SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December
31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period
from ______________ to ______________
Commission Number: 0-26577
WEBSTER CITY FEDERAL BANCORP
(Exact Name of Registrant as Specified in its Charter)
United States 42-1491186
----------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
820 Des Moines Street, Webster City, Iowa 50595-0638
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(Address of Principal Executive Offices) (Zip Code)
(515) 832-3071
---------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES [ X ] NO [ _ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B 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-KSB or any amendments to
this Form 10-KSB. [ X ]
The Registrant's revenues for year ended December 31, 2001 were $6.7 million.
As of February 28, 2002, there were issued and outstanding 1,871,151 shares
of the Registrant's Common Stock. The aggregate value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the last sale
price of such stock on the NASDAQ "Small-Cap" System as of February 28, 2002,
was $ 10,098,234. (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
1. Sections of Annual Report to Stockholders for the year ended December 31,
2001 (Parts II and III).
2. Proxy Statement for the 2002 Annual Meeting of Stockholders (Part III).
1
PART I
ITEM 1. BUSINESS
General
The Registrant, Webster City Federal Bancorp (the "Company"), and its
subsidiaries, Webster City Federal Savings Bank and Security Title and Abstract,
Inc., conduct operations in Webster City, Iowa. Webster City Federal Bancorp is
the successor to Webster City Federal Savings Bank, a federal stock savings bank
(the "Bank"), which reorganized into the holding company structure effective
July 1, 1999 (the "Holding Company Reorganization"). In the Holding Company
Reorganization, each outstanding share of the Bank's common stock was converted
by operation of law into one share of the Registrant's common stock, and each
stockholder of the Bank received the same ownership interest in the Registrant
immediately following the Holding Company Reorganization as he or she had in the
Bank immediately prior to that transaction. Webster City Federal Savings Bank
conducts its operations from a single office in Webster City, Iowa, and is the
successor to Webster City Federal Savings and Loan Association, which was
chartered originally in 1934, and became a federally chartered savings and loan
association that same year. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance
Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB")
System since 1934. Security Title and Abstract, Inc. an Iowa corporation is
engaged in the business of providing abstracting and title services for
properties located in Hamilton County, Iowa. The Company purchased the
abstracting company in September of 2000. At December 31, 2001, the Company had
total assets of $102.3 million, total deposits of $70.0 million, and
stockholders' equity of $21.3 million.
The Company is primarily engaged in the business of attracting deposits
from the general public in the Company's market area and investing such
deposits, together with other sources of funds, in mortgage loans secured by
one- to four-family residential real estate for retention in the Company's
portfolio. At December 31, 2001, $62.1 million, or 82.8% of the Company's net
loan portfolio, consisted of one-to four-family residential mortgage loans and
$4.9 million, or 7.2%, of the Company's net loan portfolio consisted of
multi-family residential, commercial real estate and other loans. The Company
also originates home equity loans, which totaled $4.7 million, or 6.4% of the
Company's net loan portfolio at December 31, 2001. At December 31, 2001,
consumer and other loans totaled $4.5 million, or 6.0%, of the Company's net
loan portfolio. The Company also invests in mortgage-backed securities issued or
guaranteed by the United States Government or agencies thereof, which totaled
$4.2 million, or 4.1%, of total assets at December 31, 2001.
The Company's principal executive office is located at 820 Des Moines
Street, Webster City, Iowa, and its telephone number at that address is (515)
832-3071.
Market Area and Competition
The Company is headquartered in Webster City, Iowa, a community of
approximately 8,000 people. The Company is the largest independent financial
institution and the leading originator of home mortgage loans headquartered in
Hamilton County. Although the Company conducts its operations from a single
office, its market area for lending and other financial services consists of
Hamilton and surrounding contiguous counties. Although the economy of the
Company's market area is heavily influenced by agriculture, it has a fairly
diverse industrial base. The major employers in the Company's market are
Frigidaire, a home appliance manufacturer, Van Diest Supply Co., a chemical and
fertilizer concern, Webster City Custom Meats, a meat processor, Tasler Inc., a
pallet/styrofoam packaging manufacturer, Arrow & Acme Corporation, a
die-castings manufacturer, Beam Industries, a central vacuum systems
manufacturer, and Daily Freeman Journal, a newspaper and printing firm.
The Company encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial banks, other savings
associations, and credit unions. Competition for loans comes from such financial
institutions as well as mortgage banking companies. The Company expects
continued strong competition in the foreseeable future, including increased
competition from
2
"super-regional" banks entering the market by purchasing large banks and savings
banks. Many such institutions have greater financial and marketing resources
available to them than does the Company. The Company competes for savings
deposits by offering depositors a high level of personal service and a wide
range of competitively priced financial services. In recent years, additional
strong competition has come from stock and bond dealers and brokers. The Company
competes for real estate loans primarily through the interest rates and loan
fees it charges and advertising.
Finally, competition is likely to increase as a result of the enactment of
the Gramm-Leach-Biley Act of 1999, which eases restrictions on entry into the
financial services market by insurance companies and securities firms. Moreover,
to the extent that these changes permit banks, securities firms and insurance
companies to affiliate, the financial services industry could experience further
consolidation. This could result in a growing number of larger financial
institutions competing in the Company's primary market area that offer a wide
variety of financial services than the Company currently offers. Competition for
deposits, for the origination of loans and the provision of other financial
services may limit the Company's growth and adversely impact its profitability
in the future.
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The principal
components of the Company's loan portfolio are fixed- and adjustable-rate first
mortgage loans secured by one- to four-family residential real estate, home
equity loans, multi-family residential mortgage loans, and, to a much lesser
extent, commercial real estate loans and consumer loans. At December 31, 2001,
the Company's net loans receivable totaled $74.5 million, of which $62.1
million, or 82.8%, were one- to four-family residential real estate mortgage
loans, $4.9 million, or 7.2%, were multi-family residential, commercial real
estate and other loans, $4.7 million, or 6.4%, were home equity loans and $4.5
million, or 6.0%, were consumer and other loans.
The Company also invests in mortgage-backed securities consisting of
pass-through certificates insured or guaranteed by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Government National Mortgage Association
("GNMA"), or the Federal National Mortgage Association ("FNMA"). At December 31,
2001, mortgage-backed securities totaled $4.2 million, or 4.1% of total assets.
At December 31, 2001, 55.9% of the Company's mortgage-backed securities were
secured by ARM loans, and 44.1% were secured by fixed-rate loans. The Company's
policy is to hold mortgage-backed securities to maturity.
3
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the Company's loan portfolio by type of loan as of the dates
indicated.
At December 31,
--------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential............................... $ 62,109 82.84% $ 55,114 79.76% $ 50,420 81.07%
Home equity................................................... 4,729 6.35 4,750 6.87 4,142 6.66
Multi-family residential, commercial real estate and other..... 4,963 7.19 5,317 7.69 5,248 8.43
--------------------- --------------------- ---------------------
Total real estate loans..................................... 71,801 96.38% 65,181 94.32% 59,810 96.16%
Consumer and other loans:
Automobile.................................................... 2,362 3.17% 2,418 3.50% 1,682 2.71%
Home improvement.............................................. 1,124 1.51 1,485 2.15 1,083 1.74
Loans on savings deposits..................................... 255 0.34 526 0.76 248 0.39
Other......................................................... 720 0.97 770 1.11 587 0.94
--------------------- --------------------- ---------------------
Total consumer and other loans.............................. 4,461 5.99% 5,199 7.52% 3,600 5.78%
Real estate sold on contract.................................... 62 0.09 66 0.10 100 0.16
--------------------- --------------------- ---------------------
Total loans receivable...................................... 76,324 102.46 70,446 101.95% 63,510 102.10%
Less:
Undisbursed loan proceeds....................................... $ 1,449 1.95% $ 928 1.35% $ 922 1.48%
Premiums on loans purchased................................... (1) (0.01)% (3) (0.01)% (6) (0.01)%
Unearned discount and net
deferred loan fees.......................................... 6 0.01 14 0.02% 20 0.02%
Allowance for loan losses..................................... 378 0.51% 403 0.59% 382 0.61%
--------------------- --------------------- ---------------------
Total loans receivable, net................................. $ 74,492 100.00% $ 69,104 100.00% $ 62,192 100.00%
===================== ===================== =====================
At December 31,
--------------------------------------------------
1998 1997
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential............................... $ 44,047 77.61% $ 40,119 73.86%
Home equity................................................... 4,347 7.66 4,286 7.89
Multi-family residential, commercial real estate and other..... 5,961 10.50 6,509 11.98
--------------------- ---------------------
Total real estate loans..................................... 54,355 95.77% 50,914 93.73%
Consumer and other loans:
Automobile.................................................... 1,536 2.71% 1,687 3.11%
Home improvement.............................................. 963 1.70 1,074 1.98
Loans on savings deposits..................................... 417 0.73 423 0.78
Other......................................................... 752 1.33 707 1.30
--------------------- ---------------------
Total consumer and other loans.............................. 3,668 6.47% 3,891 7.17%
Real estate sold on contract.................................... 128 0.23 190 0.35
--------------------- ---------------------
Total loans receivable...................................... 58,151 102.47% 54,995 101.37%
Less:
Undisbursed loan proceeds....................................... $ 999 1.76% $ 265 0.49%
Premiums on loans purchased................................... (11) (0.02)% (17) (0.03)%
Unearned discount and net
deferred loan fees.......................................... 26 0.05% 40 0.07%
Allowance for loan losses..................................... 385 0.68% 385 0.71%
--------------------- ---------------------
Total loans receivable, net................................. $ 56,752 100.00% $ 54,322 100.00%
===================== =====================
4
Loan and Mortgage-Backed Securities Maturity Schedule. The following
table sets forth the maturity or period of repricing of the Company's loan and
mortgage-backed securities portfolio at December 31, 2001. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due.
Beyond
Within 1-3 3-5 5-10 10-20 20
1 Year Years Years Years Years Years Total
-------------------------------------------------------------------
(In Thousands)
Real estate loans:
One- to four-family residential .. $5,851 $ 8,825 $3,690 $6,009 $13,558 $28,905 $66,838
Multi-family residential, commercial
real estate and other loans .... 790 1,589 195 651 884 854 4,963
Consumer and other loans ........... 722 1,337 1,272 488 560 82 4,461
Real estate sold on contract ....... -- 30 3 29 -- -- 62
------ ------- ------ ------ ------- ------- -------
Total loans receivable (gross) . 7,363 11,781 5,160 7,177 15,002 29,841 76,324
------ ------- ------ ------ ------- ------- -------
Mortgage-backed securities (gross) . 1,929 566 64 535 851 230 4,175
------ ------- ------ ------ ------- ------- -------
Total loans and
mortgage-backed securities ... $9,292 $12,347 $5,224 $7,712 $15,853 $30,071 $80,499
====== ======= ====== ====== ======= ======= =======
Fixed- and Adjustable-Rate Loan and Mortgage-Backed Securities
Schedule. The following table sets forth at December 31, 2001, the dollar amount
of all fixed rate and adjustable rate loans due, and mortgage-backed securities
that mature, after December 31, 2002.
Fixed Adjustable Total
------- ---------- -------
(In Thousands)
Real estate loans:
One- to four-family residential .... $43,866 $16,705 $60,591
Multi-family residential, commercial
real estate and other ............ 2,786 1,783 4,569
Consumer and other loans ............. 3,739 -- 3,739
Real estate sold on contract ......... 62 -- 62
------- ------- -------
Total loans receivable (gross) ... $50,453 $18,488 $68,961
======= ======= =======
Mortgage-backed securities (gross) ... $ 1,824 $ 422 $ 2,246
======= ======= =======
One- to Four-Family Residential Real Estate Loans. The Company's primary
lending activity currently consists of the origination of fixed rate and
adjustable-rate one- to four-family owner-occupied residential mortgage loans
collateralized by properties located in the Company's market area. The Company
also originates one- to four-family construction loans that convert to permanent
loans after the initial construction period which generally does not exceed nine
months. The Company is a portfolio lender. In recent years, it has not sold
loans in the secondary mortgage market and does not intend to conduct secondary
market sales in the foreseeable future. One- to four-family loans are
underwritten and originated according to policies approved by the Board of
Directors. The Company has purchased one- to four-family mortgage loans
collateralized by properties in Texas and Colorado. At December 31, 2001, the
Company had an aggregate principal balance of $5.3 million in purchased loans.
The Company currently offers fixed rate one- to four-family residential
mortgage loans with terms of up to 30 years. One- to four-family residential
real estate loans often remain outstanding for significantly shorter periods
than their contractual terms because borrowers may refinance or prepay loans at
their option. The average length of time that
5
the Company's one- to four-family residential mortgage loans remain outstanding
varies significantly depending upon trends in market interest rates and other
factors. In recent years, the average maturity of the Company's mortgage loans
has decreased significantly due to unprecedented volume of refinancing activity.
Accordingly, estimates of the average length of one- to four-family loans that
remain outstanding cannot be made with any degree of certainty. Originations of
fixed rate mortgage loans are monitored on an ongoing basis and are affected
significantly by the level of market interest rates, the Company's interest rate
gap position, and loan products offered by the Company's competitors. The
Company's fixed rate mortgage loans amortize on a monthly basis, with principal
and interest due each month.
The Company also originates adjustable-rate mortgage ("ARM") loans with a
maximum term of up to 30 years. The Company's ARM loans have interest rates that
adjust every year or every three years based on an interest rate index. The
Company's one-year ARM loans have terms of up to 30 years, with interest rates
that adjust annually based on changes in the Quarterly National Average Cost of
Funds for All SAIF Insured Institutions (the "SII Index"). The maximum annual
increase in the interest rate charged on the Company's one-year ARM loans is 100
basis points, and the maximum life of the loan increase in interest rates is 600
basis points. The interest rate on the Company's three-year ARM loans adjusts
every three years by up to 200 basis points per adjustment based on the SII
Index at the time of adjustment. The maximum life of the loan increase in
interest rate on the Company's three-year ARM loans is 600 basis points. In
2001, ARM loan originations decreased as a percentage of total mortgage loan
originations, due to a higher demand for longer term fixed rate loans in the
generally lower market interest rate environment. For the years ended December
31, 2001 and December 31, 2000, the Company originated $1.1 million and $1.5
million of ARM loans, respectively, which represented 5.9% and 11.9% of total
mortgage loan originations, respectively, during such years.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans. The Company's lending policies limit the maximum loan-to-value
ratio on fixed rate loans without private mortgage insurance to 90% of the
lesser of the appraised value or the purchase price of the property to serve as
collateral for the loan.
The Company makes one- to four-family real estate loans with loan-to-value
ratios of up to 95%; however, for one- to four-family real estate loans with
loan-to-value ratios of between 90% and 95%, the Company requires the first 25%
of the loan amount to be covered by private mortgage insurance. The Company
requires fire and casualty insurance, as well as a certificate of title, on all
properties securing real estate loans made by the Company.
Low and Moderate Income Loans. The Company participates in low- to
moderate-income home loan programs to qualifying borrowers. One loan program,
which is offered through the Company, enables borrowers to purchase a home with
a minimum 5% downpayment and a 95% loan-to-value ratio. Loans are offered on a
fixed-rate basis with terms of up to 30 years.
Multi-Family Residential, Commercial Real Estate and Other Real Estate
Loans. At December 31, 2001, the Company had a total of 36 loans secured by
multi-family and commercial real estate properties. The Company's multi-family
real estate loans are secured by multi-family residences, such as rental
properties, and commercial real estate loans are secured by other income
producing properties such as nursing homes and office buildings. The Company
also originates multi-family construction loans that convert to permanent loans
after the initial construction period which generally does not exceed nine
months. At December 31, 2001, the Company's multi-family and commercial real
estate loans had an average principal balance of $148,900 and the largest
multi-family or commercial real estate loan had a principal balance of $867,000.
Multi-family and commercial real estate loans currently are offered with
adjustable interest rates, although in the past the Company has originated
fixed-rate multi-family and commercial real estate loans. The terms of each loan
are negotiated on a case-by-case basis, although such loans typically have
adjustable interest
6
rates tied to a market index with a 600 basis point lifetime interest rate cap,
and amortize over 15 years. An origination fee of 1% is usually charged on
multi-family loans. The Company generally makes multi-family and commercial real
estate loans up to 75% of the appraised value of the property securing the loan.
The Company's originations of multi-family and commercial real estate loans
have been limited in recent years because of limited local demand. However, as
noted previously, the Company has in the past purchased out-of-market loans, and
the aggregate principal balance of such multi-family and commercial real estate
loans at December 31, 2001 was $5.3 million.
Loans secured by multi-family and commercial real estate generally involve
a greater degree of credit risk than one- to four-family residential mortgage
loans and carry larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by
multi-family and commercial real estate is typically dependent upon the
successful operation of the related real estate property. If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.
Home Equity and Home Improvement Loans. The Company also originates home
equity and home improvement loans. As of December 31, 2001, home equity and home
improvement loans totaled $5.9 million, or 7.9%, of the Company's total loan
portfolio. The Company's home equity and home improvement loans have fixed
interest rates and are generally for terms of 5 to 10 years, with a maximum of
15 years. The Company's home equity and home improvement loans are closed-end
loans for specific dollar amounts. They are secured by the borrower's principal
residence with a maximum loan-to-value ratio, including the principal balances
of both the first and second mortgage loans, of 90% or less.
Other Consumer Loans. To a much lesser extent, the Company also originates
loans secured by savings deposits, generally with fixed rates, as well as
automobile loans and student loans. Automobile loans are made on both new and
used cars, and are offered for terms of up to 72 months. The Company's
automobile loans have fixed interest rates and have loan-to-value ratios of up
to 85%. Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are secured by assets
that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Company appraises the real estate
intended to collateralize the proposed loan. An underwriter in the Company's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. Pursuant to the Company's written loan
policies, all loans are approved by the Loan Committee, which meets as
necessary. After the loan is approved, a loan commitment letter is promptly
issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Commitments are typically issued for 60-day periods. The
borrower must provide proof of fire and casualty insurance on the property
serving as collateral, which insurance must be maintained during the full term
of the loan. A certificate of title, based on a title search of the property, is
generally required on all loans secured by real property. At December 31, 2001,
the Company had outstanding loan commitments of $401,500. This amount does not
include $1.4 million of the unfunded portion of loans in process.
7
Origination, Purchase and Sale of Loans. The table below shows the Company's
originations, purchases and sales of loans for the years indicated.
Year Ended December 31
----------------------
2001 2000 1999
---- ---- ----
(In Thousands)
Total loans receivable at beginning of year ... $ 69,104 $ 62,192 $ 56,752
Loans purchased:
Real estate:
Total loans purchased ......................... -- 450 --
-------- -------- --------
Loans originated:
Real estate ................................. 21,101 12,440 20,576
Consumer .................................... 2,116 5,617 2,857
-------- -------- --------
Total loans originated ................... 23,217 18,507 23,433
-------- -------- --------
Loans transferred to REO ...................... (48) -- --
Loan repayments ............................... (17,789) (11,607) (18,007)
Other loan activity (net) ..................... 8 12 14
-------- -------- --------
Total loans receivable at end of year, net $ 74,492 $ 69,104 $ 62,192
======== ======== ========
Loan Origination Fees. In addition to interest earned on loans, the Company
generally receives fees in connection with loan originations. Mortgage loan
origination fees and certain loan origination costs, if material, are deferred
and the net fee or cost is recognized in operations using the interest method.
Direct loan origination costs on other loans are expensed, as such costs are not
material in amount. Fees deferred are recognized into income immediately upon
prepayment of the related loan. Such fees vary with the volume and type of loans
and commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand and
availability of money.
Mortgage-Backed Securities
A part of the Company's business involves investments in mortgage-backed
securities. At December 31, 2001, all of the Company's mortgage-backed
securities were insured or guaranteed by a United States Government agency or
sponsored corporation. All of the Company's mortgage-backed securities portfolio
consists of pass-through certificates. The Company invests in mortgage-backed
securities to supplement local loan originations as well as to reduce interest
rate risk exposure.
The Company's pass-through certificates represent a participation interest
in a pool of single-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interest in the form of securities, to investors such as the
Company. Such quasi-governmental agencies that guarantee the payment of
principal and interest to investors, include the FHLMC, GNMA, or the FNMA.
Pass-through certificates typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates and maturities that are within a specified range. The underlying
pool of mortgages can be composed of either fixed rate mortgage loans or ARM
loans. The interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed rate or adjustable rate, are passed on to the certificate
holder.
8
Set forth below is information relating to the Company's purchases,
sales and repayments of mortgage-backed securities for the years indicated.
Year Ended December 31,
------------------------------------
2001 2000 1999
------- ------- -------
(In Thousands)
Mortgage-backed securities
at beginning of year: .................. $ 6,025 $ 7,805 $ 9,987
Purchases .......................... -- -- 1,070
Repayments .......................... (1,807) (1,766) (3,226)
Discount (premium) amortization ..... (13) (14)
------- ------- -------
(26) Mortgage-backed securities
at end of year, net .................... $ 4,205 $ 6,025 $ 7,805
======= ======= =======
The following table sets forth selected data relating to the composition of
the Company's mortgage-backed securities for the years indicated.
At December 31,
----------------------------------------------
2001 2000 1999
------------ ----------- ------------
$ % $ % $ %
----- ---- ----- ---- ----- ----
(Dollars in Thousands)
Mortgage-backed securities:
Adjustable ................. $2,349 55.9% $3,146 52.2% $4,696 60.2%
Fixed ...................... 1,856 44.1 2,879 47.8 3,109 39.8
----- ---- ----- ---- ----- ----
Total mortgage-backed
securities, net ........ $4,205 100.0% $6,025 100.0% $7,805 100.0%
====== ===== ====== ===== ====== =====
At December 31, 2001, mortgage-backed securities totaled $4.2 million, or
4.1%, of total assets. ARM loans collateralized 55.9% of the Company's
mortgage-backed securities portfolio, and fixed-rate loans collateralized 44.1%
of the Company's mortgage-backed securities portfolio. All of the Company's
mortgage-backed securities are insured or guaranteed by the FHLMC, the GNMA, or
the FNMA. At December 31, 2001, all the Company's mortgage-backed securities
were classified as "held to maturity." At December 31, 2001, the Company's
mortgage-backed securities portfolio had a fair value of $4.3 million.
Effective February 1992, the OTS adopted Thrift Bulletin 52 ("TB 52").
Among other things, TB 52 sets forth certain guidelines with respect to
depository institutions' investment in certain "high risk mortgage securities."
"High-risk mortgage securities" are defined as any mortgage derivative product
that at the time of purchase, or at any subsequent date, meets any of three
tests that are set forth in TB 52. High-risk mortgage securities may be
purchased only in limited circumstances, and if held in a portfolio, must be
reported as trading assets at market value, or as available-for-sale assets at
the lower of cost or market value. In certain circumstances, OTS examiners may
seek the orderly divestiture of high-risk mortgage securities. As of December
31, 2001, the Company did not hold any "high-risk mortgage securities" in its
portfolio.
Delinquencies and Classified Assets
Delinquencies. The Company's collection procedures provide that when a loan
is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. If delinquency continues, early
in the second month, a delinquent notice is mailed along with a letter or
telephone call advising that the mortgagors are in violation of the terms of
their mortgage contract. If a loan becomes 60 days past due, the loan becomes
subject to
9
possible legal action. Management has been authorized by the Board of Directors
to send a letter during the third month advising of pending legal action. This
letter generally grants mortgagors an additional 15 days to bring the account to
date prior to start of any legal action. If not paid, foreclosure proceedings
are initiated. To the extent required by the Department of Housing and Urban
Development ("HUD") regulations, generally within 45 days of delinquency, a
Section 160 HUD notice is given to the borrower, which provides access to
consumer counseling services.
It is sometimes necessary and desirable to arrange special repayment
schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The
mortgagors are required to submit a written repayment schedule, which is closely
monitored for compliance. Under these terms, the account is brought to date,
usually within a few months.
Nonperforming Assets. Loans are reviewed on a regular basis and are placed
on a nonaccrual status when, in the opinion of management, the collection of
additional interest is doubtful. Mortgage loans are placed on nonaccrual status
generally when either principal or interest is more than 90 days past due.
Interest accrued and unpaid at the time a loan is placed on nonaccrual status is
charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is deemed real estate owned ("REO") until such time as it
is sold. In general, the Company considers collateral for a loan to be
in-substance foreclosed if: (i) the borrower has little or no equity in the
collateral; (ii) proceeds for repayment of the loan can be expected to come only
from the operation or sale of the collateral; and (iii) the borrower has either
formally or effectively abandoned control of the collateral to the Company, or
retained control of the collateral but is unlikely to be able to rebuild equity
in the collateral or otherwise repay the loan in the foreseeable future. Cash
flow attributable to in-substance foreclosures is used to reduce the carrying
value of the collateral.
When REO is acquired or otherwise deemed REO, it is recorded at the lower
of the unpaid principal balance of the related loan or its estimated fair value,
less estimated selling expenses. Valuations are periodically performed by
management, and any subsequent decline in fair value is charged to operations.
At December 31, 2001, the Company had $48,400 in REO.
Delinquent Loans and Nonperforming Assets. The following table sets forth
information regarding non-accrual loans delinquent 90 days or more and real
estate owned by the Company at the dates indicated. When a loan is delinquent 90
days or more, the Company fully reserves all accrued interest thereon and ceases
to accrue interest thereafter. See notes 1 and 3 to the Notes to Consolidated
Financial Statements.
At December 31,
---------------------------------------------
2001 2000 1999 1998 1997
------- -------- ------ ------ ------
(Dollars in Thousands)
Delinquent loans:
One- to four-family residential real estate $ 909 $ 195 $ -- $ -- $ --
All other real estate ..................... -- -- -- -- --
Consumer loans, other ..................... 58 -- 6 15 --
------ ------- ------- ------ ------
Total delinquent loans .................. 967 195 6 --
------
Total real estate owned (1) ................. 48 -- -- 22 59
------ ------- ------- ------ ------
Total non-performing assets ........... $1,015 $ 195 $ 6 $ 37 $ 59
====== ======= ======= ====== ======
Total loans delinquent 90 days or more
to net loans receivable ................... 1.30% 0.29% 0.01% 0.03% 0.00%
Total loans delinquent 90 days or more
to total assets ........................... .95% 0.20% 0.01% 0.02% 0.00%
Total non-performing loans and REO
to total assets ........................... 1.00% 0.20% 0.01% 0.04% 0.06%
------------------------------------
(1) Represents the net book value of property acquired by the Company through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this property
is recorded at the lower of its fair value, less estimated selling costs,
or the principal balance of the related loan.
10
The following table sets forth information with respect to loans
delinquent 30-89 days in the Company's portfolio at the dates indicated.
At December 31,
-------------------------------------
2001 2000 1999 1998 1997
------ ------ ----- ------ ------
(In Thousands)
Loans past due 30-89 days:
One- to four-family residential $1,145 $588 $445 $521 $632
All other mortgages ........... -- -- -- -- 20
Consumer, other ................. 197 208 60 94 63
------ ---- ---- ---- ----
Total past due 30-89 days ... $1,342 $796 $505 $615 $715
====== ==== ==== ==== ====
The following table sets forth information with respect to the Company's
delinquent loans and other problem assets at December 31, 2001.
At December 31, 2001
----------------------
Balance Number
------ -----
(Dollars in Thousands)
Residential real estate:
Loans 30 to 89 days delinquent ...................... $1,145 43
Loans 90 days or more delinquent .................... 909 21
All other real estate loans:
Loans 30 to 89 days delinquent ...................... -- --
Loans 90 days or more delinquent .................... -- --
Commercial non-real estate (30 days or more delinquent) -- --
Consumer loans (30 days or more delinquent) ........... 238 45
Foreclosed real estate and repossessions .............. 48 1
Other non-performing assets ........................... -- --
Restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15 (not included
in other nonperforming categories above) ............ -- --
Loans to facilitate sale of real estate owned ......... 62 4
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. 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 institution 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 little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. At December 31, 2001,
the Company had no special mention loans, $1.4 million in substandard assets and
$42,100 in doubtful assets.
11
The following table sets forth the aggregate amount of the Company's
classified assets for the years indicated.
Year Ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
(In Thousands)
Substandard assets................... $ 1,396 $ 647 $ 564
Doubtful assets...................... 42 -- 3
Loss assets.......................... -- -- --
--------- -------- ---------
Total classified assets......... $ 1,438 $ 647 $ 567
========= ======== =========
Allowance for Loan Losses. Management's policy is to provide for estimated
losses on the Company's loan portfolio based on management's evaluation of the
estimated losses that may be incurred. The Company regularly reviews its loan
portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans of which full
collectibility of interest and principal may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral. During the years ended December 31, 2001, 2000 and 1999, the Company
added $ 0, $ 0, and $0, respectively, to the provision for loan losses. The
Company's allowance for loan losses totaled $378,000, $403,000, and $382,000 at
December 31, 2001, 2000, and 1999, respectively.
Management believes that the allowances for losses on loans and investments
in real estate are adequate. While management uses available information to
recognize losses on loans and investments in real estate, future additions to
the allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowances for losses on loans and
investments in real estate. Such agencies may require the Company to recognize
additions to the allowances based on their judgments about information available
to them at the time of their examination.
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the years indicated.
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
------- --------- ------- ------- -------
(Dollars in Thousands)
Net loans outstanding .............................. $74,492 $ 69,104 $62,192 $56,572 $54,322
Average net loans outstanding ...................... 72,620 66,222 58,312 55,704 54,058
======= ========= ======= ======= =======
Allowance balances (at beginning of year) .......... 403 382 385 385 359
Provision for losses ............................... -- -- -- -- 40
Charge-offs ........................................ 25 2 9 1 15
Recoveries ......................................... 0 23 6 1 1
------- --------- ------- ------- -------
Allowance balance (at end of year) ................. $ 378 $ 403 $ 382 $ 385 $ 385
======= ========= ======= ======= =======
Allowance for loan losses as a percent
of net loans receivable at end of year ............. 0.51% 0. 59% 0.61% 0.68% 0.71%
Net loans charged off as a percent
of average net loans outstanding ................. 0.04% 0. 01% 0.01% 0.00% 0.03%
Ratio of allowance for loan losses
to total nonperforming loans
at end of year ................................... 39.1% N/M N/M N/M N/M
Ratio of allowance for loan losses
to total nonperforming loans and REO
at end of year ................................... 37.2% N/M N/M N/M 652.54%
12
Investment Activities
The Company's investment portfolio comprises investment securities, FHLB
stock, and interest-earning deposits in other institutions. The Company has $5.0
million in corporate debt securities, all of which were rated A2 or better. At
December 31, 2001, $12.5 million, or 58.7%, of the Company's in investment
securities were scheduled to mature in one year or less, $8.8 million, or 41.3%,
were scheduled to mature in from one to five years, and no investments were
scheduled to mature in over five years.
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short term demand for funds to be used in the Company's loan origination and
other activities. Currently, due to lower demand for loans, the Company's
liquidity levels are higher than they have been in recent periods. Management
believes that the higher levels are prudent because of the possibility that
interest rates may increase. By maintaining high levels of liquidity, the
Company is able to reinvest its assets more quickly in response to changes in
market interest rates, thereby potentially reducing its exposure to interest
rate volatility.
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment portfolio for the years indicated.
Year Ended December 31,
--------------------------------
2001 2000 1999
------- ------- -------
(In Thousands)
Investment portfolio:
U.S. Government and agency obligations .............. $ 5,093 $11,518 $14,916
Corporate debt securities ........................... 5,096 -- --
Interest-earning deposits in other institutions ..... 10,258 5,816 6,824
FHLB stock .......................................... 613 613 613
------- ------- -------
Total investments ................................. $21,060 $18,315 $22,353
======= ======= =======
13
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and weighted average yields
for the Company's investment portfolio at December 31, 2001.
At December 31, 2001
-------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
--------------------- ---------------------- ----------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Investment portfolio:
Investment securities, U.S. Government $ 2,024 4.40% $8,401 5.24% $ -- --%
FHLB stock.............................. 613 4.45 -- -- -- --
Interest-earning deposits
in other institutions................ 9,858 3.40 400 3.71 -- --
-------- ----- -------- ------ ------- ---------
Total.............................. $12,495 3.62% $8,801 5.17% $ -- --%
======= ===== ====== ======= ======== =========
More than Ten Years Total
-------------------------- -------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
Investment portfolio:
Investment securities, U.S. Government $-- --% $10,425 5.08%
FHLB stock.............................. -- -- 613 4.45
Interest-earning deposits
in other institutions................ -- -- 10,258 3.42
-------- ------ ------- ------
Total.............................. $-- --% $21,296 4.27%
======= ====== ======= ======
14
Sources of Funds
General. The Company's deposit-gathering activities are currently
conducted from the Company's facility in Webster City, Iowa. Deposits are the
major source of the Company's funds for lending and other investment purposes.
In addition to deposits, the Company derives funds from the amortization and
prepayment of loans and mortgage-backed securities, the maturity of investment
securities, and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes. Historically, the Company has maintained a high level of
liquidity, and only rarely uses borrowed funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's market area through the offering of a broad selection
of deposit instruments including NOW accounts, passbook savings, money market
deposit, term certificate accounts and individual retirement accounts. Deposit
account terms vary according to the minimum balance required, the period of time
during which the funds must remain on deposit, and the interest rate, among
other factors. The maximum rate of interest, which the Company must pay, is not
established by regulatory authority. The Company regularly evaluates its
internal cost of funds, surveys rates offered by competing institutions, reviews
the Company's cash flow requirements for lending and liquidity, and executes
rate changes when deemed appropriate. The Company has sought to decrease the
risk associated with changes in interest rates by offering competitive rates on
deposit accounts and by pricing certificates of deposit to provide customers
with incentives to choose certificates of deposit with longer terms. Due to the
current low market interest rate environment, however, terms of over 36 months
are not attractive to customers. The Company does not obtain funds through
brokers through a solicitation of funds outside its market area. The Company
also obtains funds from local governmental sources and held approximately
$800,000 in such funds at December 31, 2001.
Deposit Portfolio. Savings in the Company as of December 31, 2001, were
represented by the various types of deposit programs described below.
Weighted Percentage
Average of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
0.00% None Noninterest-bearing checking $ -- $ 1,763 2.52%
1.75 None NOW accounts -- 8,261 11.80
2.51 None Passbook -- 4,634 6.62
3.29 None Money market accounts 1,000 7,560 10.80
Certificates of Deposit
2.65% 3 months Fixed term, fixed rate $ 1,000 $ 633 .91%
3.31 6 months Fixed term, fixed rate 1,000 2,801 4.00
3.54 9 months Fixed term, fixed rate 1,000 3,448 4.93
4.70 12 months Fixed term, fixed rate 1,000 14,986 21.40
4.70 15 months Fixed term, fixed rate 1,000 1,961 2.80
4.55 18 months Fixed term, fixed rate 1,000 2,519 3.60
6.34 24 months Fixed term, fixed rate 1,000 12,458 17.79
4.80 30 months Fixed term, fixed rate 1,000 1,162 1.66
4.89 36 months Fixed term, fixed rate 1,000 1,734 2.48
4.50 48 months Fixed term, fixed rate 1,000 959 1.37
5.41 Over 48 months Fixed term, fixed rate 1,000 5,164 7.38
----------- ----------
$ 70,042 100.00%
15
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Company between
the dates indicated.
At December 31,
-------------------------------------------------------------------------------------------
2001 2000 1999
------------------- -------------------- --------------------
Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1) Change(2)
------- --------- --------- ------- ---------- --------- ------- ---------- ---------
(In Thousands)
Noninterest-bearing
demand ................. $ 1,763 2.52% $ 1,003 760 1.32% $ (132) $ 898 1.32% $ 586
NOW accounts ............. 8,261 11.80 819 7,979 10.02 1,171 6,808 10.02 (61)
Passbooks ................ 4,634 6.62 315 4,319 6.96 (411) 4,730 6.96 240
Money market accounts .... 7,560 10.80 1,537 6,023 8.89 (13) 6,036 8.89 140
Time deposits that mature:
within 12 months ....... 38,266 54.64 11,401 26,865 51.41 (8,052) 34,917 51.41 3,562
within 12-36 months .... 7,149 10.21 (10,337) 17,486 20.01 3,809 13,587 20.01 (4,348)
beyond 36 months ....... 2,410 3.44 696 1,714 1.39 772 942 1.39 (905)
------- ------ -------- ------- ------ ------- ------- ------ -------
Total ............... $70,042 100.00% $ 5,434 $65,146 100.00% $(2,772) $67,918 100.00% $ (786)
======= ====== ======== ======= ====== ======= ======= ====== =======
At December 31,
--------------------------------------
1998 1997
------------------- ------------------
Balance Percent(1) Change(2) Balance
------- ---------- -------- --------
(In Thousands)
Noninterest-bearing
demand ................. $ 312 0.45% $ (392) $ 704
NOW accounts ............. 6,869 10.00 622 6,247
Passbooks ................ 4,490 6.54 223 4,267
Money market accounts .... 5,896 8.58 466 5,430
Time deposits that mature:
within 12 months ....... 31,355 45.64 (2,277) 33,632
within 12-36 months .... 17,935 26.10 121 17,814
beyond 36 months ....... 1,847 2.69 (1,586) 3,433
------- ------ ------- -------
Total ............... $68,704 100.00% $(2,823) $71,527
======= ====== ======= =======
------------------------------
(1) Represents percentage of to tal deposits.
(2) Represents increase (decrease) in balance from end of prior year.
16
Time Deposit Rates. The following table sets forth the time deposits in the
Company classified by rates as of the dates indicated:
Years Ended December 31,
-------------------------------------------------------
2001 2000 1999
---- ------ ----
(In Thousands)
Rate
2.00-3.99%.......... $ 10,874
4.00-5.99%.......... 26,835 $ 25,660 $ 44,999
6.00-7.99%.......... 10,116 20,405 4,446
--------- -------- ---------
47,825 $ 46,065 $ 49,445
========== ======== =========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at December 31, 2001.
Amount Due
--------------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
---------- --------- --------- --------- --------- --------- ----------
(In Thousands)
Rate
2.00%-3.99%............................$ 8,910 $1,145 $ 819 $ -- $ -- $ -- $10,874
4.00%-5.99% ............................ 19,285 5,959 1,591 -- -- -- 26,835
6.00-7.99% ............................. 10,071 45 -- -- -- -- 10,116
------ ------ ------ ------- -------- -------- -------
$38,266 $ 7,149 $ 2,410 $ -- $ -- $ -- $ 47,825
======= ======== ======== ======== ======== ========= ==========
Large Certificates of Deposit Maturities. The following table indicates the
amount of the Company's certificates of deposit of $100,000 or more by time
remaining until maturity at December 31, 2001. This amount does not include
checking and savings deposits of greater than $100,000, which totaled
approximately $4.4 million at December 31, 2001.
Certificates
Maturity Period of Deposit
(In Thousands)
Three months or less............... $ 529
Three through six months........... 2,726
Six through twelve months.......... 1,444
Over twelve months................. 953
-------
Total......................... $ 5,652
=======
Change in Deposits. The following table sets forth changes in total
deposits of the Company for the periods indicated:
Year Ended December 31,
------------------------------------
2001 2000 1999
-------- --------- ---------
(In Thousands)
Deposits .............................................. $135,208 $143,551$ 117,534
Withdrawals ........................................... 131,100 148,031 119,630
-------- --------- ---------
Net increase (decrease) before interest credited ...... 4,108 (4,480) (2,096)
Interest credited ..................................... 1,326 1,249 1,310
-------- --------- ---------
Net increase (decrease) increase in deposits ........ $ 5,434 $ (3,231) $ (786)
======== ========= =========
17
Borrowings
Deposits are the Company's primary source of funds. The Company may also
obtain funds from the FHLB. FHLB advances are collateralized by selected assets
of the Company. Advances from the FHLB are secured by the Company's stock in the
FHLB and a portion of the Company's first mortgage loans and investment
securities. Historically, the Company has rarely used borrowed funds, but at
December 31, 2001, the Company had $9.7 million in borrowed funds.
The FHLB functions as a central reserve bank providing credit for the
Company and other member savings associations and financial institutions. As a
member, the Company is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
FHLB's assessment of the institution's creditworthiness.
The following table sets forth certain information regarding borrowings by the
Company at the dates indicated`
Year Ended December 31,
---------------------------
.
2001 2000 1999
---- ------ -----
Weighted average rate paid on FHLB advance... 5.73% 5.76% 5.26%
Rate paid on ESOP Borrowings................. N/A N/A 6.75%
----------------
N/A: Not applicable
18
During the Year Ended December 31,
--------------------------------------
2001 2000 1999
-------- --------- ---------
(Dollars in Thousands)
Maximum amount of FHLB Advance
outstanding at any month ...... $9,700 $8,200 $3,200
Approximate average FHLB advance
outstanding .................... 7,783 4,908 1,533
Approximate weighted average rate
paid on FHLB advance ........... 5.73% 5.76% 5.26%
Approximate average ESOP borrowing
outstanding .................... N/A N/A 75
Approximate weighted average rate
Paid on ESOP borrowing .......... N/A N/A 6.75%
-------------------------------
N/A: Not applicable
Employees
As of December 31, 2001, the Company had 24 full-time and 4 part-time
employees, none of whom is represented by a collective bargaining unit. The
Company considers its relationship with its employees to be good.
REGULATION AND SUPERVISION
As a federally chartered SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any changes in such regulation,
whether by the FDIC, OTS or Congress, could have a material adverse impact on
the Company and the Bank and their operations.
The description of statutory provisions and regulations applicable to
savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
19
Federal Regulation of Savings Institutions
Impact of the Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Act (the "GLB
Act"), establishes a comprehensive framework to permit affiliations among
commercial banks, insurance companies and securities firms. The GLB Act
restricts the powers of new unitary savings and loan association holding
companies. Unitary savings and loan holding companies in existence or with
applications filed with the OTS on or before May 4, 1999, such as the Company,
retain their authority under the prior law. All other unitary savings and loan
holding companies are limited to financially related activities permissible for
bank holding companies, as defined under the GLB Act. The GLB Act also prohibits
non-financial companies from acquiring grandfathered unitary savings and loan
association holding companies.
The Company does not believe that the GLB Act will have a material adverse
affect upon its operations in the near term. However, to the extent the GLB Act
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This could
result in a growing number of larger financial institutions that offer a wider
variety of financial services than the Company currently offers and that can
aggressively compete in the markets the Company currently serves.
Business Activities. The activities of savings institutions are governed by
federal law. The federal banking statutes (1) restrict the solicitation of
brokered deposits by savings institutions that are troubled or not
well-capitalized, (2) prohibit the acquisition of any corporate debt security
that is not rated in one of the four highest rating categories, (3) restrict the
aggregate amount of loans secured by non-residential real estate property to
400% of capital, (4) permit savings and loan holding companies to acquire up to
5% of the voting shares of non-subsidiary savings institutions or savings and
loan holding companies without prior approval, and (5) permit bank holding
companies to acquire healthy savings institutions.
Loans to One Borrower. Under federal law, savings institutions are
generally subject to the national bank limits on loans to one borrower or a
related group of borrowers. Generally, this limit is 15% of the Bank's
unimpaired capital and surplus on an unsecured basis. An additional amount may
be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured
by readily marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. The Bank's maximum
loans-to-one-borrower limit was $1.5 million at December 31, 2001. As of
December 31, 2001, the Bank was in compliance with its loans-to-one-borrower
limitations.
Qualified Thrift Lender Test. Federal law requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly average basis in 9 out of every 12 months. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of December 31, 2001, the Bank maintained
97.3% of its portfolio assets in qualified thrift investments and, therefore,
met the QTL test.
Capital Distributions. OTS regulations govern capital distributions by
federal savings banks, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings bank. A savings bank
must file an application for OTS approval of a capital distribution if either
(1) the total capital distributions for the applicable calendar year exceed the
sum of the savings bank's net income for that year to date plus the bank's
retained net income for the preceding two years, (2) the savings bank would not
be at least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statue, regulation, agreement or
OTS-imposed condition, or (4) the savings bank is not eligible for expedited
treatment of its filings. If an application is not required to be filed, a
savings bank which is a subsidiary of a holding company, as well as certain
other savings banks, must still file a notice with the OTS at least 30 days
before the board of directors declares a dividend or approves a capital
distribution. The Company has declared and paid dividends of $1.0 million during
the year ended December 31, 2001.
20
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus borrowings payable in
one year or less. This liquidity requirement is currently 4%. The Bank's average
liquidity ratio for December 2001 was 30.0%, which exceeded the then applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's consolidated total assets, as reported in the institution's latest
quarterly thrift financial report. Based on assets at December 31, 2001, the
Bank was required to pay a semi-annual assessment of approximately $15,500.
Community Reinvestment Act and Fair Lending Laws. Federal savings banks
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low-and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Equal
Credit Opportunity Act and the Fair Housing Act could result in enforcement
actions by the Office of Thrift Supervision, as well as other federal regulatory
agencies and the Department of Justice. The Bank received a "satisfactory"
Community Reinvestment Act rating under the current Community Reinvestment Act
regulations in its most recent federal examination by the Office of Thrift
Supervision.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% stockholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder.
Among other things, these regulations require such loans to be made on terms
substantially the same as those offered to unaffiliated individuals and do not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Bank may make to such
persons based, in part, on the Bank's capital position, and requires certain
approval procedures to be followed. At December 31, 2001, the Bank was in
compliance with the regulations.
Enforcement. OTS has primary enforcement responsibility over savings
institutions and has the authority to bring enforcement action against all
"institution-related parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors of the institutions,
receivership, conservator ship or the termination of deposit insurance. Civil
penalties cover a wide range of violations and actions, and range up to $25,000
per day, unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. Criminal penalties for most financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. The FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
21
Standards for Safety and Soundness. The federal banking agencies have
adopted regulations that set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards address
internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. The regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
Capital Requirements. The Office of Thrift Supervision capital regulations
require federal savings banks to meet three minimum capital standards: a 1.5%
tangible capital ratio; a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS rating system); and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
ratio (3% for institutions receiving the highest CAMELS rating), and together
with the risk-based capital standard itself, a 4% Tier 1 risk-based capital
standard. Institutions must generally deduct from capital investments in and
loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standards for federal savings banks require the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weighted
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain non-cumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries, less
intangible assets other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets, and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital may not exceed
100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from capital for purposes of calculating their risk-based capital
requirements. For the present time, the Office of Thrift Supervision has
deferred implementation of the interest rate risk capital charge. At December
31, 2001 the Bank met each of its capital requirements.
The following table sets forth the Bank's actual and required capital amounts
and ratios as of December 31, 2001.
For capital To be well capitalized
adequacy under prompt corrective
Actual purposes action provisions
-----------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tangible capital $20,632,000 20.2% $1,532,000 1.5% $ -- --%
Tier I (core) capital 20,632,000 20.2 4,085,000 4.0 5,106,000 5.0
Risk based capital 20,875,000 36.9 4,530,000 8.0 5,663,000 10.0
Tier I risk-based capital 20,632,000 36.4 -- -- 3,398,000 6.0
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Des Moines,
which is one of the 12 regional FHLBs. As a member of the FHLB, the Bank is
required to purchase and maintain stock in the FHLB of Des Moines in an amount
equal to the greater of 1% of its aggregate unpaid residential mortgage loans,
home purchase
22
contracts or similar obligations at the beginning of each year, or 1/20th (or
such greater fraction as established by the FHLB) of outstanding FHLB advances.
At December 31, 2001 the Bank had $613,200 in FHLB stock, which was in
compliance with this requirement. In past years the Bank has received dividends
on its FHLB stock. Dividends for the year ended and at December 31, 2001, were
4.45% and 4.00% respectively. Certain provisions of FIRREA require all 12
Federal Home Loan Banks to provide financial assistance for the resolution of
troubled savings associations and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
could cause rates on the FHLB advances to increase and could affect adversely
the level of FHLB dividends paid and the value of FHLB stock in the future.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." The banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Bank is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS.
Holding Company Regulation
General. WCF Financial, M.H.C. which owns the majority of the Company's
common stock outstanding (the "Holding Company") and the Company are
non-diversified mutual savings and loan holding companies. As such, the Holding
Company and the Company are registered with the OTS and are subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Holding Company and the Company and
their non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
Federal law prohibits a savings and loan holding company including the
Holding Company and the Company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings institution or holding company
thereof, without prior written approval of the OTS. It also prohibits the
acquisition or retention of, with certain
23
exceptions, more than 5% of a non-subsidiary savings institution, a
non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by federal law; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources, future prospects of the company
and institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
Restrictions Applicable to Mutual Holding Companies. Pursuant to federal
law and OTS regulations and policy, a mutual holding company such as the Holding
Company, and a mid-tier holding company, such as the Company may engage in the
following activities: (i) investing in the stock of a savings association; (ii)
acquiring a mutual association through the merger of such association into a
savings association subsidiary of such holding company or an interim savings
association subsidiary of such holding company; (iii) merging with or acquiring
another holding company; one of whose subsidiaries is a savings association;
(iv) investing in a corporation, the capital stock of which is available for
purchase by a savings association under federal law or under the law of any
state where the subsidiary savings association or associations share their home
offices; (v) furnishing or performing management services for a savings
association subsidiary of such company; (vi) holding, managing or liquidating
assets owned or acquired from a savings subsidiary of such company; (vii)
holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
Waiver of Dividends. OTS regulations require the Holding Company, which
owns the majority of the Company's common stock, to notify the OTS of any
proposed waiver of its right to receive dividends. It is the OTS' recent
practice to review dividend waiver notices on a case-by-case basis, and, in
general, not object to any such waiver if: (i) the mutual holding company's
board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the subsidiary is controlled by the mutual holding company, the dollar
amount of dividends waived by the mutual holding company are considered as a
restriction on the retained earnings of the subsidiary, which restriction, if
material, is disclosed in the public financial statements of the subsidiary as a
note to the financial statements; (iii) the amount of any dividend waived by the
mutual holding company is available for declaration as a dividend solely to the
mutual holding company, and, in accordance with SFAS 5, where the subsidiary
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the
subsidiary (and the subsidiary's capital ratios adjusted accordingly) in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
24
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Holding Company to convert from the mutual to the stock form of
ownership (a "Conversion Transaction"). There can be no assurance when, if ever,
a Conversion Transaction will occur. In a Conversion Transaction a new holding
company would be formed as the successor to the Company (the "New Holding
Company"), the Holding Company's corporate existence would end, and certain
depositors of the Bank would receive the right to subscribe for additional
shares of the New Holding Company. In a Conversion Transaction, each share of
Common Stock held by the Company's public stockholders ("Minority Shareholders")
would be automatically converted into a number of shares of common stock of the
New Holding Company determined pursuant an exchange ratio that ensures that
after the Conversion Transaction, subject to any adjustment to reflect the
receipt of cash in lieu of fractional shares, the percentage of the to-be
outstanding shares of the New Holding Company issued to Minority Stockholders in
exchange for their Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders immediately
prior to the Conversion Transaction.
Insurance of Accounts and Regulation by the FDIC
The Company is a member of the SAIF, 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 FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the OTS an 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 SAIF 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, ranging from .23%
to .67% of deposits, based upon their level of capital and supervisory
evaluation. Under the system, institutions classified as well capitalized (i.e.,
a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to
risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a
risk-based capital ratio of at least 10%) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized (i.e., core
or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital
ratio of less than 8%) and considered of substantial supervisory concern pay the
highest premium. Risk classification of all insured institutions will be made by
the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. The Company anticipates that its ongoing annual SAIF
premiums will be approximately $12,900.
Federal Securities Law
Shares of the Company's common stock are registered with the SEC under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is also subject to the proxy rules, tender offer rules,
insider trading restrictions, annual and periodic reporting, and other
requirements of the Exchange Act.
25
FEDERAL AND STATE TAXATION
Federal Taxation
For federal income tax purposes, the Company and its subsidiaries file a
consolidated federal income tax return on a calendar year basis. The Holding
Company is not permitted to file a consolidated federal income tax return with
the Company. Thus, the Holding Company files a separate federal income tax
return on a calendar year basis.
The Holding Company and the Company are subject to the rules of federal
income taxation generally applicable to corporations under the Internal Revenue
Code of 1986, as amended (the "Code").
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations will be able to convert to a
commercial bank charter, diversify their lending, or be merged into a commercial
bank without having to recapture any of their pre-1998 tax bad debt reserve
accumulations. Any post-1987 reserves will be subject to recapture, regardless
of whether or not a particular thrift intends to convert its charter, be
acquired, or diversify its activities. The recapture tax on post-1987 reserves
is assessed in equal installments over the six year period beginning in 1996.
However, if a thrift meets a minimum level of mortgage lending test (i.e., if
the thrift's level of mortgage lending activity (re-financing and home equity
loans do not count) is equal to or exceeds its average mortgage lending activity
for the six years preceding 1996, adjusted for inflation), then the thrift may
suspend its tax bad debt recapture for the 1996 and 1997 tax years. At June 30
2000, the Bank had a balance of approximately $800,000 of bad debt reserves in
retained income that would be recaptured under this legislation.
Savings institutions such as Bank that meet certain definitional tests
relating to the composition of assets and other prescribed by 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.
If a savings institution ceases to qualify as a "bank" (as defined in Code
Section 581) for bad debt purposes or converts to a credit union, the pre-1988
reserves and the supplemental reserves are restored to income ratably over a
six-year period, beginning in the tax year the savings institution no longer
qualifies as a bank. The pre-1988 reserves are also subject to recapture in the
case of certain excess distributions including distributions on liquidation and
dissolution and redemptions of shareholders.
In addition to the regular income tax the Company is generally subject to a
minimum tax calculation. 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 (which certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds Company's regular income tax and net operating
losses can offset no more than 90% of alternative minimum income.
The Company is accounting for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The liability method accounts for deferred income
taxes by applying the enacted statutory rates in effect at the balance sheet
date to differences between the book cost and the tax cost of assets and
liabilities. The resulting deferred tax liabilities and assets are adjusted to
reflect changes in tax laws. SFAS 109 was implemented by the Company effective
January 1, 1993.
The Company has not been audited by the Internal Revenue Service or the
State of Iowa within the past five years.
26
Iowa Taxation
The Company files an Iowa corporate tax return, the Bank files an Iowa
franchise tax return, and the Bank's subsidiary files an Iowa corporation tax
return on a calendar year basis. The Holding Company files an Iowa corporate tax
return on a calendar year basis.
The State of Iowa imposes a tax on the Iowa franchise taxable income of
savings institutions at the rate of 5%. Iowa franchise taxable income is
generally similar to federal taxable income except that interest from state and
municipal obligations is taxable, and no deduction is allowed for state
franchise taxes. The state corporation income tax ranges from 6% to 12%
depending upon Iowa corporation taxable income. Interest from federal securities
is not taxable for purposes of the Iowa corporation income tax.
ITEM 2. PROPERTIES
(a) The Company conducts its business through two facilities located in
Webster City, Hamilton County, Iowa. Webster City Federal Savings Bank is
located at 820 Des Moines Street. Security Title and Abstract, Inc, is located
at 730 Second Street. At December 31, 2001, the net book value of the Company's
property and equipment was $882,238.
(b) Investment Policies. For a description of the Company's policies (all
of which may be changed without a vote of the Company's security holders) and
the limitations on the percentage of assets which may be invested in any one
investment, or type of investment with respect to: (1) investments in real
estate or interests in real estate; (2) investments in real estate mortgages;
and (3) securities of or interests in persons primarily engaged in real estate
activities, reference is made hereunder to the information presented above under
"Item 1. Description of Business."
(c) Description of Real Estate and Operating Data. Not Applicable; the
book value of each of the Company's properties is less than 10% of the Company's
total consolidated assets at December 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is periodically involved in claims and lawsuits that are
incident to the Company's business. As of December 31, 2001, the Company was not
involved in any material claim or lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted during the fourth quarter of the year ended
December 31, 2001 to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
------------------------------------------------
STOCKHOLDER MATTERS
-------------------
For information concerning the market for the Company's common stock, the
section captioned "Stockholder Information--Stock Listing" and "--Price Range of
Common Stock and Dividends Paid" of the Company's Annual Report to Stockholders
for the Year Ended December 31, 2001 (the "Annual Report to Stockholders") is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
27
ITEM 7. FINANCIAL STATEMENTS
--------------------
Pages 13-38 of the Company's 2001 Annual Report to Stockholders are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
There were no changes in or disagreements with accountants in the Company's
accounting and financial disclosure during 2001.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
Information concerning Directors of the Company and concerning compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein
by reference from the Company's definitive Proxy Statement dated March 15, 2001
(the "Proxy Statement"), specifically the section captioned "Proposal
I--Election of Directors.
The following table sets forth information as of December 31, 2001, with
respect to the executive officers of the Company.
Name Age Occupation
---- --- ----------
Phyllis A. Murphy 51 President and Chief Executive Officer
Stephen L. Mourlam 49 Executive Vice President and Chief Financial Officer
Kyle R. Swon 40 Senior Vice President and Chief Lending Officer
ITEM 10. EXECUTIVE COMPENSATION
-----------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's Proxy Statement, specifically the sections
captioned "Proposal I--Election of Directors--Executive Compensation,"
"--Directors' Compensation," and "--Benefits."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
------------------------------------------------
AND MANAGEMENT
--------------
Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement,
specifically the section captioned "Voting Securities and Principal Holders
Thereof."
ITEM 12. CERTAIN TRANSACTIONS
---------------------
Information concerning relationships and transactions is incorporated
herein by reference from page 9 of the Company's Proxy Statement.
28
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
---------------------------------
(a) Exhibits
3.1 Federal Stock Charter of Webster City Federal Bancorp
(Incorporated by reference to Exhibit 3.1 of the Company's
Form 8-KSB as filed on July 1, 1999.
3.2 Bylaws of Webster City Federal Bancorp (Incorporated by
reference to Exhibit 3.2 of the Company's Form 8-KSB as
filed on July 1, 1999.
4 Common Stock Certificate of the Company (Incorporated by
reference to Exhibit 4 of the Company's Form 8-KSB, as
filed on July 1, 1999.
10.1.A Severance Agreement, as amended between the Company, the
Bank and Phyllis A. Murphy, President and Chief Executive
Officer.
10.1.B Severance Agreement, as amended between the Company, the
Bank and Stephen L. Mourlam, Executive Vice President and
Chief Financial Officer.
101.C Severance Agreement, as amended between the Company, the
Bank and Kyle R. Swon, Senior Vice President and Chief
Lending Officer.
13 2001 Annual Report to Stockholders
21 Subsidiaries of the Registrant
(b) Reports on Form 8-K:
-------------------
The Registrant filed no Current Report on Form 8-K during the fourth
quarter of 2001.
29
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.
WEBSTER CITY FEDERAL BANCORP
Date: March 21, 2002 By: /s/Phyllis A. Murphy
------------------------
Phyllis A. Murphy
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange 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/ Phyllis A. Murphy By: /s/Stephen L. Mourlam
----------------------------------------- -------------------------------------------
Phyllis A. Murphy, President, Chief Stephen L. Mourlam, Executive Vice President
Executive Officer and Director and Director
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 21, 2002 Date: March 21, 2002
By: /s/ Dr. Carroll E. Haynes By: /s/ Donald I. Newman
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Dr. Carroll E. Haynes, Chairman of the Board Donald I. Newman, Director
Date: March 21, 2002 Date: March 21, 2002
By: /s/ Dennis J. Tasler By: /s/ Dr. Leo Moriarty
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Dennis J. Tasler, Director Dr. Leo Moriarty, Director
Date: March 21, 2002 Date: March 21, 2002
By: /s/ Kyle R. Swon
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Kyle R. Swon, Senior Vice President and Director
Date: March 21, 2002
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