SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period from
___________________ to ______________________
Commission Number: 0-26577
WEBSTER CITY FEDERAL BANCORP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
United States 42-1491186
------------- ------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
820 Des Moines Street, Webster City, Iowa 50595-0638
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(515) 832-3071
-------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [X]
The Registrant's revenues for year ended December 31, 1999 were $6.4
million.
As of February 28, 2000, there were issued and outstanding 2,119,052
shares of the Registrant's Common Stock. The aggregate value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the last sale
price of such stock on the NASDAQ "Small-Cap" System as of February 29, 2000,
was $ 15,141,438. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the Registrant
that such person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the year ended December 31,
1999 (Parts II and III).
2. Proxy Statement for the 2000 Annual Meeting of Stockholders (Part III).
<PAGE>
PART I
ITEM 1. BUSINESS
General
The Registrant, Webster City Federal Bancorp (the "Company"), is the
successor to Webster City Federal Savings Bank, a federal stock savings bank
(the "Bank"), which reorganized into the holding company structure effective
July 1, 1999 (the "Holding Company Reorganization"). In the Holding Company
Reorganization, each outstanding share of the Bank's common stock was converted
into one share of the Registrant's common stock, and each stockholder of t he
Bank received the same ownership interest in the Registrant immediately
following the Holding Company Reorganization as he or she had in the Bank
immediately prior to that transaction. Webster City Federal Savings Bank is a
federally chartered savings bank that conducts its operations from a single
office in Webster City, Iowa, and is the successor to Webster City Federal
Savings and Loan Association, which was chartered originally in 1934, and became
a federally chartered savings and loan association that same year. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") under
the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of
the Federal Home Loan Bank ("FHLB") System since 1934. At December 31, 1999, the
Company had total assets of $94.5 million, total deposits of $67.9 million, and
stockholders' equity of $22.3 million.
The Company is primarily engaged in the business of attracting deposits
from the general public in the Company's market area and investing such
deposits, together with other sources of funds, in mortgage loans secured by
one- to four-family residential real estate for retention in the Company's
portfolio. At December 31, 1999, $50.4 million, or 81.1% of the Company's net
loan portfolio consisted of one-to four-family residential mortgage loans and
$5.2 million, or 8.4%, of the Company's net loan portfolio consisted of
multi-family residential and other loans. The Company also originates home
equity loans, which totaled $4.1 million, or 6.6% of the Company's net loan
portfolio at December 31, 1999. At December 31, 1999, consumer and other loans
totaled $3.6 million, or 5.8%, of the Company's net loan portfolio. The Company
also invests in mortgage-backed securities issued or guaranteed by the United
States Government or agencies thereof, which totaled $7.8 million, or 8.3%, of
total assets at December 31, 1999.
The Company's principal executive office is located at 820 Des Moines
Street, Webster City, Iowa, and its telephone number at that address is (515)
832-3071.
Market Area and Competition
The Company is headquartered in Webster City, Iowa, a community of
approximately 8,000 people. The Company is the largest independent financial
institution and the leading originator of home mortgage loans headquartered in
Hamilton County. Although the Company conducts its operations from a single
office, its market area for lending and other financial services consists of
Hamilton and surrounding contiguous counties. Although the economy of the
Company's market area is heavily influenced by agriculture, it has a fairly
diverse industrial base. The major employers in the Company's market are
Frigidaire, a home appliance manufacturer, Van Diest Supply Co., a chemical and
fertilizer concern, Webster City Custom Meats, a meat processor, Tasler Pallet &
E.P.S., a pallet/styrofoam packaging manufacturer, Arrow & Acme Corporation, a
die-castings manufacturer, Beam Industries, a central vacuum systems
manufacturer, and Daily Freeman Journal, a newspaper and printing firm.
<PAGE>
The Company encounters strong competition both in attracting deposits
and in originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial banks, other savings
associations, and credit unions. Competition for loans comes from such financial
institutions as well as mortgage banking companies. The Company expects
continued strong competition in the foreseeable future, including increased
competition from "super-regional" banks entering the market by purchasing large
banks and savings banks. Many such institutions have greater financial and
marketing resources available to them than does the Company. The Company
competes for savings deposits by offering depositors a high level of personal
service and a wide range of competitively priced financial services. In recent
years, additional strong competition has come from stock and bond dealers and
brokers. The Company competes for real estate loans primarily through the
interest rates and loan fees it charges and advertising.
2
<PAGE>
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The
principal components of the Company's loan portfolio are fixed- and
adjustable-rate first mortgage loans secured by one- to four-family residential
real estate, home equity loans, multi-family residential mortgage loans, and, to
a much lesser extent, commercial real estate loans and consumer loans. At
December 31, 1999, the Company's net loans receivable totaled $62.2 million, of
which $50.4 million, or 81.1%, were one- to four-family residential real estate
mortgage loans, $5.2 million, or 8.4%, were multi-family residential and other
loans, $4.1 million or 6.7%, were home equity loans and $3.6 million, or 5.8%,
were consumer and other loans.
The Company also invests in mortgage-backed securities consisting of
pass-through certificates insured or guaranteed by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Government National Mortgage Association
("GNMA"), or the Federal National Mortgage Association ("FNMA"). At December 31,
1999, mortgage-backed securities totaled $7.8 million, or 8.3% of total assets.
At December 31, 1999, 60.2% of the Company's mortgage-backed securities were
secured by ARM loans, and 39.8% were secured by fixed-rate loans. The Company's
policy is to hold mortgage-backed securities to maturity.
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Company's loan portfolio by type of loan as of the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1999 1998 1997
------------------ ---------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
One- to four-family residential................ $ 50,420 81.07% $44,047 77.61% $40,119 73.86%
Home equity 4,142 6.66 4,347 7.66 4,286 7.89
Multi-family residential, commercial real estate and other 5,248 8.43 5,961 10.50 6,509 11.98
------ ----- ------ ----- ------ -----
Total real estate loans....................... 59,810 96.16% 54,355 95.77% 50,914 93.73%
Consumer and other loans:
Automobile...................................... 1,682 2.71% 1,536 2.71% 1,687 3.11%
Home improvement................................ 1,083 1.74 963 1.70 1,074 1.98
Loans on savings deposits....................... 248 .39 417 .73 423 .78
Other........................................... 587 .94 752 1.33 707 1.30
------ ----- ------ ----- ------ -----
Total consumer and other loans................ 3,600 5.78% 3,668 6.47% 3,891 7.17%
Commercial(1)..................................... -- -- -- -- -- --%
Real estate sold on contract...................... 100 0.16 128 0.23 190 0.35
------ ----- ------ ----- ------ -----
Total loans receivable........................ 63,510 102.10 58,151 102.47% 54,995 101.37%
Less:
Undisbursed loan proceeds......................... $ 922 1.48% $ 999 1.76% $ 265 0.49%
Premiums on loans purchased..................... (6) (0.01)% (11) (0.02)% (17) (0.03)%
Unearned discount and net
deferred loan fees............................ 20 0.02 26 0.05% 40 0.07%
Allowance for loan losses...................... 382 0.61% 385 0.68% 385 0.71%
------ ----- ------ ----- ------ -----
Total loans receivable, net................... $ 62,192 100.00% $ 56,752 100.00% $ 54,153 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1996 1995
----------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential................ $38,875 71.79% 38,322 71.86%
Home equity 3,717 6.31 2,895 5.43
Multi-family residential, commercial real estate and other 7,798 14.40 8,467 15.88
------ ----- ------ -----
Total real estate loans....................... 50,390 86.19% 49,684 87.74%
Consumer and other loans:
Automobile...................................... 1,873 3.45% 1,726 3.24%
Home improvement................................ 1,069 1.98 1,101 2.07
Loans on savings deposits....................... 582 1.07 419 0.79
Other........................................... 753 1.39 735 1.38
------ ----- ------ -----
Total consumer and other loans................ 4,277 7.90% 3,981 7.47%
Commercial(1)..................................... -- -- %
Real estate sold on contract...................... 269 0.50 391 0.91
------ ----- ------ -----
Total loans receivable........................ 54,936 101.45% 54,056 101.37%
Less:
Undisbursed loan proceeds......................... $ 393 0.73% $ 244 0.46%
Premiums on loans purchased..................... % (21) (0.04)% (27) (0.05)%
Unearned discount and net
deferred loan fees............................ 52 0.10% 62 0.12%
Allowance for loan losses...................... 359 0.66% 446 0.84%
------ ----- ------ -----
Total loans receivable, net................... 54,322 100.00% $53,331 100.00%
====== ====== ======= ======
</TABLE>
- ----------------------
(1) Consists of the Company's participation in a tax abatement bond.
4
<PAGE>
Loan and Mortgage-Backed Securities Maturity Schedule. The following
table sets forth the maturity or period of repricing of the Company's loan and
mortgage-backed securities portfolio at December 31, 1999. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Beyond
Within 1-3 3-5 5-10 10-20 20
1 Year Years Years Years Years Years Total
------------------------------------------------------------------------
(In Thousands)
Real estate loans:
One- to four-family residential........... $13,651 $8,051 $ 1,989 $ 9,100 $ 8,769 $13,002 $ 54,562
Multi-family residential, commercial
real estate and other loans............. 1,734 2,088 108 384 595 339 5,248
Consumer and other loans.................... 565 1,849 445 351 377 13 3,600
Real estate sold on contract................ -- 1 18 81 -- -- 100
------ ------ ------- ------- ------- ------ --------
Total loans receivable (gross).......... 15,950 11,989 2,560 9,916 9,741 13,354 63,510
------ ------ ------- ------- ------- ------- --------
63,510
Mortgage-backed securities (gross).......... 3,150 1,172 160 1,613 1,133 519 7,747
------ ------ ------- ------- ------- ------ --------
Total loans and
mortgage-backed securities............ $19,100 $ 13,161 $ 2,720 $11,529 $10,874 $13,873 $ 71,257
======= ======== ======= ======= ======= ======= ========
</TABLE>
Fixed- and Adjustable-Rate Loan and Mortgage-Backed Securities
Schedule. The following table sets forth at December 31, 1999, the dollar amount
of all fixed rate and adjustable rate loans due, and mortgage-backed securities
that mature, after December 31, 2000.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fixed Adjustable Total
--------- ----------- --------
(In Thousands)
Real estate loans:
One- to four-family residential ....... $30,793 $10,118 $40,911
Multi-family residential, commercial
real estate and other ............... 1,537 1,977 3,514
Consumer and other loans ................ 3,032 3 3,035
Real estate sold on contract ............ 100 -- 100
------- ------- -------
Total loans receivable (gross) ...... $35,462 $12,098 $47,560
======= ======= =======
Mortgage-backed securities (gross) ...... $ 3,832 $ 765 $ 4,597
======= ======= =======
</TABLE>
<PAGE>
One- to Four-Family Residential Real Estate Loans. The Company's
primary lending activity currently consists of the origination of fixed rate and
adjustable-rate one- to four-family owner-occupied residential mortgage loans
collateralized by properties located in the Company's market area. The Company
also originates one- to four-family construction loans that convert to permanent
loans after the initial construction period which generally does not exceed nine
months. The Company is a portfolio lender. In recent years, it has not sold
loans in the secondary mortgage market and does not intend to conduct secondary
market sales in the foreseeable future. One- to four-family loans are
underwritten and originated according to policies approved by the Board of
Directors. In the current lending environment, savings deposit growth and loan
repayments have exceeded demand for loans. The Company has purchased one- to
four-family mortgage loans collateralized by properties in Texas and Colorado.
At December 31, 1999, the Company had an aggregate principal balance of $5.5
million in purchased loans.
The Company currently offers fixed rate one- to four-family residential
mortgage loans with terms of up to 30 years. One- to four-family residential
real estate loans often remain outstanding for significantly shorter periods
than their contractual terms because borrowers may refinance or prepay loans at
their option. The average length of time that
5
<PAGE>
the Company's one- to four-family residential mortgage loans remain outstanding
varies significantly depending upon trends in market interest rates and other
factors. In recent years, the average maturity of the Company's mortgage loans
has decreased significantly due to unprecedented volume of refinancing activity.
Accordingly, estimates of the average length of one- to four-family loans that
remain outstanding cannot be made with any degree of accuracy. Originations of
fixed rate mortgage loans are monitored on an ongoing basis and are affected
significantly by the level of market interest rates, the Company's interest rate
gap position, and loan products offered by the Company's competitors. The
Company's fixed rate mortgage loans amortize on a monthly basis with principal
and interest due each month.
The Company also originates adjustable-rate mortgage ("ARM") loans with
a maximum term of up to 30 years. The Company's ARM loans have interest rates
that adjust every year or every three years based on an interest rate index. The
Company's one-year ARM loans have terms of up to 30 years, with interest rates
that adjust annually based on changes in the Quarterly National Average Cost of
Funds for All SAIF Insured Institutions (the "SII Index"). The maximum annual
increase in the interest rate charged on the Company's one-year ARM loans is 100
basis points, and the maximum life of the loan increase in interest rates is 600
basis points. The interest rate on the Company's three-year ARM loans adjusts
every three years by up to 200 basis points per adjustment based on the SII
Index at the time of adjustment. The maximum life of the loan increase in
interest rate on the Company's three-year ARM loans is 600 basis points. In 1999
ARM loan originations decreased as a percentage of total mortgage loan
originations, due to a lower interest rate environment and a higher demand for
longer term fixed rate loans. For the years ended December 31, 1999 and December
31, 1998, the Company originated $3.9 million and $3.7 million of ARM loans,
respectively, which represented 19.1% and 25.7% of total mortgage loan
originations, respectively, during such years.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Company's lending policies limit the
maximum loan-to-value ratio on fixed rate loans without private mortgage
insurance to 80% of the lesser of the appraised value or the purchase price of
the property to serve as collateral for the loan.
The Company makes one- to four-family real estate loans with
loan-to-value ratios of up to 90%; however, for one- to four-family real estate
loans with loan-to-value ratios of between 80% and 90%, the Company requires the
first 20% of the loan amount to be covered by private mortgage insurance. The
Company requires fire and casualty insurance, as well as a certificate of title,
on all properties securing real estate loans made by the Company.
Low and Moderate Income Loans. The Company participates in low- to
moderate-income home loan programs to qualifying borrowers. One loan program,
which is offered through the Company, enables borrowers to purchase a home with
<PAGE>
a minimum 5% downpayment and a 95% loan-to-value ratio. Loans are offered on a
fixed-rate basis with terms of up to 30 years.
Multi-Family Residential, Commercial Real Estate and Other Real Estate
Loans. At December 31, 1999, the Company had a total of 50 loans secured by
multi-family and commercial real estate properties. The Company's multi-family
real estate loans are secured by multi-family residences, such as rental
properties, and commercial real estate loans are secured by other income
producing properties such as nursing homes and office buildings. The Company
also originates multi-family construction loans that convert to permanent loans
after the initial construction period which generally does not exceed nine
months. At December 31, 1999, the Company's multi-family and commercial real
estate loans had an average principal balance of $105,000 and the largest
multi-family or commercial real estate loan had a principal balance of $484,000.
Multi-family and commercial real estate loans currently are offered with
adjustable interest rates, although in the past the Company has originated
fixed-rate multi-family and commercial real estate loans. The terms of each loan
are negotiated on a case-by-case basis, although such loans typically have
adjustable interest rates tied to a market index with a 600 basis point lifetime
interest rate cap, and amortize over 15 years. An origination fee
6
<PAGE>
of 1% is usually charged on multi-family loans. The Company generally makes
multi-family and commercial real estate loans up to 75% of the appraised value
of the property securing the loan.
The Company's originations of multi-family and commercial real estate
loans have been limited in recent years because of limited local demand, and the
Company currently does not intend to originate or purchase such loans outside of
its market area. However, as noted previously, the Company has in the past
purchased out-of-market loans, both one-to four-family and multi-family real
estate, and the aggregate principal balance of such loans at December 31, 1999
was $5.5 million.
Loans secured by multi-family and commercial real estate generally
involve a greater degree of credit risk than one- to four-family residential
mortgage loans and carry larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
multi-family and commercial real estate is typically dependent upon the
successful operation of the related real estate property. If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.
Home Equity and Home Improvement Loans. The Company also originates
home equity and home improvement loans. As of December 31, 1999, home equity and
home improvement loans totaled $5.2 million, or 8.4%, of the Company's total
loan portfolio. The Company's home equity and home improvement loans have fixed
interest rates and are generally for terms of 5 to 10 years, with a maximum of
15 years. The Company's home equity and home improvement loans are closed-end
loans for specific dollar amounts. They are secured by the borrower's principal
residence with a maximum loan-to-value ratio, including the principal balances
of both the first and second mortgage loans, of 90% or less.
Other Consumer Loans. To a much lesser extent, the Company also
originates loans secured by savings deposits, generally with fixed rates, as
well as automobile loans and student loans. Automobile loans are made on both
new and used cars, and are offered for terms of up to 60 months. The Company's
automobile loans have fixed interest rates and have loan-to-value ratios of up
to 80%. Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are secured by assets
that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Company appraises the real estate
intended to collateralize the proposed loan. An underwriter in the Company's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. Pursuant to the Company's written loan
policies, all loans are approved by the Loan Committee, which meets as
necessary. After the loan is approved, a loan commitment letter is promptly
issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
<PAGE>
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Commitments are typically issued for 60-day periods. The
borrower must provide proof of fire and casualty insurance on the property
serving as collateral, which insurance must be maintained during the full term
of the loan. A certificate of title, based on a title search of the property, is
generally required on all loans secured by real property. At December 31, 1999,
the Company had outstanding loan commitments of $405,400. This amount does not
include $922,200 of the unfunded portion of loans in process.
7
<PAGE>
Origination, Purchase and Sale of Loans. The table below shows the
Company's originations, purchases and sales of loans for the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
<S> <C> <C> <C> .
1999 1998 1997
---- ---- ----
(In Thousands)
Total loans receivable at beginning of year .... $ 56,752 $ 54,322 $ 54,153
Loans purchased:
Real estate:
Total loans purchased ...................... -- -- --
-------- -------- --------
Loans originated:
Real estate .................................. 20,576 14,211
7,358
Consumer: .................................... 2,857 4,578 4,578
-------- -------- --------
Total loans originated .................... 23,433 18,789 11,936
-------- -------- --------
Loans transferred to REO ....................... --
(74) ........................................... (59)
Loan repayments ................................ (18,007) (16,299) (11,680)
Other loan activity (net) ...................... 14 14 (28)
-------- -------- --------
Total loans receivable at end of year, net $ 62,192 $ 56,752 $ 54,322
======== ======== ========
</TABLE>
Loan Origination Fees. In addition to interest earned on loans, the
Company generally receives fees in connection with loan originations. Mortgage
loan origination fees and certain loan origination costs, if material, are
deferred and the net fee or cost is recognized in operations using the interest
method. Direct loan origination costs on other loans are expensed, as such costs
are not material in amount. Fees deferred are recognized into income immediately
upon prepayment of the related loan. Such fees vary with the volume and type of
loans and commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand and
availability of money.
Mortgage-Backed Securities
A significant part of the Company's business involves investments in
mortgage-backed securities. At December 31, 1999, all of the Company's
mortgage-backed securities were insured or guaranteed by a United States
Government agency or sponsored corporation. All of the Company's mortgage-backed
securities portfolio consists of pass-through certificates. The Company invests
in mortgage-backed securities to supplement local loan originations as well as
to reduce interest rate risk exposure.
<PAGE>
The Company's pass-through certificates represent a participation
interest in a pool of single-family mortgages, the principal and interest
payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interest in the form of securities, to investors such as the
Company. Such quasi-governmental agencies that guarantee the payment of
principal and interest to investors, include the FHLMC, GNMA, or the FNMA.
Pass-through certificates typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates and maturities that are within a specified range. The underlying
pool of mortgages can be composed of either fixed rate mortgage loans or ARM
loans. The interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed rate or adjustable rate, are passed on to the certificate
holder.
8
<PAGE>
Set forth below is information relating to the Company's purchases,
sales and repayments of mortgage-backed securities for the years indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Mortgage-backed securities
at beginning of year: ............................... $ 9,987 $ 14,923 $ 18,579
Purchases ....................................... 1,070 -- --
Repayments ....................................... (3,226) (4,906) (3,632)
Discount (premium) amortization .................. (26) (30) (18)
-------- -------- --------
Mortgage-backed securities
at end of year, net ................................. $ 7,805 $ 9,987 $ 14,923
======== ======== ========
</TABLE>
The following table sets forth selected data relating to the
composition of the Company's mortgage-backed securities for the years indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
At December 31,
---------------------------------------------
1999 1998 1997
---- ----
$ % $ % $ %
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Mortgage-backed securities:
Adjustable.................................. $ 4,696 60.2% $ 5,294 53.0% $ 7,631 51.1%
Fixed....................................... 3,109 39.8 4,693 47.0 7,292 48.9
-------- ----- -------- ----- -------- -----
Total mortgage-backed
securities, net......................... $ 7,805 100.0%$ $ 9,987 100.0% $ 14,923 100.0%
======== ===== =========== ===== ======== =====
</TABLE>
At December 31, 1999, mortgage-backed securities totaled $7.8 million,
or 8.3%, of total assets. ARM loans collateralized 60.2% of the Company's
mortgage-backed securities portfolio, and fixed-rate loans collateralized 39.8%
of the Company's mortgage-backed securities portfolio. All of the Company's
mortgage-backed securities are insured or guaranteed by the FHLMC, the GNMA, or
the FNMA. At December 31, 1999, all the Company's mortgage-backed securities
were classified as "held to maturity." At December 31, 1999, the Company's
mortgage-backed securities portfolio had a fair value of $7.7 million.
Effective February 1992, the OTS adopted Thrift Bulletin 52 ("TB 52").
Among other things, TB 52 sets forth certain guidelines with respect to
depository institutions' investment in certain "high risk mortgage securities."
"High-risk mortgage securities" are defined as any mortgage derivative product
that at the time of purchase, or at any subsequent date, meets any of three
tests that are set forth in TB 52. High-risk mortgage securities may be
<PAGE>
purchased only in limited circumstances, and if held in a portfolio, must be
reported as trading assets at market value, or as available-for-sale assets at
the lower of cost or market value. In certain circumstances, OTS examiners may
seek the orderly divestiture of high-risk mortgage securities. As of December
31, 1999, the Company did not hold any "high-risk mortgage securities" in its
portfolio.
Delinquencies and Classified Assets
Delinquencies. The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. If delinquency continues, early
in the second month, a delinquent notice is mailed along with a letter or
telephone call advising that the mortgagors are in violation of the terms of
their mortgage contract. If a loan becomes 60 days past due, the loan becomes
subject to possible legal action. Management has been authorized by the Board of
Directors to send a letter during the third
9
<PAGE>
month advising of pending legal action. This letter generally grants mortgagors
an additional 15 days to bring the account to date prior to start of any legal
action. If not paid, foreclosure proceedings are initiated. To the extent
required by the Department of Housing and Urban Development ("HUD") regulations,
generally within 45 days of delinquency, a Section 160 HUD notice is given to
the borrower, which provides access to consumer counseling services.
It is sometimes necessary and desirable to arrange special repayment
schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The
mortgagors are required to submit a written repayment schedule, which is closely
monitored for compliance. Under these terms, the account is brought to date,
usually within a few months.
Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on a nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Mortgage loans are placed on nonaccrual
status generally when either principal or interest is more than 90 days past
due. Interest accrued and unpaid at the time a loan is placed on nonaccrual
status is charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is deemed real estate owned ("REO") until such time
as it is sold. In general, the Company considers collateral for a loan to be
in-substance foreclosed if: (i) the borrower has little or no equity in the
collateral; (ii) proceeds for repayment of the loan can be expected to come only
from the operation or sale of the collateral; and (iii) the borrower has either
formally or effectively abandoned control of the collateral to the Company, or
retained control of the collateral but is unlikely to be able to rebuild equity
in the collateral or otherwise repay the loan in the foreseeable future. Cash
flow attributable to in-substance foreclosures is used to reduce the carrying
value of the collateral.
When REO is acquired or otherwise deemed REO, it is recorded at the
lower of the unpaid principal balance of the related loan or its estimated fair
value, less estimated selling expenses. Valuations are periodically performed by
management, and any subsequent decline in fair value is charged to operations.
At December 31, 1999, the Company had no REO.
Delinquent Loans and Nonperforming Assets. The following table sets
forth information regarding non-accrual loans delinquent 90 days or more and
real estate owned by the Company at the dates indicated. When a loan is
delinquent 90 days or more, the Company fully reserves all accrued interest
thereon and ceases to accrue interest thereafter. See notes 1 and 3 to the Notes
to Consolidated Financial Statements.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Delinquent loans:
One- to four-family residential real estate........ $ -- $ -- $ -- $ 22 $ 620
All other real estate.............................. -- -- -- -- --
Consumer loans, other.............................. 6 15 4 11
----- ------ ------- ------- ------
Total delinquent loans........................... 6 15 -- 26 631
Total real estate owned (1).......................... -- 22 59 101 84
------ ------ ------- ------- ------
Total non-performing assets.................... $ 6 $ 37 $ 59 $ 127 $ 715
====== ====== ======= ======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total loans delinquent 90 days or more
to net loans receivable............................ 0.01% 0.03% 0.00% 0.05% 1.18%
Total loans delinquent 90 days or more
to total assets.................................... 0.01% 0.02% 0.00% 0.03% 0.65%
Total non-performing loans and REO
to total assets.................................... 0.01% 0.04% 0.06% 0.14% 0.74%
</TABLE>
- ------------------------------------
(1) Represents the net book value of property acquired by the Company through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this property
is recorded at the lower of its fair value, less estimated selling costs,
or the principal balance of the related loan.
10
<PAGE>
The following table sets forth information with respect to loans
delinquent 30-89 days in the Company's portfolio for the years indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 30-89 days:
One- to four-family residential.................... $ 445 $ 521 $ 632 $ 613 $ 840
All other mortgages................................ -- -- 20 62 --
-- Consumer, other........................... 60 94 63 74 105
------ ------ ------- ------- ------
Total past due 30-89 days........................ $ 505 $ 615 $ 715 $ 749 $ 945
====== ====== ======= ======= ======
</TABLE>
The following table sets forth information with respect to the
Company's delinquent loans and other problem assets at December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------
Balance Number
------- ------
(Dollars in Thousands)
<S> <C> <C>
Residential real estate:
Loans 30 to 89 days delinquent....................................... $ 445 16
Loans 90 days or more delinquent..................................... -- --
All other real estate loans:
Loans 30 to 89 days delinquent....................................... -- --
Loans 90 days or more delinquent..................................... -- --
Commercial non-real estate (30 days or more delinquent)................ -- --
Consumer loans (30 days or more delinquent)............................ 60 12
Foreclosed real estate and repossessions............................... -- --
Other non-performing assets............................................ -- --
Restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15 (not included
in other nonperforming categories above)............................. -- --
Loans to facilitate sale of real estate owned.......................... 100 7
</TABLE>
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
<PAGE>
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. At December 31, 1999,
the Company had no special mention loans, $564,000 substandard assets and $3,000
doubtful assets.
11
<PAGE>
The following table sets forth the aggregate amount of the Company's
classified assets for the years indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
---------- ---------- -------
(In Thousands)
Substandard assets............................... $ 564 $ 437 $ 625
Doubtful assets.................................. 3 -- --
Loss assets...................................... -- 2 --
--------- -------- ---------
Total classified assets..................... $ 567 $ 439 $ 625
========= ======== =========
</TABLE>
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Company's loan portfolio based on management's
evaluation of the estimated losses that may be incurred. The Company regularly
reviews its loan portfolio, including problem loans, to determine whether any
loans require classification or the establishment of appropriate reserves or
allowances for losses. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated fair value of the
underlying collateral. During the years ended December 31, 1999, 1998 and 1997,
the Company added $ 0, $ 0, and $40,000, respectively, to the provision for loan
losses. The Company's allowance for loan losses totaled $382,000, $385,000, and
$385,000 at December 31, 1999, 1998, and 1997, respectively.
Management believes that the allowances for losses on loans and
investments in real estate are adequate. While management uses available
information to recognize losses on loans and investments in real estate, future
additions to the allowances may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowances for
losses on loans and investments in real estate. Such agencies may require the
Company to recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
Analysis of the Allowance For Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the years indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ----- ---- ---- ----
(Dollars in Thousands)
Net loans outstanding......................... $62,192 $56,572 $ 54,322 $54,153 $53,331
Average net loans outstanding................. 58,312 55,704 54,058 53,536 50,524
======= ======== ======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Allowance balances (at beginning of year)..... 385 385 359 446 440
Provision for losses.......................... 0 0 40 125 15
Charge-offs................................... 9 1 15 228 14
Recoveries.................................... 6 1 1 16 5
------- -------- -------- ------- -------
Allowance balance (at end of year)............ $ 382 $ 385 $ 385 $ 359 $ 446
====== ======== ======== ======= =======
Allowance for loan losses as a percent
of net loans receivable at end of year........ 0.61% 0. 68% 0.71% 0.67% 0.83%
Net loans charged off as a percent
of average net loans outstanding............ 0.01% 0. 00% 0.03% 043% 0.03%
Ratio of allowance for loan losses
to total nonperforming loans
at end of year.............................. N/M N/M N/M N/M 70.77%
Ratio of allowance for loan losses
to total nonperforming loans and REO
at end of year.............................. N/M N/M 652.54% 281.81% 62.47%
</TABLE>
12
<PAGE>
Investment Activities
The Company's investment portfolio comprises investment securities,
FHLB stock, and interest-earning deposits in other institutions. The Company has
no investments in corporate or unrated securities. At December 31, 1999, no
investment securities was scheduled to mature in one year or less, $13.5
million, or 90.5%, was scheduled to mature in from one to five years, and $1.4
million or 9.5% was scheduled to mature in over five years.
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short term demand for funds to be used in the Company's loan origination and
other activities. Currently, due to lower demand for loans, the Company's
liquidity levels are higher than they have been in recent periods. Management
believes that the higher levels are prudent because of the possibility that
interest rates may increase. By maintaining high levels of liquidity, the
Company is able to reinvest its assets more quickly in response to changes in
market interest rates, thereby potentially reducing its exposure to interest
rate volatility.
Investment Portfolio. The following table sets forth the carrying value
of the Company's investment portfolio for the years indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
---------- --------- -------
(In Thousands)
Investment portfolio:
U.S. Government and agency obligations........... $ 14,916 $ 9,899 $ 16,638
Interest-earning deposits in other institutions.. 6,824 15,171 6,554
FHLB stock....................................... 613 613 780
--------- -------- ---------
Total investments.............................. $ 22,353 $ 25,683 $ 23,972
========= ======== =========
</TABLE>
13
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and weighted average yields
for the Company's investment portfolio at December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1999
----------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten More than Ten Years
---------------------------- -------------------- -------------------- ---------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
Investment portfolio:
Investment securities, U.S. Government $ -- -- % $ 13,498 5.60% $1,418 6.12% $ -- --%
FHLB stock..................... 613 6.30 -- -- -- -- -- --
Interest-earning deposits....
in other institutions...... 6,824 5.32 -- -- -- -- --
------- ----- -------- ------ ------ ----- ---- -----
Total.................... $ 7,437 5.40% $ 13,498 5.60% $1,418 6.12% $ -- --%
======= ==== ======== ==== ====== ==== ==== =====
</TABLE>
At December 31, 1999
-------------------------
Total
-------------------------
Annualized
Weighted
Carrying Average
Value Yield
----- -----
Investment portfolio:
Investment securities, U.S. Government $14,916 6.07%
FHLB stock..................... 613 6.30
Interest-earning deposits....
in other institutions...... 6,824 5.32
------- ----
Total.................... $22,353 5.83%
======= ====
14
<PAGE>
Sources of Funds
General. The Company's deposit-gathering activities are currently
conducted from the Company's facility in Webster City, Iowa. Deposits are the
major source of the Company's funds for lending and other investment purposes.
In addition to deposits, the Company derives funds from the amortization and
prepayment of loans and mortgage-backed securities, the maturity of investment
securities, and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes. Historically, the Company has maintained a high level of
liquidity, and only rarely uses borrowed funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's market area through the offering of a broad selection
of deposit instruments including NOW accounts, passbook savings, money market
deposit, term certificate accounts and individual retirement accounts. Deposit
account terms vary according to the minimum balance required, the period of time
during which the funds must remain on deposit, and the interest rate, among
other factors. The maximum rate of interest, which the Company must pay, is not
established by regulatory authority. The Company regularly evaluates its
internal cost of funds, surveys rates offered by competing institutions, reviews
the Company's cash flow requirements for lending and liquidity, and executes
rate changes when deemed appropriate. The Company has sought to decrease the
risk associated with changes in interest rates by offering competitive rates on
deposit accounts and by pricing certificates of deposit to provide customers
with incentives to choose certificates of deposit with longer terms. Due to the
current interest rate environment, however, terms of over 36 months are not
attractive to customers. The Company does not obtain funds through brokers
through a solicitation of funds outside its market area. The Company also
obtains funds from local governmental sources and held approximately $3.3
million in such funds at December 31, 1999.
Deposit Portfolio. Savings in the Company as of December 31, 1999, were
represented by the various types of deposit programs described below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Weighted Percentage
Average of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- ------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
0.00% None Noninterest-bearing checking $ -- $ 898 1.32%
1.75 None NOW accounts -- 6,808 10.02
2.51 None Passbook -- 4,730 6.96
3.29 None Money market accounts 1,000 6,036 8.89
Certificates of Deposit
4.10% 3 months Fixed term, fixed rate $ 1,000 $ 1,209 1.78%
4.55 6 months Fixed term, fixed rate 1,000 3,549 5.23
5.24 9 months Fixed term, fixed rate 1,000 4,511 6.64
4.42 12 months Fixed term, fixed rate 1,000 10,109 14.88
5.80 15 months Fixed term, fixed rate 1,000 5,022 7.39
4.38 18 months Fixed term, fixed rate 1,000 3,126 4.60
4.78 24 months Fixed term, fixed rate 1,000 5,268 7.76
5.27 30 months Fixed term, fixed rate 1,000 3,424 5.04
5.18 36 months Fixed term, fixed rate 1,000 2,918 4.30
5.17 48 months Fixed term, fixed rate 1,000 954 1.41
5.99 Over 48 months Fixed term, fixed rate 1,000 9,356 13.78
--------- -------
$ 67,918 100.00%
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Company between
the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31,
------------------------
1999 1998 1997
------------------- -------------------- --------------------
Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1) Change(2)
(In Thousands)
Noninterest-bearing
demand ................. $ 898 1.32% $ 586 $ 312 0.45% $ (392) $ 704 0.98% $ 20
NOW accounts ............. 6,808 10.02 (61) 6,869 10.00 622 6,247 8.73 915
Passbooks ................ 4,730 6.96 240 4,490 6.54 223 4,267 5.97 (310)
Money market accounts .... 6,036 8.89 140 5,896 8.58 466 5,430 7.59 (109)
Time deposits that mature:
within 12 months ....... 34,917 51.41 3,562 31,355 45.64 (2,277) 33,632 47.02 (838)
within 12-36 months .... 13,587 20.01 (4,348) 17,935 26.10 121 17,814 24.91 (1,319)
beyond 36 months ....... 942 1.39 (905) 1,847 2.69 (1,586) 3,433 4.80 2,216
------- ------ ------- ------- ------ ------- ------- ------ -------
Total ............... $67,918 100.00% $ (786) 68,704 100.00% $(2,823) $71,527 100.00% $ 575
</TABLE>
At December 31,
----------------------------------------------
1996 1995
--------------------------- -------
Balance Percent(1) Change(2) Balance
------- ---------- --------- -------
Noninterest-bearing
demand ................. $ 684 0.96% $ 186 $ 498
NOW accounts ............. 5,332 7.51 (651) 5,983
Passbooks ................ 4,577 6.45 (288) 4,865
Money market accounts .... 5,539 7.81 (235) 5,774
Time deposits that mature:
within 12 months ....... 34,470 48.58 407 34,063
within 12-36 months .... 19,133 26.97 870 18,263
beyond 36 months ....... 1,217 1.72 (3,214) 4,431
------- ------ ------- -------
Total ............... $70,952 100.00% $(2,925) $73,877
(1) Represents percentage of total deposits.
(2) Represents increase (decrease) in balance from end of prior year.
16
<PAGE>
Time Deposit Rates. The following table sets forth the time deposits in
the Company classified by rates as of the dates indicated:
Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------------------ ---------
(In Thousands)
Rate
4.00-5.99%............................ $ 44,999 $ 45,105 $ 46,075
6.00-7.99%............................ 4,446 6,032 8,804
8.00-9.99%............................ -- -- --
--------- -------- ---------
$ 49,445 $ 51,137 $ 54,879
========= ======== =========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at December 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Amount Due
--------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
---------- --------- --------- --------- --------- --------- -------
(In Thousands)
Rate
5.99% or less....................... $31,480 $8,525 $ 2,060 $ 1,992 $ 942 $ -- $ 44,999
6.00-7.99%.......................... 3,437 -- 970 39 -- -- 4,446
------- ------- -------- ------- ------- -------- --------
$34,917 $ 8,525 $ 3,030 $ 2,031 $ 942 $ -- $ 49,445
======= ======= ======== ======= ======= ======== ========
</TABLE>
Large Certificates of Deposit Maturities. The following table indicates
the amount of the Company's certificates of deposit of $100,000 or more by time
remaining until maturity at December 31, 1999. This amount does not include
checking and savings deposits of greater than $100,000, which totaled
approximately $3.2 million at December 31, 1999.
Certificates
Maturity Period of Deposit
(In Thousands)
Three months or less................................ $ 2,626
Three through six months............................ 2,835
Six through twelve months........................... 874
Over twelve months.................................. 782
-------
Total.......................................... $ 7,117
=======
<PAGE>
Change in Deposits. The following table sets forth changes in total
deposits of the Company for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31,
--------------------------------------
1999 1998 1997
------- -------- -------
(In Thousands)
Deposits........................................... $117,534 $115,309$ 116,818
Withdrawals........................................ 119,630 119,228 117,412
------- ------- -------
Net decrease before interest credited.............. (2,096) (3,919) (594)
Interest credited.................................. 1,310 1,096 1,169
--------- -------- --------
Net (decrease) increase in deposits.............. $ (786) $ 2,823 $ 575
========== ===========================
</TABLE>
17
<PAGE>
Borrowings
Deposits are the Company's primary source of funds. The Company may
also obtain funds from the FHLB. FHLB advances are collateralized by selected
assets of the Company. Advances from the FHLB are secured by the Company's stock
in the FHLB and a portion of the Company's first mortgage loans and investment
securities. Historically, the Company has rarely used borrowed funds, but at
December 31, 1999, the Company had $3.2 million in borrowed funds.
The FHLB functions as a central reserve bank providing credit for the Company
and other member savings associations and financial institutions. As a member,
the Company is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities that are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several different
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based either
on a fixed percentage of a member institution's net worth or on the FHLB's
assessment of the institution's creditworthiness.
The following table sets forth certain information regarding borrowings by the
Company at the dates indicated`
Year Ended December 31,
---------------------------
1999 1998 1997
---- ---- -----
Weighted average rate paid on FHLB advance....... 5.26% 4.79% N/A
Rate paid on ESOP Borrowings..................... 0.00% 6.75% 6.75%
<TABLE>
<CAPTION>
<S> <C> <C> <C>
During the Year Ended December 31,
-------------------------------------------
1999 1998 1997
-------- --------- -------
(Dollars in Thousands)
Maximum amount of FHLB Advance
outstanding at any month..................... $ 3,200 $ 1,200 N/A
Approximate average FHLB advance
outstanding................................... 1,533 1,200 N/A
Approximate weighted average rate
paid on FHLB advance.......................... 5.26% 4.79% N/A
Approximate average ESOP borrowing
outstanding................................... 00 201 276
Approximate weighted average rate
Paid on ESOP borrowing........................ 0.00% 6.75% 6.75%
</TABLE>
<PAGE>
Employees
As of December 31, 1999, the Company had 21 full-time and 4 part-time
employees, none of whom is represented by a collective bargaining unit. The
Company considers its relationship with its employees to be good.
18
<PAGE>
REGULATION AND SUPERVISION
As a federally chartered SAIF-insured savings association, the Company
is subject to examination, supervision and extensive regulation by the OTS and
the FDIC. The Company is a member of the Federal Home Loan Bank ("FHLB") system.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The Company also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS examines the Company and prepares reports for the
consideration of the Company's Board of Directors on any deficiencies that they
may find in the Company's operations. The FDIC also examines the Company in its
role as the administrator of the SAIF. The Company's relationship with its
depositors and borrowers also is regulated to a great extent by both federal and
state laws especially in such matters as the ownership of savings accounts and
the form and content of the Company's mortgage documents.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking
statutes, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions.
The description of statutory provisions and regulations applicable to
savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Company.
Moreover, because some of the provisions of FDICIA are still in the process of
being implemented through the adoption of regulations by the various federal
banking agencies, the Company cannot yet fully assess the impact of these
provisions on its operations.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower or
related group of borrowers. Generally, this limit is 15% of the Company's
unimpaired capital and surplus on an unsecured basis. An additional amount may
be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured
by readily marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. The Company's maximum
loans-to-one-borrower limit was $1.0 million at December 31, 1999. As of
December 31, 1999, the Company was in compliance with its loans-to-one-borrower
limitations.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
<PAGE>
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly average basis in 9 out of every 12 months. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. Recent legislation has expanded the
qualified thrift lender test to provide savings associations with greater
authority to lend and diversify their portfolios. In particular, credit card and
education loans may now be made by savings associations without regard to any
percentage-of-assets limit, and commercial loans may be made in an amount up to
10% of total assets, plus and additional 10% for small business loans. Loans for
personal, family and household purposes (other than credit card, small business
and educational loans) are now included without limit with other assets that, in
the
19
<PAGE>
aggregate, may account for up to 20% of total assets. As of December 31,
1999, the Company maintained 88.86% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Company, that exceeds all fully phased-in capital requirements before and after
a proposed capital distribution ("Tier 1 Association") and has not been advised
by the OTS that it is in need of more than normal supervision, could, after
prior notice but without the approval of the OTS, make capital distributions
during a calendar year equal to the greater of: (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the
Company's capital fell below its fully-phased in requirement or the OTS notified
it that it was in need of more than normal supervision, the Company's ability to
make capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. See "--Holding
Company Regulation--Dividend Waivers."
The OTS has adopted new regulations, effective April 1, 1999, that
revise the current capital distribution restrictions. The new regulations
eliminate the current tiered structure and the safe-harbor percentage
limitations. Under the new regulations a savings association may make a capital
distribution without notice to the OTS (unless it is a subsidiary of a holding
company) provided that it has a CAMEL 1 or 2 rating, is not in troubled
condition (as defined by regulation) and would remain adequately capitalized (as
defined in the OTS prompt corrective action regulations) following the proposed
distribution. Savings associations that would remain adequately capitalized
following the proposed distribution but do not meet the other noted requirements
must notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings association
may not make a capital distribution without prior approval of the OTS and the
FDIC if it is undercapitalized before, or as a result of, such a distribution.
As under the current rule, the OTS may object to a capital distribution if it
would constitute an unsafe or unsound practice. The Company qualifies for Tier 1
and has declared and paid dividends of $751,500 during the year ended December
31, 1999.
Liquidity. The Company is required to maintain an average daily balance
of liquid assets (cash, certain time deposits, bankers' acceptances, specified
U.S. Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of not less than a specified percentage of its net withdrawable
deposit accounts plus borrowings payable in one year or less. This liquidity
requirement is currently 4%, may be changed from time to time by the OTS to any
amount within the range of 4% to 10% depending upon economic conditions and the
savings flow of member institutions. OTS regulations also require each savings
<PAGE>
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet these liquidity requirements. The Company's
average liquidity ratio for December 1999 was 28.58%, which exceeded the then
applicable requirements. The Company has never been subject to monetary
penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's consolidated total assets, as reported in the institution's latest
quarterly thrift financial report. Based on assets at December 31, 1999, the
Company is required to pay a semi-annual assessment of approximately $14,100.
Community Reinvestment and Fair Lending Laws. Under the Community
Reinvestment Act (the "CRA"), as implemented by OTS regulations, a savings
institution has a continuing and affirmative obligation, consistent with its
safe and sound operation, to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders
20
<PAGE>
from discriminating in
their lending practices on the basis of characteristics specified in those
statutes and authorizes OTS enforcement actions for violations. The CRA does not
establish specific lending requirements or programs for financial institutions,
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA rating
system identifies four levels of performance that may describe an institution's
record of meeting community needs: outstanding, satisfactory, needs to improve
and substantial non-compliance. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The OTS assesses the CRA performance of
a savings institution under lending, service and investment tests, and based on
such assessment, assigns an institution in one of the four above-referenced
ratings. The Company received a "satisfactory" CRA rating under the current CRA
regulations in its most recent federal examination by the OTS.
Transactions with Related Parties. The Company's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and its non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Company's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals and
do not involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Company may make to
such persons based, in part, on the Company's capital position, and requires
certain approval procedures to be followed. At December 31, 1999, the Company
was in compliance with the regulations.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservator ship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
<PAGE>
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
The federal banking agencies recently adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted a proposed rule which proposes asset quality and earnings standards
which, if adopted, would be added to the Guidelines. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by
21
<PAGE>
the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The capital regulations of the Office of Thrift
Supervision (OTS) require institutions to have a minimum 3 percent core capital
ratio; and a minimum 8 percent risk-based capital ratio. These capital standards
set forth in the capital regulations must generally be no less stringent than
the capital standards applicable to national banks. FIRREA also specifies the
required ratio of housing-related assets in order to qualify as a savings
institution. The Company met the regulatory capital requirements at December 31,
1999 and 1998.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a 200-basis
point increase or decrease in market interest rates dividend by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. A savings association whose measured interest
rate risk exposure exceeds 2% must deduct an interest rate component in
calculating its total capital under the risk-based capital rule. The interest
rate risk component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted from
an association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a quarter lag between the
reporting date of an institution's financial data and the effective date for the
new capital requirement based on that data. A savings association with assets of
less than $300 million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis. The
OTS has postponed the effective date of the capital component in order to
provide it with an opportunity to review the interest rate risk approaches taken
by the other federal banking agencies.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) established additional capital requirements which require regulatory
action against depository institutions in one of the undercapitalized categories
<PAGE>
defined in implementing regulations. Institutions, such as the Company, which
are defined as well capitalized, must generally have a leverage capital (core)
ratio of at least 5 percent, a tier 1 risk-based capital ratio of at least 6
percent, and a total risk-based capital ratio of at least 10 percent. FDICA also
provides for increased supervision by federal regulatory agencies, increased
reporting requirements for insured depository institutions, and other changes in
the legal and regulatory environment for such institutions. The Company met the
regulatory capital requirements at December 31, 1999 and 1998.
22
<PAGE>
Regulatory Capital:
The following table sets forth the Company's actual and required
capital amounts and ratios as of December 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For capital To be well capitalized
adequacy under prompt corrective
Actual purposes action provisions
------------------- -------------------- -----------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tangible Capital $21,511,000 22.7% 1,420,000 1.5% $ -- --%
Tier I leverage (core) capital $21,511,000 22.7 3,786,000 4.0 4,731,000 5.0
Risk based capital 21,893,000 50.1 3,496,000 8.0 4,370,000 10.0
Tier I risk-based capital 21,511,000 52.4 -- -- 2,622,000 6.0
</TABLE>
Federal Home Loan Bank System
The Company is a member of the Federal Home Loan Bank ("FHLB") of Des
Moines, which is one of the 12 regional FHLBs. As a member of the FHLB, the
Company is required to purchase and maintain stock in the FHLB of Des Moines in
an amount equal to the greater of 1% of its aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year, or 1/20th (or such greater fraction as established by the FHLB) of
outstanding FHLB advances. At December 31, 1999 the Company had $613,200 in FHLB
stock, which was in compliance with this requirement. In past years the Company
has received dividends on its FHLB stock. Over the past five years such
dividends have averaged 6.83%, and were 6.35% and 6.30% for the year ended and
at December 31, 1999, respectively. Certain provisions of FIRREA require all 12
Federal Home Loan Banks to provide financial assistance for the resolution of
troubled savings associations and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
could cause rates on the FHLB advances to increase and could affect adversely
the level of FHLB dividends paid and the value of FHLB stock in the future.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
<PAGE>
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Company is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS.
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
23
<PAGE>
Holding Company Regulation
General. WCF Financial, M.H.C. which owns the majority of the Company's
common stock outstanding (the "Holding Company") is a non-diversified mutual
savings and loan holding company within the meaning of the HOLA, as amended. As
such, the Holding Company is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Holding Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. The Company must notify the OTS 30 days before
declaring any dividend to the Holding Company.
As a unitary savings and loan holding company, the Holding Company
generally will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Company continues to be a
QTL. Upon any non-supervisory acquisition by the Holding Company of another
savings association or savings bank that meets the QTL test and is deemed to be
a savings institution by the OTS, the Holding Company would become a multiple
savings and loan holding company (if the acquired institution is held as a
separate subsidiary) and would be subject to extensive limitations on the types
of business activities in which it could engage. The HOLA limits the activities
of a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior
approval of the OTS, and activities authorized by OTS regulation. The OTS is
prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
Restrictions Applicable to Mutual Holding Companies. Pursuant to
Section 10(o) of the HOLA and OTS regulations, a mutual holding company may
engage in the following activities: (i) investing in the stock of a savings
<PAGE>
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company; one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for
24
<PAGE>
savings and loan holding companies; or (B) in which multiple savings and loan
holding companies were authorized (by regulation) to directly engage on March 5,
1987; and (x) purchasing, holding, or disposing of stock acquired in connection
with a qualified stock issuance if the purchase of such stock by such savings
and loan holding company is approved by the Director. If a mutual holding
company acquires or merges with another holding company, the holding company
acquired or the holding company resulting from such merger or acquisition may
only invest in assets and engage in activities listed in (i) through (x) above,
and has a period of two years to cease any non-conforming activities and divest
of any non-conforming
investments.
Waiver of Dividends. In addition, OTS regulations require the Holding
Company, which owns the majority of the Company's common stock, to notify the
OTS of any proposed waiver of its right to receive dividends. It is the OTS'
recent practice to review dividend waiver notices on a case-by-case basis, and,
in general, not object to any such waiver if: (i) the mutual holding company's
board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the subsidiary is controlled by the mutual holding company, the dollar
amount of dividends waived by the mutual holding company are considered as a
restriction on the retained earnings of the subsidiary, which restriction, if
material, is disclosed in the public financial statements of the subsidiary as a
note to the financial statements; (iii) the amount of any dividend waived by the
mutual holding company is available for declaration as a dividend solely to the
mutual holding company, and, in accordance with SFAS 5, where the subsidiary
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the
subsidiary (and the subsidiary's capital ratios adjusted accordingly) in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Holding Company to issue from the mutual to the stock form of
ownership (a "Conversion Transaction"). There can be no assurance when, if ever,
a Conversion Transaction will occur, and the Board of Directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to the
Company (the "New Holding Company"), the Holding Company's corporate existence
would end, and certain depositors of the Bank would receive the right to
subscribe for additional shares of the New Holding Company. In a Conversion
Transaction, each share of Common Stock held by the Company's public
stockholders ("Minority Shareholders") would be automatically converted into a
number of shares of common stock of the New Holding Company determined pursuant
an exchange ratio that ensures that after the Conversion Transaction, subject to
any adjustment to reflect the receipt of cash in lieu of fractional shares, the
percentage of the to-be outstanding shares of the New Holding Company issued to
Minority Stockholders in exchange for their Common Stock would be equal to the
percentage of the outstanding shares of Common Stock held by Minority
Stockholders immediately prior to the Conversion Transaction. The total number
of shares held by Minority Shareholders after the Conversion Transaction would
also be affected by any purchase by such persons in the offering that would be
conducted as part of the Conversion Transaction.
Insurance of Accounts and Regulation by the FDIC
The Company is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
<PAGE>
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's SAIF deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums, ranging from .23%
to .67% of deposits, based upon their level of capital and supervisory
evaluation. Under the system, institutions classified as well capitalized (i.e.,
a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to
risk-weighted assets ("Tier
25
<PAGE>
1 risk-based capital") of at least 6% and a risk-based capital ratio of at least
10%) and considered healthy pay the lowest premium while institutions that are
less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions will be made by the FDIC for each semi-annual
assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. The Company anticipates that its ongoing annual SAIF
premiums will be approximately $14,500.
26
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
For federal income tax purposes, the Company and its subsidiaries file
a consolidated federal income tax return on a calendar year basis. The Holding
Company is not permitted to file a consolidated federal income tax return with
the Company. Thus, the Holding Company files a separate federal income tax
return on a calendar year basis.
The Holding Company and the Company are subject to the rules of federal
income taxation generally applicable to corporations under the Internal Revenue
Code of 1986, as amended (the "Code").
Savings institutions such as Bank that meet certain definitional tests
relating to the composition of assets and other prescribed by the Code are
permitted to establish reserves for bad debts and to make annual additions which
may, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction is computed under the experience method.
If a savings institution ceases to qualify as a "bank" (as defined in
Code Section 581) for bad debt purposes or converts to a credit union, the
pre-1988 reserves and the supplemental reserves are restored to income ratably
over a six-year period, beginning in the tax year the savings institution no
longer qualifies as a bank. The pre-1988 reserves are also subject to recapture
in the case of certain excess distributions including distributions on
liquidation and dissolution and redemptions of shareholders.
In addition to the regular income tax the Company is generally subject
to a minimum tax calculation. An alternative minimum tax is imposed at a minimum
tax rate of 20% on alternative minimum taxable income, which is the sum of a
corporation's regular taxable income (which certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds Company's regular income tax and net operating
losses can offset no more than 90% of alternative minimum income.
The Company is accounting for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." The liability method accounts for deferred
income taxes by applying the enacted statutory rates in effect at the balance
sheet date to differences between the book cost and the tax cost of assets and
liabilities. The resulting deferred tax liabilities and assets are adjusted to
reflect changes in tax laws. SFAS 109 was implemented by the Company effective
January 1, 1993.
The Company has not been audited by the Internal Revenue Service or the
State of Iowa within the past five years.
Iowa Taxation
The Company files an Iowa corporate tax return, the Bank files an Iowa
franchise tax return, and the Bank's subsidiary files an Iowa corporation tax
return on a calendar year basis. The Holding Company files an Iowa corporate tax
return on a calendar year basis..
The State of Iowa imposes a tax on the Iowa franchise taxable income of
savings institutions at the rate of 5%. Iowa franchise taxable income is
generally similar to federal taxable income except that interest from state and
<PAGE>
municipal obligations is taxable, and no deduction is allowed for state
franchise taxes.
The state corporation income tax ranges from 6% to 12% depending upon
Iowa corporation taxable income. Interest from federal securities is not taxable
for purposes of the Iowa corporation income tax.
27
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information as of December 31, 1999,
with respect to the executive officers of the Company.
Name Age Occupation
Phyllis A. Murphy 49 President and Chief Executive Officer
Stephen L. Mourlam 47 Executive Vice President and Chief Financial
Officer
Kyle R. Swon 38 Senior Vice President
Kathie R. Highland 54 Vice President and Secretary
ITEM 2. PROPERTIES
(a) The Company conducts its business through a single facility located
in Webster City, Hamilton County, Iowa. The facility opened and has been owned
by the Company since 1960. At December 31, 1999, the net book value of the
Company's property and equipment was $485,085.
(b) Investment Policies. For a description of the Company's policies
(all of which may be changed without a vote of the Company's security holders)
and the limitations on the percentage of assets which may be invested in any one
investment, or type of investment with respect to: (1) investments in real
estate or interests in real estate; (2) investments in real estate mortgages;
and (3) securities of or interests in persons primarily engaged in real estate
activities, reference is made hereunder to the information presented above under
"Item 1. Description of Business."
(c) Description of Real Estate and Operating Data. Not Applicable; the
book value of each of the Company's properties is less than 10% of the Company's
total consolidated assets at December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically involved in claims and lawsuits that are
incident to the Company's business. As of December 31, 1999, the Company was not
involved in any material claim or lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1999 to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
For information concerning the market for the Company's common stock,
the section captioned "Stockholder Information--Stock Listing" and "--Price
Range of Common Stock and Dividends Paid" of the Company's Annual Report to
Stockholders for the Year Ended December 31, 1999 (the "Annual Report to
Stockholders") is incorporated herein by reference.
28
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 13-37 of the Company's 1999 Annual Report to Stockholders are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants in the
Company's accounting and financial disclosure during 1999.
PART III
ITEM 9. DIRECTORS AND OFFICERS OF THE COMPANY
Information concerning Directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement dated March 15, 2000
(the "Proxy Statement"), specifically the section captioned "Proposal
I--Election of Directors." In addition, see Item 1. "Executive Officers of the
Company" for information concerning the Company's executive officers.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's Proxy Statement, specifically the sections
captioned "Proposal I--Election of Directors--Executive Compensation,"
"--Directors' Compensation," and "--Benefits."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Company's Proxy
Statement, specifically the section captioned "Voting Securities and Principal
Holders Thereof."
ITEM 12. CERTAIN TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from page 9 of the Company's Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Federal Stock Charter of Webster City Federal Bancorp
(Incorporated by reference to Exhibit 3.1 of the
Company's Form 8-KSB as filed on July 1, 1999.
3.2 Bylaws of Webster City Federal Bancorp (Incorporated
by reference to Exhibit 3.2 of the Company's Form
8-KSB as filed on July 1, 1999.
29
<PAGE>
4 Common Stock Certificate of the Company (Incorporated
by reference to Exhibit 4 of the Company's Form
8-KSB, as filed on July 1, 1999.
10.1.A Severance Agreement, as amended between the Company,
the Bank and Phyllis A. Murphy, President and Chief
Executive Officer.
10.1.B Severance Agreement, as amended between the Company,
the Bank and Stephen L. Mourlam, Executive Vice
President.
101.C Severance Agreement, as amended between the Company,
the Bank and Kyle R. Swon, Senior Vice President.
13 1999 Annual Report to Stockholders
21 Subsidiaries of the Registrant
(b) Reports on Form 8-K:
- ----------------------------
The Registrant filed no Current Report on Form 8-K during the
fourth quarter of 1999.
30
<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.
WEBSTER CITY FEDERAL BANCORP
Date: March 17, 2000 /s/ Phyllis A. Murphy
-----------------------------------------
Phyllis A. Murphy
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Phyliss A. Murphy /s/ Stephen L. Mourlam
------------------------------- ------------------------
Phyllis A. Murphy, Stephen L. Moulam
President, Chief Executive Executive Vice President
Officer and Director (Principal Financial and
(Principal Executive Officer) Accounting Officer)
Date: March 17, 2000 Date: March 17, 2000
/s/ Ellis S. Swon /s/ Donald I. Newman
------------------------ ----------------------
Ellis S. Swon, Donald I. Newman,
Chairman of the Board Director
Date: March 17, 2000 Date: March 17, 2000
/s/ Dennis J. Tasler /s/ Dr. Carroll E. Haynes
---------------------- --------------------------
Dennis J. Tasler, Dr. Carroll E. Haynes,
Director Director
Date: March 17, 2000 Date: March 17, 2000
<PAGE>
EXHIBIT 13
1999 ANNUAL REPORT TO STOCKHOLDERS
1999 ANNUAL REPORT TO STOCKHOLDERS
WEBSTER CITY FEDERAL BANCORP
- --------------------------------------------------------------------------------
Table of Contents
Page
----
Message of President and Chief Executive Officer ........................ 1
Selected Consolidated Financial and Other Data .......................... 2
Key Financial Ratios and Other Data ..................................... 3
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 4
Independent Auditors' Report ............................................ 13
Consolidated Balance Sheets ........................................... 14
Consolidated Statements of Operations ................................. 15
Consolidated Statements of Stockholders' Equity ....................... 16
Consolidated Statements of Cash Flows ................................. 17
Notes to Consolidated Financial Statements .............................. 18
Stockholder Information ................................................ 38
Directors and Executive Officers ..................................... 39
<PAGE>
Dear Stockholders,
The year of 1999 has been a good one for our Company. Webster City Federal
Savings Bank completed the formation of Webster City Federal Bancorp, its
holding company, on July 1, 1999. The formation of the Bancorp has allowed us to
repurchase common stock in the market - an effective use of our capital. Our
first 10% repurchase was completed in early November. An additional 10%
repurchase was announced in December of 1999.
Profitability of the Company remained strong in 1999 with net income of
$1,250,000 or $.60 per share. Return on average assets was 1.39%.
We continue to be a market leader in lending in the area. Net loans receivable
increased by 9.6% in 1999. Non-performing assets remained at the lowest levels
in our history at .01% of assets. Core deposits remained stable for the year.
With competition becoming stronger on both the deposit and lending sides, we are
confident that with our strong capital position we will be able to meet those
challenges and use our capital to enhance our shareholder value.
Webster City Federal Bancorp and subsidiaries are community oriented. We believe
first-rate customer service will continue to be important to the public, and we
intend to be the best. We are proud of a staff who does a top-notch job of
service. First-rate customer service will always be our priority.
We recognize the importance of using our capital position to enhance stockholder
value, and will continue to explore our options to make the best decisions for
all shareholders.
Thank you from the directors, officers and staff for being a part of this great
company.
Sincerely,
/s/Phyllis A. Murphy
- --------------------
Phyllis A. Murphy
President
1
<PAGE>
Selected Consolidated Financial and Other Data
The following table sets forth certain consolidated financial and other
data of Webster City Federal Bancorp (the "Company") at the dates and for the
periods indicated. For additional information about the Company, reference is
made to "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company and
related notes included elsewhere herein.
<TABLE>
<CAPTION>
Selected Financial Condition Data
At December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets ........................................ $94,525 $94,084 $95,024 $93,810 $96,538
Loans receivable, net
Real estate ..................................... 58,592 53,084 50,431 49,876 49,350
Consumer and other .............................. 3,600 3,668 3,891 4,277 3,981
------- ------- ------- ------- -------
Total loans receivable, net ..................... 62,192 56,752 54,322 54,153 53,331
Mortgage-backed securities .......................... 7,806 9,987 14,923 18,579 17,418
Investments ......................................... 14,916 9,899 16,637 14,957 16,933
Cash and cash equivalents ........................... 4,986 13,187 5,893 3,759 4,719
Deposits ............................................ 67,918 68,704 71,527 70,952 73,877
Stockholders' equity, substantially restricted ...... 22,348 23,086 22,350 21,769 21,502
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Summary of Operations
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands, except earnings per share
and cash dividends per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income ................................. $ 6,410 $ 6,646 $ 6,740 $ 6,707 $ 6,687
Interest expense ................................ 3,010 3,339 3,364 3,447 3,743
------- ------- ------- ------- -------
Net interest income before provision
for loan losses ............................ 3,400 3,307 3,376 3,260 2,944
Provision for loan losses ....................... -- -- 40 125 15
------- ------- ------- ------- -------
Net interest income after provision
for loan losses ............................ 3,400 3,307 3,336 3,135 2,929
------- ------- ------- ------- -------
Noninterest income:
Service charges and other fees ................ 162 188 157 159 148
Other income .................................. 51 56 48 59 68
------- ------- ------- ------- -------
Total noninterest income ..................... 213 244 205 218 216
Noninterest expense:
Salaries and employee benefits ................ 811 789 723 702 736
Premises and equipment ........................ 117 79 95 86 101
Other real estate expenses, net ............... 2 2 5 (29) 12
Advertising ................................... 29 27 28 31 28
Federal deposit insurance premiums ............ 40 43 36 170 172
Special insurance assessment ................... -- -- -- 502 --
Other ......................................... 585 492 493 440 447
------- ------- ------- ------- -------
Total noninterest expense ................... 1,584 1,432 1,380 1,902 1,496
------- ------- ------- ------- -------
Income before income taxes and accounting changes 2,029 2,119 2,161 1,451 1,649
Income tax expense .............................. 780 803 797 542 614
------- ------- ------- ------- -------
Net income .................................... $ 1,249 $ 1,316 $ 1,364 $ 909 $ 1,035
======= ======= ======= ======= =======
Earnings per share - basic ...................... $ 0.60 $ 0.63 $ 0.66 $ 0.44 $ 0.50
======= ======= ======= ======= =======
Earnings per share - diluted .................... $ 0.60 $ 0.62 $ 0.65 $ 0.44 $ 0.50
======= ======= ======= ======= =======
Cash dividends per share ........................ $ 0.80 $ 0.80 $ 0.80 $ 0.75 $ 0.85
======= ======= ======= ======= =======
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Key Financial Ratios and Other Data
At or for the Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Equity to assets at year end 23.64% 24.54% 23.52% 23.21% 22.27%
Net interest spread 2.61% 2.39% 2.51% 2.39% 1.97%
Net interest margin 3.72% 3.56% 3.65% 3.48% 3.08%
Return on average assets 1.39% 1.39% 1.45% 0.95% 1.06%
Return on average equity 5.71% 5.79% 6.19% 4.20% 4.86%
Stockholders' equity to average assets ratio 23.98% 24.36% 23.70% 22.71% 22.06%
Noninterest income to average assets ratrio 0.22% 0.26% 0.22% 0.24% 0.22%
Noninterest expense to average assets ratio 1.69% 1.52% 1.47% 2.00% 1.54%
Nonperforming loans to net loans 0.01% 0.03% 0.00% 0.05% 1.18%
Nonperforming assets to total assets 0.01% 0.04% 0.06% 0.14% 0.74%
Average interest-earning assets to
average interest-bearing liabiliti1ies 133.80% 132.50% 131.37% 129.77% 128.44%
Allowance for loan losses to
net loans receivable 0.61% 0.68% 0.71% 0.67% 0.83%
Allowance for loan losses to
nonperforming loans N/M N/M N/M N/M 70.77%
Net interest income to noninterest expense 214.71% 230.78% 248.26% 171.46% 196.79%
Number of full service offices 1 1 1 1 1
</TABLE>
N/M = Not Meaningful
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Webster City Federal Bancorp (the "Company") is a bank holding company
whose primary asset is 100% of the outstanding shares of Webster City Federal
Savings Bank (the "Bank") which reorganized into the holding company structure,
effective July 1, 1999. In the holding company reorganization, each outstanding
share of the Bank's common stock was converted into one share of the Company's
common stock, and each stockholder of the Bank received the same ownership
interest in the Company immediately following the holding company reorganization
as he or she had in the Bank immediately prior to that transaction.
The Company focuses on establishing and maintaining long-term
relationships with customers, and is committed to serving the financial service
needs of the communities in its market area. The Company attracts retail
deposits from the general public and uses those deposits, together with borrowed
funds, to originate residential mortgage loans and to make consumer loans.
The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Company has
sought to implement this strategy primarily by using retail deposits and, to a
lesser extent, public funds as its source of funds and maintaining a substantial
part of its assets in loans secured by one- to four-family residential real
estate located in the Company's market area, home equity loans, mortgage-backed
securities and in other liquid investment securities. Specifically, the
Company's business strategy incorporates the following elements: (1) operating
the Bank as a community-oriented financial institution, maintaining a strong
core customer base by providing quality service and offering customers the
access to senior management and services that a community-based institution can
offer; (2) maintaining high asset quality by emphasizing investment in
residential mortgage loans, mortgage-backed securities and other securities
issued or guaranteed by the United States Government or agencies thereof; (3)
maintaining capital in excess of regulatory requirements and growing only to the
extent that adequate capital levels can be maintained; and (4) managing interest
rate risk exposure while achieving desirable levels of profitability.
The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the its
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
securities, interest-bearing deposits at other institutions, investment
securities and other investments, and the interest paid on interest-bearing
liabilities, which consist of savings deposits. Net interest income is a
function of the Company's interest rate spread, which is the difference between
the average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The
Company's earnings also are affected by its level of non-interest income
including primarily service fees and charges, and non-interest expense,
including primarily compensation and employee benefits, and SAIF deposit
insurance premiums. Earnings of the Company also are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Company.
<PAGE>
Comparison of Financial Condition
Total assets increased $441,400, or .5%, to $94.5 million at December
31, 1999 from $94.1 million at December 31, 1998. Deposits decreased by
$786,000, or 11.4%, to $67.9 million at December 31, 1999 from $68.7 million at
December 31, 1998. Cash and cash equivalents decreased by $8.2 million, or
62.2%, to $5.0 million on December 31, 1999 from $13.2 million at December 31,
1998. This was due to a number of investments coming due in the latter part of
1998 that were reinvested in January of 1999. Investments (other than
mortgage-backed securities) increased $5.0 million, or 50.7%, to $14.9 million
at December 31, 1999 from $9.9 million at December 31, 1998. Net loans increased
$5.4 million, or 9.6%, to $62.2 million at December 31, 1999 from $56.7 million
at December 31, 1998. Mortgage-backed securities decreased $2.2 million, or
21.8%, to $7.8 million at December 31, 1999 from $10.0 million at December 31,
1998.
4
<PAGE>
Stockholders' equity decreased by $738,000, or 3.2%, to $22.3 million
at December 31, 1999 from $23.1 million at December 31, 1998. The decrease in
stockholders' equity was due to net income of $1.2 million, offset by dividends
of $751,500 being paid to the stockholders and the repurchase of 96,938 shares
of common stock for $1.5 million.
Results of Operations
General. The earnings of the Company depend primarily on its level of
net interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of mortgage loans,
mortgage-backed securities, interest-earning deposits at other institutions,
investment securities and other investments, and the interest paid on
interest-bearing liabilities, which have consisted of savings deposits and, to a
lesser extent, public funds. The Company had net income of $1.2 million for the
year ended December 31, 1999 compared to $1.3 million, and $1.4 million, for the
years ended December 31, 1998, and 1997, respectively.
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances rather than daily
average balances has caused any material difference in the information
presented.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------
(Dollars in Thousands)
Yield/Rate Average Average
at Average Yield/ Average Yield/
December 31, Balance Interest Cost Balance Interest Cost
------------ ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net 7.68% $58,312 $4,502 7.72% $55,704 $4,309 7.74%
Mortgage-backed securities 6.68% 9,006 571 6.34% 12,313 856 6.95%
Investment securties 6.04% 15,183 924 6.09% 14,560 959 6.59%
Other interest earning assets 4.75% 8,670 413 4.76% 10,310 522 5.06%
------- ------ ------- ------
Total interest-earning assets 91,171 6,410 7.03% 92,887 6,646 7.15%
Other noninterest-earning assets 2,004 1,887
------- -------
Total assets $93,175 $94,774
======= =======
Interest-bearing liabilities:
Deposits 4.29% 66,531 2,924 4.40% 68,701 3,270 4.76%
Borrowings 5.55% 1,608 86 5.35% 1,401 69 4.93%
------- ------ ------- ------
Total interest-bearing liabilities 68,139 3,010 4.42% 70,102 3,339 4.76%
Noninterest-bearing liabilities 2,256 1,946
------- -------
Total liabilities 70,395 72,048
Stockholders' equity 22,780 22,726
------- -------
Total liabilities and stockholders' equity $93,175 $94,774
======= =======
Net interest income $3,400 $3,307
====== ======
Net interest rate spread 2.61% 2.39%
====== ======
Net interest margin (1) 3.72% 3.56%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 133.80% 132.50%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $54,058 $4,205 7.78%
Mortgage-backed securities 16,717 1,189 7.11%
Investment securties 15,536 1,026 6.60%
Other interest earning assets 6,116 320 5.23%
------- ------
Total interest-earning assets 92,427 6,740 7.29%
Other noninterest-earning assets 1,879
-------
Total assets $94,306
=======
Interest-bearing liabilities:
Deposits 70,081 3,342 4.77%
Borrowings 276 22 7.97%
------- ------
Total interest-bearing liabilities 70,357 3,364 4.78%
Noninterest-bearing liabilities 1,893
-------
Total liabilities 72,250
Stockholders' equity 22,056
-------
Total liabilities and stockholders' equity $94,306
=======
Net interest income $3,376
======
Net interest rate spread 2.51%
======
Net interest margin (1) 3.65%
======
Ratio of average interest-earning assets to
average interest-bearing liabilities 131.37%
======
</TABLE>
(1) Net interest margin represents net interest income divided by average
interest-earning assets.
5
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) the net change.
Changes attributable to both rate and volume have been allocated proportionately
to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Rate/Volume Analysis
Years Ended December 31,
---------------------------------------------------------------
1999 vs 1998 1998 vs 1997
------------------------------ -----------------------------
Increase/ Increase/
(Decrease) (Decrease)
Due to Total Due to Total
----------------- Increase ---------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Investment securities ............... $ 40 ($ 75) ($ 35) ($ 64) ($ 3) ($ 67)
Loans receivable, net ............... 201 (8) 193 127 (23) 104
Mortgage-backed securities .......... (215) (70) (285) (307) (26) (333)
Other interest earning assets ....... (79) (30) (109) 212 (10) 202
----- ----- ----- ----- ----- -----
Total interest-earning assets .... ($ 53) ($183) ($236) ($ 32) ($ 62) ($ 94)
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Deposits ............................ (161) (185) (346) (66) (6) (72)
Borrowings .......................... 108 (91) 17 58 (11) 47
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities ($ 53) ($276) ($329) ($ 8) ($ 17) ($ 25)
----- ----- ----- ----- ----- -----
Net change in interest income: ......... $ 0 $ 93 $ 93 ($ 24) ($ 45) ($ 69)
===== ===== ===== ===== ===== =====
</TABLE>
6
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998.
Interest Income. Total interest income decreased by $236,000, or 3.6%,
to $6.4 million for the year ended December 31, 1999 from $6.6 million for the
year ended December 31, 1998. The decrease in interest income resulted primarily
from the decrease in average yield on the Bank's interest-earning assets to
7.03% from 7.15%. Declining market interest rates were the major causes of the
decrease in average yield on interest-earning assets. Average interest-earning
assets decreased by $1.7 million to $91.2 million from $92.9 million. The
decrease in average interest-earning assets resulted primarily from a decrease
of $3.3 million, or 26.9%, in the average balance of mortgage-backed securities
and a decrease of $1.6 million or 15.9% in average balance of other
interest-earning assets, offset by a $2.6 million, or 4.7%, increase in the
average balance of net loans receivable.
Interest income on real estate and other loans increased by $193,000,
or 4.5%, to $4.5 million for the year ended December 31, 1999 from $4.3 million
for the year ended December 31, 1998. This increase in interest income was the
result of a net increase in average loans outstanding for 1999 as compared to
1998, due to increased loan originations. The average yield on the loan
portfolio decreased to 7.72% for the year ended December 31, 1999 from 7.74% for
the year ended December 31, 1998. The Company uses a lagging index for its
adjustable rate loans and this caused the overall yield on the loan portfolio to
decrease in 1999 compared to 1998. Refinancing of existing loans and lower rates
being offered on new loans also caused the yield on our loan portfolio to
decline. Interest income on mortgage-backed securities decreased by $285,000, or
33.3%, to $571,300. The decrease in interest income resulted from a decrease in
average mortgage-backed securities outstanding of $3.3 million, or 26.9% and a
decrease in average yield on mortgage-backed securities to 6.34% from 6.95% due
to lower market interest rates.
Interest Expense. Total interest expense decreased by $329,000, or
9.8%, to $3.0 million for the year ended December 31, 1999 from $3.3 million for
the year ended December 31, 1998. The principal reason for the decrease in
interest expense was a decrease in the balance of average deposits of $2.1
million, or 3.2%, to $66.5 million for year ended December 31, 1999 from $68.7
million for year ended December 31, 1998. At the same time the average rates
paid on deposits dropped to 4.39% from 4.76% the prior year. Part of the
decrease in deposit interest expense was offset by an increase in the Company's
borrowings. The Company borrowed an additional $2.0 million in October 1999 at a
rate of 5.55% which increased the Company's interest expense.
Net Interest Income. Net interest income increased by $93,000, or 2.8%,
to $3.4 million for the year ended December 31, 1999, from $3.3 million for the
year ended December 31, 1998. The principal reason for the increase in net
interest income was an increase in the Company's interest rate spread to 2.61%
from 2.39%, and an increase in the Company's ratio of average interest-earning
assets to average interest-bearing liabilities.
Provision for Loan Losses. The Company maintains an allowance for loan
losses based upon management's evaluation of risks in the loan portfolio, the
Company's past loan loss experience, and current and expected future economic
conditions. The Company had no provision for loan losses for the year ended
December 31, 1999 or in 1998. Management believes that its provisions for loan
losses have maintained its allowance for loan losses at a level that is adequate
to provide for loan losses, although there can be no assurance that such losses
will not exceed estimated amounts.
<PAGE>
Non-interest Income. Non-interest income decreased by $31,000, or
12.7%, to $213,000 for the year ended December 31, 1999, from $244,000 for the
same period ended December 31, 1998. The decrease in non-interest income was due
to decreased fees from loan activities.
Non-interest Expense. Non-interest expense increased by $150,700, or
10.5%, to $1.6 million for the year ended December 31, 1999 from $1.4 million
for the year ended December 31, 1998. Non-interest expense consists primarily of
salaries and employee benefits, premises and occupancy costs, furniture and
equipment expense, data processing expense, SAIF deposit insurance premiums and
stock related expenses. Compensation and benefit costs increased due to salary
increases and the Bank paying off its ESOP loan of approximately $159,000 on
June 30, 1999.
Income Taxes. Income tax expense decreased by $23,000, or 2.9%, to
$780,000 for the year ended December 31, 1999 from $803,000 for the same period
in 1998. The effective tax rate for 1999 was 38.4% compared to 37.9% in 1998.
7
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997.
Interest Income. Total interest income decreased by $94,000, or 1.4%,
to $6.6 million for the year ended December 31, 1998 from $6.7 million for the
year ended December 31, 1997. The decrease in interest income resulted primarily
from the decrease in average yield on the Bank's interest-earning assets to
7.15% from 7.29%. Primarily declining market interest rates caused the decrease
in average yield on interest-earning assets. Average interest-earning assets
increased by $.5 million to $92.9 million from $92.4 million. The increase in
average interest-earning assets resulted primarily from an increase of $4.2
million, or 68.6%, in the average balance of other interest-earning assets,
offset by a $4.4 million, or 26.4%, decrease in mortgage-backed securities.
Interest income on real estate and other loans increased by $104,000,
or 2.5%, to $4.3 million for the year ended December 31, 1998 from $4.2 million
for the year ended December 31, 1997. This increase in interest income was the
result of a net increase in average loans outstanding for 1998 as compared to
1997, due to increased loan originations. The average yield on the loan
portfolio decreased to 7.74% for the year ended December 31, 1998 from 7.78% for
the year ended December 31, 1997. The Bank uses a lagging index for its
adjustable rate loans and this caused the overall yield on the loan portfolio to
decrease in 1998 compared to 1997. Refinancing of existing loans and lower rates
being offered on new loans also caused the yield on our loan portfolio to
decline. Interest income on mortgage-backed securities decreased by $333,000, or
28.0%, to $.9 million. The decrease in interest income resulted from a decrease
in average mortgage-backed securities outstanding of $4.4 million, or 26.4% and
a decrease in average yield on mortgage-backed securities to 6.95% from 7.11%
due to lower market interest rates.
Interest Expense. Total interest expense decreased by $25,000, or .7%,
to $3.3 million for the year ended December 31, 1998 from $3.4 million for the
year ended December 31, 1997. The principal reason for the decrease in interest
expense was a decrease in the balance of average deposits of $1.4 million, or
2.0%, to $68.7 million for year ended December 31, 1998 from $70.1 million for
year ended December 31, 1997. At the same time the average rates paid on
deposits dropped to 4.76% from 4.77% the prior year. Part of the decrease in
deposit interest expense was offset by an increase in the Bank's borrowings. The
Bank borrowed $1.2 million in January of 1998 at 4.79%, which increased the
Bank's interest expense by $55,000.
Net Interest Income. Net interest income decreased by $69,000, or 2.1%,
to $3.3 million for the year ended December 31, 1998, from $3.4 million for the
year ended December 31, 1997. The principal reason for the decrease in net
interest income was a decrease in the Bank's interest rate spread to 2.39% from
2.51%, and a decrease in the Bank's ratio of average interest-earning assets to
average interest-bearing liabilities.
Provision for Loan Losses. The Bank maintains an allowance for loan
losses based upon management's evaluation of risks in the loan portfolio, the
Bank's past loan loss experience, and current and expected future economic
conditions. The Bank had no provision for loan losses for the year ended
December 31, 1998 down from $40,000 for the year ended December 31, 1997. The
decrease was due to fewer charge-offs and fewer delinquencies in total loans
receivable outstanding for the year ended December 31, 1998. Management believes
that its provisions for loan losses have maintained its allowance for loan
losses at a level that is adequate to provide for loan losses, although there
can be no assurance that such losses will not exceed estimated amounts.
<PAGE>
Non interest Income. Non interest income increased by $39,000, or
19.0%, to $244,000 for the year ended December 31, 1998, from $205,000 for the
same period ended December 31, 1997. The increase in non interest income was due
to increased fees from loan activities.
Non interest Expense. Non interest expense increased by $54,000, or
3.9%, to $1.4 million for the year ended December 31, 1998 from $1.4 million for
the year ended December 31, 1997. Non interest expense consists primarily of
salaries and employee benefits, premises and occupancy costs, furniture and
equipment expense, data processing expense, SAIF deposit insurance premiums and
stock related expenses. Compensation and benefit costs increased, due to salary
increases and the Bank adding two additional employees late in the year.
Income Taxes. Income tax expense increased by $6,000, or .8%, to
$803,000 for the year ended December 31, 1998 from $797,000 for the same period
in 1997. The effective tax rate for 1998 was 37.9% compared to 36.9% in 1997.
8
<PAGE>
Asset and Liability Management-Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to positively affect net interest income. Similarly,
during a period of falling interest rates, a negative gap would tend to
positively affect net interest income while a positive gap would tend to
adversely affect net interest income.
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities and interest
rates of its interest rate sensitive assets and liabilities by emphasizing ARM
loans and fixed-rate one- to four-family mortgage loans with terms of 15 years
or less, and by maintaining relatively high levels of liquidity. By maintaining
a significant percentage of its assets in cash and other liquid investments, the
Company is able to reinvest a higher percentage of its assets more quickly in
response to changes in market interest rates, thereby reducing its exposure to
interest rate volatility. In addition, the Company offers competitive rates on
deposit accounts and prices certificates of deposit to provide customers with
incentives to choose certificates of deposit with longer terms.
Market Risk Management
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk is comprised primarily of interest rate risk resulting
from its core banking activities of lending and deposit taking. Interest rate
risk is the risk that changes in market interest rates might adversely affect
the Company's net interest income or the economic value of its portfolio of
assets, liabilities, and off-balance sheet contracts. Management continually
develops and applies strategies to mitigate this risk. Management does not
believe that the Company's primary market risk exposure and how those exposures
were managed in 1999 have changed when compared to 1998. Market risk limits have
been established by the Board of Directors based on the Company's tolerance for
risk.
The Company primarily relies on the OTS Net Portfolio Value Model (the Model) to
measure its susceptibility to interest rate changes. Net portfolio value (NPV)
is defined as the present value of expected net cash flows from existing assest
minus the present value of expected net cash flows from existing liabilities
plus or minus the present value of net expected cash flows from existing
off-balance sheet contracts. The Model estimates the current economic value of
each type of asset, liability, and off-balance sheet contract after various
assumed instantaneous, parallel shifts in the Treasury yield curve both upward
and downward.
<PAGE>
The NPV Model uses an option-based pricing approach to value one-to-four family
mortgages, mortgages serviced by or for others, and firm commitments to buy,
sell, or originate mortgages. This approach makes use of an interest rate
simulation program to generate numerous random interest rate paths that, in
conjunction with a prepayment model, are used to estimate mortgage cash flows.
Prepayment options and interest rate caps and floors contained in mortgages and
mortgage-related securities introduce significant uncertainty in estimating the
timing of cash flows for these instruments that warrants the use of this
sophisticated methodology. All other financial instruments are valued using a
static discounted cash flow method. Under this approach, the present value is
determined by discounting the cash flows the instrument is expected to generate
by the yields currently available to investors from an instrument of comparable
risk and duration.
The following table sets forth the present value estimates for major categories
of financial instruments of the Company at December 31, 1999, as calculated by
the OTS NPV Model. The table shows the present value of the instruments under
rate shock scenarios of -300 basis points to +300 basis points in increments of
100 basis points. As illustrated in the table, the Company's NPV is more
sensitive in a rising rate scenario than in a falling rate scenario. As market
rates increase, the market value of the Company's large portfolio of mortgage
loans and securities declines significantly and prepayments slow. As interest
rates decrease, the market value of mortgage loans and mortgage-backed
securities increase less dramatically due to prepayment risk, periodic rate
caps, and other embedded options.
9
<PAGE>
Actual changes in market value will differ from estimated changes in this table
due to various risks and uncertainties.
<TABLE>
<CAPTION>
Present Value Estimates by Interest Rate Scenario
Calculated at September 1999
-300 bp -200 bp -100 bp 0 bp +100 bp +200 bp +300 bp
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Instrument:
Mortgage loans and securities $68,542 67,498 66,434 65,075 63,408 61,604 59,754
Non-mortgage loans .......... 3,536 3,483 3,432 3,382 3,334 3,286 3,240
Cash, deposits and securities 20,360 20,285 20,194 19,725 19,226 18,750 18,295
Other assets ................ 1,612 1,891 2,232 2,661 3,078 3,469 3,836
Total assets ................ 94,050 93,157 92,292 90,843 89,046 87,109 85,125
Deposits .................... 67,912 67,425 66,949 66,484 66,030 65,586 65,152
Borrowings .................. 1,202 1,201 1,200 1,199 1,198 1,197 1,196
Other liabilities ........... 1,158 1,158 1,158 1,158 1,158 1,158 1,158
Total liabilities ........... 70,272 69,784 69,307 68,841 68,386 67,941 67,506
Commitments ................. 51 37 21 (3) (32) (62) (91)
Net portfolio value ......... $23,829 23,410 23,006 21,999 20,628 19,106 17,528
Net portfolio value ratio ... 25.34% 25.13% 24.93% 24.22% 23.17% 21.94% 20.59%
NPV minimum board limit ..... 24.00% 23.00% 22.00% 21.00% 20.00% 19.00% 18.00%
</TABLE>
Liquidity and Capital Resources
The Company is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Company's liquidity ratio averaged
28.58% during the month of December 1999. Liquidity ratios averaged 28.6% for
the three months ended December 31, 1999. The Company adjusts its liquidity
levels in order to meet funding needs of deposit outflows, payment of real
estate taxes on mortgage loans, repayment of borrowings and loan commitments.
The Company also adjusts liquidity as appropriate to meet its asset and
liability management objectives.
The Company's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other investments, and earnings and funds provided from
operations. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Company manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Company invests in
short-term interest-earning assets, which provide liquidity to meet lending
<PAGE>
requirements. At December 31, 1999, $7.4 million, or 35.5%, of the Company's
investment portfolio (including cash, deposits in other financial institutions,
FHLB stock, and securities) was scheduled to mature in one year or less, $12.5
million, or 59.7%, was scheduled to mature in one to five years, and $1.0
million or 5.0%, was scheduled to mature in over five years. Assets qualifying
for liquidity outstanding at December 31, 1999 amounted to $20.1 million. For
additional information about cash flows from the Company's operating, financing,
and investing activities, see Statements of Cash Flows included in the
Consolidated Financial Statements.
10
<PAGE>
A major portion of the Company's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash are net earnings, principal repayments
on loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, it may borrow from the FHLB, which provides an additional source of
funds.
At December 31, 1999, the Company had core capital of $21.5 million, or
22.7% of adjusted total assets, which was approximately $17.7 million above the
minimum requirements of 4.0%, of adjusted total assets in effect on that date.
On December 31, 1999, the Company had risk-based capital of $21.9 million
(including $21.5 million in risk-based capital), or 50.1% of risk-weighted
assets of $43.7 million. This amount was $18.4 million above the 8% requirement
in effect on that date. The Company is presently in compliance with the fully
phased-in capital requirements.
At December 31, 1999, the Company had outstanding loan commitments of
$405,000. This amount does not include the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less than one year as of December
31, 1999, totaled $34.9 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Company.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of the Company and notes thereto,
presented elsewhere 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 the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS 137 will be effective for the Company for the year
beginning January 1, 2001. Management is evaluating the impact the adoption of
SFAS 133 and SFAS 137 will have on the Company's consolidated financial
statements. The Company expects to adopt SFAS No. 133 and 137 when required.
Impact of Year 2000 Compliance
The Board of Directors was aware of the potential risk that Year 2000
posed for the Company and had assigned an individual to establish a Year 2000
formal project plan, which was developed and adopted by the Company. Testing and
contingency plans were also developed and adopted by the Company, and testing
procedures were also implemented.
The Company's contingency plans included two components, business
remediation and business resumption. The business remediation plan was developed
to mitigate the risk associated with the failure to successfully complete system
<PAGE>
renovation, validation or implementation of the Company's Year 2000 readiness.
This plan pertained to mission-critical systems developed in-house, by outside
software vendors, and by third-party service providers. The business resumption
plan was designed to be implemented in the event there was a system failure at
critical dates.
The Company did not feel that with all of its planning and testing as
well as having contingency plans in place they would experience any major Year
2000 problems at the end of the year. The Company did not experience any
problems at year-end nor have we experienced a problem on any of the critical
dates identified as potential problems during the first quarter of the year
2000.
11
<PAGE>
Safe Harbor Statement
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions, the
legislative/regulatory situation, monetary and fiscal policies of the U.S.
Government, including polices of the U.S. Treasury and the Federal Reserve
Board, the quality of composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the
Company's market area and accounting principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Bank's filings with the Securities Exchange Commission.
12
<PAGE>
Independent Auditors' Report
The Board of Directors
Webster City Federal Bancorp
Webster City, Iowa:
We have audited the accompanying consolidated balance sheets of Webster
City Federal Bancorp and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated 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 above
present fairly, in all material respects, the financial position of Webster
City Federal Bancorp and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/KPMG LLP
-----------
KPMG LLP
Des Moines, Iowa
January 21, 2000
13
<PAGE>
<TABLE>
<CAPTION>
WEBSTER CITY FEDERAL BANCORP
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents .................................... $ 4,986,099 13,186,836
Time deposits in other financial institutions ................ 2,585,000 2,265,000
Securities held-to-maturity (market value of $22,129,444
in 1999 and $20,064,845 in 1998) (note 2) ................ 22,721,595 19,886,768
Loans receivable, net (notes 3 and 4) ........................ 62,192,330 56,751,506
Real estate, net (note 5) .................................... -- 22,460
Federal Home Loan Bank (FHLB) stock, at cost ................. 613,200 613,200
Office property and equipment, net (note 6) .................. 485,085 496,356
Deferred taxes on income (note 9) ............................ 156,000 137,000
Accrued interest receivable (notes 2 and 3) .................. 761,267 663,648
Prepaid expenses and other assets ............................ 24,513 60,954
------------ ------------
$ 94,525,089 94,083,728
============ ============
Liabilities and Stockholders' Equity
Deposits (note 7) ............................................ $ 67,918,202 68,703,588
FHLB advance (note 8) ........................................ 3,200,000 1,200,000
Advance payments by borrowers for taxes and insurance ........ 274,377 219,583
Employee stock ownership plan (ESOP) borrowing (note 10) ..... -- 159,064
Accrued interest payable (note 7) ............................ 122,212 110,393
Current income taxes payable (note 9) ........................ 27,458 51,554
Accrued expenses and other liabilities (note 10) ............. 634,535 553,811
------------ ------------
Total liabilities ............................... 72,176,784 70,997,993
------------ ------------
Stockholders' equity (note 11):
Serial preferred stock, $.10 par value;
authorized 10,000,000 shares, none issued .............. -- --
Common stock, $.10 par value; authorized
20,000,000 shares, 2,122,216 and 2,115,990
issued and outstanding in 1999 and 1998, respectively .. 212,222 211,599
Additional paid-in capital ............................... 9,093,681 9,012,687
Retained earnings, substantially restricted .............. 14,518,728 14,020,513
Unearned ESOP shares ..................................... -- (159,064)
Treasury stock, 96,938 shares ............................ (1,476,326) --
------------ ------------
Total stockholders' equity ...................... 22,348,305 23,085,735
------------ ------------
Commitments and contingencies (notes 3 and 14)
Total liabilities and stockholders' equity ...... $ 94,525,089 94,083,728
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
WEBSTER CITY FEDERAL BANCORP
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable ........................................... $4,502,081 4,309,340 4,204,675
Mortgage-backed and related securities ..................... 571,316 856,476 1,189,466
Investment securities ...................................... 923,589 959,443 1,026,097
Other interest earning assets .............................. 413,440 521,092 319,872
---------- ---------- ----------
Total interest income ............................. 6,410,426 6,646,351 6,740,110
---------- ---------- ----------
Interest expense:
Deposits (note 7) .......................................... 2,924,174 3,269,914 3,341,865
FHLB advance (note 8) ...................................... 80,699 54,766 --
ESOP loan interest (note 10) ............................... 5,086 14,182 22,246
---------- ---------- ----------
Total interest expense ............................ 3,009,959 3,338,862 3,364,111
---------- ---------- ----------
Net interest income ............................... 3,400,467 3,307,489 3,375,999
Provision for losses on loans (note 4) ......................... -- -- 40,000
---------- ---------- ----------
Net interest income after provision
for losses on loans ............................. 3,400,467 3,307,489 3,335,999
---------- ---------- ----------
Noninterest income:
Fees and service charges ................................... 162,211 188,123 157,242
Other ...................................................... 50,929 56,296 47,707
---------- ---------- ----------
Total noninterest income ........................... 213,140 244,419 204,949
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Noninterest expense:
Compensation, payroll taxes, and employee benefits (note 10) 810,858 789,227 723,497
Advertising ................................................ 28,712 27,346 28,209
Office property and equipment .............................. 117,286 79,250 94,816
Federal insurance premiums ................................. 39,832 43,012 35,672
Data processing services ................................... 113,219 101,780 100,430
Other real estate expenses, net ............................ 1,654 2,049 4,882
Other ...................................................... 472,365 390,516 392,064
---------- ---------- ----------
Total noninterest expense ......................... 1,583,926 1,433,180 1,379,570
---------- ---------- ----------
Earnings before taxes on income ................... 2,029,681 2,118,728 2,161,378
Taxes on income (note 9) ....................................... 780,000 803,000 797,000
---------- ---------- ----------
Net earnings ...................................... $1,249,681 1,315,728 1,364,378
========== ========== ==========
Earnings per share - basic (note 1) ............................ $ 0.60 0.63 0.66
========== ========== ==========
Earnings per share - diluted (note 1) .......................... $ 0.60 0.62 0.65
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
WEBSTER CITY FEDERAL BANCORP
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
December 31, 1999 and 1998
Additional Unearned
Common Treasury paid-in Retained ESOP
stock Stock capital earnings shares Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ............. $ 210,000 -- 8,780,686 13,089,481 (311,467) 21,768,700
Net earnings ............................. -- -- -- 1,364,378 -- 1,364,378
Exercise of options (9,383 shares) ....... 938 -- 114,870 -- -- 115,808
Stock appreciation of allocated
ESOP shares .......................... -- -- 17,100 -- -- 17,100
Principal reduction ...................... -- -- -- -- 74,984 74,984
Dividends paid on common stock ........... -- -- -- (990,666) -- (990,666)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 ............. 210,938 -- 8,912,656 13,463,193 (236,483) 22,350,304
Net earnings ............................. -- -- -- 1,315,728 -- 1,315,728
Exercise of options (6,610 shares) ....... 661 -- 61,177 -- -- 61,838
Stock appreciation of allocated
ESOP shares .......................... -- -- 38,854 -- -- 38,854
Principal reduction ...................... -- -- -- -- 77,419 77,419
Dividends paid on common stock ........... -- -- -- (758,408) -- (758,408)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 ............. 211,599 -- 9,012,687 14,020,513 (159,064) 23,085,735
Net earnings ............................. -- -- -- 1,249,681 -- 1,249,681
Exercise of options (6,229 shares) ....... 623 -- 71,933 -- -- 72,556
Stock appreciation of allocated
ESOP shares .......................... -- -- 9,061 -- -- 9,061
Principal reduction ...................... -- -- -- -- 159,064 159,064
Repurchase of common stock (96,938 shares) -- (1,476,326) -- -- -- (1,476,326)
Dividends paid on common stock ........... -- -- -- (751,466) -- (751,466)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 ............. $ 212,222 (1,476,326) 9,093,681 14,518,728 -- 22,348,305
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
WEBSTER CITY FEDERAL BANCORP
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended 1999, 1998, and 1997
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings .......................................................... $ 1,249,681 1,315,728 1,364,378
------------ ------------ ------------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation ...................................................... 51,890 36,210 46,790
Amortization of fees and discounts, net ........................... 5,692 5,612 (42,315)
Provision for losses on loans ..................................... -- -- 40,000
Gain on sale of real estate, net .................................. -- (3,227) (3,739)
Earned but unallocated shares of ESOP ............................. 159,064 77,419 74,984
Stock appreciation of allocated ESOP shares ....................... 9,061 38,854 17,100
(Increase) decrease in accrued interest receivable ................ (97,619) 5,289 2,033
Decrease (increase) in prepaid expenses and other assets .......... 36,441 (16,393) 13,544
Increase in accrued interest payable .............................. 11,819 2,029 26,732
Increase in accrued expenses and other liabilities ................ 80,724 48,083 48,496
(Decrease) increase in accrued taxes on income .................... (24,096) (9,549) 89,954
Increase in deferred taxes on income .............................. (19,000) (48,000) (38,000)
------------ ------------ ------------
Total adjustments ............................................ 213,976 136,327 275,579
------------ ------------ ------------
Net cash provided by operating activities .................... 1,463,657 1,452,055 1,639,957
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturity of time deposits in other financial institutions 3,111,000 1,085,000 1,850,000
Proceeds from the maturity of investment securities ................... 4,900,000 16,650,000 7,000,000
Purchase of investment securities ..................................... (9,905,814) (9,902,281) (8,632,453)
Purchase of time deposits ............................................. (3,431,000) (2,265,000) (2,800,000)
Principal collected on mortgage-backed securities ..................... 3,226,586 4,905,638 3,637,996
Purchase of mortgage-backed securities ................................ (1,070,487) -- --
Net change in loans receivable ........................................ (5,431,628) (2,488,656) (256,688)
Proceeds from the sale of real estate ................................. 22,460 113,967 105,194
Purchase of office property and equipment ............................. (40,619) (9,990) (31,682)
Proceeds on sale of FHLB stock ........................................ -- 166,300 --
------------ ------------ ------------
Net cash (used in) provided by investing activities .......... (8,619,502) 8,254,978 872,367
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Net change in deposits ................................................ (785,386) (2,823,575) 575,419
Net (decrease) increase in advance payments by
borrowers for taxes and insurance ................................... 54,794 (15,485) (3,928)
Proceeds from FHLB advance ............................................ 2,000,000 1,200,000 --
Repurchase of common stock ............................................ (1,476,326) -- --
ESOP costs ............................................................ (159,064) (77,419) (74,984)
Proceeds on stock options ............................................. 72,556 61,838 115,808
Dividends paid ........................................................ (751,466) (758,408) (990,666)
------------ ------------ ------------
Net cash used in financing activities ........................ (1,044,892) (2,413,049) (378,351)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ......... (8,200,737) 7,293,984 2,133,973
Cash and cash equivalents at beginning of year ............................ 13,186,836 5,892,852 3,758,879
------------ ------------ ------------
Cash and cash equivalents at end of year .................................. $ 4,986,099 13,186,836 5,892,852
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................................ $ 2,998,140 3,336,833 3,337,379
Taxes on income ..................................................... 821,582 861,066 744,430
Transfers from loans to real estate acquired through foreclosure ...... -- -- 59,282
Loan originated to facilitate sale of real estate ..................... -- 73,918 --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) Summary of Significant Accounting Policies and Practices
Description of Business
Webster City Federal Bancorp (the Company) and its subsidiary, Webster
City Federal Savings Bank (the Bank,) conduct operations from a single
office in Webster City, Iowa, a community of approximately 8,000 people.
The Bank is primarily engaged in the business of attracting deposits
from the general public in its market area and investing such deposits
in mortgage loans secured by one- to four-family residential real
estate. The Bank's primary area for lending and other financial services
consists of Hamilton County, Iowa, and the surrounding contiguous
counties.
Webster City Federal Bancorp was formed on July 1, 1999 pursuant to a
plan of reorganization adopted by the Bank and its stockholders.
Pursuant to the reorganization, each share of Webster City Federal
Savings Bank stock held by existing stockholders of the Bank was
exchanged for a share of common stock of Webster City Federal Bancorp.
The reorganization had no financial statement impact and is reflected
for all prior periods presented. Approximately 55% of the Company's
capital stock is owned by WCF Financial M.H.C., a mutual holding
company. The remaining 45% of the Company's capital stock is owned by
the general public.
Principles of Consolidation
The consolidated financial statements include the accounts of Webster
City Federal Bancorp, Webster City Federal Savings Bank, and the Bank's
wholly owned subsidiary, WCF Service Corporation, which is engaged in
the sales of mortgage life and credit life insurance to the Bank's loan
customers. All material intercompany accounts and transactions have been
eliminated.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. In preparing such
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of
the balance sheet and revenues and expenses for the period. 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 loan losses.
Earnings Per Share Computations
The Company applies Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings per Share for basic and diluted earnings per share
calculation and reporting standards.
<PAGE>
Earnings per share-basic for 1999 is computed using the 2,080,517
weighted-average common shares outstanding for the year, which is net of
6,770 weighted-average unearned ESOP shares and 30,866 Treasury shares
and divided into the net earnings of $1,249,681. Earnings per
share-diluted for 1999 is computed using the 2,080,517 weighted-average
common shares outstanding and adding the dilutive effect of stock
options totaling 6,459 shares and divided into the net earnings of
$1,249,681.
18 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Earnings per share-basic for 1998 is computed using the 2,092,818
weighted-average common shares outstanding for the year, which is net of
20,127 weighted-average unearned ESOP shares and divided into the net
earnings of $1,315,728. Earnings per share-diluted for 1998 is computed
using the 2,092,818 weighted-average common shares outstanding and
adding the dilutive effect of stock options totaling 17,828 shares and
divided into the net earnings of $1,315,728.
Earnings per share-basic for 1997 is computed using the 2,075,850
weighted-average common shares outstanding for the year, which is net of
26,313 weighted-average unearned ESOP shares and divided into the net
earnings of $1,364,378. Earnings per share-diluted for 1997 is computed
using the 2,075,850 weighted-average common shares outstanding and
adding the dilutive effect of stock options totaling 16,288 shares and
divided into the net earnings of $1,364,378.
Cash and Cash Equivalents
For the purpose of reporting cash flows, the Company includes cash and
due from other financial institutions and time deposits in other
financial institutions with original maturities of three months or less
in cash and cash equivalents. Included as cash equivalents at December
31, 1999 and 1998, were interest-bearing deposits totaling $4,239,112
and $12,906,270, respectively.
Securities
Investment securities are classified based on the Company's intended
holding period. Securities which the Company has the ability and
positive intent to hold to maturity are classified as held-to-maturity.
Securities held principally for the purpose of near-term sales are
classified as trading. Securities which may be sold prior to maturity to
meet liquidity needs, to respond to market changes, or to adjust the
Company's asset-liability position are classified as available-for-sale.
At December 31, 1999 and 1998, the Bank had no trading securities or
securities available-for-sale.
Securities held-to-maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts. Trading securities
are carried at fair value, with gains and losses, both realized and
unrealized, included in operations. Securities available-for-sale are
carried at fair value, with the aggregate unrealized gains or losses,
net of the effect of taxes on income, reported as a component of
stockholders' equity.
Mortgage-backed securities are classified as held-to-maturity at
amortized cost. Premiums and discounts are amortized and accreted using
the interest method over the remaining period to contractual maturity,
adjusted for prepayments. Actual prepayment experience is periodically
<PAGE>
reviewed, and the amortization and accretion are adjusted accordingly.
These investments are not carried as available-for-sale, as the Company
has the ability and it is management's positive intent to hold them to
maturity.
Net realized gains or losses are shown in the statements of operations
using the specific identification method.
19 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Allowance for Losses on Loans
The allowance for losses on loans is maintained at an amount considered
adequate to provide for such losses. The allowance for losses on loans
is based on management's periodic evaluation of the loan portfolio and
reflects an amount that, in management's opinion, is adequate to absorb
probable losses in the existing portfolio. In evaluating the portfolio,
management takes into consideration numerous factors, including current
economic conditions, prior loan loss experience, the composition of the
loan portfolio, and management's estimate of anticipated credit losses.
Accrued interest receivable on loans which become more than 90 days in
arrears is charged to an allowance which is established by a charge to
interest income. Interest income is subsequently recognized only to the
extent cash payments are received until, in management's judgment, 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.
Under the Company's credit policies, all loans with interest more than
90 days in arrears and restructured loans are considered impaired loans.
Loan impairment is measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate
except, where more practical, at the observable market price of the loan
or the fair value of the collateral, if the loan is collateral
dependent.
Real Estate
Real estate is carried at the lower of cost or fair value less estimated
costs of disposition. When a property is acquired through foreclosure or
a loan is considered impaired, any excess of the loan balance over fair
value of the property plus disposition costs is charged to the allowance
for losses on loans. Costs relating to the development and improvement
of property are capitalized, whereas those relating to holding the
property are charged to expense. When circumstances indicate additional
loss on the property, a direct charge to the provision for losses on
real estate is made, and the real estate is recorded net of such
provision.
Loan Origination Fees and Related Costs
Mortgage loan origination fees and certain direct loan origination
costs, if material, are deferred, and the net fee or cost is amortized
using the interest method over the estimated life of the loan. Direct
loan origination costs for other loans are expensed, as such costs are
not material in amount.
Premiums and discounts in connection with mortgage loans purchased are
amortized over the term of the loans using the interest method.
20 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Financial Instruments with Off Balance Sheet Risk
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any conditions established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements
(see note 3). The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company, upon extension of credit is based on
management's credit evaluation of the counterparty.
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
provided primarily by the straight-line method over the estimated useful
lives of the related assets, which range from 10 to 50 years for the
office building and improvements and 5 to 25 years for furniture,
fixtures, and equipment.
Maintenance and repairs are charged against income. Expenditures for
improvements are capitalized and subsequently depreciated. The cost and
accumulated depreciation of assets retired or otherwise disposed of are
eliminated from the asset and accumulated depreciation accounts. Related
profit or loss from such transactions is credited or charged to income.
Taxes on Income
The Company and its subsidiaries file consolidated federal income tax
returns. Federal taxes on income are allocated based on taxable income
or loss included in the consolidated return. For state tax purposes, the
Bank files a franchise tax return and the Company and Bank's subsidiary
files a consolidated corporate income tax return.
The Company utilizes the asset and liability method for taxes on income
and deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
Stock Option Plan
The Company provides pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1996 and
subsequent years as if the fair-value-based method, which recognizes as
expense over the vesting period the fair value of stock-based awards at
the date of grant, had been applied.
21 (Continued)
<PAGE>
WEBSTER CITY FEDERAL BANCORP
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Fair Value of Financial Instruments
The Company discloses estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set
forth below:
Cash and Cash Equivalents and Time Deposits in Other Financial
Institutions
The carrying amount is a reasonable estimate of fair value.
Investment Securities
The fair value of investment securities is estimated based on bid
prices published in financial newspapers, bid quotations received
from securities dealers, or quoted market prices of similar
instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
Mortgage-Backed and Related Securities
The fair value of mortgage-backed and related securities is
estimated based on bid prices published in financial newspapers
and bid quotations received from securities dealers.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as
real estate, consumer, and commercial. The fair value of loans is
calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan.
The estimate of maturity is based on the Company's historical
experience, with repayments for each loan classification,
modified, as required, by an estimate of the effect of current
economic and lending conditions. The effect of nonperforming loans
is considered in assessing the credit risk inherent in the fair
value estimate.
FHLB Stock
The value of FHLB stock is equivalent to its carrying value
because the stock is redeemable at par value.
Accrued Interest Receivable and Accrued Interest Payable
The recorded amount of accrued interest receivable and accrued
interest payable approximates fair value as a result of the
short-term nature of the instruments.
22 (Continued)
<PAGE>
WEBSTER CITY FEDERAL BANCORP
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Deposits
The fair value of deposits with no stated maturity, such as
passbook; money market; noninterest bearing checking, and NOW
accounts, is equal to the amount payable on demand. The fair value
of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefit
that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
FHLB Advance
The fair value of the FHLB advance is based on the discounted
value of the cash flows. The discount rate is estimated using the
rates currently offered for fixed rate advances of similar
remaining maturities.
ESOP Borrowing
The fair value of the ESOP borrowing is based on the discounted
value of the cash flows using the current interest rate on a
similar type of borrowing.
Off Balance Sheet Assets (Liabilities)
The unrealized gains and losses of commitments to extend credit
are estimated using the difference between current levels of
interest rates and committed rates. The unrealized gains and
losses of letters of credit are based on fees currently charged
for similar agreements.
Limitations
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial
instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect these
estimates.
<PAGE>
Effect of New Financial Accounting Standards
Statement of Financial Accounting Standard (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral
of FASB Statement No. 133, will be effective for the Company for the
year beginning January 1, 2001. Management is evaluating the impact the
adoption of SFAS 133 will have on the Bank's consolidated financial
statements. The Company expects to adopt SFAS 133 and 137 when required.
23 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(2) Securities Held-to-maturity
Securities held-to-maturity at December 31, 1999 and 1998, were as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
----------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
1999:
U.S. agency securities ....... $14,547,903 1,202 535,275 14,013,830
Municipal bonds .............. 368,163 -- 15,800 352,363
Mortgage-backed securities:
Federal National Mortgage
Association (FNMA) ....... 2,244,933 3,720 48,999 2,199,654
Government National Mortgage
Association (GNMA) ....... 3,552,250 12,044 50,710 3,513,584
Federal Home Loan Mortgage
Corporation (FHLMC) ...... 2,008,346 85,043 43,376 2,050,013
----------- ----------- ----------- -----------
$22,721,595 102,009 694,160 22,129,444
=========== =========== =========== ===========
1998:
U.S. agency securities ....... $ 9,899,361 86,185 5,300 9,980,246
Mortgage-backed securities:
FNMA ....................... 2,290,650 30,656 494 2,320,812
GNMA ....................... 4,649,153 14,658 63,579 4,600,232
FHLMC ...................... 3,047,604 132,332 16,381 3,163,555
----------- ----------- ----------- -----------
$19,886,768 263,831 85,754 20,064,845
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated fair value of securities
held-to-maturity at December 31, 1999, are shown below by contractual
maturity. 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.
<PAGE>
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
----------- -----------
<S> <C> <C>
Due in 1 year or less ........................ $ -- --
Due after 1 year through 5 years ............. 13,497,903 13,021,055
Due after 5 years, but less than 10 years .... 1,418,163 1,345,138
Mortgage-backed and related securities ....... 7,805,529 7,763,251
----------- -----------
$22,721,595 22,129,444
=========== ===========
</TABLE>
24 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
There were no sales of securities held-to-maturity during the years
ended December 31, 1999, 1998, and 1997.
At December 31, 1999 and 1998, accrued interest receivable for
securities held-to-maturity totaled $391,205 and $309,719, respectively.
(3) Loans Receivable
At December 31, 1999 and 1998, loans receivable consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Real estate loans:
One- to four-family residential ...... $ 50,419,973 44,046,913
Multifamily residential and other .... 5,248,000 5,960,374
Home equity .......................... 4,141,657 4,346,663
------------ ------------
59,809,630 54,353,950
------------ ------------
Consumer and other loans:
Automobile ........................... 1,682,000 1,535,628
Home improvement ..................... 1,083,439 963,075
Loans on savings deposits ............ 248,158 416,802
Other ................................ 587,492 752,391
------------ ------------
3,601,089 3,667,896
------------ ------------
Real estate sold on contract ............. 100,235 128,322
------------ ------------
Total loans receivable ............. 63,510,954 58,150,168
Premium on loans purchased ............... 5,865 11,441
Unearned discount on loans purchased ..... (19,917) (25,980)
Loans in process ......................... (922,170) (998,935)
Allowance for losses on loans ............ (382,402) (385,188)
------------ ------------
$ 62,192,330 56,751,506
============ ============
</TABLE>
<PAGE>
Accrued interest receivable on loans receivable was $354,009 and
$353,929 at December 31, 1999 and 1998, respectively.
The Company grants residential and commercial real estate loans and
other consumer loans, primarily in its Hamilton County, Iowa, market
area and adjacent counties. In addition, the Company has purchased
residential loans, primarily in Iowa, Texas, and Colorado. At December
31, 1999, approximately $5.3 million of the Company's loans were secured
by properties in Texas and Colorado. Although the Company has a
diversified loan portfolio, a substantial portion of its borrowers'
ability to repay their loans is dependent upon economic conditions in
the Company's market area.
25 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Loans with interest more than 90 days in arrears, defined as impaired
and carried on nonaccrual status, amounted to $-0- at December 31, 1999
and 1998. The allowance for loan losses related to these loans were
$-0-. The average balances of nonaccrual loans for the years ended
December 31, 1999 and 1998, were $23,084 and $26,058, respectively. For
the years ended December 31, 1999 and 1998, interest income, which would
have been recorded under the original terms of the loans, was
approximately $1,628 and $500, respectively, with $1,628 interest income
actually recorded.
At December 31, 1998, the Company had commitments to buy or fund loans
of approximately $405,000, including three fixed rate commitments at
December 31, 1999, totaling $232,350 at an 8.25% interest rate. There
were no commitments to sell loans.
Loan customers of the Company include certain executive officers and
directors and their related interests and associates. All loans to this
group were made in the ordinary course of business at prevailing terms
and conditions. Such loans at December 31, 1999 and 1998, amounted to
$714,958 and $649,830, respectively. During the year ended December 31,
1998, $187,406 of new loans were made and repayments totaled $122,278.
(4) Allowance for Losses on Loans
A summary of the allowance for losses on loans follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 385,188 385,149 358,578
Provision for losses -- -- 40,000
Charge-offs (9,264) (725) (14,703)
Recoveries 6,478 764 1,274
----------- ----------- -----------
Balance at end of year $ 382,402 385,188 385,149
=========== =========== ===========
</TABLE>
(5) Real Estate
At December 31, 1999 and 1998, real estate consisted of $-0- and
$22,460, respectively, of real estate acquired through foreclosure.
26 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(6) Office Property and Equipment
At December 31, 1999 and 1998, the cost and accumulated depreciation of
office property and equipment were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land ....................................... $ 125,746 125,746
Office building and improvements ........... 741,403 728,249
Furniture, fixtures, and equipment ......... 409,376 381,910
---------- ----------
1,276,525 1,235,905
Less accumulated depreciation .............. 791,440 739,549
---------- ----------
$ 485,085 496,356
========== ==========
</TABLE>
(7) Deposits
At December 31, 1999 and 1998, deposits are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Passbook ................................. $ 4,730,437 4,490,441
Money market plus ........................ 6,035,983 5,895,738
Noninterest-bearing checking ............. 1,882,406 311,158
NOW ...................................... 5,824,154 6,868,800
Certificates of deposit .................. 49,445,222 51,137,451
----------- -----------
$67,918,202 68,703,588
=========== ===========
</TABLE>
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $7,116,565 and $8,225,000 at
December 31, 1999 and 1998, respectively.
<PAGE>
At December 31, 1999, the scheduled maturities of certificates of
deposit were as follows:
2000 $ 34,916,588
2001 8,524,708
2002 3,030,518
2003 2,031,673
2004 and thereafter 941,735
--------------
$ 49,445,222
==============
27 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Interests expense on deposits for the years ended December 31, 1999,
1998, and 1997, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Passbook ....................... $ 105,367 123,280 112,407
Money market plus and NOW ...... 303,713 292,420 275,239
Certificates of deposit ........ 2,515,094 2,854,214 2,954,219
---------- ---------- ----------
$2,924,174 3,269,914 3,341,865
========== ========== ==========
</TABLE>
Public funds amounted to approximately $3,427,000 and $8,225,000 at
December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, accrued interest payable on deposits
totaled $122,212 and $110,393, respectively.
(8) Advance from Federal Home Loan Bank (FHLB)
At December 31, 1999, the Bank has one FHLB advance totaling $3,200,000.
The advance requires monthly interest payments at a rate of 5.55% and
has a maturity date of October 26, 2009. FHLB may call the advance in
whole on October 25, 2000, at par and quarterly thereafter. Principal
payment is due at maturity.
The advance from the FHLB is secured by stock in the FHLB. In addition,
the Bank has agreed to maintain unencumbered additional security in the
form of certain residential mortgage loans aggregating no less than 125%
of outstanding advances.
28 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(9) Taxes on Income
Taxes on income were comprised as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -------------------------------------
Federal State Total Federal State Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current $ 691,000 108,000 799,000 737,000 114,000 851,000
Deferred (16,000) (3,000) (19,000) (42,000) (6,000) (48,000)
--------- --------- --------- --------- --------- ---------
$ 675,000 105,000 780,000 695,000 108,000 803,000
========= ========= ========= ========= ========= =========
<CAPTION>
1997
-------------------------------------
Federal State Total
--------- --------- ---------
<S> <C> <C> <C>
Current $ 723,000 112,000 835,000
Deferred (33,000) (5,000) (38,000)
--------- --------- ---------
$ 690,000 107,000 797,000
========= ========= =========
</TABLE>
Taxes on income differ from the amounts computed by applying the federal
income tax rate of 34% to earnings before taxes on income for the
following reasons, expressed in percentages:
<TABLE>
<CAPTION>
December 31
---------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Federal income tax rate 34.0 % 34.0 34.0
Items affecting federal income tax rate:
State taxes on income, net of federal benefit 3.3 3.3 3.3
Other 1.1 0.6 (0.4)
-------- ------- -------
38.4 % 37.9 36.9
======== ======= =======
</TABLE>
29 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998, are presented below:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred directors' fees ................... $ 215,000 193,000
General bad debt allowance ................. 140,000 140,000
--------- ---------
Gross deferred tax assets ......... 355,000 333,000
Less valuation allowance ................... -- --
--------- ---------
Net deferred tax assets ........... 355,000 333,000
--------- ---------
Deferred tax liabilities:
Deferred loan fees ......................... (108,000) (97,000)
FHLB stock dividends ....................... (74,000) (74,000)
Tax bad debt reserve ....................... (7,000) (11,000)
Accrual to cash conversion for
interest income on certain loans ......... (9,000) (10,000)
Other ...................................... (1,000) (4,000)
--------- ---------
Gross deferred tax liabilities .... (199,000) (196,000)
--------- ---------
Net deferred tax asset ............ $ 156,000 137,000
========= =========
</TABLE>
(10) Benefit Plans
Retirement Plan
The Bank is a participant in the Financial Institutions Retirement Fund
(FIRF), and substantially all of its officers and employees are covered
by the retirement plan. FIRF does not segregate the assets, liabilities,
or costs by participating employer. According to FIRF's administrators,
as of June 30, 1998, the date of the latest actuarial valuation, the
book and market values of the fund assets exceeded the value of vested
benefits in the aggregate. In accordance with FIRF's instructions, the
Bank did not make any contributions to the plan in 1999, 1998, or 1997.
30 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
ESOP
All employees meeting the age and service requirements are eligible to
participate in the ESOP established in August 1994 in conjunction with
the reorganization. Contributions made by the Company to the ESOP are
allocated to participants by a formula based on compensation.
Participant benefits become 100% vested after five years of service.
ESOP expense was $161,894, $102,304, and $80,550; for the years ended
December 31, 1999, 1998, and 1997, respectively. The Holding Company
paid the balance of the ESOP loan during 1999. Interest expense on the
ESOP's borrowing for the years ended December 31, 1999, 1998, and 1997,
was $5,086, $14,182, and $22,246, respectively. At December 31, 1998,
20,127 shares were unearned. On January 1, 1999 and 1998, 6,588 and
6,186 shares, respectively, were released for allocation. The remaining
shares were released from allocation when the loan was paid on June 30,
1999. The fair value of the unallocated shares at December 31, 1998, was
approximately $322,000.
Deferred Compensation
The Company has deferred compensation agreements with certain directors
and at December 31, 1999 and 1998, had accrued deferred compensation of
$575,448 and $516,844, respectively. Directors' fees deferred were
$29,400, $27,750, and $27,500 for 1999, 1998, and 1997, respectively.
Stock Option Plan
In 1996, the Company adopted a stock option plan (the Plan) pursuant to
which the Company's board of directors may grant stock options to
officers, key employees, and nonemployee directors of the Company. The
Plan authorizes grants of options to purchase up to 95,000 shares of
authorized but unissued common stock. Stock options for 80,750 shares
were granted upon adoption of the Plan. Stock options are granted with
an exercise price equal to the stock's fair market value at the date of
grant. All stock options have ten-year terms and vest and become fully
exercisable in three equal annual installments, commencing one year from
the date of grant.
At December 31, 1999 and 1998, there were 14,250 additional shares
available for grant under the Plan. The per share weighted-average fair
value of stock options granted during 1996 was $2.00 on the date of
grant using the Black Scholes option-pricing model, with the following
weighted-average assumptions: expected dividend yield of 6.27%, expected
volatility of 22%, risk-free interest rate of 6.37%, and an expected
life of six years.
31 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its Plan, and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Net earnings As reported $1,249,681 1,315,728 1,364,378
Pro forma 1,221,679 1,282,002 1,329,386
========== ========= =========
Earnings per share - basic As reported $ 0.60 0.63 0.66
Pro forma 0.59 0.61 0.64
========== ========= =========
Earnings per share - diluted As reported $ 0.60 0.62 0.65
Pro forma 0.58 0.60 0.63
========== ========= =========
</TABLE>
Pro forma net earnings reflects only options granted in 1996. The full
impact of calculating compensation cost for stock options under SFAS 123
is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options' vesting period
of three years. There were no options granted in 1999, 1998, or 1997.
Stock option activity during the periods indicated was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ------------------------ ----------------------
Number Exercise Number Exercise Number Exercise
of shares price of shares price of shares price
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 56,837 $ 12.75 66,167 $ 12.75 80,750 $ 12.75
Granted .................... -- -- -- -- -- --
Exercised .................. (6,226) 12.75 (9,330) 12.75 (9,833) 12.75
Expired .................... -- -- -- -- (4,750) 12.75
------ --------- ------ --------- ------ ---------
Balance at end of year ..... 50,611 12.75 56,837 12.75 66,167 12.75
====== ===== ====== ===== ====== =====
</TABLE>
<PAGE>
At December 31, 1999, the exercise price and weighted-average remaining
contractual life of outstanding options was $12.75 and 6.33 years,
respectively.
32 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(11) Stockholders' Equity
Stock Holding Company Reorganization
On July 1, 1999, the board of directors of Webster City Federal Savings
Bank adopted a plan of reorganization to create a two-tier mutual
holding company structure with the establishment of a Webster City
Federal Bancorp, a stock holding company parent of the Bank. Pursuant to
the reorganization, each share of Webster City Federal Savings Bank
stock held by the existing stockholders of the Bank was exchanged for a
share of common stock of Webster City Federal Bancorp. Upon completion
of the reorganization, Webster City Federal Bancorp owns 100 percent of
the Bank. Fifty-five percent of Webster City Federal Bancorp is owned by
WCF Financial, M.H.C., a mutual holding company and 45 percent is owned
by outside investors.
Common Stock Repurchase
The Company repurchased 96,938 shares of common stock during 1999. These
shares are recorded at cost in the Consolidated Balance Sheet.
Regulatory Capital Requirements
The Financial Institution Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the Office of Thrift Supervision
(OTS) promulgated thereunder require institutions to have a minimum 3%
core capital ratio; and a minimum 8% risk-based capital ratio. These
capital standards set forth in the capital regulations must generally be
no less stringent than the capital standards applicable to national
banks. FIRREA also specifies the required ratio of housing-related
assets in order to qualify as a savings institution. The Company and
Bank met the regulatory capital requirements at December 31, 1999 and
1998.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) established additional capital requirements which require
regulatory action against depository institutions in one of the
undercapitalized categories defined in implementing regulations.
Institutions, such as the Bank, which are defined as well capitalized,
must generally have a leverage capital (core) ratio of at least 5%, a
tier 1 risk-based capital ratio of at least 6%, and a total risk-based
capital ratio of at least 10%. FDICIA also provides for increased
supervision by federal regulatory agencies, increased reporting
requirements for insured depository institutions, and other changes in
the legal and regulatory environment for such institutions. The Company
and Bank met the regulatory capital requirements at December 31, 1999
and 1998.
33 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Bank's actual and required capital amounts and ratios as of December
31, 1999, were as follows:
<TABLE>
<CAPTION>
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
-------------------------- ------------------------ -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $ % $ % $ %
Consolidated 22,348,000 22.8 1,418,000 1.5 n/a n/a
Webster City Federal Savings Bank 21,511,000 22.7 1,420,000 1.5 n/a n/a
Tier I leverage (core) capital
Consolidated 22,348,000 22.8 3,780,000 4.0 4,725,000 5.0
Webster City Federal Savings Bank 21,511,000 22.7 3,786,000 4.0 4,732,000 5.0
Risk based capital
Consolidated 22,730,000 52.0 3,496,000 8.0 4,730,000 10.0
Webster City Federal Savings Bank 21,893,000 50.1 3,496,000 8.0 4,370,000 10.0
Tier I risk-based capital
Consolidated 22,348,000 51.1 n/a n/a 2,622,000 6.0
Webster City Federal Savings Bank 21,511,000 49.2 n/a n/a 2,622,000 6.0
============ ===== ========== ==== =========== =====
</TABLE>
At December 31, 1999 and 1998, the Bank had federal income tax bad debt
reserves of approximately $2,430,000, which constitute allocations to
bad debt reserves for federal income tax purposes for which no provision
for taxes on income had been made. If such allocations are charged for
other than bad debt losses, taxable income is created to the extent of
the charges. The Bank's retained earnings at December 31, 1999 and 1998,
were substantially restricted because of the effect of these tax bad
debt reserves.
Dividends and Restrictions Thereon
The board of directors of the Bank declared and paid two 20(cent) per
share dividends during the first and second quarters of 1999. The board
of directors of the Company declared and paid two 20(cent) per share
dividends during the third and fourth quarters of 1999.
The Holding Company waived its right to receive the dividend declared
and paid on all four of the 20(cent) dividends during the year. The OTS
required that the retained earnings of the Bank be restricted by
$920,000, the amount of the 1999 waived dividends. Cumulative restricted
retained earnings at December 31, 1999, for waived dividends were
$4,312,500.
<PAGE>
The board of directors of the Bank declared and paid four 20(cent) per
share dividends in 1998.
The Holding Company waived its right to receive the dividend declared
and paid on all four of the 20(cent) dividends during the year. The OTS
required that the retained earnings of the Bank be restricted by
$920,000, the amount of the 1998 waived dividends. Cumulative restricted
retained earnings at December 31, 1998, for waived dividends were
$3,392,500.
The board of directors of the Bank declared and paid four 20(cent) per
share dividends in 1997.
The Holding Company waived its right to receive the dividend declared
and paid on all but 50,000 shares of the first two 20(cent) dividends.
It received its entire dividend on the third 20(cent) dividend declared
and paid and waived its right to receive the fourth 20(cent) dividend
declared and paid. The OTS required that the retained earnings of the
Bank be restricted by $670,000, the amount of the 1997 waived dividends.
Cumulative restricted retained earnings at December 31, 1997 for waived
dividends were $2,472,500.
34 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Federal regulations impose certain limitations on the payment of
dividends and other capital distributions by the Bank. Under the
regulations, a savings institution, such as the Bank, that will meet the
fully phased-in capital requirements (as defined by the OTS regulations)
subsequent to a capital distribution is generally permitted to make such
capital distribution without OTS approval so long as they have not been
notified of the need for more than normal supervision by the OTS. The
Bank has not been so notified and, therefore, may make capital
distributions during the calendar year equal to net income plus 50% of
the amount by which the Bank's capital exceeds the fully phased-in
capital requirement as measured at the beginning of the calendar year. A
savings institution with total capital in excess of current minimum
capital requirements but not in excess of the fully phased-in
requirements is permitted by the new regulations to make, without OTS
approval, capital distributions of between 25 and 75% of its net income
for the previous four quarters, less dividends already paid for such
period. A savings institution that fails to meet current minimum capital
requirements is prohibited from making any capital distributions without
prior approval from the OTS.
(12) Fair Value of Financial Instruments
The estimated fair values of Company's financial instruments (as
described in note 1) at December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- --------------------------
Carrying Fair Carrying Fair
amount value amount value
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents . $ 4,986,099 4,986,099 13,186,836 13,186,836
Time deposits in other
financial institutions .. 2,585,000 2,585,000 2,265,000 2,265,000
Securities held-to-maturity 22,721,595 22,129,444 19,886,768 20,064,845
Loans receivable, net ..... 62,192,330 57,722,978 56,751,506 57,179,537
FHLB stock ................ 613,200 613,200 613,200 613,200
Accrued interest receivable 761,267 761,267 663,648 663,648
Financial liabilities:
Deposits .................. 67,918,202 68,094,360 68,703,588 69,392,150
FHLB Advance .............. 3,200,000 2,848,656 1,200,000
ESOP borrowing ............ -- -- 159,064 160,120
Accrued interest payable .. 122,212 122,212 110,393 110,393
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Notional Unrealized Notional Unrealized
Amount gain (loss) Amount gain (loss)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Off balance sheet instrument -
Commitments to extend credit . $ 405,000 -- 770,000 --
=========== =========== =========== ===========
</TABLE>
35 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(13) Parent Company Only Financial Statements
<TABLE>
<CAPTION>
Condensed Balance Sheet
December 31, 1999
1999
-------------
<S> <C>
Cash and cash equivalents ................................... $ 837,260
Investment in subsidiary .................................... 21,511,045
------------
Total assets ................................... $ 22,348,305
============
Stockholders' equity:
Common stock ............................................ $ 212,222
Additional paid-in capital .............................. 9,093,681
Retained earnings ....................................... 14,518,728
Treasury stock .......................................... (1,476,326)
------------
Total stockholders' equity ..................... 22,348,305
------------
Total liabilities and stockholders' equity ..... $ 22,348,305
============
<CAPTION>
Condensed Statement of Operations
For the Year Ended December 31, 1999
1999
------------
<S> <C>
Dividend income ........................................... $ 3,082,125
Interest income ........................................... 250
Equity in undistributed earnings of subsidiary ............ (1,775,022)
Noninterest expenses ...................................... (57,672)
-----------
Net earnings before income
tax expense ................................ 1,249,681
Income tax expense ........................................ --
-----------
Net earnings ................................. $ 1,249,681
===========
</TABLE>
36 (Continued)
<PAGE>
WEBSTER CITY FEDERAL Bancorp
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
For the Year Ended December 31, 1999
1999
-----------
<S> <C>
Operating activities:
Net earnings ............................................ $ 1,249,681
Equity in undistributed earnings of subsidiary .......... 1,775,022
-----------
Net cash provided by operating activities ...... 3,024,703
-----------
Financing activities:
Repurchase of common stock .............................. (1,476,326)
Proceeds on stock options ............................... 40,349
Dividends paid .......................................... (751,466)
-----------
Net cash used in
financing activities ......................... (2,187,443)
Net increase in cash
and cash equivalents ......................... 837,260
Cash and cash equivalents at beginning of period ............ --
-----------
Cash and cash equivalents at end of period .................. $ 837,260
===========
</TABLE>
(14) Contingencies
The Company is involved with various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Bank's consolidated financial statements.
37 (Continued)
<PAGE>
WEBSTER CITY FEDERAL BANCORP
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 1:00 p.m.,
Wednesday, April 19, 2000, at the main office of the Company located at 820 Des
Moines Street, Webster City, Iowa.
STOCK INFORMATION
Webster City Federal Bancorp common stock is traded over the counter,
on the NASDAQ Small-Cap Market under the symbol "WCFB".
As of February 29, 2000, the Company had 228 shareholders of record
(which does not include approximately 250 shareholders whose stock is in nominee
or "street" name) and 1,940,781 shares of common stock outstanding.
The price ranges of the common stock and dividend payouts on such
common stock for each quarter were as follows:
<TABLE>
<CAPTION>
1999 1998
Dividend Dividend Fiscal Year 1999 Fiscal Year 1998
Paid Paid Low High Low High
---- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
First quarter ........ $.20 $.20 $14.75 $16.85 $20.00 $21.25
Second quarter ....... $.20 $.20 $13.75 $15.50 $18.25 $21.75
Third quarter ........ $.20 $.20 $13.75 $15.75 $12.50 $18.50
Fourth quarter ....... $.20 $.20 $12.75 $15.63 $14.25 $17.00
</TABLE>
STOCKHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
Phyllis A. Murphy, President Registrar and Transfer Co.
Webster City Federal Bancorp 10 Commerce Drive
820 Des Moines Street, P.O. Box 638 Cranford, New Jersey 07016
Webster City, Iowa 50595-0638 (800) 368-5948
(515) 832-3071
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its
year ended December 31, 1999 with the Securities Exchange Commission. Copies of
the Form 10-KSB, annual report and the Company's Quarterly Reports may be
obtained without charge by contacting Phyllis A. Murphy, President and Chief
Executive Officer, Webster City Federal Bancorp, 820 Des Moines Street, P.O. Box
638, Webster City, Iowa 50595-0638, (515) 832-3071.
38
<PAGE>
WEBSTER CITY FEDERAL BANCORP
STOCKHOLDER INFORMATION
COMPANY AND BANK ADDRESS
820 Des Moines Street Telephone: (515) 832-3071
Webster City, IA 50595-0638 Fax: (515) 832-3085
Web Page: www.webcityfed.com
DIRECTORS OF THE BOARD
Ellis S. Swon
Chairman of the Board;
Our Executive Officer
Retired President and Chief Executive Officer
of Webster City Federal Savings Bank
Dr. Carroll E. Haynes
Retired Dentist
Dennis J. Tasler
President and Chief Executive Officer
of Tasler Pallet & EPS, Inc.
Donald I. Newman
Retired President and Chief Executive Officer
of Webster City Federal Savings Bank
Phyllis A. Murphy
President and Chief Executive Officer
of Webster City Federal Savings Bank
WEBSTER CITY FEDERAL SAVINGS BANK EXECUTIVE OFFICERS
Phyllis A. Murphy
President and Chief Executive Officer
Stephen L. Mourlam
Executive Vice President and Chief Financial Officer
Kyle R. Swon
Senior Vice President and Chief Lending Officer
William J. Biggins
Vice President
Jeffrey C. Kluver
Vice President
Kathie R. Highland
Vice President and Secretary
<PAGE>
INDEPENDENT AUDITORS
KPMG LLP
2500 Ruan Center
Des Moines, Iowa 50309
CORPORATE COUNSEL
Bottorff Law Firm
913 Seneca Street
Webster City, Iowa 50595
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Ave NW, Suite 400
Washington, DC 20015
39
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
<S> <C> <C>
Parent Company Subsidiary Company State of Incorporation
--------------------------------------- ------------------------------------- -------------------------------------
Webster City Federal Bancorp Webster City Federal Savings Bank Iowa
Webster City Federal Savings Bank WCF Service Corporation Iowa
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,986,099
<INT-BEARING-DEPOSITS> 2,585,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 22,721,595
<INVESTMENTS-MARKET> 22,129,444
<LOANS> 62,574,732
<ALLOWANCE> 382,402
<TOTAL-ASSETS> 94,525,089
<DEPOSITS> 67,918,202
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,058,582
<LONG-TERM> 3,200,000
0
0
<COMMON> 212,222
<OTHER-SE> 22,136,083
<TOTAL-LIABILITIES-AND-EQUITY> 94,525,089
<INTEREST-LOAN> 4,502,081
<INTEREST-INVEST> 1,494,905
<INTEREST-OTHER> 413,440
<INTEREST-TOTAL> 6,410,426
<INTEREST-DEPOSIT> 2,924,174
<INTEREST-EXPENSE> 85,785
<INTEREST-INCOME-NET> 3,400,467
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,370,786
<INCOME-PRETAX> 2,029,681
<INCOME-PRE-EXTRAORDINARY> 2,029,681
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,249,681
<EPS-BASIC> .60
<EPS-DILUTED> .60
<YIELD-ACTUAL> 7.03
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 385,188
<CHARGE-OFFS> 9,264
<RECOVERIES> 6,478
<ALLOWANCE-CLOSE> 382,402
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 382,402
</TABLE>
