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, 2002
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
Incorporation or Organization) Identification Number)
820 DES MOINES STREET, WEBSTER CITY,IOWA 50595-0638
---------------------------------------- ----------
(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, 2002 were $6.7
million.
As of February 28, 2003, there were issued and outstanding 1,888,376
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, 2003,
was $ 11,813,436. (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,
2002 (Parts II and III).
2. Proxy Statement for the 2003 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, 2002, the Company had
total assets of $103.5 million, total deposits of $70.3 million, and
stockholders' equity of $22.2 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, 2002, $62.4 million, or 85.1% of the Company's net
loan portfolio, consisted of one-to four-family residential mortgage loans and
$3.9 million, or 5.3%, 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 $4.3 million, or 5.9% of the
Company's net loan portfolio at December 31, 2002. At December 31, 2002,
consumer and other loans totaled $3.8 million, or 5.2%, 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
$2.7 million, or 2.6%, of total assets at December 31, 2002.
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 "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
2
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, 2002, the Company's net loans receivable totaled $73.3 million, of
which $60.7 million, or 82.8%, were one- to four-family residential real estate
mortgage loans, $5.7million, or 7.8%, were multi-family residential, commercial
real estate and other loans, $4.3 million, or 5.9%, 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,
2002, mortgage-backed securities totaled $2.7 million, or 2.6% of total assets.
At December 31, 2002, 54.2% of the Company's mortgage-backed securities were
secured by ARM loans, and 45.8% 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,
--------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Real estate loans:
One- to four-family
residential $ 60,677 82.76% $62,109 82.84% $55,114 79.76% $ 50,420 81.07% $ 44,047 77.61%
Home equity 4,347 5.93 4,729 6.35 4,750 6.87 4,142 6.66 4,347 7.66
Multi-family residential,
commercial real estate
and other 5,680 7.75 4,963 7.19 5,317 7.69 5,248 8.43 5,961 10.50
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total real estate loans 70,704 96.43% 71,801 96.38% 59,810 94.32% 59,810 96.16% 54,355 95.77%
Consumer and other loans:
Automobile 1,994 2.72% 2,362 3.17% 2,418 3.50% 1,682 2.71% 1,536 2.71%
Home improvement 768 1.05 1,124 1.51 1,485 2.15 1,083 1.74 963 1.70
Loans on savings deposits 320 .44 255 .34 526 .76 248 39 417 .73
Other 706 .96 720 .97 770 1.11 587 94 752 1.33
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total consumer and
other loans 3,788 5.17% 4,461 5.99% 5,199 7.52% 3,600 5.78% 3,668 6.47%
Real estate sold on
contract 53 0.07 62 0.09 66 0.10 100 0.16 128 0.23
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total loans receivable 74,545 101.67 76,324 102.46% 70,446 101.95% 63,510 102.10% 58,151 102.47%
Less:
Undisbursed loan proceeds $ 822 1.12% $ 1,449 1.95% $ 928 1.35% $922 1.48% $ 999 1.76%
Premiums on loans
purchased _ _ (1) (0.01)% (3) (0.01)% ( 6) (0.01)% (11) (0.02)%
Unearned discount and net
deferred loan fees _ _ 6 0.01% 14 0.02% 20 0.02% 26 0.05%
Allowance for loan losses 404 0.55% 378 0.51% 403 0.59% 382 0.61% 385 0.68%
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total loans receivable,
net $ 73,319 100.00% $74,492 100.00% $69,104 100.00% $ 62,192 100.00% $56,752 100.00%
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, 2002. 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........... $6,928 $5,753 $3,542 $7,997 $13,590 $27,214 $65,024
Multi-family residential, commercial
real estate and other loans............. 969 1,084 268 17 1,503 1,838 5,680
Consumer and other loans.................... 676 1,290 1,053 375 354 40 3,788
Real estate sold on contract................ --- --- --- 53 --- --- 53
------ ------ ------- ------- ------- ------ --------
Total loans receivable (gross).......... 8,573 8,127 4,863 8,442 15,447 29,092 74,545
------ ------ ------- ----- ------ ------ ------
Mortgage-backed securities (gross).......... 1,195 320 32 342 613 162 2,665
------ ------ ------- ------- ------- ------ --------
Total loans and
mortgage-backed securities............ $9,768 $ 8,447 $ 4,896 $ 8,731 $16,060 $29,254 $ 77,210
====== ======= ======= ======= ======= ======= ========
FIXED- AND ADJUSTABLE-RATE LOAN AND MORTGAGE-BACKED SECURITIES
SCHEDULE. The following table sets forth at December 31, 2002, the dollar amount
of all fixed rate and adjustable rate loans due, and mortgage-backed securities
that mature, after December 31, 2003.
Fixed Adjustable Total
----------- ---------- -----------
(In Thousands)
Real estate loans:
One- to four-family residential............................. $ 46,614 $ 11,483 $ 58,097
Multi-family residential, commercial
real estate and other..................................... 3,808 903 4,711
Consumer and other loans...................................... 4,710 -- 4,710
Real estate sold on contract.................................. 53 -- 53
--------- -------- ---------
Total loans receivable (gross)............................ $ 55,185 $ 12,386 $ 67,571
========= ========= =========
Mortgage-backed securities (gross)............................ $ 1,179 $ 290 $ 1,469
========= ========== =========
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, 2002, the
Company had an aggregate principal balance of $4.0 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 the Company's one- to four-family
residential mortgage loans remain outstanding varies significantly depending
upon
5
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
2002, 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, 2002 and December 31, 2001, the Company originated $2.8 million and $1.1
million of ARM loans, respectively, which represented 16.4% and 5.9% 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, 2002, the Company had a total of 44 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, 2002, the Company's multi-family and commercial real
estate loans had an average principal balance of $126,500 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 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.
6
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, 2002 was $5.6 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, 2002, home equity and
home improvement loans totaled $5.1 million, or 7.0%, 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, 2002,
the Company had outstanding loan commitments of $272,300. This amount does not
include $822,500 of the unfunded portion of loans in process.
7
ORIGINATION, PURCHASE OF LOANS. The table below shows the Company's
originations, purchases and sales of loans for the years indicated.
Year Ended December 31
----------------------------------------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Total loans receivable at beginning of year........ $ 74,492 $ 69,104 $ 62,192
Loans purchased:
Real estate:
Total loans purchased.............................. -- -- 450
--------- -------- ---------
Loans originated:
Real estate...................................... 16,783 21,101 12,440
Consumer......................................... 5,430 2,116 5,617
--------- --------- ---------
Total loans originated........................ 22,213 23,217 18,507
--------- -------- ---------
Loans transferred to REO........................... (391) (48) ___
Loan repayments.................................... (23,012) (17,789) (11,607)
Other loan activity (net).......................... 17 8 12
------------- -------- ---------
Total loans receivable at end of year, net... $ 73,319 $ 74,492 $ 69,104
========= ======== =========
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
Apart of the Company's business involves investments in mortgage-backed
securities. At December 31, 2002, 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 and
repayments of mortgage-backed securities for the years indicated.
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Mortgage-backed securities
at beginning of year:............................ $4,205 $6,025 $7,805
Purchases....................................
Repayments.................................... (1,509) (1,807) (1,766)
Discount (premium) amortization............... (7) (13) (14)
--------- -------- -------
Mortgage-backed securities
at end of year, net.............................. $2,689 $4,205 $6,025
========= ======== ===========
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,
-------------------------------------------------
2002 2001 2000
---- ---- ----
$ % $ % $ %
--- --- --- --- --- ---
(Dollars in Thousands)
Mortgage-backed securities:
Adjustable........................................ $ 1,457 54.2% $ 2,349 55.9% $ 3,146 52.2%
Fixed............................................. 1,232 45.8 1,856 44.1 2,879 47.8
-------- ------ ---------- ---------- --------
Total mortgage-backed
securities, net............................... $ 2,689 100.0% $ 4,205 100.0% $ 6,025 100.0%
======== ====== ======== ====== ======== =====
At December 31, 2002, mortgage-backed securities totaled $2.7 million,
or 2.6%, of total assets. ARM loans collateralized 54.2% of the Company's
mortgage-backed securities portfolio, and fixed-rate loans collateralized 45.8%
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, 2002, all the Company's mortgage-backed securities
were classified as "held to maturity." At December 31, 2002, the Company's
mortgage-backed securities portfolio had a fair value of $2.8 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, 2002, 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 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
9
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, 2002, the Company had $18,000 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,
--------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Delinquent loans:
One- to four-family residential real estate........ $ 104 $ 909 $ 195 $ -- $ --
All other real estate.............................. -- -- -- -- --
Consumer loans, other.............................. 6 58 -- 6 15
----- ------ ------ ------- ------
Total delinquent loans........................... 110 967 195 6 --
Total real estate owned (1).......................... 19 48 -- -- 22
------- -------- ------ ------- ------
Total non-performing assets.................... $ 129 $1,015 195 $ 6 $ 37
====== ====== ======= ======= =======
Total loans delinquent 90 days or more
to net loans receivable............................ .18% 1.30% 0.29% 0.01% 0.03%
Total loans delinquent 90 days or more
to total assets.................................... .11% 0.95% 0.20% 0.01% 0.02%
to total assets.................................... .12% 1.00% 0.20% 0.01% 0.04%
------------------------------------
(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,
-------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In Thousands)
Loans past due 30-89 days:
One- to four-family residential.................... $1,453 $1,145 $ 588 $ 445 $ 521
All other mortgages................................ 938 -- -- -- --
Consumer, other..................................... 167 197 208 60 94
------ ------ ------- ------- ------
Total past due 30-89 days........................ $2,558 $1,342 $ 796 $ 505 $ 615
====== ====== ======= ======= =====
The following table sets forth information with respect to the
Company's delinquent loans and other problem assets at December 31, 2002.
At December 31, 2002
----------------------------
Balance Number
(Dollars in Thousands)
Residential real estate:
Loans 30 to 89 days delinquent....................................... $ 1,453 51
Loans 90 days or more delinquent..................................... 150 6
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)............................ 204 48
Foreclosed real estate and repossessions............................... 18 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.......................... 53 3
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, 2002,
the Company had no special mention loans, $1.1 million in substandard assets and
$17,000 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,
------------------------------------------------------------
2002 2001 2000
--------- --------- ----------
(In Thousands)
Substandard assets................................. $ 1,070 $ 1,396 $ 647
Doubtful assets.................................... 17 42 --
Loss assets........................................ -- -- --
--------- -------- ---------
Total classified assets....................... $ 1,087 $ 1,438 $ 647
========= ======== =========
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, 2002, 2001 and 2000,
the Company added $80,000, $ 0, and $0, respectively, to the provision for loan
losses. The Company's allowance for loan losses totaled $404,000, $378,000, and
$403,000 at December 31, 2002, 2001, and 2000, respectively.
Management believes that the allowances for losses on loans are
adequate. While management uses available information to recognize losses on
loans 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,
-----------------------------------------------------------
2002 2001 2000 1999 1998
---- ----- ---- ---- ----
(Dollars in Thousands)
Net loans outstanding......................... $73,319 $74,492 $69,104 $62,192 $56,572
Average net loans outstanding................. 75,378 72,620 66,222 58,312 55,704
======= ======== ======== ======= =======
Allowance balances (at beginning of year)..... 378 382 385 385
Provision for losses.......................... 80 _ _ _
-................... -
Charge-offs................................... 78 25 2 9 1
Recoveries.................................... 24 0 23 6 1
------- -------- -------- -------- ------
Allowance balance (at end of year)............ $ 404 $ 378 $ 403 $ 382 $ 385
====== ======== ======== ======= =======
Allowance for loan losses as a percent
of net loans receivable at end of year........ 0.55% 0. 51% 0.59% 0.61% 0.68%
Net loans charged off as a percent
of average net loans outstanding............ 0.10% 0. 04% 0.01% 0.01% 0.00%
Ratio of allowance for loan losses
to total nonperforming loans
at end of year.............................. N/M 39.1% N/M N/M N/M
Ratio of allowance for loan losses
to total nonperforming loans and REO
at end of year.............................. N/M 37.2% N/M N/M N/M
12
INVESTMENT ACTIVITIES
The Company's investment portfolio comprises investment securities,
FHLB stock, and interest-earning deposits in other institutions. The Company has
$4.0 million in corporate debt securities, all of which were rated A2 or better.
At December 31, 2002, $12.8 million, or 52.7%, of the Company's in investment
securities were scheduled to mature in one year or less, $10.5 million, or
43.3%, were scheduled to mature in from one to five years, and $1.0 million, or
4.0%, 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,
------------------------------------------------------------
2002 2001 2000
---------- --------- ---------
(In Thousands)
Investment portfolio:
U.S. Government and agency obligations........... $ 3,550 $ 1,518 $ 11,518
Corporate debt securities........................ 4,040 5,096 _
Interest-earning deposits in other institutions.. 15,976 10,258 5,816
FHLB stock....................................... 705 613 613
--------- -------- ---------
Total investments.............................. $ 24,271 $ 21,060 $ 18,315
========= ======== =========
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, 2002.
At December 31, 2002
------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total
---------------- ----------------- ------------------ ------------------- --------
Annualized Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- --------- -------- --------- -------- ---------- -------- --------- -------- -------
(Dollars in Thousands)
Investment portfolio:
Investment securities,
U.S.Government $ 2,015 5.16% $4,546 5.34% $1,029 6.34% $ -- -- $ 7,590 5.4
FHLB stock............... 705 3.00 -- -- -- -- -- -- 705 3.00
Interest-earning deposits
in other institutions.... 10,043 1.81 5,933 3.55 -- -- -- -- 15.976 2.462
------ ----- -------- --------- --------
Total...................$12,763 2.40% $10,479 4.33% $1,029 6.34% $ -- -- $24,271 3.40%
======= ===== ======= ===== ======= ===== ========= ==== ======== =====
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 $2.2
million in such funds at December 31, 2002.
DEPOSIT PORTFOLIO. Savings in the Company as of December 31, 2002, were
represented by the various types of deposit programs described below.
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
0.00% None Noninterest-bearing checking $ -- $ 1,580 2.25%
0.50 None NOW accounts -- 8,134 11.58
1.00 None Passbook -- 4,871 6.94
1.61 None Money market accounts 1,000 7,825 11.14
Certificates of Deposit
1.98% 3 months Fixed term, fixed rate $ 1,000 $ 800 1.14%
2.24 6 months Fixed term, fixed rate 1,000 1,768 2.52
2.59 9 months Fixed term, fixed rate 1,000 1,923 2.74
2.73 12 months Fixed term, fixed rate 1,000 4,650 6.62
2.79 15 months Fixed term, fixed rate 1,000 938 1.34
3.52 18 months Fixed term, fixed rate 1,000 11,308 16.10
3.63 24 months Fixed term, fixed rate 1,000 3,157 4.50
3.95 30 months Fixed term, fixed rate 1,000 851 1.21
4.32 36 months Fixed term, fixed rate 1,000 16,160 23.02
4.52 48 months Fixed term, fixed rate 1,000 742 1.06
4.88 Over 48 months Fixed term, fixed rate 1,000 5,505 7.84
----------- ---------
$ 70,212 100.00%
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,
---------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------ ------------------------------ -----------------------------
Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1) Change(2)
------- ---------- --------- ------- ---------- --------- ------- ---------- ---------
(In Thousands)
Noninterest-bearing
demand....................... $ 1,580 2.25% $ (183) 1,763 2.52% $ 1,003 $ 760 1.32% $ 586
NOW accounts................... 8,134 11.58 (127) 8,261 11.80 819 7,979 10.02 (61)
Passbooks...................... 4,871 6.94 237 4,634 6.62 315 4,319 6.96 240
Money market accounts.......... 7,825 11.14 265 7,560 10.80 1,537 6,023 8.89 140
Time deposits that mature:
within 12 months............. 20,420 29.08 (17,846) 38,266 54.64 11,337 26,865 51.41 3,562
within 12-36 months.......... 24,725 35.21 17,576 7,149 10.21 (10,337) 17,486 20.01 (4,348)
beyond 36 months............. 2,657 3.78 247 2,410 3.44 696 1,714 1.39 (905)
------- ---------- --------- ------- ---------- --------- ------- ---------- ---------
Total..................... $ 70,212 100.00% $ 169 $ 70,042 100.00% $ 5,434 $ 65,146 100.00% $ (786)
======= ========== ========= ======= ========== ========= ======= ========== =========
---------------------------------------
1999 1998
----------------------------- -------
Balance Percent(1) Change(2) Balance
------- ---------- --------- -------
Noninterest-bearing $ 898 1.32% $ 586 $ 312
demand....................... 6,808 10.02 (61) 6,869
NOW accounts................... 4,730 6.96 240 4,490
Passbooks...................... 6,036 8.89 140 5,896
Money market accounts..........
Time deposits that mature: 34,917 51.41 3,562 31,355
within 12 months............. 13,587 20.01 (4,348) 7,935
within 12-36 months.......... 942 1.39 (905) 1,847
beyond 36 months............. ------- ---------- --------- -------
$67,918 100.00% $(786) $68,704
Total..................... ======= ========== ========= =======
------------------------------
(1) Represents percentage of total 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,
------------------------------------------------------------
2002 2001 2000
---- ----- ----
(In Thousands)
Rate
----
2.00-3.99%......................................... $ 24,979 $ 10,874 $ -
4.00-5.99%......................................... 22,775 26,835 25,660
6.00-7.99%......................................... 48 10,116 20,405
--------- -------- ---------
$ 47,802 $ 47,825 $ 46,065
========= ======== =========
TIME DEPOSIT MATURITIES. The following table sets forth the amount and
maturities of time deposits at December 31, 2002.
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%....................................... $ 15,373 $ 7,245 $ 1,983 $ 170 $ 197 $ 11 $ 24,981
4.00%-5.99%....................................... 4,991 1,015 14,482 652 1,627 -- 22,774
6.00-7.99%........................................ 48 -- -- -- -- -- 48
------ ------- ------- ------ ------- ----- --------
$20,420 $ 8,260 $16,465 $ 822 $ 1,824 $ 11 $ 47,802
======== ======== ======== ======= ======== ======= =========
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, 2002. This amount does not include
checking and savings deposits of greater than $100,000, which totaled
approximately $6.2 million at December 31, 2002.
Certificates
Maturity Period of Deposit
(In Thousands)
Three months or less................................................... $ 1,341
Three through six months............................................... 300
Six through twelve months.............................................. 706
Over twelve months..................................................... 3,838
-------
Total............................................................. $ 6,185
=======
17
CHANGE IN DEPOSITS. The following table sets forth changes in total
deposits of the Company for the periods indicated:
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
------ ------ ------
(In Thousands)
Deposits........................................... $147,024 $135,208 $143,551
Withdrawals........................................ 148,414 131,100 148,031
------- ------- -------
Net increase (decrease) before interest credited... (1,390) 4,108 (4,480)
Interest credited.................................. 1,560 1,326 1,249
------- ------- -------
Net increase (decrease) increase in deposits..... $ 170 $5,434 $(3,231)
======== ======= =======
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, 2002, 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,
-------------------------------------------------
2002 2001 2000
---- ---- ----
Weighted average rate paid on FHLB advance......... 5.15% 5.73% 5.76%
18
During the Year Ended December 31,
------------------------------------------
2002 2001 2000
------- --------- --------
(Dollars in Thousands)
Maximum amount of FHLB Advance
outstanding at any month........................ $ 9,700 $ 9,700 $ 8,200
Approximate average FHLB advance
outstanding...................................... 9,700 7,783 4,908
Approximate weighted average rate
paid on FHLB advance............................. 5.15% 5.73% 5.76%
EMPLOYEES
As of December 31, 2002, 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.
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
19
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, 2002. As of
December 31, 2002, 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, 2002, the Bank maintained
94.8% 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 $731,600 during the
year ended December 31, 2002.
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 2002 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, 2002, 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, 2002, 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
21
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.
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, 2002 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, 2002.
For capital To be well capitalized
adequacy under prompt corrective
Actual purposes actionprovisions
----------- ------------ ----------------------
22
Amount Percent Amount Percent Amount Percent
Tangible capital $ 21,530,000 20.9% $ 1,545,000 1.5% $ - -%
Tier I (core)capital 21,530,000 20.9 4,154,000 4.0 5,148,000 5.0
Risk based capital 21,799,000 44.6 3,912,000 8.0 4,890,000 10.0
Tier I risk-based capital 21,530,000 44.0 - - 2,934,000 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 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, 2002 the Bank had $704,900 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, 2002, were
2.97% and 2.99% 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.
23
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 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
24
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.
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.
25
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.
THE USA PATRIOT ACT
In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at minimum:
(i) internal policies, procedures, and controls; (ii) specific
designation of an anti-money laundering compliance officer; (iii)
ongoing employee training programs; and (iv) an independent audit
function to test the anti-money laundering program.
o Section 326 authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations by October 26, 2002 that provide for minimum standards
with respect to customer identification at the time new accounts
are opened.
o Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific,
and, where necessary, enhanced due diligence policies, procedures,
and controls designed to detect and report money laundering.
o Financial institutions are prohibited from establishing,
maintaining, administering or managing correspondent accounts for
foreign shell banks (foreign banks that do not have a physical
presence in any country), and will be subject to certain record
keeping obligations with respect to correspondent accounts of
foreign banks.
26
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 ("Sarbanes-Oxley"), which implemented legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board that will enforce auditing, quality control and
independence standards and will be funded by fees from all publicly traded
companies, Sarbanes-Oxley places certain restrictions on the scope of services
that may be provided by accounting firms to their public company audit clients.
Any non-audit services being provided to a public company audit client will
require pre-approval by the company's audit committee. In addition,
Sarbanes-Oxley makes certain changes to the requirements for audit partner
rotation after a period of time. Sarbanes-Oxley requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the Securities and Exchange Commission,
subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement. The Company's Chief Executive Officer and Chief
Financial Officer have signed certifications to this Form 10-K as required by
Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel will be required to
report evidence of a material violation of the securities laws or a breach of
fiduciary duty by a company to its chief executive officer or its chief legal
officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of
directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is extended; and
bonuses issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the company's
securities during retirement plan "blackout" periods, and loans to company
executives (other than loans by financial institutions permitted by federal
rules and regulations) are restricted. In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under Sarbanes-Oxley be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates. The legislation accelerates the
time frame for disclosures by public companies, as they must immediately
disclose any material changes in their financial condition or operations.
Directors and executive officers must also provide information for most changes
in ownership in a company's securities within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under Sarbanes-Oxley, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. Sarbanes-Oxley also
27
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent accountant engaged in the audit of the
company's financial statements for the purpose of rendering the financial
statements materially misleading. Sarbanes-Oxley also requires the Securities
and Exchange Commission to prescribe rules requiring inclusion of any internal
control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley requires the company's registered public accounting
firm that issues the audit report to attest to and report on management's
assessment of the company's internal controls.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
FEDERAL 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 December 31, 2002 and 2001, the Bank had federal income
tax bad debt reserves of approximately $2.4 million, which constitute
allocations to bad debt reserves for federal income tax purposes for which no
provision for taxes on income had been made.
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
28
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.
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, 2002, the net book value of the Company's
property and equipment was $726,135.
(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, 2002.
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, 2002, the Company was not
involved in any material claim or lawsuit.
29
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, 2002 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, 2002 (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.
ITEM 7. FINANCIAL STATEMENTS
Pages 14-40 of the Company's 2002 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 2002.
PART III
30
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 14, 2003
(the "Proxy Statement"), specifically the section captioned "Proposal
I--Election of Directors. The following table sets forth information as of
December 31, 2002, with respect to the executive officers of the Company.
NAME AGE OCCUPATION
Phyllis A. Murphy 52 President and Chief
Executive Officer
Stephen L. Mourlam 50 Executive Vice President and
Chief Financial Officer
Kyle R. Swon 41 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.
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.
31
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 as
originally filed with the December 2000, 10-KSB.
10.1.B Severance Agreement, as amended between the Company, the Bank
and Stephen L. Mourlam, Executive Vice President and Chief
Financial Officer as originally filed with the December 2000,
10-KSB.
10.1.C Severance Agreement, as amended between the Company, the Bank and
Kyle R. Swon, Senior Vice President and Chief Lending Officer as
originally filed with the December 2000, 10-KSB..
13 2002 Annual Report to Stockholders
21 Subsidiaries of the Registrant
99.1 Certification of Chief Executive Officer and Chief Financial
Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) REPORTS ON FORM 8-K:
The Registrant filed no Current Report on Form 8-K during the fourth
quarter of 2002.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Under the supervision
and with the participation of management, including our Chief Executive Officer
and Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date") within
90days prior to the filling of this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us (or our consolidated
subsidiaries) required to be included in our periodic SEC filings.
(b) Change in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors
that could significantly affect these controls subsequent to the date of
the evaluation.
See the Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, which immediately precedes the signature page.
32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Phyllis A. Murphy, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of Webster City
Federal Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
--------------------------------- -------------------------------------
Date Phyllis A. Murphy
President and Chief Executive Officer
33
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen L. Mourlam, Executive Vice President and Chief Financial
Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of Webster City
Federal Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
-------------------------- ----------------------------
Date Stephen L. Mourlam
Executive Vice President and
Chief Financial Officer
34
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, 2003 By: /s/
--------------------------
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/ By: /s/
--------------------------------- --------------------------------
Phyllis A. Murphy, President, Chief Stephen L. Mourlam,
Executive Officer and Director Executive Vice President and Director
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Date: March 21, 2003 Date: March 21, 2003
By: /s/ By: /s/
----------------------------------------- --------------------
Dr. Carroll E. Haynes, Chairman of the Board Donald I. Newman, Director
Date: March 21, 2003 Date: March 21, 2003
By: /s/ By: /s/
-------------------------- --------------------
Dennis J. Tasler, Director Dr. Leo Moriarty, Director
Date: March 21, 2003 Date: March 21, 2003
By: /s/
------------------------------------------------
Kyle R. Swon, Senior Vice President and Director
Date: March 21, 2003
35
EXHIBIT 13
2002 ANNUAL REPORT TO STOCKHOLDERS
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PARENT COMPANY SUBSIDIARY COMPANY STATE OF INCORPORATION
-------------- ------------------ ----------------------
Webster City Federal Bancorp Webster City Federal Federal
Savings Bank
Webster City Federal WCF Service Corporation Iowa
Savings
Webster City Federal Security Title & Abstract Iowa
Bancorp
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Phyllis A. Murphy, President and Chief Executive Officer and Stephen L. Mourlam,
Executive Vice President and Chief Financial Officer of Webster City Federal
Bancorp ("the Company") each certify in their capacity as an officer of the
Company that they have reviewed the annual report of the Company on Form 10-KSB
for the fiscal year ended December 31, 2002 and that to the best of their
knowledge:
(1) the report fully complies with the requirements of Sections 13(a) of
the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all
material respects, the financial condition and results of operations.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
--------------------------------- ------------------------------------
Date Phyllis A. Murphy
President and Chief Executive Officer
-------------------------------- -------------------------------------
Date Stephen L. Mourlam
Executive Vice President,
Chief Financial Officer