<PAGE>
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
For the fiscal year ended June 30, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission file number 0-21687
IFB HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 43-1760023
- ---------------------------------------- -------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
522 Washington Street, Chillicothe, Missouri 64601
- -------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (660) 646-3733
----------------------------------------
</TABLE>
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
-------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-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 amendment to
this Form-10KSB. [X]
The registrant's revenues for the fiscal year ended June 30, 1998 were $5.1
million.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on the National Daily Quotation System Pink Sheets as of
September 22, 1998, was $5.7 million. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant.)
As of September 22, 1998, there were issued and outstanding 474,398 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and III of Form 10-KSB - Annual Report to Stockholders for the
fiscal year ended June 30, 1998.
Part III of Form 10-KSB - Proxy Statement for 1998 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Description of Business
IFB Holdings, Inc. (the "Company") was organized in October 1996 for the purpose
of serving as a holding company for Investors Federal Bank and Savings
Association (the "Bank") upon its conversion from mutual to stock form, and of
Investors Federal Bank, National Association following the conversion from a
thrift to a national bank. On December 30, 1996, the Company closed its public
offering for 592,523 shares of its common stock and acquired the Bank as part of
the Bank's conversion from a mutual to a stock chartered federal savings bank.
Approximately 50% of the net conversion proceeds were retained by the Company.
The Company is subject to regulation by the Federal Reserve Bank and the
Securities and Exchange Commission. The business of the Company consists
primarily of the business of the Bank.
The Bank was originally chartered as a federal savings association in 1934 under
the name Chillicothe Federal Savings and Loan Association. In 1974, the Bank
changed its name to Investors Federal Savings and Loan Association, and in 1988
the Bank changed its name to Investors Federal Bank and Savings Association.
On December 30, 1996, the Bank completed its conversion from a mutual to a stock
charter. The Bank converted to a National Bank on January 30, 1997, and changed
its name to Investors Federal Bank, National Association.
The executive offices of the Company and the Bank are located at 522 Washington
Street, Chillicothe, Missouri 64601. The telephone number at that address is
(660) 646-3733.
The Bank has been, and intends to continue to be, a community-oriented financial
institution offering selected financial services to meet the needs of the
communities it serves. The Bank attracts deposits from the general public and
historically has used such deposits, together with other funds, to originate and
purchase one- to four-family residential mortgage loans, and to originate non-
residential real estate loans (primarily farm loans), and consumer loans
consisting primarily of loans secured by automobiles. In addition, in recent
years, the Bank has expanded its loan portfolio by purchasing SBA-guaranteed
loans and FHA-insured Title I home improvement loans. Because of the limited
lending opportunities in its local market area and to the extent adjustable-rate
one- to four-family residential mortgage loans are unavailable for purchase at
attractive yields, the Bank also invests in mortgage-backed securities and other
investment securities.
Market Area and Competition
The Bank conducts its operations through its main office in Chillicothe and
branch offices in Hamilton and Gallatin, Missouri. The Bank's offices are
located in the northwest part of Missouri, approximately 95 miles northeast of
Kansas City and approximately 60 miles south of the Iowa-Missouri state line.
The Bank's market area is changing primarily from an agrarian economy into a
subregional manufacturing and distribution center. The major employers in the
Bank's market area are Donaldson Company, Lambert Manufacturing, Midwest Gloves
Corporation, SEMCO, the Department of Corrections, the local school districts,
Wire Rope Corp. of America, Landmark Metal Fabricating and Hamilton Hillcrest.
The Bank faces significant competition in attracting deposits and originating
loans. This competition arises, with respect to originating loans , from
mortgage bankers and to a lesser extent from commercial banks, savings
institutions and credit unions, and with respect to attracting deposits, from
securities firms and mutual funds and from other financial institutions in its
market area. In Livingston, Caldwell and Daviess Counties, where the Bank's
three offices are located, there are ten commercial banks, in addition to the
Bank.
1
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Lending Activities
General. The Bank has emphasized and, subject to market conditions, will
continue to emphasize the origination and purchase of one- to four-family
residential mortgage loans. In recent years, subject to market conditions, the
Bank has emphasized the origination and purchase of ARM loans and shorter-term
fixed-rate residential mortgage loans. At June 30, 1998, the Bank's portfolio
of one- to four-family residential mortgage loans totaled $25.6 million, or
72.0% of total loans. The Bank also originates loans secured by farm residences
and combinations of farm residences and farm real estate. At June 30, 1998, the
non-residential real estate portfolio (consisting principally of farm loans)
totaled $2.2 million, or 6.3% of total loans, all of which were secured by
properties located in the Bank's market area. The Bank's non-mortgage loans
consist primarily of automobile loans, all of which are direct originations
(i.e., not through a dealer), SBA-guaranteed loans and FHA-insured Title I home
improvement loans.
Under OCC regulations, a national bank's loans-to-one borrower limit is
generally limited to the greater of 15% of unimpaired capital and surplus or
$500,000. At June 30, 1998, the maximum amount which the Bank could have lent
under this limit to any one borrower and the borrower's related entities was
approximately $966,000. At June 30, 1998, the Bank had no loans or groups of
loans to related borrowers with outstanding balances in excess of this amount.
The Bank's largest lending relationship at June 30, 1998 was twelve loans to an
individual borrower aggregating $904,183 and secured by one- to four- family
residential rental properties. At June 30, 1998, these loans were performing in
accordance with their terms.
Loan Portfolio Composition. Set forth below is data relating to the composition
of the Bank's loan portfolio by type of loans as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
. 1998 1997 1996
------------ -------- --------
Amount Percent Amount Percent Amount Percent
------------ -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
- ------------------
One- to four-family............. $25,633 72.04% $23,386 77.35% $22,798 79.49%
MultiFamily (5 or more)......... 589 1.65 - - - -
Non-residential real estate..... 2,237 6.29 1,729 5.72 1,955 6.81
Commercial...................... 1,828 5.14 471 1.56 369 1.29
------- ------- ------- ------ ------- ------
Total real estate loans........ 30,287 85.12 25,586 84.63 25,122 87.59
------- ------- ------- ------ ------- ------
Consumer and other loans:
- -------------------------
Automobile...................... 2,447 6.88 1,669 5.52 1,365 4.76
SBA guaranteed.................. 952 2.68 971 3.21 982 3.42
Home improvement-FHA............ 936 2.63 1,202 3.98 437 1.52
Savings account................. 468 1.31 395 1.30 341 1.19
Other........................... 492 1.38 410 1.36 434 1.52
------- ------- ------- ------ ------- ------
Total consumer and other loan.. 5,295 14.88 4,647 15.37 3,559 12.41
------- ------- ------- ------ ------- ------
Total loans.................... 35,582 100.00% 30,233 100.00% 28,681 100.00%
======= ====== ======
Less:
- -----
Loans in process............... (6) (1) (5)
Deferred fees and origination costs 3 15 36
Allowance for losses............ (324) (285) (283)
------- ------- -------
Total loans receivable, net..... $35,255 $29,962 $28,429
======= ======= =======
</TABLE>
2
<PAGE>
The following table shows the composition of the Bank's loan portfolio by fixed-
and adjustable-rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
1998 1997 1996
--------------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
----------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family........... $ 4,821 13.55% $ 4,281 14.16% $ 4,180 14.58%
Multifamily (5 or more)....... 589 1.66 - - - -
Commercial.................... 1,132 3.18 438 1.45 369 1.28
Non-residential............... 319 .89 212 .70 317 1.11
------- ------ ------- ------ ------- ------
Total real estate loans...... 6,861 19.28 4,931 16.31 4,866 16.97
Consumer and other............ 4,342 12.20 3,681 12.18 2,530 8.82
------- ------ ------- ------ ------- ------
Total fixed-rate loans....... 11,203 31.48 8,612 28.49 7,396 25.79
------- ------ ------- ------ ------- ------
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family........... 20,812 58.49 19,105 63.19 18,618 64.91
Commercial.................... 696 1.96 33 .11 - -
Non-residential............... 1,918 5.39 1,517 5.02 1,638 5.71
------- ------ ------- ------ ------- ------
Total real estate loans...... 23,426 65.84 20,655 68.32 20,256 70.62
Consumer and other............ 953 2.68 966 3.19 1,029 3.59
------- ------ ------- ------ ------- ------
Total adjustable-rate loans.. 24,379 68.52 21,621 71.51 21,285 74.21
------- ------ ------- ------ ------- ------
Total loans.................. 35,582 100.00% 30,233 100.00% 28,681 100.00%
====== ====== ======
Less:
- -----
Loans in process.............. (6) (1) (5)
Deferred fees and
origination costs............ 3 15 36
Allowance for loan losses..... (324) (285) (283)
------ ------- -------
Total loans receivable, net.. $35,255 $29,962 $28,429
======= ======= =======
</TABLE>
One- to Four-Family Mortgage Loans. The Bank's primary lending activity is the
origination for its portfolio of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Bank's market
area. Loans are generated through the Bank's marketing efforts, its existing
customers and referrals, real estate brokers, builders and local businesses. The
Bank generally has limited its real estate loan originations to the financing of
properties located within its market area, although it has from time to time in
the past purchased loans secured by properties located outside of its market
area. The average principal balance of the loans in the Bank's one- to four-
family residential mortgage loan portfolio was approximately $37,200 at June 30,
1998. At June 30, 1998, the Bank had $25.6 million, or 72.0% of its total loan
portfolio, invested in mortgage loans secured by one- to four-family residences.
The Bank originates fixed-rate residential one- to four-family loans with terms
of up to 30 years. As of June 30, 1998, $4.8 million, or 13.6% of the Bank's
loan portfolio, consisted of fixed-rate residential one-to four-family loans.
The Bank's fixed-rate mortgage loans amortize monthly with principal and
interest due each month. 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 Bank also offers ARM loans for terms ranging up to 30 years. The Bank
currently offers ARM loans that adjust every year, with interest rate adjustment
limitations up to two percentage points per year and up to six percentage points
over the life of the loan; however, a majority of the ARM loans in the Bank's
3
<PAGE>
portfolio have adjustment limitations of one percentage point per year and five
percentage points over the life of the loan. Additionally, the Bank offers ARM
loans that adjust annually after an initial lock-in term of three or five years
has expired. In a rising interest rate environment, such rate limitations may
prevent ARM loans from repricing to market interest rates, which would have an
adverse effect on net interest income. The Bank has used different interest
indices for ARM loans in the past, and currently uses the one year U.S. Treasury
Index adjusted to a constant maturity, with margins of 275-350 basis points for
agency conforming ARM loans. ARM loans secured by residential one- to four-
family real estate totaled $20.8 million, or 58.5% of the
Bank's total loan portfolio at June 30, 1998. The origination of fixed-rate
mortgage loans versus ARM loans is monitored on an ongoing basis and is affected
significantly by the level of market interest rates, customer preference, the
Bank's interest rate gap position and loan products offered by the Bank's
competitors. During fiscal year 1998, the Bank originated $2.7 million in
fixed-rate residential mortgage loans and $3.9 million of ARM loans. During
fiscal year 1997, the Bank originated $1.8 million of fixed-rate residential
mortgage loans and $3.2 million of ARM loans. During fiscal year 1996, the Bank
originated $2.1 million of fixed-rate residential mortgage loans and $3.1
million of ARM loans.
Regulations limit the amount that a bank 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
("LTV") ratio of 95% for residential property (and 100% for loans guaranteed by
the Veterans Administration) and 90% for all other real estate loans. The
Bank's lending policies, however, generally limit the maximum LTV ratio of 80%
of the lesser of the appraised value or the purchase price of the property
securing the loan in the case of loans secured by one- to four-family owner-
occupied properties. On conventional one- to four-family loans, the Bank will
lend up to a 95% LTV ratio; however, loans with LTV ratios in excess of 80% may
require private mortgage insurance and loans with LTV ratios in excess of 90%,
with rare exceptions, require private mortgage insurance or additional readily
marketable collateral.
When underwriting residential real estate loans, the Bank reviews each loan
applicant's employment, income and credit history. The Bank's policy is to
obtain credit reports and financial statements on all borrowers and guarantors.
Properties securing real estate loans are appraised by the Bank's employees.
Appraisals are subsequently reviewed by the Bank's Chief Lending Officer and the
Loan Committee, as applicable. Management believes the stability of income,
past credit history and adequacy of the proposed security are integral parts in
the underwriting process. Generally, the applicant's total monthly mortgage
payment, including all escrow amounts, is limited to 25 percent of the
applicant's total monthly income. In addition, total monthly obligations of the
applicant, including mortgage payments, should not generally exceed 33% of total
monthly income. Written appraisals are always required on real estate property
offered to secure an applicant's loan. The Bank requires fire and casualty
insurance on all properties securing real estate loans, as well as title
insurance or a certified abstract and written attorney's title opinion.
Non-Residential Real Estate Lending. The Bank originates loans secured by farm
residences and combinations of farm residences and farm real estate. At June
30, 1998, the non-residential real estate portfolio totaled $2.2 million, or
6.3% of total loans, all of which were secured by properties located in the
Bank's market area. The principal balance of such loans in the Bank's portfolio
ranged from approximately $6,000 to $250,000 at June 30, 1998. Non-residential
real estate mortgage loans are generally made for terms of 15 to 20 years.
Loans secured by farm real estate generally involve greater risks than one- to
four-family residential mortgage loans. Payments on loans secured by such
properties may, in some instances, be dependent on farm income from the
properties. To address this risk, applicants may be required to provide income
projections for the coming year as well as a five-year history on past
production from the farm securing the loan. The Bank also evaluates the cash
flow from the farm securing the loan, and the Bank's analysis of such cash flow
data is an important part of the underwriting decision. Nonetheless, such loans
are more
4
<PAGE>
difficult to evaluate. If the estimate of value proves to be inaccurate, the
Bank may be confronted with a property the value of which is insufficient to
assure full repayment in the event of default and foreclosure. The Bank seeks to
minimize these risks in a variety of ways, including limiting the size of such
loans, limiting the maximum loan to value ratio to 75% and strictly scrutinizing
the financial condition of the borrower and the quality of the collateral
securing the loan. All of the properties securing the Bank's nonresidential real
estate mortgage portfolio are inspected and appraised by the Bank's lending
personnel before the loan is made.
Commercial Real Estate Lending. The Bank occasionally originates loans secured
by commercial real estate. At June 30, 1998, $1.8 million, or 5.1%, of the
Bank's loan portfolio consisted primarily of two commercial real estate loans,
which represented a purchased participation in a commercial real estate loan
secured by a nursing home located in St. Peters, Missouri, a suburb of St.
Louis, and a purchased loan secured by Super 8 Motel located in Trenton,
Missouri, approximately 30 miles north of the Bank's main office. At June 30,
1998, these loans were performing in accordance to their terms.
Commercial real estate loans originated or purchased by the Bank may be either
fixed- or adjustable-rate loans with terms to maturity and amortization
schedules of up to 30 years. Commercial real estate loans are written in
amounts of up to 80% of the lesser of the appraised value of the property or the
sales price.
Appraisals on properties which secure commercial real estate loans are performed
by the Bank's employees or an independent appraiser designated by the Bank
before the loan is made. All appraisals on commercial real estate loans are
reviewed by the Bank's management. In underwriting such loans, the Bank
primarily considers the cash flows generated by the real estate to support the
debt service, the financial resources and income level of the borrower and the
Bank's experience with the borrower. In addition, the Bank's underwriting
procedures require verification of the borrower's credit history, an analysis of
the borrower's income, financial statements and banking relationships, a review
of the borrower's property management experience and references, and a review of
the property, including cash flow projections and historical operating results.
The Bank seeks to ensure that the property securing the loans will generate
sufficient cash flow to adequately cover operating expenses and debt service
payments.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to four-family
residential lending. Nevertheless, loans secured by such properties are
generally larger, more difficult to evaluate and monitor and, therefore
generally, involve a greater degree of risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate are
often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate
market or the economy. If the cash flow from the project is reduced, the
borrower's ability to repay the loan might be impaired. The Bank has attempted
to minimize these risks by lending primarily to the ultimate user of the
property or on existing income-producing properties.
Consumer and Other Lending. Investors Federal originates a limited variety of
consumer loans, primarily direct automobile loans. The Bank currently
originates substantially all of its consumer loans in its primary market area.
The Bank also occasionally purchases consumer and other loans originated by
other financial institutions. Such purchased loans include adjustable rate
loans guaranteed by the SBA and FHA insured Title I home improvement loans.
The primary component of the Bank's consumer loan portfolio consists of
automobile loans secured by both new and used cars and light trucks. The Bank
originates automobile loans on a direct basis, where the Bank extends credit
directly to the borrower. The Bank's automobile loans generally have terms that
do not exceed six years and carry a fixed-rate of interest. Generally loans on
new vehicles are made in amounts up to 80% of cost and loans on used vehicles
are made in amounts up to 90% of the vehicles' "Black Book" value, as published
by the Hearst Business Media Corporation. Collision and comprehensive insurance
coverage is required on all automobile loans.
5
<PAGE>
The Bank also purchases FHA home improvement loans, which are fixed-rate with
terms ranging from one to fifteen years. Principal and interest payments on
such loans are 100% guaranteed to investors, such as the Bank, by the
Department of Housing and Urban Development, a department of the United States
Government. At June 30, 1998, the Bank's purchased FHA home improvement loan
portfolio consisted of four FHA loan packages, with fixed rates ranging
between 9.25%-10.25% in the aggregate amount of $936,000, representing 2.6% of
the Bank's total loan portfolio.
The Bank also purchases adjustable rate loans guaranteed by the SBA, an
independent agency of the Federal Government. Such loans are generally
originated by financial institutions to small- and medium-sized businesses, with
interest rates that adjust monthly or quarterly based on the prime rate. SBA-
guaranteed loans generally have terms ranging from seven to 25 years depending
on the use of the proceeds. The principal and interest on such loans is 90%
insured by the Small Business Administration and the Bank has limited its
purchases to the guaranteed portion of such loans. Such loans are generally
sold at a premium to par value primarily due to the SBA's guarantee. As of June
30, 1998, the Bank's purchased SBA-guaranteed loan portfolio consisted of three
loans in the aggregate amount of $952,000, representing 2.7% of the Bank's total
loan portfolio.
Finally, the Bank has originated a small number of loans for the purchase of
farm equipment. Such loans are generally secured by chattel and equipment and
generally are originated as fixed-rate loans with terms of less than five years.
Consumer loans vary according to the type and value of collateral, length of
contract and creditworthiness of the borrower. The underwriting standards
employed by the Bank for originated consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, in relation to the proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or are secured by
rapidly depreciable assets, such as automobiles. Further, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. At
June 30, 1998, $10,000 in consumer loans were non-performing. There can be no
assurances, however, that delinquencies will not increase in the future.
6
<PAGE>
Loan Maturity Schedule
The following schedule illustrates the contractual maturity and weighted average
rates of the Bank's total loan portfolio at June 30, 1998. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
scheduled payments, possible prepayments or enforcement of due-on-sale clauses.
The total amounts of loans due after June 30, 1999 that have predetermined
interest rates is $11.2 million, and that have floating or adjustable rates is
$24.4 million.
<TABLE>
<CAPTION>
Multifamily,
Commercial &
One- to Four Family Nonresidential Real Estate Consumer and Other Total
-------------------- -------------------------- ------------------ ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ----- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During Years Ending June 30,
- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 (1)..................... $ 551 7.60% $ 181 8.00% $ 842 9.04% $ 1,574 8.42%
2000......................... 113 8.83 14 9.32 402 9.69 529 9.49
2001......................... 234 8.47 8 9.62 645 9.48 887 9.22
2002 to 2003................. 944 7.55 19 10.90 1,249 8.72 2,212 8.24
2004 to 2008................. 3,501 8.55 1,560 9.38 1,031 9.23 6,092 8.88
2009 to 2023................. 15,689 8.21 2,872 8.35 1,057 7.28 19,618 8.18
2024 and following........... 4,601 7.61 - - 69 7.35 4,670 7.61
------- ------ ------ -------
$25,633 8.28% $4,654 9.00 $5,295 10.17 $35,582 8.22%
======= ====== ====== =======
</TABLE>
________________________
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
7
<PAGE>
Origination, Purchases and Sales of Loans
Loan originations are developed from continuing business with depositors and
borrowers, soliciting realtors, builders, walk-in customers and third-party
sources. The Board of Directors of the Bank has authorized certain officers to
originate loans within specified underwriting limits. Specifically, Bank
officers may originate loans secured by single-family, owner occupied residences
up to $100,000 (based on a 60% LTV ratio), up to $87,500 (based on a 70% LTV
ratio), up to $82,500 (based on a 75% LTV ratio), up to $80,000 (based on an 80%
LTV ratio), and up to $72,000 (based on a 90% LTV ratio). All loans over
$100,000 require action by the Bank's Loan Committee and all loans originated
over a 90% LTV ratio require action by the Bank's Loan Committee. In addition,
the full Board of Directors meets monthly to review all real estate loans made
by officers of the Bank.
While the Bank originates both adjustable-rate and fixed-rate loans, its ability
to originate loans to a certain extent is dependent upon the relative customer
demand for loans in its market, which is affected by the interest rate
environment, among other factors. For fiscal year 1998, the Bank originated
$7.4 million in fixed-rate loans and $4.9 million in adjustable-rate loans.
In order to supplement local loan demand, the Bank also has purchased loans in
the secondary mortgage market. These loans have consisted of one- to four-
family residential mortgage loans secured by property located in the State of
Missouri, although the Bank's purchased loan portfolio includes seasoned one- to
four-family residential mortgage loans secured by collateral located outside
Missouri. At June 30, 1998, $8.3 million, or 23.4%, of the Bank's total loan
portfolio consisted of purchased one- to four-family residential mortgage loans.
During the year ended June 30, 1998, the Bank purchased $2.7 million in one-to
four-family residential mortgage loans, $600,000 in multifamily residential
mortgage loans, and $1.4 million in commercial real estate loans, all of which
were collateralized by properties located in the State of Missouri.
The Bank generally does not sell in the secondary mortgage market residential
mortgage loans that it originates. In the years ended June 30, 1998 and 1997,
the Bank did not sell any originated mortgage loans; in the year ended June 30,
1996, the Bank sold $80,000 in one- to four-family residential mortgage loans.
The fixed rate residential one- to four-family mortgage loans originated by the
Bank are generally underwritten in conformity with the criteria established by
the FHLMC.
8
<PAGE>
Set forth below is a table showing the Bank's loan originations, purchases,
sales and repayments for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1998 1997 1996
-------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Originations by Type:
- ---------------------
Adjustable rate:
Real estate - one- to four-family.......... $ 3,943 $3,172 $3,068
- non-residential.................... 798 119 516
Non-real estate - consumer and commercial.. 200 200 -
------- ------ ------
Total adjustable-rate............... 4,941 3,491 3,584
------- ------ ------
Fixed rate:
Real estate - one- to four-family........... 2,683 1,848 2,144
- non-residential..................... 161 65 -
-commercial.......................... 249 35 -
Non-real estate - consumer and other........ 4,331 2,755 3,440
------- ------ ------
Total fixed-rate......................... 7,424 4,703 5,584
------- ------ ------
Total loans originated................... 12,365 8,194 9,168
------- ------ ------
Purchases:
- ----------
Real estate - one- to four-family............ 2,707 1,655 2,292
- multifamily (5 or more)............. 600
- commercial.......................... 1,350 -
Non-real estate - consumer................... 904
------- ------ ------
Total loans purchased..................... 4,657 2,559 2,292
------- ------ ------
Sales and Repayments:
- ---------------------
Real estate - one- to four-family............ - - 80
------- ------ ------
Total loans sold......................... - - 80
Principal repayments......................... 11,609 9,198 9,086
------- ------ ------
Total reductions........................ 11,609 9,198 9,086
Increase (decrease) in other items, net....... (65) (3) (11)
------- ------ ------
Net increase (decrease)................ $ 5,348 $1,552 $2,283
======= ====== ======
</TABLE>
Asset Quality
The Bank's collection procedures provide that when a real estate loan is past
due 15 days, a delinquent notice is sent requesting payment. If a payment is
more that 30 days past due then personal contact is made by the collection
officer. If the deed of trust calls for a right-to-cure notice, then the
required notice is mailed by certified mail and regular mail when the loan
becomes 30 days past due. Personal contact is continued on all delinquent real
estate loans until the loan is completely current.
9
<PAGE>
With respect to consumer loans, a delinquent notice is sent requesting payment
five days after the due date. If payment is not made by the 30th day after it
is due, the Bank sends a right to cure letter by certified mail and by regular
mail. If consumer loans are not resolved by 90 days, the account is put on non-
accrual status and repossession and /or legal action is normally initiated.
Real estate loans of 60 days or more past due and consumer loans of 30 days or
more past due are reported monthly to the Board of Directors. For both consumer
loans and real estate loans, the Bank officer has authority to begin foreclosure
and/or repossession procedures at any time he feels it necessary or advisable.
At June 30, 1998, the percentage of total loans delinquent 90 days or more to
total loans was 1.4% and the percentage of total loans delinquent 60 to 89 days
to total loans was 0.5%.
Delinquent Loans and Non-performing Assets. Loans are reviewed on a regular
basis and are placed on non-accrual status when, in the opinion of management,
the collection of additional interest is doubtful. Mortgage and consumer loans
are placed on non-accrual status when principal is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. The loan will remain on non-accrual status
until the loan is brought current.
Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is
classified as real estate owned until such time as it is sold. When real estate
owned is acquired, it is recorded at the lower of the unpaid principal balance
of the related loan, or its fair value, less estimated selling expenses. Any
further write-down of real estate owned is charged against earnings. At June
30, 1998, the Bank had no property classified as real estate owned.
The following table sets forth information with respect to the Bank's delinquent
loans at June 30, 1998.
<TABLE>
<CAPTION>
Loans Delinquent For
--------------------------------------------------------------------
60-89 Days 90 Days and Over Loans Total Delinquent
------------------------------ ----------------------------- ------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ----- ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family..... 5 160 .62% 3 203 .79% 8 363 1.41%
Nonresidential real
estate................. - - - 2 141 6.30 2 141 6.30
Consumer................ 3 2 .04 6 10 .19 9 12 .23
Home Improvement-FHA.... - - - 9 141 .15 9 141 .15
- ---- -- ---- -- ----
Total................ 8 $162 .46% 20 $495 1.39% 28 $657 1.85%
= ==== == ==== == ====
</TABLE>
The following table sets forth information regarding non-performing loans at the
dates indicated. As of the dates indicated, the Bank had no material
restructured loans within the meaning of SFAS No. 15 and no real estate owned.
In addition, as of the dates indicated, the Bank had no accruing loans that were
delinquent more than 90 days. All loans over 90 days past due are classified as
non-accrual.
<TABLE>
<CAPTION>
At June 30,
--------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family $203 $ 57 $ 25
Nonresidential real estate................... 141 146 93
Consumer..................................... 10 21 10
Home Improvement-FHA......................... 141 - -
---- ---- ----
Total..................................... $495 $224 $128
==== ==== ====
Total non-accruing loans as a percentage to
total assets................................... .65% .37% .24%
==== ==== ====
</TABLE>
10
<PAGE>
For the year ended June 30, 1998, gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to $52,154. The amount that was included in interest
income on such loans was $33,101 for the year ended June 30, 1998.
Classified Assets. Federal regulations provide for the classification of loans
and other assets, such as debt and equity securities, considered by the OCC to
be of lesser quality, as "substandard," "doubtful" or "loss". An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured 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.
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem
assets as "loss," it is required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to charge-off
such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
regulatory authorities, who may order the establishment of additional general or
specific loss allowances.
In connection with the filing of its periodic reports with the OCC and in
accordance with its classification of assets policy, the Bank reviews loans in
its portfolio quarterly to determine whether such assets require classification
in accordance with applicable regulations.
On the basis of management's review of its assets, at June 30, 1998, the Bank
had classified a total of $228,000 of its loans and other assets as follows:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
(In Thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Special Mention.......... $ - $ - $ -
Substandard.............. 223 210 378
Doubtful................. 1 16 -
Loss..................... 4 2 4
---- ---- ----
Total................. $228 $228 $382
==== ==== ====
General loss allowance... $324 $285 $279
==== ==== ====
Specific loss allowance.. $ - $ - $ 4
==== ==== ====
Charge-offs $ 53 $ 3 $ 8
==== ==== ====
</TABLE>
11
<PAGE>
Other Loans of Concern. In addition to the non-performing loans set forth in the
tables above, as of June 30, 1998, there were no loans classified by the Bank
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories.
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the amount of
loans outstanding and other factors that warrant recognition in providing for an
adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the lower of
cost or fair value minus estimated cost to sell. If fair value at the date of
foreclosure is lower than the balance of the related loan, the difference will
be charged-off to the allowance for loan losses at the time of transfer.
Valuations are periodically updated by management and if the value declines, a
specific provision for losses on such property is established by a charge to
operations. At June 30, 1998, the Bank had no properties that were acquired
through foreclosure.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At June 30, 1998, the bank had a total allowance for loan losses
of $324,000, representing 65.5% of total non-performing loans and .92% of the
Bank's loans receivable, net.
The following table sets forth the allocation for loan losses by category at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
of Loans of Loans Of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............ $271 $25,633 72.04% $236 $23,386 77.35% $225 $22,798 79.49%
Multifamily (5 or more)........ - 589 1.65 - - - - - -
Commercial real estate ........ - 1,828 5.14 - 471 1.56 - 369 1.29
Non-residential real estate ... 14 2,237 6.29 15 1,729 5.72 19 1,955 6.81
Consumer and other............. 39 5,295 14.88 34 4,647 15.37 39 3,559 12.41
---- ------- ------ ---- ------- ------ ---- ------- ------
Total......................... $324 $35,582 100.00% $285 $30,233 100.00% $283 $28,681 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
</TABLE>
12
<PAGE>
The following table sets forth information with respect to the Bank's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
As of June 30,
--------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $285 $283 $ 81
---- ---- ----
Charge-offs:
Consumer and other............................ (65) (3) (11)
Recoveries:....................................
Consumer and other............................ 13 5 3
---- ---- ----
Net charge-offs................................ (53) 2 (8)
Additions charged to operations................ 91 - 210
---- ---- ----
Balance at end of period....................... $324 $285 $283
==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period... .15% (.01%) .03%
==== ====== ====
Ratio of net charge-offs during the period to
average non-performing assets................. (18.34%) (1.13%) 9.51%
======== ======= =====
</TABLE>
Investment Activities
General. National Banks have the authority to invest in types of assets
including U.S. Treasury obligations, securities of various federal agencies,
certain certificates of deposits of insured banks and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds. Subject
to various restrictions, national banks may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a national bank is otherwise
authorized to make directly.
The investment policy of the Bank, as established by the Board of Directors, is
to invest funds among various categories of investments and maturities based
upon the Bank's liquidity needs, asset/liability management policies, investment
quality, marketability and performance objectives.
Mortgage-backed Securities. The Bank purchases mortgage-backed securities
primarily to supplement its lending activities, to generate positive interest
rate spreads on large principal balances with minimal administrative expense, to
lower the credit risk of the Bank as a result of the guarantees provided by
FHLMC, FNMA and GNMA and to generally assist in managing the interest rate risk
of the Bank. The Bank has invested primarily in federal agency securities,
principally FHLMC, FNMA, and GNMA obligations. In addition, the Bank invests in
collateralized mortgage obligations ("CMOs") and participations in Small
Business Administration pools. Included in the Bank's mortgage-backed
securities portfolio are real estate mortgage investment conduits which mature
in 2007 through 2027 and have adjusting interest rates based on a variety of
interest rate indices. At June 30, 1998, the Bank's investment in mortgage-
backed securities totaled $29.5 million, or 38.7% of its total assets. At June
30, 1998, all of the Bank's mortgage-backed securities were classified as
available-for-sale. The portfolio had coupon rates ranging from 5% to 8.565%
and had a weighted average rate of 6.65% at June 30, 1998.
13
<PAGE>
On November 15, 1995, the FASB issued a FASB Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." The Special Report allows for a "one-time
reclassification" of securities as of a single date between November 15, 1995
and December 31, 1995. In December 1995, the Bank reclassified approximately
$8.1 million of mortgage-backed securities from the held to maturity
classification to the available for sale classification. The estimated fair
value of the Bank's mortgage-backed securities available for sale at June 30,
1998, was $29.5 million.
The FHLMC, FNMA and GNMA certificates are modified pass-through mortgage-backed
securities that represent undivided interests in underlying pools of fixed-rate,
or certain types of adjustable-rate, single-family residential mortgages issued
by these government-sponsored entities. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, i.e., fixed rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. FHLMC provides the certificate holder a guarantee of timely payments of
interest and ultimate collection of principal, whether or not they have been
collected. GNMA's guarantee to the holder of timely payments of principal and
interest is backed by the full faith and credit of the United States Government.
FNMA is a private corporation chartered by Congress which guarantees the timely
payment of principal and interest on FNMA securities, which are indirect
obligations of the United States Government. At June 30, 1998, $10.2 million of
the Bank's CMOs and REMICs were guaranteed by FNMA or FHLMC, and the remaining
$524,000 of CMOs and REMICs were guaranteed by private mortgage insurance
companies.
Collateralized mortgage obligations include real estate mortgage investment
conduits, and are securities created by segregating or partitioning cash flows
from mortgage pass-through securities or from pools of mortgage loans. CMOs
provide a broad range of mortgage investment vehicles by tailoring cash flows
from mortgages to meet the varied risk and return preferences of investors.
CMOs are typically issued by a special purpose entity that may be organized in a
variety of legal forms, such as a trust, a corporation or a partnership. REMICs
may be sponsored by private issuers, such as mortgage bankers or money center
banks, or by U.S. Government agencies and government-sponsored entities. At
June 30, 1998, the Bank's portfolio of REMICs included an investment in the
Huntington Residential Mortgage Trust, which consists of a pool of fixed-rate
mortgage loans. At June 30, 1998, the aggregate book value and aggregate market
value of the Bank's investment in this security was $340,429. CMOs are
collateralized by mortgage loans or mortgage-backed securities that are
transferred to the CMO trust or pool by a sponsor. The issue is structured so
that collections from underlying collateral provide a cash flow to make
principal and interest payment on the obligation, or "tranches," of the issuer.
The Bank's investment in CMOs is in the fixed rate classes with scheduled
repayments and weighted average lives ranging up to five years at the time of
purchase, and in the floating rate classes which reset monthly based on the
applicable index.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Bank. These types of securities also permit
the Bank to optimize its regulatory capital because they have low risk
weighting.
OCC Banking Circular 228 requires that institutions classify mortgage derivative
products acquired, including REMICs and certain tranches of CMOS, as "high-risk
mortgage derivatives: if such products exhibit greater price volatility than a
bench mark fixed-rate 30-year mortgage-backed pass-through security.
Institutions may only hold high-risk mortgage securities to reduce interest-rate
risk in accordance with safe and sound practices and must also not have any
securities that would be identified under OCC Banking Circular 228 as "high-risk
mortgage securities." The Bank also evaluates its mortgage-backed securities
portfolio annually for compliance with applicable regulatory requirements,
including testing for identification of high risk investments pursuant to
Federal Financial Institutions Examination Council standards.
14
<PAGE>
Of the Bank's $29.5 million mortgage-backed securities portfolio at June 30,
1998, substantially all had contractual maturities over six years. The actual
maturity of a mortgage-backed security may be less than its stated maturity due
to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally are
the most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Bank may be subject to reinvestment risk because, to the extent that the Bank's
mortgage-backed securities amortize or prepay faster than anticipated, the Bank
may not be able to reinvest the proceeds of such repayments and prepayments at a
comparable rate. In contrast to mortgage-backed securities in which cash flow
is received (and hence, prepayment risk is shared) prorata by all securities
holders, the cash flow from the mortgages or mortgage-backed securities
underlying REMICs are segmented and paid in accordance with a predetermined
priority to investors holding various tranches of such securities or
obligations. A particular tranche of REMICs may therefore carry prepayment risk
that differs from that of both the underlying collateral and other tranches.
The Bank also invests in SBA-guaranteed loan participation certificates, which
represent participations in a pool of SBA loans. Such certificates are
purchased by the Bank from brokers which purchase the individual loans directly
from the originators and pool such loans for sale to investors. The Small
Business Administration is authorized by the Small Business Act to guarantee a
certain percentage of the loan amount made by financial institutions to
qualifying small businesses. Only the guaranteed portion of the loan is sold
into the secondary market as a loan or pooled security. Accordingly, the
certificates purchased by the Bank are 100% guaranteed by the full faith and
credit of the United States Government.
Loans in a pool must be fully disbursed and current when the pool is formed and
the minimum aggregate principal balance of the guaranteed portion outstanding at
the time of certificate issuance is $1 million. At least four guaranteed
portions are in each pool and no individual loan may constitute more than 25% of
the pool. The pools are closed end with no substitutions of guaranteed portions
that prepay or default.
The guaranteed portion of a given pool must be all fixed or all variable rate.
The certificates purchased by the Bank generally are adjustable rate and adjust
at a specified discount to the prime rate. While the SBA guarantee eliminates
credit risk, the Bank is subject to the risk that certificates will prepay.
Certificates are available with interim and/or lifetime interest rate caps. In
exchange for accepting the cap, the prices of the certificates to the Bank are
lower. Prepayments on capped pools are generally expected to be less than
uncapped pools because lenders generally offer interest rate caps only to their
most credit-worthy customers.
15
<PAGE>
Set forth below is a table showing the Bank's purchases, sales and repayments of
mortgage-backed securities and mortgage related securities for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Purchases:
- ---------
Adjustable-rate mortgage-backed securities (1)......................... $ 6,985 $ 726 $1,311
Mortgage related securities:
CMO/REMIC-adjustable-rate............................................ 9,025 2,367 2,395
SBA pools-adjustable-rate............................................ 2,191 3,166 5,013
SBA pools-fixed-rate................................................. - - 645
------- ------ ------
Total purchases.................................................... 18,201 6,259 9.364
Sales:
- -----
Adjustable-rate mortgage-backed securities (1)......................... 489 1,336 1,177
Mortgage related securities:
CMO/REMIC-adjustable-rate............................................ 970 500 302
SBA pools-adjustable-rate............................................ - - 754
------- ------ ------
Total sales........................................................ 1,459 1,836 2,233
Principal Repayments:
- --------------------
Adjustable-rate mortgage-backed securities (1)......................... 2,152 1,428 2,360
Mortgage related securities:
CMO/REMIC-adjustable-rate............................................ 1,949 282 159
CMO/REMIC-fixed-rate................................................. - 7 63
SBA pools-adjustable-rate............................................ 1,692 1,104 258
SBA pools-fixed-rate................................................. 168 180 52
------- ------ ------
Total principal repayments......................................... 5,961 3,001 2,892
Increase (decrease) in other items, net................................. 212 108 29
------- ------ ------
Net increase (decrease)................................................ $10,993 $1,530 $4,268
........................................................................ ======= ====== ======
</TABLE>
- ------------------------------------------
(1) Consists of pass-through securities.
16
<PAGE>
The following table sets forth the composition of the Bank's mortgage-backed
securities portfolio at the date indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
held-to-maturity: (1)
GNMA....................... $ - -% $ - -% $ - -%
FNMA....................... - -
FHLMC...................... - - - - - -
CMOs/REMICs................ - - - - - -
Mortgage-backed securities
available for sale:
GNMA....................... 2,842 9.64% 1,220 6.59% 1,163 6.85%
FNMA....................... 5,626 19.08 3,183 17.20 4,542 26.76
FHLMC...................... 1,756 5.95 1,520 8.22 2,240 13.20
CMOs/REMICs................ 10,733 36.39 4,596 24.84 2,982 17.57
SBA pools.................. 8,282 28.08 7,786 42.09 5,846 34.45
------- ------ ------- ------ ------- ------
29,239 99.14% 18,305 98.94% 16,773 98.83%
Unamortized premium
(discounts), net........... 256 .86 196 1.06 198 1.17
------- ------ ------- ------ ------- ------
Total..................... $29,495 100.00% $18,501 100.00% $16,971 100.00%
======= ====== ======= ====== ======= ======
- --------------------------
(1) By June 30, 1996, pursuant to SFAS No. 115, the Bank had classified all of its mortgage-backed securities as available
for sale.
</TABLE>
Other Investments. At June 30, 1998, the Bank's investment securities other
than mortgage-backed securities consisted of federal agency obligations,
municipal bonds, FHLB stock and other FHLB interest-earning assets, FRB stock,
FNMA & FHLMC Preferred Stock, Merrill Lynch stock and interest-earning deposits
with other financial institutions. In addition, in recent years, the Bank has
also invested in certain mutual funds whose assets conform to the investments
that a national bank is otherwise authorized to make directly. The Bank's
investments in mutual funds includes an investment in the Federated United
States Government Securities Fund. As of June 30, 1998, the aggregate book
value and aggregate market value of the Bank's investment in this mutual fund
was $383,000.
OCC regulations restrict investments in corporate debt and equity securities by
the Bank. These restrictions include prohibitions against investments in the
debt securities of any one issuer in excess of 10% of the Bank's unimpaired
capital and surplus. At June 30, 1998, the Bank was in compliance with this
regulation.
17
<PAGE>
The following table sets forth the composition of the Company's investment
securities, net of premiums and discounts, at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1998 1997 1996
----------------- ---------------- -----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
Federal agency obligations................ $ - -% $ 496 6.31% $ - -%
Municipal bonds........................... 245 3.61 215 2.73 215 5.11
Bankers Acceptances....................... - - 998 12.69 - -
US Treasury Notes......................... - - 500 6.36 - -
------ ------ ------ ------ ------ ------
Subtotal.............................. 245 3.61 2,209 28.09 $ 215 5.11
Investment securities available for sale:
FHLB Zero Coupon Bond...................... 573 8.43 93 1.18
Federal agency obligations................. 599 8.82 1,575 20.02 962 22.89
------ ------ ------ ------ ------ ------
Subtotal.............................. 1,417 20.86 3,877 49.29 1,177 28.00
Equity securities:
FHLB stock................................ 1,554 22.87 814 10.35 724 17.23
FRB stock................................. 83 1.22 83 1.06 - -
Mutual funds.............................. 1,491 21.95 1,395 17.72 1,308 31.12
FNMA preferred stock...................... 1,045 15.38 1,034 13.15 994 23.65
FHLMC preferred stock..................... 689 10.14 663 8.43 - -
Merrill Lynch Preferred stock............. 515 7.58 - - - -
------ ------ ------ ------ ------ ------
Total debt and equity securities........ $6,794 100.00% $7,866 100.00% $4,203 100.00%
Average remaining life of
debt securities........................... 9.92 YEARS 3.74 YEARS 6.68 YEARS
Other interest-earning assets:
Interest-earning deposits................. $2,995 100.00% $2,422 100.00% $1,609 100.00%
Certificates of deposit................... - - - - - -
------ ------ ------ ------ ------
Total.................................. $2,995 100.00% $2,422 100.00% $1,609 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Investment Portfolio Maturities. The following table sets forth the scheduled
maturities, carrying values, market values and average yields for the Company's
debt securities at June 30, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------
Less than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
--------- --------- --------- --------- ---------------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Municipal securities......... $ 215 $ - $ - $ 30 $ 245 $ 245
Federal agency obligations... - 499 100 - 599 600
Mortgage-backed securities... - - 2,543 26,951 29,494 29,494
Banker's acceptance.......... - - - - - -
US Treasury.................. - - - - - -
FHLB zero coupon bond........ - - - 573 573 573
--------- ------ ------ ------- ------- -------
Total investment securities.. $ 215 $ 499 $2,643 $27,554 $30,911 $30,912
========= ====== ====== ======= ======= =======
Weighted average yield....... 5.84% 6.18% 7.23% 6.06% 6.33% 6.33%
</TABLE>
18
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, receipt of principal
and interest on loans and securities, FHLB advances, and other funds provided
from operations.
FHLB advances are used to support lending activities and to assist in the Bank's
asset/liability management strategy. Typically, the Bank does not use other
forms of borrowings. At June 30, 1998, the Bank had $31.1 million in FHLB
advances.
Deposits. Investors Federal offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook,
demand, NOW, money market deposit and certificate accounts. The certificate
accounts currently range in terms from 91 days to eight years.
The Bank relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. Currently, Investors
Federal solicits deposits from its market area only, and does not use brokers to
obtain deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest rates and
competition.
The Bank has become more susceptible to short-term fluctuations in deposit flows
as customers have become more interest-rate conscious. The Bank endeavors to
manage the pricing of its deposits in keeping with its profitability objectives
giving consideration to its asset/liability management. Notwithstanding the
foregoing, a significant percentage of the Bank's deposits are for terms of less
than one year. At June 30, 1998, $13.9 million, or 64.5% of the Bank's
certificates of deposit were in certificates of deposit with terms of 12 months
or less. The Bank believes that upon maturity most of these deposits will
remain at the Bank. The ability of the Bank to attract and maintain savings
accounts and certificates of deposit, and the rates paid on these deposits, has
been and will continue to be significantly affected by market conditions.
Savings Portfolio
The following table sets forth the dollar amount of savings deposits with
various types of deposit programs offered by the Bank at the periods indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Transaction Accounts and Savings Deposits:
- -----------------------------------------
Savings deposits............................ $ 2,572 7.28% $ 2,526 7.21 $ 2,607 7.32%
Demand and NOW deposits..................... 4,295 12.16 4,165 11.89 3,824 10.74
Money market deposit accounts............... 6,830 19.33 6,982 19.92 7,301 20.51
------- ------ ------- ------ ------- ------
Total non-certificate accounts.............. 13,697 38.77 13,673 39.02 13,732 38.57
------- ------ ------- ------ ------- ------
Certificates:
- ------------
0.00 - 3.99%................................ - - 8 .02 39 .11
4.00 - 5.99%................................ 18,558 52.52 17,252 49.23 16,839 47.30
6.00 - 7.99%................................ 2,966 8.39 4,014 11.45 4,554 12.79
8.00 - 9.99%................................ 34 .10 33 .10 331 .93
------- ------ ------- ------ ------- ------
Total certificates.......................... 21,558 61.01 21,307 60.80 21,763 61.13
------- ------ ------- ------ ------- ------
Accrued interest............................ 79 .22 64 .18 103 .30
------- ------ ------- ------ ------- ------
Total deposits.............................. $35,334 100.00% $35,044 100.00% $35,598 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
19
<PAGE>
Deposit Activity
The following table sets forth the deposit activities of the Bank for the
periods indicated:
Years Ended June 30,
--------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Opening balance.............. $ 34,980 $ 35,495 $ 35,210
Deposits..................... 76,064 81,054 72,437
Withdrawals.................. (76,937) (82,781) (73,237)
Interest Credited............ 1,148 1,212 1,085
-------- -------- --------
Ending balance............... $ 35,255 $ 34,980 $ 35,495
======== ======== ========
Net increase (decrease)...... $ 275 $ (515) $ 285
======== ======== ========
Percent increase (decrease).. .79% (1.45)% .81%
======== ======== ========
Time Deposit Maturity Schedule
The following table shows weighted average rate and maturity information for the
Bank's certificates of deposit as of June 30, 1998.
Certificate accounts maturing in Weighted
-------------------------------- Total Average Percent of
quarter ending: Balance Rate Total
-------------- ------- --------- -----------
(Dollars in Thousands)
September 30, 1998.............. $ 5,584 5.41% 25.92%
December 31, 1998............... 4,397 5.47 20.40
March 31, 1999.................. 1,988 5.43 9.22
June 30, 1999................... 1,932 5.59 8.96
September 30, 1999.............. 821 5.63 3.81
December 31, 1999............... 1,124 5.91 5.22
March 31, 2000.................. 1,073 5.89 4.98
June 30, 2000................... 1,380 6.00 6.40
September 30, 2000.............. 682 5.66 3.16
December 31, 2000............... 660 5.94 3.06
March 31, 2001.................. 485 5.89 2.25
June 30, 2001................... 455 5.85 2.11
Thereafter...................... 977 5.71 4.51
------- ------
Total........................ $21,558 5.59 100.00%
======= ======
20
<PAGE>
The following table indicates the amount of the Bank's certificates of deposit
and other deposits by time remaining until maturity as of June 30, 1998.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or less Months Months Months Total
------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificates of deposit less
than $100,000................................ $5,108 $4,048 $3,401 $6,981 $19,538
Certificates of deposit of
$100,000 or more............................. 806 214 357 544 1,921
Public Funds (1)............................... 22 77 - - 99
------ ------ ------ ------ -------
Total certificates of deposit................ $5,936 $4,339 $3,758 $7,525 $21,558
====== ====== ====== ====== =======
</TABLE>
- ----------------------------------
(1) Deposits from governmental and other public entities.
Borrowings. Investors Federal's borrowings historically have consisted of
advances from the FHLB of Des Moines. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At June 30, 1998, the Bank had $31.1 million in
advances from the FHLB with maturities from July 1998 to May 2013, which
included a daily line of credit from the FHLB of $2.5 million. The line of
credit's interest rate is based upon the FHLB's average Fed Funds rate plus 20
basis points, and adjusts daily. As of June 30, 1998, the interest rate on the
line of credit was 6.4% and the Bank had a line of credit available of $3
million. The Bank has the ability to purchase additional capital stock from the
FHLB.
For the years ended June 30, 1998, 1997, and 1996, the Bank had maximum balances
of FHLB advances of $31.1 million, $16.3 million, and $14.5 million,
respectively. The average balances of such advances for such periods were $22.2
million, $12.8 million, and $11.1 million for the years ended June 30, 1998,
1997, and 1996, respectively. For such periods, the Bank did not have any other
borrowings or any securities sold under agreements to repurchase. At June 30,
1998, 1997, and 1996, the Bank's balance of FHLB advances was $31.1 million,
$16.3 million, and $13.5 million, respectively, and the weighted average
interest rate of such advances was 5.86%, 6.25%, and 6.19%, respectively.
Employees
At June 30, 1998, the Bank had 16 full-time and 8 part-time employees. The
Bank's employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
Service Corporation Activities
The Bank is able to invest unlimited amounts in subsidiaries that are engaged in
activities in which the parent bank may engage. In addition, a national bank
may invest limited amounts in subsidiaries that provide banking services, such
as data processing, to other financial institutions. At June 30, 1998,
Investors Federal had one subsidiary, Investors Federal Service Corporation, a
Missouri corporation, which was established in June 1992 for the primary purpose
of offering credit life, health and accident insurance to its customers. The
Bank is now offering such products directly and the subsidiary is largely
inactive.
21
<PAGE>
REGULATION
General
Investors Federal is a national bank and its deposits are federally insured by
the full faith and credit of the United States Government. Accordingly, the
Bank is subject to broad federal regulation and oversight extending to all its
operations. The Bank is a member of the FHLB of Des Moines and the Federal
Reserve System. As the bank holding company of the Bank, the Holding Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary national banks. The Bank is a member of the SAIF. The deposits of
the Bank are insured by the SAIF of the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Bank.
The Bank is subject to supervision, examination and regulation by the OCC and to
OCC regulations governing such matters as capital standards, mergers,
establishment of branch offices, subsidiary investments and activities and
general investment authority, and it is subject to the FDIC's authority to
conduct special examinations. The Bank is required to file reports with the OCC
concerning its activities and financial condition and will be required to obtain
regulatory approvals prior to entering into certain transactions, including
mergers with, or acquisitions of, other depository institutions.
Insurance of Accounts and Regulation by the FDIC
Investors Federal 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 U.S. 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 banks, after
giving the OCC an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums, ranging from 0% to .27% 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 core capital to risk-weighted assets of at least 6% and a
risk-based capital ratio of at least 10%) and considered healthy would pay the
lowest premium while institutions that are less than adequately capitalized
(i.e., a core capital or core capital to risk-based capital ratios of less than
4% or a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern would pay the highest premium. Risk classification of all
insured institutions will be made by the FDIC for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semi-annual basis, if
it determines that the reserve ratio of the SAIF will be less that 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.
22
<PAGE>
In September 1996, Congress enacted legislation to recapitalize the SAIF by a
one-time assessment on SAIF-insured deposits held as of March 31, 1996. The
assessment was 65.7 basis points per $100 in deposits, payable on November 30,
1996. For the Bank, the assessment amounted to $226,000, based on the Bank's
deposits held as of March 31, 1995. In addition, beginning January 1, 1998,
pursuant to the legislation, interest payments on FICO bonds issued in the late
1980's by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation will be paid jointly by BIF-insured
institutions and SAIF-insured institutions. The FICA assessment is 1.29 basis
points per $100 in BIF deposits and 6.44 basis points per $100 in SAIF deposits.
Beginning January 1, 2000, the FICO interest payments will be paid pro-rata by
banks and thrifts based on deposits (approximately 2.4 basis points per $100 in
deposits).
The legislation further provides that the BIF and SAIF will merge on January 1,
1999 if there are no more savings associations as of that date. Several bills
have been introduced in the current Congress that would eliminate the federal
thrift charter and OTS. The bills would require that all federal savings
associations convert to national banks or state depository institutions by no
later than January 1, 1998 in one bill and June 30, 1998 in the other and would
treat all state savings associations as state banks for purposes of federal
banking laws. Subject to a narrow grandfathering, all savings and loan holding
companies would become subject to the same regulation as bank holding companies
under the pending legislative proposals. Under such proposals, any lawful
activity in which a savings association participates would be permitted for up
to two years following the effective date of its conversion to the new charter,
with two additional one-year extensions which may be granted as the discretion
of the regulator. The legislative proposals would also abolish the OTS and
transfer its functions to the federal bank regulators with respect to the
institutions and to the Federal Reserve Board with respect to the regulation of
holding companies. The Bank is unable to predict whether the legislation will
be enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also unable to
predict whether the SAIF and BIF funds will eventually be merged.
While the legislation has reduced the disparity between premiums paid on BIF
deposits and SAIF deposits, and has relieved the thrift industry of a portion of
the contingent liability represented by the FICO bonds, the premium disparity
between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions will continue until at least January 1, 1999.
Regulatory Capital Requirement
The Bank is subject to the capital regulations of the OCC. The OCC's
regulations establish two capital standards for national banks: a leverage
requirement and a risk-based capital requirement. In addition, the OCC may, on
a case-by-case basis, establish individual minimum capital requirements for a
national bank that vary from the requirements which would otherwise apply under
OCC regulations. A national bank that fails to satisfy the capital requirements
established under the OCC's regulations will be subject to such administrative
action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier 1
capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMELS rating system for banks. National banks not rated composite 1
under the CAMELS rating system for banks are required to maintain a minimum
ratio of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the
level and nature of risks of their operations. For purposes of the OCC's
leverage requirement, Tier 1 capital generally consists of the same components
as core capital under the OTS's capital regulations, except that no intangibles
except certain purchased mortgage servicing rights and purchased credit card
relationships may be included in capital.
The risk-based capital requirement established by the OCC's regulations require
national banks to maintain "total capital" equal to at least 8% of total risk-
weighted assets. For purposes of the risk-based capital requirement, "total
capital" means Tier 1 capital (as described above) plus "Tier 2 capital" (as
described
23
<PAGE>
below), provided that the amount of Tier 2 capital may not exceed the amount of
Tier 1 capital, less certain assets. The components of Tier 2 capital under the
OCC's regulations generally correspond to the components of supplementary
capital under OTS regulations. Total risk-weighted assets generally are
determined under the OCC's regulations in the same manner as under the OTS's
regulations.
The OCC has revised its risk-based capital requirements to permit the OCC to
require higher level capital for an institution in light of its interest rate
risk. In addition, the OCC has proposed that a bank's interest rate risk
exposure would be quantified using either the measurement system set forth in
the proposal or the institution's internal model for measuring such exposure, if
such model is determined to be adequate by the institution's examiner. Small
institutions that are highly capitalized and have minimal interest rate risk,
such as the Bank would be exempt from the rule unless otherwise determined by
the OCC.
Bank Holding Companies. The Federal Reserve Board has established capital
requirements for bank holding companies with consolidated assets of $150 million
or more that generally parallel the capital requirements for national banks
under the OCC's regulations. Since the Holding Company's consolidated assets
are less than $150 million, the Federal Reserve Board's holding company capital
requirements do not apply to the Holding Company.
Limitations on Dividends and Other Capital Distributions
The Bank's ability to pay dividends are governed by the National Bank Act and
OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a national
bank from declaring a dividend on its shares of common stock until the surplus
fund equals the amount of capital stock or, if the surplus fund does not equal
the amount of capital stock, until one-tenth of the Bank's net profits for the
preceding half year in the case of quarterly or semi-annual dividends, or the
preceding two half-year periods in the case of annual dividends, are transferred
to the surplus fund. In addition, the prior approval of the OCC is required for
the payment of a dividend if the total of all dividends declared by a national
bank in any calendar year would exceed the total of its net profits for the year
combined with its net profits for the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a national
bank when it determines such payment to be an unsafe and unsound banking
practice. In addition, the National bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the National Bank
would be classified as "undercapitalized" under the OCC's regulations. Finally,
the National Bank, will not be able to pay dividends on its capital stock if its
capital would thereby be reduced below the remaining balance of the liquidation
account established in connection with the Stock Conversion.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution,
including the Bank, has a continuing and affirmative obligation consistent with
safe and sound banking practices to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OCC, in connection with the
examination of the Bank, to access the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OCC.
24
<PAGE>
The federal banking agencies, including the OCC, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment and
lending in its local community. The Bank was examined for CRA compliance in
1996 and received a rating of "satisfactory record of meeting community credit
needs."
Transactions with Affiliates
Generally, transactions between a bank or its subsidiaries and its affiliates
are required to be on terms as favorable to the bank as transactions with non-
affiliates. In addition, certain of these transactions, such as loans to an
affiliate, are restricted to a percentage of the bank's capital. Affiliates of
the Bank include the Holding Company and any company which is under common
control with the Bank. In addition, a bank may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OCC. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must
be made on terms substantially the same as for loans to unaffiliated
individuals.
Regulation of the Company
General. The Company, as the sole shareholder of the National Bank, is a bank
holding company registered with the FRB. Bank holding companies are subject to
comprehensive regulation by the FRB under the BHCA, and the regulations of the
FRB. As a bank holding company, the Company will be required to file reports
with the FRB and such additional information as the FRB may require, and will be
subject to regular examinations by the FRB. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe and unsound
practices.
Under FRB policy, a bank holding company must serve as a source of strength for
its subsidiary banks. Under this policy the FRB may require, and has required in
the past, a holding company to contribute additional capital to an
undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before: (i)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company: or (iii) merging or consolidating with
another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other
things, operating a savings institution, mortgage company, finance company,
credit card company or factoring company; performing certain data processing
operations; providing certain investment and financial advice; underwriting and
acting as an insurance agent for certain types of credit-related insurance;
leasing property on a full-payout, non-operating basis;
25
<PAGE>
selling money orders, travelers' checks and United States Savings Bonds; real
estate and personal property appraising; providing tax planning and preparation
services; and, subject to certain limitations, providing securities brokerage
services for customers. The Company has no present plans to engage in any of
these activities.
Interstate Banking and Branching. On September 29, 1994, the Reigle-Neal
Interstate Banking and Branching Act of 1994 (the "Act") was enacted to ease
restrictions on interstate banking. The Act allows the FRB to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of the bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Act also prohibits the FRB from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, as of June 1, 1998, the federal banking agencies are authorized to
approve interstate merger transactions without regard to whether such
transaction is prohibited by the law of any state, unless the home state of one
of the banks opts out of the Act by adopting a law after the date of enactment
of the Act and prior to June 1, 1998 which applies equally to all out-of-state
banks and expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.
The Act authorizes the OCC and FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The Act also requires the appropriate federal banking
agencies to prescribe regulations by June 1, 1998 which prohibit any out-of-
state bank from using the interstate branching authority primarily for the
purpose of deposit production. These regulations must include guidelines to
ensure that interstate branches operated by an out-of-state bank in a host state
are reasonably helping to meet the credit needs of the communities which they
serve.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized." See-"-Regulatory Capital
Requirements."
Bank holding companies are required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized
26
<PAGE>
standard for commercial banks, has a safety and soundness examination rating of
at least a "2" and is not subject to any unresolved supervisory issues.
Capital Requirements. The FRB has established capital requirements for bank
holding companies that generally parallel the capital requirements for national
banks. For bank holding companies with consolidated assets of less than $150
million, such as the Company, compliance is measured on a bank-only basis.
Federal Securities Law
The stock of the Company is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At June 30,
1998, the Bank was in compliance with these reserve requirements.
The Bank is a member of the Federal Reserve System and owns stock in the FRB of
Kansas City in an amount equal to 3% of the Bank's paid in capital and surplus
(an additional 3% will be subject to call by the FRB of Kansas City).
Federal Home Loan Bank System
The Bank is a member of the FHLB of Des Moines, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are
subject to the regulation and oversight of the Federal Housing Finance Board.
All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Des Moines. At June 30, 1998, the Bank had $1.6 million (at cost) of FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 7.22% and were 6.88% for fiscal 1998. For
the fiscal year ended June 30, 1998, dividends paid by the FHLB of Des Moines to
the Bank totaled approximately $79,000, which constitutes a $25,000 increase
over the amount of dividends received in fiscal year 1997. No assurance can be
given that such dividends will continue in the future at such levels. The Bank
currently intends to remain a member of the FHLB of Des Moines.
27
<PAGE>
Under federal law, the FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to low and moderately priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a corresponding reduction in the Bank's capital.
28
<PAGE>
Item 2. Description of Properties
-------------------------
The Bank conducts its business through its main office, located in
Chillicothe, Missouri and two branch offices, one located in Hamilton and one
located in Gallatin, Missouri. The following table sets forth information
relating to the Bank's offices as of June 30, 1998. The total net book value of
the Bank's premises and equipment (including land, buildings and leasehold
improvements and furniture, fixtures and equipment) at June 30, 1998 was
$417,000.
Total
Approximate Net Book Value
Date Square of Real Estate at
Location Acquired Footage June 30, 1998
- ---------------------------- -------- ------- ---------------
Main Office: 1966 3,910 $235,000
522 Washington Street
Chillicothe, Missouri 64601
Branch Offices: Leased 660 -
400 North Main (month-to-
Gallatin, Missouri 64640 month)
304 North Davis 1975 1,458 $ 17,000
Hamilton, Missouri 64644
Item 3. Legal Proceedings
-----------------
The Company and Investors Federal are involved, from time to time, as
plaintiff or defendant in various legal actions arising in the normal course of
their businesses. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing Investors Federal in the proceedings, that the
resolution of these proceedings should not have a material effect on the Holding
Company's financial position or results of operations on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1998.
29
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
--------------------------------------------------------------------
Matters
- -------
Page 46 of the attached 1998 Annual Report to Shareholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
Pages 5 to 14 of the attached 1998 Annual Report to Shareholders are
herein incorporated by reference.
Item 7. Financial Statements
--------------------
Pages 15 to 45 of the attached 1998 Annual Report to Shareholders are
herein incorporated by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
- --------------------
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
30
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
--------------------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the company's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on November 17, 1998.
There are no executive officers who are not also directors.
Item 10. Executive Compensation
----------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on November 17, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
November 17, 1998.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on November 17,
1998.
31
<PAGE>
PART IV
Item 13. Exhibits List and Reports on Form 8-K
-------------------------------------
(a)(1) Financial Statements:
The following information appearing in the Registrant's Annual Report to
Shareholders for the year ended June 30, 1998, is incorporated by reference in
this Form 10-KSB Annual Report as Exhibit 13.
Page in
Annual
Report
-------
Annual Report Section
---------------------
Report of Independent Auditors.......................................... 14
Consolidated Statements of Financial Condition at June 30, 1998 and
1997................................................................... 15
Consolidated Statements of Income for the Years ended June 30, 1998,
1997 and 1996.......................................................... 16
Consolidated Statements of Stockholder's Equity for the Years ended
June 30, 1998, 1997 and 1996........................................... 17
Consolidated Statements of Cash Flows for the Years ended June 30,
1998, 1997 and 1996.................................................... 18
Notes to Consolidated Financial Statements.............................. 21
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
(a)(3) Exhibits:
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
------ ----------------------------------- ---------------
2 Plan of acquisition, reorganization,
Arrangement, liquidation
or succession None
3 Certificate of Incorporation and
Bylaws *
4 Instruments defining the rights of
security holders, including debentures *
9 Voting trust agreement None
10.1 Employment Agreement with Earle S.
Teegarden, Jr. *
32
<PAGE>
10.2 Employment Agreement with Larry
R. Johnson *
10.3 Employee Stock Ownership Plan *
10.4 Profit Sharing Plan *
10.5 Stock Option and Incentive Plan 10.5
10.6 Recognition and Retention Plan 10.6
11 Statement re: computation of per
share earnings None
13 Annual Report to Shareholders 13
16 Letter re: change in certifying
accountant None
18 Letter re: change in accounting
principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters
Submitted to vote of
security holders None
23 Consent of experts and counsel 23
24 Power of attorney Not required
27 Financial Data Schedule 27
- --------------------------
*Filed on October 7, 1996 as exhibits to the Registrant's Form S-1
registration statement (Registration No. 333-13495), pursuant to the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
(b) Reports on Form 8-K:
----------------------
No current reports on Form 8-K were filed by the Company during the three
months ended June 30, 1998.
33
<PAGE>
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.
IFB HOLDINGS, INC.
Date: September 22, 1998 By: /s/ Earle S. Teegarden, Jr.
Earle S. Teegarden, Jr
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ Earle S. Teegarden, Jr. By: /s/ Larry R.Johnson
-------------------------------------------- ------------------------------------
Earle S. Teegarden, Jr, President Larry R. Johnson, Senior
Chief Executive Officer, Chief Financial Executive Vice-President,
Officer and Director Cashier and Secretary,and Director
Date: September 22, 1998 Date: September 22, 1998
By: /s/ Mark D. Buntin By: /s/ J. Michael Palmer
-------------------------------------------- ------------------------------------
Mark D. Buntin J. Michael Palmer, Director
(Principal Accounting Officer)
Date: September 22, 1998 Date: September 22, 1998
By: /s/ Robert T. Fairweather By: /s/ Armand J. Peterson
-------------------------------------------- ------------------------------------
Robert T. Fairweather, Director Armand J. Peterson, Director
Date: September 22, 1998 Date: September 22, 1998
By: /s/ Edward P. Milbank
--------------------------------------------
Edward P. Milbank, Director
Date: September 22, 1998
</TABLE>
34
<PAGE>
Exhibit 10.5
IFB HOLDINGS, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
1. Plan Purpose.
The purpose of the Plan is to promote the long-term interests of the
Corporation and its stockholders by providing a means for attracting and
retaining directors, advisory directors, officers and employees of the
Corporation and its Affiliates. It is intended that designated Options granted
pursuant to the provisions of this Plan to persons employed by the Corporation
or its Affiliates will qualify as Incentive Stock Options. Options granted to
persons who are not employees will be Non-Qualified Stock Options.
2. Definitions.
The following definitions are applicable to the Plan:
"Affiliate" - means any "parent corporation" or "subsidiary
corporation" of the Corporation, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
"Award" - means the grant of an Incentive Stock Option, a Non-Qualified
Stock Option, a Stock Appreciation Right, a Limited Stock Appreciation Right, or
any combination thereof, as provided in the Plan.
"Bank" - means Investors Federal Bank, National Association, and any
successor entity.
"Board" or "Board of Directors"- means the board of directors of the
Corporation or its Affiliate, as applicable.
"Change in Control" of the Bank or the Corporation means a change in
control of a nature that: (i) would be required to be reported in response to
Item 1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (ii) results in a Change in Control of the Bank or the
Corporation within the meaning of the Bank Holding Company Act of 1956, as
amended ("BHCA"), and applicable rules and regulations promulgated thereunder,
as in effect at the time of the Change in Control; or (iii) without limitation
such a Change in Control shall be deemed to have occurred at such time as (a)
any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of Corporation's
outstanding securities except for any securities purchased by the Bank's
employee stock ownership plan or trust; or (b) individuals who constitute the
Board on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided, however, that this subsection
(b) shall not apply if the Incumbent Board is replaced by the appointment by a
Federal banking agency of a conservator or receiver for the Bank and, provided
further that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least two-thirds of the directors
comprising the Incumbent Board, or whose nomination for election by the
Corporation's stockholders was approved by the same nominating committee serving
under an Incumbent Board, shall be, for purposes of this clause (b), considered
as though he were a member of the Incumbent Board; or (c) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Corporation or similar transaction in which the Bank
or Corporation is not the surviving institution occurs; or (d) a proxy statement
soliciting proxies from stockholders of the Corporation, by someone other than
the current management of the Corporation, seeking stockholder approval of a
plan of reorganization, merger or consolidation of the Corporation or Bank or
similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are to be exchanged for or converted into cash or property or
securities not issued by the Bank or Corporation shall be distributed and the
requisite number of proxies approving such plan of reorganization, merger or
consolidation of the Corporation or Bank are received and voted in favor of such
transactions; or (e) a tender offer is made for 25% or more of the outstanding
securities of the Bank or Corporation and the shareholders owning beneficially
or of record 25% or more of the outstanding securities of the Bank or
Corporation have tendered or
<PAGE>
offered to sell their shares pursuant to such tender offer and such tendered
shares have been accepted by the tender offeror.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 3 hereof.
"Continuous Service" - means the absence of any interruption or
termination of service as a director, advisory director, officer or employee of
the Corporation or an Affiliate, except that when used with respect to persons
granted an Incentive Option means the absence of any interruption or termination
of service as an employee of the Corporation or an Affiliate. Service shall not
be considered interrupted in the case of sick leave, military leave or any other
leave of absence approved by the Corporation or in the case of transfers between
payroll locations of the Corporation or between the Corporation, its parent, its
subsidiaries or its successor. With respect to any advisory director,
continuous service shall mean availability to perform such functions as may be
required of such persons.
"Corporation" - means IFB Holdings, Inc., a Delaware corporation.
"Disability" - means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or
approved by the Board must advise the committee that it is either not possible
to determine when such Disability will terminate or that it appears probable
that such Disability will be permanent during the remainder of said
Participant's lifetime.
"Employee" - means any person, including an officer or director, who is
employed by the Corporation or any Affiliate.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as
amended.
"Exercise Price" - means (i) in the case of an Option, the price per
Share at which the Shares subject to such Option may be purchased upon exercise
of such Option and (ii) in the case of a Right, the price per Share (other than
the Market Value per Share on the date of exercise and the Offer Price per Share
as defined in Section 10 hereof) which, upon grant, the Committee determines
shall be utilized in calculating the aggregate value which a Participant shall
be entitled to receive pursuant to Sections 9, 10 or 12 hereof upon exercise of
such Right.
"Incentive Stock Option" - means an option to purchase Shares granted
by the Committee pursuant to Section 6 hereof which is subject to the
limitations and restrictions of Section 8 hereof and is intended to qualify
under Section 422 of the Code.
"Limited Stock Appreciation Right" - means a stock appreciation right
with respect to Shares granted by the Committee pursuant to Sections 6 and 10
hereof.
"Market Value" - means the average of the high and low quoted sales
price on the date in question (or, if there is no reported sale on such date, on
the last preceding date on which any reported sale occurred) of a Share on the
Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not quoted on the Composite Tape, on the New York Stock
Exchange, or, if the Shares are not listed or admitted to trading on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which the Shares are listed or admitted
to trading, or, if the Shares are not listed or admitted to trading on any such
exchange, the mean between the closing high bid and low asked quotations with
respect to a Share on such date on the NASDAQ System, or any similar system then
in use, or, if no such quotations are available, the fair market value on such
date of a Share as the Committee shall reasonably determine.
"Non-Employee Director" - means a Director who (a) is not employed by
the Corporation or an Affiliate; (b) does not receive compensation directly or
indirectly as a consultant (or in any other capacity than as a director) greater
than $60,000; (c) does not have an interest in a transaction requiring
disclosure under Item 404(a) of Regulation
A-2
<PAGE>
S-K; or (d) is not engaged in a business relationship for which disclosure would
be required pursuant to Item 404(b) of Regulation S-K.
"Non-Qualified Stock Option" - means an option to purchase Shares
granted by the Committee pursuant to Section 6 hereof to (i) a Director who is
not an employee of the Corporation or Affiliate or (ii) to any other Participant
and such Option is either (A) not designated by the Committee as an Incentive
Stock Option, or (B) fails to satisfy the requirements of an Incentive Stock
Option as set forth in Section 422 of the Code and the regulations thereunder.
"Normal Retirement" means retirement after reaching 65 years of age.
"Option" - means an Incentive Stock Option or a Non-Qualified Stock
Option.
"Outside Director" - means a director of the Corporation or an
Affiliate who is not an employee of the Corporation or an Affiliate.
"Participant" - means any director, advisory director, officer or
employee of the Corporation or any Affiliate who is selected by the Committee to
receive an Award.
"Plan" - means the 1997 Stock Option and Incentive Plan of the
Corporation.
"Related" - means (i) in the case of a Right, a Right which is granted
in connection with, and to the extent exercisable, in whole or in part, in lieu
of, an Option or another Right and (ii) in the case of an Option, an Option with
respect to which and to the extent a Right is exercisable, in whole or in part,
in lieu thereof has been granted.
"Right" - means a Limited Stock Appreciation Right or a Stock
Appreciation Right.
"Shares" - means the shares of common stock of the Corporation.
"Stock Appreciation Right" - means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Sections 6 and 9 hereof.
"Termination for Cause" - means the termination of employment or
termination of service on the Board caused by the individual's personal
dishonesty, willful misconduct, any breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, or the willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses), or a final cease-and-desist order, any of which results in material
loss to the Corporation or one of its Affiliates.
3. Administration.
The Plan shall be administered by a Committee of the Board consisting
of either (i) at least two Non-Employee Directors of the Corporation, or (ii)
the entire Board of the Corporation. Except as limited by the express provisions
of the Plan, the Committee shall have sole and complete authority and
discretion, to (i) select Participants and grant Awards; (ii) determine the
number of Shares to be subject to types of Awards generally, as well as to
individual Awards granted under the Plan; (iii) determine the terms and
conditions upon which Awards shall be granted under the Plan; (iv) describe the
form and terms of instruments evidencing such grants; and (v) establish from
time to time regulations for the administration of the Plan, interpret the Plan,
and make all determinations deemed necessary or advisable for the administration
of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of
a majority of the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee without a meeting,
shall be acts of the Committee.
A-3
<PAGE>
4. Participation in Committee Awards.
The Committee may select from time to time Participants in the Plan
from those directors, advisory directors, directors emeriti, officers and
employees, of the Corporation or its Affiliates who, in the opinion of the
Committee, have the capacity for contributing to the successful performance of
the Corporation or its Affiliates.
5. Shares Subject to Plan.
Subject to adjustment by the operation of Section 11 hereof, the
maximum number of Shares with respect to which Awards may be made under the Plan
is ten (10%) of the total Shares issued in the Bank's conversion to capital
stock form. The Shares with respect to which Awards may be made under the Plan
may be either authorized and unissued shares or issued shares heretofore or
hereafter reacquired and held as treasury shares. Shares which are subject to
Related Rights and Related Options shall be counted only once in determining
whether the maximum number of Shares with respect to which Awards may be granted
under the Plan has been exceeded. An Award shall not be considered to have been
made under the Plan with respect to any Option or Right which terminates and new
Awards may be granted under the Plan with respect to the number of Shares as to
which such termination has occurred.
6. General Terms and Conditions of Options and Rights.
The Committee shall have full and complete authority and discretion,
except as expressly limited by the Plan, to grant Options and/or Rights and to
provide the terms and conditions (which need not be identical among
Participants) thereof. In particular, the Committee shall prescribe the
following terms and conditions: (i) the Exercise Price of any Option or Right,
which shall not be less than the Market Value per Share at the date of grant of
such Option or Right, (ii) the number of Shares subject to, and the expiration
date of, any Option or Right, which expiration date shall not exceed ten years
from the date of grant, (iii) the manner, time and rate (cumulative or
otherwise) of exercise of such Option or Right, and (iv) the restrictions, if
any, to be placed upon such Option or Right or upon Shares which may be issued
upon exercise of such Option or Right.
Furthermore, at the time of any Award, the Participant shall enter into an
agreement with the Corporation in a form specified by the Committee, agreeing to
the terms and conditions of the Award and such other matters as the Committee,
in its sole discretion, shall determine (the "Option Agreement").
7. Exercise of Options or Rights.
(a) Except as provided herein, an Incentive Stock Option or Related
Right granted under the Plan shall be exercisable during the
lifetime of the Participant to whom such Incentive Stock Option
or Related Right was granted only by such Participant. Except as
provided in paragraphs (c) and (d) of this Section 7, no Option
or Right may be exercised unless at the time such Participant
exercises such Option or Right, such Participant has maintained
Continuous Service since the date of grant of such Option or
Right.
(b) To exercise an Option or Right under the Plan, the Participant to
whom such Option or Right was granted shall give written notice
to the Corporation in form satisfactory to the Committee (and, if
partial exercises have been permitted by the Committee, by
specifying the number of Shares with respect to which such
Participant elects to exercise such Option or Right) together
with full payment of the Exercise Price, if any and to the extent
required. The date of exercise shall be the date on which such
notice is received by the Corporation. Payment, if any is
required, shall be made either (i) in cash (including check, bank
draft or money order) or (ii) if permitted by the Committee, (A)
by delivering Shares already owned by the Participant and having
a fair market value equal to the applicable exercise price, such
fair market value to be determined in such appropriate manner as
may be provided by the Committee or as may be required in order
to comply with or to conform to requirements of any applicable
laws or regulations, (B) by delivering a combination of cash and
A-4
<PAGE>
such Shares, or (C) by a "cashless exercise". Upon a cashless
exercise, the Participant shall give the Corporation written
notice of the exercise of the Option together with an order to a
registered broker-dealer or equivalent third party, to sell part
or all of the Common Stock subject to the Option and to deliver
enough of the proceeds to the Corporation to pay the Option
exercise price and any applicable withholding taxes. If the
Participant does not sell the Common Stock subject to the Option
through a registered broker-dealer or equivalent third party, the
Optionee can give the Corporation written notice of the exercise
of the Option and the third party purchaser of the Common Stock
subject to the Option shall pay the Option exercise price plus
applicable withholding taxes to the Corporation.
(c) If a Participant to whom an Option or Right was granted shall
cease to maintain Continuous Service for any reason (excluding
death, Disability, Normal Retirement, following a Change in
Control, or Termination For Cause), such Participant may, but
only within the period of three months immediately succeeding
such cessation of Continuous Service and in no event after the
expiration date of such Option or Right, exercise such Option or
Right to the extent that such Participant was entitled to
exercise such Option or Right at the date of such cessation,
provided, however, that such right of exercise shall not be
available to a Participant if the Committee otherwise determines
and so provides in the applicable instrument or instruments
evidencing the grant of such Option or Right. If a Participant to
whom an Option or Right was granted shall cease to maintain
Continuous Service by reason of death, Disability, Normal
Retirement or following a Change in Control, then, unless the
Committee shall have otherwise provided in the instrument
evidencing the grant of an Option or Right, all Options and
Rights granted, whether or not fully exercisable, shall become
exercisable in full upon the happening of such event and shall
remain so exercisable for a period of one year following the date
of his cessation of Continuous Service, provided, however, that
any such Option shall not be eligible for treatment as an
Incentive Stock Option in the event such Option is exercised more
than three months following the date of his Normal Retirement or
Change in Control; and provided further, that no Option shall be
eligible for treatment as an Incentive Stock Option in the event
such Option is exercised more than one year following cessation
of Continuous Service due to Disability and provided further, in
order to obtain Incentive Stock Option treatment for Options
exercised by heirs or devisees of an Optionee, the Optionee's
death must have occurred while employed or within three (3)
months of termination of employment. In no event shall the
exercise period extend beyond the expiration of the Incentive
Stock Option term. If the Continuous Service of a Participant to
whom an Option or Right was granted by the Corporation is
terminated in a Termination for Cause, all rights under any
Option or Right of such Participant shall expire immediately upon
the effective date of such termination.
(d) In the event of the death of a Participant while in the
Continuous Service of the Corporation or an Affiliate or within
the one-year period referred to in paragraph (c) of this Section
7, the person to whom any Option or Right held by the Participant
at the time of his death is transferred by will or the laws of
descent and distribution, may, but only to the extent such
Participant was entitled to exercise such Option or Right
immediately prior to his death, exercise such Option or Right at
any time within a period of one year succeeding the date of death
of such Participant, but in no event later than ten years from
the date of grant of such Option or Right. Following the death of
any Participant to whom an Option was granted under the Plan,
irrespective of whether any Related Right shall have theretofore
been granted to the Participant or whether the person entitled to
exercise such Related Right desires to do so, the Committee may,
as an alternative means of settlement of such Option, elect to
pay to the person to whom such Option is transferred by will or
by the laws of descent and distribution, the amount by which the
Market Value per Share on the date of exercise of such Option
shall exceed the Exercise Price of such Option, multiplied by the
number of Shares with respect to which such Option is properly
exercised. Any such settlement of an Option shall be considered
an exercise of such Option for all purposes of the Plan.
A-5
<PAGE>
(e) Notwithstanding the provisions of subparagraphs (c) and (d)
above, the Committee may, in its sole discretion, establish
different terms and conditions pertaining to the effect of
termination to the extent permitted by applicable federal and
state law.
8. Incentive Stock Options.
Incentive Stock Options may be granted only to Participants who are
Employees. Any provision of the Plan to the contrary notwithstanding, (i) no
Incentive Stock Option shall be granted more than ten years from the date the
Plan is adopted by the Board of Directors of the Corporation and no Incentive
Stock Option shall be exercisable more than ten years from the date such
Incentive Stock Option is granted, (ii) the Exercise Price of any Incentive
Stock Option shall not be less than the Market Value per Share on the date such
Incentive Stock Option is granted, (iii) any Incentive Stock Option shall not be
transferable by the Participant to whom such Incentive Stock Option is granted
other than by will or the laws of descent and distribution, and shall be
exercisable during such Participant's lifetime only by such Participant, (iv) no
Incentive Stock Option shall be granted to any individual who, at the time such
Incentive Stock Option is granted, owns stock possessing more than ten percent
of the total combined voting power of all classes of stock of the Corporation or
any Affiliate unless the Exercise Price of such Incentive Stock Option is at
least 110 percent of the Market Value per Share at the date of grant and such
Incentive Stock Option is not exercisable after the expiration of five years
from the date such Incentive Stock Option is granted, and (v) the aggregate
Market Value (determined as of the time any Incentive Stock Option is granted)
of the Shares with respect to which Incentive Stock Options are ex ercisable
for the first time by a Participant in any calendar year shall not exceed
$100,000.
9. Stock Appreciation Rights.
A Stock Appreciation Right shall, upon its exercise, entitle the
Participant to whom such Stock Appreciation Right was granted to receive a
number of Shares or cash or combination thereof, as the Committee in its
discretion shall determine, the aggregate value of which (i.e., the sum of the
amount of cash and/or Market Value of such Shares on date of exercise) shall
equal (as nearly as possible, it being understood that the Corporation shall not
issue any fractional shares) the amount by which the Market Value per Share on
the date of such exercise shall exceed the Exercise Price of such Stock
Appreciation Right, multiplied by the number of Shares with respect of which
such Stock Appreciation Right shall have been exercised. A Stock Appreciation
Right may be Related to an Option or may be granted independently of any Option
as the Committee shall from time to time in each case determine. At the time of
grant of an Option the Committee shall determine whether and to what extent a
Related Stock Appreciation Right shall be grant ed with respect thereto;
provided, however, and notwithstanding any other provision of the Plan, that if
the Related Option is an Incentive Stock Option, the Related Stock Appreciation
Right shall satisfy all the restrictions and limitations of Section 8 hereof as
if such Related Stock Appreciation Right were an Incentive Stock Option and as
if other rights which are Related to Incentive Stock Options were Incentive
Stock Options. In the case of a Related Option, such Related Option shall cease
to be exercisable to the extent of the Shares with respect to which the Related
Stock Appreciation Right was exercised. Upon the exercise or termination of a
Related Option, any Related Stock Apprecia Appreciation Right shall terminate to
the extent of the Shares with respect to which the Related Option was exercised
or terminated.
10. Limited Stock Appreciation Rights.
At the time of grant of an Option or Stock Appreciation Right to any
Participant, the Committee shall have full and complete authority and discretion
to also grant to such Participant a Limited Stock Appreciation Right which is
Related to such Option or Stock Appreciation Right; provided, however and
notwithstanding any other provision of the Plan, that if the Related Option is
an Incentive Stock Option, the Related Limited Stock Appreciation Right shall
satisfy all the restrictions and limitations of Section 8 hereof as if such
Related Limited Stock Appreciation Right were an Incentive Stock Option and as
if all other Rights which are Related to Incentive Stock Options were Incentive
Stock Options. In no event shall a Limited Stock Appreciation Right be
exercisable in whole or in part before the expiration of six months from the
date of grant of the Limited Rights. A Limited Right may be exercised only in
the event of a Change in Control of the Corporation.
A-6
<PAGE>
A Limited Stock Appreciation Right shall, upon its exercise, entitle
the Participant to whom such Limited Stock Appreciation Right was granted to
receive an amount of cash equal to the amount by which the Market Value on the
date of such exercise, as shall have been provided by the Committee in its
discretion at the time of grant, shall exceed the Exercise Price of such Limited
Stock Appreciation Right, multiplied by the number of Shares with respect to
which such Limited Stock Appreciation Right shall have been exercised. Upon the
exercise of a Limited Stock Appreciation Right, any Related Option and/or
Related Stock Appreciation Right shall cease to be exercisable to the extent of
the Shares with respect to which such Limited Stock Appreciation Right was
exercised. Upon the exercise or termination of a Related Option or Related Stock
Appreciation Right, any Related Limited Stock Appreciation Right shall terminate
to the extent of the Shares with respect to which such Related Option or Related
Stock Appreciation Right was exercised or terminated. In the event of a Change
in Control in which pooling accounting treatment is a condition to the
transaction, the Limited Right shall be exercised solely for shares of stock of
the Corporation, or in the event of a merger transaction, for shares of the
acquiring corporation or its parent, as applicable. The number of shares to be
received on the exercise of such Limited Right shall be determined by dividing
the amount of cash that would have been available under the first sentence above
by the Market Value at the time of exercise of the shares underlying the Option
subject to the Limited Right.
11. Adjustments Upon Changes in Capitalization.
In the event of any change in the outstanding Shares subsequent to the
effective date of the Plan by reason of any reorganization, recapitalization,
stock split, stock dividend, pro rata return of capital to all shareholders,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number, class and exercise price of shares with respect to which Awards have
been granted under the Plan shall be appropriately adjusted by the Committee,
whose determination shall be conclusive; provided, however, that no such
adjustments may be made which will change materially the value of benefits
available to a Participant under a previously granted Award. With respect to
Incentive Stock Options, no such adjustment shall be made if it would be deemed
a "modification" of the Award under Section 424 of the Code.
12. Effect of Merger.
In the event of any merger, consolidation or combination of the
Corporation (other than a merger, consolidation or combination in which the
Corporation is the continuing entity and which does not result in the
outstanding Shares being converted into or exchanged for different securities,
cash or other property, or any combination thereof) pursuant to a plan or
agreement the terms of which are binding upon all stockholders of the
Corporation (except to the extent that dissenting stockholders may be entitled,
under statutory provisions or provisions contained in the certificate of
incorporation, to receive the appraised or fair value of their holdings), any
Participant to whom an Option or Right has been granted at least six months
prior to such event shall have the right (subject to the provisions of the Plan
and any limitation or vesting period applicable to such Option or Right),
thereafter and during the term of each such Option or Right, to receive upon
exercise of any such Option or Right an amount equal to the excess of the fair
market value on the date of such exercise of the securities, cash or other
property, or combination thereof, receivable upon such merger, consolidation or
combination in respect of a Share over the Exercise Price of such Right or
Option, multiplied by the number of Shares with respect to which such Option or
Right shall have been exercised. Such amount may be payable fully in cash,
fully in one or more of the kind or kinds of property payable in such merger,
consolidation or combination, or partly in cash and partly in one or more of
such kind or kinds of property, all in the discretion of the Committee.
13. Assignments and Transfers.
No Award of Incentive Stock Options nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award of Incentive
Stock Options under the Plan may be assigned, encumbered or transferred except,
in the event of the death of a Participant, by will or the laws of descent and
distribution. In the discretion of the Board, all or any Non-Qualified Stock
Options granted hereunder may be transferable by the Participant, provided,
however, that the Board may limit the transferability of such Option or Options
to a designated class or classes of persons.
A-7
<PAGE>
14. Employee Rights Under the Plan.
No director, officer or employee shall have a right to be selected as a
Participant nor, having been so selected, to be selected again as a Participant
and no director, officer, employee or other person shall have any claim or right
to be granted an Award under the Plan or under any other incentive or similar
plan of the Corporation or any Affiliate. Neither the Plan nor any action taken
thereunder shall be construed as giving any employee any right to be retained in
the employ of the Corporation or any Affiliate.
15. Delivery and Registration of Stock.
The Corporation's obligation to deliver Shares with respect to an Award
shall, if the Committee so requests, be conditioned upon the receipt of a
representation as to the investment intention of the Participant to whom such
Shares are to be delivered, in such form as the Committee shall determine to be
necessary or advisable to comply with the provisions of the Securities Act of
1933 or any other Federal, state or local securities legislation or regulation.
It may be provided that any representation requirement shall become inoperative
upon a registration of the Shares or other action eliminating the necessity of
such representation under such Securities Act or other securities legislation.
The Corporation shall not be required to deliver any Shares under the Plan prior
to (i) the admission of such shares to listing on any stock exchange or other
system on which Shares may then be listed, and (ii) the completion of such
registration or other qualification of such Shares under any state or Federal
law, rule or regulation, as the Committee shall determine to be necessary or
advisable.
This Plan is intended to comply with Rule 16b-3 under the Securities
Exchange Act of 1934. Any provision of the Plan which is inconsistent with said
Rule shall, to the extent of such inconsistency, be inoperative and shall not
affect the validity of the remaining provisions of the Plan.
16. Withholding Tax.
The Corporation shall have the right to deduct from all amounts paid in
cash with respect to the exercise of a Right under the Plan any taxes required
by law to be withheld with respect to such cash payments. Where a Participant
or other person is entitled to receive Shares pursuant to the exercise of an
Option or Right pursuant to the Plan, the Corporation shall have the right to
require the Participant or such other person to pay the Corporation the amount
of any taxes which the Corporation is required to withhold with respect to such
Shares, and may, in its sole discretion, withhold sufficient Shares to cover the
amount of taxes which the Corporation is required to withhold.
17. Amendment or Termination.
The Board of Directors of the Corporation may amend, suspend or
terminate the Plan or any portion thereof at any time, provided, however, that
no such amendment, suspension or termination shall impair the rights of any
Participant, without his consent, in any Award made pursuant to the Plan. Any
amendment or modification of the Plan or an outstanding Award under the Plan,
including but not limited to the acceleration of vesting of an outstanding Award
for reasons other than death, Disability, Normal Retirement or a Change in
Control, shall be approved by the Committee or the full Board of the
Corporation.
18. Effective Date and Term of Plan.
The Plan shall become effective on January 1, 1998, following its
ratification by stockholders of the Corporation. It shall continue in effect
for a term of ten years from the effective date unless sooner terminated under
Section 17 hereof.
A-8
<PAGE>
Exhibit 10.6
IFB HOLDINGS, INC.
RECOGNITION AND RETENTION PLAN
1. Plan Purpose.
The purpose of the Plan is to promote the long-term interests of the
Corporation and its stockholders by providing a means for attracting and
retaining directors, advisory directors and officers of the Corporation and its
Affiliates.
2. Definitions.
The following definitions are applicable to the Plan:
"Award" - means the grant by the Committee of Restricted Stock, as provided
in the Plan.
"Affiliate" - means any "parent corporation" or "subsidiary corporation" of
the Corporation, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Bank" - means Investors Federal Bank, National Association and its
predecessors and successors.
"Board" or "Board of Directors" - means the board of directors of the
Corporation or its Affiliate, as applicable.
"Change in Control" of the Bank or the Corporation means a change in
control of a nature that: (i) would be required to be reported in response to
Item 1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (ii) results in a Change in Control of the Bank or the
Corporation within the meaning of the Bank Holding Company Act of 1956, as
amended ("BHCA"), and applicable rules and regulations promulgated thereunder,
as in effect at the time of the Change in Control; or (iii) without limitation
such a Change in Control shall be deemed to have occurred at such time as (a)
any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of Corporation's
outstanding securities except for any securities purchased by the Bank's
employee stock ownership plan or trust; or (b) individuals who constitute the
Board on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided, however, that this subsection
(b) shall not apply if the Incumbent Board is replaced by the appointment by a
Federal banking agency of a conservator or receiver for the Bank and, provided
further that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least two-thirds of the directors
comprising the Incumbent Board, or whose nomination for election by the
Corporation's stockholders was approved by the same nominating committee serving
under an Incumbent Board, shall be, for purposes of this clause (b), considered
as though he were a member of the Incumbent Board; or (c) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Corporation or similar transaction in which the Bank
or Corporation is not the surviving institution occurs; or (d) a proxy statement
soliciting proxies from stockholders of the Corporation, by someone other than
the current management of the Corporation, seeking stockholder approval of a
plan of reorganization, merger or consolidation of the Corporation or Bank or
similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are to be exchanged for or converted into cash or property or
securities not issued by the Bank or Corporation shall be distributed and the
requisite number of proxies approving such plan of reorganization, merger or
consolidation of the Corporation or Bank are received and voted in favor of such
transactions; or (e) a tender offer is made for 25% or more of the outstanding
securities of the Bank or Corporation and the shareholders owning beneficially
or of record 25% or more of the outstanding securities of the Bank or
Corporation have tendered or
<PAGE>
offered to sell their shares pursuant to such tender offer and such tendered
shares have been accepted by the tender offeror.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 6 hereof.
"Continuous Service" - means the absence of any interruption or termination
of service as a director, advisory director, officer or employee of the
Corporation or any Affiliate. Service shall not be considered interrupted in
the case of sick leave, military leave or any other leave of absence approved by
the Corporation or any Affiliate or in the case of transfers between payroll
locations of the Corporation or between the Corporation, its subsidiaries or its
successor. With respect to any advisory director, continuous service shall mean
availability to perform such functions as may be required of such persons.
"Corporation" - means IFB Holdings, Inc., a Delaware corporation.
"Disability" - means the permanent and total inability by reason of mental
or physical infirmity, or both, of an employee to perform the work customarily
assigned to him. Additionally, a medical doctor selected or approved by the
Board must advise the committee that it is either not possible to determine when
such Disability will terminate or that it appears probable that such Disability
will be permanent during the remainder of said Participant's lifetime.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as
amended.
"Non-Employee Director" - means a director who (a) is not employed by the
Company or an Affiliate; (b) does not receive compensation directly or
indirectly as a consultant (or in any other capacity than as a director) greater
than $60,000; (c) does not have an interest in a transaction requiring
disclosure under Item 404(a) of Regulation S-K; or (d) is not engaged in a
business relationship for which disclosure would be required pursuant to Item
404(b) of Regulation S-K.
"Normal Retirement" means retirement after reaching 65 years of age.
"Outside Director" - means a director of the Corporation or an Affiliate
who is not an employee of the Corporation or an Affiliate.
"Participant" - means any director, advisory director, officer or employee
of the Corporation or any Affiliate who is selected by the Committee to receive
an Award.
"Plan" - means the Recognition and Retention Plan of the Corporation.
"Restricted Period" - means the period of time selected by the Committee
for the purpose of determining when restrictions are in effect under Section 3
hereof with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" - means Shares which have been contingently awarded to a
Participant by the Committee subject to the restrictions referred to in Section
3 hereof, so long as such restrictions are in effect.
"Shares" - means the common stock, par value $0.01 per share, of the
Corporation.
B-2
<PAGE>
3. Terms and Conditions of Restricted Stock.
The Committee shall have full and complete authority, subject to the
limitations of the Plan, to grant awards of Restricted Stock and, in addition to
the terms and conditions contained in paragraphs (a) through (f) of this Section
3, to provide such other terms and conditions (which need not be identical among
Participants) in respect of such Awards, and the vesting thereof, as the
Committee shall determine.
(a) At the time of an award of Restricted Stock, the Committee shall
establish for each Participant a Restricted Period during which or
at the expiration of which, as the Committee shall determine and
provide in the agreement referred to in paragraph (d) of this
Section 3, the Shares awarded as Restricted Stock shall vest, and
subject to any such other terms and conditions as the Committee
shall provide, shares of Restricted Stock may not be sold,
assigned, transferred, pledged, voted or otherwise encumbered by
the Participant, except as hereinafter provided, during the
Restricted Period. Except for such restrictions, and subject to
paragraphs (c) and (e) of this Section 3 and Section 4 hereof, the
Participant as owner of such shares shall have all the rights of a
stockholder. The Committee shall have the authority, in its
discretion, to accelerate the time at which any or all of the
restrictions shall lapse with respect thereto, or to remove any or
all of such restrictions.
(b) If a Participant ceases to maintain Continuous Service for any
reason (other than death, Disability, Normal Retirement, or
following a Change in Control), all Shares of Restricted Stock
awarded to such Participant and which at the time of such
termination of Continuous Service are subject to the restrictions
imposed by paragraph (a) of this Section 3 shall upon such
termination of Continuous Service be forfeited and returned to the
Corporation. If a Participant ceases to maintain Continuous Service
by reason of death, Disability, Normal Retirement, or following a
Change in Control, Restricted Stock then still subject to
restrictions imposed by paragraph (a) of this Section 3 will be
free of those restrictions and shall be immediately vested.
(c) Each certificate in respect of Shares of Restricted Stock awarded
under the Plan shall be registered in the name of the Participant
or in the name of the Plan on behalf of the Participant and
deposited by the Participant, together with a stock power endorsed
in blank, with the Corporation and shall bear the following (or a
similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions
(including forfeiture) contained in the Recognition and Retention
Plan of IFB Holdings, Inc. Copies of such Plan are on file in the
office of the Secretary of IFB Holdings, Inc., 522 Washington
Street, Chillicothe, Missouri 64601."
(d) At the time of any Award, the Participant shall enter into an
agreement with the Corporation in a form specified by the
Committee, agreeing to the terms and conditions of the Award and
such other matters as the Committee, in its sole discretion, shall
determine (the "Restricted Stock Agreement").
(e) After an Award has been granted but before such Award has been
earned, the Participant shall receive any cash dividends paid with
respect to such shares, or shall share in any pro-rata return of
capital to all shareholders with respect to the Common Stock. Stock
dividends declared by the Corporation and paid on Awards that have
not yet been earned shall be subject to the same restrictions as
the Restricted Stock and the certificate(s) or other instruments
representing or evidencing such shares shall be legended in the
manner provided in paragraph 3(c) and shall be delivered to the
Escrow Agent for distribution to the Participant when the
Restricted Stock upon which such dividends were paid are earned.
Unless the Participant has made an election under Section 83(b) of
the Code, cash dividends or other amounts so paid on shares that
have not yet been earned by the Participant shall be treated as
compensation income to the Participant when paid. If dividends are
paid with respect
B-3
<PAGE>
to shares of Restricted Stock under the Plan that have been issued
but not awarded, or that have been forfeited and returned to the
Corporation or to a trust established to hold issued and unawarded
or forfeited shares, the Committee can determine to award such
dividends to any Participant or Participants under the Plan, to any
other employee or director of the Corporation or the Bank, or can
return such dividends to the Corporation.
(f) After an Award has been granted, the Participant as conditional
owner of the Restricted Stock shall have the right to vote such
shares.
(g) At the expiration of the restrictions imposed by paragraph (a) of
this Section 3, the Corporation shall redeliver to the Participant
(or where the relevant provision of paragraph (b) of this Section 3
applies in the case of a deceased Participant, to his legal
representative, beneficiary or heir) the certificate(s) and stock
power deposited with it pursuant to paragraph (c) of this Section 3
and the Shares represented by such certificate(s) shall be free of
the restrictions referred to in paragraph (a) of this Section 3.
4. Adjustments Upon Changes in Capitalization.
In the event of any change in the outstanding Shares subsequent to the
effective date of the Plan by reason of any reorganization, recapitalization,
stock split, stock dividend, combination or exchange of shares, merger,
consolidation or any change in the corporate structure or Shares of the
Corporation, the maximum aggregate number and class of shares as to which Awards
may be granted under the Plan and the number and class of shares with respect to
which Awards theretofore have been granted under the Plan shall be appropriately
adjusted by the Committee, whose determination shall be conclusive. Any shares
of stock or other securities received, as a result of any of the foregoing, by a
Participant with respect to Restricted Stock shall be subject to the same
restrictions and the certificate(s) or other instruments representing or
evidencing such shares or securities shall be legended and deposited with the
Corporation in the manner provided in Section 3 hereof.
5. Assignments and Transfers.
No Award nor any right or interest of a Participant under the Plan in any
instrument evidencing any Award under the Plan may be assigned, encumbered or
transferred except, in the event of the death of a Participant, by will or the
laws of descent and distribution or pursuant to a domestic relations order as
defined in the Code or Title I of ERISA or the rules thereunder.
6. Administration.
The Plan shall be administered by a Committee of the Board consisting of
either (i) at least two Non-Employee Directors of the Corporation, or (ii) the
entire Board of the Corporation. Except as limited by the express provisions of
the Plan, the Committee shall have sole and complete authority and discretion,
to (i) select Participants and grant Awards; (ii) determine the number of shares
to be subject to types of Awards generally, as well as to individual Awards
granted under the Plan; (iii) determine the terms and conditions upon which
Awards shall be granted under the Plan; (iv) prescribe the form and terms of
instruments evidencing such grants; and (v) establish from time to time
regulations for the administration of the Plan, interpret the Plan, and make all
determinations deemed necessary or advisable for the administration of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
B-4
<PAGE>
7. Shares Subject to Plan.
Subject to adjustment by the operation of Section 4 hereof, the maximum
number of Shares with respect to which Awards may be made under the Plan is 4%
of the total Shares sold in the Bank's conversion to stock form. The shares
with respect to which Awards may be made under the Plan may be either authorized
and unissued shares or issued shares reacquired and held as treasury shares. An
Award shall not be considered to have been made under the Plan with respect to
Restricted Stock which is forfeited and new Awards may be granted under the Plan
with respect to the number of Shares as to which such forfeiture has occurred.
8. Employee Rights Under the Plan.
No director, officer or employee shall have a right to be selected as a
Participant nor, having been so selected, to be selected again as a Participant
and no director, officer, employee or other person shall have any claim or right
to be granted an Award under the Plan or under any other incentive or similar
plan of the Corporation or any Affiliate. Neither the Plan nor any action taken
thereunder shall be construed as giving any employee any right to be retained in
the employ of the Corporation, the Bank or any Affiliate.
9. Withholding Tax.
Upon the termination of the Restricted Period with respect to any shares of
Restricted Stock (or at any such earlier time that an election is made by the
Participant under Section 83(b) of the Code, or any successor provision thereto,
to include the value of such shares in taxable income), the Corporation may
withhold from any payment or distribution made under this Plan sufficient Shares
or may withhold or cause to be paid by Participant sufficient cash to cover any
applicable withholding and employment taxes. The Corporation shall have the
right to deduct from all dividends paid with respect to shares of Restricted
Stock the amount of any taxes which the Corporation is required to withhold with
respect to such dividend payments. No discretion or choice shall be conferred
upon any Participant with respect to the form, timing or method of any such tax
withholding.
10. Amendment or Termination.
The Board of Directors of the Corporation may amend, suspend or terminate
the Plan or any portion thereof at any time, provided, however, that no such
amendment, suspension or termination shall impair the rights of any Participant,
without his consent, in any Award theretofore made pursuant to the Plan. Any
amendment or modification of the Plan or an outstanding Award under the Plan,
including but not limited to the acceleration of vesting of an outstanding Award
for reasons other than death, Disability, Normal Retirement, or termination
following a Change in Control, shall be approved by the Committee or the full
Board of the Corporation.
11. Term of Plan.
The Plan shall become effective on January 1, 1998 following its
ratification by stockholders of the Corporation. It shall continue in effect
until the earlier of (i) ten years from the effective date unless sooner
terminated under Section 10 hereof, or (ii) the date on which all shares of
common stock available for award hereunder have vested in the recipients of such
Awards.
B-5
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
President's Message....................................................... 1
General Information....................................................... 2
Selected Consolidated Financial and Other Data of the Company............. 3-4
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 5-14
Consolidated Financial Statements.........................................15-45
Stockholder Information................................................... 46
Corporate Information..................................................... 47
<PAGE>
[LETTERHEAD OF IFB HOLDINGS, INC. APPEARS HERE]
September 17, 1998
Message to our Stockholders:
The Board of Directors, Officers and Staff of IFB Holdings, Inc. and its wholly
owned subsidiary, Investors Federal Bank, National Association, are pleased to
provide you with our second annual report.
Investors Federal Bank and Savings Association officially became a subsidiary of
IFB Holdings, Inc. on December 30, 1996, when the bank converted to stock form.
On January 30, 1997, the Bank changed its charter to a national bank charter.
We wish to thank our officers and employees for their hard work and dedication
during the past year and for our profitable year.
Net income for the year was $597,000, up from $300,000 for fiscal 1997. Our
return on assets for the year ended June 30, 1998 was .89% with a return on
average equity of 7.14%.
Our total assets as of June 30, 1998 were $76.2 million with loans receivable of
$35.3 million and deposits of $35.3 million. Our stockholders' equity was $9.3
million or 12.22% of assets. The Bank had regulatory capital ratios of 21.4% for
total risk-based capital to risk-weighted assets, 20.3% for Tier I capital to
risk-weighted assets, and 8.7% for Tier I capital and tangible capital to
adjusted total assets.
Non-performing assets of the Bank increased during 1998. At June 30, 1998,
non-performing assets were $495,000, an increase of $271,000 from June 30, 1997.
Loan loss reserves at June 30, 1998 were $324,000 or 65.45% of non-performing
assets.
In thanking our valued customers and stockholders for their continued support we
are optimistic about the future, and confident that our strategies and plans
will provide security for our customers and stockholders.
Sincerely,
Earle S. Teegarden, Jr.
President and Chief Executive Officer
1
<PAGE>
GENERAL INFORMATION
-------------------
IFB Holdings, Inc. (the "Company") is a Delaware Corporation which is the
holding company for Investors Federal Bank, National Association (the "Bank").
The Company was organized by the Bank for the purpose of acquiring all of the
capital stock of the Bank in connection with the conversion of the Bank from
mutual to stock form, which was completed on December 30, 1996 (the
"Conversion").
The only significant assets of the Company are the capital stock of the Bank,
the Company's loan to the Company's Employee Stock Ownership Plan (ESOP),
$956,000 in securities available for sale and cash of approximately $1.6
million. The business of the Company initially consists of the business of the
Bank.
The Bank is the successor to Investors Federal Bank and Savings Association (the
"Association") which had served Missouri since its founding as a mutual thrift
in 1934. The Association converted to a national bank in January 1997 following
its conversion to stock form in December 1996. As part of the stock conversion,
the Association became a wholly owned subsidiary of the Company which acquired
all of the Association's newly issued stock with the proceeds from a public
offering of the Company's stock.
As a bank holding company, the Company is registered with and subject to
regulation and examination by the Board of Governors of the Federal Reserve
System. As a national bank, the Bank is subject to comprehensive regulation and
examination by the Office of the Comptroller of the Currency (OCC) which also
serves as its chartering authority. Because the Bank was formerly chartered as a
savings association, its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC) which
insures the Bank's deposits to the legal maximum of $100,000 per account.
Investors Federal has been, and intends to continue to be, a community-oriented
financial institution offering selected financial services to meet the needs of
the communities it serves. The Bank attracts deposits from the general public
and historically has used such deposits, together with other funds, to originate
and purchase one- to four-family residential mortgage loans, and to originate
non-residential real estate loans (primarily farm loans), and consumer loans
consisting primarily of loans secured by automobiles. In addition, in recent
years, the bank has expanded its loan portfolio by purchasing Small Business
Administration ("SBA")-guaranteed loans and Federal Housing Administration
("FHA")-insured Title I home improvement loans. At June 30, 1998, the Bank's
total loan portfolio was $35.3 million, of which 72.0% were one- to four-family
residential mortgage loans, 6.3% were non-residential real estate loans, 12.2%
were consumer loans (including FHA home improvement loans), and 2.7% were
SBA-guaranteed loans.
2
<PAGE>
IFB HOLDINGS, INC.
------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
----------------------------------------------------------
Set forth below are selected consolidated financial and other data of the
Company at and for the years indicated. The selected consolidated financial and
other data does not purport to be complete and is qualified in its entirety by
reference to the detailed information and Consolidated Financial Statements and
Notes thereto presented elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ---------------------------------
Total assets $76,178 $60,220 $52,587 $45,013 $41,095
Loans receivable, net 35,255 29,962 28,429 26,340 22,719
Mortgage-backed securities:
Held to maturity -- -- -- 8,306 10,674
Available for sale 29,495 18,501 16,971 4,397 470
Investment securities:
Held to maturity 245 2,209 215 815 809
Available for sale 4,911 4,760 3,264 1,737 2,009
Deposits 35,255 34,980 35,495 35,210 37,072
FHLB advances 31,075 16,265 13,474 6,419 1,073
Total stockholders' equity 9,312 8,641 3,268 3,042 2,743
Year Ended June 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- ------------------------
Total interest income $ 4,831 $ 3,868 $ 3,616 $ 2,843 $ 2,509
Total interest expense 2,982 2,364 2,264 1,716 1,432
------- ------- ------- ------- -------
Net interest income 1,849 1,504 1,352 1,127 1,077
Provision for loan losses 91 -- 210 1 15
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 1,758 1,504 1,142 1,126 1,062
------- ------- ------- ------- -------
Fees and service charges 225 232 231 225 218
Gain on sales of interest-earning
assets, net 66 14 46 19 7
Other non-interest income 22 19 80 22 59
------- ------- ------- ------- -------
Total non-interest income 313 265 357 266 284
Total non-interest expense 1,126 1,298 1,030 1,011 1,101
------- ------- ------- ------- -------
Income before income taxes 945 471 469 381 245
Income tax expense 348 171 167 135 105
Cumulative effect on prior years of
a change in accounting principle -- -- -- 27 25
------- ------- ------- ------- -------
Net income $ 597 $ 300 $ 302 $ 273 $ 165
======= ======= ======= ======= =======
Earnings per share-basic $ 1.08 $ .55 N/A N/A N/A
======= ======= ======= ======= =======
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
At or For the Years Ended June 30,
------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- ----------------------------------------
Performance ratios:
Return on assets (1) .89% .55% .61% .64% .40%
Return on total equity (2) 7.14 4.75 8.86 8.88 6.13
Interest rate spread information:
Average during period 2.06 2.16 2.38 2.36 2.39
End of period 1.84 2.39 2.29 2.64 2.55
Net interest margin (3) 2.83 2.82 2.79 2.72 2.67
Ratio of noninterest expense to
average total assets 1.68 2.37 2.07 2.38 2.66
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.88 114.80 108.63 108.64 108.00
Asset quality ratios:
Non-performing assets to total assets
at end of period (4) .65 .37 .24 .06 .33
Allowance for loan losses to
non-performing loans 65.45 127.23 221.09 65.03 64.69
Allowance for loan losses to loans
receivables, net .92 .94 1.00 .31 .39
Capital ratios:
Total equity to total assets at end
of period 12.22% 14.35% 6.21% 6.76% 6.67%
Average total equity to average
assets 12.49% 11.55% 6.85% 7.24% 6.53%
Other data:
Number of full-service offices 3 3 3 3 3
Number of deposit accounts -- 6,537 7,083 7,302 7,519
Number of real estate loans
outstanding -- 1,290 1,237 1,251 1,205
</TABLE>
- --------------
(1) Ratio of net income to average total assets.
(2) Ratio of net income to average total equity.
(3) Net interest income as a percentage of average interest-earning assets.
(4) Non-performing assets includes non-accrual loans, foreclosed real estate and
other repossessed assets.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
other sections contained in this report.
General
- -------
The business of the Bank is that of a financial intermediary consisting
primarily of attracting deposits from the general public and using such deposits
to originate loans secured by one- to four-family residences and agricultural
real estate and, to a lesser extent, agricultural non-real estate loans,
consumer loans, and commercial real estate and non real estate loans. The Bank's
income is derived principally from interest earned on loans and, to a lesser
extent, from interest earned on securities and mortgage-backed and related
securities. The operations of the Bank are influenced significantly by general
economic conditions and by policies of financial institution regulatory
agencies, including the Office of the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation (FDIC). The Bank's cost of funds is
influenced by interest rates on competing investments and general market
interest rates. Lending activities are affected by the demand for financing of
real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered.
The Bank's net interest income is dependent primarily upon the difference or
spread between the average yield earned on loans and investment securities and
the average rate paid on deposits, as well as the relative amounts of such
assets and liabilities. The Bank, as other financial institutions, is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
reprice at different times, or on a different basis, than its interest-earning
assets.
Asset Liability Management
- --------------------------
One of the Bank's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates. The
Bank has sought to reduce exposure of its earnings to changes in market interest
rates by managing the mismatch between asset and liability maturities and
interest rates.
The Bank's Board of Directors has formulated an Asset/Liability Policy designed
to promote long-term profitability while managing interest rate risk. The
Asset/Liability Policy is designed to reduce the impact of changes in interest
rates on the Bank's net interest income by achieving a more favorable match
between the maturity or repricing dates of its interest-earning assets and
interest-bearing liabilities. The Bank has sought to reduce exposure of its
earnings to changes in market interest rates by increasing the interest rate
sensitivity of the Bank's assets through the origination of loans with interest
rates subject to periodic adjustment to market conditions. Accordingly, the Bank
has emphasized the origination of adjustable-rate mortgage ("ARM") loans and
consumer loans (which generally have shorter terms) for retention in its
portfolio. The Bank has also increased its FHLB borrowings in an effort to
lengthen the maturity of its liabilities. Finally, the Bank has sought to
maintain a strong base of less interest sensitive and lower costing "core
deposits" in the form of passbook accounts, NOW accounts, money market accounts
and noninterest-bearing demand accounts, and by promoting longer-term
certificates of deposit in an effort to extend the maturity of its liabilities.
5
<PAGE>
Financial Condition
- -------------------
Total assets increased $16.0 million, or 26.5%, to $76.6 million at June 30,
1998 from $76.1 million at June 30, 1997. This was primarily the result of
increases of $11.0 million, or 59.4%, in mortgage-backed securities, $5.3
million, or 17.7%, in loans receivable and $573,000, or 23.7%, in
interest-earning deposits. The substantial increases in mortgage-backed
securities, and interest earning assets were funded primarily from an increase
in FHLB advances of $14.8 million, which reflected management's asset/liability
strategy of seeking to earn the spread between the yield earned on
adjustable-rate interest-earning assets and the rates paid on the FHLB advances.
Loans receivable, net, increased by $5.3 million, or 17.7%, to $35.2 million at
June 30, 1998 from $30.0 million at June 30, 1997, due primarily to purchases of
one-to-four family residential mortgage loans, as well as moderate increases in
all types of loans.
Deposits increased $275,000, or 0.8%, to $35.3 million at June 30, 1998, from
$35.0 million at June 30, 1997, due primarily to an increase of $246,000 in
total certificates of deposit.
Management utilized FHLB advances because such advances, unlike deposit
accounts, do not require the Bank to incur the operating expenses associated
with attracting and servicing customer accounts. In addition, such advances can
be accessed immediately and in specified amounts.
Total stockholders' equity increased $0.7 million, or 7.8%, to $9.3 million at
June 30, 1998 from $8.6 million at June 30, 1997, due to net earnings during the
fiscal year ended June 30, 1998.
Results of Operations
- ---------------------
The Company's results of operations depend primarily on the level of its net
interest income and noninterest income and its control of operating expenses.
Net interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The Company's noninterest income consists primarily of fees charged on
transaction accounts and fees charged for delinquent payments received on
mortgage and consumer loans.
6
<PAGE>
The following table presents for the period indicated the total dollar amount
of interest income from average interest-earning assets and the resultant yields
as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates. No tax equivalent
adjustments were made. Non-accruing loans have been included in the table as
loans carrying a zero yield.
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------------------
1998 1997
------------------------------------ ----------------------------------
At June 30, 1998
----------------------- Average Average
Outstanding Outstanding Interest Outstanding Interest
Balance Yield/Rate Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
----------- ---------- ----------- ----------- ---------- ---------- ----------- ----------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 35,255 8.22% $ 32,780 2,755 8.40% $ 28,753 $ 2,343 8.15%
Mortgage-backed securities 29,495 6.65% 23,073 1,555 6.74% 16,866 1,147 6.77%
Investment securities 5,156 5.45% 6,709 391 5.83% 4,451 269 6.04%
Investments in other
financial institutions 2,995 2.95% 1,627 46 2.83% 2,376 58 2.44%
FHLB and FRB stock 1,638 6.95% 1,190 84 7.06% 809 56 6.92%
---------- ---------- ------- ------- ---------- ------- ------
Total interest-earning
assets (1) 74,539 7.17% 65,379 4,831 7.39% 53,255 3,868 7.26%
======= -------
Noninterest-earning assets 1,639 -- 1,535 -- 1,363 -- --
---------- ---------- ----------
Total assets $ 76,178 $ 66,914 $ 54,618
========== ========== ==========
Interest-bearing liabilities:
Savings deposits $ 2,572 3.00% $ 2,528 76 3.01% $ 2,703 82 3.03%
Demand and NOW
deposits (2) 9,353 3.58% 10,224 353 3.45% 9,529 350 3.67%
Certificate accounts 21,558 5.59% 21,034 1,175 5.59% 21,330 1,184 5.55%
FHLB advances 31,075 5.86% 22,151 1,378 6.22% 12,826 748 5.83%
---------- ---------- ------- ---------- -------
Total interest-bearing
liabilities 64,558 5.33% 55,937 2,982 5.33% 46,388 2,364 5.10%
======= -------
Noninterest-bearing liabilities 2,308 -- 2,620 -- 1,921 -- --
---------- ---------- ----------
Total liabilities 66,866 58,557 48,309
Stockholders' equity 9,312 8,357 6,309
---------- ---------- ----------
Total liabilities and
stockholders' equity $ 76,178 $ 66,914 $ 54,618
========== ========== ==========
Net interest income $ 1,849 $ 1,504
======= =======
Net interest rate spread 1.84% 2.06% 2.16%
===== ======= =======
Net earning assets $ 9,981 $ 9,442 $ 6,867
========== ========== ==========
Net interest margin 2.83% 2.82%
======= =====
Average interest-earning
assets to average interest-
bearing liabilities 1.17x 1.15x
======= =====
</TABLE>
- --------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Excludes non-interest-bearing deposit accounts.
7
<PAGE>
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes due to
changes in outstanding balances and those due to changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by prior interest rate) and (ii) changes in rate
(i.e., changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Years Ended June 30,
-----------------------------------
1998 vs. 1997
-----------------------------------
Increase/(Decrease)
Due to Total
----------------------
Increase
Volume Rate (Decrease)
------ ---- ----------
(In Thousands)
Interest-earning assets:
Loans receivable $ 338 $ 74 $ 412
Mortgage-backed securities 418 (5) 413
Investment securities 131 (9) 122
Interest earning deposits (20) 8 (12)
FHLB stock 27 1 28
------- ------- -------
Total interest-earning assets $ 894 $ 69 963
======= ======= =======
Interest-bearing liabilities:
Savings deposits $ (5) $ (1) $ (6)
Demand and NOW deposits 25 (22) 3
Certificate accounts (18) 9 (9)
FHLB advances 577 53 630
------- ------- -------
Total interest-bearing liabilities $ 579 $ 39 618
======= ======= -------
Net interest income $ 345
=======
8
<PAGE>
Comparison of Operating Results for the Years
Ended June 30, 1998 and 1997
Performance Summary
- -------------------
Net earnings for the year ended June 30, 1998 increased by $297,000, or 99.0% to
$597,000 from $300,000 for the year ended June 30, 1997. The increase was
primarily due to the combined effects of a $345,000 increase in net interest
income, an increase in the loan loss provision of $91,000, a $48,000 increase in
non-interest income, a $172,000 decrease in non-interest expense, and a $177,000
increase in income tax expense. For the years ended June 30, 1998 and 1997, the
returns on average assets were 0.89% and 0.55% respectively, while the returns
on average equity were 7.14% and 4.15% respectively.
Net Interest Income
- -------------------
For the year ended June 30, 1998, net interest income increased by $345,000, or
22.9%, to $1.85 million from $1.50 million for the year ended June 30, 1997. The
increase reflected an increase of $963,000 in interest income to $4.8 million
from $3.9 million which more than offset an increase of $618,000 in interest
expense to $3.0 million from $2.4 million. The increase in interest income
reflected increased balances of loans receivable, mortgage-backed securities and
investment securities and to a lesser extent, increased yields earned on loans
receivable. Increased balances were funded by $14.8 million of additional FHLB
advances. Interest expense increased primarily due to an increased balance of
FHLB advances together with higher rates paid on such advances.
For the year ended June 30, 1998, the average yield on interest-earning assets
was 7.39% compared to 7.26% for the year ended June 30, 1997. The average cost
of interest-bearing liabilities was 5.33% for the year ended June 30, 1998, and
5.10% for the year ended June 30, 1997. The increase in the average yield on
interest-earning assets was due to higher overall levels of interest rates for
loans for the year ended June 30, 1998 as compared to the earlier period. The
average balance of interest-earning assets increased by $12.2 million to $65.4
million for the year ended June 30, 1998 from $53.2 million for the year ended
June 30, 1997. The increase primarily reflected an increase of $6.2 million in
the average balance of mortgage-backed securities, $4.0 million in the average
balance of loans and $2.2 million in the average balance of investment
securities for the year ended June 30, 1998 as compared to the year ended June
30, 1997. During this same period, average interest-bearing liabilities
increased by $9.5 million to $55.9 million for the year ended June 30, 1998 from
$46.4 million for the year ended June 30, 1997. The increase primarily reflected
an increase of $9.3 million is the average balance of FHLB advances.
The Bank's average interest rate spread was 2.06% for the year ended June 30,
1998, compared to 2.16% for the earlier year period. The average net interest
margin was 2.83% for the year ended June 30, 1998, compared to 2.82% for the
year ended June 30, 1997.
Provision for Loan Losses
- -------------------------
During the year ended June 30, 1998, the Bank had a $91,000 provision for loan
losses compared to no provision for the year ended June 30, 1997. The allowance
for loan losses of $324,000, or .91% of loans receivable, net at June 30, 1998,
compared to $285,000, or .94% of loans receivable, net at June 30, 1997. The
allowance for loan losses as a percentage of non-performing loans decreased to
65.45% at June 30, 1998, from 127.73% at June 30, 1997. The ratio decreased due
to the increase in non-performing loans to $495,000 at June 30, 1998 compared to
$271,000 at June 30, 1997. Management believes the ratio
9
<PAGE>
of the allowance for loan losses to net loans receivable is adequate.
Management will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Bank maintains its allowance for loan
losses at a level which it considers to be adequate to provide for potential
losses, there can be no assurance that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.
Non-Interest Income
- -------------------
For the year ended June 30, 1998, non-interest income increased $48,000 to
$313,000 from $265,000 for the year ended June 30, 1997. Customer service
charges, primarily relating to fees on transaction accounts, were $225,000 for
the year ended June 30, 1998 and $232,000 for the year ended June 30, 1997.
Other non-interest income included late charges on loans of $8,000 and $10,000
for the years ended June 30, 1998 and 1997, respectively, and gain on sale of
investments of $66,000 and $14,000 for the years ended June 30, 1998 and 1997,
respectively.
Income Taxes
- ------------
Income taxes increased by 177,000 to $348,000 for the twelve months ended June
30, 1998 from $171,000 for the year ended June 30, 1997. The effective tax rates
were 36.9% and 36.3% for the years ended June 30, 1998 and 1997, respectively.
Non-Interest Expense
- --------------------
Non-interest expense decreased $172,000 to $1.1 million for the year ended June
30, 1998 from $1.3 million for the year ended June 30, 1997.The decrease was due
to no SAIF assessment in 1998 compared to the $226,000 special assessment in
1997 to recapitalize the SAIF fund. This was partially offset due to a $62,000
increase in other noninterest expense.
Comparison of Operating Results for the Years Ended June 30, 1997 and 1996
Performance Summary
- -------------------
Net earnings for the year ended June 30, 1997 decreased by $2,000, or 0.7% to
$300,000 from $302,000 for the year ended June 30, 1996. The decrease was
primarily due to the combined effects of a $152,000 increase in net interest
income, a decrease in the loan loss provision of $210,000, and a $92,500
decrease in non-interest income, the net of which was more than offset by a
$268,000 increase in non-interest expense, primarily due to the special SAIF
assessment of $226,000, and a $4,000 increase in income tax expense. For the
years ended June 30, 1997 and 1996, the returns on average assets were 0.55% and
0.61% respectively, while the returns on average equity were 4.75% and 8.86%
respectively.
Net Interest Income
- -------------------
For the year ended June 30, 1997, net interest income increased by $152,000, or
11.2%, to $1.50 million from $1.35 million for the year ended June 30, 1996. The
increase reflected an increase of $252,000 in interest income to $3.9 million
from $3.6 million which more than offset an increase of $100,000 in interest
expense to $2.4 million from $2.3 million. The increase in interest income
reflected increased balances of loans receivable, mortgage-backed securities and
investment securities offset by somewhat lower yields earned on interest-earning
assets. Increased balances were funded by the net "Conversion" proceeds of $5.5
million and $2.8 million of additional FHLB advances. Interest expense increased
primarily
10
<PAGE>
due to an increased balance of FHLB advances together with higher rates paid on
such advances.
For the year ended June 30, 1997, the average yield on interest-earning assets
was 7.26% compared to 7.45% for the year ended June 30, 1996. The average cost
of interest-bearing liabilities was 5.10% for the year ended June 30, 1997, an
increase from 5.07% for the year ended June 30, 1996. The decrease in the
average yield on interest-earning assets was due to lower overall levels of
interest rates for loans for the year ended June 30, 1997 as compared to the
earlier period. The average balance of interest-earning assets increased by $4.7
million to $53.2 million for the year ended June 30, 1997 from $48.5 million for
the year ended June 30, 1996. The increase primarily reflected an increase of
$1.5 million in the average balance of loans and $1.5 million in the average
balance of investment securities for the year ended June 30, 1997 as compared to
the year ended June 30, 1996. During this same period, average interest-bearing
liabilities increased by $1.7 million to $46.4 million for the year ended June
30, 1997 from $44.7 million for the year ended June 30, 1996.
The Bank's average interest rate spread was 2.16% for the year ended June 30,
1997, compared to 2.38% for the earlier year period. The average net interest
margin was 2.82% for the year ended June 30, 1997, compared to 2.79% for the
year ended June 30, 1996.
Provision for Loan Losses
- -------------------------
During the year ended June 30, 1997, the Bank had no provision for loan losses
compared to a provision of $210,000 for the year ended June 30, 1996. The
allowance for loan losses of $285,000, or .94% of loans receivable, net at June
30, 1997, compared to $283,000, or 1.00% of loans receivable, net at June 30,
1996. The allowance for loan losses as a percentage of non-performing loans
decreased to 127.73% at June 30, 1997, from 221.09% at June 30, 1996. The ratio
decreased due to the increase in non-performing loans from $128,000 at June 30,
1996 to $224,000 at June 30, 1997. Management believes the ratio of the
allowance for loan losses to net loans receivable is adequate.
Non-Interest Income
- -------------------
For the year ended June 30, 1997, non-interest income decreased $92,000 to
$265,000 from $357,000 for the year ended June 30, 1996. Included in
non-interest income for the year ended June 30, 1996 was $66,000 of patronage
dividends from and gain on the sale of the Bank's former cooperative data
processing service bureau. Patronage dividends are an allocation of earnings to
the user/owners of the cooperative data processing service bureau, all of which
were paid to the Bank and the other user/owners at the time of the sale of the
bureau. Customer service charges, primarily relating to fees on transaction
accounts, were $232,000 for the year ended June 30, 1997 and $231,000 for the
year ended June 30, 1996. Other non-interest income included late charges on
loans of $10,000 and $7,000 for the years ended June 30, 1997 and 1996,
respectively.
Income Taxes
- ------------
Income taxes increased by $4,000 to $171,000 for the twelve months ended June
30, 1997 from
11
<PAGE>
$167,000 for the year ended June 30, 1996. The effective tax rates were 36.3%
and 35.6% for the years ended June 30, 1997 and 1996, respectively.
Non-Interest Expense
- --------------------
Non-interest expense increased $267,000 to $1.3 million for the year ended June
30, 1997 from $1.0 million for the year ended June 30, 1996. A special
assessment of $226,000 to recapitalize the Savings Association Insurance Fund
(SAIF) substantially contributed to the increase. As a result of the special
assessment, the FDIC has substantially decreased the assessment rate for SAIF
deposit insurance in future periods. The increase was also due to an increase in
compensation and benefits of $55,000, primarily due to ESOP compensation.
Occupancy and equipment expense was up $39,000 due primarily to depreciation on
new hardware and software. This was more than offset by a $46,000 decrease in
data processing expenses due to a new in-house system.
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to convert assets into cash or cash
equivalents without significant loss. Liquidity management involves evaluating
the Bank's daily cash flow requirements to meet customer demands, whether they
be depositors wishing to withdraw funds or borrowers requiring funds to meet
their credit needs. Without proper liquidity management, the Company would not
be able to perform the primary function of a financial intermediary and would,
therefore, not be able to meet the production and growth needs of the
communities it serves.
The primary investing activity of the Bank is the origination of loans. The Bank
originated loans of $12.4 million and $8.2 million in 1998 and 1997,
respectively. The Bank's primary sources of funds for investment are cash
receipts from deposits and principal and interest collections on loans and net
earnings. Additional liquidity is available from the maturity and earnings on
securities and mortgage backed securities (MBS), as well as the ability to
liquidate securities available-for-sale. The Bank also has an agreement with the
FHLB of Des Moines to provide cash advances. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. Commitments at June 30,
1998 to originate mortgage loans were approximately $729,000. Commitments on
behalf of borrowers for unused lines of credit were approximately $543,000
expiring in one year or less. These commitments are legally binding agreements
to lend to the Bank's customers. The Bank has $13.9 million in certificates due
within one year and $13.7 million in other deposits without specific maturity at
June 30, 1998. Historically, the Bank has been able to retain most of the
deposits or attract new deposits by offering competitive rates. Management
believes it has an adequate level of liquidity to ensure the availability of
sufficient funds to support loan growth and deposit withdrawals and to satisfy
financial commitments.
The Bank had regulatory capital ratios of 21.4% for total risk-based capital to
risk-weighted assets, 20.3% for Tier I capital to risk-weighted assets, and 8.7%
for Tier I capital and tangible capital to adjusted total assets. See Note 11 of
the Notes to Consolidated Financial Statements for further discussion of the
Bank's regulatory capital.
Recent Accounting Developments
SFAS No. 130 "Reporting Comprehensive Income," will be adopted July 1, 1998.
This
12
<PAGE>
statement provides accounting and reporting standards to report a measure of all
changes in equity of an enterprise that results from recognized transactions and
economic events of the period. The major component of comprehensive income for
the Company will be unrealized gains and losses on certain investments in debt
and equity securities.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management believes adoption of SFAS Nos. 130 and 133 does not have a material
effect on the financial position or results of operations, nor will adoption
require additional capital resources.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Association keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
Year 2000
The Bank has been in contact with hardware and software providers of their data
processing system. Testing has begun and should be completed prior to December
31, 1998, though testing will continue through June 30, 1999.
Through contact with the various providers, the Bank does not foresee any major
capital expenditure and expects a cost of no more than $10,000 to be Year 2000
compliant.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation. The primary impact of inflation on the operations of
the Bank is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services. In the current interest
rate environment, management believes that the liquidity and the maturity
structure of the Bank's assets and liabilities are critical to the maintenance
of acceptable performance levels.
13
<PAGE>
[LETTERHEAD OF LOCKRIDGE, CONSTANT & CONRAD, LLC APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
IFB Holdings, Inc.
Chillicothe, Missouri
We have audited the accompanying consolidated statements of financial condition
of IFB Holdings, Inc. and Subsidiary as of June 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
IFB Holdings, Inc. and Subsidiary as of June 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Lockridge, Constant & Conrad, LLC
Chillicothe, Missouri
September 17, 1998,
14
<PAGE>
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
At June 30,
---------------------
1998 1997
------- -------
ASSETS (In Thousands)
------ -------------
<S> <C> <C>
Cash on hand and non-interest earning deposits $ 546 $ 581
Interest-earning deposits 2,995 2,422
Investment securities (Note 2):
Securities available-for-sale at fair value 4,911 4,760
Securities held-to-maturity at amortized cost
(estimated market value of $245,000 and
$2,210,000, respectively) 245 2,209
Mortgage-backed securities (Note 3):
Securities available-for-sale at fair value 29,495 18,501
Loans receivable, net (Note 4) 35,255 29,962
Accrued interest receivable (Note 5) 623 446
Investment required by law - stock in
Federal Home Loan Bank and Federal Reserve Bank,
at cost 1,638 897
Premises and equipment (Note 6) 417 357
Other assets 53 85
-------- --------
Total Assets $ 76,178 $ 60,220
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits (Note 7) $ 35,255 $ 34,980
Federal Home Loan Bank advances (Note 8) 31,075 16,265
Advances from borrowers for taxes and insurance 28 33
Income taxes (Note 10):
Current 36 72
Deferred 178 72
Accrued expenses and other liabilities 294 157
-------- --------
Total liabilities 66,866 51,579
-------- --------
Commitments and contingencies (Note 14)
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding -- --
Common stock $.01 par value; authorized
900,000 shares, issued 592,523 shares in 1998 and 1997 6 6
Additional paid-in capital 5,554 5,530
Retained earnings, substantially
restricted (Note 10) 3,992 3,559
Unrealized gain (loss) on securities
available-for-sale, net of tax 134 (33)
Common stock acquired by the ESOP (Note 9) (374) (421)
-------- --------
Total stockholders' equity 9,312 8,641
-------- --------
Total Liabilities and Stockholders' Equity $ 76,178 $ 60,220
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
For the Three Years Ended June 30, 1998
Consolidated Statements of Income
Years ended June 30,
-----------------------------------------
1998 1997 1996
------- --------- --------
(In Thousands)
<S> <C> <C> <C>
Interest income:
Loans receivable (Note 4) $2,755 $2,343 $2,340
Investment securities:
Taxable interest 273 237 120
Nontaxable interest 13 13 13
Dividends 105 19 18
FHLB and FRB dividends 84 56 39
Mortgage-backed and related securities 1,555 1,142 1,039
Other interest-earning assets 46 58 47
------ ------ ------
Total interest income 4,831 3,868 3,616
------ ------ ------
Interest expense:
Deposits (Note 7) 1,604 1,616 1,634
Federal Home Loan Bank advances 1,378 748 630
------ ------ ------
Total interest expense 2,982 2,364 2,264
------ ------ ------
Net interest income 1,849 1,504 1,352
Provision for loan losses (Note 4) 91 -- 210
------ ------ ------
Net interest income after provision for loan losses 1,758 1,504 1,142
------ ------ ------
Noninterest income:
Banking service charges and fees 225 232 231
Gain on sales of interest-earning assets, net (Note 12) 66 14 46
Other (Note 13) 22 19 80
------ ------ ------
Total noninterest income 313 265 357
------ ------ ------
Noninterest expense:
Compensation and benefits (Note 9) 674 671 616
Occupancy and equipment (Note 6) 114 104 65
SAIF deposit insurance premium 22 283 80
Data processing 2 2 48
Professional fees 69 68 47
Printing, postage and supplies 80 67 65
Other (Note 13) 165 103 109
------ ------ ------
Total noninterest expense 1,126 1,298 1,030
------ ------ ------
Income before income taxes 945 471 469
Income tax expense (Note 10) 348 171 167
------ ------ ------
Net income $ 597 $ 300 $ 302
====== ====== ======
Earnings per share-basic $ 1.08 $ .55 N/A
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
For the Three Years Ended June 30, 1998
<TABLE>
<CAPTION>
Consolidated Statement of Stockholders' Equity
Three Years Ended June 30, 1998
---------------------------------------------------------------------------------
(In Thousands)
Unrealized
Gain (Loss)
on Securities
Available-
for-Sale,
Net of Common
Additional Deferred Stock
Common Paid-In Retained Income Acquired
Stock Capital Earnings Taxes by ESOP Total
------- ---------- -------- ------------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ -- $ -- $ 3,037 $ 5 $ -- $ 3,042
Net income for the year ended
June 30, 1996 -- -- 302 -- -- 302
Change in net unrealized gains
(losses) for available-for-sale
securities, net of deferred income
tax of $24,000 -- -- -- (76) -- (76)
------- ------- ------- ------- ------- -------
Balance, June 30, 1996 -- -- 3,339 (71) -- 3,268
Additions (deductions) for the year
ended June 30, 1997:
Net income -- -- 300 -- -- 300
Sale of common stock, net of
offering costs of $403,000 6 5,516 -- -- -- 5,522
Unearned ESOP shares -- -- -- -- (474) (474)
Dividends declared ($.15 per share) -- -- (80) -- -- (80)
Allocation of ESOP shares -- 14 -- -- 53 67
Change in unrealized gain (loss) on
securities available-for-sale, net
of deferred income tax of $20,000 -- -- -- 38 -- 38
------- ------- ------- ------- ------- -------
Balance, June 30, 1997 6 5,530 3,559 (33) (421) 8,641
Additions (deductions) for the year
ended June 30, 1998:
Net income -- -- 597 -- -- 597
Dividends declared ($.30 per share) -- -- (164) -- -- (164)
Allocation of ESOP shares -- 24 -- -- 47 71
Change in unrealized gain (loss) on
securities available-for-sale, net
of deferred income tax of $86,000 -- -- -- 167 -- 167
------- ------- ------- ------- ------- -------
Balance, June 30, 1998 $ 6 $ 5,554 $ 3,992 $ 134 $ (374) $ 9,312
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
For the Three Years Ended June 30, 1998
Consolidated Statements of Cash Flows
Years ended June 30,
----------------------------------
1998 1997 1996
--------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 597 $ 300 $ 302
Adjustments to reconcile net income to
net cash provided by operating activities:
Net loss (gain) on sales of:
Investment securities (30) -- --
Mortgage-backed securities (35) (14) (46)
Depreciation 54 52 23
Provision for loan loss 91 -- 210
Amortization of premiums, discounts, and loan fees (1) 48 9
FHLB stock dividend -- -- (9)
Changes in assets and liabilities:
Interest receivable (176) 10 (135)
Prepaid expenses and other assets 32 (8) 25
Income taxes (16) 2 (29)
Accrued expenses and other liabilities 137 (42) 76
ESOP compensation expense 24 14 --
----- ----- -----
NET CASH PROVIDED BY
OPERATING ACTIVITIES 677 362 426
----- ----- -----
(Continued)
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
For the Three Years Ended June 30, 1998
Consolidated Statements of Cash Flows (continued)
Years ended June 30,
-------------------------------------------------------
1998 1997 1996
--------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Cash flows from investing activities:
Net decrease (increase) in loans (728) 104 (288)
Purchased loans (4,657) (1,655) (2,007)
Purchase of investment securities-
available-for-sale (2,594) -- (1,579)
Purchase of investment securities-
held-to-maturity -- (3,402) --
Purchase of mortgage-backed
securities - available-for-sale (18,684) (6,315) (9,540)
Mortgage-backed securities
principal repayments -
available-for-sale 5,961 2,890 3,009
Proceeds from maturities/calls
of investment securities
available-for-sale 3,102 -- 600
Proceeds from sales of
investment securities -
available-for-sale 1,042 -- --
Proceeds from sales of mortgage-
backed securities - available
-for-sale 2,311 1,858 2,257
Purchase of FHLB and FRB stock (741) (173) (365)
Proceeds from maturities of
certificates of deposit -- -- 100
Proceeds from sales of real
estate owned -- -- --
Purchase of office properties
and equipment (114) (34) (140)
Loan to ESOP -- (474) --
Repayment on ESOP loan 47 52 --
------- ------- -------
NET CASH USED IN
INVESTING ACTIVITIES (15,055) (7,149) (7,953)
------- ------- -------
(Continued)
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
For the Three Years Ended June 30, 1998
Consolidated Statements of Cash Flows (continued)
Years ended June 30,
--------------------------------------------------------
1998 1997 1996
---------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends paid (164) (80) --
Net increase (decrease) in demand deposits,
NOW accounts, passbook savings accounts,
and certificates of deposit 275 (515) 268
Net increase in escrow mortgage funds (6) (2) (15)
Proceeds from Federal Home Loan Bank advances 35,775 18,550 9,000
Principal repayments on Federal Home Loan
Bank advances (21,464) (15,965) (746)
Net borrowings from Federal Home Loan Bank
line of credit 500 200 (1,200)
Proceeds from the issuance of common stock -- 5,522 --
-------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 14,916 7,710 7,307
-------- -------- --------
INCREASE (DECREASE) IN CASH 538 923 (220)
CASH AT BEGINNING OF YEAR 3,003 2,080 2,300
-------- -------- --------
CASH AT END OF YEAR $ 3,541 $ 3,003 $ 2,080
======== ======== ========
<CAPTION>
Supplemental disclosure of cash flow information:
Cash paid for:
Interest - deposits $ 318 $ 321 $ 383
======== ======== ========
Interest - advances $ 1,258 $ 747 $ 619
======== ======== ========
Income taxes $ 364 $ 166 $ 176
======== ======== ========
Noncash investing and financing activities:
Loans transferred to real estate owned $ -- $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
June 30, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
IFB Holdings, Inc.(the "Company") is a Delaware corporation incorporated in
October, 1996, for the purpose of being the holding company for Investors
Federal Bank, N.A. (the Bank). On December 30, 1996, the Bank converted from a
mutual to a stock form of ownership, and the Company completed its initial
public offering, and, with a portion of the net proceeds acquired all of the
issued and outstanding capital stock of the Bank (the "Conversion").
The Bank provides financial services to individuals and corporate customers, and
is subject to competition from other financial institutions. The Bank is also
subject to the regulations of certain Federal agencies and undergoes periodic
examination by those regulatory authorities.
The Company is principally engaged in one to four family home lending in
agricultural-based rural communities in and around Chillicothe, Missouri. The
Company also makes consumer loans depending on demand and management's
assessment as to the quality of the loan.
Basis of Financial Statement Presentation
- -----------------------------------------
The accompanying consolidated financial statements include the accounts of the
Company, and its wholly-owned subsidiary, Investors Federal Bank, N.A., and
Investors Federal Service Corporation, the Bank's wholly owned subsidiary. All
significant intercompany transactions and balances are eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the year. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosure or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgements about information available to them at the time of their examination.
Because of these factors, in management's judgement, the allowances for loan
losses reflected in the consolidated financial statements is adequate to absorb
estimated losses that may exist in the current portfolio.
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About
-----------------
Fair Value of Financial Instruments, requires that the estimated fair value of
- ------------------------------------
the Bank's financial instruments be disclosed. Fair market value estimates of
financial instruments are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time
21
<PAGE>
June 30, 1998, 1997 and 1996
The entire holdings or a significant portion of a particular financial
instrument. Because no market exists for a significant portion of the Bank's
financial instruments, some fair value estimates are subjective in nature and
involve uncertainties and matters of significant judgment. Changes in
assumptions could significantly affect these estimates. Fair value estimates are
presented for existing on-balance-sheet and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant affect on
fair value estimates and have not been considered in any of the estimates (see
Note 19).
Cash Equivalents
- ----------------
Cash equivalents of $3,541,000 and $3,003,000 at June 30, 1998 and 1997,
respectively, consist of cash on hand, funds due from banks and money market
mutual funds. For purposes of the statements of cash flows, the Bank considers
all highly liquid debt instruments with original maturities when purchased of
three months or less to be cash equivalents.
Investment Securities
- ---------------------
Investment securities that are held for short-term resale are classified as
trading securities and are carried at fair value. Debt securities that
management has the ability and intent to hold to maturity are classified as
held-to-maturity and are carried at cost, adjusted for amortization of premium
and accretion of discounts using the interest method. Other marketable
securities are classified as available-for-sale and are carried at fair value.
Realized and unrealized gains and losses on trading securities are included in
net income. Unrealized gains and losses, net of tax, on securities
available-for-sale are recognized as direct increases or decreases in
stockholders' equity. Cost of securities sold is determined using the specific
identification method. Yields on tax exempt obligations are not computed on a
tax-equivalent basis.
Mortgage-Backed Securities
- --------------------------
Mortgage-backed securities represent participating interest in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are classified as available-for-sale or
held-to-maturity. Available-for-sale securities are carried at fair value with
the unrealized gain or loss, net of income tax, reflected as a separate
component of stockholders' equity and held-to-maturity securities are carried at
amortized cost. Premiums and discounts are amortized using the interest method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments. Cost of mortgage-backed securities sold is recognized using the
specific identification method.
The Bank evaluates mortgage-backed securities on a monthly basis to monitor
prepayments and the resulting effect on yields and valuations. Management
considers the concentration of credit risk to be minimal on mortgage-backed
securities because all such securities are guaranteed as to timely payment of
principal and interest by FNMA, FHLMC, GNMA and SBA or the underlying loans are
insured by private mortgage insurance. Cost of securities sold are recognized
based on the specific-identification method. All sales are made without
recourse.
At June 30, 1998 and 1997, the Bank had no outstanding commitments to sell loans
or securities.
Equity securities that are nonmarketable are carried at cost. Nonmarketable
equity securities held by the Bank consist of their patronage equity in the
Financial Information Trust (a computer service bureau) and stock in the Federal
Home Loan Bank and Federal Reserve Bank. In June, 1996, the Bank sold its
interest in the Financial Information Trust.
22
<PAGE>
June 30, 1998, 1997 and 1996
The Bank, as a member of the Federal Home Loan Bank System and Federal Reserve
Bank, is required to maintain an investment in capital stock. No ready market
exists for the stock and it has no quoted market value. For reporting purposes
these investments are assumed to have a market value equal to cost. (See Note
19.)
Accounting for Certain Investments in Debt and Equity Securities
- ----------------------------------------------------------------
In May 1993 the FASB issued SFAS No. 115, Accounting for Certain Investments in
-------------------------------------
Debt and Equity Securities. SFAS No. 115 addresses the accounting and reporting
- --------------------------
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Those investments are to be
classified in three categories and accounted for as follows:
* Debt securities that the enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and
---------------------------
reported at amortized cost.
* Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
-------
securities and reported at fair value, with unrealized gains and losses
----------
included in earnings.
* Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
------------------
securities and reported at fair value, with unrealized gains and losses
----------
excluded from earnings and reported in a separate component of
stockholders' equity.
SFAS No. 115 is restrictive as to suitable reasons for selling any security
classified as held-to-maturity. Investments and mortgage-backed securities
classified as available-for-sale provide greater flexibility for asset/liability
management, liquidity needs, reacting to changes in market rates and related
prepayment risk, and changes in availability of and the yield on alternative
investments. The Bank has determined that all of their mortgage-backed
securities are classified as available-for-sale, and a majority of their
investment securities are classified as available-for-sale.
Loans Receivable
- ----------------
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses, and net deferred loan-origination costs.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgement, the borrower's
ability to make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.
Effective July 1, 1995, the Bank adopted SFAS No. 114, Accounting by Creditors
-----------------------
for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for
- ------------------------ ---------------------------
Impairment of a Loan - Income Recognition and Disclosures, which amends SFAS No.
- ---------------------------------------------------------
114. SFAS No. 114, as amended by SFAS No. 118, defines the recognition criteria
for loan impairment and the measurement methods for certain impaired loans and
23
<PAGE>
June 30, 1998, 1997 and 1996
loans for which terms have been modified in troubled-debt restructurings (a
restructured loan). Specifically, a loan is considered impaired when it is
probable a creditor will be unable to collect all amounts due - both principal
and interest according to the contractual terms of the loan agreement. When
measuring impairment, the expected future cash flows of an impaired loan are
required to be discounted at the loan's effective interest rate. Alternatively,
impairment can be measured by reference to an observable market price, if one
exists, or the fair value of the collateral for a collateral-dependent loan.
Regardless of the historical measurement method used, SFAS No. 114 requires a
creditor to measure impairment based on the fair value of the collateral when
the creditor determines foreclosure is probable. Additionally, impairment of a
restructured loan is measured by discounting the total expected future cash
flows at the loan's effective rate of interest as stated in the original loan
agreement.
The Bank applies the recognition criteria of SFAS No. 114 to multi-family
residential loans, commercial real estate loans and agriculture loans. Smaller
balance, homogeneous loans, including one-to-four family residential loans and
consumer loans, are collectively evaluated for impairment. SFAS No. 118 amends
SFAS No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans. The Bank has elected to continue to use its
existing nonaccrual methods for recognizing interest on impaired loans. The
adoption of SFAS No. 114 and SFAS No. 118 resulted in no prospective adjustment
to the allowance for loan losses and did not affect the Bank's policies
regarding charge-offs or recoveries.
Loan-Origination Fees, Commitment Fees, and
- -------------------------------------------
Related Costs
- -------------
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income using the interest
method over the contractual life of the loans, adjusted for estimated
prepayments based on the Bank's historical prepayment experience.
Foreclosed Real Estate
- ----------------------
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value less estimated selling costs at the date of
foreclosure. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are expensed.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated net realizable value.
All foreclosed real estate owned is held-for-sale. There was no foreclosed real
estate owned at June 30, 1998.
Income Taxes
- ------------
Deferred income taxes arise from temporary differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
An asset and liability approach is used for financial accounting and reporting
of income taxes which, among other things, requires the Bank to take into
account changes in the tax rates when valuing the deferred income tax accounts
recorded on the balance sheet. A deferred tax liability or asset is recognized
for the estimated future tax effects attributable to temporary differences and
loss carryforwards. Temporary differences include
24
<PAGE>
June 30, 1998, 1997 and 1996
differences between financial statement income and tax return income which are
expected to reverse in future periods as well as differences between the tax
bases of assets and liabilities and their amounts for financial reporting which
are also expected to be settled in future periods. To the extent a deferred tax
asset is established which is not realizable, a valuation allowance shall be
established against such asset.
Premises and Equipment
- ----------------------
Land is carried at cost. Buildings, furniture, fixtures, and equipment are
carried at cost, less accumulated depreciation and amortization. Buildings,
furniture, fixtures and equipment are depreciated using the straight-line method
over the estimated useful lives of the assets. Estimated useful lives range from
ten to forty years for buildings and related improvements and from three to
eighteen years for furniture, fixtures and equipment.
Net Income Per Share
- --------------------
Earnings per share are calculated in accordance with Financial Accounting
Standards Board Statement No. 128 (SFAS No. 128). This statement, which is
effective for the periods ending after December 15, 1997, requires disclosure of
basic earnings per share and diluted earnings per share, and also requires
restatement of earnings per share data for prior periods. Basic earnings per
share was computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. The company
has no itrems which cause dilution of earnings per share.
The following shows the amounts used in computing earnings per share.
1998
-------------------------------
Income Shares Per-Share
(numerator)(denominator) amount
Basic EPS Net income $597,000 552,151 $1.08
=====
1997
-----------------------------
Income Shares Per-Share
(numerator) (denominator) amount
Basic EPS Net income $300,000 547,929 $ .55
=====
25
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 2: INVESTMENT SECURITIES
Securities available-for sale consist of the following:
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Bonds, notes and debentures
at fair value:
Federal agencies $ 598 $ -- $ (1) $ 597
FHLB zero coupon bond 556 17 -- 573
Equity securities at fair value:
Mutual funds 1,499 9 (17) 1,491
FNMA preferred stock 1,002 44 -- 1,046
FHLMC preferred stock 665 24 -- 689
Preferred stock trust 500 15 -- 515
------- ------- ------- -------
$ 4,820 $ 109 $ (18) $ 4,911
======= ======= ======= =======
<CAPTION>
June 30, 1997
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Bonds, notes and debentures
at fair value:
Federal agencies $ 1,591 $ 4 $ (20) $ 1,575
FHLB zero coupon bonds 95 -- (2) 93
Equity securities at fair value:
Mutual funds 1,415 2 (22) 1,395
FNMA preferred stock 1,002 32 -- 1,034
FHLMC preferred stock 665 -- (2) 663
------- ------- ------- -------
$ 4,768 $ 38 $ (46) $ 4,760
======= ======= ======= =======
</TABLE>
26
<PAGE>
June 30, 1998, 1997 and 1996
Securities held-to-maturity consist of the following:
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
------------
<S> <C> <C> <C> <C>
Bonds, notes and debentures at fair value:
Municipal securities $ 245 $ -- $ -- $ 245
======= ======= ======= =======
<CAPTION>
June 30, 1997
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
------------
<S> <C> <C> <C> <C>
Bonds, notes and debentures at fair value:
Bankers acceptance $ 998 $ -- $ -- $ 998
U.S. Treasury note 500 -- (1) 499
Federal agencies 496 2 -- 498
Municipal securities 215 -- -- 215
------- ------- ------- -------
$ 2,209 $ 2 $ (1) $ 2,210
======= ======= ======= =======
</TABLE>
The following is a summary of debt securities at June 30, 1998, by contractual
maturity for available-for-sale and held-to-maturity securities.
<TABLE>
<CAPTION>
Securities Available- Securities To Be Held-
for-Sale To-Maturity
---------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(In Thousands)
------------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 215 $ 215
Due after one year
through five years 498 496 -- --
Due after five years
through ten years 100 101 -- --
Due after ten year 556 573 30 30
------ ------ ------ ------
$1,154 $1,170 $ 245 $ 245
====== ====== ====== ======
</TABLE>
During the year ended June 30, 1998, the Bank had gross realized gains of
$30,000 on sales of available-for-sale investment securities and no gross
realized losses.
During the year ended June 30, 1997, the Bank did not sell any investment
securities from their available-for-sale portfolio.
27
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 3: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
--------------
<S> <C> <C> <C> <C>
Mortgage-backed securities at fair value:
GNMA certificates $ 2,870 $ 7 $ (7) $ 2,870
FHLMC certificates 1,753 15 (1) 1,767
FNMA certificates 5,643 49 (22) 5,670
CMO/REMIC 10,666 50 (17) 10,699
SBA pools 8,451 45 (7) 8,489
-------- -------- -------- --------
$ 29,383 $ 166 $ (54) $ 29,495
======== ======== ======== ========
</TABLE>
Of the $10,699,000 of fair value of CMO/REMIC's above, $10,175,000 was
guaranteed by FNMA or FHLMC. The balance of $524,000 was guaranteed by private
mortgage insurance companies.
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
--------------
<S> <C> <C> <C> <C>
Mortgage-backed securities at fair value:
GNMA certificates $ 1,193 $ 15 $ (3) $ 1,205
FHLMC certificates 1,505 21 (6) 1,520
FNMA certificates 3,109 56 (1) 3,164
CMO/REMIC 4,617 12 (8) 4,621
SBA pools 8,118 13 (140) 7,991
-------- -------- -------- --------
$ 18,542 $ 117 $ (158) $ 18,501
======== ======== ======== ========
</TABLE>
Of the $4,621,000 of fair value of CMO/REMIC's above, $4,112,000 was guaranteed
by FNMA or FHLMC. The balance of $509,000 was guaranteed by private mortgage
insurance companies.
28
<PAGE>
June 30, 1998, 1997 and 1996
The amortized cost and fair value of mortgage-backed securities by contractual
maturity, are shown below as of June 30, 1998. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Mortgage-Backed Securities
Available-for-Sale
------------------------------
Amortized Fair
Cost Value
--------- -------
(In Thousands)
--------------
<S> <C> <C>
Due in one year or less $ -- $ --
Due after one year
through five years 254 255
Due after five years
through ten years 2,526 2,533
Due after ten years 26,603 26,707
------- -------
$29,383 $29,495
======= =======
</TABLE>
During the year ended June 30, 1998, the Bank sold mortgage-backed securities
available-for-sale with total proceeds of $2,311,000 resulting in gross realized
gains of $35,000 and no realized losses. During the year ended June 30, 1997,
the Bank sold mortgage-backed securities available-for-sale with total proceeds
of $1,862,000 resulting in gross realized gains of $14,000 and no realized
losses.
During the year ended June 30, 1996, the Bank sold mortgage-backed securities
available-for-sale with total proceeds of $2,257,000 resulting in gross realized
gains of $46,000 and no realized losses.
Mortgage-backed securities available-for-sale with a fair value of $16,036,000
were pledged in connection with Federal Home Loan Bank
borrowings at June 30, 1998.
29
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 4: LOANS RECEIVABLE
Loans receivable at June 30 are summarized as follows:
1998 1997
-------- --------
(In Thousands)
Mortgage loans:
One-to-four-family $25,633 $23,386
Commercial 1,828 471
Non-residential real estate 2,237 1,729
Multi-family 589 --
------- -------
Total mortgage loans 30,287 25,586
------- -------
Other loans:
Automobile 2,447 1,669
SBA guaranteed 952 971
Home improvement - FHA 936 1,202
Loans on savings accounts 468 395
Other 492 410
------- -------
Total other loans 5,295 4,647
------- -------
Add:
Deferred loan costs 3 15
Less:
Loans in process 6 1
Allowance for loan losses 324 285
------- -------
Loans receivable, net $35,255 $29,962
======= =======
At June 30, 1998, the Bank's loan portfolio consisted of $11,203,000 of fixed
rate loans and $24,378,000 of variable rate loans. The fixed rate loans had a
weighted average term to maturity of 12.88 years and a weighted average interest
rate of 8.90%.
The Bank is required to maintain qualifying collateral for the Federal Home Loan
Bank of Des Moines (the "Bank") representing 150 percent of current Bank credit.
(See Note 8.) At June 30, 1998, the Bank met this requirement. Qualifying
collateral is defined as fully disbursed, whole first mortgage loans on improved
residential property or securities representing a whole interest in such
mortgages. The mortgages must not be past due more than 60 days. They must not
be otherwise pledged or encumbered as security for other indebtedness, and the
documents must be in the physical possession or control of the Bank. The
documents that govern the determination of the qualifying mortgage collateral
are the (a) Federal Home Loan Bank of Des Moines' Credit Policy Statement, dated
May 1, 1997, and (b) the Agreement for Advances, Pledge, and Security Agreement
between the Bank and the Federal Home Loan Bank of Des Moines, dated April 3,
1989.
30
<PAGE>
June 30, 1998, 1997 and 1996
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
1998 1997 1996
------ ------ ------
(In Thousands)
Balance at beginning of year $ 285 $ 283 $ 81
Provision charged to
income 91 -- 210
Charge-offs (65) (3) (11)
Recoveries 13 5 3
----- ----- -----
Balance at end of year $ 324 $ 285 $ 283
===== ===== =====
Nonaccrual and renegotiated loans for which interest has been reduced totaled
approximately $495,000 and $224,000 at June 30, 1998 and 1997, respectively.
Interest income foregone on these loans was insignificant.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
NOTE 5: ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30 is summarized as follows:
1998 1997
---- ----
(In Thousands)
Investment securities $ 51 $ 26
Mortgage-backed
securities 266 177
Loans receivable 306 243
----- ----
$ 623 $446
===== ====
NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment at June 30 are summarized as follows:
1998 1997
---- ----
(In Thousands)
Cost:
Land $101 $101
Building 396 359
Furniture, fixtures, and equipment 457 473
---- ----
954 933
Less accumulated depreciation and
amortization 537 576
---- ----
$417 $357
==== ====
Depreciation expense for the years ended June 30, 1998, 1997 and 1996 was
$54,000, $52,000 and $23,000, respectively.
31
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 7: DEPOSITS
<TABLE>
<CAPTION>
Deposits at June 30 are summarized as follows:
1998 1997
---------------------------- -----------------------------
Weighted Weighted
Average Average
Rate Amount % Rate Amount %
----- ------- ----- ---- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing -- % $ 1,772 5.0 -- % $ 1,800 5.1
Demand and NOW 2.61% 2,523 7.2 2.71% 2,371 6.8
Money market 3.94% 6,830 19.4 3.94% 6,982 20.0
Passbook savings 3.00% 2,572 7.3 3.00% 2,520 7.2
------- ----- ------- -----
2.92% 13,697 38.9 3.10% 13,673 39.1
------- ----- ------- -----
Certificates of deposit:
2.00% to 2.99% -- % -- -- 2.00% 2 --
3.00% to 3.99% -- % -- -- 3.91% 6 --
4.00% to 4.99% 4.75% 573 1.6 4.79% 1,108 3.2
5.00% to 5.99% 5.47% 17,985 51.0 5.40% 16,144 46.2
6.00% to 6.99% 6.37% 2,610 7.4 6.32% 3,580 10.2
7.00% to 7.99% 7.40% 356 1.0 7.26% 434 1.2
8.00% to 8.99% 8.10% 34 .1 8.10% 33 .1
5.59% 21,558 61.1 5.57% 21,307 60.9
------- ----- ------- -----
4.59% $35,255 100.0 4.60% $34,980 100.0
======= ===== ======= =====
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $1,924,000 and $1,291,000 at June 30,
1998 and 1997, respectively. Balances of deposit accounts in excess of $100,000
are not federally insured.
At June 30, 1998, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Year Ending June 30,
---------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
------- ------- ------- ------- ------- ---------
(In Thousands)
--------------
<S> <C> <C> <C> <C> <C> <C>
4.00% to 4.99% $ 515 $ 46 $ 12 $ -- $ -- $ --
5.00% to 5.99% 12,682 2,793 1,621 385 191 312
6.00% to 6.99% 350 1,527 649 62 20 3
7.00% to 7.99% 322 34 -- -- -- --
8.00% to 8.99% 34 -- -- -- -- --
------- ------- ------- ------- ------- -------
$13,903 $ 4,400 $ 2,282 $ 447 $ 211 $ 315
======= ======= ======= ======= ======= =======
</TABLE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Passbook, money market and NOW $ 429 $ 432 $ 453
Interest expense on certificates of deposit greater
than $100,000 94 74 75
Certificates of deposit 1,081 1,110 1,106
------ ------ ------
$1,604 $1,616 $1,634
====== ====== ======
</TABLE>
32
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES
Advances consist of the following:
Final Interest June 30,
Maturity Dates Rate Range 1998
-------------- ---------- --------------
(In thousands)
--------------
July 1, 1998-June 30, 1999 5.556%-6.130% $21,300
July 1, 1999-June 30, 2000 5.930%-6.630% 2,200
July 1, 2000-June 30, 2001 6.000%-6.820% 1,200
July 1, 2001-June 30, 2002 7.310%-7.310% 500
July 1, 2002-June 30, 2003 6.280%-6.280% 486
Thereafter 4.820%-6.860% 5,389
-------
$31,075
=======
June 30,
1997
--------------
(In thousands)
--------------
July 1, 1997-June 30, 1998 5.350%-6.160% $11,700
July 1, 1998-June 30, 1999 6.030%-6.130% 600
July 1, 1999-June 30, 2000 6.330%-6.630% 1,100
July 1, 2000-June 30, 2001 6.000%-6.820% 1,200
July 1, 2001-June 30, 2002 7.310%-7.310% 500
Thereafter 5.760%-6.570% 1,165
-------
$16,265
=======
See Notes 3 and 4 of the financial statements for collateral securing this
indebtedness.
The maximum amount of Federal Home Loan Bank advances outstanding at any month
end during the years ended June 30, 1998 and 1997 was $31,075,000 and
$16,265,000 respectively.
33
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 9: PENSION PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Bank had a defined contribution pension plan which covered all eligible
employees who had completed one full year of continuous service. The benefits
contemplated by the plan were funded through employer contributions on the basis
of salaries. The cost of funding is charged to current operations as accrued and
there is no unfunded liability for past service. The amount funded and charged
to expense amounted to approximately $23,000 in 1996. The Bank is in the process
of discontinuing the plan.
Employee Stock Ownership Plan
- -----------------------------
In conjunction with the Conversion, the Bank formed an Employee Stock Ownership
Plan ("ESOP"). The ESOP covers substantially all employees with more than one
year of employment and who have attained the age of 21. The ESOP borrowed
$474,000 from the Company and purchased 47,401 common shares issued in the
Conversion. The loan is payable over a period of 10 years with an interest rate
equal to the Bank's prime rate. The Bank makes scheduled discretionary cash
contributions to the ESOP sufficient to service the amount borrowed.
Shares are released for allocation to participants based upon the ratio of the
current year's debt service to the sum of total principal and interest payments
over the life of the loan. Released shares are allocated among ESOP participants
on the basis of compensation in the year of allocation.
Dividends paid on allocated shares are added to participant accounts. Dividends
paid on unallocated shares are to be used to pay principal and interest on the
loan.
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the debt of the ESOP is recorded as debt and shares pledged as
collateral are reported as unearned ESOP shares, a reduction of stockholder's
equity. As shares are released from collateral, the Bank records compensation
expense in an amount equal to the fair value of the shares, and the shares
become outstanding for net income per share computations. ESOP compensation
expense was $65,000 and $73,000 for the years ended June 30, 1998 and 1997,
respectively.
The ESOP shares as of June 30, 1998 were as follows:
Allocated shares 7,630
Shares released for allocation 2,370
Unreleased shares 37,401
------
Total ESOP shares 47,401
======
Fair value of unreleased shares
at June 30, 1998 $615,000
========
34
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 10: INCOME TAXES
As discussed in Note 1, the Company uses the liability method of accounting for
income taxes. Under this method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities.
Retained earnings of the Bank at June 30, 1998 and 1997 includes approximately
$127,000, for which no provision for federal income tax has been made. This
amount represents allocation of income to bad debt deductions for tax purposes
only. Reduction of amounts allocated for purposes other than tax bad debt losses
will create income for tax purposes only, which will be subject to the then
current corporate income tax rate.
Income tax expense for the periods then ended is summarized as follows:
June 30,
------------------------------------------
1998 1997 1996
--------- --------- ---------
Current $ 327,000 $ 221,000 $ 208,000
Deferred (benefit) 21,000 (50,000) (41,000)
--------- --------- ---------
$ 348,000 $ 171,000 $ 167,000
========= ========= =========
Total income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rates of 34 percent to income before income taxes as a result
of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $ 321,000 $ 160,000 $ 160,000
State tax net of Federal tax benefit 37,000 12,000 8,000
Municipal income and dividends nontaxable (40,000) (16,000) (3,000)
Compensation expense for employee stock plan 4,000 5,000 --
Other 26,000 10,000 2,000
--------- --------- ---------
Total income tax expense $ 348,000 $ 171,000 $ 167,000
========= ========= =========
</TABLE>
35
<PAGE>
June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Deferred tax liabilities (assets) are comprised of the following at June 30:
1998 1997
--------- ---------
<S> <C> <C>
Income and expenses recognized in the financial statements on the accrual
basis, but on the cash basis for tax purposes $ 152,000 $ 125,000
Income tax basis of FHLB stock versus carrying value 51,000 49,000
Deferred loan costs 1,000 6,000
Net fixed assets 35,000 19,000
Unrealized gain on available-for-sale securities 69,000 --
--------- ---------
Gross deferred tax liabilities 308,000 199,000
--------- ---------
Unrealized loss on available-for-sale securities -- (17,000)
Provision for loan loss (130,000) (110,000)
--------- ---------
Gross deferred tax assets (130,000) (127,000)
--------- ---------
Net deferred tax liability $ 178,000 $ 72,000
========= =========
</TABLE>
For years ended June 30, 1998, 1997 and 1996, deferred tax expense resulted from
temporary differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities. The sources and tax effects of
these temporary and timing differences are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income and expense recognized in the financial statements on
the accrual basis, but on the cash basis for tax purposes $ 28,000 $ (1,000) $ 30,000
FHLB stock basis 1,000 -- 3,000
Tax bad debt reserve -- (44,000) 4,000
Deferred loan fees (4,000) (8,000) 2,000
Net fixed assets 15,000 4,000 9,000
Provision for loan loss (19,000) (1,000) (89,000)
-------- -------- --------
$ 21,000 $(50,000) $(41,000)
======== ======== ========
</TABLE>
The Bank did not establish a valuation allowance for its deferred tax assets as
management believes they are realizable.
36
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 11: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of the Comptroller of the Currency
(OCC). Failure to meet the minimum regulatory capital requirements can initiate
certain mandatory, and possible additional discretionary actions by regulators,
that if undertaken, could have a direct material affect on the Bank and the
consolidated financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective action guidelines are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined), and
tangible capital to adjusted total assets (as defined). As discussed in greater
detail below, as of June 30, 1998, the Bank does meet all of the capital
adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the OCC, the Bank was
categorized as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as
disclosed in the table below. There are no conditions or events since the most
recent notification that management believes have changed the Bank's prompt
corrective action category.
<TABLE>
<CAPTION>
For Capital Adequacy Purposes
and to be Well-Capitalized
under the
Prompt Corrective Action
Actual Provisions
------------------ -----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
As of June 30, 1998
Total Risk-Based Capital (to Risk
Weighted Assets) $6,599 21.4% $3,084 10.0%
Tier I Capital (to Risk-Weighted
Assets) $6,275 20.3% $1,855 6.0%
Tier I Capital (to Adjusted Total Assets) $6,275 8.7% $4,328 6.0%
Tangible Capital (to Adjusted Total Assets) $6,275 8.7% $3,606 5.0%
As of June 30, 1997
Total Risk-Based Capital (to Risk
Weighted Assets) $6,155 26.1% $2,359 10.0%
Tier I Capital (to Risk-Weighted Assets) $5,870 24.9% $1,416 6.0%
Tier I Capital (to Adjusted Total Assets) $5,870 10.9% $3,241 6.0%
Tangible Capital (to Adjusted Total
Assets) $5,870 10.9% $2,701 5.0%
</TABLE>
37
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 12: GAIN ON SALES OF INTEREST EARNING ASSETS, NET
Gains are summarized as follows for the years ended June 30:
1998 1997 1996
-------- -------- --------
Realized gains on sales of:
Mortgage-backed securities - gains $ 36,000 $ 14,000 $ 46,000
Investment securities - gains 30,000 -- --
-------- -------- --------
$ 66,000 $ 14,000 $ 46,000
======== ======== ========
NOTE 13: OTHER NON-INTEREST INCOME AND EXPENSE
Other non-interest income and expense amounts are summarized as follows for the
years ended June 30:
1998 1997 1996
-------- -------- --------
Other noninterest income:
Loan late charges $ 13,000 $ 10,000 $ 7,000
Other 9,000 9,000 73,000
-------- -------- --------
$ 22,000 $ 19,000 $ 80,000
======== ======== ========
Other noninterest expense:
Advertising and promotion $ 24,000 $ 20,000 $ 19,000
Telephone 19,000 17,000 16,000
Other 122,000 66,000 74,000
-------- -------- --------
$165,000 $103,000 $109,000
======== ======== ========
In 1996, other income includes approximately $66,000 of patronage dividends and
gain on the sale of the Bank's former cooperative data processing service
bureau. Patronage dividends are an allocation of earnings to the user owners of
a cooperative association, which may be credited to the user owner's account or
paid in cash. As a result of the sale of the service bureau, all of the
dividends have been paid to the Bank.
NOTE 14: COMMITMENTS AND CONTINGENCIES
Loan Commitments
- ----------------
At June 30, 1998, the Bank had outstanding firm commitments to originate loans
as follows:
Fixed Rate Variable Rate Total
---------- ------------- -----
$74,000 $655,000 $729,000
======= ======== ========
These loans are at rates of 7.25% to 9.75% for terms of five to thirty years.
38
<PAGE>
June 30, 1998, 1997 and 1996
The Bank is involved, from time to time, as plaintiff or defendant in various
legal actions arising in the normal course of their businesses. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing the Bank
in the proceedings, that the resolution of these proceedings should not have a
material effect on the Bank's financial position or results of operations on a
consolidated basis.
NOTE 15: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Those instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the statement of financial position. The contract or notional
amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the commitments to extend credit is represented by the contractual
notional amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Unless noted otherwise, the Bank does not require collateral or other security
to support financial instruments with credit risk.
Contract or
Notional Amount
---------------
Financial instruments the contract
amounts of which represent credit risk:
Commitments to extend credit $ 729,000
Open lines of credit $ 543,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
commitments and outstanding lines of credit generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since some
commitments can expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant, and
equipment, and income-producing commercial properties.
The Bank invests funds in other financial institutions in the form of
certificates of deposit, none of which exceed the insured limit of $100,000. In
addition, the Bank maintains cash accounts at the Federal Home Loan Bank and
four banks. Balances reflected on the banks' statements exceed the $100,000
insurance limit by varying amounts on a daily basis. The Bank controls this risk
by monitoring the financial condition of the banks. The Federal Home Loan Bank
is an instrumentality of the U.S. Government.
39
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 16: RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Bank or its subsidiary were loan
customers. A summary of aggregate related party loan activity, for loans
aggregating $60,000 or more to any one related party, is as follows:
June 30, June 30,
1998 1997
-------- --------
Beginning balance $172,000 $ 77,000
New loans 90,000 97,000
Repayments 14,000 2,000
-------- --------
Ending balance $248,000 $172,000
======== ========
In the opinion of management, related party loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve more
than the normal risk of collectibility.
NOTE 17: CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statement of financial condition, as of June 30, 1998
and condensed statements of earnings and cash flows for the year then ended for
IFB Holdings, Inc. should be read in conjunction with the consolidated financial
statements and the notes thereto.
June 30,
1998
--------------
(In thousands)
ASSETS
Cash on hand and noninterest earning deposits $ 1,219
Interest-earning deposits in other institutions 344
Investment securities available-for-sale 515
Mortgage-backed securities available-for-sale 441
Interest receivable 2
Investment in subsidiary 6,415
ESOP loan receivable 374
-------
Total assets $ 9,310
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable $ (4)
Accrued expenses 2
-------
Total liabilities (2)
-------
Common stock 6
Additional paid in capital 5,554
Retained earnings 3,992
Unrealized gain (loss) on securities, net of taxes 134
ESOP obligation (374)
-------
Total Stockholders' Equity 9,312
-------
Total liabilities and
stockholders' equity $ 9,310
=======
40
<PAGE>
June 30, 1998, 1997 and 1996
Statement of Income
Year Ended
June 30,
1998
--------------
(In thousands)
Interest income:
Investment securities $ 96
ESOP loan 34
-------
130
Income from investment in subsidiary 528
Noninterest expense 18
-------
Income before income taxes 640
Income tax expense 43
-------
Net income $ 597
=======
Statement of Cash Flows
Year Ended
June 30,
1998
--------------
(In thousands)
Cash flows from operating activities:
Net income $ 597
Equity in earnings of subsidiary (350)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums and discounts (5)
(Increase) decrease in interest receivable 9
Decrease in income tax payable (34)
Increase (decrease) in other liabilities (1)
-------
Net cash provided by operating activities 216
-------
Cash flows from investing activities:
Purchase of investment securities (941)
Maturities of investments 2,000
Repayment on ESOP loan 47
-------
Net cash provided (used) in investing activities 1,106
-------
Cash flows from financing activities:
Dividends paid (164)
-------
Net cash provided by financing activities (164)
-------
Increase in cash and cash equivalents 1,158
Cash and cash equivalents at beginning of period 405
-------
Cash and cash equivalents at end of period $ 1,563
=======
Dividends paid by subsidiary to parent $ 178
=======
41
<PAGE>
June 30, 1998, 1997 and 1996
NOTE 18: FEDERAL DEPOSIT INSURANCE PREMIUMS
The deposits of the Bank are presently insured by the Savings Association
Insurance Fund (SAIF), which together with the Bank Insurance Fund (BIF), are
the two insurance funds administered by the FDIC. In the third quarter of 1995,
the FDIC lowered the premium schedule for BIF-insured institutions in
anticipation of the BIF achieving its statutory reserve ratio. The reduced
premium created a significant disparity in deposit insurance expense, causing a
competitive advantage for BIF members. Legislation enacted on September 30, 1996
provided for a one-time special assessment of .657% of the Bank's SAIF insured
deposits at March 31, 1995. The purpose of the assessment is to bring the SAIF
to its statutory reserve ratio. Based on the above formula, the Bank's SAIF
assessment of $226,000 was recorded in the 1997 consolidated financial
statements. Although the special one-time assessment significantly increased
noninterest expense for the year, the anticipated reduction in the premium
schedule will reduce the Bank's federal insurance premiums for future periods.
NOTE 19: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
company's financial instruments at June 30, 1998 and 1997. FASB Statement No.
107, Disclosures About Fair Value of Financial Instruments, defines the fair
-----------------------------------------------------
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
<TABLE>
<CAPTION>
1998 1997
------------------------------ -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------ ------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Nontrading instruments:
Cash and cash equivalents $ 3,541 $ 3,541 $ 3,003 $ 3,003
Investment securities and mortgage-backed securities $ 34,651 $ 34,651 $ 25,470 $ 25,470
Loans, net $ 35,255 $ 35,747 $ 29,962 $ 30,162
Accrued interest receivable $ 623 $ 623 $ 446 $ 446
FHLB and Federal Reserve bank stock $ 1,638 $ 1,638 $ 897 $ 897
Deposit liabilities $ 35,255 $ 35,923 $ 34,980 $ 35,106
Debt-FHLB advances $ 31,075 $ 30,203 $ 16,265 $ 16,193
Other liabilities $ 536 $ 536 $ 334 $ 334
Unrecognized financial instruments:
Commitments to extend credit $ - $ - $ - $ -
Open lines of credit $ - $ - $ - $ -
</TABLE>
42
<PAGE>
June 30, 1998, 1997 and 1996
The carrying amounts in the table are included in the statement of financial
position under the indicated captions, except for advances from borrowers for
taxes and insurance, income taxes payable and accrued expenses and other
liabilities which have been combined into other liabilities. For unrecognized
financial instruments, the carrying amounts represent accruals or deferred
income arising from those unrecognized financial instruments for which at June
30, 1998, there were none.
Estimation of Fair Values
- -------------------------
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments.
Short-term financial instruments are valued at their carrying amounts included
in the statement of financial position, which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments. This
approach applies to cash and cash equivalents, accrued receivables, and certain
other liabilities.
Loans are valued on the basis of estimated future receipts of principal and
interest, discounted at various rates. Future cash flows of loans are estimated
based on their maturities and weighted average rates and are discounted at
current rates offered for similar loan terms to new borrowers.
Investment securities are valued at quoted market prices if available. For
unquoted securities, the reported fair value is estimated by the Company on the
basis of financial and other information.
Fair value of demand deposits and deposits with no defined maturity is taken to
be the amount payable on demand at the reporting date. The fair value of
fixed-maturity deposits is estimated using rates currently offered for deposits
of similar remaining maturities. The intangible value of long-term relationships
with depositors is not taken into account in estimating the fair values
disclosed.
Rates currently available to the Company for Federal Home Loan Bank advances
with similar terms and remaining maturities are used to estimate the fair value
of existing borrowings as the present value of expected cash flows. Advances
which have maturities within one year or rates which adjust monthly are valued
at the carrying amount.
NOTE 20: RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130 "Reporting Comprehensive Income," will be adopted July 1, 1998.
This statement provides accounting and reporting standards to report a measure
of all changes in equity of an enterprise that results from recognized
transactions and economic events of the period. The major component of
comprehensive income for the Company will be unrealized gains and losses on
certain investments in debt and equity securities.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
43
<PAGE>
June 30, 1998, 1997 and 1996
Management believes adoption of SFAS Nos. 130 and 133 does not have a material
effect on the financial position or results of operations, nor will adoption
require additional capital resources.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Association keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
NOTE 21: CONVERSION TO STOCK FORM OF OWNERSHIP
On December 30, 1996, the Company sold 592,523 shares of common stock at $10.00
per share to depositors and employees of the Bank. On January 30, 1997, the
charter was changed from a federal stock savings bank to a national bank. Total
proceeds from the Conversion, after deducting conversion expenses of $403,000,
were $5,522,000 and are reflected as common stock and additional paid-in capital
in the accompanying consolidated statement of financial condition. The Company
used $2,762,000 of the net proceeds to acquire all of the capital stock of the
Bank.
The Bank may not declare or pay a cash dividend if the effect thereof would
cause its net worth to be reduced below either the amount required for the
liquidation account discussed below or regulatory capital requirements.
At the time of the conversion, the Bank established a liquidation account in an
amount equal to its retained earnings as reflected in the latest statement of
financial condition used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental account holders who continue to maintain their deposit accounts in
the Bank after conversion. In the event of a complete liquidation of the Bank,
and only in such an event, eligible depositors who continue to maintain accounts
shall be entitled to receive a distribution from the liquidation account before
any liquidation may be made with respect to common stock.
Unlike the Bank, the Company is not subject to regulatory restrictions on the
payment of dividends to is stockholders. However, the Company's source of funds
for future dividends may depend upon dividends received by the Company from the
Bank.
NOTE 22: OFFICER, DIRECTOR AND EMPLOYEE PLANS
The Company's stockholders approved a stock option and incentive plan and a
recognition and retention plan (RRP) at the Annual meeting in November, 1997.
Stock Option and Incentive Plan
- -------------------------------
The plan is implemented for the benefit of the directors, officers and employees
of the Company and its affiliates. The maximum number of shares to be issued
from authorized but not currently outstanding shares under the plan is 59,252 or
10% of the total shares issued in the conversion. The exercise price of the
options shall not be less than the common stock market value at the date the
options are granted.
Recognition and Retention Plan
- ------------------------------
The RRP plan can award shares authorized but not currently outstanding to
directors and to employees in key management positions in order to provide them
with a proprietary interest in the Company in a manner designed to encourage
such employees to remain with the Company. The maximum number of shares
authorized under the plan is 23,700 or 4% of the total shares issued in the
conversion. No shares have been granted or awarded for the stock option and
incentive plan or the RRP.
44
<PAGE>
June 30, 1998, 1997 and 1996
The effective date of the plans was January 1, 1998. The term of the plan is ten
years. The future impact of the plan would be to increase (1) the number of
outstanding shares of common stock, and (2) compensation expense, and decrease
(1) net income per share, and (2) book value per share. It is not possible to
quantify the effect on the financial position or results of operations from
implementing the plan at this time.
NOTE 23: MARKET RISK DISCLOSURES
The Bank's net portfolio values would change as market interest rates change. As
of June 30, 1998, a 200 basis point increase in the market interest rates would
cause approximately a $531,000, or 8.79 percent, decline in the market value of
its portfolio assets.
NOTE 24: RESTATEMENT OF COMMON STOCK PAR VALUE
Common stock was miscalculated at the time it was initially recorded by $53,000.
Additional paid-in capital was understated by the same amount. The June 30, 1997
financial statements have been restated, resulting in no effect on total
stockholders' equity.
NOTE 25: YEAR 2000
The Bank has been in contact with hardware and software providers of their data
processing system. Testing has begun and should be completed prior to December
31, 1998, though testing will continue through June 30, 1999.
Through contact with the various providers, the Bank does not foresee any major
capital expenditure and expects a cost of no more than $10,000 to be Year 2000
compliant.
NOTE 26: SUBSEQUENT EVENT-TREASURY STOCK
Subsequent to June 30, 1998, the company acquired 118,125 shares of treasury
stock at a cost of $1,816,746.
45
<PAGE>
IFB HOLDINGS, INC.
------------------
STOCKHOLDER INFORMATION
-----------------------
Annual Meeting
- --------------
The Annual Meeting of Stockholders will be held at 2:00 p.m. on November 17,
1998 at the Grand River Inn, located at the intersection of highways U.S. 36 and
U.S. 65, Chillicothe, Missouri.
Stock Listing
- -------------
IFB Holdings, Inc. common stock is traded on the NASDAQ Bulletin Board under the
symbol "IFBH".
Price Range of Common Stock
- ---------------------------
The per share price range of the common stock and dividends paid per share of
common stock, for each quarter since conversion was as follows:
Quarter Ended High Low Dividends
------------- ---- --- ---------
December 31, 1996 12 1/4 12 1/4 N/A
March 31, 1997 13 12 1/4 N/A
June 30, 1997 13 12 1/4 $.15
September 30, 1997 14 1/4 12 1/2 N/A
December 31, 1997 15 1/4 14 $.15
March 31, 1998 16 9/16 14 3/4 N/A
June 30, 1998 17 16 3/8 $.15
A $.15 per share dividend was declared by the Board of Directors on November 18,
1997, payable December 31, 1997 to stockholders of record December 10, 1997. A
$.15 per share dividend was declared by the Board of Directors on May 19, 1998,
payable June 30, 1998 to stockholders of record June 5, 1998. As of June 30,
1998, there were 199 stockholders of record and 592,523 shares of common stock
issued and outstanding.
Dividends will be paid upon the determination of the Board of Directors that
such payment is consistent with the long-term interests of IFB Holdings, Inc.
The factors affecting this determination include the Company's current and
projected earnings, operating results, financial condition, regulatory
restrictions, future growth plans, and other relevant factors.
Illinois Stock Transfer Company is the Company's stock agent and registrar.
Illinois Stock Transfer Company maintains the Company's stockholder records. To
change the name, address, or ownership of stock, to report lost stock
certificates, or to consolidate accounts, contact Illinois Stock Transfer
Company, 209 West Jackson Boulevard, Suite 903, Chicago, Illinois 60606, phone
number: 312-427-2953.
Annual Report, Other Reports and General Inquiries
- --------------------------------------------------
IFB Holdings, Inc. is required to file an Annual Report on Form 10KSB for its
fiscal year ended June 30, 1998 with the Securities and Exchange Commission.
Copies of this annual report may be obtained without charge upon written request
to: Earle Teegarden, Jr. 522 Washington Street - Box 110, Chillicothe, Missouri
64601-0110, phone number: 660/646-3733.
<TABLE>
<CAPTION>
Market Makers
- -------------
<S> <C> <C>
Trident Securities, Inc. Friedman, Billings, Ramsey & Co., Inc. Tucker Anthony, Inc.
1275 Peachtree St., N.E. - Suite 466 1919 Pennsylvania Ave., N.W. - Suite 616 1 South Wacker Dr.
Atlanta, Georgia 30309 Washington, D.C. 20006 Chicago, Illinois 60606
800-340-6321 800-846-5050 Contact Curt Thompson at
888-655-4135
</TABLE>
46
<PAGE>
IFB HOLDINGS, INC.
CORPORATE INFORMATION
<TABLE>
<CAPTION>
Officers Directors
- -------- ---------
<S> <C> <C>
Earle S. Teegarden, Jr. Robert T. Fairweather Larry R. Johnson
President, CEO and CFO Chairman of the Board - Executive Officer
Retired retail hardware
Larry R. Johnson J. Michael Palmer
Senior Vice President and Secretary Edward P. Milbank Private Investor
Vice-Chairman of the Board
Mark D. Buntin President, Milbank Mills - Armand J. Peterson
Chief Accounting Officer A feed manufacturing company President, Chillicothe Iron &
Steel - A steel fabricating company
Earle S. Teegarden, Jr.
Chief Executive Officer
</TABLE>
<TABLE>
<CAPTION>
INVESTORS FEDERAL BANK, N.A.
- ----------------------------
Officers Directors
- -------- ---------
<S> <C>
Earle S. Teegarden, Jr., President Robert T. Fairweather, Chairman
Larry R. Johnson, Senior Executive Vice-President Edward P. Milbank, Vice-Chairman
Cashier and Secretary
Earle S. Teegarden, Jr., President
Charles Merrill, Vice-President and Treasurer
Larry R. Johnson, Senior Executive
Mark Buntin, Vice-President and Chief Vice-President
Accounting Officer
J. Michael Palmer
Sandra Wheeler, Assistant Vice President
Armand J. Peterson
Office Location
- ---------------
522 Washington Street Telephone: 660-646-3733
Chillicothe, MO 64601 FAX: 660-646-7300
Special Counsel Independent Auditors
- --------------- --------------------
Luse, Lehman, Gorman, Pomerenk Lockridge, Constant & Conrad, LLC
& Schick, P.C. 448 Washington Street
5335 Wisconsin Avenue, N.W. Chillicothe, MO 64601
Suite 400
Washington, D.C. 20015 660-646-6911
</TABLE>
47
<PAGE>
Exhibit 21
Subsidiaries of the Small Business Issuer
Name: Jurisdiction of Incorporation
Investors Federal Bank, National Association United States
522 Washington Street
Chillicothe, Missouri 64601
<PAGE>
Exhibit 23
IFB Holdings, Inc.
522 Washington
Chillicothe, MO 64601
We consent to the information by reference in this annual report (Form 10-KSB)
if IFB Holdings, Inc. of our report dated September 17, 1998 included in the
1998 Annual Report to Shareholders of IFB Holdings, Inc.
By: /s/ Lockridge, Constant & Conrad, LLC
-------------------------------------
September 24, 1998
Chillicothe, Missouri
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 546
<INT-BEARING-DEPOSITS> 2,995
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,406
<INVESTMENTS-CARRYING> 245
<INVESTMENTS-MARKET> 245
<LOANS> 35,255
<ALLOWANCE> 324
<TOTAL-ASSETS> 76,178
<DEPOSITS> 35,255
<SHORT-TERM> 21,300
<LIABILITIES-OTHER> 536
<LONG-TERM> 10,149
0
0
<COMMON> 6
<OTHER-SE> 9,306
<TOTAL-LIABILITIES-AND-EQUITY> 76,178
<INTEREST-LOAN> 2,755
<INTEREST-INVEST> 2,030
<INTEREST-OTHER> 46
<INTEREST-TOTAL> 4,831
<INTEREST-DEPOSIT> 1,604
<INTEREST-EXPENSE> 2,982
<INTEREST-INCOME-NET> 1,849
<LOAN-LOSSES> 91
<SECURITIES-GAINS> 66
<EXPENSE-OTHER> 1,126
<INCOME-PRETAX> 945
<INCOME-PRE-EXTRAORDINARY> 945
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 597
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> .07
<LOANS-NON> 495
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 285
<CHARGE-OFFS> 65
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 324
<ALLOWANCE-DOMESTIC> 285
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
