $95.3 million, all of which were secured by
underlying collateral issued under government-sponsored agency programs or
residential real estate mortgage loans. Premiums associated with the purchase of
these CMOs are not significant, therefore, the risk of significant yield
adjustments because of accelerated prepayments is limited. Yield adjustments are
encountered as interest rates rise or decline, which in turn slows or increases
prepayment rates and affect the average lives of the CMOs.
At September 30, 1999, $130.9 million or 98.1% of the Company's
mortgage-backed securities portfolio had fixed rates of interest and $2.5
million or 1.9% of such portfolio had adjustable rates of interest.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees that back them, are
more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. At September 30, 1999, $98.1
million or 73.5% of the Company's mortgage-backed securities were pledged to
secure various obligations of the Company.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. The prepayment risk associated with
mortgage-backed securities is monitored periodically, and prepayment rate
assumptions adjusted as appropriate to update the Company's mortgage-backed
securities accounting and asset/liability reports. Classification of the
Company's mortgage-backed securities portfolio as available for sale is designed
to minimize that risk.
The following table sets forth the carrying value of the Company's
mortgage-backed securities at the dates indicated.
September 30,
------------------------------------
1997 1998 1999
-------- -------- --------
(In Thousands)
Ginnie Mae ........................................ $ 20,925 $ 42,951 $ 27,886
CMO ............................................... 3,832 11,283 95,325
Freddie Mac ....................................... 3,813 2,827 5,791
Fannie Mae ........................................ 14,939 4,711 3,934
Privately Issued Mortgage Pass-Through Certificates 916 682 493
-------- -------- --------
Total ........................................ $ 44,425 $ 62,454 $133,429
======== ======== ========
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at September 30, 1999. Not considered in
the preparation of the table below is the effect of prepayments, periodic
principal repayments and the adjustable-rate nature of these instruments.
Due in
----------------------------------------------------
After 1 After 5 September 30,
Year Years 1999
1 Year or Through Through After Balance
Less 5 Years 10 Years 10 Years Outstanding
-------- -------- -------- -------- -----------
(Dollars in Thousands)
Ginnie Mae ................... $ -- $ -- $ 112 $ 27,774 $ 27,886
CMO .......................... -- 9,563 16,597 69,165 95,325
Freddie Mac .................. 110 161 895 4,625 5,791
Fannie Mae ................... -- 94 1,594 2,246 3,934
Privately Issued Mortgage
Pass-Through Certificates(1) -- -- -- 493 493
-------- -------- -------- -------- --------
Total ................... $ 110 $ 9,818 $ 19,198 $104,303 $133,429
======== ======== ======== ======== ========
Weighted average yield 10.75% 6.58% 6.66% 6.47% 6.50%
- ------------------
(1) This security is rated AA by a nationally recognized rating agency.
At September 30, 1999, the contractual maturity of 78.2% of all of the
Company's mortgage-backed securities was in excess of ten years. The actual
maturity of a mortgage-backed security is typically less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
different than anticipated will affect the yield to maturity. The yield is based
upon the interest income and the amortization of any premium or discount related
to the mortgage-backed security. In accordance with generally accepted
accounting principles, premiums and discounts are amortized over the estimated
lives of the loans, which decrease and increase interest income, respectively.
The prepayment assumptions used to determine the amortization period for
premiums and discounts can significantly affect the yield of the mortgage-backed
security, and these assumptions are reviewed periodically to reflect actual
prepayments. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of mortgages,
the geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of falling mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
circumstances, the Company may be subject to reinvestment risk because to the
extent that the Company's mortgage-backed securities amortize or prepay faster
than anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
Sources of Funds
General. The Company's sources of funds are deposits, borrowings,
amortization and repayment of loan principal (including interest earned on
mortgage-backed securities), interest earned on or maturation of investment
securities and short-term investments, and funds provided from operations.
Borrowings, including Federal Home Loan Bank ("FHLB") of Des Moines and
Federal Reserve Bank of Chicago ("FRB") advances, reverse repurchase agreements
and retail repurchase agreements, may be used at times to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels, may be used on a longer-term basis to support expanded lending
activities, and may also be used to match the funding of a corresponding asset.
Deposits. The Company offers a variety of deposit accounts having a
wide range of interest rates and terms. The Company's deposits consist of
passbook savings accounts, money market savings accounts, NOW and regular
checking accounts, and certificate accounts currently ranging in terms from
fourteen days to 60 months. The Company only solicits deposits from its primary
market area and does not use brokers to obtain deposits. The Company relies
primarily on competitive pricing policies, advertising and customer service to
attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. Based
on its experience, the Company believes that its passbook savings, money market
savings accounts, NOW and regular checking accounts are relatively stable
sources of deposits. However, the ability of the Company to attract and maintain
certificates of deposit and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Company during
the periods indicated.
Year Ended September 30,
-------------------------------------------
1997 1998 1999
--------- --------- ---------
(Dollars in Thousands)
Opening balance ............. $ 233,406 $ 246,116 $ 283,858
Deposits .................... 543,824 615,028 608,478
Withdrawals ................. (541,351) (589,176) (599,915)
Interest credited ........... 10,237 11,890 12,359
--------- --------- ---------
Ending balance ............. $ 246,116 $ 283,858 $ 304,780
========= ========= =========
Net increase (decrease) ..... $ 12,710 $ 37,742 $ 20,922
========= ========= =========
Percent increase (decrease) . 5.45% 15.34% 7.37%
========= ========= =========
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company for the periods
indicated.
Year Ended September 30,
------------------------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------- -------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Transactions and Savings Deposits:
- ----------------------------------
Commercial Demand ............... $ 5,572 2.26% $ 4,971 1.75% $ 5,681 1.86%
Passbook Accounts ............... 21,562 8.76 18,610 6.56 17,043 5.59
NOW Accounts .................... 16,408 6.67 16,637 5.86 16,055 5.27
Money Market Accounts ........... 11,869 4.82 22,509 7.93 41,905 13.75
-------- ------ -------- ------ -------- ------
Total Non-Certificate ........... 55,411 22.51 62,727 22.10 80,684 26.47
-------- ------ -------- ------ -------- ------
Certificates:
- -------------
Variable ........................ 1,259 .51 559 .20 1,253 .41
0.00 - 3.99% ................... 202 .08 95 .03 267 .09
4.00 - 5.99% .................. 129,409 52.58 130,729 46.05 185,476 60.85
6.00 - 7.99% .................. 56,515 22.97 87,940 30.98 37,098 12.17
8.00 - 9.99% .................. 3,320 1.35 1,808 .64 2 .01
-------- ------ -------- ------ -------- ------
Total Certificates .............. 190,705 77.49 221,131 77.90 224,096 73.53
-------- ------ -------- ------ -------- ------
Total Deposits .................. $246,116 100.00% $283,858 100.00% $304,780 100.00%
======== ====== ======== ====== ======== ======
The following table shows rate and maturity information for the Company's
certificates of deposit as of September 30, 1999.
0.00- 4.00- 6.00- 8.00- Percent
Variable 3.99% 5.99% 7.99% 9.99% Total of Total
-------- ---- -------- ------- ---- -------- --------
(Dollars in Thousands)
Certificate accounts
maturing in
quarter ending:
- --------------------
December 31, 1999 $ 249 $179 $37,837 $ 8,944 $ 2 $ 47,211 21.1%
March 31, 2000 245 8 39,778 4,332 --- 44,363 19.8
June 30, 2000 183 -- 40,080 8,558 --- 48,821 21.8
September 30, 2000 192 --- 24,521 3,883 --- 28,596 12.8
December 31, 2000 189 --- 10,782 1,625 --- 12,596 5.6
March 31, 2001 85 8 8,048 1,435 --- 9,576 4.3
June 30, 2001 --- --- 6,729 2,015 --- 8,744 3.9
September 30, 2001 --- --- 4,828 1,669 --- 6,497 2.9
December 31, 2001 --- --- 3,089 229 --- 3,318 1.5
March 31, 2002 --- --- 3,549 298 --- 3,847 1.7
June 30, 2002 --- --- 1,255 251 --- 1,506 .6
September 30, 2002 --- --- 1,700 818 --- 2,518 1.1
Thereafter 110 72 3,280 3,041 --- 6,503 2.9
------ ---- -------- ------- ---- -------- -----
Total $1,253 $267 $185,476 $37,098 $ 2 $224,096 100.0%
====== ==== ======== ======= ==== ======== =====
Percent of total .56% .12% 82.76% 16.55% .01% 100.00%
====== ==== ======== ======= ==== ========
The following table indicates the amount of the Company's certificates
of deposit and other deposits by time remaining until maturity as of September
30, 1999.
Maturity
----------------------------------------------------------
After After
3 Months 3 to 6 6 to 12 After
or Less Months Months 12 months Total
------- ------- ------- ------- ----------
(In Thousands)
Certificates of deposit less than $100,000 $42,653 $42,436 $66,018 $52,258 $203,365
Certificates of deposit of $100,000 or more 5,930 5,064 6,770 2,967 20,731
------- ------- ------- ------- --------
Total certificates of deposit $48,583 $47,500 $72,788 $55,225 $224,096(1)
======= ======= ======= ======= ========
- --------------
(1) Includes deposits from governmental and other public entities totaling $6.6
million.
Borrowings. Although deposits are the Company's primary source of
funds, the Company's policy has been to utilize borrowings when they are a less
costly source of funds, can be invested at a positive interest rate spread, or
when the Company desires additional capacity to fund loan demand.
The Company's borrowings historically have consisted of advances from
the FHLB of Des Moines upon the security of a blanket collateral agreement of a
percentage of unencumbered loans and the pledge of specific investment
securities. Such advances can be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At
September 30, 1999, the Company had $161.3 million of advances from the FHLB of
Des Moines and the ability to borrow up to an additional $37.3 million. All of
the Company's advances currently carry fixed rates, except a $200,000 line of
credit which adjusts daily. At September 30, 1999, advances totaling $48.8
million (including the line of credit) had terms to maturity of one year or
less. The remaining $112.5 million had maturities ranging up to 20 years.
From time to time, the Company has offered retail repurchase agreements
to its customers. These agreements typically range from 14 days to five years in
term, and typically have been offered in minimum amounts of $100,000. The
proceeds of these transactions are used to meet cash flow needs of the Company.
At September 30, 1999, the Company had approximately $3.0 million of retail
repurchase agreements outstanding.
The Company has also, from time to time, entered into reverse
repurchase agreements through nationally recognized broker-dealer firms. These
agreements are accounted for as borrowings by the Company and are secured by
certain of the Company's investment and mortgage-backed securities. The
broker-dealer takes possession of the securities during the period that the
reverse repurchase agreement is outstanding. The terms of the agreements have
typically ranged from 30 days to a maximum of six months. The Company has not
entered into any reverse repurchase agreements in the past five years.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, retail repurchase agreements and other
borrowings (consisting of FRB advances) for the periods indicated.
Year Ended September 30,
--------------------------------------
1997 1998 1999
-------- -------- --------
(In Thousands)
Maximum Balance:
FHLB advances ................... $107,426 $109,766 $161,348
Retail repurchase agreements .... 2,790 4,075 4,322
Other borrowings ................ 2,900 2,100 200
Average Balance:
FHLB advances ................... $ 80,685 $ 95,328 $135,846
Retail repurchase agreements .... 2,285 2,916 3,300
Other borrowings ................ 1,258 557 48
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated.
At September 30,
--------------------------------------
1997 1998 1999
-------- -------- --------
(Dollars in Thousands)
FHLB advances ..................................... $107,426 $ 85,264 $161,348
Retail repurchase agreements ...................... 1,800 4,075 3,021
Other borrowings .................................. 2,900 550 --
-------- -------- --------
Total borrowings ............................. $112,126 $ 89,889 $164,369
======== ======== ========
Weighted average interest rate of FHLB advances ... 5.86% 5.91% 5.38%
Weighted average interest rate of retail repurchase
agreements ....................................... 5.79% 5.71% 5.28%
Weighted average interest rate of other borrowings 5.55% 5.45% ---%
Subsidiary Activities
The only subsidiaries of the Company are First Federal and Security.
First Federal has one service subsidiary, First Services Financial Limited
("First Services"). At September 30, 1999, the net book value of First Federal's
investment in First Services was approximately $749,000. Security does not have
any subsidiaries.
First Federal organized First Services, its sole service corporation,
in 1983. First Services is located in Storm Lake, Iowa and offers mutual funds
and, in some locations, insurance products and annuities. In addition, Brookings
Service Corporation ("BSC"), a subsidiary of First Services, offers full
brokerage services through PrimeVest Financial Services, Inc., a third party
vendor. First Services, together with its subsidiary BSC, recognized a net loss
of $17,000 during fiscal 1999.
Regulation
General. First Midwest currently has two wholly-owned subsidiaries,
First Federal, a federally-chartered thrift institution and Security, an
Iowa-chartered commercial bank. First Federal is subject to extensive
regulation, supervision and examination by the OTS, as its chartering authority
and primary federal regulator, and by the Federal Deposit Insurance Corporation
(the "FDIC"), which insures its deposits up to applicable limits. First Federal
is a member of the FHLB System and is subject to certain limited regulation by
the FRB. Such regulation and supervision governs the activities in which an
institution can engage and the manner in which such activities are conducted,
and is intended primarily for the protection of the insurance fund and
depositors. Security is subject to extensive regulation, supervision and
examination by the Iowa Superintendent of Banking (the "ISB") and the FRB, which
are its state and primary federal regulators, respectively. It is also subject
to regulation by the FDIC, which insures its deposits up to applicable limits.
As with First Federal, such regulation and supervision governs the activities in
which it can engage and the manner in which such activities are conducted and is
intended primarily for the protection of the insurance fund and depositors.
First Midwest is regulated as a bank holding company by the FRB. Bank
holding companies are subject to comprehensive regulation and supervision by the
FRB under the Bank Holding Company Act of 1956 (the "BHCA") and the regulations
of the FRB. As a bank holding company, First Midwest must file reports with the
FRB and such additional information as the FRB may require, and is subject to
regular inspections by the FRB. First Midwest is subject to the activity
limitations imposed under the BHCA and in general may engage in only those
activities that the FRB has determined to be closely related to banking.
Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities which are intended
to strengthen the financial condition of the banking industry, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC, the FRB or the Congress could have a material impact on
First Midwest, First Federal or Security and their respective operations.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Financial Institutions. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, First Federal is required to file periodic reports with the OTS and
is subject to periodic examination by the OTS and the FDIC. The last regular OTS
examination of First Federal was as of October 4, 1999. When these examinations
are conducted by the OTS, the examiners may require First Federal to provide for
higher general or specific loan loss reserves. Security is subject to similar
regulation and oversight by the ISB and the FRB and was last examined as of
January 18, 1999.
Each federal banking regulator has extensive enforcement authority over
its regulated institutions. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports. Except under
certain circumstances, public disclosure of final enforcement actions by the
regulator is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. Security is subject to such restrictions
under state law as administered by the ISB. Federal savings associations are
also generally authorized to branch nationwide whereas Iowa chartered banks such
as Security are limited to establishing branches in the counties contiguous to
the county where their home office is located. At September 30, 1999, First
Federal and Security were in compliance with the noted restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). Security is subject to similar restrictions. At
September 30, 1999, First Federal's and Security's lending limit under these
restrictions was $5.3 million and $964,000, respectively. First Federal and
Security are in compliance with the loans-to-one-borrower limitation.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the Savings Association Insurance Fund (the "SAIF") and Security is a
member of the Bank Insurance Fund (the "BIF"), each of which is administered by
the FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against any FDIC insured institution after giving its primary federal
regulator the opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. The current assessment rates range from zero
to .27% of deposits. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period. Institutions that are
well-capitalized and have a high supervisory rating are subject to the lowest
assessment rate. At September 30, 1999, each of First Federal and Security met
the capital requirements of a "well capitalized" institution and were not
subject to any assessment. See Note 14 of Notes to Consolidated Financial
Statements in the Annual Report.
Prior to the enactment of the legislation recapitalizing the SAIF in
1996, a portion of the SAIF assessment imposed on savings associations was used
to repay obligations issued by a federally chartered corporation to provide
financing for resolving the thrift crisis in the 1980s. Although the legislation
also now requires assessments to be made on BIF-assessable deposits for this
purpose, effective January 1, 1997, that assessment will be limited to 20% of
the rate imposed on SAIF assessable deposits until the earlier of December 31,
1999 or when no savings association continues to exist, thereby imposing a
greater burden on SAIF member institutions such as First Federal. Thereafter,
however, assessments on BIF-member institutions will be made on the same basis
as SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions is approximately a 6 basis points
assessment on SAIF deposits and a 1 basis point assessment on BIF deposits until
BIF insured institutions participate fully in the assessment.
Regulatory Capital Requirements. Federally insured financial
institutions, such as First Federal and Security, are required to maintain a
minimum level of regulatory capital. These capital requirements mandate that an
institution maintain at least the following ratios: (1) a core (or Tier 1)
capital to adjusted total assets ratio of 4% (which can be reduced to 3% for
highly rated institutions); (2) a Tier 1 capital to risk weighted assets ratio
of 4% and (3) a risk based capital to risk-weighted assets ratio of 8%. Capital
requirements in excess of these standards may be imposed on individual
institutions on a case-by-case basis. See Note 14 of Notes to Consolidated
Financial Statements in the Annual Report.
An FDIC-insured institution's primary federal regulator is also
authorized and, under certain circumstances required, to take certain actions
against an "undercapitalized institution" (generally defined to be one with less
than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or
an 8% risk-based capital ratio). Any such institution must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The primary
federal regulator is also authorized, and with respect to institution's whose
capital is further depleted, required to impose additional restrictions that can
affect all aspects of the institution's operations, including the appointment of
a receiver for a "critically undercapitalized" institution (i.e., one with a
tangible capital ratio of 2% or less). As a condition to the approval of the
capital restoration plan, any company controlling an undercapitalized
institution must agree that it will enter into a limited capital maintenance
guarantee with respect to the institution's achievement of its capital
requirements.
The imposition of any of these measures on First Federal or Security
may have a substantial adverse effect on Company's operations and profitability.
First Midwest shareholders do not have preemptive rights, and therefore, if
First Midwest is directed by the OTS, the FRB or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in shareholders
percentage of ownership of First Midwest.
Limitations on Dividends and Other Capital Distributions. The OTS
imposes various restrictions on savings associations with respect to their
ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. The OTS also prohibits a savings association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result of
such action, the regulatory capital of the association would be reduced below
the amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
Savings institutions such as First Federal may make a capital
distribution without the approval of the OTS, provided they notify the OTS
30-days before they declare the capital distribution and they meet the following
requirements: (i) have a regulatory rating in one of the two top examination
categories, (ii) are not of supervisory concern, and will remain adequately- or
well-capitalized, as defined in the OTS prompt corrective action regulations,
following the proposed distribution, and (iii) the distribution does not exceed
their net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If a savings
institution does not meet the above stated requirements, it must obtain the
prior approval of the OTS before declaring any proposed distributions.
Security may pay dividends, in cash or property, only out of its
undivided profits. In addition, FRB regulations prohibit the payment of
dividends by a state member bank if losses have at any time been sustained by
such bank that equal or exceed its undivided profits then on hand, unless (i)
the prior approval of the FRB has been obtained and (ii) at least two-thirds of
the shares of each class of stock outstanding have approved the dividend
payment. FRB regulations also prohibit the payment of any dividend by a state
member bank without the prior approval of the FRB if the total of all dividends
declared by the bank in any calendar year exceeds the total of its net profits
for that year combined with its retained net profits of the previous two
calendar years (minus any required transfers to a surplus or to a fund for the
retirement of any preferred stock).
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis or meet the requirements for a domestic
building and loan association under the Internal Revenue Code. Under either
test, the required assets primarily consist of residential housing related loans
and investments. At September 30, 1999, First Federal met the test and has
always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL within one year and
thereafter remains a QTL, or limits its new investments and activities to those
permissible for both a savings association and a national bank. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends and branching
authority. If such association has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in prepayment
penalties.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS and the FRB, in connection with the examination of First
Federal and Security, respectively, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by the institution. An unsatisfactory rating may be used as the
basis for the denial of such an application. First Federal was examined for CRA
compliance in May 1997 and Security was examined in June 1999 and both received
a rating of "satisfactory."
Bank Holding Company Regulation
General. Bank holding companies such as First Midwest are subject to
comprehensive regulation by the FRB under the BHCA and the regulations of the
FRB. As a bank holding company, First Midwest is required to file reports with
the FRB and such additional information as the FRB may require, and is subject
to regular inspections by the FRB. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require a
holding company to contribute additional capital to an undercapitalized
subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
The BHCA prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution (such as First Federal), mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; real estate and personal property appraising; and, subject to certain
limitations, providing securities brokerage services for customers. The scope of
permissible activities may be expanded from time to time by the FRB. Such
activities may also be affected by federal legislation.
Interstate Banking and Branching. The FRB may approve an application of
an adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than such holding company's home state, without regard to
whether the transaction is prohibited by the laws of any state. The FRB may not
approve the acquisition of a bank that has not been in existence for the minimum
time period (not exceeding five years) specified by the statutory law of the
host state or if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. Iowa has adopted a five year
minimum existence requirement. States are authorized to limit the percentage of
total insured deposits in the state which may be held or controlled by a bank or
bank holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. Individual states may also waive
the 30% state-wide concentration limit.
The federal banking agencies are also generally authorized to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state. Interstate acquisitions of branches or the
establishment of a new branch is permitted only if the law of the state in which
the branch is located permits such acquisitions. Interstate mergers and branch
acquisitions are also subject to the nationwide and statewide insured deposit
concentration amounts described above. Iowa permits interstate branching only by
merger.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that its net income
for the past year is sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the holding company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
Capital Requirements. The FRB has established capital requirements for
bank holding companies that generally parallel the capital requirements for
commercial banks and federal thrift institutions such as First Federal and
Security. First Midwest is in compliance with these requirements.
Federal Home Loan Bank System
First Federal and Security are both members of the FHLB of Des Moines,
which is one of 12 regional FHLBs, that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances must be used for residential
home financing.
As members of the FHLB System, First Federal and Security are required
to purchase and maintain stock in the FHLB of Des Moines. At September 30, 1999,
the Banks had in the aggregate $8.1 million in FHLB stock, which was in
compliance with this requirement. For the fiscal year ended September 30, 1999,
dividends paid by the FHLB of Des Moines to First Federal and Security totaled
$469,000. Over the past five calendar years such dividends have averaged 7.25%
and were 6.25% for the first three quarters of the calendar year 1999.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
Federal and State Taxation
Federal Taxation. Savings institutions such as First Federal that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction is computed under the experience method.
In addition to the regular income tax, corporations, including savings
banks such as First Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings bank's bad debt
reserves and deducted for federal income tax purposes exceed the allowable
amount of such reserves computed under the experience method and to the extent
of the bank's supplemental reserves for losses on loans ("Excess"), such Excess
may not, without adverse tax consequences, be utilized for the payment of cash
dividends or other distributions to a shareholder (including distributions on
redemption, dissolution or liquidation) or for any other purpose (except to
absorb bad debt losses). As of September 30, 1999, First Federal's Excess for
tax purposes totaled approximately $6.7 million.
First Midwest and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. First
Midwest and its consolidated subsidiaries have not been audited by the IRS
within the past ten years. In the opinion of management, any examination of
still open returns (including returns of subsidiaries and predecessors of, or
entities merged into, First Midwest) would not result in a deficiency which
could have a material adverse effect on the financial condition of First Midwest
and its subsidiaries.
Iowa Taxation. First Federal and Security file Iowa franchise tax
returns. First Midwest and First Federal's subsidiary file Iowa corporation tax
returns on a fiscal year-end basis.
Iowa imposes a franchise tax on the taxable income of mutual and stock
savings banks and commercial banks. The tax rate is 5%, which may effectively be
increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax.
Taxable income under the Iowa corporate income tax is generally similar
to taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision. The taxable income for Iowa franchise
tax purposes is apportioned to Iowa through the use of a one-factor formula
consisting of gross receipts only.
South Dakota Taxation. First Federal files a South Dakota franchise tax
return due to the operations of its Brookings division. The South Dakota
franchise tax is imposed only on depository institutions. First Midwest,
Security and First Federal's subsidiaries are therefore not subject to the South
Dakota franchise tax.
South Dakota imposes a franchise tax on the taxable income of a
depository institution at the rate of 6%. Taxable income under the franchise tax
is generally similar to taxable income under the federal corporate income tax,
except that, under the South Dakota franchise tax, no deduction is allowed for
state income and franchise taxes, bad debt deductions are determined on the
basis of actual charge-offs, income from municipal obligations exempt from
federal taxes are included in the franchise taxable income, and there is a
deduction allowed for federal income taxes accrued for the fiscal year. The
taxable income for South Dakota franchise tax purposes is apportioned to South
Dakota through the use of a three-factor formula consisting of tangible real and
personal property, payroll and gross receipts.
Delaware Taxation. As a Delaware holding company, First Midwest is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. First Midwest is
also subject to an annual franchise tax imposed by the State of Delaware.
Competition
The Company faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from commercial banks, savings banks, credit
unions, insurance companies, and mortgage bankers making loans secured by real
estate located in the Company's market area. Commercial banks and credit unions
provide vigorous competition in consumer lending. The Company competes for real
estate and other loans principally on the basis of the quality of services it
provides to borrowers, interest rates and loan fees it charges, and the types of
loans it originates.
The Company attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings banks, credit unions and brokerage offices located in
the same communities. The Company competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
The Company serves Adair, Buena Vista, Calhoun, Guthrie, Ida,
Pocahontas, Polk and Sac counties in Iowa and Brookings County in South Dakota.
There are 31 commercial banks, four savings banks, other than First Federal, and
one credit union which compete for deposits and loans in the First Federal's
primary market area in northwest Iowa and eight commercial banks, one savings
bank, other than First Federal, and one credit union which compete for deposits
and loans in First Federal's market area in South Dakota. In addition, there are
twelve commercial banks in Security's primary market area in west central Iowa.
First Federal entered the Des Moines, Iowa market area as a result of the
acquisition of Iowa Savings and competes for deposits and loans with numerous
financial institutions located throughout the metropolitan area.
Employees
At September 30, 1999, the Company and its subsidiaries had a total of
130 employees, including 13 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
Executive Officers of the Company Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company who
do not serve on the Company's Board of Directors. There are no arrangements or
understandings between such persons named and any persons pursuant to which such
officers were selected.
Donald J. Winchell - Mr. Winchell, age 47, serves as Senior Vice
President, Treasurer and Chief Financial Officer of First Midwest and First
Federal, and is responsible for the formulation and implementation of policies
and objectives for First Federal's finance and accounting functions. His duties
include financial planning, interest rate risk management, accounting,
investments, financial policy development and compliance, budgeting and
asset/liability management. Mr. Winchell also serves as Treasurer of First
Services Financial Limited and Brookings Service Corporation. Mr. Winchell
joined First Federal in 1989 as Vice President and Chief Financial Officer, was
appointed Treasurer in 1990, and Senior Vice President in 1992. Prior to joining
First Federal, Mr. Winchell served as Senior Vice President and Chief Financial
Officer of Midwest Federal Savings and Loan Association of Nebraska City,
Nebraska since 1981. Mr. Winchell received a Bachelor of Science degree and a
Bachelor of Business Administration degree from Washburn University, Topeka,
Kansas. Mr. Winchell is a certified public accountant.
Item 2. Description of Property
The Company conducts its business at its main office and branch office
in Storm Lake, Iowa, and five other locations in its primary market area in
Northwest Iowa. The Company also operates two offices in Brookings, South
Dakota, through the Company's Brookings Federal Bank division of the Bank; two
offices in Des Moines, Iowa, through the Company's Iowa Savings Bank division of
the Bank; and three offices in West Central Iowa through the Company's Security
State Bank subsidiary.
The Company owns all of its offices, except for the branch offices
located at Storm Lake Plaza, Storm Lake, Iowa and West Des Moines, Iowa as to
which the land is leased. The total net book value of the Company's premises and
equipment (including land, building and leasehold improvements and furniture,
fixtures and equipment) at September 30, 1999 was $4.8 million. See Note 7 of
Notes to Consolidated Financial Statements in the Annual Report.
The Company believes that its current facilities are adequate to meet
the present and foreseeable needs of the Company and the Banks. The Company has
initiated plans to construct two new offices to be located in Urbandale, Iowa
and Sioux Falls, South Dakota. The construction of these offices is anticipated
to be completed during the first quarter of the 2001 fiscal year. In November
1996, the Company purchased an existing building located in West Des Moines,
Iowa. In March 1998, the facility opened as an additional office of the Iowa
Savings Bank Division of First Federal.
The Bank maintains an on-line data base with a service bureau, whose
primary business is providing such services to financial institutions. The net
book value of the data processing and computer equipment utilized by the Company
at September 30, 1999 was approximately $302,000.
Item 3. Legal Proceedings
The Company is involved as plaintiff or defendant in various legal
actions arising in the normal course of its business. While the ultimate outcome
of these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing Company in the
proceedings, that the resolution of these proceedings should not have a material
effect on Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Page 56 of the attached 1999 Annual Report to Shareholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 9 of the attached 1999 Annual Report to Shareholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis or Financial Condition and Results
of Operation
Pages 10 through 21 of the attached 1999 Annual Report to Shareholders
are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Pages 16 through 18 of the attached 1999 Annual Report to Shareholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 22 through 52 of the attached 1999 Annual Report to Shareholders
are herein incorporated by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders held in January 2000, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Executive Officers
Information concerning executive officers of the Company are
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held in January 2000, a copy of
which will be filed not later than 120 days after the close of the fiscal year,
and from the information set forth under the caption "Executive Officers of the
Company Who Are Not Directors" contained in Part I of this Form 10-K.
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% shareholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, except as noted below, based solely on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required during the fiscal year ended
September 30, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with. G. Mark Mickelson filed late two reports in connection with two
acquisitions of First Midwest common stock.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held in January 2000, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held in January
2000, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held in January 2000, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of documents filed as part of this report:
(1) Financial Statements:
The following financial statements are incorporated by
reference under Part II, Item 8 of this Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Balance Sheets as of September 30, 1999 and 1998.
3. Consolidated Statements of Income for the Years Ended
September 30, 1999, 1998 and 1997.
4. Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended September 30, 1999, 1998
and 1997.
5. Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999, 1998 and 1997.
6. Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All financial statement schedules have been
omitted as the information is not required under the
related instructions or is inapplicable.
(3) Exhibits:
See Index of Exhibits.
(b) Reports on Form 8-K:
There were no Form 8-Ks filed by the Registrant during the three month
period ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MIDWEST FINANCIAL, INC.
Date: December 28, 1999 By: /s/James S. Haahr
--------------------------------
James S. Haahr
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/James S. Haahr Date: December 28, 1999
---------------------------------
James S. Haahr, Chairman of the Board
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/E. Wayne Cooley Date: December 28, 1999
---------------------------------
E. Wayne Cooley, Director
By: /s/E. Thurman Gaskill Date: December 28, 1999
---------------------------------
E. Thurman Gaskill, Director
By: /s/Rodney G. Muilenburg Date: December 28, 1999
---------------------------------
Rodney G. Muilenburg, Director
By: /s/Jeanne Partlow Date: December 28, 1999
---------------------------------
Jeanne Partlow, Director
By: /s/G. Mark Mickelson Date: December 28, 1999
---------------------------------
G. Mark Mickelson, Director
By: /s/J. Tyler Haahr Date: December 28, 1999
---------------------------------
J. Tyler Haahr, Director, Senior Vice
President, Secretary and Chief Operating
Officer
By: /s/Donald J. Winchell Date: December 28, 1999
---------------------------------
Donald J. Winchell, Senior Vice
President Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
3(i) Registrant's Articles of Incorporation as currently in effect, filed
on June 17, 1993 as an exhibit to the Registrant's registration
statement on Form S-1 (Commission File No. 33-64654), are
incorporated herein by reference.
3(ii) Registrant's Bylaws, as amended and restated, filed as Exhibit 3(ii)
to Registrant's Report on Form 10-K for the fiscal year ended
September 30, 1998 (Commission File No. 0-22140), is incorporated
herein by reference.
4 Registrant's Specimen Stock Certificate, filed on June 17, 1993 as
an exhibit to the Registrant's registration statement on Form S-1
(Commission File No. 33-64654), is incorporated herein by reference.
10.1 Registrant's 1995 Stock Option and Incentive Plan, filed as Exhibit
10.1 to Registrant's Report on Form 10-KSB for the fiscal year ended
September 30, 1996 (Commission File No. 0-22140), is incorporated
herein by reference.
10.2 Registrant's 1993 Stock Option and Incentive Plan, filed on June 17,
1993 as an exhibit to the Registrant's registration statement on
Form S-1 (Commission File No. 33-64654), is incorporated herein by
reference.
10.3 Registrant's Recognition and Retention Plan, filed on June 17, 1993
as an exhibit to the Registrant's registration statement on Form S-1
(Commission File No. 33-64654), is incorporated herein by reference.
10.4 Employment agreement between First Federal Savings Bank of the
Midwest and J. Tyler Haahr, filed as an exhibit to Registrant's
Report on Form 10-K for the fiscal year ended September 30, 1997
(Commission File No. 0-22140), is incorporated herein by reference.
10.5 Registrant's Supplemental Employees' Investment Plan, filed as an
exhibit to Registrant's Report on Form 10-KSB for the fiscal year
ended September 30, 1994 (Commission File No. 0-22140), is
incorporated herein by reference.
10.6 Employment agreements between First Federal Savings Bank of the
Midwest and James S. Haahr and Donald J. Winchell, filed on June 17,
1993 as an exhibit to the Registrant's registration statement on
Form S-1 (Commission File No. 33-64654), is incorporated herein by
reference.
10.7 Registrant's Executive Officer Compensation Program, filed as
Exhibit 10.6 to Registrant's Report on Form 10-K for the fiscal year
ended September 30, 1998 (Commission File No. 0-22140), is
incorporated herein by reference.
10.8 Registrant's Executive Officer Incentive Stock Option Plan for
Mergers and Acquisitions, filed as Exhibit 10.7 to Registrant's
Report on Form 10-K for the fiscal year ended September 30, 1998
(Commission File No. 0-22140), is incorporated herein by reference.
11 Statement re: computation of per share earnings (included under Note
1 and 2 of Notes to Consolidated Financial Statements in the Annual
Report to Shareholders' attached hereto as Exhibit 13).
13 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Expert.
27 Financial Data Schedule (electronic filing only).