Selected Consolidated Financial and Other Data
The following table sets forth certain selected consolidated financial and other
data of First Federal Bankshares, Inc. (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
Subsidiaries and related notes included elsewhere herein.
---------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share amounts
---------------------------------------------------------------------------------------------------------------
Financial Condition at June 30 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Total assets $660,124 723,382 680,672 551,450 468,568
Securities available-for-sale 87,598 117,326 122,047 65,195 64,098
Securities held-to-maturity 22,725 23,737 32,006 32,023 29,758
Loans receivable, net 417,898 505,090 457,058 404,800 341,254
Office property and equipment, net 14,686 15,315 15,412 10,845 9,638
Federal Home Loan Bank (FHLB) stock, at cost 9,469 8,929 8,094 5,671 5,000
Excess of cost over fair value of assets acquired 18,942 19,900 20,946 8,158 318
Deposits 488,708 471,626 464,169 392,425 326,734
FHLB advances 89,118 174,020 138,617 107,901 96,500
Stockholders' equity 72,587 68,113 68,273 42,020 38,865
Operations Data for Year Ended June 30
Total interest income 50,578 47,973 41,136 35,364 33,691
Total interest expense 32,271 29,814 24,864 21,377 20,328
-------- -------- -------- -------- --------
Net interest income 18,307 18,159 16,272 13,987 13,363
Provision for losses on loans 5,155 554 365 345 258
-------- -------- -------- -------- --------
Net interest income after provision for
losses on loans 13,152 17,605 15,907 13,642 13,105
-------- -------- -------- -------- --------
Noninterest income:
Fees and service charges 3,681 2,901 2,146 1,392 1,143
Net gain (loss) on sale of securities 1,583 (170) (12) -- --
Gain on sale of branch deposits -- -- 1,088 -- --
Real estate related activities 1,206 1,464 950 719 595
Other income 1,939 2,315 1,362 1,067 691
-------- -------- -------- -------- --------
Total noninterest income 8,409 6,510 5,534 3,178 2,429
-------- -------- -------- -------- --------
Noninterest expense:
Compensation and benefits 8,605 8,992 7,674 6,702 5,655
Office property and equipment 2,419 2,282 1,901 1,500 1,293
Special deposit insurance assessment -- -- -- -- 2,233
Amortization of cost over fair
value of assets acquired 954 980 479 108 26
Other noninterest expense 4,813 4,344 4,124 3,218 3,364
-------- -------- -------- -------- --------
Total noninterest expense 16,791 16,598 14,178 11,528 12,571
-------- -------- -------- -------- --------
Earnings before income taxes 4,770 7,517 7,263 5,292 2,963
Income taxes 1,764 2,641 2,700 1,874 1,024
-------- -------- -------- -------- --------
Net earnings $ 3,006 4,876 4,563 3,418 1,939
======== ======== ======== ======== ========
Earnings per share (1):
Basic earnings per share $ 0.68 1.07 0.97 0.73 0.42
======== ======== ======== ======== ========
Diluted earnings per share $ 0.67 1.07 0.96 0.72 0.41
======== ======== ======== ======== ========
Cash earnings per share (2)
Basic earnings per share $ 0.90 1.29 1.07 0.76 0.42
======== ======== ======== ======== ========
Diluted earnings per share $ 0.89 1.28 1.06 0.74 0.41
======== ======== ======== ======== ========
Cash dividends declared per common share $ 0.32 0.30 0.29 0.29 0.28
======== ======== ======== ======== ========
----------------------------------------------------------------------------
(1) Adjusted for stock distributions and April 1999 stock conversion.
(2) Cash earnings exclude amortization of excess of cost over fair value of
assets acquired.
1
Selected Consolidated Financial and Other Data (Continued)
Key Financial Ratios and Other Data at or for the Years Ended June 30
2001 2000 1999(9) 1998 (8) 1997
---- ---- ------- -------- ----
Performance Ratios:
Return on assets (net income divided
by average total assets) (1) .43 % .70 % .78 % .71 % .43 %
Cash basis return on assets (2) .56 .84 .86 .73 .43
Return on equity (net income divided
by average equity) (1) 4.16 7.22 9.48 8.39 5.20
Cash basis return on equity (2) 5.49 8.67 10.47 8.65 5.27
Average net interest rate spread (3) 2.44 2.50 2.72 2.74 2.71
Net yield on average interest-earning
assets (4) 2.81 2.81 2.99 3.07 3.07
Net interest income after provision for
loan losses to total other expenses (1) 78.33 106.07 112.20 118.34 103.25
Average interest-earning assets to
average interest-bearing liabilities 107.48 106.64 105.83 107.14 107.69
----------------------------------------------------------------------------------------------------------
Asset Quality Ratios:
Nonperforming loans to total loans .64 .42 .54 .33 .15
Nonperforming loans to total assets .40 .29 .36 .24 .11
Nonperforming assets as a percentage
of total assets (5) .42 .30 .37 .34 .11
Nonperforming loans and real estate
owned to total loans and real
estate owned .67 .43 .54 .47 .15
Allowance for loan losses to total loans 1.12 .67 .68 .64 .52
----------------------------------------------------------------------------------------------------------
Capital, Equity and Dividend Ratios:
Tangible capital (6) 7.60 6.71 6.52 6.20 8.24
Core capital (6) 7.60 6.71 6.52 6.20 8.24
Risk-based capital (6) 13.25 12.46 13.20 12.51 17.00
Average equity to average assets ratio 10.22 9.68 8.24 8.46 8.20
Dividend payout ratio 47.06 28.04 30.10 39.67 68.12
----------------------------------------------------------------------------------------------------------
Other Data:
Book value per common share (7) $ 15.95 $ 14.52 $ 14.17 $ 8.99 $ 8.34
Number of full-service offices 17 18 19 15 13
-----------------------
(1) Excluding the SAIF assessment, the Company's return on assets,
return on equity, and net interest income after provision for loan
losses to total other expenses would have been .73%, 8.95%, and
125.29%, respectively, for the year ended June 30, 1997.
(2) Cash basis return on assets is calculated by dividing cash earnings
by average total assets and cash basis return on equity is
calculated by dividing cash earnings by average stockholders'
equity. Cash earnings exclude amortization of excess of cost over
fair value of assets acquired.
(3) Represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Represents net interest income as a percentage of average
interest-earning assets.
(5) Non-performing assets include non-accruing loans, accruing loans
delinquent 90 days or more, and foreclosed assets but do not include
restructured loans. (6) End of period ratio (7) Adjusted for stock
distributions and April 1999 stock conversion.
(8) Operating data includes effect of First Federal's acquisition of GFS
Bancorp, Inc. for periods subsequent to March 31, 1998.
(9) Operating data includes effect of the acquisition of Mid-Iowa
Financial Corp. for periods subsequent to April 13, 1999.
2
Selected Consolidated Financial and Other Data (Continued)
Quarterly Financial Data:
Dollars in thousands, except per share amounts
June March December September
Three Months Ended 2001 2001 2000 2000
------------------ ------- -------- -------- --------
Interest income $ 11,532 12,887 13,179 12,980
Interest expense 7,039 8,096 8,668 8,468
-------- -------- -------- --------
Net interest income 4,493 4,791 4,511 4,512
Provision for losses on loans 4,710 150 150 145
-------- -------- -------- --------
Net interest income after provision (217) 4,641 4,361 4,367
Noninterest income 3,236 1,941 1,620 1,611
Noninterest expense 3,828 4,512 4,206 4,244
-------- -------- -------- --------
Earnings before income taxes (809) 2,070 1,775 1,734
Income taxes (254) 797 698 523
-------- -------- -------- --------
Net Earnings ($ 555) 1,273 1,077 1,211
======== ======== ======== ========
Earnings per share:
Basic ($ 0.127) 0.291 0.243 0.272
Diluted ($ 0.125) 0.287 0.241 0.270
======== ======== ======== ========
June March December September
Three Months Ended 2000 2000 1999 1999
------------------ ------- -------- -------- --------
Interest income $ 12,486 12,181 11,765 11,541
Interest expense 7,923 7,654 7,214 7,023
-------- -------- -------- --------
Net interest income 4,563 4,527 4,551 4,518
Provision for losses on loans 155 159 135 105
-------- -------- -------- --------
Net interest income after provision 4,408 4,368 4,416 4,413
Noninterest income 1,648 1,500 1,618 1,744
Noninterest expense 4,129 4,060 4,190 4,219
-------- -------- -------- --------
Earnings before income taxes 1,927 1,808 1,844 1,938
Income taxes 679 644 578 740
-------- -------- -------- --------
Net earnings $ 1,248 1,164 1,266 1,198
======== ======== ======== ========
Earnings per share:
Basic $ 0.281 0.260 0.273 0.258
Diluted $ 0.279 0.258 0.272 0.257
======== ======== ======== ========
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." The Company desires
to take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the express
purpose of availing itself of the protections of the safe harbor with respect to
all such forward-looking statements. These forward-looking statements, which are
included in Management's Discussion and Analysis, describe future plans or
strategies and include the Company's expectations of future financial results.
The words "believe," "expect," "anticipate," "project," and similar expressions
identify forward-looking statements. The Company's ability to predict results or
the effect of future plans or strategies or qualitative or quantitative changes
based on market risk exposure is inherently uncertain. Factors which could
affect actual results include but are not limited to (a) changes in general
market interest rates, (b) general economic conditions, (c) legislative and
regulatory changes, (d) monetary and fiscal policies of the U. S. Treasury and
the Federal Reserve, (e) changes in the quality or composition of the Company's
loan and investment portfolios, (f) deposit flows, (g) competition, and (h)
demand for financial services in the Company's market area. These factors should
be considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements, since results in future periods may
differ materially from those currently expected because of various risks and
uncertainties.
General
First Federal Bankshares, Inc. (the "Company") was organized under Delaware law
in December 1998 by First Federal Bank (the "Bank") to be the savings and loan
holding company of the Bank in connection with the Bank's April 13, 1999
conversion from mutual holding company form to the fully-converted stock form of
ownership (the "Conversion"). The Company's principal activity consists of
ownership of all of the stock in the Bank. Consequently, the net income of the
Company is primarily derived from the Bank. In addition to the Bank, the Company
owns Equity Services, Inc., a real estate development company and Mid-Iowa
Security Corporation, which generates revenues primarily by providing real
estate brokerage services. The Bank is a federally chartered stock savings bank
headquartered in Sioux City, Iowa. The Bank is the successor of First Federal
Savings and Loan Association of Sioux City, which was founded in 1923.
The Company's results of operations are primarily dependent on its net interest
income. Net interest income is the difference between interest income earned on
loans, mortgage-backed securities and investment securities and interest expense
paid on deposits and borrowings. The Company's net income also is affected by
its provision for loan losses, as well as the amount of noninterest income,
including loan fees and service charges, and noninterest expense, such as
salaries and employee benefits, deposit insurance premiums, occupancy and
equipment costs and income taxes. 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.
Recent Developments
In August 2001, the Bank's primary regulatory agency completed fieldwork on an
examination of the Bank. A final report of examination has not yet been issued.
In discussions with management the regulators have indicated, based on borrower
information obtained subsequent to June 30, 2001, that they will request a
one-category downgrade in the regulatory classification of three commercial real
estate loans. One loan, previously not classified, had a principal balance of
$4.5 million and would be classified "special mention" while the other two loans
previously in the "special mention" category, with principal balances totaling
$4.1 million, would be re-classified "substandard". Under the Bank's existing
classification of assets policy, these downgrades would require an addition to
the allowance for loan losses of approximately $700,000. If circumstances with
respect to the three loans do not change through September 30, 2001, management
will downgrade the three loans as of that date and will record the corresponding
provision expense in the first quarter of fiscal 2002. Net of tax, the
additional provision for loan losses, when recorded with respect to these three
loans, will negatively impact earnings by approximately $439,000. In July 2001,
the Company sold a branch office located in northwest Iowa to a local financial
institution. The
4
purchaser assumed deposits of $8.9 million and acquired loans totaling $2.8
million. In addition, the office building and fixtures were sold to the
purchaser. The net result of this transaction was a pre-tax gain of $456,000.
Net of tax, the gain on the sale of this branch office totaled $286,000.
Business Strategy
The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community savings bank dedicated to
providing quality banking services to its customers. The Company has sought to
implement this strategy in recent years by: (1) closely monitoring the needs of
customers; (2) emphasizing family financial services such as residential
mortgage loans, consumer loans and various checking and savings products; (3)
offering commercial real estate loans and small business lending services; (4)
monitoring, with the intention of reducing, interest rate risk exposure; (5)
controlling operating expenses; and (6) maintaining strong asset quality.
Financial Condition
Total assets decreased by $63.3 million, or 8.7%, to $660.1 million at June 30,
2001 from $723.4 million at June 30, 2000. The decrease in total assets was
primarily due to a decrease in loans receivable as the Company sought to reduce
relatively low-yielding one-to-four family mortgage loans and increase its
portfolio of higher-yielding commercial real estate loans, commercial business
loans and consumer loans. In March 2001 the Company securitized $112.7 million
of fixed-rate single-family mortgage loans and subsequently sold the securities
in the secondary market. Primarily due to this restructuring, loans receivable
decreased by $87.2 million, or 17.3%, to $417.9 million at June 30, 2001 from
$505.1 million at June 30, 2000. Partially offsetting the decrease in loans
receivable due to the sale of single-family mortgages was an increase of $32.0
million, or 29.4%, during fiscal 2001 in commercial multi-family and
nonresidential real estate loans, an increase of $18.7 million, or 27.9%, in
consumer and home equity loans and an increase of $6.4 million, or 75.5%, in
commercial business loans. The balance of securities available-for-sale
decreased by $29.7 million, or 25.3%, to $87.6 million at June 30, 2001 from
$117.3 million at June 30, 2000. The decrease in the balance of securities
available-for-sale was primarily due to a decrease in the balance of callable
agency securities as issues totaling $26.2 million were called in the generally
lower market interest rate environment during the second half of fiscal 2001.
Proceeds from the sale of the single-family loans were used to repay short-term
Federal Home Loan Bank (the "FHLB") borrowings. The balance of advances from
FHLB decreased by $84.9 million, or 48.8%, to $89.1 million at June 30, 2001
from $174.0 million at June 30, 2000. Deposit balances increased by $17.1
million, or 3.6%, to $488.7 million at June 30, 2001 from $471.6 million at June
30, 2000. In the generally lower market interest rate environment following
Federal Reserve Board (the "FRB") interest rate cuts totaling 275 basis points
in calendar 2001, reinvestment options were limited. Proceeds from calls, sales
and maturities of investment securities and increased deposit balances resulted
in a substantial increase in the balance of interest-bearing deposits in other
financial institutions. Interest-bearing deposit balances increased by $54.1
million to $57.7 million at June 30, 2001 from $3.6 million at June 30, 2000.
Stockholders' equity increased by $4.5 million, or 6.6%, to $72.6 million at
June 30, 2001 from $68.1 million at June 30, 2000. The increase in stockholders'
equity was largely due to fiscal year earnings totaling $3.0 million and an
increase of $4.0 million in other comprehensive income. The increase in other
comprehensive income was the result of a decrease in unrealized losses in the
Company's available-for-sale securities portfolio due to higher valuations for
such securities. The higher valuations occurred as market interest rates dropped
after six FRB rate-cutting decisions between January and June 2001. Dividends
declared during the year ended June 30, 2001 totaled $1.4 million (excluding
dividends paid on unallocated Employee Stock Ownership Plan ("ESOP") shares).
During the twelve months ended June 30, 2001 the Company repurchased 154,000
shares of its common stock at a total cost of $1.5 million, or an average of
$9.94 per share. In November 2000 the Company completed a repurchase program
announced in December 1999 with the purchase of 100,500 shares of its common
stock. In December 2000, the Company commenced a second share repurchase program
to acquire approximately 460,000 shares, or 10%, of its outstanding common
stock. As of June 30, 2001, 406,500 shares remained to be repurchased under this
program.
5
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 daily averages.
Years Ended June 30
2001 2000 1999
------------------------------ ---------------------------- -----------------------------
Rate at
June 30, Average Average Average Average Average Average
2001 Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---- ------- ------------------- ---------------- ---------- ------- -------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) 8.25% $484,911 $39,573 8.16% 480,377 37,146 7.73% 416,631 32,736 7.86%
Mortgage-backed
securities 7.16% 38,661 2,678 6.93% 34,528 2,235 6.47% 34,824 2,361 6.78%
Investment securities (2) 6.24% 119,729 7,924 6.62% 129,135 8,441 6.54% 87,677 5,764 6.57%
Short-term invest-
ments and other
interest-earning
assets (3) 3.81% 9,314 403 4.33% 2,805 151 5.38% 4,864 275 5.64%
----- ----- --- ----- ----- --- ----- ----- --- -----
Total interest-earning
assets 7.54% 652,615 50,578 7.75% 646,845 47,973 7.42% 543,996 41,136 7.56%
----- ------ ----- ------ ----- ------ -----
Noninterest-earning assets 53,433 50,944 40,590
-------- ------- -------
TOTAL ASSETS $706,048 697,789 584,586
======== ======= =======
Interest-bearing liabilities:
Deposits 4.81% $457,439 23,070 5.04% 450,272 20,521 4.56% 394,722 17,884 4.53%
Borrowings 5.81% 149,756 9,201 6.14% 156,271 9,293 5.95% 119,329 6,980 5.85%
----- -------- ----- ----- ------- ------ ----- ------- ----- -----
Total interest-bearing
Liabilities 4.97% 607,195 32,271 5.31% 606,543 29,814 4.92% 514,051 24,864 4.84%
----- ------ ----- ------ ----- ------ -----
Noninterest-bearing:
Deposits 16,286 13,584 11,031
Liabilities 10,434 10,099 11,352
------- ------- --------
TOTAL LIABILITIES 633,915 630,226 536,434
Stockholders' equity 72,133 67,563 48,152
-------- -------- --------
TOTAL LIABILITIES
AND STOCK-
HOLDERS' EQUITY $706,048 697,789 584,586
======== ======= =======
Net interest income $18,307 18,159 16,272
======= ====== ======
Interest rate spread (4) 2.57% 2.44% 2.50% 2.72%
==== ==== ==== ====
Net yield on interest-
earning assets (5) 2.92% 2.81% 2.81% 2.99%
==== ==== ==== ====
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 107.48% 106.64% 105.83%
====== ====== ======
--------------------------------------------------
(1) Average balances include nonaccrual loans.
(2) Investment securities not tax-effected.
(3) Includes interest-bearing deposits in other financial institutions.
(4) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of Iinterest-bearing
liabilities. interest-bearing liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
6
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
(change in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume); and (iv) the net
change.
Years Ended June 30
2001 vs. 2000 2000 vs. 1999
----------------------------------------------------------------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------------- -------------------------------
TOTAL TOTAL
RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
------ ---- ------ ---------- ------ ---- ------ ----------
(Dollars in Thousands)
Interest Income:
Loans receivable $ 351 2,066 11 2,428 $ 5,009 (542) (58) 4,409
Mortgage-backed securities 268 159 16 443 (20) (108) 2 (126)
Investments (615) 103 (5) (517) 2,726 (26) (23) 2,677
Other interest-earning assets 350 (29) (69) 252 (115) (13) 4 (124)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 354 2,299 (47) 2,606 $ 7,600 (689) (75) 6,836
------- ------- ------- ------- ------- ------- ------- -------
Interest Expense:
Savings deposits 327 2,161 62 2,550 $ 2,517 118 1 2,636
Borrowings (387) 297 (2) (92) 2,161 119 33 2,313
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities (60) 2,458 60 2,458 $ 4,678 237 34 4,949
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income $ 414 (159) (107) 148 $ 2,922 (926) (109) 1,887
======= ======= ======= ======= ======= ======= ======= =======
Comparison of Operating Results for Fiscal Years Ended June 30, 2001 and 2000
General. Net earnings totaled $3.0 million, or $0.67 per diluted share, for the
year ended June 30, 2001 as compared to net earnings totaling $4.9 million, or
$1.07 per diluted share, for the year ended June 30, 2000.
Interest Income. Interest income increased by $2.6 million, or 5.4%, to $50.6
million in fiscal 2001 from $48.0 million in fiscal 2000. The increase in
interest income was primarily due to an increase of 33 basis points, or 4.4%, in
the average yield on interest-earning assets to 7.75% in fiscal 2001 from 7.42%
in fiscal 2000. In addition, the average balance of interest-earning assets
increased by $5.8 million, or 0.9%, to $652.6 million in fiscal 2001 from $646.8
million in fiscal 2000. The increase in interest income resulted primarily from
an increase totaling $2.4 million, or 6.5%, in interest income earned on loans
to $39.6 million in fiscal 2001 from $37.2 million in fiscal 2000. Interest
income on mortgage-backed securities ("MBS") increased by $443,000, or 19.8%, to
$2.7 million in fiscal 2001 from $2.2 million in fiscal 2000. During the same
period, interest income on investment securities decreased by $517,000, or 6.1%,
to $7.9 million from $8.4 million and interest income on other interest-earning
assets increased by $252,000, or 166.9%, when compared to fiscal 2000.
The increase in interest income on loans was largely due to an increase in the
average yield on loans receivable. The average yield on loans receivable
increased by 43 basis points to 8.16% for fiscal 2001 from 7.73% for fiscal
2000. The increase in the average yield on loans was largely due to the
Company's strategy of increasing its portfolio of commercial real estate,
commercial business and consumer loans that generally have higher interest rates
than one-to-four family residential mortgages. Also contributing to the increase
in yield on loans receivable was the securitization and sale of $112.7 million
of single-family long-term fixed-rate loans in March 2001. Prepayments and
refinancing activity generally increased as mortgage market rates stabilized in
fiscal 2001 at historically attractive rates. The Company's one-to-four family
residential loan balances decreased further as customers refinanced and a
majority of the new fixed-rate originations were sold in the secondary market
rather than held in the Company's loan portfolio.
The increase in interest income on MBS was primarily due to an increase of $4.2
million, or 12.0%, in the average
7
balance of MBS to $38.7 million for the year ended June 30, 2001 from $34.5
million for the year ended June 30, 2000. In addition, the average yield on MBS
increased by 46 basis points to 6.93% in fiscal 2001 from 6.47% in fiscal 2000.
The increase in the average balance and in the yield on MBS was primarily due to
the fact that the $112.7 million in single-family loans securitized in March
2001 were carried as MBS until sales were completed in the final four months of
fiscal 2001. The decrease in interest income on investment securities was
primarily due to a decrease of $9.4 million, or 7.3%, in the average balance of
investment securities to $119.7 million in fiscal 2001 from $129.1 million in
fiscal 2000. The yield on investment securities increased slightly to 6.62% in
fiscal 2001 from 6.54% in fiscal 2000.
Interest Expense. Interest expense increased by $2.5 million, or 8.2%, to $32.3
million in fiscal 2001 from $29.8 million in fiscal 2000. The increase in
interest expense was primarily due to an increase of 39 basis points in the
average cost of interest-bearing liabilities to 5.31% in fiscal 2001 from 4.92%
in fiscal 2000. Interest expense on deposits increased by $2.6 million, or
12.4%, to $23.1 million in fiscal 2001 from $20.5 million in fiscal 2000. The
increase in interest expense on deposits was primarily due to an increase of 48
basis points, or 10.5%, in the average rate paid on deposits to 5.04% in fiscal
2001 from 4.56% in fiscal 2000. The average balance of deposits increased by
$7.1 million, or 1.6%, to $457.4 million for fiscal 2001 from $450.3 million for
fiscal 2000. Interest paid on borrowings totaled $9.2 million and $9.3 million,
respectively, for the twelve months ended June 30, 2001 and 2000. The average
balance of borrowings decreased by $6.5 million, or 4.2%, to $149.8 million in
fiscal 2001 from $156.3 million in fiscal 2000. The decrease in interest expense
on borrowings due to the decrease in the average balance of borrowings was
largely offset by an increase of 19 basis points in the average rate paid on
borrowings to 6.14% in fiscal 2001 from 5.95% in fiscal 2000.
Net Interest Income. Net interest income before provision for loan losses
increased by $148,000, or 0.8%, to $18.3 million for fiscal 2001 from $18.2
million for fiscal 2000. The Company's interest rate spread was 2.44% and 2.50%,
respectively, and the net yield on interest-earning assets was 2.81% for both
fiscal 2001 and 2000.
Provision for Loan Losses. Provision for loan loss expense totaled $5.2 million
for fiscal 2001 as compared to $554,000 for fiscal 2000. Provision for loan
losses was increased due to increased growth in commercial real estate and
business loan balances and in consumer loan balances, which generally involve a
greater degree of credit risk than one-to-four family residential mortgage
loans; and, due to a $3.5 million charge-off related to a large commercial
credit. Net charge-offs as a percentage of average loans outstanding were 0.79%
and 0.06%, respectively, for fiscal years 2001 and 2000. The allowance for loan
losses is established through a provision for loss based on management's
evaluation of the risk inherent in the loan portfolio, the composition of the
portfolio, specific impaired loans and current economic conditions. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgment about information available to them at the time of their examination.
Management periodically monitors and modifies the level of the allowance for
loan losses in order to maintain it at a level which management considers
adequate to provide for potential loan losses.
Noninterest Income. Noninterest income increased by $1.9 million, or 29.2%, to
$8.4 million for fiscal 2001 from $6.5 million for fiscal 2000. The increase in
noninterest income was primarily due to a net pre-tax gain on the sale of
securities that totaled $1.6 million for fiscal 2001 as compared to a net
pre-tax loss totaling $170,000 for fiscal 2000. The gain on sale of securities
was primarily due to gains realized on the sale of the $112.7 million of
mortgage loans securitized in March 2001, which totaled $1.7 million. Service
charges and other fees increased by $780,000, or 26.9%, to $3.7 million for the
year ended June 30, 2001 from $2.9 million for the year ended June 30, 2000. The
increase in service charges and other fees resulted from increased service fees
from the Company's growing business and personal deposit account relationships
and to increases in loan-related fees due to stronger mortgage origination
activity during fiscal 2001 as compared to fiscal 2000. Gain on sale of loans
held for sale increased by $171,000, or 94.6%, to $351,000 for fiscal 2001 from
$180,000 for fiscal 2000 due to increases in residential loan originations.
Partially offsetting the increases in noninterest income for fiscal 2001 when
compared
8
to fiscal 2000 was a decrease in gain on the sale of real estate owned and held
for development of $310,000, or 51.5%, to $292,000 for fiscal 2001 from $602,000
for fiscal 2000. In addition, income from other real estate-related activities
decreased by $258,000, or 17.6%, to $1.2 million for fiscal 2001 from $1.5
million for fiscal 2000. The decrease in real estate-related income was
primarily due to a decrease in real estate sales commissions from the Company's
real estate brokerage subsidiary. Other income decreased by $127,000, or 8.9%,
to $1.3 million for fiscal 2001 from $1.4 million for fiscal 2000, largely due
to decreased revenues in the Company's non-bank subsidiaries.
Noninterest Expense. Noninterest expense increased by $193,000, or 1.2%, to
$16.8 million in fiscal 2001 from $16.6 million in fiscal 2000. The principal
component of the Company's noninterest expense is salaries and employee
benefits. Compensation and benefit expense decreased by $387,000, or 4.3%, to
$8.6 million in fiscal 2001 from $9.0 million in fiscal 2000 primarily due to a
reduction of 11 full-time-equivalent employees for fiscal 2001 as compared to
fiscal 2000. Deposit insurance premium expense decreased by $94,000, or 49.6%,
to $95,000 in fiscal 2001 from $189,000 in fiscal 2000. The deposit insurance
premium rate decreased to $0.01985 per hundred dollars of deposits for the
twelve months ended June 30, 2001 from $0.0398 per hundred dollars of deposits
for the twelve months ended June 30, 2000. Advertising expense decreased by
$119,000, or 25.1%, in fiscal 2001 as compared to fiscal 2000. More than
offsetting the decreases in noninterest expense for fiscal 2001 as compared to
fiscal 2000, were increases in other noninterest expenses categories. Office
property and equipment expense and data processing expense increased by
$137,000, or 6.0%, and $46,000, or 10.3%, respectively, over the prior fiscal
year period. Other general and administrative expense increased by $636,000, or
19.7%, to $3.9 million for fiscal 2001 from $3.2 million for fiscal 2000,
largely due to increases in professional and consulting fees related to
strategic planning and to increases in charitable contribution expense and state
franchise tax expense.
Income tax expense. Net earnings before income taxes decreased by $2.7 million,
or 36.5%, to $4.8 million for fiscal 2001 from $7.5 million for fiscal 2000.
Income tax expense decreased by $877,000, or 33.2%, to $1.8 million for fiscal
2001 from $2.6 million for fiscal 2000. The Company's effective tax rate
increased to 37.0% for fiscal 2001 from 35.1% for fiscal 2000.
Comparison of Operating Results for Fiscal Years Ended June 30, 2000 and 1999
General. Net earnings totaled $4.9 million, or $1.07 per diluted share, for the
year ended June 30, 2000 as compared to net earnings totaling $4.6 million, or
$.96 per diluted share, for the year ended June 30, 1999. The acquisition of
Mid-Iowa Financial Corp. ("Mid-Iowa") effective on April 13, 1999 was accounted
for using the purchase method of accounting; therefore, the results of
operations for the fiscal year ended June 30, 1999 included Mid-Iowa's results
of operations from April 14, 1999 through June 30, 1999. In addition, the
average balances of assets and liabilities for fiscal 1999 included Mid-Iowa's
asset and liability balances from April 14, 1999 through June 30, 1999 only.
Interest Income. Interest income increased by $6.9 million, or 16.6%, to $48.0
million in fiscal 2000 from $41.1 million in fiscal 1999. The increase in
interest income was due to an increase of $102.8 million, or 18.9%, in the
average balance of interest-earning assets to $646.8 million in fiscal 2000 from
$544.0 million in fiscal 1999. The increase in the average balance of
interest-earning assets was primarily due to the acquisition of Mid-Iowa in
April 1999. The average yield on interest-earning assets decreased to 7.42% in
fiscal 2000 from 7.56% in fiscal 1999. The increase in interest income resulted
primarily from a $4.4 million, or 13.5%, increase in interest income on loans to
$37.1 million in fiscal 2000 from $32.7 million in fiscal 1999. Interest income
on mortgage-backed securities ("MBS") decreased by $126,000, or 5.3%, to $2.2
million in fiscal 2000 from $2.4 million in fiscal 1999. During the same period,
interest income on investment securities increased by $2.7 million, or 46.4%, to
$8.4 million from $5.8 million.
The increase in interest income on loans resulted from an increase of $63.8
million, or 15.3%, in the average balance of loans receivable to $480.4 million
for the year ended June 30, 2000, from $416.6 million for the year ended June
30, 1999. The average yield on loans receivable decreased by 13 basis points to
7.73% for fiscal 2000 from 7.86% for fiscal 1999. The Company's large portfolio
of residential mortgage loans reacts much less quickly to increases
9
in market interest rates than, for example, shorter-term commercial and consumer
loans. During the generally lower interest rate environment in fiscal 1999,
prepayments increased and fixed-rate mortgage loans and adjustable-rate mortgage
loans with lower interest rates were originated. Adjustable-rate loans include
various embedded options that limit the timing and extent of future interest
rate changes. Prepayments slowed as market rates generally increased in fiscal
2000 and the relatively low-rate mortgage loans originated in fiscal 1999
contributed to the decrease in the average yield earned on loans receivable. The
decrease in interest income on MBS was primarily due to a decrease of 31 basis
points in the average yield on MBS to 6.47% in fiscal 2000 from 6.78% in fiscal
1999. The increase in interest income on investment securities was primarily due
to an increase of $41.5 million in the average balance of investment securities
to $129.1 million in fiscal 2000 from $87.6 million in fiscal 1999. The yield on
investment securities decreased slightly to 6.54% in fiscal 2000 from 6.57% in
fiscal 1999.
Interest Expense. Interest expense totaled $29.8 million in fiscal 2000,
representing a $4.9 million, or 19.9%, increase from $24.9 million in fiscal
1999. The increase was due to an increase of $92.4 million, or 18.0%, in the
average balance of interest-bearing liabilities to $606.5 million in fiscal 2000
from $514.1 million in fiscal 1999. The increase in the average balance of
interest-bearing liabilities was largely due to the Mid-Iowa acquisition. The
average cost of interest-bearing liabilities increased by 8 basis points to
4.92% in fiscal 2000 from 4.84% in fiscal 1999. Interest expense on deposits
increased by $2.6 million, or 14.7%, to $20.5 million in fiscal 2000 from $17.9
million in fiscal 1999 and interest paid on borrowings increased by $2.3
million, or 33.1%, to $9.3 million in fiscal 2000 from $7.0 million in fiscal
1999. The increase in interest expense on deposits was primarily due to an
increase of $55.6 million, or 14.1%, in the average balance of deposits to
$450.3 million for fiscal 2000 from $394.7 million for fiscal 1999. The average
rate paid on deposits increased slightly to 4.56% in fiscal 2000 from 4.53% in
fiscal 1999. The increase in interest expense on borrowings resulted from a
$37.0 million increase in the average balance of borrowings to $156.3 million in
fiscal 2000 from $119.3 million in fiscal 1999. The average rate paid on
borrowings increased to 5.95% in fiscal 2000 from 5.85% in fiscal 1999 in the
generally higher interest rate environment during fiscal 2000.
Net Interest Income. Net interest income before provision for loan losses
increased by $1.9 million, or 11.6%, to $18.2 million for fiscal 2000 from $16.3
million for fiscal 1999. The increase in net interest income in fiscal 2000 was
primarily due to volume increases resulting from the Mid-Iowa acquisition.
Volume increases in the average balance of interest-earning assets in fiscal
2000 resulted in an increase in interest income of $7.6 million, while volume
increases in the average balance of interest-bearing liabilities resulted in an
increase in interest expense of $4.7 million. The Company's interest rate spread
was 2.50% and 2.72%, respectively, and the net yield on interest-earning assets
was 2.81% and 2.99%, respectively, for fiscal 2000 and 1999. The decrease in the
interest rate spread and in the net yield on interest-earning assets occurred
because the Company's interest-bearing liabilities repriced more quickly than
its interest-earning assets in the generally higher market interest rate
environment.
Provision for Loan Losses. Provision for loan loss expense increased by
$189,000, or 51.8%, to $554,000 for fiscal 2000 from $365,000 for fiscal 1999.
Provision for loan losses was increased due to increased loan volume resulting
from the Mid-Iowa acquisition and growth related to commercial and consumer loan
products, which generally involve a greater degree of risk than residential
mortgage loans. Net charge-offs as a percentage of average loans outstanding
were .06% and .04%, respectively, for fiscal years 2000 and 1999.
Noninterest Income. Noninterest income increased by $1.0 million, or 17.6%, to
$6.5 million for fiscal 2000 from $5.5 million for fiscal 1999. During fiscal
1999 the Company recorded a $1.1 million pre-tax gain on the sale of branch
deposits. Excluding this gain, noninterest income increased by $2.1 million, or
46.4%, to $6.5 million for fiscal 2000 from $4.4 million for fiscal 1999. The
increase in noninterest income in fiscal 2000 was largely due to growth related
to the Mid-Iowa acquisition. Service charges and other fees increased by
$755,000, or 35.2%, to $2.9 million for the year ended June 30, 2000 from $2.1
million for the year ended June 30, 1999. Additionally, gain on sale of fixed
assets totaled $108,000 for fiscal 2000 while a loss of $33,000 was recorded in
fiscal 1999 and gain on the sale of real estate owned and held for development
increased by $422,000, or 235.1%, to $602,000 for fiscal 2000 from $180,000 for
fiscal 1999. Income from other real estate-related activities increased by
$514,000, or 54.1%, to $1.5 million for fiscal 2000 from $1.0 million for fiscal
1999. The increase in real estate-related income was primarily due to income
from the real estate brokerage company acquired in the acquisition of Mid-Iowa.
Other income increased by $505,000, or 55.0%, to $1.4 million for fiscal 2000
from $919,000 for fiscal 1999, largely due
10
to increased revenues in the Company's non-bank subsidiaries. Partially
offsetting the increases in noninterest income for fiscal 2000 when compared to
fiscal 1999 was a decrease of $116,000 in gain on sale of loans held for sale,
reflecting the slowdown in mortgage activity due to generally higher mortgage
interest rates in fiscal 2000. In addition, loss on sale of securities totaled
$170,000 for fiscal 2000 due to sales of investment securities at a loss.
Proceeds of approximately $8.4 million from the securities' sales were used to
fund loans with higher yields.
Noninterest Expense. Noninterest expense increased by $2.4 million, or 17.1%, to
$16.6 million in fiscal 2000 from $14.2 million in fiscal 1999. The increase in
noninterest expense in fiscal 2000 was also largely due to growth related to the
Mid-Iowa acquisition. The principal component of the Company's noninterest
expense is salaries and employee benefits. Compensation and benefit expense
increased by $1.3 million, or 17.2%, to $9.0 million in fiscal 2000 from $7.7
million in fiscal 1999 primarily due to the addition of the Mid-Iowa staff.
Office property and equipment expense increased by $382,000, or 20.1%. Deposit
insurance premium expense decreased by $57,000, or 23.3%, to $189,000 in fiscal
2000 from $246,000 in fiscal 1999. Deposits totaling approximately $105.6
million were added with the Mid-Iowa acquisition; however, the deposit premium
rate decreased to .04% of the deposit assessment base for fiscal 2000 from .06%
of the deposit assessment base for fiscal 1999. Data processing expense and
advertising expense decreased by $19,000, or 4.0%, and by $110,000, or 18.8%,
respectively, in fiscal 2000 as compared to fiscal 1999. Amortization of
intangibles increased by $500,000, to $979,000 in fiscal 2000, from $479,000 in
fiscal 1999 due to the Mid-Iowa acquisition. The excess of cost over fair value
of assets related to the Mid-Iowa acquisition is being amortized over a period
of 25 years. Other general and administrative expense increased by $407,000, or
14.4%, to $3.2 million for fiscal 2000 from $2.8 million for fiscal 1999.
Income tax expense. Net earnings before income taxes increased by $253,000, or
3.5%, to $7.5 million for fiscal 2000 from $7.3 million for fiscal 1999. Income
tax expense decreased by $59,000, or 2.2%, to $2.6 million for fiscal 2000 from
$2.7 million for fiscal 1999. The Company's effective tax rate decreased to
35.1% for fiscal 2000 from 37.2% for fiscal 1999, partially due to increased
balances in the Company's tax-exempt investment portfolio.
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. Interest rate sensitivity is based on
numerous assumptions, such as prepayment estimates, which are revised annually
to reflect the anticipated interest rate environment.
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. 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 negatively affect net interest income.
The Company has utilized the following strategies in recent years in an effort
to reduce interest rate risk: (a) the Company seeks to originate and hold in
portfolio adjustable rate loans which have annual interest rate adjustments; (b)
the Company seeks to originate shorter-term commercial and consumer loans; (c)
the Company seeks to lengthen the maturity of deposits, when cost effective,
through the pricing and promotion of certificates of deposit; (d) the Company
seeks to attract low cost checking and transaction accounts which tend to be
less interest rate sensitive when interest rates rise; and (e) the Company has
used long term Federal Home Loan Bank advances to fund the origination of fixed
rate loans. The Company does not solicit negotiated high-rate jumbo certificates
of deposit or brokered deposits, which are extremely rate sensitive.
At June 30, 2001, total interest-earning assets maturing or repricing within one
year exceeded total interest-bearing liabilities maturing or repricing in the
same period by $32.2 million, representing a cumulative positive one-year gap
11
ratio of 4.9%. The Company has an asset/liability committee (the "ALCO"), which
includes the Company's president and senior Company officers. The ALCO meets
weekly to review loan and deposit pricing and production volumes, interest rate
risk analysis, liquidity and borrowing needs, and other asset and liability
management topics. The ALCO reports quarterly to the Board of Directors on
interest rate risk and trends, as well as liquidity and capital ratios and
requirements.
Market Risk Management
Market risk is the risk of loss arising 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 exposures and how those
exposures were managed in fiscal 2001 have changed significantly when compared
to fiscal 2000 aside from the sale of a significant portion of the Company's
single-family fixed-rate residential mortgage loans during fiscal 2001 and the
redeployment of those proceeds into shorter-term assets and generally
higher-rate commercial and consumer loans. After six interest rate hikes by the
Federal Reserve Board between January 2, 2001 and June 30, 2001, the net
portfolio value of the Company, assuming no change in interest rates (the "Base
Case Scenario"), has increased by $11.4 million, or 21.7%, to $64.2 million at
June 30, 2001 from $52.8 million at June 30, 2000. The net portfolio value ratio
in the Base Case Scenario was 9.75% and 7.51%, respectively, at June 30, 2001
and 2000. The Board of Directors has established market risk limits based on the
Company's tolerance for risk. At June 30, 2001, the net portfolio value ratio
was inside the board limits in all rate-change scenarios. The Company primarily
relies on the Office of Thrift Supervision (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 assets 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.
The 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 June 30, 2001, as calculated by the
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 values of the Company's portfolio of loans and securities decrease
and prepayments slow. As interest rates decrease, the market values of loans and
securities increase, but less dramatically than in the rising rate scenarios,
due to prepayment risk, periodic rate caps, and other embedded options.
12
Present Value Estimates by Interest Rate Scenario
Calculated at June 30, 2001
-----------------------------------------------Base-------------------------------------
-300 bp -200 bp -100 bp 0 bp +100 bp $200 bp +300 bp
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Financial Instrument:
Mortgage loans and securities $396,295 391,399 386,640 381,136 374,598 367,841 360,809
Non-mortgage loans 61,996 60,843 59,735 58,669 57,644 56,658 55,697
Cash, deposits and securities 172,683 171,516 170,604 168,171 163,724 158,965 154,414
Other assets 40,392 44,047 47,330 50,547 53,351 56,240 59,019
-------- -------- -------- -------- -------- -------- --------
Total assets 671,366 667,805 664,309 658,523 649,317 639,704 629,939
Deposits 502,242 498,991 495,799 492,674 489,600 486,603 483,646
Borrowings 98,576 95,271 92,746 90,828 89,290 87,974 86,774
Other liabilities 11,287 11,283 11,279 11,273 11,270 11,266 11,261
-------- -------- -------- -------- -------- -------- --------
Total liabilities 612,105 605,545 599,824 594,775 590,160 585,843 581,681
-------- -------- -------- -------- -------- -------- --------
Commitments 2,329 1,684 1,071 451 (347) (1,274) (2,238)
-------- -------- -------- -------- -------- -------- --------
Net portfolio value $ 61,590 63,944 65,556 64,199 58,810 52,587 46,020
======== ======== ======== ======== ======== ======== ========
Net portfolio value ratio 9.17% 9.58% 9.87% 9.75% 9.06% 8.22% 7.31%
======== ======== ======== ======== ======== ======== ========
NPV minimum: board limit 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%
======== ======== ======== ======== ======== ======== ========
Liquidity and Capital Resources
The Company is required by OTS regulation to maintain sufficient liquidity to
assure its safe and sound operation. The Company historically has maintained a
level of liquid assets in excess of regulatory requirements, and the Company's
liquidity ratio averaged 31.4% during the quarter ended June 30, 2001. The
Company adjusts its liquidity levels in order to meet funding needs for deposit
outflows, payment of real estate taxes from escrowed funds, when applicable, and
loan commitments. The Company also adjusts liquidity as appropriate to meet its
asset/liability objectives.
The Company's primary sources of funds are deposits, amortization and prepayment
of loans and mortgage-backed securities, FHLB advances, maturities of investment
securities and other short-term investments, and funds provided from operations.
While scheduled loan and mortgage-backed securities repayments 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 steady deposit
balance. In addition, the Company invests excess funds in interest-bearing
deposits in other financial institutions, investment securities and other
short-term interest-earning assets that provide liquidity to meet lending
requirements.
Investments and other assets qualifying for liquidity, outstanding at June 30,
2001, 2000, and 1999, totaled $172.4 million, $142.7 million, and $150.4
million, respectively.
Deposits are the Company's primary source of externally generated funds. The
level of deposit inflows during any given period is heavily influenced by
factors outside of management's control, such as the general level of short-term
and long-term interest rates in the economy, as well as higher alternative
yields that investors may obtain on competing investment instruments such as
money market mutual funds. The Company's net deposits before interest credited
decreased by $7.1 million during fiscal 2001. The Company's net deposits before
interest credited increased by $12.6 million for fiscal 2000. Net deposits
before interest credited increased by $53.5 million for fiscal 1999, due
primarily to the Mid-Iowa acquisition, net of branch deposit sales that totaled
approximately $19.4 million.
Similarly, the general level of market interest rates heavily influences the
amount of principal repayments on loans and mortgage securities. Principal
repayments on loans for fiscal 2001 totaled $177.9 million as compared to $156.9
million in fiscal 2000 and $163.1 million in fiscal 1999. Funds received from
principal repayments on mortgage-backed securities for fiscal 2001, 2000 and
1999, totaled $7.1 million, $8.4 million and $12.1 million, respectively.
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, borrowing agreements exist with the FHLB, which provide an
additional source of funds. At June 30, 2001 and 2000, the Company had $89.1
million and $174.0 million, respectively, in outstanding advances from the FHLB.
13
At June 30, 2001, the Company had outstanding loan commitments and consumer and
commercial approved, but unused, lines of credit totaling $74.0 million.
Certificates of deposit scheduled to mature or reprice in one year or less at
June 30, 2001 totaled $175.3 million. 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.
Effect of New Accounting Standards
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and its related amendment SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, effective July 1, 2000. Such adoption did not have a
material effect on its financial statements.
In September 2000, the FASB issued SFAS No. 140, Accounting for the Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
replaces SFAS No. 125 (of the same title). SFAS No. 140 revises certain
standards in the accounting for securitizations and other transfers of financial
assets and collateral, and requires some disclosures relating to securitization
transactions and collateral. SFAS No. 140 carries over most of SFAS No. 125's
provisions. The collateral and disclosure provisions of SFAS No. 140 are
effective for year-end 2000 financial statements. The other provisions of SFAS
No. 140 are effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The impact of the
revised provisions is not material.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately. SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment. The Company is required to adopt the provisions of SFAS
No. 141 immediately. The Company has elected to early adopt SFAS No. 142 as of
July 1, 2001.
SFAS No. 141 will require upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and make any necessary reclassifications in
order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Upon adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make necessary amortization period adjustments by the end of the first
interim period after adoption.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Statement will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption.
As of the date of adoption, the Company had unamortized goodwill in the amount
of $18,522,607 and unamortized identifiable intangible assets in the amount of
14
$419,687. Amortization expense related to goodwill and to identifiable
intangible assets was $843,790 and 109,889, respectively for the year ended June
30, 2001.
15
FIRST FEDERAL BANKSHARES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
and Supplementary Information
June 30, 2001 and 2000
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
First Federal Bankshares, Inc.
and Subsidiaries
Sioux City, Iowa:
We have audited the accompanying consolidated balance sheets of First
Federal Bankshares, Inc. and subsidiaries (the Company) as of June 30,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for each
of the years in the three-year period ended June 30, 2001. 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 auditing standards generally
accepted in the United States of America. 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
First Federal Bankshares, Inc. and subsidiaries as of June 30, 2001 and
2000, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended June 30,
2001, in conformity with accounting principles generally accepted in the
United States of America.
/s/KPMG LLP
-----------
KPMG LLP
September 14, 2001
Des Moines, Iowa
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 and 2000
Assets 2001 2000
------------- -------------
Cash and due from banks $ 20,241,215 16,611,443
Interest-bearing deposits in other financial institutions 57,708,338 3,555,263
------------- -------------
Cash and cash equivalents 77,949,553 20,166,706
------------- -------------
Securities available-for-sale (note 2) 87,598,252 117,326,062
Securities held-to-maturity (fair value of $22,882,470 in 2001
and $23,067,005 in 2000) (note 2) 22,725,200 23,737,311
Loans receivable, net (notes 3 and 4) 417,897,877 505,089,564
Office property and equipment, net (note 5) 14,686,405 15,314,905
Federal Home Loan Bank (FHLB) stock, at cost 9,468,700 8,928,900
Accrued interest receivable (note 6) 3,793,058 4,800,415
Refundable income taxes 112,365 --
Deferred tax asset (note 10) 500,000 2,362,000
Excess of cost over fair value of assets acquired 18,942,294 19,900,409
Other assets (note 7) 6,450,646 5,755,245
------------- -------------
Total assets $ 660,124,350 723,381,517
============= =============
Liabilities and Stockholders' Equity
Deposits (note 8) $ 488,708,229 471,625,531
Advances from FHLB (note 9) 89,117,564 174,020,499
Advance payments by borrowers for taxes and insurance 1,910,376 2,828,275
Accrued taxes on income (note 10) -- 292,740
Accrued interest payable (notes 8 and 9) 5,676,823 4,297,514
Accrued expenses and other liabilities 2,123,911 2,204,039
------------- -------------
Total liabilities 587,536,903 655,268,598
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized;
1,000,000 shares, none issued -- --
Common stock, $.01 par value, 12,000,000 shares authorized; 4,849,536
and 4,833,608 shares issued at June 30, 2001 and 2000, respectively 48,495 48,336
Additional paid-in capital 36,053,892 36,002,723
Retained earnings, substantially restricted (note 12) 41,357,535 39,782,321
Treasury stock, at cost, 298,375 and 144,050 shares
at June 30, 2001 and 2000, respectively (2,803,832) (1,273,138)
Accumulated other comprehensive income -
net unrealized (loss) on securities available-for-sale (343,831) (4,343,049)
Unearned ESOP (note 11) (1,473,470) (1,634,600)
Unearned RRP (note 11) (251,342) (469,674)
------------- -------------
Total stockholders' equity 72,587,447 68,112,919
Contingencies (note 15) -- --
------------- -------------
Total liabilities and stockholders' equity $ 660,124,350 723,381,517
============= =============
See accompanying notes to consolidated financial statements.
2
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2001, 2000, and 1999
2001 2000 1999
------------ ------------ ------------
Interest income:
Loans receivable $ 39,573,543 37,145,258 32,736,304
Mortgage-backed securities 2,677,812 2,235,090 2,361,176
Investment securities 7,924,018 8,441,174 5,764,481
Other interest-earning assets 403,045 151,037 274,191
------------ ------------ ------------
Total interest income 50,578,418 47,972,559 41,136,152
------------ ------------ ------------
Interest expense:
Deposits (note 8) 23,069,897 20,520,340 17,884,113
Advances from FHLB and other borrowings 9,201,508 9,293,181 6,980,013
------------ ------------ ------------
Total interest expense 32,271,405 29,813,521 24,864,126
------------ ------------ ------------
Net interest income 18,307,013 18,159,038 16,272,026
Provision for losses on loans (note 4) 5,155,000 554,000 365,000
------------ ------------ ------------
Net interest income after provision for losses on loans 13,152,013 17,605,038 15,907,026
------------ ------------ ------------
Noninterest income:
Fees and service charges 3,681,102 2,901,004 2,146,078
Gain on sale of branch deposits -- -- 1,087,884
Gain on sale of real estate owned and held for development 291,923 602,134 179,695
Net gain (loss) on sale of securities 1,583,419 (169,856) (12,141)
Gain on sale of loans 350,758 180,240 295,812
(Loss) gain on sale of office property and equipment (1,811) 108,462 (32,689)
Real estate related activities 1,206,120 1,463,766 950,131
Other income 1,297,235 1,423,966 918,895
------------ ------------ ------------
Total noninterest income 8,408,746 6,509,716 5,533,665
------------ ------------ ------------
Noninterest expense:
Compensation and benefits (note 11) 8,605,079 8,991,983 7,673,781
Office property and equipment 2,419,203 2,282,175 1,900,655
Deposit insurance premiums 95,249 189,022 246,462
Data processing 490,393 444,582 463,220
Advertising 355,917 475,256 585,348
Amortization of excess of cost over fair value of assets acquired 953,679 979,554 479,200
Other expense 3,871,346 3,235,531 2,828,560
------------ ------------ ------------
Total noninterest expense 16,790,866 16,598,103 14,177,226
------------ ------------ ------------
Earnings before income taxes 4,769,893 7,516,651 7,263,465
Income taxes (note 10) 1,764,000 2,641,000 2,700,000
------------ ------------ ------------
Net earnings $ 3,005,893 4,875,651 4,563,465
============ ============ ============
Earnings per share:
Basic earnings per share $ 0.68 1.07 0.97
Diluted earnings per share 0.67 1.07 0.96
============ ============ ============
See accompanying notes to consolidated financial statements.
8
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended June 30, 2001, 2000, and 1999
Accumulated
Additional other
Common paid-in Retained Treasury comprehensive
stock capital earnings stock income
----- ------- -------- ----- ------
Balance at June 30, 1998 $ 46,773 11,059,966 30,678,991 -- 234,353
----------- ----------- ----------- ----------- -----------
Net earnings -- -- 4,563,465 -- --
Net change in unrealized losses on
securities available-for-sale -- -- -- -- (2,432,261)
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- -- (4,276)
----------- ----------- ----------- ----------- -----------
Total comprehensive income -- -- 4,563,465 -- (2,436,537)
----------- ----------- ----------- ----------- -----------
Reorganization of MHC -- -- 1,675,313 -- --
Proceeds of stock offering, net 1,238 24,842,903 -- -- --
Stock options exercised 167 54,691 -- -- --
Employee stock ownership plan
(ESOP) borrowing -- -- -- -- --
ESOP shares allocated -- -- -- -- --
Dividends on common stock
at $.2914 per share (note 12) -- -- (634,558) -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 48,178 35,957,560 36,283,211 -- (2,202,184)
----------- ----------- ----------- ----------- -----------
Net earnings -- -- 4,875,651 -- --
Net change in unrealized losses on
securities available-for-sale -- -- -- -- (2,112,605)
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- -- (28,260)
----------- ----------- ----------- ----------- -----------
Total comprehensive income -- -- 4,875,651 -- (2,140,865)
----------- ----------- ----------- ----------- -----------
Stock options exercised 158 48,398 -- -- --
Treasury stock acquired -- -- -- (1,930,138) --
Recognition and retention plan (RRP) awarded -- 18,250 -- 657,000 --
Amortization of RRP -- -- -- -- --
ESOP shares allocated -- -- -- -- --
Stock depreciation of allocated ESOP shares -- (21,485) -- -- --
Dividends on common stock
at $.30 per share (note 12) -- -- (1,376,541) -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 48,336 36,002,723 39,782,321 (1,273,138) (4,343,049)
----------- ----------- ----------- ----------- -----------
Net earnings -- -- 3,005,893 -- --
Net change in unrealized gains on
securities available-for-sale -- -- -- -- 4,992,022
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- -- 992,804
----------- ----------- ----------- ----------- -----------
Total comprehensive income -- -- 3,005,893 -- 3,999,218
----------- ----------- ----------- ----------- -----------
Stock options exercised 159 55,478 -- -- --
Treasury stock acquired -- -- -- (1,530,694) --
Amortization of RRP -- -- -- -- --
ESOP shares allocated -- -- -- -- --
Stock depreciation of allocated ESOP shares -- (4,309) -- -- --
Dividends on common stock
at $.32 per share (note 12) -- -- (1,430,679) -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2001 $ 48,495 36,053,892 41,357,535 (2,803,832) (343,831)
=========== =========== =========== =========== ===========
Unearned Unearned
ESOP RRP Total
----------- ----------- -----------
Balance at June 30, 1998
-- -- 42,020,083
----------- ----------- -----------
Net earnings
Net change in unrealized losses on -- -- 4,563,465
securities available-for-sale
Less: reclassification adjustment for net -- -- (2,432,261)
realized gains included in net income
(net of tax expense)
-- -- (4,276)
----------- ----------- -----------
Total comprehensive income
-- -- 2,126,928
----------- ----------- -----------
Reorganization of MHC
Proceeds of stock offering, net -- -- 1,675,313
Stock options exercised -- -- 24,844,141
Employee stock ownership plan -- -- 54,858
(ESOP) borrowing
ESOP shares allocated (1,844,500) -- (1,844,500)
Dividends on common stock 30,742 -- 30,742
at $.2914 per share (note 12)
-- -- (634,558)
----------- ----------- -----------
Balance at June 30, 1999
(1,813,758) -- 68,273,007
----------- ----------- -----------
Net earnings
Net change in unrealized losses on -- -- 4,875,651
securities available-for-sale
Less: reclassification adjustment for net -- -- (2,112,605)
realized gains included in net income
(net of tax expense)
-- -- (28,260)
----------- ----------- -----------
Total comprehensive income
-- -- 2,734,786
----------- ----------- -----------
Stock options exercised
Treasury stock acquired -- -- 48,556
Recognition and retention plan (RRP) awarded -- -- (1,930,138)
Amortization of RRP -- (675,250) --
ESOP shares allocated -- 205,576 205,576
Stock depreciation of allocated ESOP shares 179,158 -- 179,158
Dividends on common stock -- -- (21,485)
at $.30 per share (note 12)
-- -- (1,376,541)
----------- ----------- -----------
Balance at June 30, 2000
(1,634,600) (469,674) 68,112,919
----------- ----------- -----------
Net earnings
Net change in unrealized gains on -- -- 3,005,893
securities available-for-sale
Less: reclassification adjustment for net -- -- 4,992,022
realized gains included in net income
(net of tax expense)
-- -- 992,804
----------- ----------- -----------
Total comprehensive income
-- -- 7,005,111
----------- ----------- -----------
Stock options exercised
Treasury stock acquired -- -- 55,637
Amortization of RRP -- -- (1,530,694)
ESOP shares allocated -- 218,332 218,332
Stock depreciation of allocated ESOP shares 161,130 -- 161,130
Dividends on common stock -- -- (4,309)
at $.32 per share (note 12)
-- -- (1,430,679)
----------- ----------- -----------
Balance at June 30, 2001
(1,473,470) (251,342) 72,587,447
=========== =========== ===========
See accompanying notes to consolidated financial statements.
4
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2001, 2000, and 1999
2001 2000 1999
------------- ------------- -------------
Cash flows from operating activities:
Net earnings $ 3,005,893 4,875,651 4,563,465
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loans originated for sale to investors (51,027,680) (24,583,322) (39,229,306)
Proceeds from sale of loans originated for sale 49,374,634 24,441,563 39,397,920
Provision for losses on loans and other assets 5,155,000 554,000 365,000
Depreciation and amortization 2,702,411 2,602,628 1,420,630
Provision for deferred taxes (516,000) 61,000 (166,000)
Net gain on sale of loans (350,758) (180,240) (295,812)
Net (gain) loss on sale of securities available-for-sale (1,583,419) 169,856 12,141
Net gain on sale of branch deposits -- -- (1,087,884)
Net loss (gain) on sale of office property and equipment 1,811 (108,462) 32,689
Net gain on sale of real estate owned and held for development (291,923) (602,134) (179,695)
Net loan fees deferred (79,841) 85,339 88,902
Amortization of premiums and discounts on loans,
mortgage-backed securities, and investment securities 741,313 974,710 102,264
Decrease (increase) in accrued interest receivable 1,007,357 (198,157) (220,578)
Increase in other assets (658,979) (1,475,968) (368,112)
Increase (decrease) in accrued interest payable 1,379,309 125,186 (389,503)
Decrease in accrued expenses and other liabilities (80,128) (212,777) (1,203,050)
(Decrease) increase in accrued taxes on income (405,105) (126,366) 1,153,878
------------- ------------- -------------
Net cash provided by operating activities 8,373,895 6,402,507 3,996,949
------------- ------------- -------------
Cash flows from investing activities:
Purchase of securities held-to-maturity (2,375,000) (519,205) (10,656,182)
Proceeds from maturities of securities held-to-maturity 3,388,388 6,562,213 20,603,333
Proceeds from sale of securities available-for-sale 130,677,652 8,367,496 4,864,324
Purchase of securities available-for-sale (12,553,258) (11,060,185) (82,741,656)
Proceeds from maturities of securities available-for-sale 31,182,842 6,132,470 54,168,500
Purchase of FHLB stock (539,800) (834,600) (623,700)
Loans purchased (21,760,000) (20,861,000) (4,870,000)
(Increase) decrease in loans receivable (6,910,671) (30,475,278) 19,095,423
Proceeds from sale of office property and equipment 525 182,214 9,147
Purchase of office property and equipment (607,930) (1,186,425) (2,922,414)
Proceeds from sale of foreclosed real estate 373,789 2,069,491 975,396
Proceeds from sale of real estate held for development 792,000 1,316,500 140,987
Net expenditures on real estate held for development (508,728) (821,410) --
MHC Reorganization -- -- 292,474
Net cash and cash equivalents of acquisitions -- -- 7,097,244
------------- ------------- -------------
Net cash provided by (used in) investing activities 121,159,809 (41,127,719) 5,432,876
------------- ------------- -------------
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2001, 2000, and 1999
2001 2000 1999
------------- ------------- -------------
Cash flows from financing activities:
Increase (decrease) in deposits $ 17,082,698 7,456,053 (32,750,620)
Proceeds from advances from FHLB 36,500,000 76,155,665 16,000,000
Repayment of advances from FHLB and other borrowings (121,509,920) (40,800,790) (19,176,065)
Net (decrease) increase in advances payments by borrowers
for taxes and insurance (917,899) 271,157 75,368
Issuance of common stock, net 55,637 48,556 24,898,999
Purchase of treasury stock (1,530,694) (1,930,138) --
Cash dividends paid (1,430,679) (1,376,541) (634,558)
------------- ------------- -------------
Net cash (used in) provided by financing activities (71,750,857) 39,823,962 (11,586,876)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 57,782,847 5,098,750 (2,157,051)
Cash and cash equivalents at beginning of year 20,166,706 15,067,956 17,225,007
------------- ------------- -------------
Cash and cash equivalents at end of year $ 77,949,553 20,166,706 15,067,956
============= ============= =============
Supplemental disclosures:
Cash paid during the year for:
Interest $ 30,892,096 29,688,335 25,253,629
Income taxes 2,687,949 2,678,647 1,797,480
Noncash activities -
Loans converted to securities available-for-sale 111,495,480 -- --
============= ============= =============
See accompanying notes to consolidated financial statements.
6
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(1) Summary of Significant Accounting Policies and Practices
Organization
First Federal Bankshares, Inc. (the Company) is the holding company
for First Federal Bank (the Bank). The Company owns 100% of the
Bank's common stock. Currently, the Company engages in no other
significant activities beyond its ownership of the Bank's common
stock. Consequently, its net income is derived primarily from the
Bank. The Bank is organized as a federally chartered stock savings
bank engaging in retail and commercial banking and related
financial services, primarily in the Sioux City metropolitan area;
adjacent counties, including parts of Nebraska and South Dakota;
and in central Iowa. The Bank provides traditional products and
services of banking, such as deposits and mortgage, consumer, and
commercial loans.
Prior to April 13, 1999, the Bank was owned approximately 53.49% by
First Federal Bankshares, M.H.C. (the Mutual Holding Company) and
46.51% by public shareholders. On April 13, 1999, pursuant to a
plan of conversion and reorganization, and after a series of
transactions: (1) the Company was formed to own all of the capital
stock of the Bank, (2) the Company sold the ownership interest in
the Bank previously held by the Mutual Holding Company to the
public in a subscription offering (the Offering) (2,635,000 common
shares at $10.00 resulting in net cash proceeds after costs and
funding the ESOP (note 11) of approximately $23 million), (3)
previous public shareholders of the Bank had their shares exchanged
into 2,182,807 common shares of the Company (exchange ratio of
1.64696 to 1) (the Exchange) and (4) the Mutual Holding Company
ceased to exist. The total number of shares of common stock
outstanding following the Offering and Exchange was 4,817,807. The
reorganization was accounted for in a manner similar to a pooling
of interests and did not result in any significant accounting
adjustments. As a result of the reorganization, the consolidated
financial statements for periods prior to June 30, 1999 have been
restated to reflect the changes in the par value of common stock
from $1.00 to $.01 per share and in the number of authorized shares
of common stock from 20,000,000 to 12,000,000. The primary purpose
of the Offering was to fund the acquisition of Mid-Iowa Financial
Corp. and its wholly owned subsidiary, Mid-Iowa Savings Bank, FSB
(note 1: Acquisitions).
Principles of Presentation
The accompanying consolidated financial statements include the
accounts of First Federal Bankshares, Inc., its wholly owned
subsidiaries, a real estate brokerage company, a real estate
development company, and the Bank and the Bank's wholly owned
subsidiaries. In consolidation, all significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
7
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Acquisitions
On April 13, 1999, the Company acquired Mid-Iowa Financial Corp.,
Newton, Iowa (Mid-Iowa), parent company of Mid-Iowa Savings Bank.
The shareholders of Mid-Iowa received $28.3 million cash for all
outstanding shares. The acquisition was accounted for as a
purchase; accordingly, Mid-Iowa's results of operations were
included in the financial statements from the acquisition date.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company includes cash and
due from other financial institutions and interest-bearing deposits
with original maturities of three months or less in cash and cash
equivalents.
Earnings Per Share
Basic earnings per share computations for the years ended June 30,
2001, 2000, and 1999 were determined by dividing net earnings by
the weighted-average number of common shares outstanding during the
years then ended. Diluted net earnings per common share amounts are
computed by dividing net income by the weighted-average number of
common shares and all dilutive potential common shares outstanding
during the year. The average number of common shares have been
restated for the stock conversion in 1999.
The following information was used in the computation of net income
per common share on both a basic and diluted basis for the years
ended June 30, 2001, 2000, and 1999:
8
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Securities
Securities which the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity. Such
securities are carried at cost, adjusted for unamortized premiums
and unearned discounts. Premiums are amortized and discounts are
accreted using the interest method over the remaining period to
contractual maturity, adjusted in the case of mortgage-backed
securities for actual prepayments. Original issue discounts on
short-term securities are accreted as accrued interest receivable
over the lives of such securities.
Securities classified as available-for-sale are carried at
estimated fair value. Unrealized gains and losses on such
securities are reported as a separate component of stockholders'
equity, net of deferred taxes. Realized gains and losses from the
sale of securities are recognized using the specific identification
method.
Unrealized losses on securities judged to be other than temporary
are charged to operations.
Loans Receivable
Loans receivable are stated at unpaid principal balances less the
allowances for loan losses and net of deferred loan origination
fees and discounts. Discounts on first mortgage loans are amortized
to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
Allowances for Losses on Loans and Real Estate
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 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 probable credit losses.
Under the Company's credit policies, loans with interest more than
90 days in arrears and restructured loans are generally 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 acquired 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 is charged to the
allowance for losses on loans. 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.
Accrued interest receivable in arrears which management believes is
doubtful of collection (generally when a loan becomes 90 days
delinquent) is charged to income. Subsequent interest income is not
recognized on such loans until collected or until determined by
management to be collectible.
9
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Financial Instruments with Off-balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with
off-balance sheet risk, which include commitments to extend credit.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend
credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer
as long as there are no violations 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
certain of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. 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.
Unearned Loan Fees and Discounts
Certain fees and direct expenses incurred in the loan origination
process are deferred, with recognition thereof over the contractual
life of the related loan as a yield adjustment using the interest
method of amortization. Any unamortized fees on loans sold are
credited to income in the year such loans are sold.
Premiums and discounts in connection with mortgage loans purchased
are amortized over the terms of the loans using the interest
method.
Office Property and Equipment
Office property and equipment are recorded at cost, and
depreciation is provided primarily on a straight-line basis over
the estimated useful lives of the related assets, which range from
15 to 40 years for office buildings and from 3 to 10 years for
furniture fixtures, automobiles and equipment.
Maintenance and repairs are charged against income. Betterments are
capitalized and subsequently depreciated. The cost and accumulated
depreciation of properties retired or otherwise disposed of are
eliminated from the asset and accumulated depreciation accounts.
Related gain or loss from such transactions is credited or charged
to income.
Excess of Cost Over Fair Value of Assets Acquired
The Company will early adopt Statement of Financial Accounting
Standards (SFAS) 142 on July 1, 2001. Prior to the adoption, the
excess of cost over fair value of assets acquired was being
amortized on a straight-line basis over its estimated useful life
of 25 years. The asset was evaluated by management for impairment
whenever events or changes in circumstances indicated that the
carrying amount of the asset may not be recoverable based on facts
and circumstances related to the value of net assets acquired that
gave rise to the asset. After the adoption date, Statement 142
requires that intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142.
10
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Taxes on Income
The Company files a consolidated Federal income tax return. Federal
income taxes are allocated based on taxable income or loss included
on the consolidated return. For state tax purposes, the Bank files
a franchise tax return, while the Company, its other subsidiaries,
and the Bank's subsidiaries file corporate income tax returns.
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 of a change in
tax rates on deferred tax assets and liabilities 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 material employee stock option grants
made 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.
Reclassifications
Certain amounts previously reported have been reclassified to
conform with the presentation in these consolidated financial
statements. These reclassifications did not affect previously
reported net income or retained earnings.
Fair Value of Financial Instruments
The Company's fair value estimates, methods, and assumptions for
its financial instruments are set forth below:
Cash and Cash Equivalents
The recorded amount of cash and cash equivalents
approximates fair value.
Securities
The fair value of 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.
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.
11
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
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.
Federal Home Loan Bank Stock
The value of Federal Home Loan Bank (FHLB) stock is
equivalent to its carrying value because it is redeemable
at par value.
Accrued Interest Receivable
The recorded amount of accrual interest receivable
approximates fair value.
Deposits
The fair value of deposits with no stated maturity, such
as passbook, money market, noninterest bearing checking,
and checking 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.
Advances from Federal Home Loan Bank
The fair value of advances from FHLB is based on the
discounted value of contractual cash flows.
Advances Payments by Borrowers for Taxes and Insurance
The recorded amount of advances payments by borrowers for
taxes and insurance approximates fair value.
Accrued Interest Payable
The recorded amount of accrual interest payable
approximates fair value.
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.
12
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Effect of New Accounting Standards
The Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related amendment SFAS
No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No.
133, which was effective for the Company for the year beginning
July 1, 2000. Such adoption did not have a material effect on the
financial statements.
In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140, Accounting for the Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, which replaces
SFAS No. 125 (of the same title). SFAS No. 140 revises certain
standards in the accounting for securitizations and other transfers
of financial assets and collateral, and requires some disclosures
relating to securitization transactions and collateral, but it
carries over most of SFAS No. 125's provisions. The collateral and
disclosure provisions of SFAS No. 140 are effective for year-end
2000 financial statements. The other provisions of this Statement
are effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001; the
impact of the revised provisions is not material.
In July 2001, the FASB issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after June 30,
2001. SFAS No. 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be
accounted for separately. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment.
The Company is required to adopt the provisions of SFAS No. 141
immediately. The Company has elected to early adopt SFAS No. 142 as
of July 1, 2001.
SFAS No. 141 will require, upon adoption of SFAS No. 142, that the
Company evaluate its existing intangible assets and goodwill that
were acquired in a prior purchase business combination, and to make
any necessary reclassifications in order to conform with the new
criteria in SFAS No. 141 for recognition apart from goodwill. Upon
adoption of SFAS No. 142, the Company will be required to reassess
the useful lives and residual values of all intangible assets
acquired, and make necessary amortization period adjustments by the
end of the first interim period after adoption.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an
assessment of whether there is an indication that goodwill is
impaired as of the date of adoption.
As of the date of adoption, the Company had unamortized goodwill in
the amount of $18,522,607 and unamortized identifiable intangible
assets in the amount of $419,687. Amortization expense related to
goodwill and to identifiable intangible assets was $843,790 and
$109,889, respectively for the year ended June 30, 2001.
13
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(2) Securities
Following is a schedule of amortized costs and estimated fair
values as of June 30, 2001 and 2000:
2001
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ----------- ----------- -----------
Available-for-sale:
Mortgage-backed securities:
Government National Mortgage
Association (GNMA) $ 2,262,940 894 17,473 2,246,361
Federal Home Loan Mortgage
Corporation (FHLMC) 2,320,052 45,939 -- 2,365,991
Federal National Mortgage
Association (FNMA) 1,666,393 17,138 3,813 1,679,718
United States government
agency securities 62,303,324 13,346 568,556 61,748,114
Other investment securities 19,594,374 35,246 71,552 19,558,068
----------- ----------- ----------- -----------
$88,147,083 112,563 661,394 87,598,252
=========== =========== =========== ===========
Held-to-maturity:
Mortgage-backed securities:
GNMA $ 1,735,647 32,379 4,528 1,763,498
FHLMC 1,804,014 3,206 9,721 1,797,499
FNMA 7,147,720 115,372 2,167 7,260,925
United Stated government
agency securities 875,511 3,100 -- 878,611
United States treasury securities 2,002,586 14,992 -- 2,017,578
Local government securities 9,159,722 40,952 36,315 9,164,359
----------- ----------- ----------- -----------
$22,725,200 210,001 52,731 22,882,470
=========== =========== =========== ===========
14
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
2000
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ------------ ------------ ------------
Available-for-sale:
Mortgage-backed securities:
GNMA $ 9,802,075 28,156 69,045 9,761,186
FHLMC 2,937,010 -- 60,193 2,876,817
FNMA 3,601,857 198 55,057 3,546,998
United States government
agency securities 95,450,189 -- 6,285,497 89,164,692
Other investment securities 12,460,981 99,585 584,197 11,976,369
------------ ------------ ------------ ------------
$124,252,112 127,939 7,053,989 117,326,062
============ ============ ============ ============
Held-to-maturity:
Mortgage-backed securities:
GNMA $ 2,039,098 10,578 44,823 2,004,853
FHLMC 2,293,716 -- 92,555 2,201,161
FNMA 8,770,015 -- 253,220 8,516,795
United Stated government
agency securities 1,109,252 -- 28,780 1,080,472
United States treasury securities 2,009,184 -- 26,137 1,983,047
Local government securities 7,516,046 837 236,206 7,280,677
------------ ------------ ------------ ------------
$ 23,737,311 11,415 681,721 23,067,005
============ ============ ============ ============
15
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
The amortized cost and fair value at June 30, 2001 are shown below
by contractual maturity. Expected maturities will differ from
contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Available-for-sale Held-to-maturity
--------------------------- ----------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
----------- ----------- ----------- -----------
Due in 1 year or less $ 9,553,259 9,545,697 3,572,821 3,592,334
Due after 1 year through 5 years -- -- 2,497,372 2,501,447
Due after 5 years through 10 years 37,924,864 37,779,173 1,536,886 1,546,077
Due after 10 years 34,419,575 33,981,312 4,430,740 4,420,690
----------- ----------- ----------- -----------
81,897,698 81,306,182 12,037,819 12,060,548
Mortgage-backed securities 6,249,385 6,292,070 10,687,381 10,821,922
----------- ----------- ----------- -----------
$88,147,083 87,598,252 22,725,200 22,882,470
=========== =========== =========== ===========
Proceeds from the sale of securities available for sale were
$130,677,652, $8,367,496, and $4,864,324 during 2001, 2000, and
1999, respectively. Gross realized gains on these sales were
$1,731,569, $3,784, and $16,392 and gross realized losses on these
sales were $148,150, $173,640, and $28,533 in 2001, 2000, and 1999,
respectively.
Securities with an amortized cost of $6,480,701 and an estimated
fair value of approximately $6,500,000 at June 30, 2001 were
pledged to various entities.
16
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(3) Loans Receivable
Loans receivable at June 30, 2001 and 2000 are summarized as
follows:
2001 2000
------------- -------------
First mortgage loans:
Secured by one to four family residences $ 181,034,482 325,057,383
Secured by other properties 141,064,808 109,049,175
Home equity and second mortgage loans 38,223,700 35,695,170
Automobile loans 24,212,132 13,801,203
Commercial business loans 14,975,815 8,532,865
Other nonmortgage loans 23,339,750 17,545,098
------------- -------------
422,850,687 509,680,894
Less:
Allowance for loan losses (note 4) 4,736,738 3,394,448
Undisbursed portion of loans in process 458,055 550,160
Net unearned premiums on loans (1,537,496) (1,683,824)
Deferred loan fees 1,295,513 2,330,546
------------- -------------
$ 417,897,877 505,089,564
============= =============
Troubled Debt Restructurings
At June 30, 2001, 2000, and 1999, the Company had nonaccrual loans
of $1,094,000, $25,000, and $2,064,000, respectively, and
restructured loans of $130,000, $65,000, and $32,000, respectively.
Interest income recorded during 2001, 2000, and 1999 on
restructured loans was not materially different than interest
income which would have been recorded if these loans had been
current in accordance with their original terms. Interest forgone
on nonaccrual loans was $105,653 in 2001, $1,250 in 2000, and
$50,259 in 1999.
Regulatory Examination
In August 2001, the Bank's primary regulatory agency completed
fieldwork on an examination of the Bank. A final report of
examination has not yet been issued. In discussions with management
the regulators have indicated, based on borrower information
obtained subsequent to June 30, 2001, that they will request a
one-category downgrade in the regulatory classification of three
commercial real estate loans. One loan, previously not classified,
had a principal balance of $4.5 million and would be classified
"special mention" while the other two loans previously in the
"special mention" category, with principal balances totaling $4.1
million, would be re-classified "substandard". Under the Bank's
existing classification of assets policy, these downgrades would
require an addition to the allowance for loan losses of
approximately $700,000. If circumstances with respect to the three
loans do not change through September 30, 2001, management will
downgrade the three loans as of that date and will record the
corresponding provision expense in the first quarter of fiscal
2002. Net of tax, the additional provision for loan losses, when
17
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
recorded with respect to these three loans, will negatively impact
earnings by approximately $439,000.
Loan Servicing
The Company originates mortgage loans for portfolio investment or
sale in the secondary market. During the period of origination,
mortgage loans are designated as held either for sale or for
investment purposes. Mortgage loans held for sale are carried at
the lower of cost or market value, determined on an aggregate
basis. There were no mortgage loans held for sale at June 30, 2001.
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The
unpaid principal balance of these loans was $142,730,413,
$42,865,542, and $46,079,709 at June 30, 2001, 2000, and 1999,
respectively. Servicing loans for others generally consists of
collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors, and foreclosure processing.
Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. In connection with these
loans serviced for others, the Company held borrowers' escrow
balances of $814,977, $110,483, and $142,002 at June 30, 2001,
2000, and 1999, respectively.
Concentrations of Credit Risk
The Company conducts the majority of its loan origination
activities in its market area, which includes Northwest and Central
Iowa and portions of Nebraska and South Dakota. In addition to loan
origination, the Company has purchased loans outside of its primary
lending area. 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.
Loans purchased outside the Company's primary lending area totaled
approximately $135.0 million at June 30, 2001, and included
approximately $121.0 million in loans that are geographically
distributed in the Midwestern United States. The remaining loans
are distributed throughout the United States, with the largest
geographic concentrations including Colorado with $8.6 million and
Connecticut with $1.8 million.
Included in the totals of loans purchased outside the Company's
primary lending area are loans purchased from a mortgage banking
firm headquartered in Madison, Wisconsin. The Company has an
exclusive agreement with this firm, which gives the Company first
right of refusal on any real estate loans generated, including
one-to-four family, multi-family, commercial real estate, and land
development loans secured by properties located primarily in the
Madison, Wisconsin metropolitan area. The Company has sold, and
anticipates that it will continue to sell, participation interests
in these loans to other financial institutions located in Iowa and
contiguous states. At June 30, 2001, the outstanding principal
balance of loans purchased under the above agreement was
approximately $93.3 million and participation interests in these
balances sold to other financial institutions totaled approximately
$22.9 million.
18
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Securitized Mortgage Loans
In March 2001, the Company sold approximately $112.7 million of
fixed rate single family mortgage loans in securitized
transactions. In those securitizations, the Company retained
servicing responsibilities. The Company recognized pretax gains of
approximately $1,714,000 on the sale of the securitized mortgage
loans.
19
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(4) Allowance for Loan Losses
A summary of the allowance for loan losses follows:
2001 2000 1999
----------- ----------- -----------
Balance at beginning of year $ 3,394,448 3,134,664 2,607,167
Additions related to acquisitions -- -- 325,143
Provision for losses 5,155,000 554,000 365,000
Charge-offs (3,890,291) (380,133) (247,118)
Recoveries 77,581 85,917 84,472
----------- ----------- -----------
Balance at end of year $ 4,736,738 3,394,448 3,134,664
=========== =========== ===========
(5) Office Property and Equipment
At June 30, 2001 and 2000, the cost and accumulated depreciation of
office property and equipment were as follows:
Office property and equipment:
Land and improvements $ 3,260,070 3,260,070
Building and improvements 13,350,537 13,304,698
Furniture, fixtures, equipment, and automobiles 5,884,001 5,693,880
Deposits on assets not in service and not depreciated 280,565 10,658
----------- -----------
Total cost - office properties 22,775,173 22,269,306
Less accumulated depreciation 8,088,768 6,954,401
----------- -----------
Office property and equipment, net $14,686,405 15,314,905
=========== ===========
(6) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
2001 2000
---------- ----------
Loans receivable $2,446,262 2,891,828
Securities 1,346,796 1,908,587
---------- ----------
$3,793,058 4,800,415
========== ==========
20
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(7) Other Assets
Included in other assets at June 30, 2001 are mortgage servicing
rights. The changes in capitalized mortgage servicing rights for
the year ended June 30, 2001 were as follows:
Balance at beginning of year $ --
Originated 700,250
Amortization (25,500)
---------
Balance at end of year $ 674,750
=========
The fair value of mortgage servicing rights was approximately
$674,750 at June 30, 2001.
The key economic assumptions used in determining the fair value of
mortgage servicing rights at the date of securitizations resulting
from securitizations completed in 2001 were as follows:
Prepayment speed 15.54 %
Weighted average life 3.52 years
Residual cash flows discounted at 9.25 %
At June 30, 2001, key economic assumptions and sensitivity of the
current fair value of the mortgage servicing rights to immediate 50
and 100 basis point adverse changes in those assumptions were as
follows:
Fair value of mortgage servicing rights $674,750
Expected weighted average life 3.52 years
Prepayment speed assumption 15.54%
Decrease in fair value from a 50 basis point change $ 56,000
Decrease in fair value from a 100 basis point change 106,000
Discount rate assumption ranges 9.24-9.28%
Decrease in fair value from a 50 basis point change $ 56,000
Decrease in fair value from a 100 basis point change 106,000
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a
50 basis point variation in assumption generally cannot be
extrapolated because the relationship of the change in the
assumption to the change in fair value may not be linear. Also, in
the above table, the effect of a variation in particular assumption
on the fair value of the servicing rights is calculated
independently, without changing any other assumption. In reality,
changes in one factor may result in changes in another (for
example, changes in prepayment speed estimates could result in
changes in the residual cash flows discount rates), which might
magnify or counteract the sensitivities.
21
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(8) Deposits
At June 30, 2001 and 2000, deposits are summarized as follows:
2001 2000
------------ ------------
Noninterest-bearing checking $ 21,157,593 12,779,090
Savings accounts 27,899,162 28,839,342
Demand and NOW accounts 49,175,576 59,685,156
Money market accounts 84,003,514 77,364,537
Certificates of deposit 306,472,384 292,957,406
------------ ------------
$488,708,229 471,625,531
============ ============
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $30,500,000 and
$28,200,000 at June 30, 2001 and 2000, respectively.
At June 30, 2001, the scheduled maturities of certificates of
deposit were as follows:
2002 $175,254,344
2003 97,562,040
2004 26,515,327
2005 5,826,071
2006 and thereafter 1,314,602
------------
$306,472,384
============
Interest expense on deposits is summarized as follows:
2001 2000 1999
----------- ----------- -----------
Savings $ 392,534 474,073 505,205
Money market and checking 4,396,509 4,350,896 3,614,159
Certificates of deposit 18,280,854 15,695,371 13,764,749
----------- ----------- -----------
$23,069,897 20,520,340 17,884,113
=========== =========== ===========
At June 30, 2001 and 2000, accrued interest payable on deposits
totaled $5,665,642 and $4,230,016, respectively.
22
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(9) Advances from FHLB
A summary at June 30, 2001 and 2000 follows:
FHLB of Des Moines (A)
Stated maturity in fiscal year
ending June 30:
2001 (B) -- % $ -- 6.46% $ 52,458,483
2002 6.17 18,000,569 6.54 13,007,397
2003 6.24 13,000,000 6.24 13,000,000
2004 5.91 3,000,000 5.91 3,000,000
2005 -- -- -- --
2006 and thereafter (C) 5.55 50,702,891 5.54 50,580,596
-------------- -------------
84,703,460 132,046,476
Amortizing advances (D) 5.25 4,414,104 5.36 5,474,023
Fed Funds advance with FHLB (E) Variable -- Variable 23,500,000
LIBOR advances with FHLB (F) Variable -- Variable 13,000,000
-------------- ------------
$ 89,117,564 $174,020,499
============== ============
(A) Advances from the FHLB are secured by stock in the FHLB.
In addition, the Company has agreed to maintain
unencumbered additional security in the form of certain
residential mortgage loans aggregating no less than 135%
of outstanding balances.
(B) Includes one FHLB short-term Repo Advance for year 2000
that matures on July 11, 2000 in the amount of
$25,000,000. The interest on this advance is due at
maturity at a rate of 6.71% and the term is 14 days.
23
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(C) Consists of FHLB Convertible advances. Convertible
advances are advances that the FHLB may terminate and
require the Company to repay prior to the stated maturity
date of the advance. Usage of this type of advance is
limited to 15% of the Company's total assets by the FHLB.
At June 30, 2001 and 2000, the advances included in this
maturity range are callable after an initial lock-out
period according to the following schedule:
Weighted- Weighted-
average average
Callable in fiscal year interest rate 2001 interest rate 2000
ending June 30: ------------- ------------- ------------- -------------
2001 -- % $ -- 5.31% $ 6,000,000
2002 5.17 12,000,000 5.04 6,000,000
2003 5.45 20,975,123 5.45 20,961,107
2004 5.92 17,727,768 5.89 17,619,489
------------- --------------
$ 50,702,891 $ 50,580,596
============= ==============
(D) Amortizing advances are advances that amortize over a 15
year period matched to a weighted-average rate of
comparable FHLB bonds.
(E) The Fed Funds Advance does not require the Company to
establish a committed line to obtain an advance. The Fed
Funds Advance rate on new borrowings is based on the Fed
Funds Market rate at the time of borrowing. There are no
minimum advance amounts, no commitment fees, and no
prepayment penalties. Outstanding Fed Funds Advances
automatically renew each day and are repriced based on the
FHLB's return on overnight investments. Fed Funds Advances
have no stated maturity and may be prepaid at will. During
2001, the interest rate at which these advances repriced
ranged from 3.92% to 7.42%. Fed Funds Advances are
collateralized as described in (A) above.
(F) London Interbank Offered Rate (LIBOR) advances from the
FHLB are collateralized as described in (A) above. Four
advances totaling $12 million matured in the fiscal year
ended June 30, 2001 and accrued interest at rates ranging
from .045% below to .03% above the published LIBOR rate,
adjusted monthly. The remaining $1 million LIBOR advance
outstanding at June 30, 2000 was repaid by the Company on
May 30, 2001 without penalty. LIBOR advances are
prepayable at any time; however, the Company is required
to reimburse the FHLB for any actual open market
transaction costs that the FHLB sustains because of the
prepayment.
At June 30, 2001 and 2000, accrued interest payable on
advances from FHLB totaled $11,181 and $67,498,
respectively.
24
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(10)Taxes on Income
Taxes on income for the years ended June 30, 2001, 2000, and 1999
were comprised as follows:
2001 2000
---------------------------------------------- --------------------------------------------
Federal State Total Federal State Total
----------- ----------- ----------- ----------- ----------- -----------
Current $ 1,975,000 305,000 2,280,000 2,234,000 346,000 2,580,000
Deferred (447,000) (69,000) (516,000) 53,000 8,000 61,000
----------- ----------- ----------- ----------- ----------- -----------
$ 1,528,000 236,000 1,764,000 2,287,000 354,000 2,641,000
=========== =========== =========== =========== =========== ===========
1999
------------------------------------------------------------
Federal State Total
----------- ----------- ------------
$ 2,482,000 384,000 2,866,000
(144,000) (22,000) (166,000)
----------- ----------- -----------
$ 2,338,000 362,000 2,700,000
=========== =========== ===========
Taxes on income differ from the amounts computed by applying the
Federal income tax rate of 34% to earnings from continuing
operations before taxes on income for the following reasons:
2001 2000 1999
----------- ----------- -----------
Computed "expected" tax expense $ 1,621,764 2,555,661 2,469,578
Purchase accounting adjustments 278,000 278,000 144,000
Nontaxable interest income (97,000) (131,000) (66,000)
State income taxes 155,760 233,640 287,100
Other, net (194,524) (295,301) (134,678)
----------- ----------- -----------
$ 1,764,000 2,641,000 2,700,000
=========== =========== ===========
25
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
June 30, 2001 and 2000 are presented below:
Deferred tax assets:
Allowance for loan losses $ 1,258,000 1,072,000
Unrealized loss on securities available-for-sale 205,000 2,583,000
Deferred compensation 188,000 153,000
Accrued vacation pay 106,000 104,000
Deferred directors fees 117,000 95,000
Deferred loan fees 21,000 123,000
Accrued expenses 11,000 1,000
Other 24,000 24,000
----------- -----------
Total gross deferred tax assets 1,930,000 4,155,000
----------- -----------
Deferred tax liabilities:
FHLB stock dividends (725,000) (725,000)
Fixed assets (255,000) (235,000)
Purchase accounting adjustments (251,000) (526,000)
Bad debt reserves in excess of base year (199,000) (307,000)
----------- -----------
Total gross deferred tax liabilities (1,430,000) (1,793,000)
----------- -----------
Net deferred tax asset $ 500,000 2,362,000
=========== ===========
Based upon the Company's level of historical taxable income and
anticipated future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these
deductible differences.
(11) Employee Benefit Plans
Pension
The Bank is a participant in the Financial Institutions Retirement
Fund (FIRF), and substantially all of its officers and employees
are covered by the plan. FIRF does not segregate the assets,
liabilities, or costs by participating employer. According to
FIRF's administrators, as of June 30, 2000, the date of the latest
actuarial valuation, the book and market values of the fund assets
exceed the value of vested benefits in the aggregate. In accordance
with FIRF's instructions, there was no pension contribution in
2001, 2000, and 1999 because the plan was fully funded.
26
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Profit Sharing Plan
Bank employees participate in the First Federal Bank Employees'
Savings & Profit Sharing Plan and Trust (the Profit Sharing Plan).
Employees who are at least 21 years of age become eligible for
participation after 12 months of continuous employment (during
which at least 1,000 hours of service are completed). The Bank
matches an amount equal to 25% of the first 4% of the employee's
contributions. Profit Sharing Plan expense for the years ended June
30, 2001, 2000, and 1999 was $44,555, $42,619, and $40,895,
respectively.
ESOP
In July, 1992, as part of the reorganization to the stock form of
ownership, the Bank's Employee Stock Ownership Plan (ESOP)
purchased 143,809 shares of the Company's common stock at $3.066
per share, or $441,000, which was funded by a loan from an
unaffiliated lender. This loan was repaid in December 1996, and the
shares were fully allocated to participants at June 30, 1998. In
April, 1999, as part of the reorganization and conversion of First
Federal Bankshares, M.H.C., the Bank's ESOP purchased 184,450
shares of the Company's common stock at $10 per share, which was
funded by a 15-year, 7% loan from the Company. Quarterly principal
payments of $30,742 commenced on June 30, 1999. All employees
meeting the age and service requirements are eligible to
participate in the ESOP. Contributions made by the Bank to the Plan
are allocated to participants by using a formula based on
compensation. Participant benefits become 100% vested after five
years of service. The ESOP is accounted for under "Employers'
Accounting for Employee Stock Ownership Plans" (SOP 93-6).
Dividends paid on unallocated shares reduce the Company's cash
contributions to the ESOP. The ESOP's borrowing from the Company is
eliminated in consolidation.
At June 30, 2001 and 2000, allocated shares were 138,423 and
125,945, respectively. Shares committed to be released were 7,746
and 8,075, respectively. The fair value of the 147,347 and 163,460
unallocated shares was approximately $1.9 million and $1.3 million,
respectively.
Plan expense was $141,737, $157,403, and $58,822 for the years
ended June 30, 2001, 2000, and 1999, respectively. Interest expense
was $114,174, $123,359, and $27,592 on the Plan's borrowing for the
years ended June 30, 2001, 2000, and 1999.
Stock Appreciation Rights
In connection with the acquisition of GFS Bancorp, Inc., Grinnell,
Iowa (GFS) on March 31, 1998, certain GFS stock options were
exchanged for Company stock appreciation rights (SAR). The SAR
entitled the holder to receive a cash payment equal to the
appreciation in value of the SAR over a base amount. At June 30,
1998, the Company's liability for SAR was approximately $947,000
and SAR expense for the three months then ended was approximately
$23,000. The Company received a benefit to earnings of
approximately $82,000 regarding the SAR before they were
extinguished with a cash payment to the holders of $864,500 during
the year ended June 30, 1999.
27
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Stock Options
The Company's 1992 stock option plan permitted the board of
directors to grant options to purchase up to 124,510 shares of the
Company's $.01 par value common stock. The options may be granted
to directors and officers of the Company. The price at which
options may be exercised cannot be less than the fair value of the
shares at the date the options are granted. The options are subject
to certain vesting requirements and maximum exercise periods, as
established by the board of directors. At June 30, 2001, the
Company had 15,420 options yet to be granted under this plan.
In October 1999, the Company established the 1999 stock option plan
(1999 Plan). The Company's 1999 Plan permits the board of directors
to grant options to purchase up to 263,500 shares of the Company's
$.01 par value common stock. The options may be granted to
directors and officers of the Company. The price at which options
may be exercised cannot be less than the fair value of the shares
at the date the options are granted. The options are subject to
certain vesting requirements and maximum exercise periods, as
established by the board of directors.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had compensation cost for
the Company's stock option plans been determined consistent with
SFAS 123, the Company's net income and earnings per share for
options granted and vested would have been reduced to the pro forma
amounts indicated below:
2001 2000 1999
----------- --------- ---------
Net income:
As reported $ 3,005,893 4,875,651 4,563,465
Pro forma 2,942,362 4,828,003 4,516,419
Basic earnings per share:
As reported 0.68 1.07 0.97
Pro forma 0.67 1.06 0.96
Diluted earnings per share:
As reported 0.67 1.07 0.96
Pro forma 0.66 1.06 0.95
============= ============ ============
The fair value of each option grant has been estimated using the
Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal year 2001,
2000, and 1999: dividend yield of 3.41%; expected volatility of
22.76%; risk free interest rate of 6.29%; and expected life of 7.5
years.
28
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Changes in options outstanding and exercisable during 2001, 2000,
and 1999, as restated for stock distributions and the stock
conversion, were as follows:
Exercisable Outstanding Option price
options options per share
------- ------- ---------
June 30, 1998 65,369 70,309 $3.066 - 20.341
Vested 1,647 -- 20.341
Exercised (16,750) (16,750) 3.066 - 5.213
June 30, 1999 50,266 53,559 3.066 - 20.341
Granted -- 247,000 9.25
Forfeited -- (1,000) 9.25
Vested 6,647 -- 9.250 - 20.341
Exercised (15,839) (15,839) 3.066
June 30, 2000 41,074 283,720 3.066 - 20.341
Forfeited (400) (5,400) 9.25
Vested 49,247 -- 7.6875 - 20.341
Exercised (15,930) (15,930) 3.066 - 9.25
June 30, 2001 73,991 262,390 3.066 - 20.341
Recognition and Retention Plan
In October 1999, the Company established the 1999 Recognition and
Retention Plan (RRP) for certain executive officers. The Company
contributed funds to the RRP to acquire 79,050 or 3% of the shares
of common stock sold in the Offering in April 1999. On October 21,
1999, the Company awarded 73,000 shares of RRP stock to certain
officers and directors. The shares of stock vest over a five year
period. RRP expense for the years ended June 30, 2001, 2000, and
1999 was $218,332, $205,576, and $0, respectively.
(12) Stockholders' Equity
Regulatory Capital Requirements
The Financial Institution Reform, Recovery, and Enforcement Act of
1989 (FIRREA) and the capital regulations of the OTS promulgated
thereunder require institutions to have minimum regulatory tangible
capital equal to 1.5% of total assets, a minimum 3% leverage
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.
29
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDCIA) 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 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 Bank met all regulatory capital requirements at June 30, 2001
and 2000.
The Bank's actual and required capital amounts and ratios as of
June 30, 2001 are presented in the following table:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------------ ----------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Tangible capital $ 48,397,000 7.6 % $ 9,547,000 1.5 % $ -- -- %
Tier 1 leverage (core) capital 48,397,000 7.6 19,094,000 3.0 31,824,000 5.0
Tier 1 risk-based capital 48,397,000 12.1 25,459,000 4.0 23,524,000 6.0
Risk-based capital 52,569,000 13.3 31,744,000 8.0 39,680,000 10.0
============= =========== ============ ============ ============ ===========
Retained earnings at June 30, 2001 included approximately
$9,165,000, which constitute allocations to bad debt reserves for
Federal income tax purposes and for which no provision for taxes on
income has been made. If such allocations are charged for other
than bad debt losses, taxable income is created to the extent of
the charges.
Dividends and Restrictions Thereon
The Plan of Conversion (note 1) provided for the establishment of a
special "liquidation account" for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders in an amount
equal to the greater of:
1. the sum of the Mutual Holding Company's ownership
interests in the surplus and reserves of the Bank as of
the date of its latest balance sheet contained in the
final offering circular, and the amount of any dividends
waived by the Mutual Holding Company; or
2. the retained earnings of the Bank at the time that the
Bank reorganized into the Mutual Holding Company in July
1992.
Each eligible Account Holder and Supplemental Eligible Account
Holder, if such person were to continue to maintain such person's
deposit account at the Bank, would be entitled, upon a complete
liquidation of the Bank after the conversion, to an interest in the
liquidation account prior to any payment to the Company as the sole
stockholder of the Bank.
30
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Federal regulations impose certain limitations on the payment of
dividends and other capital distributions by the Bank. Under these
regulations, a savings institution, such as the Bank, that will
meet the fully phased-in capital requirements (as defined by OTS
regulations) subsequent to a capital distribution is generally
permitted to make such a capital distribution without OTS approval,
subject to certain limitations and restrictions as described in the
regulations. 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 earnings 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. The Bank's current compliance with fully phased-in capital
requirements would permit payment of dividends upon notice to the
OTS.
( 13) Financial Instruments with Off-balance Sheet Risk
The Company is a party to various transactions with off-balance
sheet risk in the normal course of business. These transactions are
primarily commitments to originate loans. These instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recorded in the consolidated financial
statements.
At June 30, 2001 and 2000, the Company had commitments to originate
and purchase loans approximating $48,276,000 and $22,691,000,
respectively, excluding undisbursed portions of loans in process.
Commitments, which are disbursed subject to certain limitations,
extend over various periods of time. Generally, unused commitments
are canceled upon expiration of the commitment term as outlined in
each individual contract. Because the credit worthiness of each
customer is reviewed prior to extension of the commitment, the
Company adequately controls its credit risk on these commitments,
as it does for loans recorded on the statement of financial
condition.
The Company had approved, but unused, consumer lines of credit of
approximately $15,185,000 and $13,798,000 at June 30, 2001 and
2000, respectively. At June 30, 2001 and 2000, approximately 56%
and 58%, respectively, of the consumer lines outstanding were for
the Company's credit card program. The Company had approved, but
unused, commercial lines of credit of approximately $10,502,000 and
$5,637,000 at June 30, 2001 and 2000, respectively.
At June 30, 2001 and 2000, the Company had commitments to sell
loans approximating $4,750,000 and $1,707,000, respectively.
31
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(14)Fair Value of Financial Instruments
The estimated fair values of Company's financial instruments (as
described in note 1) were as follows:
2001 2000
------------------------------ ----------------------------
Carrying Fair Carrying Fair
amount value amount value
------------ ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 20,241,215 20,241,215 16,611,443 16,611,443
Interest-bearing deposits in other
financial institutions 57,708,338 57,708,338 3,555,263 3,555,263
Investment securities available-for-sale 87,598,252 87,598,252 117,326,062 117,326,062
Investment securities held-to-maturity 22,725,200 22,882,470 23,737,311 23,067,005
Loans receivable, net 417,897,877 422,691,000 505,089,564 498,682,000
FHLB stock 9,468,700 9,468,700 8,928,900 8,928,900
Accrued interest receivable 3,793,058 3,793,058 4,800,415 4,800,415
Financial liabilities:
Deposits 488,708,229 492,674,000 471,625,531 468,336,000
Other borrowings 89,117,564 90,828,000 174,020,499 171,247,000
Advances payments by borrowers
for taxes and insurance 1,910,376 1,910,376 2,828,275 2,828,275
Accrued interest payable 5,676,823 5,676,823 4,297,514 4,297,514
============ ============ ============ ============
Notional Unrealized Notional Unrealized
amount gain (loss) amount gain (loss)
------ ----------- ------ -----------
Commitments to extend credit $ 48,276,000 -- 22,691,000 --
Consumer lines of credit 15,185,000 -- 13,798,000 --
Commercial lines of credit 10,502,000 -- 5,637,000 --
Commitments to sell loans (4,750,000) -- (1,707,000) --
============== ========= =========== =========
(15)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 Company's financial position or
results of its operations.
(16)Parent Company Financial Information
Condensed Statements of Financial Condition at June 30, 2001 and
2000, and Condensed Statements of Operations and Cash Flows for the
years ended June 30, 2001 and 2000 are shown below for First
Federal Bankshares, Inc. which was formed on April 13, 1999 in a
reorganization accounted for in a manner similar to a pooling of
interest.
32
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Condensed Statements of Financial Condition
Assets 2001 2000
------------ ------------
Cash deposited at First Federal Bank $ 100,447 154,567
Interest-bearing deposits in other financial institutions 1,208,338 1,555,263
------------ ------------
Cash and cash equivalents 1,308,785 1,709,830
Investment securities available-for-sale at fair value 3,141,489 2,645,614
Loans receivable, net 1,553,991 1,676,958
Investment in subsidiaries 66,497,031 61,962,455
Accrued taxes on income 48,257 9,378
Accrued interest receivable 12,498 36,844
Other assets 51,684 87,840
------------ ------------
Total assets $ 72,613,735 68,128,919
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Accrued expenses and other liabilities $ 26,288 16,000
------------ ------------
Total liabilities 26,288 16,000
------------ ------------
Stockholders' equity:
Preferred stock; $.01 par value;
authorized 1,000,000 shares; none issued -- --
Common stock; $.01 par value; 12,000,000 shares
authorized; 4,849,536 and 4,833,608 shares issued
and outstanding at June 30, 2001 and 2000, respectively 48,495 48,336
Additional paid in capital 36,053,892 36,002,723
Retained earnings 41,357,535 39,782,321
Treasury stock (2,803,832) (1,273,138)
Accumulated other comprehensive income -
net unrealized loss on securities available-for-sale (343,831) (4,343,049)
Unearned ESOP (1,473,470) (1,634,600)
Unearned RRP (251,342) (469,674)
------------ ------------
Total stockholders' equity 72,587,447 68,112,919
------------ ------------
Total liabilities and stockholders' equity $ 72,613,735 68,128,919
============ ============
33
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Condensed Statements of Operations
Interest income:
Loans receivable $ 115,889 129,710
Investment securities 186,707 113,829
Other interest-earning assets 109,478 127,267
Gain on sale of investment securities 17,143 --
Other general and administrative expense (478,266) (211,928)
----------- -----------
(Losses) earnings before income taxes (49,049) 158,878
Taxes on income (25,000) 54,000
----------- -----------
(Losses) earnings before subsidiary income (24,049) 104,878
Equity in undistributed earnings of subsidiaries 3,029,942 4,770,773
----------- -----------
Net income $ 3,005,893 4,875,651
=========== ===========
34
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Condensed Statements of Operatins
Interest income:
Loans receivable $ 115,889 129,710
Investment securities 186,707 113,829
Other interest-earning assets 109,478 127,267
Gain on sale of investment securities 17,143 --
Other general and administrative expense (478,266) (211,928)
----------- -----------
(Losses) earnings before income taxes (49,049) 158,878
Taxes on income (25,000) 54,000
----------- -----------
(Losses) earnings before subsidiary income (24,049) 104,878
Equity in undistributed earnings of subsidiaries 3,029,942 4,770,773
----------- -----------
Net income $ 3,005,893 4,875,651
=========== ===========
34
(Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
Condensed Statements of Cash Flows
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 3,005,893 4,875,651
Adjustments to net income:
Equity in undistributed earnings of subsidiaries (3,029,942) (4,770,773)
Net gain on sale of securities available-for-sale (17,143) --
Decrease in income tax payable (38,879) (31,378)
Decrease in payable to First Federal Bank -- (2,598)
Increase in other assets (7,844) (43,050)
Amortization of premiums and discounts 7,875 10,699
Decrease (increase) in accrued interest receivable 24,346 (30,336)
Increase in accrued expense and other liabilities 10,288 16,000
----------- -----------
Net cash (used in) provided by operating activities (45,406) 24,215
----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available-for-sale 100,000 --
Proceeds from sale of securities available-for-sale 1,032,143 --
Purchase of investment securities available-for-sale (1,500,453) (1,025,000)
Decrease in loans receivable 122,967 336,800
----------- -----------
Net cash used by investing activities (245,343) (688,200)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 55,637 48,556
Purchase of treasury stock (1,530,694) (1,930,138)
Cash dividends paid (1,430,679) (1,376,541)
Dividends received from (investment in) subsidiaries 2,795,440 3,512,652
----------- -----------
Net cash (used in) provided by financing activities (110,296) 254,529
----------- -----------
Net (decrease) increase in cash and cash equivalents (401,045) (409,456)
Cash and cash equivalents - beginning of period 1,709,830 2,119,286
----------- -----------
Cash and cash equivalents - end of period $ 1,308,785 1,709,830
=========== ===========
35